Rubicon's Revenue Halves In Q4 Due Weak Demand And Delayed Ramp-up At PSS Wafer Customer

For fourth-quarter 2015, Rubicon Technology Inc of Bensenville, IL, USA (which makes monocrystalline sapphire substrates and products for the LED, semiconductor and optical industries) has reported revenue of $2.45m, more than halving from $5.35m last quarter and down on $8.9m a year ago, as the sapphire market in general remained weak. Full-year revenue has almost halved, from $45.7m in 2014 to $23.8m in 2015.

Optical and R&D revenue (mainly optical) was $1.1m, down from $1.4m last quarter and half the $2m a year ago.

Wafer revenue fell to $0.9m, down from $2.1m last quarter and $2m a year ago. However, this was due mainly to a key customer for 6-inch patterned sapphire substrate (PSS) wafers delaying the start of its volume purchase order by a quarter, from 1 October to 1 January (based on revised end-customer demand). PSS wafers hence contributed just $0.4m (roughly level with $0.5m a year ago but down from $1.4m last quarter). Polished wafers contributed $0.46m (down from $0.76m last quarter and $1.47m a year ago).

Also, excess sapphire capacity and fluctuations in inventory levels in the supply chains of the two major existing markets (LEDs and mobile devices) have reduced demand, creating additional downward pressure on pricing. Rubicon hence limited its sales of 2- and 4-inch cores, for which revenue totaled just $0.5m, down from $1.8m last quarter and $4.8m a year ago. Specifically, revenue for 4-inch cores has fallen from $1.6m a year ago and $1.2m last quarter to $0.47m, while revenue for 2-inch cores (used predominantly for the mobile device market) was just $10,000, down from $0.55m last quarter and as much as $3.2m a year ago.

Given the lower demand for 2- and 4-inch cores, Rubicon has scaled back crystal growth production further, from 40% to 30% of capacity (to reduce core and boule inventory). Idle plant cost hence rose from $1.8m last quarter to $2.3m. The further weakening of sapphire pricing required Rubicon to evaluate the carrying value of its raw material, leading to a $2.3m non-cash charge to adjust the raw material inventory to its estimated replacement value.

Operating expenses were $3.3m, up from $3m last quarter due to higher legal and professional fees.

On a non-GAAP basis (excluding non-cash charges), net loss was $9.9m ($0.38 per share), up from $7.7m ($0.29 per share) last quarter and $9.4m ($0.36 per share) a year ago.

Building consignment inventory of 6-inch PSS wafers for the key customer (in preparation for volumes ramping in the first quarter) and limiting the sales of cores increased the net cash used in operating activities from $1.9m last quarter to $5.5m (above Q3's level of $5.1m). During the quarter, cash and short-term investments fell further, from $34.1m to $30m.

Total capital expenditure for full-year 2015 was kept under $1m, investing only in tools to reduce wafer polishing cost. "Improving cash flow remains a top priority," says chief financial officer Mardel Graffy. "We are implementing changes that we expect to reduce wafer costs over the next several months and expect cash flow from operations to improve," he adds.

"Our key 6-inch customer began drawing on consignment inventory in January," notes CEO Bill Weissman. Rubicon hence expects wafer revenue to rebound in first-quarter 2016 to at least Q3/2015's level of about $2m (driven by growth in 6-inch PSS wafer sales), while 4-inch core sales should also increase. Rubicon believes that 2-inch core inventory levels have come down, but there continues to be excess inventory in the supply chain. "We have begun seeing some more interest in 4-inch core for the LED market but pricing remains very weak," notes Weissman. Overall revenue should hence rebound slightly to $4-5m. The firm expects some reduction in cash used in operating activities. Additional growth in the wafer business is expected in second-quarter 2016.

"Continued decline of 4-inch wafer prices has delayed the migration to 6-inch. However, we believe 4-inch wafer pricing is now at or below cash cost and not likely to get much lower," comments Weissman. "Therefore, we expect to see chip manufacturers put a greater focus on 6-inch migration going forward. We believe that more LED chip manufacturers will adopt the 6-inch platform and that 6-inch PSS should become the fastest-growing sub-segment of the LED substrate market," he adds.

"While PSS pricing is impacted by the macro of sapphire pricing environment, it tends to be less volatile. We believe we have a competitive advantage in being able to produce PSS wafers in a vertically integrated process starting from powder aluminum oxide, particularly in larger diameters - few competitors have that capability," Weissman continues. "For customers that are very sensitive to potential disruptions in their supply chain and consistency of quality, that vertical integration is very important. This was a significant factor in our qualification at an important 6-inch PSS customer and we believe it will become increasingly important to other LED chip manufacturers over time," he adds.

"The customer qualification process for these wafers can be quite lengthy, which can lead to greater customer loyalty and intimacy. However, despite the limited number of capable competitors for 6-inch PSS wafers, current pricing is also weak because the demand for the 6-inch wafers today is fairly limited," Weissman says. "Therefore it is essential that we continue to expedite cost reductions in our polishing operation so that we can optimize the potential of our vertical integration model, particularly as it relates to our PSS opportunity," he adds.

"We also recently terminated the resource-sharing agreement we entered into with another polisher last year. Given the current market conditions, the other party is no longer in need of extra capacity," says Graffy. "That agreement was aimed at gaining some additional insight into low-cost polishing of smaller diameters while potentially reducing some of our idle plant costs in the near-term," he adds. "While the other party did not complete all of their obligations, we benefited from the arrangement from their polishing insight and we are now back to our full capacity for when it is needed." Rubicon is on track to reducing costs for 6-inch polishing operations over the next several months.

"Our efforts to reduce wafer costs are well underway and we are expecting to see progress in the first quarter as we introduce new consumables and refine processes [followed by a more substantial reduction in the second quarter]," Weissman says. "Paramount among our objectives this year is the drive to reduce the use of cash and become cash-flow-positive as soon as possible… We will continue to tightly manage CapEx. "

"The overall weak sapphire pricing environment is primarily the result of excess capacity which has been driven by the prospect of sapphire cover glass in mobile devices," notes Weissman. "While the prospects for that application coming to market remains uncertain, there are several new applications in various stages of development that have the potential to become large consumers of sapphire and help to reduce the current market imbalance and supply and demand," he adds. "During this difficult time, we are focused on building value to developing new and more differentiated products, while aggressively working on cost reductions. In addition to pursuing our PSS potential, we are targeting high-margin optical applications and developing new products," he adds. "We are working with developers of some very interesting potential new applications for sapphire [primarily in the consumer electronics and medical device markets] which fit particularly well with Rubicon's unique set of sapphire knowledge and capabilities."

Having begun supplying samples to these optical business opportunities, Rubicon expects to move two new technologies into production later this year: its LANCE technology (which produces large rectangular windows for defense and commercial applications) and its SapphirEX coating technology. "We are on track to complete our LANCE crystal growth deliverables this year, producing windows as large as 36" x 18" x 2", which are unprecedented in the market," notes Weissman. "We also expect to move SapphirEX into production later this year and we are pleased with the initial interest in that product," he adds.

"Our goal is to drive growth that is more balanced between large-diameter PSS, optical products, bulk crystal like cores and rectangular blocks and new products," explains Weissman. "Pricing remains depressed, particularly for bulk crystal, but that could change quickly as the cover glass application or the other new applications currently in development are adopted."