Rubicon Technology, Inc.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Good afternoon and welcome to the Rubicon First Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Dee Johnson, Vice President and Investor Relations. Please go ahead.

[Dee Johnson:]

Thank you, Eriksson and good afternoon everyone. We're pleased you could join us today for Rubicon's first quarter 2016 earnings conference call. With me today is Bill Weissman, Rubicon's CEO and Mardel Graffy, Rubicon's Chief Financial Officer. We have allotted one hour for our call this afternoon. Bill will provide an overview of first quarter results of operations and Mardel will review our financial results in detail and discuss our outlook for the second quarter of 2016. We will then be happy to take questions. Today's call is being webcast through the Investor Relations section of our Web site. The webcast and press release can be found at ir.rubicontechnology.com. A replay of this call will be available for one week and the webcast will be archived in the Investor Relations section of our Web site. Before we begin, please be advised that certain statements in this presentation relate to future results that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties and assumptions as to future events that may not prove to be accurate. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our 2015 Form 10-K as amended and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. On this call, we will mention among other performance measures, non-GAAP loss per share, which is a non-GAAP performance measure. Please refer to the company's earnings release issued earlier today for a reconciliation of non-GAAP loss per share to GAAP loss per share. And now I would like to turn the call over to Bill Weissman.

[Bill Weissman:]

Thank you, Dee. Good afternoon everyone and thank you for joining us today. The Sapphire market continues to be very challenging with excess capacity in the market and fluctuations and inventory levels keeping Sapphire pricing at historically low levels. While the LED market continues to grow and some competitors have left the market there continues to be an excess supply of Sapphire at the moment. As a result, our sales focus with -- within the existing markets is on products where we have greater differentiation such as optical products and large diameter PSS wafers. And we continue to develop our new technologies like LANCE and SapphirEX. We also remain focused on our ongoing cost reduction initiatives to improve margin in cash flow. In addition to reporting on first quarter results and second quarter outlook, we will provide an update on the status of those projects on this call. While remains in excess of Sapphire capacity in the market based on current applications for Sapphire there are number of new applications and development that could become significant new markets. As we mentioned last quarter in addition to supplying our traditional customers in the Sapphire market, we are engaged in ongoing discussions with developers of some very interesting new applications for Sapphire and have begun supplying them with samples. These new applications are in various stages of development and have the potential to become large consumers to Sapphire to help reduce the current market imbalance of supply and demand. The largest such application is in the consumer electronics market. Developer of this product has been evaluating Sapphire against another material for using the product. We have been providing samples and initial feedback so far has been promising. If Sapphire is selected we believe we are well positioned to become an important part of the supply chain given the stringent specifications. We should have a clear picture of this potential customer's material selection in the coming months, while timing is uncertain there is potential for minuscule volumes later this year and large volumes next year and beyond. We are also working with other product developers and consumer electronics and medical device markets and believe that they also fit particularly well with Rubicon's unique set of Sapphire knowledge and capabilities. Some of these opportunities may take a couple of years to fully develop, but there is clearly potential to see a strong demand from a new application in the near term as well. In evaluating the potential of these new applications, we carefully consider Rubicon's differentiation versus competitors to understand the potential to generate good margins and durable customer relations. In each of these opportunities that we are working on we believe we do believe we do have a competitive advantage to enable us to grow these business opportunities profitability. Regarding the first quarter results, revenue increased sequentially by $1.8 million to $4.3 million in the quarter on increased wafer sales into the LED market particularly from PSS wafer sales which accounted for most of the increase. While OLED is taking market share from Sapphire based LEDs in the back lighting segment, the general lighting market continues to grow. We do believe that there remains opportunity within that segment of the market for revenue and margin growth. Specifically, we believe that demand for six inch diameter PSS wafers will continue to grow and as the competitive landscape for providing that product is more limited. Most of our PSS sales in the first quarter were six inch diameter and we expect additional growth this year. While we don't expect an increase in PSS revenue in the second quarter based on current customer projections we expect third quarter revenue from PSS wafer sales to be significantly higher. While PSS pricing is impacted by the macro Sapphire pricing environment, it tends to be less volatile. We believe we have a competitive advantage and being able to produce high-quality large diameter PSS wafers in a vertically integrated process starting from powder aluminum oxide. We believe that few competitors have that capability. For customers that are very sensitive to potential disruptions in the supply chain and consistency of quality that vertical integration is very important. The customer qualification process of these wafers can be quite lengthy, which we believe can lead to greater customer loyalty and into business. However, despite the limited number of capable competitors for six inch PSS wafers current pricing is also weak because the demand for these six inch wafers today is fairly limited. 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 PSS opportunities. We made progress in the first quarter and we are continuing to implement improvements. One challenge in reducing wafer cost has been the limited volumes processed in our Malaysian facility. The expected increase volumes in the third quarter, which is based on customer projections should also help, reduce wafer costs. In addition to pursuing our PSS potential, we are targeting high margin optical applications and developing new products. We are making significant strides in building a valuable optical business like cultivating new customers, expanding our product offerings and completing the development of two new technologies, our LANCE and our SapphirEX technologies. Our optical business will focus primarily on Sapphire windows and lenses for defense and commercial applications in order to take advantage of our strength in producing very high-quality Sapphire in large geometries. This is an area where we expect increasing opportunities with strong margin potential. We are focusing our customer relationship and technology development efforts on larger size Sapphire parts for a variety of markets. We believe that a combination of Sapphire quality in large dimension format for the optical market is unmatched by any other Sapphire produced. Our LANCE project, which is a government-funded development of Sapphire growth technology to produce windows as large as 18 by 36 inches and up to two inches thick, continues to move to a completion of the required deliverables on the government contracts. Last quarter we reported that we had some important dimensional milestones and this quarter we provided our first 18 by 36 inch window which is the largest size required under that agreement. While we still have a few more windows to produce we are nearing completion of the crystal growth deliverables. There is significant interest in these massive windows and we believe that completing the development of this technology should add significant values to our optical business. LANCE is a unique technology which greatly strengthens our technology platform in this business unit and gives us a strong foundation for becoming the dominant supplier of larger Sapphire optical products within the next one to two years. In addition to large windows, we are developing a Sapphire coating technology, SapphirEX, which is progressing nicely. We mentioned last quarter we are scheduled to take delivery on a production tool in May. This tool will enable us to provide the higher volume samples and pilot production capacity which are required for customers to fully qualify and commercialize new products. Our samples for this product in our initial focus market have performed well in customer testing. The qualification process is moving forward nicely with samples now being placed in a commercial setting for final testing. We have also increased our marketing efforts by displaying samples in recent trade shows which has generated interest for many other potential markets including defense and some electronics, instrumentation and industrial. The next several months are important as we continue to build our intellectual property for the optical business. While we are building value in a near term through development of new technologies and evolving our existing technology, we are keenly aware of our cash burn rate and paramount among our objectives this year is the drive to reduce the ease of cash and become cash flow positive as soon a possible. The significantly depressed Sapphire prices have posted additional challenges but we remain focused on that objective and are aggressively working on reducing costs. We continue our efforts to reduce both wafer and crystal growth costs and keep support cost as low as possible. Capital expenditures also continue to be very carefully managed. We kept our capital expenditures under $1 million for the entire year of 2015. We spent $550,000 in the first quarter on capital expenditures with most of that going with the first payment of new SapphirEX tour. Most of the remaining balance on that tool approximately $700,000 will likely be paid in the second quarter. Beyond that our capital commitment -- committed capital expenditure for 2016 is very limited. We are continuing to invest in R&D, which is essential for the development of new technologies and new products. As expected cash use in the first quarter was relatively high as $5.7 million because it included the initial payment on the SapphirEX tool and a $900,000 payment for settlement of securities litigation that was previously expensed. While we will have the remaining balance of the SapphirEX tool to pay in the second quarter, we expect cash used for capital expenditures to be minimal for the remainder of the year and expect to see a reduction in cash season operations as we further reduce cost. Our first quarter GAAP loss per share was $0.28 as compared with a GAAP loss of $0.49 in the prior quarter which included certain non-cash charges. The fourth quarter non-GAAP loss per share excluding those charges was $0.38. In summary, the Sapphire market continues to be very challenging but we are taking the actions necessary to diversify the business to reduce volatility and drive stronger margins over the long-term while maintaining intense focus on cost reductions to reduce cash usage in the near term. We made progress in the first quarter in building value in our optical business by advancing our LANCE and SapphirEX technologies closer to production. Six inch PSS revenue is expected to grow significantly in the third quarter and we expect to make more progress reducing wafer cost by then. We see the potential for new applications for Sapphire that comes to the market over the next couple of years some of which could begin driving meaningful demand for Rubicon in 2016 and we expect to have a clear picture on the largest of these opportunities in the next few months. I'd like to turn the call over to Mardel, who'll provide you with greater details on financial results of the first quarter and our outlook for the second quarter.

[Mardel Graffy:]

Thank you, Bill. Revenue for the first quarter was $4.3 million up from $2.5 million in the prior quarter. As Bill mentioned the majority of the increase was attributable to increased wafer revenue, which was higher sequentially by $1.5 million, $1.1 million of the $1.5 million of increased wafer revenue was from PSS wafers. Based on recent customer rejections we do not see an increase in wafer revenue in the second quarter, but expect a significant step up in volumes in the third quarter. Revenue from core sales in the first quarter totaled $440,000 similar to the prior quarter. Most of those sales were four inch diameter to the LED market. Pricing was very weak for two and four inch cores; we have been limiting core sales as a result. Our crystal growth production is operating at 30% capacity, which is at level at which we can retain our key crystal growth talent. This talent is important for us to keep if we are to be able to respond to the new application opportunities we are working on. The crystals produced are primarily used for six inch wafers optical parts and some relatively small volume four inch core sold to a couple of key customers in that market to maintain the relationships. Our optical and R&D revenue was $1.5 million in the first quarter up $400,000 from the prior quarter. We continue to build a pipeline in the optical business and the addition of technologies like LANCE, extra large full growth and SapphirEX are expected to improve margins and drive growth in this business unit in coming years. With the low crystal growth utilization and under utilized polishing operation in Malaysia, idle plan cost remained high at $2.3 million in the first quarter similar to the prior quarter. Operating expenses in the first quarter totaled $2.7 million down from $3.3 million in the prior quarter. The decrease was due to lower general and administrative expenses including reduced professional fees and lower bad debt expense. As Bill mentioned, our GAAP loss per share was $0.28 in the first quarter as compared with $0.49 in the fourth quarter and our non-GAAP loss per share was $0.38 in the fourth quarter, which adjust for certain non-cash charges. The GAAP to non-GAAP reconciliation is provided in our press release. Turning to the balance sheet and cash flow, our cash in short-term investments balance totaled $25 million at March 31. Our receivables remain of high-quality and our DSO at March 31 was 41 days. Inventory was down sequentially by $500,000 with continued reduction of raw materials stock. Regarding our outlook for the second quarter, we expect revenue and GAAP loss per share to be similar to the first quarter. We expect revenue growth to resume in the third quarter based on projections provided by our wafer customers. I would now like to turn the call back over to Bill for some closing comments and then we'll be happy to take your questions.

[Bill Weissman:]

During this difficult period for the Sapphire industry, we continue to aggressively work on product cost reductions while focusing development and marketing efforts on products that should diversify the business and drive stronger margin. While the competitive landscape is beginning to shrink with some Sapphire producers and polishers exiting the market, it could take sometime until we get a better balance of supply and demand based on existing markets for Sapphire. That is why the potential new applications I mentioned are very important and we believe we have a competitive advantage in each of these potential new products. We expect to see meaningful developments in the new markets and in the development of our new technologies as well as progress in further reducing product costs in the next several months. As these projects unfold our management team and Board of Directors will continue to make strategic decisions that we believe will maximize Rubicon's value. I want to thank you all for joining us today and for your continued support. Operator, if we have any questions, we'd be happy to take them at this time.

[Operator:]

[Operator Instructions] Our first question comes from Andrew Abrams of SCMR LLC. Please go ahead.

[Andrew Abrams:]

Hi, guys. A question on core sales, would you continue to sell a similar amount of four inch for the next quarter or so, if pricing stays relatively flat or are you going to hold back or increase that number again if we were to assume flat pricing?

[Bill Weissman:]

We'll probably continue to sell roughly the same amount as Mardel mentioned in her remarks. We want to keep the certain core talent in certain number of furnaces running at least until we see how these new market opportunities develop. If they ramp quickly we want to be able to respond to them accordingly. So, I would expect at least over the next quarter to have a similar volume of core sales.

[Andrew Abrams:]

Got it. And linearity of the PSS business, I know this is a tough business to predict on a quarter-to-quarter basis. Since you have a particular customer that seems to be driving the PSS business, is there any way we can see linearity here once they've established the -- by third quarter once they've established kind of a baseline for PSS sales?

[Bill Weissman:]

Well, as we ramp at the end of the year, we'll be pretty well maxed out on our patterning capacity and would expect it to stay kind of at that level until additional capacity is added. And of course that decision would have to be made based on the source of -- capital for that investment and the return on that investment and so on. So, we see a step, I expect to see a step-up in the back half of the year and kind of remain -- potentially remain at the level until additional capacity is added.

[Andrew Abrams:]

Got it. And lastly on the cost side, is there any cost reduction available left in the crystal growth or polishing side or is this all going to be SG&A kind of cost reductions?

[Bill Weissman:]

Most of it is in the polishing side still. We're still working on improvements on the polishing in Malaysia both in terms of process and as I mentioned the volume, once we get a larger volume through that factory, it's going to help as well so. We're looking at everything though. We're looking -- continuing to look at SG&A. We are looking at crystal growth. We have a number of projects underway to improvement yields. So we're looking at every possible product as well as SG&A to reduce cost over the next -- remainder of this year.

[Andrew Abrams:]

Got it. Thank you.

[Operator:]

[Operator Instructions] It seems we have no further questions at this time.

[Dee Johnson:]

Okay. Thanks, Eriksson. And thanks to everyone who joined us today. We appreciate your interest and we look forward to speaking with you again soon. This concludes the Rubicon first quarter conference call.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.