Rubicon Technology, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good afternoon and welcome to the Rubicon Technology First 2015 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 Dee Johnson, Vice President, Investor Relations. Please go ahead.

[Dee Johnson:]

Thank you, Jana. Good afternoon everyone. We are pleased you could join us today for Rubicon’s first quarter 2015 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 2015. We will then be happy to take your questions. Today’s call is being webcast through the Investors Relations section of our website. 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 website. 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 most recent Form 10-K 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. Now I’d like to turn the call over to Bill.

[William F. Weissman:]

Thank you, Dee. Good afternoon everyone and thank you joining us today. The sapphire market continues to be very challenging. The market remains in a state of excess supply with fluctuations in demand, resulting in significant price pressure. However the LED market continues to grow and applications for sapphire continue to expand beyond LED lighting which is gradually absorbing capacity. There remains enormous opportunity ahead for sapphire in general and for Rubicon in particular as the LED market finally begins to transition to larger substrates and new and exciting applications in the mobile device and optical markets continue to develop. On our last call we discussed some of our 2015 objectives which include aggressively pursuing our PSS potential, targeting high margin optical applications and driving down product costs. So in today’s call we will update you on these initiatives as well as discuss first quarter results and the second quarter outlook. Currently the bulk of sapphire demand comes from two markets, the LED market and the mobile device market. We see fluctuations in demand from bulk markets due to seasonality and timing of end product introductions. In the first quarter we saw weakness in the LED market and some strengthening in the mobile device market. For the first quarter our revenue of $8.9 million was consistent with the prior quarter revenue. This was reflective of some increase in the two-inch core revenue primarily for the mobile device market offset by lower four-inch core sales to the LED market in the quarter. The LED market which typically strengthened after Chinese New Year, this year remained soft throughout the quarter. However we are seeing the LED market begin to pick up and expect increased four-inch core revenue in the second quarter. Mardel will provide a more detailed breakdown of revenue in a few minutes and we have provided a revenue table in our press release for your convenience. Sapphire use in mobile devices is expanding with the introduction of smart watches and broader use in camera lens covers. These applications use two-inch diameter sapphire and other relatively small dimensions. The current excess capacity of sapphire was largely driven by the growth expectation for this segment, particularly as it relates to the potential use of sapphire in larger pieces such as faceplates for smart phones. While this application has not yet been adopted we believe it will be in time. While the focus of sapphire face plates has primarily been on scratch and break resistance some are considering ways to use the qualities of single crystal sapphire to add greater functionality. In the meantime capacity continues to be gradually absorbed by the greater adoption of these smaller pieces for mobile devices and four and six inch substrates for the growing LED general lighting markets. Our wafer revenue in the first quarter was $1.9 million, similar to the prior quarter. Our sales focus right now is on PSS rather than polished wafers. While volume PSS orders have certainly been slower in coming than expected we do have visibility to growing PSS volumes in the back half of the year. Our Optical and R&D revenue totaled $1.9 million in the first quarter, down slightly from the prior quarter revenue of $2.2 million. Optical and R&D revenue will fluctuate quarter-to-quarter. As I mentioned in the last quarter we are increasing our business and technology development efforts in optical markets for aerospace, defense and industrial applications as well as in the consumer electronics market. Our focus will be on large size sapphire windows, high value added fabricated sapphire parts and lower cost sapphire products for high volume applications. With the recent addition of Hap Hewes as Senior Vice President we have significantly strengthened our ability to commercialize new technologies, capture new opportunities and increase our market share in these diverse markets. While the optical market does not have the scale of the LED and mobile device markets there is continued growth potential with higher margin opportunities in these markets, especially for larger window applications made possible by our proprietary large crystal growth technologies. Our LANCE project a technology designed to produce very large thick sapphire windows continues to progress. We recently exhibited a 25 by 17 inch window at the SPIE defense sensing and security trade show which attracted a great deal of interest from both military and industrial product developers, including several requests for quotations. We still have additional milestones to deliver to finish the deliverables under our research and development contract, so commercial availability is likely a year away. However we have started quality testing and sampling parts, for our LANCE slabs to demonstrate performance. Combining these activities with increasing awareness of our large area window capabilities will help us build awareness in commercial and defense markets. We already have several customers and partners ready to move forward quickly with new products and new application development once we move to commercialization. We are also making progress with our R&D project aimed at providing a more affordable solution for the use of sapphire in smartphones, tablets, and other mobile devices and displays. We are currently working with several major consumer electronics manufacturers interested in testing our samples of sapphire coated glass and we expect this program to accelerate in coming months. Additionally we are moving forward with the proof-of-concept of our net-shape growth technology to provide a low cost single crystal solution for the consumer electronics market. Both technologies provide the durability and other benefits of sapphire that offer the potential of much lower cost than bulk sapphire solutions. Continuing to lower product cost is a major focus for us this year. As I mentioned on our last call, it’s our goal to ensure that Rubicon is positioned to drive strong margins when the markets strengthen and to ensure that we are cash flow positive by the end of this year, even as the pricing environment remains difficult. While it will be challenging to achieve these goals without some pricing improvement we will be taking action over the next couple of quarters to reduce costs. This along with increased PSS volumes should reduce our cash burn. Regarding product cost I believe our crystal is the best quality in the market and that our crystal growth costs are also among the lowest in the industry. Even so we continue to work on furnace redesigns and process improvement to further reduce cost. We also continue to improve on our proprietary raw material processes to reduce crystal growth cost. As I discussed in recent calls we are still cycling through old more expensive raw material stock so the current low cost of our internal raw material production is not yet fully reflected in our statement of operations. As a result the cost of raw material and our cost of goods sold is nearly double that of our current raw material production cost. The impact of this on EPS in the first quarter was about $0.03. These costs as well as our raw material inventory balance will continue to come down. We have now begun to convert our 83 kilogram furnaces to 93 kilogram, which not only produces more material at a nominally incremental cost but also reduces defects which increases crystal yield. As we did with the conversion of our 31 kilogram furnaces to 35 kilogram this will be done gradually according to our maintenance schedule. I believe that our patterning operation is cost competitive and our patterning capability is strong. The area where we have greatest opportunity to reduce cost and where we must reduce cost is in polished wafers. We need to ensure that the incremental revenue from increasing PSS volumes generates positive cash flow in the near term and provides strong margins as the market improves. Addressing polished wafer cost therefore is a high priority. Over the past several months we have been working on a number of initiatives to reduce these costs, including the development of a new polishing platform. In coming months we will be able to determine the cost reduction impact of these initiatives. Given our objectives of introducing new products and enhancing our existing technology to further reduce cost we have been strengthening our technology team. In March Dr. Christine Richardson joined Rubicon as our new Chief Technology Officer. Christine has a combination of very strong leadership skills, a solid material science background that is very difficult to find. We are very pleased to have Christine on board. In summary the sapphire market continues to be very challenging but the actions we are taking during this difficult time in the market will position the company to drive strong margins from a more diverse set of products once the market improves. We believe that we will increase our PSS revenue over the course of this year. We are excited about the opportunity to commercialize new products in the consumer electronics, defense and aerospace markets and to grow our current optical business and we are committed to aggressively reducing product cost to put us on the path back to profitability. I would like to turn the call over to Mardel who will provide you with greater details on the financial results for the first quarter and our outlook for the second quarter of 2015.

[Mardel A. Graffy:]

Thank you, Bill. Revenue for the first quarter was $8.9 million, even with the prior quarter. Core revenue increased to $5.1 million from $4.7 million in the prior quarter. As Bill explained increased volume sales of two-inch core partially offset by lower four-inch core sales. Wafer sales were essentially unchanged from the prior quarter. PSS wafer sales were still limited to qualification levels, but we expect volumes to increase in the second half of the year. While we work on reducing polished wafer cost we are focusing on PSS wafer sales rather than polished wafer sales. Optical and R&D revenue was slightly lower in the quarter. Optical revenue tends to fluctuate throughout the year, so there will be some volatility quarter-to-quarter. However we see revenue from this market continuing to grow year-on-year, especially given the enhanced focus we are placing on this business. Our crystal growth operations continue to run at full capacity throughout the quarter. Our polishing and patterning operations remain underutilized however, but utilization will increase as PSS wafer orders move from qualification to production volumes. Idle plant costs in the first quarter were $2.2 million. Operating expenses in the first quarter totaled $2.8 million as compared with $3.2 million in the prior quarter. The decrease is due to lower bad debt expense and a decrease in consulting fees. Our loss per share in the first quarter was $0.32 as compared with fourth quarter loss of $0.36 per share. Turning to the balance sheet and cash flow we maintain a strong cash position with our cash and short-term investments balance of $41 million at March 31st with no debt. We used $3.9 million in cash in the quarter. Our DSO at March 31st decreased to 77 days, down from the prior quarter end DSO of 85 days. This reflects collection of accounts that were past due on December 31st. Inventory levels in total decreased by $941,000. Our raw material inventory balance declined sequentially by $1.6 million, going from $14.5 million at the end of the fourth quarter to $12.9 million at the end of the first quarter. In addition to reducing our per unit cost through our internal raw material process we have also reduced the total quantities in inventory. [Indiscernible] inventory increased somewhat in the quarter but is still within our desired normal safety stock level. Regarding our outlook for the second quarter core volumes will likely be higher, however two-inch demand is limited in the second quarter and pricing will be lower. Pricing continues to be challenging and the impact of the Russian ruble and Japanese yen exchange rate adds additional challenges at the moment. In addition the PSS revenue will still be limited to qualification volumes in the second quarter. As a result revenue and loss per share in the second quarter is expected to be similar to the first quarter. I would now like to turn the call back over to Bill for some closing comments and then we will be happy to take your questions.

[William F. Weissman:]

Thank you, Mardel. The sapphire market remains very challenging at the moment. However the outlook for commercial sapphire remains strong. The general lighting segment of the LED market is still in early stages of adoption and the LED industry is continuing to migrate to larger diameter substrates. The mobile device market offer significant growth potential and I believe there remains a lot of untapped opportunity for Rubicon in the optical sapphire market. At this time we are placing intense focus on reducing our product cost and introducing new products while tightly managing cash flow. While the timing is uncertain we believe the pricing environment will improve. We saw a meaningful price increase in the first half of last year before the recent pullback which indicated that capacity was tightening. The actions we are taking this year once the market improves -- with the actions we are taking this year once the market improves we will be better positioned to generate strong margins once again. I want to thank you all for joining us today and now we’d be happy to take your questions. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. At this time we showing no questions I would like to turn the conference back over to Dee Johnson for any closing remarks.

[Dee Johnson:]

We appear to have no questions, so perhaps we are in conflict with another company’s call right now. If you would like to follow up with us please give me a call at 847-457-3426. Thanks for joining us today we appreciate your interest and we look forward to speaking with you again soon. This concludes Rubicon’s first quarter conference call.