Rubicon Technology, Inc.
Q4 2015 Earnings Call Transcript

Published: 24 Feb 2016

[Operator:]

Good day and welcome to the Rubicon fourth quarter 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 of Investor Relations. Please go ahead.

[Dee Johnson:]

Thank you Laura. Good afternoon everyone. We are pleased you could join us today for Rubicon's fourth 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 fourth quarter results of operations and Mardel will review our financial results in detail and discuss our outlook for the first quarter of 2016. We will then be happy to take your questions. Today's call is being webcast through the Investor 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. 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.

[Bill Weissman:]

Thank you Dee. Good afternoon everyone and thank you for joining us today. As expected, the fourth quarter was a particularly challenging one. The Sapphire market in general remained weak as excess capacity in the market and fluctuations in inventory levels and the supply chain limited demand creating additional downward pressure on pricing for the industry. In addition, we began building a consignment stock for a key six-inch PSS customer in preparation for volumes ramping in the first quarter. As a result, revenue was limited in the quarter. Fourth quarter revenue was $2.5 million lower sequentially by $2.9 million. Revenue from wafer sales was lower due to a temporary decline from a key customer in the quarter and the limited demand of two and four-inch core sales in the period due to weak pricing. Our wafer revenue was $900,000 in the fourth quarter as compared to $2.1 million in the third quarter. However, our key six-inch customer began drawing and consignment inventory in January and we expect first quarter wafer sales to be back about $2 million with additional built expected in the second quarter. We expect first quarter wafer revenue to be, from both four and six-inch diameters, with the majority of revenue coming from six-inch PSS sales. We believe that more LED chip manufacturers will adopt the six-inch platform and that six-inch PSS should become the fastest growing subsegment of the LED substrate market. Continued decline of four-inch wafer prices has delayed the migration to six-inch. However, we believe four-inch wafer pricing is now at or below cash cost and not likely to get much lower. Therefore, we expect to see chip manufacturers put a greater focus on six-inch migration going forward. While PSS pricing is impacted by the macro of Sapphire pricing environment, it tends to be less volatile. For PSS, 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. We believe that few competitors have that capability and 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 six-inch PSS customer and we believe it will become increasingly important to other LED chip manufacturers over time. 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 six-inch PSS wafers, current pricing is also weak because the demand for the 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 our PSS opportunity. 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. 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. 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. We are engaged in ongoing discussions with the developers of some very interesting new applications for Sapphire and have begun supplying these opportunities with samples. These applications are primarily in the consumer electronics and medical device markets and are outside of the traditional LED and mobile device markets. In evaluating these potential new opportunities, we believe that they fit particularly well with Rubicon's unique set of Sapphire knowledge and capabilities. Therefore, with these exciting new opportunities of Sapphire in the horizon, the future of the industry is not completely dependent on any one application such as cover glass for mobile devices. However, the timing of these new applications is uncertain. For the largest of these opportunities, we believe a decision will be reached on the use of Sapphire in this unique product in the next six months. The Sapphire is to be included in this product. We feel we are well-positioned to become an important part of the supply chain and that meaningful volumes could begin later this year with significant ramp of this application projected in 2017 and beyond. In the meantime, fluctuations from the two major existing markets, LED and mobile devices and excess capacity have resulted in a very challenging pricing environment. The two-inch core, which is used predominantly for the mobile device market, we believe inventory levels have come down some, but there continues to be excess inventory in the supply chain. We have begun seeing some more interest in four-inch core for the LED market but pricing remains very weak. Revenue from two and four-inch core sales totaled $500,000 in the fourth quarter, down from $1.8 million in the prior quarter. We had limited sales of two and four-inch core in the period due to pricing and we have scaled back crystal growth production. While it is important to reduce core and boule inventory to generate cash, we are waiting to see how pricing develops, now that the Chinese New Year holiday is over. 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. We are making significant strides in building a valuable optical business by 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, 200 to 500 millimeters and greater in dimensions for aerospace, semiconductor, defense and industrial markets. We are currently producing larger windows for semiconductor and defense applications from our large Kyropoulos boules up to 13 inches in diameter and we will be increasing that to 16-inches this year. While others can grow crystals of comparable size, most cannot meet the quality of the requirements. Our LANCE project, which is government-funded development of large Sapphire growth technology to produce windows as large as 18 by 36 inches and up to two inches thick, has hit some important dimensional milestones this month and we are well on track to finishing the remainder of the crystal growth levels this year. There is significant customer interest in these massive windows and we believe that moving this technology from development to production over the next couple of quarters adds significant value to our optical business. LANCE is a unique technology, which greatly strengthens our technology platform and this business unit and gives us a strong foundation of becoming the dominant supplier of large area Sapphire optical products within the next one to two years. In addition to larger windows, we are developing a Sapphire coating technology, SapphirEX, which is progressing nicely. 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. We are also now increasing marketing efforts into other potential markets for this product. The next couple of quarters are important as we continue to build our intellectual property for the optical business. Additionally, in R&D we are moving forward with the proof of concept of our net-shaped growth technology to provide a low-cost single crystal solution for the consumer electronics market and next-generation Kyropoulos furnaces to significantly reduce costs. While we are building value in the 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 use of cash and become cash flow positive as soon as possible. Further declining Sapphire prices have posed additional challenges, but we remain focused on that objective and are aggressively working on reducing product costs. In addition to our efforts to reduce wafer costs, we are also focused on reducing crystal cost to improve yield and continuing to reduce overhead. While enhancing our technology and developing new products are essential for the long-term success of the company, we are doing so while very carefully managing capital expenditures. We kept our total capital expenditures under $1 million for the entire year of 2015, investing only in tools to reduce our polishing cost. We will continue to tightly manage CapEx. As I mentioned, given the success to-date with SapphirEX, we are purchasing a tool to move that technology forward. This tool will cost approximately $1.2 million. Beyond that, our committed capital expenditure for 2016 is very limited. At some point, additional investment will be needed in order to realize the full revenue potential of our new technologies. However, we will commit capital only when we have a high degree of confidence that the market opportunities exist and that the technology is mature enough to hit the yields and cost targets required to generate a good return. As expected, cash used in the fourth quarter increased due to restricting core sales in building the consignment inventory of PSS wafers for a key customer. Cash used in the quarter totaled $55 million. Fourth quarter GAAP loss per share was $0.49 and included non-cash charges which Mardel will discuss further. Mardel will also comment further our outlook for the first quarter. In summary, the Sapphire market remains very challenging at the moment with weakness in all of the existing markets. 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 short-term. We see the potential for new applications for Sapphire to come to market over the next couple of years, some of which could begin driving meaningful demand for Rubicon in 2016. While working on developing new markets, we are completing the development of new technologies this year which we believe will add significant value. I would like to turn the call over to Mardel who will provide you with greater details on the financial results of the fourth quarter and our outlook for the first quarter of 2016.

[Mardel Graffy:]

Thank you, Bill. Revenue for the fourth quarter was $2.5 million, down $2.9 million from the prior quarter. As bill mentioned, wafer revenue was lower sequentially by $1.2 million. We expect revenue to rebound to at or above third quarter levels in the first quarter with additional growth expected in the second quarter. Pricing was very weak for two and four-inch cores in the fourth quarter due to reduced end-user demand and inventory levels at our customers. As a result, we have limited the amount of core sales, resulting in a sequential revenue decrease of $1.3 million. Our optical and R&D revenue was $1.1 million in the fourth quarter, slightly lower than the prior quarter. While not yet reflected in revenue, we are making progress in developing the optical business. We are building a pipeline in the addition of technologies like LANCE, extra large boule growth and SapphirEX, are expected to improve margins and drive growth in this business unit in coming years. Given the lower demand for two and four-inch core, we have scaled back crystal growth production further and are currently operating our crystal growth at 30% of capacity. While we expect the market to improve, it is difficult to predict the timing and we want to avoid building excess inventory. While wafer revenue was limited in the quarter, we produced consignment inventory of PSS wafers for a key customer in the quarter based on their projected first quarter demand. 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. That agreement was aimed at gaining some additional insight into low cost polishing smaller diameters while potentially reducing some of our idle plant costs in the near-term. While the other party did not complete all of their obligations, we benefited from the arrangement from their polishing insight and we now back to our full capacity for when it is needed. Regarding our six-inch polishing operation, we believe we are on track to reducing cost of that product over the next several months. Idle plant cost in the fourth quarter totaled $2.3 million as compared with $1.8 million in the prior quarter due primarily to scaling back crystal production. Operating expenses in the third quarter totaled $3.3 million as compared with $3 million in the prior quarter. The increase was due to higher legal and professional fees. Sapphire pricing weakened further which required us to evaluate the carrying value of our raw material. We recorded a $2.3 million non-cash charge in the quarter to adjust the raw material inventory to its estimated replacement value. Our GAAP loss per share is $0.49 in the fourth quarter as compared with $1.84 in the third quarter and our non-GAAP loss per share was $0.38 in the fourth quarter as compared with $0.29 in the prior quarter. GAAP to non-GAAP reconciliation is provided our press release. Turning to the balance sheet and cash flow. Our cash and short-term investments balance totaled $30 million at December 31. As expected, cash used in the fourth quarter was higher than the prior quarter. Building the consignment inventory and limiting the sale of core increased cash usage. While the consignment inventory may increase at times, as our customer's projections increase, the book of inventory has been built in the fourth quarter. Also we are reducing the core and boule inventory in time. However, as Bill mentioned, we will be monitoring how the pricing environment develops over the next few months before taking any action. Regarding our outlook for the first quarter, we expect revenue to increase to between $ million and $5 million with expected increases in wafer and four-inch core sales. We are expecting wafer cost to begin coming down in the first quarter with a more substantial decrease in the second quarter. GAAP loss for the first quarter is likely to be between $0.24 and $0.28 per share. We expect some reduction in cash used from operations in the first quarter. However, we will have the $900,000 payment for settlement of securities litigation that was previously expensed in a down payment on our SapphirEX tool in the first quarter, as Bill previously noted. 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.

[Bill Weissman:]

The existing markets for commercial Sapphire continue to grow and we expect new applications for Sapphire to emerge in coming years. However, there remains significant excess supply of Sapphire in the market and fluctuations in demand continue to create additional challenges. 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 margins. 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. 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. 2016 and in particular the next six months are extremely important for the company as we move new technologies to production, reduce product costs and see how these potential new Sapphire markets develop. During this time, improving cash flow will continue to be a top priority. I believe that the actions we are taking this year in cost reduction, technology development and new product development will diversify and position the company to reduce volatility and drive stronger margins while still positioning us to capture opportunities that arise in the bulk Sapphire market as they develop. Well, I thank you all for joining us today and thank you for your continued support and now may we take your first question.

[Operator:]

[Operator Instructions]. Our first question will come from Colin Rusch of Opco.

[Colin Rusch:]

Thanks so much. Can you talk a little bit about the learnings the you weren't able to get out of the polishing arrangement that you still can finish and actually start integrating to your process? What else do you need to figure out at this point?

[Bill Weissman:]

Well, we really didn't get into that for the six-inch product. It was more to get a low cost 4 inch polishing platform in place and potentially take some learnings in that process and translate them to six-inch. So we did not get the four-inch platform in place, which is okay. Our main focus is on six-inch anyway. And we have acquired some knowledge and some learnings in the process that we are able to translate to six-inch. So I think largely we have gotten a lot out of that relationship that we were hoping to get and now obviously we have the full use of our operation in the future as we need it. So it's a bit unfortunate where it didn't get completed. It's understandable that the other party, their priorities changed but I think largely we were able to get much of the information we were hoping to get from that relationship.

[Colin Rusch:]

Okay. And then right now you are in a pretty rough patch in terms of the end-market and the stock is trading below cash value by significant amount. At what point do you start looking at strategic options for the platform? And how should we think about your approach and your thought process around that?

[Bill Weissman:]

Well, as I said, in the this year, particularly next six months, there is a lot going on. We have the technologies that we are moving from development into production. Some of these new markets, new applications that we are working with developers, are very real and some of them are very large. So we have to carefully monitor how those develop this year as well and continue and develop our optical business. So I think if we are able to do those things and have some success, particularly with the new applications, we will have a much different situation that we are looking at in the second half of the year.

[Colin Rusch:]

Perfect. You know what, I am going to hop back in queue and maybe take some of the other questions offline. Thanks so much.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Dee Johnson for any closing remarks.

[Dee Johnson:]

Okay. Thank you everyone for joining us today. We appreciate your interest and we look forward to speaking with you again soon. This concludes the Rubicon fourth quarter conference call. Good bye.

[Operator:]

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