Rubicon Technology, Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Good afternoon and welcome to the Rubicon Technology Fourth Quarter 2014 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. Please go ahead.

[Dee Johnson:]

Thank you, Amy and good afternoon everyone. We are pleased you could join us today for Rubicon’s fourth quarter 2014 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 discuss key 2015 objectives and Mardel will review our financial results in detail and discuss our outlook for the first 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 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 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.

[Bill Weissman:]

Thank you, Dee. Good afternoon everyone and thank you for joining us today. The LED market continues to grow and applications for sapphire continue to expand beyond LED lighting. There remains enormous opportunity ahead for Rubicon as the LED market finally begins the transition for larger substrates and new and exciting applications in the mobile device and optical markets open up. However, the sapphire market is still relatively young and the market remained challenging in the fourth quarter with continued pricing pressure and fluctuations in demand. This afternoon in addition to discussing our fourth quarter results we will talk about our action plan for 2015, which includes a number of initiatives addressing market development and cost reduction. Specifically we will be discussing impressively pursuing PSS potential, targeting high margin optical applications and driving down product costs. Further Rubicon is positioned to drive strong margins when the market strengthens, but also to ensure that we are cash flow positive by the end of this year even if pricing continues to be challenging. In the fourth quarter we saw demand improve for some products, but the market was softer for others. Our revenue for the fourth quarter totaled $8.9 million up 11% sequentially from $8 million in the third quarter. Revenue from two-inch core, which is primarily used in the mobile device market and the China LED market, increased by 2.3 million sequentially to 3.2 million in the fourth quarter. Our two-inch demand was very soft in the prior quarter primarily due to excess inventory in the supply chain. Fourth quarter demand was not strong enough however to improve two-inch pricing which remained at an all-time low. While we saw an improvement in two-inch demand, four-inch demand was very limited in the fourth quarter due to seasonality in the backlighting segment of the LED market. The backlighting segment continues to represent a significant portion of the LED demand and this segment tends to be weaker in the fourth quarter and through the Chinese New Year. As a result our revenue from four-inch core was lower sequentially by 1.7 million going from 3.3 million in the third quarter to 1.6 million in the fourth quarter. We do expect improvement in four-inch demand after Chinese New Year. Wafer revenue was $2 million in the fourth quarter similar to the prior quarter. PSS revenue increased as we continue to make progress with PSS customer qualification, particularly with the six-inch product. To my knowledge Rubicon continues to be the only third-party provider with high volume six-inch patterning capability. We believe we’re working with the key six-inch customers and prospects and that our revenue ramp depends on timing of when customers move to a six-inch platform or begin to purchase six-inch PSS from an external vendor. We are working with several customers that currently have internal six-inch patterning capability and are now considering purchasing patterned six-inch wafers rather than adding further internal capacity. With respect to customers moving to the six-inch PSS platform, we have a customer that has firm plans to move to production on six-inch PSS this year. They have provided us with a forecasted rough schedule that has the potential to use up to 30% of our capacity by the end of the year. We continue to work hard to penetrate the more established four-inch PSS market to gain share. We are making progress with some key accounts and expect volumes to pick up in the second half of the year. For PSS, our goal remains to fully utilize our existing capacity by year-end and I believe that that goal is very achievable. Our optical and R&D revenues totaled $2.2 million in the fourth quarter as compared to 1.8 million in the prior quarter. With the increase coming from higher volumes from current customers in commercial and defense markets and from new parts reaching production volumes for several optical applications. We're increasing our business and technology development efforts in the optical markets for aerospace, defense and industrial applications as well as in the consumer electronics market. Our focus will be large sized sapphire windows, high value-added fabricated sapphire piece and parts and lower cost sapphire products for high volume applications. We recently hired Hap Hewes as Senior Vice President to lead these development and commercialization activities. Hap has deep experience in these markets and in commercializing new sapphire technologies and products. Our optical revenue has grown steadily and the optical markets offer high margin opportunities and further revenue growth potential especially for large window applications made possible by our proprietary large crystal growth technologies. We have now produced largest ever sapphire windows from our LANCE program which along with our 200 kilogram ES2 growth technology opens up many new opportunities in aerospace, defense and industrial applications. We are also making progress with our R&D projects aimed at providing a more affordable solution for the use of sapphire smartphones, tablets and many other mobile devices and display. We are currently working with several major consumer electronics manufacturers interested in testing our sapphire coated samples and we expect this program to accelerate in coming months. We are also 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 in the current bulk sapphire solution. The sapphire pricing environment continues to be very challenging while volumes for two-inch have been strengthening the price has not yet moved upward. Part of the current challenge is the favorable currency movement for competitors in Russia and Japan. This has put further pricing pressure going into the first quarter. Prior to this recent pull back in pricing we saw sapphire prices increasing in the first half of 2014 for the first time in two years, indicating that supply was finally beginning to tighten. I believe that the recent price reductions are a result of inventory fluctuations, seasonality and demand and currency fluctuations rather than an increase in supply. While sapphire pricing is very difficult to predict, I expect sapphire prices to strengthen in 2015 as applications for sapphire continue to expand. Given the unpredictability of the market, one of our top priorities is to ensure the business is cash flow positive by the end of this year, even if we do not see a meaningful improvement in the pricing environment. That requires product cost reductions particularly in our wafer products and increased wafer volumes. Regarding wafer volumes based on our sales activity for polished and PSS wafers, I'm confident that our wafer volumes will increase throughout the year. Regarding product cost, I believe our crystal has the best quality in the market and that our crystal growth costs are among the lowest in the industry. Even so, we continue to work on furnace design changes and process improvements to further reduce costs. We also continue to lower our raw material cost in crystal growth. As I mentioned on our last call the current low cost of our internal raw material production is not yet fully reflected in our statement of operations. Back at the prior market peak, we were concerned about the potential bottleneck in the raw material part of the supply chain and we accumulated significant inventory of material we viewed at that time known as crackle. That material continues to flow through our production. As a result the cost of raw material and our cost of goods sold is nearly double that of our current raw material production costs. The impact of this on EPS in the fourth quarter was around $0.03 per share and overtime those costs will come down as well as our raw material inventory balances. I believe our patterning operation also leads the industry in capability and cost. The area where we have the greatest opportunity to reduce cost and where we must reduce cost is in polishing. Over the past several months, we've been working on the development of the new polishing platform and expect to have the development completed in the second quarter. Early result suggests the new process should yield a significant reduction in cost, while providing greater capability in controlling flatness and other characteristics in the wafers. In summary, we are confident that we will increase our polished and PSS’s wafer revenue over the course of this year. We are excited about the opportunity to commercialize new products into consumer electronic, defense and aerospace markets and to grow our current optical business and we are committed to aggrievedly reducing product costs to put us back on the path of profitability. I would like the turn call over to Mardel who will provide you with greater details on the financial results for the fourth quarter and our outlook for the first quarter of 2015.

[Mardel Graffy:]

Thank you, Bill. Revenue for the fourth quarter was 8.9 million as compared with 8 million in the prior quarter. As Bill explained, sales of two-inch material increased offset impart by lower demand for four-inch material. We have included a table in our press release that provides a more complete breakdown of revenue for the period. Core revenue increased to 4.7 million from 4.2 million in the prior quarter. PSS and six-inch polished wafer sales offset a decrease in revenue from four-inch polished wafers. Four-inch wafer sales were lower due to the LED backlighting seasonality. We expect demand for four-inch to improve after Chinese New Year given that the holiday is a bit later this year we will not likely see much improvement until the second quarter. We are beginning to see some growth in PSS revenue and expect that to continue to build particularly in the second half of the year. Optical and R&D revenue totaled 2.2 million in the fourth quarter as compared with 1.8 million in the prior quarter for the reasons Bill provided. We are putting our greater focus on the optical market for new and existing products and expect continued growth from this market. Our crystal growth operations continue to run at full capacity throughout the capacity. Our polishing and patterning operations remain underutilized however, but utilization will increase as PSS wafer orders move from qualification to production volume. Idle plant cost in the fourth quarter totaled 1.8 million which was comparable with the prior quarter. Operating expenses in the fourth quarter totaled 3.2 million as compared with 4.4 million in the prior quarter. Decrease was due to severance costs and loss on disposal of assets recorded in the third quarter. Our per share loss in the fourth quarter was $0.36 as compared with the third quarter loss of $0.53 per share. The third quarter loss included $0.17 per share in non-cash charges for inventory write-offs and loss on disposal of assets. Turning to the balance sheet and cash flow, we maintained a strong cash position with our cash and short-term investment balance of $45 million at December 31st with no debt. Our DSO at December 31st increased to 85 days, up from the prior quarter end DSO of 66 days. This reflects some slowing of payment but also is reflective of a shift in revenue in the quarter from prepaid customers to customers with payment terms. Inventory levels in total were relatively unchanged. Our raw material inventory balance declined sequentially $875,000 going from 15.4 million at the end of the third quarter to 14.5 million at the end of the fourth quarter. Raw material inventory balances should continue to decline as we used up more expense of older material and replaced it with our own internally processed material that is significantly lower cost but of equal quality. All inventory increased somewhat in the quarter so we had been at an inventory level that was below our desired safety stock level and the current stock is at a normal level. Regarding our outlook for the first quarter, we expect revenue and EPS to be roughly the same as the fourth quarter. The first quarter is always effected by the Chinese New Year. Core volumes would likely be higher however average pricing will be lower than in Q4. Six-inch polished wafer orders with one key customer will be lower in the first quarter which should resume again in the second quarter. We expect to make progress on cost reduction in the quarter but the impact of these changes may be offset by price reductions resulting from the currency fluctuations as Bill mentioned. I would now like to turn the back over to Bill for some closing comments and then we will be happy to take your questions. Bill?

[Bill Weissman:]

Thank you, Mardel. Our sapphire markets remains challenging at the moment. The outlook for commercial sapphire remains very strong. Sapphire continues to be the substrate used in the production of over 95% of high brightness LEDs and the market hype of other materials such as silicone and Pure GaN displacing sapphire has faded. While we haven’t yet seen the quantum leap in use of sapphire for the mobile device market, sapphire use in these applications is growing rapidly and I believe there remains a lot of untapped opportunity for Rubicon in the optical sapphire market. It is crucial this year that we significantly reduce our product costs, while introducing new products and focus on expanding markets with untapped potential. We have plans in place to execute on these objectives and I believe 2015 will be a transformative year for Rubicon. I want to thank you all for joining us today and thank you for your continued support. And now, Amy may we take our first question.

[Operator:]

[Operator Instructions] And our first question comes from Avinash Kant at D.A. Davidson.

[Avinash Kant:]

My first question was you have talked about PSS and I think in your prepared remarks you said that you will get to the full capacity on PSS by the end of this year, could you give us some idea what kind of revenue opportunity we’re thinking of at the run rate, when you get the full capacity?

[Bill Weissman:]

Sure. Based on the current install capacity just as a reminder, the plan has always been to put some additional equipment in that clean room a relatively minor cost that would increase this capacity by at least 50% but the current install capacity with current pricing will probably in the $68 million range per quarter.

[Avinash Kant:]

68 million per quarter?

[Bill Weissman:]

6 to 8.

[Avinash Kant:]

6 million to 8 million per quarter and this is pre the 50% increase that you could do based on additional equipment, right?

[Bill Weissman:]

That’s right.

[Avinash Kant:]

So the total capacity could be taken up to roughly like 12 million or something per quarter.

[Bill Weissman:]

Right.

[Avinash Kant:]

But you’re talking about 6 million to 8 million at this point when you talk, so you expect to be at 6 million to 8 million run rate by the end of this year on the PSS, right?

[Bill Weissman:]

Yes, that’s our goal.

[Avinash Kant:]

Okay. And the second thing was that we did see the press that you put about the large sapphires windows and could you give us a little idea what’s the end application for this and what kind of opportunity are we looking at from these products?

[Bill Weissman:]

Well the last project is funded by the air force and initial application, I’m not sure exactly what they had in mind but it’s obviously military applications and we believe that the initial opportunity from that application is just several million dollars a year and as it expands into other military and commercial applications it could grow significantly from there. The timing is other than to find we have to continue the deliverables on that R&D contract, our expectation is at the end of this year or early next year we’ll start to see some revenues from that.

[Avinash Kant:]

Okay. So the R&D part of this will be done by early next year you think maybe definitely the first half of next year?

[Bill Weissman:]

Before that, yes.

[Avinash Kant:]

And then, so what’s the market size, I also saw something like a sensor, is it a sensor technology or its straight windows?

[Bill Weissman:]

No, it’s a window, but it’s window not to protect personnel but it’s one of the benefits of sapphire is its transmission capability. So it’s protecting instrumentation primarily. So it’s not a sensor, but it could be used as a joint sapphire for example to protect instrumentation since they can fly through dust storms and sand storms and not be affected by that.

[Avinash Kant:]

So any idea in terms of what’s the opportunity for plane or what’s the market any way to kind of figure this one out and I’m assuming that margins will be better than this one?

[Bill Weissman:]

The margins will be very strong on this one and again that initial application will be several million dollars per year and there is lots of other military applications it could be applied to I am sure and then once the product is available I believe we’ll see some commercial applications for it too. So this could be I am not saying in the 10s of millions of dollars but initially it will be certainly of the several million.

[Operator:]

The next question comes from Jade Dorsheimer at Canaccord Genuity.

[Jade Dorsheimer:]

Bill, just maybe a high level sort of philosophical question for you, under your leadership the helm of Rubicon, what you see is sort of differences between how Roger ran the business and how you plan to or intend to run it?

[Bill Weissman:]

Well the number of things we’re focusing on here, we’re building the -- we are focused on reducing cost, but we’re very conscious of strengthening the technology team, the only way to really reduce cost is to deal through the technology so we’re strengthening the team and also focused on the market facing stuff improving customer relations which is critical bringing half on board I think is instrumental and building the optical practice. So really improving our customer service and strengthening the technology and by doing that we can both grow the wafer business that I mentioned and reduce product costs.

[Jade Dorsheimer:]

And on the wafer business, it’s taking considerably longer to ramp that side of the business, what’s been the greatest unforeseen challenge that surprised you and where do you see, is there a certain aspect of the technology that seems to be delaying the qualification of customers or why are we running what six or nine months behind on that side of the business?

[Bill Weissman:]

On the PSS side I think a six-inch I think there is really a lot of interest in it and the delay is really the timing around either adopting a six-inch PSS platform or really starting to buy from the third-party and we had assumed that would happen a little faster than it has but we’re making good progress and as I mentioned we have the one customer that is committed to moving to that platform this year, we are and I believe the number one provider and will be the number one provider there and that could use significant amount of our capacity, and I believe we will see a couple of other start to buy from third-parties and we will be obviously the most likely candidate since we really are the only one that has a high volume capability on six-inch. I think the bigger challenge has been on the four-inch side. It is an established market and we're trying to basically gain market share there and that's been challenging because there have been developed some strong relationships between patterners and the polishers and then customers there and that's been a little bit more challenging than expected, but there too I think we're making decent progress. Probably recall in the polishing side, we really focused exclusively on six-inch and I think if we think back at things we would have differently certainly we would have focused on four-inch sooner because the other six-inch market didn’t develop as quickly as everyone had hoped and so there too I think from a cost perspective and especially we've been kind of behind the curve on catching up on polishing cost for four-inch so that's why we've got a pretty intense focus on that right now as well.

[Jade Dorsheimer:]

And then if we look at the I know you have mentioned to Avinash that 6 million to 8 million per quarter is the capacity on the six-inch indications -- what are the type of volumes that this one customer would be looking at for six-inch?

[Bill Weissman:]

Well as I mentioned it to be probably 30% of that capacity by the end of the year and then growth from there.

[Jade Dorsheimer:]

So we're looking at sort of from a run-rate perspective kind of getting to somewhere around 2 million to 3 million type of level if you're successful on the -- if your customary I should say is successful on that six-inch transition, is that the right way to look at it?

[Bill Weissman:]

That's right, yes.

[Jade Dorsheimer:]

And then will you be filling that other capacity or is your attempt to fill that other capacity that's going to be underutilized with four-inch demand is that the plan until six-inch is large enough in 2016 to absorb that?

[Bill Weissman:]

Our preference is to fill the six-inch, but realistically we think most of it will be four-inch now I do think we probably would have one other meaningful six-inch PSS customer by the end of the year, so I'd say we may be looking at maybe half-half six-inch and four-inch by the end of the year.

[Jade Dorsheimer:]

And that would return to profitability from a overhead absorption perspective as it seems as if the crystal has that capacity at this point?

[Bill Weissman:]

Yes exactly we weren’t selling out on crystal fully but we expect to in the coming quarters obviously we would also have polished wafer volumes as well and given those volumes along with the cost reduction which is critical it should get us to in cash flow breakeven even if the market doesn’t improves significant between now and the end of the year.

[Operator:]

The next question comes from Pierre Maccagno at Dougherty & Company.

[Pierre Maccagno:]

So just to clarify when you say the capacity is 6 million to 8 million per quarter is that assuming only six-inch or is that assuming half six-inch half four-inch?

[Bill Weissman:]

Well I mean it doesn’t really matter which way it goes, but as I have mentioned the last question that I expect by the end of the year it will probably be a fairly even mix between four and six-inch.

[Pierre Maccagno:]

But if you were just fully six-inch the revenue would be higher correct in terms of capacity?

[Bill Weissman:]

Not so much really I mean the six-inch pricing now is not -- there's not a whole lot of premium at the moment over the four-inch, the volumes obviously will be much higher for four-inch but on a surface area basis there's not a huge difference at the moment in pricing.

[Pierre Maccagno:]

On a per area basis, okay. And then the effect of GTAT closing their plant any effect have you seen positive for your business or for the overall industry what are your comments on that?

[Bill Weissman:]

Well it's positive for the optical business another reason why we're intensifying our focus on optical and that is obviously we're not in the LED space in a meaningful way the wildcard is still what's going to happen with -- mostly if there's any crystal on the floor in Arizona when that comes to market how it impacts the market is a bit of a wildcard the furnace is also but less concerned about that obviously they couldn’t make those furnaces work I don’t really see people lining up to get a hold of those furnaces but they likely would find their -- some of them will find a way into the marketplace, but that doesn’t concern me terribly. I think the short-term risk is more around if there's sapphire sitting on the floor and when that comes to market.

[Pierre Maccagno:]

But that will be mostly for two-inch cores probably growth?

[Bill Weissman:]

Yes I believe so yes.

[Pierre Maccagno:]

And then regarding the face plates, can you talk a little bit more about customer interaction any possibility of anything happening in that sector?

[Bill Weissman:]

Yes there's still a fair amount of interest in that and we're still providing small volumes of blocks and even finished face plates. I'd say to dive down a little bit after Apple didn’t announce the sapphire face plate in their last phone but I think it's picking up a little bit again now and we’re still prepared to participate in that market by selling blocks, but we’re still very heavily focused on these R&D solutions so we think there has got to be a cheaper solution and we think we’re making progress and coming up with some technology solutions to bring that to market cheaper.

[Pierre Maccagno:]

And the new solutions should available by the end of the year or by when?

[Bill Weissman:]

The coating solution is very close, I mean, we’re producing a really high quality sample and just to give you a sense this process the hardness is basically the same as sapphire basically a nine and the more scale, you can bend it with all your strength and it won’t break. So it’s really got some, really great characteristics to it. There is a couple of things we’re still working out based on customer requirements, but certainly by the end of the year we would expect to see some revenue from that with that. The second project which is a single crystal net-shaped solution is still in proof of concept and that’s probably a year to two years away.

[Pierre Maccagno:]

And then maybe just to the cost, you say that the main lever for the cost is lower than the polishing correct, but that’s any other ones that are strong levers for cost reduction?

[Bill Weissman:]

We are working that every single area in the Company and working intently on we are reducing cost everywhere but the area where our focus are most I would say need the most attention is in polishing area for sure and that’s where we’re putting a lot of attention and we’re working on this new platform and so far that’s progressing nicely.

[Pierre Maccagno:]

And finally, post 2016 you think there is going to be a big ramp in six-inch for you?

[Bill Weissman:]

Yes, I think we will start to see moving in six-inch, we -- last year I think with the big four-inch move, right there was a deep shift to four-inch and a very little to two-inch used in the LED market right now and most of that’s in China. And I think the next logical progression is six-inch and we’ll start to see a more meaningful shift and it’s been later than we had hoped but I think it’s still coming. And that will be huge for Rubicon because I think that’s still one of our areas of greatest strength.

[Pierre Maccagno:]

But as you shift there, so what’s going change the margins or what’s sort of do you expect when you shift from four to six-inch?

[Bill Weissman:]

Well, six-inch pricing is under a lot of pressure now too as every other sapphire product the number on it but that’s because the usage is fairly limited. I think if once the demand starts to take off six-inch I think we will see better pricing on six-inch versus four and two. And so I think that will help our margin structure as well.

[Operator:]

The next question comes from Andrew Abrams at SCMR LLC.

[Andrew Abrams:]

Bill, you’ve talked a little bit about a technology change in the polishing side in order to become more efficient and reduce costs, can you talk just a little bit about kind of where that’s going, does it entail new equipment or is it an upgrade to what you already have, is there a cost associated with it in terms of CapEx or is it just better use of the equipment that you already have?

[Bill Weissman:]

No there will be some additional equipment. The CapEx, if it’s successful the CapEx requirement would be about a $1.5 million, so it’s not a huge commitment. We would have some absolute equipment as a result of that and that could be $1.5 million equipment that becomes absolute, so there would be some equipment change but nothing really major.

[Andrew Abrams:]

And you mentioned that the six-inch pricing premium has pretty much of evaporated and everything is kind of floating the way it normally should I guess as opposed to maybe a year-and-half ago when six-inch had a big premium, is the price of six-inch a detriment in your conversions with your customers or is this more an equipment change commitment that they have to make or a desire to add capacity or a need to add capacity by moving to six-inch?

[Bill Weissman:]

Yes, I don’t think the six-inch wafer pricing is a detriment any more, it is basically on par with the other others diameters but it is remember a lot of this move to four-inch and so it’s more of a capacity more of an equipment retooling issue and capacity planning, so I don’t see that the wafer costs in any way being a detriment of the migration to six-inch at this point.

[Andrew Abrams:]

And are you committed to adding the additional capacity to PSS and polishing this year or is that really a function of whether you get a second customer or market conditions going forward?

[Bill Weissman:]

We’re committed to putting in once the demand justifies it, and it will be fairly quick, it’s just a few pieces of equipment with a relatively short lead time, so we don’t need to make those decisions too far ahead.

[Operator:]

The next question comes from Andrew Uerkwitz at Oppenheimer.

[Andrew Uerkwitz:]

So just quickly I mean you have cleared all the points I was going to ask about, if you can give one simple answer kind of walk us through how you get to breakeven, what is the different pushes and pulls are where you think the best is, where the biggest opportunity is, is it just volumes, it is pricing, this pricing need to come back at all is that all cost downs? And then finally if you could drill in how confident you are or what gives you confidence that the back half will indeed be stronger is it orders in hand is it, give us a little sense on your confidence there? Thank you.

[Bill Weissman:]

Sure so, on the crystal side for the core business that basically, you’re going to have the record low pricing at or close to being cash flow positive on a gross margin basis and we’ll continue to reduce the cost there, but obviously we need some margin and some volume in order to over the overhead. So the volume on the wafering side of things will pick up and we need to reduce the cost to make sure we’re generating, we’re not only just cash flow breakeven on that but generating some positive margin so that’s why the cost structure is critical there. In terms of the volumes and why we have confidence there I did mention to one customer that’s given up a schedule and I mentioned that we’re pretty confident that we are the kind of the lead vendor of course for that customer. So that gives us some confidence. And then the qualification process with some of the others I think are also moving in the right direction and I think gives us the lot of confidence that volumes will pick up. So that’s kind of how we’re approaching this and that’s why we believe by the end of this year we can get to that breakeven number even if things don’t improve dramatically. We would like to see some improvement in the core pricing obviously we’d want to be generating some cash flow positive numbers on the crystal side as well but it doesn’t have to be huge increases in pricing we’re just talking about fairly modest increases.

[Andrew Uerkwitz:]

One follow-up, I believe, correct me if I’m wrong on this one, your predecessor used to say that you guys had the lowest cost sapphire in the business, it sounds like you guys are making a lot of effort to help drive down some additional costs, is there a recognition that your competitors are caught up on the cost side or the technology maybe want the cost leader because you have talked a little about the motivations there and how you ultimately can drive cost now? Thank you.

[Bill Weissman:]

No, I think we are still on the crystal side I think we are rather than anybody in terms of cost out there, and our quality is better than anybody we believe. There is not a lot of information available out there, so a lot of that is anecdotal and I think there are one or two others that have cost structures as penetrative as us and their benefits today maybe partly currency driven but I think compared to most sapphire crystal growth companies out there we have an extremely low cost structure. So I don’t think there has been a lot change there I think the changes have been more recently around things like and currency and those kinds of things rather than fundamental changes and technology.

[Operator:]

Our next question comes from Brian Lee at Goldman Sachs.

[Hank Elder:]

This is Hank Elder on for Brian Lee. Thanks for taking the question. You guys historically have been more cautious than some of your peers on the non-LED applications particularly in handsets I know that you guys have been more proactively and I’m just wondering if there is anything you guys are seeing in the market now versus before, if there is specific customer pull forward or something of that nature, just trying to get a sense for the timing?

[Bill Weissman:]

I don’t know that we’ve been any more cautious other than the one company that was obviously I think they are cautious. We had served the global device market with two-inch core from the beginning we continue to just like our competitors do. And we provide samples for full face plates and continuing to work on that and I think we’ve been probably more aggressive than anybody out there in terms of trying to find new technologies to serve that market. And the increased focus on optical now is not just mobile device, it is part of it, but also we think there is enormous potential for larger windows in that optical market especially in light of some of the technology that as we have made internally and all that stuff is why we hired half and some of these R&D projects really are getting close to be ready for market. So we really need that client facing support but would relapse and that’s the main reason for hiring half.

[Operator:]

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

[Dee Johnson:]

Great. Thank you very much. That was a good Q&A session. Thanks to everyone for joining us today. We really appreciate your interest and we look forward to speaking with you again soon. This concludes Rubicon’s fourth quarter conference call.

[Bill Weissman:]

Thank you.

[Operator:]

Thank you for attending. You may now disconnect.