Rubicon Technology, Inc.
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Rubicon Technology Incorporated Earnings Conference Call. My name is Ian and I will be your coordinator for today’s call. As a reminder this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator instructions) We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Dee Johnson, Vice President of Investor Relations. Please proceed.

[Dee Johnson:]

Thank you, Ian and good afternoon everyone. We are pleased you could join us today for Rubicon’s first quarter 2013 earnings conference call. With me today are Raja Parvez, Rubicon’s President and Chief Executive Officer; and Bill Weissman, Chief Financial Officer. We have allotted one hour for our call this afternoon. Raja will provide an overview of first quarter results of operations and discuss the current market environment, and then Bill will review our financial results in detail and discuss our outlook for the second quarter of 2013. We will then be happy to take your questions. Today’s call is being webcast through the Investors Relations section of our website, located at www.rubicon-es2.com. A replay of this call will be available for eight days and the webcast will be archived in the Investor Relations section of our website. As a reminder, our press release and preliminary financial statements are also available 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 provision 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 would like to introduce our President and CEO, Raja Parvez.

[Raja Parvez:]

Thank you, Dee. Good afternoon, everyone, and thank you for joining us today. Revenue for the first quarter totaled $8.3 million as compared to our prior quarter revenue of $20 million. Revenue was lower sequentially due to a reduction in six-inch wafer orders as our key customers had excess inventory of wafers going into the quarter. Given the inventory level our largest six-inch LED customer did not order any additional wafers from us in the quarter. Our SoS customer continue to order but at lower volume, as a result revenue from this sale of six-inch wafers declined to $6.1 million in Q1 from $17.6 million in the prior quarter. We will have another difficult quarter for six-inch sales in Q2 but expect to begin seeing orders improve in the second half of the year. Turning to the small diameter side of the market, we said on our last call that we will resume selling two and four-inch core in volume despite the weak pricing environment in order to reduce our inventory level and maintain customer relationships. Most of the orders that we’ll book was for Q2 delivery however revenue from two-through four-inch core increased to 1 million from $337,000 in the prior quarter. Our orders for the second quarter caused for us to shift a considerably higher volume of two-through four-inch core in fact in the second quarter we will likely shift at least 50% more core than we had shift in any previous quarter in our history. Our relationships in the marketplace are still very strong and Rubicon remains a preferred supplier globally. This solid state lighting market is clearly strengthening with LED use in general lighting application gearing momentum. Industry forecasts are pointing to rapid adoption and growth of solid state lighting and the general illumination market has become the growth driver for the LED industry. The sapphire overcapacity that has driven prices to record low levels is gradually be absorbed by the increased demand and we’re beginning to see pricing for two and four-inch cores increase. Pricing for two and four-inch core thus far in Q2 is up around 10% over Q1. This is a small dollar amount given the extremely low pricing in the current market, but it is the first time we have seen sapphire prices increase in the past two years so that is encouraging. Demand from the SoS market was also up with slow start this year and sell throughout some of our key customer’s products was weaker than expected. However our customer is projecting strong demand in the second half of this year as new smartphone models are introduced. Our customer’s RF technology offers significant advantages over the legacy antenna switch solution including smaller form factor, less power usage, and, most importantly enhanced performance. With the increasing RF complexity required in newer mobile devices, the performance advantages offered by this SoS solution is becoming increasingly important. The expected rapid growth in LTE networks and smartphones should drive strong growth for SoS RF chips as more of these models are introduced. In addition, our SoS customer also continues to work on expanding their content in each smartphone by introducing new products, such as digital tunable capacitors and power amplifiers. And SoS as RF chips are also used in wireless infrastructure, broadband, automotive, defense and aerospace applications. So we believe the SoS market will continue to be a strong market for us in coming years. Our optical and R&D revenue totaled $1.2 million in the first quarter as compared to $2 million in the fourth quarter. Optical revenue was consistent with the prior quarter while R&D revenue was $700,000 lower. Our R&D revenue currently comes from over LANCE project which involves building a unique crystal growth furnace and developing corresponding processes that could produce large area sapphire windows up to 2 inches thick. Revenues realized based on our expenditures for that project which will vary from period-to-period primarily based on the timing of equipment purchases. Regarding earnings for the quarter, we had a net loss of $0.15 per share in the first quarter as compared to a net loss of $0.05 in the prior quarter. The weaker six-inch sales and resulting lower utilization of our operations resulted in additional pressure on margins in the period. Current market conditions for sapphire continue to be very challenging however the markets we sell have very high growth potential and we are now seeing their potential being to be realized particularly in the use of LEDs in general lighting application. This sapphire overcapacity is being absorbed and we are now beginning to see some positive moment on price for two-through four-inch products. While we expect another couple of challenging quarters ahead we expect to see continued improvement in demand and improved pricing for two-through four-inch products. While we expect pricing for two-to four-inch product to continue to gradually increase this year, pricing of six-inch/16 wafer is becoming more challenging. Competitors are trying to enter the six-inch market by offering prices below cost. While it is yet to be seen how effectively they will be able to compete given the current limited six-inch customer base right now it will likely result in pricing pressure in the near term. We believe we will finally begin to see greater adoption of six-inch wafers among major LED chip manufacturers within the next year. MOCVD utilization rates are increasing and in order to grow chip manufacturers will either have to invest in new tools or find a way to increase throughput from existing infrastructure. In either case there is an opportunity for them to mainly create from moving to a large diameter platform. It is very important for Rubicon to broaden the six-inch customer base and we would feel that (probably) the most opportune time for us to help facilitate that transition. So we are working aggressively to further encourage the migration to larger diameters. As the six-inch customer base expands and the general lighting market continues to grow pricing should become more rational. It is critical in this market environment to continually focus on cost reduction and we have a number of initiatives underway that will further reduce our already low product costs. We took delivery on additional raw material processing equipment in the first quarter and we’ll be ramping their capability to significantly lower our crystal growth costs. The relocation of the remainder of our polishing production to our Malaysia facility is now complete which will now result in a significant reduction in our polished wafer costs. In addition we have several development projects underway that are focused on developing new processes and examining new tools that could enhance our capabilities and reduce costs. We have recruited several highly experienced sapphire polishing subject matter experts to focus exclusively on this process development and also to development disruptive technologies to significantly reduce costs and enhance capability through eliminating process steps. Additionally new product introduction is also a priority this year and we are in the process of extending our vertical integration by building out an internal wafer patterning capability. We will be introducing large diameter pattern substrate to the LED market by the end of the year. Pattern substrates are now used by many of the top LED chip manufacturers and an increasing number of chip manufacturers are becoming comfortable outsourcing this process. Today PSS outsourcing has been demonstrated only at a smaller diameter level to our knowledge Rubicon will be the first vertically integrated supplier of large diameter PSS wafer. While the market we serve have tremendous growth potential, they are evolving and subject to rapid change which will likely continue to lead to considerable volatility. We are very pleased to see the recent accelerate in the LED generalizing market and believe there will be strong growth from the SoS market as well. During these period of volatility we have continued focus on reducing cost, extending our vertical integration and introducing new products such as PSS wafers and larger area vendor. We remain the most capable and reliable vertically integrated sapphire producer in the market and are very well positioned to benefit from the rapid growth that is expected from our end markets. I would now like to turn the call over to Bill, who will provide you with greater details on the financial results for the first quarter and our outlook for the first quarter.

[Bill Weissman:]

Thank you, Raja. Revenue for the first quarter was $8.3 million as compared to $20 million in the prior quarter. As Raja mentioned revenue was low sequentially due to reduced six-inch wafer orders from both of our key customers as they both had excess inventory of wafers going into the quarter. Revenue from six-inch wafer sales totaled $6.1 million in the first quarter most of which was sold to the SoS market. Six-inch wafer sales in the prior quarter totaled $17.6 million. Revenue from two to four-inch cores in the first quarter was $1 million as compared to $337,000 in the fourth quarter. As Raja also mentioned we have orders booked for the second quarter like copper rust to ship a considerably higher volume of two to four-inch cores in the period. While there as recently been some positive price movement, pricing remains extremely low. We expect continued gradual improvement in pricing of two to four-inch cores with the continued growth of the end markets absorbing the excess capacity. Optical and R&D revenue totaled $1.2 million in the first quarter as compared to $2 million in the fourth quarter. As Raja mentioned the lower revenue is associated with the timing of revenue recognition on our LANCE project. Our utilization rates were low in the first quarter which significantly impacted our margins. Our wafering operations ran at approximately 30% in the quarter due to the weaker six-inch wafer orders. Our crystal growth operations were scaled back to 40% in order to begin reducing boule inventory levels. With the strong second quarter orders two to four-inch cores and the scale back crystal production inventory levels are now declining in the second quarter. Operating expenses in the first quarter were reduced to $2.9 million as compared to $3.1 million in the fourth quarter. We had a per share loss in the first quarter of $0.15 as compared to a per share loss in the fourth quarter of $0.05 with lower utilization and reduced wafer sales putting additional pressure on margins. Turning to the balance sheet and cash flow, we maintained a strong cash position with $36 million in cash and short-term investments at December 31, with no debt. Most of our inventory is in raw material and boule inventory. As I mentioned with the strong core sales in the second quarter and scale back crystal growth operations boule inventory is now declining. In addition our safety stock of raw material is now more than sufficient and our commitments to purchase additional material are complete. So we are now drawing down our raw material stock. As a result, total inventory levels are now declining. Our capital expenditures in the first quarter were only $192,000. We do expect to spend $10 million to $15 million over the rest of the year primarily on building our PSS wafer capability and enhancing our polishing platform to further reduce wafer costs. Our accounts receivable remained of high-quality while our DSO was at 95 days at March 31 we collected most of our open accounts receivable in early April. Our DSO at April 2 was 17 days. Regarding our outlook for the second quarter, while the LED market is strengthening and sapphire capacity is being absorbed at a more rapid rate. It will take a while longer for pricing to improve materially. In addition six-inch wafer orders will remain weak in the second quarter our customers continue to work down remaining wafer inventory. As a result, we expect the second quarter to be very challenges. We will be selling a considerable amount of two to four-inch core in the second quarter but selling prices remain below our total cost and our utilization rates will remain at low level in the quarter. As a result we expect revenue for the second quarter to be between $10 million and $12 million with a loss per share between $0.19 and $0.23 based on $22.5 million shares outstanding at a 46% tax benefit. I would like to turn the call back over to Raja for some closing comments and then we will be happy to take your questions.

[Raja Parvez:]

Thank you, Bill. While the sapphire market remains challenging, we are seeing real signs of improvement in overall demand. Pricing for two through four-inch products begin to increase for the first time in two years and that is despite Rubicon adding a significant amount of material to the market in the second quarter. We have some near term challenging regarding the existing market but I strongly believe we will soon see the customer base expand for that product and Rubicon differentiation in that market will drive strong growth. Our vertical integration is a real differentiator in the market and allows us to better control quality and cost and provide assurance to our customer that their orders will be delivered on time and with consistent quality. We will be extending our vertical integration this year by building out an internal wafer patterning capability and we’ll be introducing large diameter patterned substrate to the LED market. The markets we serve are young, are evolving and will likely continue to see volatility. However, by focusing on reducing costs and evolving our products through technology, we intend to maintain our market leadership role and position the company to capitalize on market conditions when they later change. I want to thank you all for joining us today and thank you for your continued support. And now may we take our first question.

[Operator:]

Thank you, sir. Ladies and gentlemen your question-and-answer session will now begin. (Operator Instructions). This comes from the line of Jed Dorsheimer at Canaccord. Please go ahead.

[Jed Dorsheimer:]

Hi. Thanks. I guess first question I’m just so a little curious why the inventory build in the quarter as you are trying to work that down?

[Bill Weissman:]

Yeah, we scaled back crystal growth in the quarter so it’s mid quarter when we started the scale that back and the core sales were not that strong in the period that’s why we saw a bit of an increase in boule inventory but now we are starting to see those inventory levels come down considerably. In the month of April we’ve used quite a bit, quite a few of the boules are ready.

[Jed Dorsheimer:]

Okay. And in terms of your CapEx $15 million seems like a lot for PSS. So I was wondering if you could maybe just provide a little bit more color in terms of how much is bricks and motor versus tools or I guess maybe just ask a simple question. Where is the vast majority of that being spent to build-out the PSS?

[Bill Weissman:]

Only half of that about $7 million is for PSS and it’s all clean room and equipment type of expenditures. The rest is some of it is maintenance CapEx and the rest is enhancing our polishing platform we have a number of cost reduction initiative underway to reduce our wafer cost, some of if require some investment in tools, but we’re making really significant progress on those initiatives already and we think by the end of the year we’ll have our wafer cost down dramatically.

[Raja Parvez:]

And as to add to the six inch capability in terms of PSS, while we are doing is actually we are installing the equipment and the infrastructure that will serve us many years to come not only in the current requirements by the LED chip manufactures which are more in the micro pattern area, but this technology will also allow us to introduce some micron all the way up to 0.2 micron which will be required as we move forward in terms of the chip design and so forth. So we are really building a true benchmark capability to offer that product to our customers.

[Jed Dorsheimer:]

Okay. And when you commented that, I guess though in terms of two inch and four inch cores being below or selling prices being below cost. I’m just wondering is pricing has moved up here, are you referring to – well I guess you are referring to core cost right?

[Bill Weissman:]

Yes.

[Jed Dorsheimer:]

And in Q2 with the coding activity is that now above the manufacturing cost?

[Bill Weissman:]

No, we still need to see some more increases before we get to that point.

[Jed Dorsheimer:]

And is that mainly because of your fab?

[Bill Weissman:]

No fab is full, it’s just the matter, it’s a function of the pricing got served taken too low, the 10% increase is not enough to bring us back up to breakeven on those products. But we don’t – there is not or we don’t need fusion not some additional increases, but we do need some additional increases to get back to that point.

[Jed Dorsheimer:]

Okay. I’ll jump back in the queue. Thanks.

[Operator:]

Thank you. We have another question for you, this one is from Avinash Kant, D. A. Davidson & Company. Please go ahead.

[Avinash Kant:]

Good afternoon Raja and Bill.

[Raja Parvez:]

Good afternoon.

[Avinash Kant:]

So in the guidance that you are giving for revenues in Q2 how should we think of mix between LED and SoS would there be any SoS sales are not?

[Bill Weissman:]

Yes there will be, I think in that quarter given the weaker wafer sales in the quarter will likely be the majority of the revenue in that quarter, for that but it should flip back in the second of the year where we have most of our revenue coming from six inch wafers.

[Avinash Kant:]

But you didn’t have any – any SoS sales this quarter right/

[Bill Weissman:]

Yes, we did almost all of our wafer sales were SoS sales.

[Avinash Kant:]

Sorry and you had no LED sales in six inch I believe?

[Bill Weissman:]

We have limited LED sales, yes.

[Avinash Kant:]

Okay. And when the six inch wafer sales come back, now you are talking about some pricing pressure, could you elaborate a little bit in terms of where the pricing is and at that point are you in terms of your cost what kind of margins can we think off?

[Bill Weissman:]

Well we don’t give product prices, but what’s happening as Raja mentioned is that we have there is a limited number of six inch users right now and there are few competitors that are eager to get in there selling it below their cost to get in there, which is obviously going to have a near term impact on pricing. What we’re doing now is we’re being even more aggressive going to those LED manufacturers that are likely users of six inch, because we think their fabs are getting full and now it’s really the time to push them over the line in terms of making a decision to move to a larger diameter platform. And so part of that is going to offering aggressive pricing and so, margins will be down a bit on six inch but how far down is too early to tell and we think next year with the broader customer base for that product and the strong tailwinds from general lighting I think it will be as Raja said much more rationale pricing environment and a much more profitable product for us.

[Raja Parvez:]

And additionally, in addition to our frame the aggressive and attractive pricing to encourage the user base we are also will be offering the very attractive and very advanced tough classification, because we are the most experience six inch producer has been for number of years and we have really technology platform that I believe not only in the pricing over the long term, but also in a much more differentiated in terms of the performance as also our demonstrated ability to produce and supply really large volume of sapphire wafers that we have done so far. And that we have done so far more than 400,000 plus six inch wafers to LED and SoS markets and makes us the most experienced supplier. So it’s a combination of attractive pricing, state-of-the-art specification, stability and our own internal vertical integration of the combination that we are going to even more aggressively do our larger diameter potential customers?

[Avinash Kant:]

Thanks Raja.

[Operator:]

Thank you for your question. We have another question for you, this one is from Stephen Chin at UBS. Please go ahead.

[Stephen Chin:]

Hi thank you for taking my question. Just to follow-up on the two inch prices, how much higher does two inch prices need to be in order to be breakeven I know you know lot by as 10% more or you know are we talking 20%, 25% more any ballpark would be great?

[Bill Weissman:]

Yeah it’s around 20%, 25%. I remember we were talking percentages off of a very low number at this point in time. So the dollar amount is not big, but it needs about there about that 20%, 25%.

[Stephen Chin:]

Got it. Thank you. Another question on your direct sales to China, could you tell us more on what is the wafer sizes to be shared in China are you seeing any meaningful attraction of large customers there? And are you, and well you referring to the volume discounts of price, discounts earlier to these guys?

[Raja Parvez:]

ell first of all that in the past 12 months we have considerably gained the market share in China and we have several large customers that we have been supplying for last – we are supplying now especially in Q2. So we made a lot of progress direct to sales of China because we have now dedicated sales force focusing on China in additional Taiwan. Now traditionally we all as been having strong market in Taiwan, but in last 12 months we’re gaining considerable market share. So all the major LED chip manufacturer and the polishing companies in China are our direct customers. And in fact that’s where the majority of the volume is coming especially in Q2.

[Stephen Chin:]

Got it, thank you.

[Operator:]

thank you for your question. (Operator Instructions). We have another question for you, now this one is from the line of Brian Lee, Goldman Sachs. Please go ahead Brian.

[Brian Lee:]

Hey guys thanks for taking the question, I guess just to stay on the pricing topic for a moment. Did you mentioned what pricing in Q1 was on 2, 4 inch cores how compared to Q4?

[Bill Weissman:]

It was flat.

[Brian Lee:]

Flat, okay. And does your view of gradual pricing improvement through year end capture that 20% to 25% additional increase of the – the 10% increase your seeing in 2Q that would get you back to breakeven/

[Bill Weissman:]

Well it’s hard to say, but yeah I think it’s a very reasonable expectation that we’ll get up to that point on the end of the year.

[Brian Lee:]

Okay.

[Raja Parvez:]

We are seeing the signs off from the market, again we need to have more validation, but we’re seeing the sign in terms of the customer RFQs and the order pattern at this moment.

[Bill Weissman:]

We are being very cautious one quarter doesn’t make a trend, but at this point demand continues to be strong, so we’re hopeful that we can get to that point by the end of the year.

[Brian Lee:]

Okay, great. And then I guess switching gears just on the – the six inch LED wafer side of things, your expectation to sell more volume then obviously what’s a very light first half, so in the second half are we – is it fair to assume that those are going to be positive gross margins even in the context of some of the pricing commentary you made in the current competitive landscape?

[Bill Weissman:]

It’s difficult to say, second half the SoS demand should be stronger is what our customers indicated publicly based on new four inch introductions and new product introduction so we’re very optimistic about the second half and the SoS segment, the LED segment will also be much stronger as when inventory levels are worked off and pricing yet to be seen as we said that’s going to be it will come down some, but again I think – I think – continuing – going to continue to be the primary supplier and make us much margin make in the near term, I think next year, we’re much more bullish on it we expect that customer base to be much broader and demand to be even stronger.

[Brian Lee:]

Is there a meaningful differential between the margins you’ve achieved on the six inch LED wafers versus the – the one that you supplied to your SoS customer?

[Bill Weissman:]

Historically no, but the competitive landscape is changing a bit, so it’s coming a little bit more competitive on the LED side, but historically no.

[Brian Lee:]

Okay. Last one from me and I’ll jump back in the queue. Just wondering if you can give us a sense for the potential near term cash burn relative to the $7 million or so that we saw in Q1? Thanks.

[Bill Weissman:]

Well Q2 actually I don’t expect to burn anything, we should be – we may even had a little bit of cash are going to be drawing down fairly significant amount of inventory and cash collections are there mentioned we – we see the collected most of our receivables in early April which should get reflected in our Q2 numbers. So I don’t expect any burn in the second quarter.

[Brian Lee:]

Okay thanks guys.

[Operator:]

Thank you very much for your question. There is no further questions in the queue. So at this time I would like to hand back to Dee Johnson or closing remarks.

[Dee Johnson:]

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

[Bill Weissman:]

Thank you.

[Raja Parvez:]

Thank you.

[Bill Weissman:]

Have a good day.

[Operator:]

Thank you. Ladies and gentlemen and that concludes our conference call. You may now disconnect. Thank you very much for joining us, do enjoy the rest of your day. Good bye.