Rubicon Technology, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good afternoon and welcome to the Rubicon Technology Second Quarter 2013 Earnings 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 second 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 second 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 third 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, but now as our web address have changed, the webcast and press release can be found at ir.rubicontechnology.com. A replay of this call will be available for one week and webcast will be archived in the Investor Relations section of our website. Before we begin, please be advised that certain statements in this presentation relates 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. The second quarter reflects positive market trends including high volume and improved pricing for our 2 and 4-inch core driven by an improving LED market along with some challenges in our larger diameter wafer business and low utilization rate for our capacity resulting in a mixed quarter. Revenue for the second quarter totaled $10.6 million as compared to our prior quarter of $8.3 million. The sequential increase in revenue was driven by increased sales up 2 and 4-inch core offset in part by reduction in 8-inch wafer orders. We saw a considerable increase in demand for 2 and 4-inch core in the second quarter with revenue from those products increasing six-fold from $1 million in the first quarter to $6 million in the second quarter. We saw market pricing for 2 and 4-inch products increase sequentially in the second quarter by roughly 10%, which was a first increase in sapphire pricing in the past two years. Since we generally book orders one quarter ahead, a change in market pricing is reflected in the following quarters. So this increase will be reflected in our third quarter results. The stronger demand was driven by the strengthening LED market with the general lighting segment playing a key role in the increasing demand for LED chips. We believe that the demand from the general lighting segment will remain strong for the foreseeable future. According to display surge, the demand for LED chips for the general illumination will nearly double in 2013 compared with 2012 from 16.7 billion to 33.7 billion chips. And that demand will double again, in the next two years to 73 billion chips in 2015. The strengthening LED market is absorbing the excess global slide of sapphire which has kept sapphire pricing at record lows for the past two years. 2 and 4-inch pricing is increasing again in the third quarter with prices up by at least an additional 10% further evidence of the strengthening market. While pricing for 2 and 4-inch core is still below our total cost, current market pricing for those products is near breakeven and we believe we will see the pricing environment for those products continue to improve in the coming quarters. In addition to the strengthening LED demand, we expect to see increased usage of sapphire in non-LED product. We believe the non-LED use of sapphire in mobile devices will expand whether from increased reduction of existing applications like camera lens covers or the introduction of new applications such as fingerprint recognition or other forms of biometric biz into smartphone where the scratch existence of sapphire becomes essential. In addition, the introduction of smart watches could generate significant additional sapphire demand. To give you a sense for the volume involved in some of these applications, we estimate that if the majority of smartphone manufacturers and calculated sapphire, camera lens cover. The demand from that small piece will absorb more than 15% of existing global sapphire capacity. Obviously, the other potential application would be larger in size than the camera lens and would require substantially more sapphire if adopted. Six-inch wafer sales were lower sequentially growing from $6.1 million in the first quarter to $3.2 million in the second quarter. High inventory levels at our two (main) 16 customers resulted in reduced orders in the second quarter. Our SoS customer continue to order but at a lower volume. Demand from the SoS market was up with slow start this year as run through some of the end product containing our customer SoS chips was weaker than expected which resulted in excess sapphire boule inventory at that customer. However, our customer is projecting continued growth in the second half of this year as new smartphone models are introduced. Newer phone models or LCD networks are more complex and require more advanced antenna switches like those that are using SoS RF technology. In addition, our SoS customer continue to work on expanding their content in each market by introducing new products such as digital tunbale capacitors and power amplifiers. SoS RF chips were also used in wireless, infrastructure, broadband, automotive, defense and aerospace application. So, we believe the SoS market has continued to be a strong market for us in coming years. However, given excess inventory levels we may not see an increase in orders from the SoS market for another quarter or two. Six-inch wafer demand from the LED market remains limited today most of our six-inch sales into the LED market have historically with the one high volume six-inch user. We did not have any sales to that customer in the second quarter as they had excess inventory and also have partial internal solutions. Competitors are aggressively trying to compete for what is currently a very limited demand from the six-inch wafer market because most industry experts see larger diameter substrate as the future of the industry. While the capability of these competitors in supporting high volume, high quality requirements that are meant to be determined this is currently creating price pressure in six-inch market. Clearly, we need to expand the six-inch wafer user base in order to change the dynamics. As we said in our last call, we are offering wafers with very tight certification at very effective pricing as an additional incentive to chip manufactures contemplating to move with six-inch platform. While we do not expect results overnight, we do believe that 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 manufactures either as to invest in new tool are finding a way to increase throughput from their existing infrastructure. In either case, there is an opportunity for them to benefit from moving to a larger diameter platform. As the six-inch customer base expand and as small diameter processing increases with increasing demand from general lighting and optical market, six-inch pricing should become more rationale. Our optical and R&D revenue totaled $1.2 million in the second quarter consistent with the prior quarter. Our R&D revenue currently comes from our lens project which involves building a unique crystal growth furnace and developing corresponding processes that can produce large area sapphire windows up to 2-inch thick. That project is on track and we are schedule to take delivery on the component of the larger furnace in the next couple of months which will then allow us to begin work on scaling up the size of the crystal. Produced with the target of 36-inches by 18-inches. Revenue is realized is based on over expenditures for their projects which will vary from period to period primarily based on the timing of equipment purchases. With the stronger demand from 2 and 4-inch core, we are shipping significant volumes of sapphire while maintaining a low utilization over crystal growth operation. As a result our total inventory levels are declining contributing to cash flow. Reduction in inventory level along with strong accounts receivable collection in the quarter allowed us to increase cash and invest this balance by $4.9 million in the second quarter leaving us with total cash and investments of $41 million at June 30, 2013 with no outstanding debt. We expect sales volume of 2 and 4-inch core to remain high throughout the year which should deplete most of our boule inventories by the end of the year. Based on this outlook, we expect to begin increasing utilization of our crystal growth facilities early next year. Keeping crystal growth utilization low has allowed us to begin converting boule inventory into cash. However, the resulting idle capacity is currently having a significant impact on our margin and our (inaudible) results. Utilization of crystal growth facilities is currently 45% and utilization of our parking operation is currently at 10% due to the lull in 6-inch orders. Idle plant cost in the second quarter totaled $3.7 million which is a significant portion of our gross loss in the period. We expect the crystal growth component of idle plant cost to come down dramatically going into the New Year with a plant reengagement of crystal growth policies on the next year. And our expectation is that polished and satin wafers volume should also be up considerably by then. Our plant introduced a large diameter satin substrate product by the end of this year remains on track. We are effectively shipping 4 and 6-inch sati substrates from our own facility in Malaysia in the fourth quarter of this year. This should allow us to capture more revenue and margin on the same patents area of step up and they establish and even closer relationship with the technical teams and our customers. We also feel it could help facilitate fixing adoption amongst chip manufactures as there will be one less process to scale up before migrating to another platform. Our focus will be on 6-six inch and we will be the first third-party to offer 6-inch patent substrate in volume. However, we have also been introducing 4-inch satin substrates to utilize capacity until there is a greater 6-inch adoption. Regarding earning for the quarter, we had a net loss of $0.26 per share in the second quarter as compared to a net loss of $0.15 in the prior quarter. The weaker 6-inch sales and resulting lower utilization of our passing operation along with higher smaller diameter sales and prices currently below total cost resulted in addition pressure on margin in the period. Reducing our cost structure at each step of the manufacturing process remains a top priority for us. While our believe that our vertically integration provides us to the very competitive cost structure today, we are remindful of the importance on maintaining a lesser focus on reduction and we have a number of projects underway to further reduce product cost. We will set a very aggressive cost reduction project internally and we are seeing good results. While current market conditions for sapphire continue to be very challenging, we are now seeing steady improvement. We are now seeing two consecutive quarters of price increases in order for 2 and 4-inch core and we expect a continued steady improvement in pricing there is an continued strong demand for LEDs in general lighting applications and our optical application for sapphire. While we expect another couple of challenging quarter ahead, the improving pricing environment for smaller diameter products and the expected increase in our factory’s utilization particularly going into next year would allow us to significantly improve financial performance. We are excited about the introduction of our PSS product planned for later this year and we believe that the LED industry finally coined a greater adoption of larger substrates next year. I would now like to turn the call over to Bill who will provide you with greater details on the financial results for the second quarter and our outlook for the third quarter.

[Bill Weissman:]

Thank you, Raja. Revenue for the second quarter was $10.6 million as compared to $8.3 million in the prior quarter. As Raja mentioned, shipments of two important cores were up dramatically, while revenue from six-inch wafer sales was lower sequentially for the reasons Raja provided. Revenue from six-inch wafer sales totaled $3.2 million in the second quarter, most of which were sold to the SoS market. Six-inch wafer sales in the prior quarter totaled $6 million. Revenue from 2 and 4-inch core in the second quarter was $6 million as compared to $1 million in the first quarter. Demand for these products from the LED market was much stronger in the quarter. Despite Rubicon shipping considerably more sapphire into the LED market in the second quarter as compared to the prior quarter, market prices for 2 and 4-inch core orders increased throughout the quarter by approximately 10%. As Raja mentioned, there is typically a one quarter delay before changes in market prices are reflected in our results. Demand remained strong and we’re seeing market prices increasing again in the third quarter by at least an additional 10% most of which would be reflected in fourth quarter earnings. Optical and R&D revenue totaled $1.2 million in the second quarter unchanged from the prior quarter revenue. We began scaling back our crystal growth production in the first quarter in order to begin drawing down boule inventory levels. This combined with lower utilization of our polishing infrastructure in the second quarter resulted in idle plant cost of $3.7 million in the second quarter which accounted for a significant portion of our negative gross margin in the second quarter. Idle plant cost in the prior quarter totaled $2.3 million. Based on the volume material we are currently selling, we expect boule inventory levels to approach a more normal level by the end of the year and we will then begin reengaging the idle crystal growth capacity. Regarding the idle wafering capacity, we expect to see 6-inch wafer orders to strengthen later in the year and we also expect to begin shipping PSS wafers in volume early next year which will begin to absorb our capacity. The additional idle plant costs and the heavier mix and small diameter in the second quarter resulted an increase in growth loss to $6.4 million from $3.4 million in the prior quarter. Operating expenses in the second quarter totaled $3.1 million as compared to $2.9 million in the prior quarter. The increase was attributable to additional R&D expenses related to our PSS product development and additional sales and marketing expenses. We also incurred $427,000 loss on disposal of assets in the quarter, a piece of equipment from the first generation of our raw material process was replaced by a more efficient equipment that would allow us to further reduce the raw material cost. We had a per share loss in the second quarter of $0.26 as compared to per share loss in the first quarter of $0.15. Product mix, lower utilization as well as the loss on disposal of assets and a slightly lower effective tax benefit rate all contributed to the larger loss per share in the quarter. Turning to the balance sheet and cash flow, we maintained a strong cash position with our cash in short-term investment increasing by $4.9 million in the quarter to $41 million at June 30, with no debt. With the scale back production and high volume of core sale in the second quarter, we saw boule inventory level begin to decline in the quarter. We also begin reducing raw material inventory levels from the second quarter. As a result, total inventory was reduced by $5.8 million in the quarter. Our DSO at June 30 was 27 days as compared to 95 days at the end of the prior quarter. We had strong collections in the quarter and many of our filing 4-inch core sales in the second quarter included terms that required either partial or full prepayment. Our capital expenditures in the second quarter were $2.9 million, we do expect to spend between $7 million and $10 million over the rest of the year, primarily un-building our PSS wafer capability, enhancing our polishing platform to further reduce wafer cost. Regarding our outlook for the third quarter, we believe the LED market will continue to strengthen and as we mentioned we expect pricing for two important cores to be higher in the third quarter. We believe it would take another quarter or two to see meaningful improvement in the six-inch wafer orders and there will likely be additional price pressure on that product in the near term. As a result, we expect the third quarter revenue to be similar to the second quarter. Idle plant costs will remain high in the third quarter but we should see some improvement in profitability with pricing increases for two and four-inch cores and product cost reductions offset partially by a lower six-inch into wafer volume and pricing. As a result, we expect our loss per share between $0.20 and $0.24 based on 22.5 million shares outstanding and 45% tax benefits rate. I’d like to now 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’re seeing a real signs of improvement in overall demand. Pricing on orders by 2 and 4-inch products has now increased by two consecutive quarters. The prospects for a continued growth are very interesting with the general lighting segment of the LED market gaining momentum and the expected adoption of sapphire for optical application such as the mobile device application, I mentioned earlier. We have some very exciting new product development projects underway such as PSS and large area optical windows and several cost induction initiatives in progress which should see significant benefit next year. We have some near term challenging regarding the 16 markets but I strongly believe we will soon see the customer base expand for that product and Rubicon differentiation in the market will drive strong growth. The markets which are young are in warning and will likely continue to be volatile. However, by focusing on reducing cost and evolving our products through technology, we intend to maintain our market leadership growth and position the company to capitalize on market condition as they improve. 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:]

(Operator Instructions) Our first question comes from Jed Dorsheimer of Canaccord.

[Josh Baribeau:]

Hi, thanks, this is actually Josh for Jed is traveling. Now that you are entering the 4-inch polish market that’s a little bit new from a strategy perspective, how did you get comfortable with the fact that you won’t be creating a channel conflict by further competing with your polishing customers?

[Raja Parvez:]

Well, we are actually – will be providing the six-inch PSS, four-inch PSS product and I believe that this would be the only third party providing from a vertical integrated supply point of views of our customer, the existing customers which are also the four inch or six inch users, we do not believe there would be any conflict with the current supply chain.

[Josh Baribeau:]

Okay. How do you think about market share in the silicon sapphire, sapphire and silicon market going forward, do you still maintain a very high percentage, did you see that market as it matures, you’re losing a little bit of share or maybe making it up and volumes as the market grows?

[Raja Parvez:]

First of all, we have not lost any market share this year. And I believe yes, we will continue to grow with that customer, we have a dominant position in that market with the customer and we continued to have strong relationship with that customer and we continue to provide really competitive pricing and very effective differentiated sophistication to that customers. And I believe we will grow as they will grow and will continue to be a dominant player in that market and part of the supply chain.

[Josh Baribeau:]

Okay. And then finally for me, so it sounds like, you’re being very aggressive on six-inch pricing in order to drive the option which is actually, which is a good strategy but I’m wondering if you’d driven it so far down that you are below, your cost, so what do you think cost can be and if you’re hoping once people adapt that you can -- that pricing will come back up, can you tell us a little bit about how you are pricing versus where your costs are?

[Bill Weissman:]

Yes, still that product is still profitable although it’s a very small market at this point, platform prices could come down below cost. But its always based on supply and demand right its like small diameter pricing is increasing once the adoption rate increases and we don't think that the suppliers will increase as fast as the demand will and therefore it we believe the pricing of the product would come back again. So its all matter of supply and demand.

[Josh Baribeau:]

Great. I will pass it on. Thanks.

[Operator:]

Our next question comes from Avinash Kant at D. A. Davidson.

[Unidentified Analyst:]

Hi, this is Karen filling in for Avinash.

[Bill Weissman:]

Hey.

[Unidentified Analyst:]

Good morning. I was just wondering if you can comment a little bit more on the six-inch wafers growing in the second half and the sales mix between SoS and LEDs?

[Raja Parvez:]

I believe that, look we are currently working with number of potential customers and I believe that first of all from SoS, as our customer has reported that they see continued strength in the second half and we will continue to grow with that customer. As far as LED is concerned, okay our six-inch demand on the LED side is weak at the moment because the major user of the six-inch is being supported by combination of existing inventory, additional internal productions and they are getting some wafers from a couple of newly qualified sources that have offered extremely low pricing in order to get into stores. We currently do not have any orders from them, but we may see some small volume in the quarter. But I believe that we will continue to be a part of this supply chain but that volume will be probably lower than the past because of our vertical integration and our capability that remember, we have been thus far the largest supplier of six-inch polished wafers and thus far we have supplied close to half a million six-inch polished wafer in the LED and SoS market. Because of our capability, we believe, that at an additionally since we will be offering four and six-inch patent wafer substrates, we have been discussing the potential six-inch users and who are having a very promising discussions with them and encouraging discussion and we will be introducing that part and when you sell the PSS product by definition you are also selling the polished wafer products as well.

[Unidentified Analyst:]

Okay. So when you commented on the second half picking up with six-inch wafers, its predominantly just a growth within SoS?

[Raja Parvez:]

Predominantly in SoS but there could be some improvements in the LED side as well.

[Unidentified Analyst:]

Okay. And then I know you talk a lot about LED just really picking up and how much is that is -- and general lighting things strong, so how much is your LED business is general lighting versus backlighting?

[Bill Weissman:]

We generally have great visibility for the end product because people (inaudible), we don’t really see who the end customer is. But we know, we generally follow the overall market. The overall market recently has been driven by the strength in the general light market and I think there is more and more sapphire are being absorbed by some of the non-LED applications as well so that is as much as we know in terms of the end market.

[Unidentified Analyst:]

Okay. That helped answer my other question too. Thank you.

[Bill Weissman:]

Operator, do we have any other question?

[Operator:]

Next question comes from Andrew Huang at Sterne Agee.

[Andrew Huang:]

Thanks for taking my question guys. So when I think about your commentary on six-inch wafers and then 2 and 4-inch core and then I think about your Q2, Q3 revenue guidance, my guess is that six-inch is expected to come down again in Q3 is that correct, and that growth would be kind of coming from 2 and 4-inch core still?

[Bill Weissman:]

Yes, I think we expect the six-inch order to be down a bit basically because based on prior commitment to our customer taking more wafers in the second quarter than they really needed. So we saw that further efficient inventory adjustment going on in the third quarter with them. We are hopeful that those volumes will pick back up in the fourth quarter.

[Andrew Huang:]

Right, in the fourth quarter, so does that mean that in Q3, I am sorry when I think about, yes Q4 six-inch revenue, you think that will be up sequential, flat or down?

[Bill Weissman:]

Still early to tell but our expectation, it will be up.

[Andrew Huang:]

Okay, great. And then can you give us some additional color on your comment that 2 and 4-inch pricing is continuing to increase in the third quarter, how sustainable do you think those price increases are?

[Raja Parvez:]

Well, based on our import, some of our customer around the globe, we’re seeing more and more demand. As we mentioned earlier, we have been supplying unique amount of 2 and 4-inch for the past two quarters and demand you see right now and the balance between the capacity available and demand, we believe that the pricing of 2 and 4-inch will continue to increase at least next couple of quarters.

[Andrew Huang:]

You had really strong results in Q2 in your 2 and 4-inch core, can you give us a sense of where the strength was by geography?

[Raja Parvez:]

Well, most of the 2 and 4our-inch core was coming out of especially as you know our majority of sales is in Asian markets. However, the 2 and 4 majority is coming from China followed by Taiwan and followed by the other countries like Japan, South Korea and Taiwan.

[Andrew Huang:]

Got it. And then given that you have in the boule inventory to last year, through the end of the year, do you think, isn’t get to breakeven gross margin without turning on your crystal growth capacity?

[Bill Weissman:]

No, it would be very close to carrying that kind of idle plant cost of $2.7 million of a quarter is pretty significant.

[Andrew Huang:]

Okay. And just as reminder in Q1, you said the idle plant cost is $2.3 million?

[Bill Weissman:]

Yes.

[Andrew Huang:]

Okay, thanks. I’ll get back in queue.

[Operator:]

The next question comes from Paul Coster of JPMorgan.

[Paul Coster:]

Yes, thanks very much. I think last quarter you said that if prices increase 20%, 25%, you should be at breakeven by year end and it sort of attempts an increase here and sense like posted momentum into this quarter, do you still think that the breakeven before year end is attainable?

[Bill Weissman:]

For the more sustainable product, yes. It’s not, yes, it’s not certain but we certainly believe it is sustainable.

[Paul Coster:]

Okay. And then one (should) so point on language really several times during the prepared remarks, you talked of the strong demand in 2 and 4-inch cores, when you say strong demand that I’m kind to looking at the numbers relative to the past then it doesn’t seem very strong, so can you just explain what do you mean by that?

[Bill Weissman:]

Well, our volumes are significantly higher than they ever been, just the pricing, it so depressed. But that’s why if you are comparing dollars versus the past, it wouldn’t seem large.

[Paul Coster:]

So, are you in a, can you compare the volume today versus -- previously have you got some kind of metrics, you can share with us?

[Bill Weissman:]

Yes, its almost 50% more than any other period we shipped in our history.

[Paul Coster:]

Okay, got it. And then the last question, I got is when we, you said that you don't have that much insight into the end users of the product but hasn’t been any change in the sort of geographic mix of the end customers or your customers rather?

[Bill Weissman:]

Yes, well, we’ve seen a significant demand for 2 and 4-inch core in the China market, so much more of our shipments have gone to the China in the second quarter than they have previously.

[Paul Coster:]

All right. Thank you very much.

[Operator:]

Our next question comes from Brian Lee at Goldman Sachs.

[Brian Lee:]

Hey guys, thanks for taking the questions and sorry if you covered this but did you quantify how you expect pricing to trend in 3Q and 4Q for six–inch LED wafers and also in SoS? And then directionally, should we expect margins to be higher in small diameter or six-inch exiting the year given your view on pricing trends?

[Bill Weissman:]

Well, we did say that we expect some pricing pressure to continue for a period of time, till the adoption increases. So those prices will likely come down both for LED and SoS, just which product is making more larger margin at the end of the year if you get to cope with them right now. But obviously they’re headed in two different directions at this very moment, small diameter pricing is increasing and six-inch is coming out and we think that six-inch pricing would stabilize and going into next year with boarder adoption, the increase volumes. I think some of the competitive landscape, we’ll rationalize somewhat. So I think we expect to see price improvement and six-inch going into the next year. In the long run, the six-inch product in our view will always earn a premium because it’s a much more difficult product to make than in a normal environment, it’s going to earn higher margins.

[Raja Parvez:]

And additionally, remember we have the largest experience and one of the most very – supplier of six-inch polish wafer. I think we believe that, that trend especially, vertical integration and now new differentiated products, which (inaudible) continue to maintain the market leadership in that area moving forward.

[Brian Lee:]

Okay, that’s helpful. Thanks. And then I guess I was also wondering are you still engaged that your larger historical customer for six-inch LED wafers or is that no longer an opportunity and then one last one on margin, is there any difference between the SoS and six-inch wafers dedicated for LED? Thanks.

[Raja Parvez:]

Well, first part of the question, yes, of course, we continued to be fully engaged with that customer on a regular basis and we have the most capability and we are the most experienced with that customer -- they have with us. Of course, as I mentioned earlier. At the moment, it’s some pressure on this and because of the pressure that I mentioned but of course we will continue to have a dialog with them. And I believe we will continue to be – will be part of the supply chain as moving further. Because of our capability and the track record that we have demonstrated into the market and specifically to that customer. We have grown significantly because of that customer and we are also part of their becoming a more able and introducing of six-inch flat from few years ago.

[Bill Weissman:]

Second part to your question is historically the SoS and the LED six-inch business has been similar in margin.

[Brian Lee:]

Okay, thanks a lot guys.

[Operator:]

Our next question comes from Jagadish Iyer at Piper Jaffray

[Jagadish Iyer:]

Hi, Raja and Bill, thanks for taking my questions, two questions. First, I wanted to find out on this PSS commentary that you made, I just wanted to find out, are those – those uptake of those products would that be existing customers or would that be new customers and what is the pricing premium for PSS versus non-PSS wafers?

[Raja Parvez:]

Well, first of all, the customers for PSS probably both existing and out of the brand new customers. Essentially we are working with all the major LED chip manufacturers around the globe. So it will be a combination of that. Obviously, with existing 16 power customer, they know a lot about us. But this also give us the more opportunity and expands more avenue working for some new customers because in the LED, SoS area, there are chip LED companies who have some internal PSS capability but many of and some from the – as they procure from outside. But thus far no third party has been able to provide a light (inaudible) substrates. So, I believe that this will be a more value added to them what they’re doing internally. This will be a combination of that.

[Jagadish Iyer:]

Yes and the pricing premium between PSS versus non-PSS splits?

[Bill Weissman:]

For six-inch, it would be likely in between 40% to 50% premium.

[Raja Parvez:]

And that kind of premium has been already established in the market for the smaller diameter for number of years, I repeat the 2 and 4-inch.

[Jagadish Iyer:]

Yes. And I just wanted to clarify Raja in your prepared remarks, you did say that your third quarter, you’re seeing pricing increase on 2-inch and 4-inch but also you did mention something about aggressive pricing. I just wanted to kind of get in the context, what were you trying to do, would like to clarify that please?

[Raja Parvez:]

Well, what we are doing is this, in order to further provide incentive to the current six-inch users and also potentially incentive to the new six-inch users. We are providing -- we have the strategy, we are able to providing a very competitive and effective pricing. Second, we are also providing a very attractive specification and benchmark specification because of our capability and track record. And above all, our sustainability of a trusted supplier in this world market, so this is three-strong approach that we are doing above and beyond. We are also providing a more specific customer technical support to our customers on the side so that we are posting our all the projectors to enable our customer to easily migrate to the six inch line.

[Jagadish Iyer:]

All right. So, one last question for Bill. Bill just a big picture question in terms of the overall profitability, I just wanted to find out what are your latest thoughts in terms of the profitability of the whole operation is? Could it be in the first half of 2014 or potentially in the second of half of 2014? Thank you.

[Bill Weissman:]

Well, we don’t give guidance beyond on the next quarter out, but again based on all the positive trends we’re seeing now, the progress we are making in cost reduction, we’re very optimistic about 2014 and won’t give any specific guidance on 2014 but we’re certainly pretty bullish on it.

[Jagadish Iyer:]

Thank you.

[Operator:]

(Operator Instructions). Our next question comes from Andrew Abrams at JG Capital.

[Andrew Abrams:]

Hi guys, thank you for taking my questions. Question one six-inch pricing pressure. Can you kind of give us a handle on where that pressure is coming from? There have been stories about some Chinese manufacturers trying to get into the business and I’m not sure what the accuracy of any of those is, maybe you can shed a little light on that?

[Bill Weissman:]

No, it’s not, there essentially there is a couple of policies that are acquiring some core and are getting in at low volumes and competing for, again it’s a very limited user base of that right now, so it doesn’t take much in terms of additional sapphire in terms of the six-inch wafers to kind of knock up the pricing in the short term. Plus we’re being proactive in pricing to try and expand the customer base. So we are driving a lot of it as well. So we think its essential that we take advantage in this period of time where MOCVD utilization rates and are high again and people are making decisions around capacity to really drive (inaudible) extension and we think it’s important to do that by offering very attractive pricing, it’s a bit of a lost leader upfront, but we think it’s critical for our business to expand by customer base. So we are also contributing to the lower pricing of six-inch.

[Andrew Abrams:]

Got it. And for your six-inch customer, your non-SoS customer, the product that they are producing internally. Can you talk a little bit how you compete with that product, is that a core product only that they have to send out to be polished or is that internally done completely as if it was something that you had produced?

[Raja Parvez:]

Well of course, we cannot specifically comment on a particular company but we believe that they are a permanent solution, they procure a core and many processing is done internally.

[Andrew Abrams:]

Okay, thanks. And lastly the cost reduction plans that you are talking about for the balance of this year. Can you be a little more specific as to what they might be, I know that you kind of gotten fairly well through your raw material changes, is there other prosthesis that you are working on specifically?

[Bill Weissman:]

Yes, predominantly on the wafer side although the raw material realizing the savings from that is really ahead of us here because we just ramped up the volume which allows us to get the cost down to the target levels that we’ve been treating for and we have a lot of crackle inventory. So it will be sometime before we can really use 100% of raw material, but we are starting to realize some savings from that already. Most of the savings really come from the wafering side, there are significant savings we are realizing already on the wafering side in Malaysia, the moves in Malaysia, the remainder of our polishing infrastructure help, process improvements are on the way right now, we already reduced our cost by 20% on a six-inch wafer side already, and we have very significant, very aggressive targets for the rest of this year to lower those wafer costs further.

[Andrew Abrams:]

Would you consider yourself the low cost producer regardless of any other circumstances for six-inch cores and also polishing?

[Bill Weissman:]

We believe that we are extremely competitive in terms of cost right now. Our vertical integration really allows us to control cost at each step of the process from raw material, crystal growth we build our own furnaces and have low power costs, very highly automated equipment, and now our – with all of our more labor intensive slicing and polishing infrastructure in Asia, we think we have a very, very attractive price for our products. And as I mentioned with the additional cost initiatives we have underway, we are confident that if we were already not the lowest cost provider out there (inaudible) soon.

[Andrew Abrams:]

Got it. Thanks very much.

[Operator:]

Our next question comes from Andrew Huang at Sterne Agee.

[Andrew Huang:]

Thanks for the follow-up question. If I exclude the idle plant charges it looks like your COGS increased by about $4 million and then your revenues all increased by $2 million, so can you help us out as to why (inaudible)?

[Bill Weissman:]

Obviously, we sold lot more core, which is – as we said are currently at a loss. We had a lot of activity in the process development that I mentioned as captured not as an R&D line but captured as our costs because we are making products in the course of developing those processes. So there are number of factors but obviously when you are selling more volume of a product that’s currently the price below your cost that’s the kind of situation you are going to have.

[Andrew Huang:]

Okay. Thanks for the clarification.

[Bill Weissman:]

Operator any other questions?

[Operator:]

At this, we would like to close the question-and-answer session. And I would like to turn the conference back over to Dee Johnson for any closing remarks.

[Dee Johnson:]

Thanks Amy and thanks everyone for joining us today. We appreciate your interest and we look forward to speaking with you again soon. This concludes Rubicon’s second quarter conference call.

[Bill Weissman:]

Thank you.

[Raja Parvez:]

Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation, you may now disconnect.