Rubicon Technology, Inc.
Q3 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Good day and welcome to the Rubicon Technology’s Third Quarter 2013 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Dee Johnson, Vice President, Investor Relations. Ms. Johnson, the floor is yours, ma’am.

[Dee Johnson:]

Thank you, Mike and good afternoon everyone. We are pleased you could join us today for Rubicon’s third 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 third 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 fourth 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 has 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 the webcast will be archived in the Investor Relations section of our website. Before we begin, please be advised that certain statements in this presentation relate to future results that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties and assumptions as to future events that may not prove to be accurate. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Now, I 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 sapphire market continued to strengthen in the third quarter driven by the growing momentum of the LED market and demand from non-LED applications for mobile devices such as the sapphire home button in the new iPhone 5S as well as the sapphire camera lens cover and dual flash now being adopted by more smartphone manufacturers. As a result of the growing demand, pricing for 2-inch and 4-inch sapphire cores have increased again. This is the third consecutive quarter of price increases and current market pricing, which will be reflected in our fourth quarter results, is back to around breakeven. Demand from the LED market is now being driven primarily from the general lighting segment. The backlighting market continues to be the largest segment and other applications such as the dual flash in the mobile devices are adding demand. But the general lighting segment appears to be the real growth driver and we believe that the demand from the general lighting segment will continue to grow and even accelerate for the foreseeable future. According to a recent report on packaged LEDs by IHS shipments of LED lens for lighting are to increase dramatically in coming years rising to 2.4 billion units in 2016 and near fivefold increase up from $520 million in 2013. The other major contributor to the increasing demand for sapphire are non-LED applications, for sapphire in mobile devices. Last year Apple adopted a sapphire camera lens cover other smartphone manufacturers are now beginning to adopt the sapphire lens cover for their newer models. And now in Apple’s latest iPhone model the 5S they have incorporated a sapphire home button. Apple chose to switch to sapphire for this home button in the 5S because sapphire is virtually scratch proof, which is an important statistic to ensure the effectiveness of the fingerprint recognition security they have built into the phone. Many believe their mobile devices will be used as credit cards in the future for the security build into these devices will be critical. Biometrics such as fingerprint recognition provides significantly greater security than the password and we believe it’s likely to become increasingly popular in mobile devices, kiosks, etcetera. Therefore the use of biometrics could be a significant growth driver for sapphire in coming years. Our revenue for the third quarter was $11 million, which was slightly higher than the prior quarter, while demand continued to strengthen our fabrication capacity for production 2 inch and 4 inch cores has been operating at near full utilization and therefore volumes sold in the third quarter were similar to the prior quarter. However, revenue from core sales increased by $1 million sequentially growing from $6 million in the second quarter to $7 million in the third quarter primarily due to the increased pricing for 2-inch and 4-inch cores has risen steadily over the past few quarters and we believe the pricing environment will continue to improve going into the next year. The increased revenue from our 2-inch and 4-inch cores was offset by reduced revenue from polished wafers which was lower sequentially by $1 million. While demand for 6-inch wafers in the LED market is limited at the moment, we believe that we will finally begin to see greater adoption of 6-inch wafers among major LED chip manufacturers within the next year. MOCVD’s 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 their existing infrastructure. In either case there is an opportunity for them to benefit from moving to a larger diameter platform. We have been aggressively marketing 6-inch wafer to the top tier LED chip manufacturers and are seeing an increased level of interest in larger wafers. In the fourth quarter we will begin shipping 6-inch qualification samples to one of these Tier 1 chip manufacturers and we expect to see production volume orders from this customer as early as the second quarter of next year. The industry’s migration to 6-inch, while gaining momentum will nonetheless take time to develop. However, most industry analysts agree that it is the logical progression and we will believe that the activity around 6-inch wafers in the LED market will build throughout next year. We are also very excited to announce the launch of our patterned sapphire substrates PSS product. Our infrastructure is in place and development is ahead of schedule, so we are now producing samples for both 4-inch and 6-inch pattern wafers. We have been marketing the PSS product and are very pleased with our success to-date. 71 LED chip manufacturers have already requested PSS samples. Overall boom have requested 6-inch PSS samples. These samples are of various pattern types, densities and heights. We offer fully customizable sub-micron patenting capability with dimensional tolerances with one-tenth of a micron. We also offer the industry’s smallest edge exclusive zone maximizing the usable wafer surface area yielding more chips per wafer. We are very pleased with this response so far to this offering. We are the first vertically integrated sapphire producer to offer high volume 4-inch and 6-inch pattern substrates. While our primary focus is on 6-inch PSS. We are to be selling 4-inch PSS wafers in the near-term to utilize the PSS infrastructure. By offering the 4-inch PSS product, we will also be better utilizing our existing polishing infrastructure. While we are a few quarters away from volume production orders, we believe that PSS wafers sales should generate at least an incremental $15 million in revenue for us in 2014. While we are very optimistic about our LED polished and PSS wafering business for next year, we do have some additional near-term challenges on the wafer side of the business. Our SoS customers continue to have excess inventory of sapphire wafers. In addition, this customer is introducing new RF chips that will be produced on SOI early next year that may display some of their SoS chips. As a result, we expect purchasing from this customer not to resume until the third quarter of next year and likely at lesser volume than we have seen historically. While this is obviously the supporting news under additional changes in improving utilization of our wafering operations in the near-term, the market size of the SoS business is small in comparison to the LED and non-LED opportunities we have just discussed. We will, however, continue to serve this market going forward, because large-diameter R-plane sapphire will continue to be used to produce chips for advanced auto publications such as base stations and defense applications. In addition, sapphire companies are now purchasing small volumes of R-plane wafer from us to develop chips for handset and other applications. Given the technologically demanding requirement and our extensive know-how in large-diameter R-plane sapphire, we expect to maintain a leadership position in this developing market. Turning to our finished optical products and R&D activities, revenue totaled $1.9 million in the third quarter, up from $1.2 million in the prior quarter. The increase was primarily due to additional R&D revenue based on higher expenditures in the quarter as we took delivery on equipment in the quarter, where R&D revenue 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. We took delivery on key furnace spot in the quarter, which will allow us to begin work on scaling up the size of the crystal produced with the target size of 36 inch by 18 inches. Revenue on this project is realized based on our expenditures for their project and will vary from period to period primarily based on the timing of the equipment purchases. Regarding earnings for the quarter, we had a net loss of $0.26 per share in the third quarter consistent with the major prior quarter loss per share. The improving margin on 2-inch and 4-inch core from increased pricing was offset in part by weaker 6-inch sales and resulting lower utilization of our polishing operations. A significant amount of the pressure on earnings is due to idled plant cost associated with low utilization, which totaled $3.9 million in the third quarter. We continue to maintain a lower utilization of our crystal ball growth operation in the quarter while shipping significant volume in order to reduce boule inventory levels. As a result, our boule inventory is now near the desired level and we have thus begun increasing crystal growth production. We plan to aggressively ramp up the crystal growth operations in coming months and expect to be at 100% plus utilization by the end of the first quarter. Approximately $1 million of the quarterly idle plant cost will be eliminated once we are at full utilization in crystal growth. Getting to a high utilization rate in our polishing operation will likely take while longer. However, we are expecting increased demand for 6-inch wafers from the LED market and we believe our PSS offering of both 4-inch and 6-inch will generate significant demand next year. It is important to remember that we have not historically sold 4-inch wafers. So by offering 4-inch PSS wafers, we should be driving incremental volume through the polishing operation. Our primary focus has been and continues to be product innovation and cost reduction. Over the course of this year we have added significant depth to our technical teams, particularly in polishing and tackling. That investment had paid off with process improvement by that significantly we lowered our wafer cost this year and has at the same time allowed us to introduce the PSS product ahead of schedule. We have also added domain knowledge in epitaxial which will be focused on developing potential next generation products such as large diameter templates and advanced optical products. It is our continual focus on technological leadership, which has allowed us to create vertically integrated models with differentiated processes and equipment at each step of the manufacturing process and has allowed us to be first in products like large-diameter polished wafers and now large-diameter PSS and soon large rectangular windows. I would now like to turn this call over to Bill who will provide you with greater details on the financial results for the third quarter and our outlook for the fourth quarter. Bill?

[Bill Weissman:]

Thank you, Raja. Revenue for the third quarter was $11.1 million as compared to $10.6 million in the prior quarter. Revenue from 2-inch and 4-inch core sales increased 19% sequentially primarily the result of increased pricing for those products. Revenue from 2-inch and 4-inch cores in the quarter totaled $7 million as compared to $6 million in the prior quarter. As Raja mentioned, 2-inch and 4-inch core volumes sold in the quarter were similar to the prior due to fabrication capacity constraints. Market pricing for most sapphire products has risen now for three consecutive quarters, while pricing for 2-inch and 4-inch cores is still very low compared to historical pricing. The current market price which will be reflected in our fourth quarter results is now back up to approximately breakeven levels. Given the momentum of the LED in general lighting market and new applications for sapphire, we expect pricing to continue to raise going into next year. Revenue from 6-inch wafer sales was $1.9 million in the third quarter, lower sequentially by $1.3 million due to reduced orders from the SoS market for the reasons Raja provided. While we do expect limited wafer revenue in the near-term, we are excited about the early interest in our PSS offering and remain very optimistic about increased adoption of 6-inch wafers next year. Optical and R&D revenue totaled $1.9 million in the third quarter, up from $1.3 million in the prior quarter. We continue to make progress on our lens R&D project and taking delivery on components of our new larger furnace resulted in higher R&D revenue in the quarter. This is an important milestone in the project, significant process of development with a smaller furnace has resulted in a unique design for this larger furnace that will allow us now to start process development on this 36-inch rectangular windows. Low plant utilization continues to be a drag on earnings and our idle plant costs in the third quarter totaled $3.9 million, which accounted for a significant portion of our negative gross margin in the quarter. Idle plant costs in the prior quarter totaled $3.7 million. However, with the high volume sales of 2-inch and 4-inch cores sold over the several months our boule inventory is now at a level where we are now starting to reengage our idle crystal growth facilities. The current plan is to have all of our furnaces operating by the end of the first quarter of next year which is required for us to maintain the current volume of core sales. Two, our boule inventory levels should continue to decline over the next two quarters as we ramp crystal growth production back up. Once all of our premises are operational, the quarterly idle plant costs will be reduced by approximately $1 million. Utilization of our polishing operations will also improve as we ramp up production on PSS and 6-inch polished wafers. Operating expenses in the third quarter totaled $3.1 million, consistent with the prior quarter’s operating expense total. Within operating expenses our R&D expense increased $200,000 sequentially due to increased activity on PSS development. We had our per share loss in the third quarter of $0.26 unchanged from the prior quarter. Product mix, lower utilization and a slightly lower effective tax benefit rate offset pricing increases on 2-inch and 4-inch core products. Turning to the balance sheet and cash flow, we maintained a strong cash position with our cash in short-term investment balance of $37 million at September 30 with no debt. Our DSO at September 30 remained very low at 36 days as we continue to require either partial or full prepayment from customers in certain regions. Our capital expenditures in the third quarter were $4 million, most of which was spent on our PSS infrastructure. We do expect to spend a similar amount in the fourth quarter primarily on the remainder of the PSS equipment and enhancing our polishing platform to further reduce our wafer cost. Regarding our outlook for the fourth quarter, we believe that sapphire demand will continue to strengthen and we expect pricing for 2-inch and 4-inch cores to be higher in the fourth quarter and we have added some additional core fabrication capacity. With lower than expected wafer orders from the SoS market, our wafer revenue will be lower in the fourth quarter offsetting both as a sequential price and volume increases for the 2-inch and 4-inch core. Therefore, we are expecting fourth quarter revenue to be similar to the third quarter. We are very optimistic about the wafer demand next year, but it will take another couple of quarters to see a meaningful improvement in wafer orders. Idle plant costs will remain high in the fourth quarter, but we will begin to see some reduction in idle plant cost associated with our crystal growth operations as we are now starting the process of reengaging idle crystal growth furnaces. As a result, we expect a loss per share of between $0.20 and $0.24 based on of 22.5 million shares outstanding and a 45% tax benefit rate. I would now 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. Good. While we faced some challenges in the near-term, we are very excited about the potential for our existing markets and the prospects for the broader usage of sapphire in general. We believe that the market opportunities ahead of us are substantial and the work we have done this year in product development and our cost reduction positions us extremely well into benefit from these growing markets. With this continuing pricing environment and improving utilization of our production facilities, we expect to begin seeing strong improvement in operating results growing into next year. 2014 should be a very exciting year for Rubicon. We expect strong acceptance of our new PSS product. We believe we will finally begin to see some meaningful migration to 6-inch substrates in the LED market. And we believe that the unique physical properties of sapphire that has resulted in adoption of its use in new applications such as home buttons and camera lenses will continue to open up new opportunities. I want to thank you all for joining us today and thank you for your continued support. Now, may we take our questions?

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question we have comes from Jed Dorsheimer of Canaccord. Please go ahead.

[Jed Dorsheimer:]

Hi, thanks for taking my questions. I guess, first question, your comment excluding – Roger, your comment excluding idle factory cost to get back to breakeven in fourth quarter, I assume you mean cash costs for manufacturing? And is that – so if you can confirm that? And then secondly that seems like it’s a higher level than it’s been in the past, is this because of the increased infrastructure on the downstream?

[Bill Weissman:]

No, those are not the cash cost, that was limited to the 2-inch and 4-inch core. So the pricing on 2-inch and 4-inch cores is getting close to breakeven for those products. Now in addition for the idle plant costs, we still have the wafer costs and those we are making in terms of wafers these days are samples for PSS and qualification wafers for 6-inch polished. And there is a lot of development costs associated with producing those so the wafer business is not profitable at the moment either. So it’s – the comments around breakeven were around 2-inch and 4-inch core pricing only.

[Jed Dorsheimer:]

Okay. And then just your limited – your constraints on 2-inch and 4-inch I mean inventory only came down by about what $6 million quarter-over-quarter which was a nice job. But it seems if I would have thought you would be able to feel any excess demand with that inventory, could you just reconcile where the constraint actually is on the 2-inch and 4-inch and why you wouldn’t be able to have brought inventories down further to and boost revenues.

[Bill Weissman:]

Sure. The capacity constraint is within fabrication of core, so coring out the boules and then finishing of the cores. As you can imagine if you are coring out one core that’s 6-inch diameter that’s nine times the surface area of a 2-inch core. So when you are coring out primarily small diameter you can’t core quite as much as you would if you had a good mix of larger and smaller diameters. So that’s where the bottleneck has been, but despite that we have reduced inventories quite significantly and they will continue to come down over the next quarters even though we are ramping crystal growth back up. We don’t want to add too much more fabrication because then we will be out of alignment when of he large diameter business comes back we will have excess capacity which we don’t want.

[Jed Dorsheimer:]

Got it. So should we look Bill at capacity right now is $7 million for the 2-inch and 4-inch and then any price increases basically how to look at the business?

[Bill Weissman:]

And we are trying to add 5% to 10% more capacity.

[Jed Dorsheimer:]

Okay, that’s helpful. One question on SoS and I just want to dig into the PSS, but on the SoS, given that your customers moved away from the technology in their new products to the silicon on insulator, does this drop to a certain baseline, how should we look at that business on more of a longer-term basis.

[Raja Parvez:]

Well first of all this customer is going to continue to use dual platform substrates SaaS, SoS and SoI however for a good newer RF chips they plan to use SoI. As we have reported in previous quarters they had an excess inventory and as a result of this one we believe that this inventory will not be exhausted until third quarter of next year. However, we expect that sapphire orders from this customer to review in third quarter of 2014. But they will be lesser volume as historically because their (indiscernible) has reduced – will be reduced compared to what we have historically sold to them, but they plan to continue to use dual platform substrates.

[Jed Dorsheimer:]

Okay. And then Raja could you just clarify I thought I heard you say that PSS would be did you say $15 million or $50 million in 2014?

[Raja Parvez:]

$15 million, it’s $15 million at least additional revenue incremental revenue for PSS.

[Jed Dorsheimer:]

And that would be heavily back half loaded so obviously going into ’15 it would be significantly more than that? And then how should we look at ASPs for 6-inch PSS, I know for 2 inch it doubles – typically doubles the wafer pricing. For 6-inch I assume it it would be less but I’m not familiar just because it doesn’t seem to be anyone offering those in the market right now, could you help us in terms of how we should look at that.

[Bill Weissman:]

Sure, it would be less, it wouldn’t be – geometry doesn’t work in that case, but it will be 50%, 60% premium over our polished wafer.

[Raja Parvez:]

And we are getting a very good response from our customers as we are indicated we have seven Tier 1 LED chip companies who have requested samples out of seven four of them are 6-inch PSS and we are very excited about it. We are in the process of producing those samples and even before we began this project we have been consulting the customers and specification alignments concurrently we have product development and we are ahead of the product development and so far we are very pleased with the response from our customers.

[Jed Dorsheimer:]

Great. I will jump back and let somebody else ask. Thank you.

[Operator:]

Next we have a question from the location of Avinash Kant of D.A. Davidson. Please go ahead.

[Avinash Kant:]

Good afternoon Raja and Bill.

[Raja Parvez:]

Hi Avinash, how are you?

[Avinash Kant:]

So one or two questions in your talk about the PSS revenues contributing $15 million or more in next year’s revenues, what’s the basis of that, is it the qualifications that are going on, is it the indications you have got in from customer, how do you get to that number?

[Raja Parvez:]

Okay, this is based on clearly the customer expectations and discussion with the customers. And also it’s a combination of the qualifications, their interest level. And remember, no one today has the capability to offer high volume large diameter 6-inch PSS products because of the complex processing required. We are first one to offer this one. And this is also very critical for LED chip manufacturers as you know many of them have some internal capability. So in fact they were very pleased to hear that a company like us has invested into this infrastructure to offer this one. So it’s a combination of factors and we are very comfortable with that number that we have provided.

[Bill Weissman:]

So we look as we mentioned we are already sending samples to – we would be sending samples to seven different Tier 1 chip manufacturers, obviously we are not expecting them off to convert into volume business next year, but certain percentage will and we look that the probability of how many will and what their order size is likely to be is how we came up with that number.

[Avinash Kant:]

And of the seven that you are sending it to could give us some idea about how many of them have their internal capability and how many don’t?

[Raja Parvez:]

I think out of seven I believe probably four and five of them have their internal capability. The other ones which have the 4-inch currently, they do outsource 2-inch and 4-inch, because there are some outfits that provide, but none of them is vertically integrated. In fact, three of the customers has categorically informed me personally that they rather work with a vertically integrated supplier of PSS polished and who have this own in-depth capability because of the technology required and the IP restrictions they have. So that’s why I believe based on. Now, moving forward and as you recall several years ago, not everybody was doing PSS, but now majority of the LED chip manufacturers are doing PSS, because it provides them additional opportunity to extract the life by the chip, which is almost a free light and this is also now us providing (indiscernible) wafers that PSS gives them another ability to focus on their products versus doing this an additional process internally as well. So it’s a combination of the factors.

[Avinash Kant:]

Okay. And a quick one the SoS side, I think you said your revenues were $1.9 million in SoS this quarter, in the guidance that you are providing what kind of SoS assumption do you have next quarter?

[Bill Weissman:]

Well, the wafer business will probably be in the neighborhood of $1 million maybe half of that SoS and half LED.

[Avinash Kant:]

$1 million half of that is SoS, perfect. Thank you.

[Operator:]

The next we have comes from Andrew Huang of Sterne Agee.

[Andrew Huang:]

Thank you. I guess my first question is back on that PSS business, so you are saying you have seven Tier 1 customers sampling PSS, can you say how many of them are currently in production have 6-inch?

[Raja Parvez:]

Out of them, I think three to four customers are in production on the 6-inch you are asking question on 6-inch PSS or 6-inch polished?

[Andrew Huang:]

6-inch polished.

[Raja Parvez:]

Clearly 6-inch partnered two of them.

[Andrew Huang:]

Okay got it. And then the next question is on idle capacity charges, so it seems like what’s happening over the next 12 months is that your crystal growth idle capacity should be getting better, right. But on the flip side it seems like you are polishing is getting worst, right. So at what point in 2014 can we expect all of these idle capacity charges to go away and is your PSS capacity right now considered idle capacity since it’s not in production?

[Bill Weissman:]

Yes, it is. And so our wafering capacity utilization will in our view be kind of bottomed yet in Q4 and then start to pick up in Q1. Crystal growth utilization as we said will be – we’re ramping that as quickly as we can and that will get back to 100% according to our plan by the end of the first quarter. The timing of exactly when we’re going to have high utilization in the polishing and patterning is a little bit more difficult to say, we can’t say we do expect it to start improving meaningfully starting in the first quarter.

[Raja Parvez:]

Yes. And adding to that look there is still limited use of 6-inch wafers in the LED market. However we are making very good progress with several customers and expect orders in Q1 from two of those customers by the polishing and wafers. So our utilization in polish and then we will follow on the PSS will continue to improve.

[Andrew Huang:]

Okay.

[Raja Parvez:]

Sorry, if I could one more thing. As we mentioned we didn’t – we haven’t really provided 4-inch wafers in the past. So by offering a 4-inch patterned wafer that should be pushing of lot of incremental volume through our polishing operation and to help us to get that higher utilization more quickly.

[Andrew Huang:]

Okay. So I think you said that in the quarter you spent $4 million in CapEx, most of that was on PSS equipment. So did that contribute – I guess did that add new depreciation into the quarter results that was not there in the prior quarter?

[Raja Parvez:]

Yes.

[Andrew Huang:]

Okay. So that’s basically why the loss is – your cost of goods sold actually increased slightly on a sequential basis?

[Raja Parvez:]

That’s part of it, yes.

[Andrew Huang:]

Sorry, what was the other part?

[Raja Parvez:]

Well there were some additional volume, how much additional volume on core, but there were some additional volume on core and the wafer development activities, a lot of that is captured in cost of goods sold for the PSS and the 6-inch polish qualification wafers.

[Andrew Huang:]

Okay. Got it. And then when you talked I think you mentioned in one of the answers to the questions that you expected to get some more fabrication or coring capacity so you can cut more both. When is that capacity going to come online?

[Raja Parvez:]

We’ve added about 5% between the beginning of Q3 and the end of Q3 and we hope to add another 5% by the end of the year.

[Andrew Huang:]

So right now for Q4 you should have at least another like 7% in core capacity?

[Raja Parvez:]

Roughly 7% compared to what we were at the beginning of Q3.

[Andrew Huang:]

Right, okay. Thanks. I’ll get back in the queue.

[Operator:]

Next we have Andrew Abrams of JG Capital.

[Andrew Abrams:]

Thanks guys. Bill, can you give us utilization rate in third quarter and for crystal growth and for polishing?

[Bill Weissman:]

Sure. Crystal growth was about 40% and polishing was less than 10%.

[Andrew Abrams:]

So crystal growth stayed roughly where it was I assume and pretty sure that was about the same as it was last?

[Bill Weissman:]

That’s right. We’ve just started ramping up crystal growth, yes.

[Andrew Abrams:]

And by the end of fourth quarter where would you expect both of those to be?

[Bill Weissman:]

Crystal growth should be around 65% to 70% and polishing will actually be a little bit worse.

[Andrew Abrams:]

Okay. Got it. And what about 6-inch pricing, I know it had been declining in second quarter and you were facing a little competition from some new entrants that were discounting in order to get through the door. Was that consistent in third quarter where six-pricing down again or where was it relative to previous quarter?

[Bill Weissman:]

6-inch LED pricing came down fairly dramatically in the second quarter and it’s been kind of stable since then. And the SoS pricing has come down some.

[Andrew Abrams:]

So more in SoS than in any LED side?

[Bill Weissman:]

As far as sequential change, yes.

[Andrew Abrams:]

Right, okay. And lastly on your customers that are looking at 6-inch unpolished I mean unpatterned. Are these new customers or is this your existing customer that’s coming back again you mentioned that there were two customers that you were expecting to begin shipping to in 2014, are they both new?

[Raja Parvez:]

No, they are both new and existing customers.

[Andrew Abrams:]

New and existing.

[Raja Parvez:]

Existing customers, yes.

[Andrew Abrams:]

Got it.

[Raja Parvez:]

Remember we provide products in various categories through almost every LED chip manufacturers so and we got the new customer ads of course we go after it, but this is a new customer and existing previous customer.

[Andrew Abrams:]

Got it. Okay. Thanks very much. I appreciate it.

[Operator:]

Next we have a question from the location of Stephen Chin, UBS. Mr. Chin, your line might be muted sir. Okay. We’ll proceed to the next question. It will go through Brian Lee (Goldman Sachs).

[Brian Lee:]

Hey guys thanks for taking the question. I guess first going back to the SoS business for a second. Can you elaborate a bit on the dual substrate platform for your large SoS customer I guess just curious what, what’s driving that and then also what visibility do you have in terms of that not being a longer term shift that all of their new chip platforms moved to SOI going forward?

[Raja Parvez:]

Well our customer has informed us that they plan to continue to use SoS for some of their chips especially high-end performance chips, but large volume RF chips that will be moved into SOI based on their product offerings and their customer demand. And as I mentioned they do have inventory which will be select until Q3 of next year, but moving forward in the long-term I believe that they will continue to the sapphire but at a lower volumes because of this dual platform use. However in addition to attending a R-plane SoS capability is a very complex task. In fact, we co-develop this know-how with this customer with that since 2006. Time-to-time, we had been selling some 4-inch and some 6-inch and some eight-inch R-plane wafers through other than this customer for especially sensor and (indiscernible) and RF devices. And we will continue explore those possibilities. So we’ll remain a market leader in this segment even though the customer diversification will take place and but this is a significant amount of know-how that we have attained over the years and we plan to continue to use that.

[Brian Lee:]

Okay. That’s helpful. And then I guess on following up on some of the questions around PSS sales for 2014. Can you give us some sense of what you expect the split to look like between four, four and 6-inch of the $15 million revenue target you talk about and then are you going to be selling that under contract or will this all be spot market purchases?

[Raja Parvez:]

Well we think most of the volume for 2014 will be 4-inch initially. Our goal is to really focus on 6-inch, but obviously there is not a level of 6-inch adoption out there quite yet. So in time those shift to 6-inch within the short term it will be primarily 4-inch whether it’s quarterly purchase orders or contract it’s little too early to say.

[Brian Lee:]

Okay. Maybe last one from me also on that same topic. Any sense of how given the early customer visibility that you have, how concentrated that sales target for next year would look, is it just going to be really a customer or two that’s going to drive the book of that and what you expect a meaningful amount of contribution from each of the seven customers you’re currently engaged with? Thanks.

[Raja Parvez:]

Well look as said we have worked with seven customers. Obviously all seven of them are – will not be adopting at the same time and it will depend on progressively while we do expect that it will be from really Tier 1 LED customers who will be utilizing this and especially the qualification cycle for the PSS will be longer than a typical polish wafer. But we are confident that this will eventually turn out to be more diversified business rather than focus, driven by only one customer because many of LED chip manufacturers have been looking for a third-party liable vendor who has the capability to know-how or the capacity to offer these products. And we are very happy to see the initial response we have from them,

[Bill Weissman:]

And again that’s the advantage we’re also offering 4-inch so it allows to have more diversification in terms of the customer base initially.

[Brian Lee:]

Okay. Thanks guys.

[Operator:]

(Operator Instructions) The next question we have comes from Jagadish Iyer of Piper Jaffray. Please go ahead.

[Jagadish Iyer:]

Yes. Thanks for taking my question Raja and Bill. I just have two questions, so first you’re not been profitable for this year and if I put your SoS revenues and your optical revenues for next year kind of extrapolating the third quarter numbers. It looks like there is expectation that there is going to be huge ramp in LED revenues that the street is looking for. Where could we be right here and where could we be wrong here?

[Raja Parvez:]

Well, it’s not just LED revenue obviously we think the general lighting segment of the LED market is going to be very strong next year but now with our new applications now for sapphire, the home button, the camera lenses and we think there are probably couple others coming down the line. So, there is significant volume being driven by the non-LED market. So, it’s a combination of both of those things that are going to drive the growth next year.

[Bill Weissman:]

Fair. And many and many move are smartphone especially by other manufacturer are adopting sapphire either in the lens cover or the home button or other applications on the sapphire external part of the sapphire. So, non-LED segment is growing pretty rapidly and becoming a really the key to our business.

[Raja Parvez:]

The other benefit of offering the patent substrate in selling again if you’re saying about 12-inch in wafer form not only wafer form but patent wafer form as you’re adding a lot more revenue on top of the same real state of sapphire than you would if you’re selling in plain core form.

[Jagadish Iyer:]

So, are you able to quantify how much of rate is going into non-LED portions this year?

[Raja Parvez:]

Difficult for us, no, because obviously we sell to that market we too sell in that market to the core business and we sell at the power shooters and sell it on, we don’t know if there is – how much of it that they’re selling on through the LED market versus how much is going on for the non-LED market.

[Bill Weissman:]

However, we are providing a significant amount of core going to the non-LED product segment as well.

[Jagadish Iyer:]

And then as a follow-up, I just wanted to find out how much are you pushing your breakeven to push towards profitability, are you just expecting a bounce back in pricing to get to profitability? Thanks.

[Raja Parvez:]

No, we have – the core business of pricing in the core business has been improving throughout this year but it unfortunately it’s been proving at a time when the wafer business has struggled, so that’s offset the kind of the benefits and I think we’ve now seen the bottom of the wafer business in Q4 and we should start to see improvement in both segments going into next year. Again, a big part of our gross losses is idle plant is nearly $4 million quarterly charge which should start to go away, our very clear line asiding $2 million of that going away in the first quarter and the rest of it have to go away to increase utilization of the polishing operation and we feel very good about that as well since it’s going to take a little bit longer on the polishing side. So, combination of losing that idle plant cost and improve pricing and I think you’re going to see – we expect to show a dramatic improvement of profitability next year.

[Bill Weissman:]

And then also we continue to focus on the cost introductions and introducing new technology platform which will further reduce the cost and impact on the profitability.

[Jagadish Iyer:]

Thank you.

[Operator:]

Next we have a follow-up from Andrew Huang of Sterne Agee.

[Andrew Huang:]

Hello. Thank you, guys. I apologize, can you just repeat how much for Q3 for the quarter you just reported, how much wafer revenue there was for LED and how much there was for SoS. And then your expectations for Q4?

[Bill Weissman:]

The SoS revenue was $1.8 million in the third quarter, rest of the wafer and what we gave obviously would be LED.

[Andrew Huang:]

So, that’s like $0.1 million basically?

[Bill Weissman:]

You chose by in.

[Andrew Huang:]

Yes. And then for Q4, you said about 500,000 each.

[Bill Weissman:]

Right.

[Andrew Huang:]

Okay, got it. And then I guess, I don’t think we’ve talked about on this call yet but do you have any updated thoughts on the potential for sapphire cover glass?

[Raja Parvez:]

Well, there has been lot of chat and the rumors over the last couple of years on this one but still having a cover glass peer of the sapphire is – the cost is a major issue. And also as we know that peer sapphire is also not the optimal solution here because it has a optical properties and scratch resistance but it is more breakable than Gorilla Glass. So some kind of hardware solution has to take in place in order to serve that market.

[Bill Weissman:]

Well rest of here may be even as – sapphire manufacturer don't adopt a full sapphire faceplate if they want to incorporate biometrics and they don't have a home button and surely you can fabricate the bottom of the faceplate and sapphire and have some kind of the machine. So, it don't really necessarily have to have the full faceplate to drive a lot of additional growth in that market it could be a portion of that faceplate and we're just trying from a biometric standpoint.

[Raja Parvez:]

In our side, you can see that you know now we have – they are introducing 5S, but I think 5S but also there are lot of rumor that the tablet which are the iPads and other -- other manufacturer's tablet they will be also using sapphire for the camera lens cover and so forth.

[Andrew Huang:]

Right, okay.

[Raja Parvez:]

And they are -- their area size are larger than the lens cover for example, so just one application on a one device and the size of part as those are also increasing as the scale side of the device is increasing too.

[Andrew Huang:]

And I want to go back to the $15 million in PSS revenue for calendar 2014, I think you said it's going to be very back -- backend loaded I think you said that 2 of the customers, 2 of the 7 customers are already in production on 6-inch I guess the questions is, free to hit your target do you need all 7 of those customers to ramp or is that only some of the customers to get to the $15 million?

[Raja Parvez:]

No, no we're not -- we're not assuming we have and the production was somewhat of them you know if we get production orders from reasonably being good shape.

[Bill Weissman:]

Yes.

[Andrew Huang:]

Okay, great.

[Raja Parvez:]

And the part of the reason is back-loaded is because of the quantification time and we are ready to produce high volume now towards the capability it's just that qualification as you can imagine you for 6-inch polished wafers qualification cycle is that region and they grow up to per month but if you do the PSS in addition to by the time they have a device performance and reliability and aging results it takes anywhere from 4 to 6 months. So that's one of the reason that it will be back-loaded.

[Andrew Huang:]

Okay. And then I guess one last question if you don't mind. I think in the last quarter, the last quarters when your 2-inch and 4-inch core revenue started to pick up and that my sense is that that was primarily coming from China, has there been any change in the demand for 2-inch and 4-inch core like in terms of geography?

[Raja Parvez:]

No, but the primary market for that is Taiwan and China and it's in the third quarter which fairly evenly spread for us.

[Andrew Huang:]

Okay.

[Operator:]

That appears we have no further questions at this time. We’ll go ahead and conclude today’s question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

[Raja Parvez:]

Great, thanks. Thanks everyone for joining us today. We appreciate your interest and we look forward to speaking with you again soon. This concludes the third quarter conference call.

[Bill Weissman:]

Thank you.

[Operator:]

And we thank you everyone for our time. The conference call is now concluded. At this time you may disconnect your lines. Thank you again and have a great day.