Rubicon Technology, Inc.
Q1 2009 Earnings Call Transcript

Published: 29 Apr 2009

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 Rubicon Technology Incorporated Earnings Conference Call. My name is Katy and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the call over to Mr. Bill Weissman, Chief Financial Officer. Mr. Weissman, please proceed.

[Bill Weissman:]

Thank you, Katy and good morning everyone. We are pleased you could join us for today’s Rubicon’s first quarter 2009 earnings conference call. My name is Bill Weissman, and I’m Rubicon’s Chief Financial Officer. With me today is Raja Parvez, Rubicon’s President and Chief Executive Officer. We have allotted 45 minutes for our call this morning. Raja will provide an overview of first quarter results of operations and discuss the current market environment and then I will review our financial results in detail. We will discuss our current outlook for the second quarter and provide additional market information based on Raja’s recent customer visits. We’ll then be happy to take your questions. Today’s call is being simulcast on our Investor Relations 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 on 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, Bill. Good morning, everyone, and thank you for joining us today. The results of operations in the first quarter was within our expected range with revenue up $2.3 million and a net loss of $3.9 million. As expected, revenue from the LED market decreased to $1.3 million in the first quarter as a result of lower demand for LED based products, and the resulting excess inventory throughout the supply chain. As we discussed in our last call in February, companies at our levels of the supply chain and in our geographic regions have seen demand drop considerably as the world's major economies have fallen into recession. However we are beginning to see improvement in LED market particularly in Taiwan. I just returned from Asia, where I met with our customers and others in the industry. In Taiwan leading LED chip makers have significantly ramped up factory utilization going into Q2. Accordingly, their inventory of polished substrate has been reduced and as a result, our customers, the substrate polishers, have also resumed production and are beginning to consume their inventories. This improvement is being driven primarily by the increased rate of adoption of LED backlighting for notebook and netbook computers as well as rush to bring LED backlit LCD television to market by some of the large consumer electronics companies. The rate of penetration of LEDs in these applications has accelerated with notebook manufacturers launching ultra thin green model, the penetration rate of LED-backlit notebooks and netbooks may now reach as high as 70 to 80% by the end of this year compared to earlier estimates of 30%. The key drivers for this acceleration are reduced LED-backlit unit cost and proven performance. In addition, certain large consumer electronics manufacturers are aggressively bringing to market large screen LED-backlit LCD Televisions. Production costs have come down and these companies anticipate that these eco-friendly, ultra-thin, light weight televisions with exceptional picture quality will stimulate demand. As these televisions gain in popularity, this can become a significant driver for LED demand. For example, each large screen television requires approximately 1000 LEDs where as the average laptop has approximately 50 LEDs. Currently the resurgence of activity is centered in Taiwan because several high volume providers of cost effective LED chips, LED-backlit units and LCD panels are located in Taiwan. Several of these, several of the world’s leading consumer electronics manufacturers source a portion of their LED chips and LCD panels from these companies. As you are probably aware, Taiwan LED companies still use 2 inch wafers almost exclusively. However, most of these consumer electronics manufacturers are adding capacity to produce more LED chips internally on higher throughput, cost effective, large diameter wafers. Therefore in time, we expect to see a significant portion of the LED chips for backlighting units migrate to larger diameters sapphire wafers. Demand for other LED applications such as automotive and mobile devices remain sluggish and we do not expect significant improvement in demand for these products until the economic environment improves. However, we continue to see steady increases in general illumination applications. Typically, these applications require high brightness LED chips which are produced in Japan, North America, and Europe primarily using large diameter wafers. Overall in the LED market, we expect inventory level at our customers to be down to near normal level by the end of the second quarter. We therefore anticipate increased orders going into the third quarter starting with primarily doing substrates followed by an increase in large diameter substrates later this year. Regarding the SoS market, as previously discussed we resumed shipments of 6 inch wafers into the SoS market in the first quarter. Shipments are at a base level of approximately $500,000 per quarter based on our contract which allows us to keep our polishing operation working and prepare to respond when the market picks up and inventories at our customer are depleted. While SoS products are often used in highly integrated devices such as smartphones which continue increasing adoption, overall the mobile device industry continues to struggle in this economy and with current customer inventory level, we expect revenue from the SoS market to remain at this base level until next year. Our optical revenues for the first quarter were lower than expected at $600,000 compared to $1 million in the fourth quarter of 2008. Orders for windows and other optical products with commercial applications slowed in the second half of the quarter due to the overall economic environment. We continue to make progress on the defense side of the optical business. We have products in qualification and continue to develop more relationships in the market. This month we participated in our first defense and security tradeshow in Florida where we presented our new 450 pound bull. We believe the super bull is the largest man made sapphire crystal ever produced. This will enable us to introduce new products for large optical window applications in the near-term and also gives us the capability to produce 12 inch wafers when the LED and the SoS markets are ready for that side substrate. I am encouraged by the continued adoption of new applications in the LED market. The general consensus in the LED market is that demand is improving and is expected to continue as LED backlight displaces CCFL laptops. Computer monitors and televisions and as more general illumination applications are introduced. As a result I expect that our orders will begin to increase in the third quarter. As demand increases we are well positioned to respond to customer requirements. We have retained all of our key people, have a buffer stock of sapphire bulls and have ample capacity which can be quickly ramped up. In addition, as evidenced by the introduction of our new super bull we continue to invest in our technology platforms as well as initiative to introduce new products and to lower our long-term cost structure. Finally, as you know, we have a strong balance sheet with considerable cash and no debt which enables to efficiently operationalize these initiatives. This will ensure that Rubicon Technology is even better positioned to serve our customers as the market begins to pick up. I would now like to turn the call over to Bill who will provide you with greater details on the financial results of the first quarter. Bill?

[Bill Weissman:]

Thank you Raja. As Raja mentioned revenue for the first quarter was $2.3 million as compared to $4 million in the previous quarter and $10.5 million in the same period last year. Revenue from the LED market was $1.3 million in the first quarter, down from $3.1 million last quarter and $6.5 million in the same period last year, due to the continued softening in the LED markets. $1.1 million of our LED revenue in the quarter was from large diameter sapphire with only $200,000 coming from 2-inch material. We resumed shipments of 6 inch polished wafers into the SoS market in the first quarter which totaled $446,000. We had no SoS revenue in the fourth quarter of 2008 and $2.9 million of SoS revenue in the first quarter of 2008. Our optical revenue was lower than expected at $575,000 in the first quarter as compared to $986,000 in the fourth quarter of 2008 and $879,000 in the first quarter of 2008. As Raja mentioned orders for optical product slowed in the second half of the quarter. Early in the fourth quarter we made significant adjustments in staffing and production schedules in response to the reduced demand including a 30% reduction in staff. We have also been monitoring all areas of spending even more closely than ever. We have retained all employees that are essential to maintaining our intellectual property and our ability to ramp up operations once the market returns. With lower utilization of our people and equipment in the quarter, gross margin was a negative $2.6 million. Operating expenses in the fourth quarter totaled $1.5 million, $300,000 lower than the previous quarter and $900,000 lower than the same period of last year as we continue to control cost. Basic and diluted EPS for the first quarter was a loss of $0.19 per share. Turning to the balance sheet and cash flow, our cash position remains strong with $50 million in cash and investments excluding our investment in Peregrine.In the first quarter, we limited our capital expenditures to approximately $500,000 and our total cash used excluding amounts used for the share repurchase program to $2.9 million. Taking advantage of Rubicon’s share price, we used $2.6 million for the repurchase of our shares in the quarter. To date we have repurchased approximately 1.25 million shares at an average costs of $4.53 per share. Our accounts receivable remained of high quality. DSO at the end of the first quarter was 60 days up three days from the prior quarter DSO of 57 days. Inventory increased slightly to $8.1 million from $7.9 million in the fourth quarter. Of the $8.1 million inventory balance, $4.6 million is in raw materials and $1.4 million is in bull inventory. As for our expectations for the second quarter, while we are encouraged by the recent activity in the LED market, we believe that it will take the rest of this quarter for customers to work down their inventories of sapphire. As a result, we expect second quarter results to be similar to the first quarter but we do expect orders to pick up in Q3. However given that we still have limited visibility, we are not able to provide specific guidance of the remainder of the year at this time. I want to thank you all for joining us today and thank you for your continued support and Katy, may we take our first question.

[Operator:]

(Operator Instructions) Your first question comes from the line of Jed Dorsheimer from Canaccord Adams, please proceed.

[Jed Dorsheimer:]

Couple of questions actually, and maybe just a segmented start with sort of the 2 inch LED market over in Asia. On market share, have you seen any market share shifts in the 2 inch market particularly as pricings become more aggressive over the last few quarters? And then also maybe an update on the pricing environment, have you seen any stabilization are you still seeing pricing coming down at same rates and maybe then I have some follow-ons?

[Raja Parvez:]

The first part of the question, we have not seen any shift into the market share we continue have a strong market share specially in the 2 inch market coming out Taiwan currently.

[Bill Weissman:]

With regard to pricing, pricing did continue to erode some in the quarter it was down probably another 10%, 5% to 10% depending on the product. It is as you would expect a very difficult pricing environment right now given the kind of, we hit the bottom essentially in the first quarter and now the things are just beginning to pick up obviously customers -- whole supply chain is looking for bargains. And there is a significant pricing pressure. So, year-over-year, 2-inch is probably down nearly 48% from where it was the prior year so. But that we expect to improve obviously as demand improves and particularly in the larger diameter given there is fairly limited competition in that space and once demand picks up pricing will respond.

[Jed Dorsheimer:]

So I'm surprised that you have not seen any share shift to given the dollar strengthening versus the Russian ruble and also the yen. I would think that would be an advantage to some of your competitors in those markets. Are you matching pricing with those companies or I'm just a little surprised you have not seen any share shift there?

[Bill Wiessman:]

Well, we're obviously trying to stay competitive on pricing. Remember this, there is very little buying activity in 2-inches, people are still working through inventory levels. So, obviously customers are now talking to us about orders they expect to place in Q3 and based on that we believe that there has not been any shift in our position in the market.

[Raja Parvez:]

And Jed, in addition, remember Rubicon technology is still the high volume producer of sapphire and stable and very reliable producer and we have strong relationships and we are price competitive, but those things are really very significantly helping us.

[Jed Dorsheimer:]

Sure I understand. So, I guess as we look at the trend for the backlighting which is the driver of growth rate now and causing the utilization rates to rise and some of the capacity expansion plans to occur. It’s mainly based over in Taiwan and Korea and given that you are broadly spread between the leaders in US, Europe, Japan that are not seeing as much of that same dynamic as some of the Taiwanese and Korean suppliers. If 2 inch remains at the -- more utilization rates remain in the 90 plus range for most of the Asian based companies. And so you see a resurgence in your 2 inch demand come back. What utilization rate do you think that would take your overall business to?

[Bill Wiessman:]

Well, not sure I understand.

[Jed Dorsheimer:]

So, I guess what I am trying to figure out is --

[Bill Wiessman:]

2 inch.

[Jed Dorsheimer:]

Yeah, if all you were selling is 2 inch and let's say that the 3 and 4 inch market are flat to what current levels are at. Just for your LED business, and let's say silicon and sapphire is flat, what utilization rate will that uptick in the 2 inch bring your overall utilization to?

[Bill Wiessman:]

Well, overall if you go back to better times earlier like last year, if you look at what percentage of our revenue was 2 inch based. It was about 40%, 45% so that would be what I would expect our utilization to be only doing 2-inch.

[Raja Parvez:]

Yeah, however, in addition to what is happening currently, yes, it is centered in Taiwan and some of the consumer electronics companies out of Korean regions are sourcing some of their LED chips and panel from Taiwan manufacturers. But most of those consumer electronic companies are also installing and expanding their internal capacity and most of that is on the larger diameter sapphire. So we expect in time that the other companies, especially Europe, North America and Japan who primarily use larger diameter which is 3 inch plus to also ramp up their production into this area.

[Bill Wiessman:]

Yeah it’s difficult to say Jed because that was based on last year, obviously we are seeing based on what we are hearing right now 2-inch is kind of accelerating based on these new applications. So could easily be more then that but it’s difficult to say.

[Jed Dorsheimer:]

Fair enough and I guess that’s helpful. On the 3 and 4 inch market, I guess if we see a resurgence overall, and let's say that the volume we calculate for the backlighting is about 2.5 times the size of what we saw on the handset market. So, let’s say we see a resurgence in overall LED demand but your silicon on sapphire market stays flat, will you be able to achieve the same close to 100% utilization rates just on LED alone or not at this point.

[Bill Wiessman:]

Sure we see, obviously future with it, but based on what we are hearing we could easily do that if things turn out to be as positive as we expect them to be going into next year.

[Jed Dorsheimer:]

Alright, and then one more, then I will jump back in the queue. CapEx plans for this year at this point, Bill, have you ratcheted those, what do those look like for the full year, is it still sort of $12 million to $15 million range for the year or how should we be looking at that?

[Bill Wiessman:]

At this point, it is a bit probably close to 10 I think. 2 to 3 range in the second quarter and 10 for full year and that’s all really thus we have capacity if not expansion bases all related to R&D initiatives and cost reduction initiatives.

[Jed Dorsheimer:]

Alright great that’s helpful, I will jump back in the queue.

[Operator:]

Your next question comes from the line of Steven Chan from UBS. Please proceed.

[Steven Chan:]

Sure hi Bill.

[Bill Wiessman:]

Good morning

[Steven Chan:]

Just wanted to follow-up on the last question about Rubicon factory capacity utilization rates. What did you say Bill, you thought Rubicon’s factory utilization rates were today and the bottom line to that how would you expect the utilization rates to progress through the rest of this June quarter, would you expect the utilization rates to improve in the month of May versus month of April and then continue improvement in the month of June?

[Bill Wiessman:]

Yeah we are still at around 10% Steven, we expect them to gradually increase over the quarter, but again that’s primarily 2-inch material which is why despite we see some gradual improvement in the utilization over the quarter, you wouldn’t see dramatic improvement in the revenue and bottom-line yet. But then going into the third quarter we expect that to improve significantly.

[Steven Chan:]

Okay, what do you estimate the breakeven capacity utilization rates would be in your factories? And would you expect you need to get to around 50% utilization rates at least the breaking even?

[Bill Wiessman:]

It’s very difficult to say right now in the current pricing environment, it depends on pricing and mix. So it’s extremely difficult to say at this time.

[Steven Chan:]

Okay maybe I could change the topic to the order trends. Would you be able to tell us, what the new orders were in the first quarter and what the outlook would be for the second quarter for new orders?

[Bill Wiessman:]

Well again as we have discussed last time, the dynamics have shifted considerably, we are back into kind of current business at the moment. And so obviously there is not very good long-term visibility which is why we are not providing guidance beyond the second quarter.

[Steven Chan:]

Okay, so when you say you expect sapphire wafer orders to pick up in the third quarter perhaps, are you referring mostly to the 2-inch sapphire wafer or would you expect some of the larger diameter wafer orders also show a pick up in the third quarter?

[Bill Wiessman:]

We expect it largely to be 2 inch in the third quarter with larger diameter improving little later in the year.

[Steven Chan:]

Okay. The last question I had is just a follow-up in the view that the second quarter results will be similar to the first quarter. On the balance sheet, would we expect to see inventories also remain relatively flat or do you expect inventories to showing the modest increase?

[Bill Wiessman:]

Should be relatively flat, it was relatively flat this quarter as well. Again most of it is in raw material and bull inventory. I think we are at a bull inventory level that we are happy with. We have scaled down our purchases of raw material so that we are now basically using what we are requiring. So we should not see any significant change in the inventory. And then going into the second half, we will start working down some of that raw material inventory.

[Steven Chan:]

Okay. Thanks that’s helpful.

[Operator:]

Your next question comes from the line of Neil Doradla from William Blair. Please proceed.

[Brian Neujip:]

Hi, guys it's [Brian Neujip] for Neil. Just a clarification on the guidance first, when you say you are expecting that in the quarter, next quarter I mean is that consistent with the range you provided earlier or is that consistent kind of with the performance this quarter?

[Bill Wiessman:]

Consistent with the performance this quarter.

[Brian Neujip:]

And then so back to the pricing environment, that was very helpful on the 2-inch pricing. Is the price erosion much different in three and four inch market? And then as a follow-up to that is it really just all excess capacity because of the inventories being drawn down or is there I mean do you feel like there is capacity coming online from any competitors?

[Bill Wiessman:]

Regarding a larger diameter pricing it’s been a little more resistant. But since the market is so weak at the moment it has also been impacted, it’s down about 25% year-over-year but again that we do expect that to bounce back much faster than the 2-inch regarding the, it’s better landscape however.

[Raja Parvez:]

And there has been no additional significant change to the competitive landscape other than what we reported last time when we continued to be a very desirable provider of sapphire because of our low cost and high volume capabilities. But there are people entering into different parts of the supply chain.

[Brian Neujip:]

Can you just talk a little bit more about how much leverage do you think is in the operating model right now. So, if we do see some kind of bounce back in revenue in the second half, there is incremental revenue over the first half, what kind of variable costs are attached to that and not just assuming flat pricing from here?

[Bill Wiessman:]

Well, we do expect to see incremental volume this quarter but again it could be 2-inch and the pricing is very soft right now. So that’s why we are not anticipating any significant leverage in the short-term. But obviously as pricing improves and volumes increase then we will see, see a pretty good leverage because our fixed costs are probably $3.5 million per quarter right now and once the volumes pick up, we will be able to get better leverage over that fixed cost.

[Brian Neujip:]

Right so if you, we look at some of the, if we were at $6.5 million kind of a run rate on expenses, you think you can breakeven if revenue were to eventually get to that level or does it take more like $8 million or $9 million, is there some kind of range that you guys expect?

[Bill Wiessman:]

You know, well, previously we had targeted $7 million, but again it depends largely on pricing and mix.

[Brian Neujip:]

Sure

[Bill Wiessman:]

So I would say to have it at $7 million we have to see some improvement in pricing.

[Brian Neujip:]

Fair enough and then the last thing is, where are we in terms of LED market, wafer size demand, I mean is there anyone actually sampling the 6-inch or 8-inch wafers that you guys are able to produce and if not, I mean is there any visibility on that when there might be demand there for that?

[Raja Parvez:]

Yes there is a lot of activity going on in 6-inch and some in 8-inch. We are working with several companies on the 6-inch qualification and based on that report, we see the market we believe that 6-inch will get into the production volumes in later part of 2010.

[Brian Neujip:]

Okay thank you very much

[Operator:]

Your next question comes from the line of Joseph Foresi from Janney Montgomery Scott. Please proceed.

[Joseph Foresi:]

Hi guys my first question here is just on the demand, is the pick up in demand because of a shortage of supply or is it based on what you think is going to happen in the consumer market?

[Raja Parvez:]

The pick-up in demand is because of the acceleration of the applications, specially netbooks, notebooks and also now the LED TVs that’s where this surge of the demand is currently coming from.

[Joseph Foresi:]

Any thoughts as to why that acceleration is happening now given where the economy is why there, it’s time, it’s cheaper, there is any particular reason why the acceleration is happening at this pace, it seems to be a little bit quicker the one we expect?

[Raja Parvez:]

You already answered part of your question, but yes it is the cost is coming down of the backlight units. It is a newer technology. It is eco-friendly and the backlight units manufacturers are also able to charge a premium because of its very high level of picture quality and also the performance. So, all of those factors are coming in the implementations stage. So, that’s why this demand is becoming a size demand, and especially coming from the netbook and notebooks. As you recall, previous estimates for the penetration of LED backlight units for netbooks and notebooks were in the range of 30%. Now, on the average what we have seen and witness and seeing is that the penetration of the LEDs backlight units especially for netbooks and notebooks could reach as high as 70% to 80% during this year. In addition, the LED TVs is also becoming a reality now, you have seen that some of the consumer electronic companies have already announced several of their new models in the last couple of weeks and the reports are they continue to launch new models in coming months as well. So it is basically application and the drivers are obviously lower costs and also the proven technology.

[Joseph Foresi:]

Okay. Can you just talk about your relationship with your top client, has that changed improved, is that part of the reason that you are thinking demand is going to pick up maybe you can just or you are just becoming more diversified on the client base?

[Raja Parvez:]

Well, we continue to focus on the diversification of the business, but our relationships with our customers continue to be strong even during this time that I myself and the sales team has been visiting customers. I just came back about 10 days ago and we continue to talk to them, continue to be with them, continue to work with them and we have been working with them through difficult times. So I think the relationships are very prestine that Rubicon Technology has with all of our customer base.

[Joseph Foresi:]

Any shift in the top customer?

[Raja Parvez:]

No significant shift in the top customers.

[Joseph Foresi:]

And you expect that to continue and to grow going forward?

[Raja Parvez:]

I believe so.

[Joseph Foresi:]

Okay and then just lastly I do not know if you mentioned this prior to this, is backlog depleted at this point, do you have a number for backlog?

[Bill Wiessman:]

Well Joe, the backlog number does not have the meaning used to give in this environment, if we saw that contracts and deals that we had, customers just could not order them. So, unfortunately, the backlog isn’t a very meaningful number at this point.

[Joseph Foresi:]

Okay, so essentially we are completely just in time at this point.

[Bill Wiessman:]

Yes.

[Joseph Foresi:]

Okay thank you.

[Operator:]

Your next question comes from the line of Jed Dorsheimer from Canaccord Adams, please proceed.

[Jed Dorsheimer:]

I had a follow up on non-LED business, the silicon on sapphire, any update on the qualification of some of your largest customers, outsourcing partners in particular in Korea and TSMC and Taiwan, have they qualified your sapphire substrates and where are they in that process?

[Raja Parvez:]

I believe that based on what we know right now I think that our products and with some of those their outsourcing partners have been already qualified. And some of them are in qualifications. I also believe that they are making a pretty good progress in terms of outsourcing that product to some of the foundries that you have just mentioned.

[Jed Dorsheimer:]

So, I'm sorry Raja just I guess more specific there is three outsourced partners OKI, TSMC and MagnaChip. Which of those have actually qualified the substrates?

[Raja Parvez:]

All three of them.

[Jed Dorsheimer:]

All three, so they’re all qualified at this point.

[Raja Parvez:]

Yeah

[Jed Dorsheimer:]

Alright thank you

[Operator:]

Your next question comes from the line of Jiwon Lee from Sidoti & Company. Please proceed.

[Jiwon Lee:]

Yeah good morning just to try to better understand the pricing dynamics, you mentioned that the 2-inch year-over-year, the pricing was down about 40%, could you make similar comments about the 3-inch and above?

[Bill Wiessman:]

Yes what I had said is that they are down about 25% year-over-year.

[Jiwon Lee:]

Okay excellent and then as for your top customers, how many 10% customers did you have or top three or top five customers, what was sort of the percentage of their sales for the quarter? Thank you.

[Bill Wiessman:]

Our top ten customers represented 67% of our sales.

[Jiwon Lee:]

Okay, and what was that a quarter ago, was it kind of similar?

[Bill Wiessman:]

A quarter ago it was 72%.

[Jiwon Lee:]

Okay that’s all from me. Thank you.

[Operator:]

Your next question comes from the line of Yair Reiner from Oppenheimer & Company. Please proceed.

[Yair Reiner:]

COGS on a pure dollar basis were up sequentially by about $600,000, can you explain the causes for that and how we should think about it on a sequential basis, please?

[Bill Wiessman:]

Yeah there is a number of factors that go into that, obviously pricing and mix, inventory valuations, also in the quarter we had spend some money bringing our polishing operations back up took advantage of some of the down time to do some maintenance on our facility. So there is a number factors in there that impact that. So, again it should be roughly in that range of $4 million to $5 million at these levels, but it will be impacted by pricing and mix.

[Yair Reiner:]

Next question, I wanted to go back to the inventories. It seems like you have enough inventory now to probably satisfy demand for at least a couple of quarters. How will selling products out of inventory impact gross margin versus selling product just right out of your utilized capacity?

[Bill Wiessman:]

Well, that is another factor obviously but remember that the vast majority of inventory right now is in raw materials and in bull inventory, not in finished goods. But it does have an impact for example in the first quarter, a lot of the SoS revenue came from off the shelf product that was already made. So that’s not helping getting leverage over the fixed costs. But the vast majority over inventories and raw material and bull inventory, and we have raw material that we could use for probably the next year and half or so once the market picks up.

[Yair Reiner:]

Okay. In terms of channel inventories, recognize the inventories are going down at many of your customers, do you have a sense of how much inventory is floating out there from your competitors and how much needs to be burned off kind of in that perceptive?

[Raja Parvez:]

Our inventory is coming down significantly in past about a month or so I believe currently the inventory in different channel is anywhere from about three weeks to about six weeks.

[Yair Reiner:]

Very good, and then final question, where do you think that your utilization rate would have been in the first quarter if, kind if your selling to your customers would have reflected the amount of LEDs you are actually producing?

[Bill Wiessman:]

Good question, but difficult to really say, maybe instead of 10% maybe 30% to 40%.

[Yair Reiner:]

Okay great actually just one more question for you Bill if I could, could you repeat the breakdown of revenues between the three segments?

[Bill Weissman:]

Sure, our LED was $1.3 million of the total and SoS was roughly $0.5 million, and in around numbers optical was around $600,000.

[Yair Reiner:]

Great, thank you very much.

[Operator:]

Your next question comes from the line of Avinash Kant from Davidson & Company. Please proceed.

[Avinash Kant:]

Good morning Bill and Raja.

[Bill Wiessman:]

Good morning.

[Avinash Kant:]

The question I had was, you talked in your prepared remarks about the market opportunity from LED backlit notebook and netbooks. Now if that number goes from a 30% to 70% or so what kind of opportunity in revenue terms or in volume terms we are talking for sapphire wafers. If that were to be the utilization by the end of year for example?

[Bill Wiessman:]

I don’t know -- we have to actually quantify that yet.

[Raja Parvez:]

Yeah I mean the way to answer that question is that, as the average laptop uses roughly approximately 50 LEDs which is about 400 micron in size and whereas the 40-inch plus screen LED TV, BLU backlit unit uses approximately about 1000 LEDs. So if the range of penetration goes 30% to 70% of course progressively the demand will increase. So I think directionally as more and more backlight units are being adopted by the LED. So it’s potentially a very positive trend for Rubicon Technology and for the industry.

[Avinash Kant:]

I was just trying to figure out what’s the overall opportunity because of course given the players we can figure out or we can make assumptions on the market share. But how big is the market right now even if we factored in these adoptions that’s what I'm trying to get at?

[Bill Wiessman:]

We're looking at that. We still have not really quantified yet trying to determine exactly where the market is in terms of percentage adoption today and how that’s, it’s all using 2-inch how that will all play out. So we don’t really have a good answer for you quite here on that right now.

[Avinash Kant:]

Okay and the company specifics. I think if you were to run at 100% utilization most likely your revenues for the full-year would be roughly in the, I would say $50 million kind of range?

[Bill Wiessman:]

Well again based on today’s pricing it would be probably 30% less than that because that was based on pricing. The $50 million capacity was based on how we were operating in terms of pricing and mix a few quarters ago, but again the pricing will improve, the mix will improve. But, so at the end of year we are back to a reasonable mix and pricing and that’s true yes.

[Avinash Kant:]

Right so it was 30% lower, basically $35 million, $36 million seems to be the full capacity range at the current ASPs and I was trying to figure out what kind of margin could you reach and what kind of earnings you could make on those revenues at 100% utilization at this point?

[Bill Wiessman:]

Well, again, at the ASPs and mix and we probably still be close to breakeven at that point in time because the pricing is so weak, but that’s not going to continue. So, I think worse case at these levels that would be kind of a breakeven scenario but pricing and mix will improve and we expect our profitability to get back to the ranges they were in the middle of last year when utilization was high.

[Avinash Kant:]

Okay. And in the past, as the industry has gone through several downturns, have you seen pricing recover to the same level when things improve or it still does not recover to the same level?

[Raja Parvez:]

The same level, it is difficult to answer the same level, but when in the past when industry has recovered there has been cases where the pricing has improved and even we I think increased the pricing back middle of 2006. But what’s different right now is these applications are accelerating, as we mentioned the backlight unit general illumination street lights. So we believe as the more adoption of LED takes place, that especially in the larger diameter applications we will have opportunities to stabilize and also improve the pricing.

[Bill Wiessman:]

As Raja said there has not really been any significant change in capacity in the marketplace. So when demand returns to where it was logic would suggest that pricing would return to around the same level.

[Raja Parvez:]

Actually when the supply and demand balance is achieved, and believe it is going to happen.

[Avinash Kant:]

In your prepared remarks you talked about SoS being at these levels till next year, you mean, up until the beginning of next or through the end of next year?

[Raja Parvez:]

Beginning of the next year.

[Avinash Kant:]

Beginning.

[Bill Wiessman:]

Yes.

[Avinash Kant:]

Okay and one final question, of course as you see the inventories come down and the industry coming back to some normal levels, in Q3 we should expect a step up in revenues there or a gradual improvement?

[Bill Wiessman:]

Well again we are not giving guidance on it. We have to just wait and see how things develop. We just don’t have enough visibility right now to give you a good sense for that.

[Avinash Kant:]

Okay and the conversations that you are having right now in terms of Q3 with your customers, they are still not significant enough you mean.

[Bill Wiessman:]

Yeah they are not making commitments at this point, they are just kind of reestablishing dialogue around pricing and volumes and those kinds of things.

[Avinash Kant:]

Okay thank you. Bill and Raja

[Operator:]

Your next question comes from the line of Daniel Amir from Lazard Capital Markets. Please proceed.

[Daniel Amir:]

Thanks a lot most of my questions have been asked but couple of questions here. One on the SoS market. Can you give some clarity whether there is still a lot of inventory in the channel, but are there any signs that demand is starting to pick up or is this pretty much, as this market is still seeing a lot of pressure here due to the mobile phone weakness?

[Raja Parvez:]

Well it certainly looks that some potion of the mobile market is growing steadily, especially the smartphones. And the portion of the market which is sort of a non-smartphones is still struggling because of the overall economic environment. But that market SoS, RFIC market continues to steadily progress at a pretty good rate. What has happened is this because of the inventory issue and the challenges that we had and that said we are trying to work through with our customers and we believe that starting next year, inventory level will be at the level that demand will start picking up, but this industry continues to grow because it's still a disruptive and very proven and very desirable technology.

[Daniel Amir:]

So, you are not concerned that it's still driven largely by one major customer, which is still not one of the major companies on the public side?

[Raja Parvez:]

Well, we are cognizant of that, but as we mentioned earlier in the call that that customer has now qualified three very large major foundries and working with them and as the demand improves some of the production is already being done by one of those foundries and the other foundries are also prime to capture that market as well. So, we feel confident that as the market grows next year, that there will be a good demand for that.

[Daniel Amir:]

Okay. My final question is on the customer base, your comment before and looking at diversified customer base, I mean how much success have you had in the Korean market as the Taiwanese market especially as we look at some of the LCD, LED TV backlighting which is bit more lot of activity in Korea on this as compared to the Taiwanese market where that's probably their major outlook for issuance?

[Raja Parvez:]

Well, most of our customers are global companies and global customers and we are still a leader in the Taiwan market for those products and many of those chips are really being consumed in the Korean markets. So we continue to make a good progress in the Korean market through our partners from Taiwan and from other global partners that we provide product.

[Daniel Amir:]

Okay. Thanks.

[Operator:]

(Operator Instructions)

[Bill Wiessman:]

Actually, Katy, I think we are beyond our 45 minute allotted time anyway. So, we should probably wrap up. So, thank you all for joining us this morning on the call. I hope, our comments have provided some insights on current challenges facing the business and on the actions we have taken to address challenges and to build long-term values. So, thank you very much for joining us and we look forward to talking to you all again soon.

[Raja Parvez:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.