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Rubicon Technology, Inc. (RBCN)

Q4 2012 Earnings Conference Call

February 20, 2013 5:00 p.m.ET

Executives

Raja Parvez – President & CEO

Bill Weissman – CFO, Treasurer & Secretary

Dee Johnson – VP of Investor Relations

Analysts

Jed Dorsheimer – Canaccord

Avinash Kant – D. A. Davidson & Company

Daniel Amir – Lazard

Stephen Chin – UBS

Paul Coster – JPMorgan

Brian Lee – Goldman Sachs

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Rubicon Technology Incorporated Earnings Conference Call. My name is Aisha and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Dee Johnson, Vice President of Investor Relations. Please proceed.

Dee Johnson

Thank you, Aisha. Good afternoon, everyone. We are pleased you could join us today for Rubicon’s fourth quarter 2012 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 fourth 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 first quarter of 2013. We will then be happy to take your questions.

Today’s call is being webcast through the Investors Relations section of our website, located at www.rubicon-es2.com. A replay of this call will be available for eight days and the webcast will be archived in the Investor Relations section of our website. As a reminder, our press release and preliminary financial statement are also available in the Investor Relations section of our website.

Before we begin, please be advised that certain statements in this presentation relate to future results that are forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the accuracy of which statements are necessarily subject to risks, uncertainties and assumptions as to future events that may not prove to be accurate. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Now, I would like to introduce our President and CEO, Raja Parvez.

Raja Parvez

Thank you, Dee. Good afternoon, everyone, and thank you for joining us today. Revenue for the fourth quarter totaled $20 million, consistent with our prior quarter revenue of $19.9 million. We had another sequential increase in revenue from six-inch polished wafers, which increased 7% to $17.5 million in the fourth quarter.

We saw strong demand for six-inch wafers from the LED market, with six-inch wafer revenue from that market increasing to $10.5 million in the fourth quarter from $7.7 million in the prior quarter. Six-inch revenue from the SoS market was somewhat lower in the quarter, totaling $7 million, as compared to $8.7 million in the prior quarter.

We saw only a slight sequential reduction in average pricing for six-inch wafers in the quarter. We continue to be the largest provider of six-inch polished wafers in the market due to our strength in both large diameter crystal growth and large diameter polishing, evidenced by the fact that we have now shipped over 400,000 polished six-inch wafers to date into the LED and SoS markets.

Our emphasis on vertical integration, which offers cost efficiencies and greater control of sapphire production, enables us to scale production and ensures our customers an unparalleled reliable supply of high-quality large diameter sapphire wafers that meet their unique specifications.

The silicon on sapphire market, which uses six-inch wafers, exclusively has grown significantly and SoS RFIC chips are now in many of the leading brands of smartphones. Our customers, RF technology, offers significant advantages over the legacy antenna switch solution, including smaller form factor, less power usage and, most importantly, enhanced performance.

With the increasing RF complexity required in newer mobile devices, the performance advantages offered by the SoS solution is becoming increasingly important. The expected rapid growth in LTE networks and smartphones should drive strong growth for SoS RF chips, as more of these models are introduced.

In addition, our SoS customer also continue to work on expanding their content in each smartphone by introducing new products, such as digital tunable capacitors and power amplifiers.

SoS RF chips are also used in wireless infrastructure, broadband, automotive and defense and aerospace applications. So we believe the SoS market will continue to be a strong market for us in coming years.

In the LED market, there continues to be a limited number of six-inch users at the moment. However, we are seeing some LED chip manufacturers resume their development efforts on six-inch wafers, with the intent to eventually move to a six-inch platform. The current down cycle in the LED market has certainly delayed broader adoption of six-inch substrates by LED chip manufacturers. However, we continue to believe, as do many industry analysts, that large diameter substrates are the future of LED chip manufacturing.

As capacity and the more technologically advanced LED chip manufacturers approaches full utilization, the added throughput offered by moving to larger diameter substrates should facilitate faster adoption.

Turning to the smaller diameter side of the market, given the weak pricing for two through four-inch core, we decided not to sell those products in the third and fourth quarters, with a few exceptions. As a result, revenue from two through four-inch core sales was limited in both quarters.

Revenue from two through four-inch core totaled $337,000 in the fourth quarter and $1.3 million in the prior quarter. While the pricing involvement has not improved yet for these products, we have begun taking a large number of orders for the first and second quarters in order to begin reducing our inventory levels and maintain customer relationships. With our resumption of sales into this market, pricing has actually decreased further and is now below our carrying costs in finished goods and WIP inventory for those products.

As a result, we recorded a $1.6 million adjustment in the period to reflect the value of those products in inventory at the current market pricing. We believe that our competitors are now selling smaller diameter cores at cash cost at the moment to reduce inventory or keep utilization rates high. However, it is our belief that excess capacity in the market is gradually being absorbed and that the pricing environment should eventually improve.

Exactly when and how quickly pricing will improve is difficult to predict. Within the LED market, the backlighting sector should continue to grow in volume in coming years, as LED penetration continues to increase and as TVs continue to get larger. While growth rates have slowed, there’s still growth expected in this sector of the market. However, it is the general illumination sector that is now becoming the main driver of growth in the LED industry.

According to Strategies Unlimited, the lighting market has already become the largest LED sector, slightly surpassing TVs and monitors in 2012. IMS Research recently forecasted that LED sales into the general illumination market would grow from $2.9 billion in 2012 to $5.9 billion in total, 2015, a compound annual growth rate of 26%. Continued reduction in cost per lumen and greater customer awareness of the benefits of LED lighting are driving this growth.

Strategies Unlimited reported last week that the growth rate of LED lens and luminaires in 2012 was 72% in the commercial market. In the residential market, IMS predicts that by 2016 LED lens will be the most popular A-type or household-type light bulbs.

Consumers are increasingly aware of the energy savings and long life provided by LED bulbs. And as light bulb prices continue to fall, with 40-watt equivalent LED bulbs at around $10, more homeowners are doing the math and making the decision for LEDs.

Our optical and R&D revenue totaled $2 million in the fourth quarter, consistent with optical and R&D revenue in the prior quarter. Of this total, $776,000 was from our LANCE project, which involves building a unique crystal growth furnace and developing corresponding processes that could produce large area sapphire windows at least 2 inches thick. We recorded $422,000 in revenue from the LANCE project in third quarter.

Regarding earnings for the quarter, we had a net loss of $1.1 million in the fourth quarter, as compared to a net income of $272,000 in the prior quarter. While pricing of six-inch wafers was fairly stable in the quarter, the lower market pricing on smaller diameter core and corresponding adjustment to inventory were the main reasons for sequential decrease.

2012 was a challenging year for the LED supply chain in general and for sapphire in particular. During the current industry cycle, we focused on enhancing our competitive position by developing new products, adding intellectual property and reducing our cost structure. In addition to the LANCE project, we continue to develop large diameter wafer patterning capability and expect to introduce that product this year. We continue to enhance our existing technology platforms and in recent months, we were awarded two patents for efficiencies added to our fabrication and polishing processes.

We have a number of initiatives underway that will further reduce our already low product costs. We continue to refine our new raw material preparation process and are now taking delivery on the equipment needed to expand that capability to support most of our crystal growth operation with internally processed raw material.

This will result in a significant reduction in our raw material costs, which is a major component of our crystal growth costs. We are also in the process of relocating the remainder of our polishing production to our Malaysia facility, which will result in a significant reduction in our polished wafer costs.

In addition, we have a number of development projects underway that are examining new tools and developing new processes that could increase our capabilities, while at the same time eliminate process steps, thereby reducing costs.

While the market we serve has tremendous growth potential, they are evolving market subject to rapid change will likely continue to lead to considerable volatility. Bill will provide more details on our outlook for the first quarter, but our revenue will be considerably lower in the first quarter for a couple of reasons.

Similar to what we experienced last year, our largest LED customer for six-inch wafers has excess inventory and will not likely need additional material until the second quarter. Also our SoS customer has recently announced that their orders are down based on weaker than expected sales by a key end customer.

However, they also expressed confidence in a strong second half of the year based on the expected introduction of new smartphone models by their end customers late in the year. As a result, six-inch revenue will be significantly lower in the first quarter, but we believe we’ll see strong orders for six-inch wafers in the second half for both the SoS and LED markets.

Our markets have been marked by volatility in the volume and price since the business started 12 years ago, and we expect to see considerable improvement in the second half of this year. We remain the most capable and reliable sapphire producer, and we are very well-positioned to benefit from the rapid growth that is expected from our end-markets.

I would now like to turn this call over to Bill, who will provide you with greater details on the financial results for the fourth quarter and our outlook for the first quarter.

Bill Weissman

Thank you, Raja. Revenue for the fourth quarter was $20 million as compared to $19.9 million in the prior quarter. 88% of our revenue for the quarter was generated from six-inch wafer sales to both the LED and SoS markets.

As Raja mentioned, given the current low pricing for two through four-inch cores, we decided to sell a very limited quantity of those products in the quarter. Six-inch wafer sales increased 7% sequentially to $17.5 million in the fourth quarter, driven by increased orders from our largest LED customer, partially offset by a sequential decrease in revenue from the SoS market.

As Raja also mentioned, optical and R&D revenue totaled $2 million in the fourth quarter with $776,000 of that total coming from the LANCE project. Our gross margin was 5% in the quarter, as compared to 12% in the prior quarter.

The lower margin was primarily due to the decline in smaller diameter core pricing in the quarter, which resulted in the $1.6 million lower costs or market inventory adjustments. Other factors included lower utilization rates and slightly lower six-inch pricing.

Operating expenses in the fourth quarter totaled $3.1 million, down $500,000 sequentially, primarily resulting from our lower bonus accrual and a reduction in our allowance for doubtful accounts in the period.

We had a per share loss in the fourth quarter of $0.05, as compared to a diluted EPS in the third quarter of a positive $0.01 per share. As a reminder, our projected effective tax rate while in a profit operating mode remains 30% to 35%. However, the rate of tax benefit accrued while in a loss mode will typically be higher and will vary based on the distribution of activity between our U.S. and Malaysia operations.

Turning to the balance sheet and cash flow, we maintained a strong cash position with $44 million in cash and short-term investments at December 31, with no debt, unchanged from the prior quarter balance. Most of our inventory is in raw material and boule inventory. Our safety stock of raw material is now more than sufficient and our commitments to purchase additional material are complete.

So we will now be drawing down the raw material stock. We have also decided to further scale back our crystal growth production temporarily to reduce boule inventory levels. As a result, total inventory levels should begin to decline. In addition, our capital expenditure requirements are limited this year with the exception of our investment in patterned sapphire substrate production.

Our accounts receivable remained of high-quality and our DSO remained at 57 days at December 31, also unchanged from the prior quarter-end.

Regarding our outlook for the first quarter, we expect the first quarter to be very challenging with cyclicality impacting orders from both our two largest six-inch wafer customers in the quarter. As a result, we expect revenue in the first quarter to be approximately $8 million. However, we believe the markets we serve will strengthen throughout the year with six-inch orders, in particular, being much stronger in the second half. As Raja mentioned, our SoS customers is extremely well-positioned to capture market share for switches in the latest model more advanced smartphones to be introduced later this year.

In the LED market, the general lighting segment is expected to drive strong growth later in the year. Pricing for two through four-inch cores will remain weak in the near term, but as the LED market strengthens, we believe pricing will eventually improve, as current pricing levels are not sustainable in our opinion.

With the reduced sales volume in the first quarter, utilization rates will be low in both crystal growth and polishing, putting pressure on margins in the quarter. This will be compounded by the moving of our remaining polishing operations to Malaysia, which causes some temporary redundancy. Consequently we expect a loss per share between $0.10 and $0.14 in the first quarter based on a 22.5 million share count and a 50% tax benefit.

I would like to turn the call back over to Raja for some closing comments and then we will be happy to take your questions.

Raja Parvez

Thank you, Bill. While the volatility of markets we serve presents challenges, we have executed our vision and have earned our place as the most capable, the most respected, the most reliable supplier of sapphire product in the world. And we are positioned extremely well to serve these high growth markets.

We continue to focus on enhancing our existing platform and developing new products. Projects like our in-house raw material production and the continued move of our polishing operation to Malaysia will significantly reduce our costs once completed this year and further enhance our competitive advantage. Our vertical integration is a real differentiator in the market and allows us to better control quality and costs and provide assurance to our customers that their orders will be delivered on time and with consistent quality.

We will be extending the vertical integration this year by completing the build-out of an internal wafer patterning capability and will be introducing large diameter patterned substrate to the LED market. The markets we serve are young, are evolving and will likely continue to see volatility. However, by focusing on reducing costs and evolving our products through technology, we intend to maintain our market leadership role and position the company to capitalize on market conditions when they later change.

I want to thank all of you for joining us today and thank you for your continued support. And now, operator, may we have – we take our first question?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jed Dorsheimer with Canaccord. Please proceed.

Jed Dorsheimer – Canaccord

Hi. Thanks. I guess the first question is the $12 million sequential decline in revenues. Is that essentially mean that the six-inch – your six-inch sales are going to roughly zero in Q1?

Bill Weissman

No. Our six-inch should still be more than half of our revenue in Q1.

Jed Dorsheimer – Canaccord

Okay. The strategy of sort of – of not selling and now going back, do you feel like – what’s the strategy to regain customers that you chose not to sell to in Q3 and Q4, for the two and four-inch cores?

Raja Parvez

Well, the reason we did now is that, first, we wanted to reduce our inventory level, but most importantly to maintain our customer relationships, because we expect that second half of this year things should improve. So we’ll be well positioned to take – so we have a place with our customers and that was the reason.

Bill Weissman

Yeah. We’ve not lost any customers. We’ve maintained our customer relationships, even though we haven’t sold much material to them over the past several months. But, as Raja said, we want to make sure we maintain those relationships and start to reduce inventory, which is why we’re now selling those materials again.

Jed Dorsheimer – Canaccord

So, I guess, I’m just trying to reconcile. If we look at some of the Taiwanese results from some public competitors in the sapphire market, they’ve already seen a bottom and are starting to actually see sequential increases and a stabilization in the business, yet, as we look at your Q1, we’re seeing a fairly dramatic fall-off. So I’m just trying to reconcile the not losing any customers. How do you reconcile that difference?

Bill Weissman

Well, a lot of the orders we’re currently taking are going to be for the second quarter. The drop-off in revenue in our case is because of the lower six-inch, and our Taiwanese competitors do not really participate in that market. In terms of pricing for smaller diameter, I don’t know how they could say that pricing has stabilized and improved. Clearly, it has not in the past several months.

Raja Parvez

And also, you remember that we do not sell polished product in the smaller diameter, and they all, polishing customer, our customers, they do. So that could be one of the rationalizations.

Jed Dorsheimer – Canaccord

Okay. Then on the large PSS, I mean are there any customers that you’re aware of that are using – when you say large, are you assuming four-inch and six-inch or just six-inch, could you just clarify that?

Raja Parvez

Well, first of all, as you know, our focus has been and will continue to be on six-inch. However, we will be – in this case, we’ll also provide four-inch PSS wafers. And yes, we are – we have been and we’ll continue to discuss with the customers and we are aligning the specifications. And we will be ready to provide the product when the product is manufactured internally this year.

Jed Dorsheimer – Canaccord

Okay, great. I’ll jump back into the queue. Thank you.

Operator

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

Avinash Kant – D. A. Davidson & Company

Good afternoon, Raja and Bill.

Raja Parvez

Hello.

Avinash Kant – D. A. Davidson & Company

So one or two questions. The first one is that as you see the decline in six-inch business going forward – especially in Q1, does your customer on the SoS side have any meaningful inventory of your product?

Bill Weissman

Yeah. We believe there’s inventory both at our LED and our SoS customer at the moment, yeah.

Avinash Kant – D. A. Davidson & Company

So how much time do you think it takes for them to dissipate or consume that inventory?

Bill Weissman

Well, again, on the SoS side, they’re expecting a very strong half – second half of the year. And I think they’ll be working off that inventory throughout the first half. So, we do expect additional orders. And I expect it to be extremely strong in the second half.

Avinash Kant – D. A. Davidson & Company

And also as you see the LED market now, the growth drivers coming more from the general lighting side. Do you think you have any particular advantage in the general lighting area versus the backlighting, or is it the same for everybody?

Raja Parvez

Well, first of all, you know, as the – we have been all waiting for general illumination, really, market to take off. Now, there are some sign that it is beginning to take off. And that’s where the more devices will be required. That’s where the larger diameter cost efficiency come into play. And as you know, many of our customers, especially with the larger diameter, even though their – part of their production goes to the display market, but their main focus has been and continue to be the general illumination. So we are confident that once the general illumination really takes more product into the market in the second half, we should take full advantage with our customers as well.

Bill Weissman

Plus, larger diameter wafers do have an extra advantage, when you’re talking about large die sizes, the efficiencies are even greater for that application.

Avinash Kant – D. A. Davidson & Company

So have you seen people start to qualify those six-inch wafers with you now?

Raja Parvez

Yeah. Look, we have been constantly working with our all six-inch potential customers for quite some time. In some cases, we are fully qualified, but they have not migrated from their current platform that is the two-inch or four-inch to six-inch yet. In some cases, we are qualified. In some cases, we are being – we’re qualifying them. But rest assured that we are at the forefront in front of our customers. Wherever there’s a large diameter customer need we are ahead of it. And in many cases that is – in fact, now, because of general illumination, we are seeing that some of our customers are again re-focusing on development activities on the six-inch products.

Avinash Kant – D. A. Davidson & Company

Did you give out your CapEx expectations for the year 2013?

Bill Weissman

It’ll likely be between $10 million and $15 million, with a little over half of that going towards the PSS initiative.

Avinash Kant – D. A. Davidson & Company

Thank you so much.

Operator

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

Daniel Amir – Lazard

Yes. Thanks a lot. First of all, on the pricing side, what is the level of visibility that you have that you’re going to see a bounce in the two and four pricing? It seems like that at different times in 2012 you expressed that things might bottom out and they – and I guess they didn’t bottom out. And now, you’re thinking that it’s not sustainable, that it’s just a matter of time when it bounces back. So if you could give us any qualification around that that’d be helpful? And I have one follow-up. Thanks.

Bill Weissman

We don’t know the timing obviously of recovery in pricing. We are a bit surprised ourselves that pricing went down even further, but it’s at such a ridiculously low level now, it’s hard to imagine going any lower. But exactly when and how quickly the pricing will recover is difficult to say, but clearly the traction that the market is starting to see in general illumination is helping to absorb capacity and should help at some point.

Daniel Amir – Lazard

Okay. And on the SoS side, you expect kind of a big bounce back in the second half. I mean, so what type of revenue growth year-over-year should we see in that business?

Bill Weissman

Well, it’s difficult to say. Obviously, I think I believe our customer has given some guidance on what they expect their growth to be for the full year. And we certainly don’t have any reason to believe that we wouldn’t be able to mirror that, but it’s difficult to say.

Raja Parvez

Well, as you know that they have mentioned and we’ve mentioned it in our call as well, that they are expecting a strong second half because that is the time when most of these smartphone manufacturers introduce new models. And we have been – we have maintained a majority market share with both LED and SoS customer, and I believe we’ll continue to do so, as long as we continue to provide a high-quality product and competitive pricing, which we plan to do so. So once that – their production needs are improved, accordingly, our wafers will go into their products as well. So we believe that we have a very strong relationship with both of these customers and it’s just the demand side has to improve both on the LED side and as far as SoS side.

Daniel Amir – Lazard

Okay. And then I guess just finally on the OpEx side. So what type of R&D level should we be looking at for next quarter?

Bill Weissman

R&D will be up a little bit this year, but not dramatically. A lot of the investments we’re making for SoS – I’m sorry, for PSS and LANCE, et cetera, have already been made. So there wouldn’t be any significant increases.

Daniel Amir – Lazard

That’s for the year, right? But for the quarter?

Bill Weissman

Right, and the run rate.

Daniel Amir – Lazard

So...

Bill Weissman

The run rate shouldn’t change dramatically.

Daniel Amir – Lazard

Okay. All right. Thanks.

Operator

Your next question comes from the line of Stephen Chin with UBS. Please proceed.

Stephen Chin – UBS

Thank you. Hi, Raja and Bill.

Raja Parvez

Hello.

Bill Weissman

Hi.

Stephen Chin – UBS

A question on selling of inventory in the quarter to keep customer relationships. Can you provide an estimate of what ending inventory will likely be at the end of March 2013 quarter? Just wondering if this is a meaningful amount of inventory that you’re planning to sell?

Bill Weissman

Well, I think you’ll see more of an impact on our inventory levels in the second quarter. We scaled back some of our crystal growth production, but it’s been done into the first quarter, and more of the volumes are booked for the second quarter than the first quarter. So we should see some improvement, but the real reductions in inventories will really start in the second quarter.

Stephen Chin – UBS

Got it. And second question on your quarterly sales breakeven level. Can you share why you have decided not to take action to lower operating expenses right now? Is it because you expect sapphire demand to increase meaningfully in the second half?

Bill Weissman

Well, our operating expenses are already extremely low. There’s not too much we can do there. We have reduced our U.S. head count by about a third. So we are doing – taking some significant steps in order to reduce overall costs, as well as trying to reducing product costs through the measures we mentioned, raw materials and polishing move to Malaysia.

Raja Parvez

Look, we continue to focus on new platform technology, as Bill mentioned, continue to move our polishing infrastructure and all manufacturing to Malaysia, introduced new products. As we’ve said, we’ve also reduced the head count here in the U.S. So parallel to all of those activities, we continue to reduce the costs to stay competitive in this market. But as we mentioned earlier, especially two through four-inch pricing are not sustainable. They are very, very low and, however, because of the demand side and some inventory level from the incumbent and established sapphire producers has resulted in this situation.

Stephen Chin – UBS

Got it. And one final question from me on the cash balances. Can you give us an idea of where you estimate the cash levels will be at the end of the March quarter? And also what do you estimate the normal cash burn would be if the quarterly sales stay at $8 million per quarter?

Bill Weissman

Well, I don’t want to give you specific numbers, but we have looked at very conservative scenarios for this year and our cash balance remains strong throughout the year even under that scenario. That’s because we are drawing down inventory and the CapEx is fairly limited. So we don’t have any cash concerns. We did put a $25 million working capital line of credit in place as a backup, but we don’t anticipate using that this year under any scenario.

Stephen Chin – UBS

Great. Thank you very much.

Bill Weissman

You’re welcome.

Operator

(Operator Instructions) Your next question comes from the line of Paul Coster with JPMorgan. Please proceed.

Paul Coster – JPMorgan

Yes. Thanks very much for taking the questions. Obviously, the industry has become very competitive, quite cutthroat. On the other hand, you’ve gone to a more vertically integrated model. As revenues recover what kind of margin structure should we expect? Would it look similar to the prior peak, or do you think it will be different this time around?

Bill Weissman

Well, it’s difficult to project out. We do feel that the margins at some point will be quite healthy, particularly for the more differentiated products like large diameter wafers and PSS products. The smaller diameters will always be competitive and more commodity pricing, but the overall margin – very unlikely we get back to 65% gross margin like we saw in 2011, but it should still be quite healthy margin. As the industry matures, we’ll see less and less of this volatility, the highs will be lower, and the lows will be lower, and we’ll start to generate decent, more consistent margins.

Paul Coster – JPMorgan

So as you think about the industry long-term, what kind of growth rate do you expect over, say, three to five years in terms of two-inch equivalent wafer output?

Bill Weissman

Well, again, the LED market is expecting something in the neighborhood of 30% compounded annual growth rate. The SoS market is also – have got very strong growth potential. And so we think there’ll be 25%, 30% growth easily in the market.

Paul Coster – JPMorgan

And are you seeing any evidence of the irrational pricing maybe forcing a shakeout here?

Raja Parvez

Well, not direct evidence, but we – I just came from Asia visiting all customers and I believe that general thesis is this that the market has been lower for a very, very long time. A majority of the participants in the entire supply chain from raw material to finished fixtures have been having a lot of concerns and issues regarding the margin and everything. But we believe that since the general illumination, which we all have been waiting for many years to really grow, we are seeing the sign of that growth. And many of our customers whose main focus was to general illumination are now – are stating the same thing too.

So we believe that in the long-term, especially second half and beyond, we expect to see this market will be less volatile than it has been because of this different sectors like display and so forth. So if the general illumination market continues to grow, which we expect, and all the initial reports are, I will believe this industry will be a bit more stable than it has been thus far.

Paul Coster – JPMorgan

Okay, one last question then. As the general illumination market starts to kick in, are you seeing different customers emerging or different sort of divisions within your existing customer base emerging as your key clients?

Raja Parvez

Well, overall customer base remains the same. However, their focus and their emphasis and their new product introductions will differ, because since now the general illumination – and also, as you know, in order to enter into the general illumination market, our customers had to also develop their new products and also meet the regulatory and also the industry standards. And our information is that most of our customers have gone through that process, so I believe that when the market improves they will be ready to launch those new products.

Paul Coster – JPMorgan

Very good. Thank you.

Operator

Your next question comes from the line of Brian Lee with Goldman Sachs. Please proceed.

Brian Lee – Goldman Sachs

Hey, guys. Thanks for taking the question. I had two, and sorry if missed this, but did you mention how much pricing is expected to be down in two through four-inch cores and also in six-inch wafers for the LED segment?

Bill Weissman

Well, we don’t expect the two through four-inch core pricing to decline any more. And six-inch pricing, it’s difficult to tell, but we think there will be some price pressure on six-inch in the near-term. But, again, as demand for that product picks up later in the year that should ease.

Brian Lee – Goldman Sachs

Okay. And then, we’ve been hearing more from chip manufacturers on the potential for sapphire recycling or reuse. Any thoughts you guys can share on trends that you might be seeing there and how it might impact your outlook whether near-term or longer-term? Thanks.

Raja Parvez

Well, very few, very few LED chip manufacturers recycle the sapphire, very few, and in most cases – in almost most cases those are the fresh wafer they use. But time to time they come up with creative ways to do so, but there’s no general trend. And from the technological point of view, or the used point of view, from major recycling of the sapphire wafers.

Brian Lee – Goldman Sachs

Okay. Thanks, guys.

Operator

There are no further questions in the queue at this time. I would now like to turn the call over to Dee Johnson for closing remarks. Please proceed.

Dee Johnson

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

Raja Parvez

Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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