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Executives

Raja Parvez - President & Chief Executive Officer

Bill Weissman - Chief Financial Officer, Treasurer & Secretary

Analysts

Joseph Foresi - Janney Montgomery Scott

Jiwon Lee - Sidoti & Co.

Brian Weinstein - William Blair & Co

Avinash Kant - D. A. Davidson & Co.

Josh Baribeau - Canaccord Adams

Rubicon Technology Inc. (RBCN) Q4 2008 Earnings Call February 18, 2009 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Rubicon Technology Inc. Earnings Call. My name is Clarissa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this call. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s call, Mr. Bill Weissman, Chief Financial Officer. Please proceed.

Bill Weissman

Thank you, Clarissa, and good morning everyone. Thank you for joining us today for Rubicon’s fourth quarter and full year 2008 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 45 minutes for our call this morning. Raja will provide an over of fourth quarter and full year 2008 results of operations and discuss the current market environment and then I will review our financial results in detail. Given the lack of visibility and uncertainty in the market right now.

We will not be providing full year 2009 guidance at this time. However, Raja will discuss our outlook for the first quarter of 2009 and provide additional market information based on his 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 rubicon-es2.com. A replay of this call will be available for two weeks, and the webcast will be archived in the Investor Relations section of our website.

Before we start, I will read our Safe Harbor statement. 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’d like to introduce our President and CEO, Raja Parvez.

Raja Parvez

Thank you, Bill. Good morning, everyone, and thank you for joining us today. 2008 was a year of both significant accomplishments and challenges. In the first half of 2008, we experienced record growth and were challenged to build out capacity fast enough to meet the market demand, which we were able to do by rapidly bringing on-line our new state-of-the-art crystal growth facility in Bensenville, Illinois.

We also developed and implemented the production volume capability for 8-inch polish wafers. We accomplished our goals, ahead of schedule by operationalzing larger crystal furnaces and developing slicing and polishing processes that provided high-quality, high performance 8-inch diameter products for SoS and LED substrates and also for new large diameter optical window applications.

Additionally, we also rapidly increased our production capacity for 4-inch and 6-inch wafers for the LED market to meet the growing demand for these products. Our product mix continues to shift toward larger diameter products throughout 2008, which is consistent with our long-term growth strategy to move the markets to larger diameter products.

Due to our technology, quality and production capability advantages in large diameters sapphire. Rubicon will continue to have a significant and growing share of the market. Our greatest challenge is the one we continue to work thorough today. The global economic slowdown began to significantly impact demand for sapphire substrates in the second half of 2008 and the environment continues to be very challenging today.

The sudden reduction in demand for substrates in the LED and SoS markets driven by the sharp drop in consumer spending has resulted in reduced revenue and limited visibility on future orders. Revenue in the fourth quarter was at the low end of our projected range and totaled $4 million, which compares to revenue of $11.8 million in the third quarter of 2008 and $9.5 million in the fourth quarter of 2007.

Accordingly, our net loss for the quarter was $1.8 million. In the LED market, our costumers experienced a worsening environment in the fourth quarter with further reduction in orders, this has resulted in excess inventory throughout the LED supply-chain, which is gradually being depleted. Currently visibility remains very limited.

Overall revenue from the LED market in the fourth quarter declined 54% for both the prior quarter and the fourth quarter of last year.

While demand has weakened for all products, the hardest hit has been smaller diameter 2-inch substrates. This product is most often used to produce LEDs for mobile devices and other lower-end applications. Not only as sales of these end-user products down, the penetration level of LED lighting in these products is also allegedly high.

As a result, approximately 70% of our LED sales in the fourth quarter were in larger diameter material compared to approximately 47% in the prior quarter.

Now regarding our SoS business. This industry is also largely dependent on the consumer electronics market, which has also been significantly impacted by the economic downturn.

As we previously discussed, our customers reduced demand combined with the inventory issue that already existed at that customer resulted in the halting of shipments at the beginning of fourth quarter. Subsequently, we had essentially no revenue from the SoS market in the fourth quarter.

However, as we announced in early December, we entered into a revised agreement with our key SoS customer Peregrine Semiconductor, under the revised agreement, we have resumed a baseline level of SoS wafers shipments to Peregrine starting in January. This baseline level of shipments will result in revenue of approximately $2 million in 2009.

More importantly, we have deepened our relationship with Peregrine through this new agreement. In addition to resuming a base level of shipments, the agreement cost for Peregrine to purchase at least 50% of this sapphire requirements from Rubicon through year 2010. Also as a demonstration of our strong belief in their technology and to bring our organizations even closer together, Rubicon participated Peregrine’s most recent equity financing round by purchasing $2 million of Peregrine preferred stock.

I am very please to have this new agreement in place and look forward to a continued close relationship with Peregrine. The long-term growth prospects for SoS, RFIC technology remain very strong. Our article business continues to grow steadily with revenue totaling a record $1 million in the fourth quarter, up 30% year-over-year and 6% sequentially.

This revenue growth has been driven by new product shipments in the military, sensor and instrumentation markets. We are targeting applications that need very high quality sapphire in larger sizes and we are having success penetrating into market segments such as Missile Dome Code and Fire Detectors. As our revenue in the fourth quarter was at the low-end of our projected range, our net loss totaled $1.8 million in the quarter.

In order to minimize the financial impact of the drop in demand, we have taken swift measures to reduce our cost structure, including reducing our total staff by one-third. It is important to note, however that we have maintained our core technology staff and capabilities throughout our crystal growth and post crystal growth operations. These engineers and growers are the heart of our technology and we need them in order to ramp back up quickly when the market turns.

Despite the difficult fourth quarter, our full year 2008 revenue was up 11% over 2007 to $37.8 million. Due to the strong growth we experienced in the first half of 2008. As growth was driven mainly by larger diameter substrates.

Large diameter substrates also minimize the impact of the softness in the LED market in the second half of the year. Our large diameter capability remains one of our key areas of differentiation and we continue in our efforts to develop even larger crystals.

While we have temporarily put expansion CapEx on hold, we will continue to invest in the development of our crystal growth and sapphire fabrication technologies. We have planned to extend our technology lead for a larger size sapphire for the optical and substrate markets this year. We have already produced 18 substrate and windows and we have plan to introduce 12 in sapphire windows and substrates in 2009.

These are challenging times, but the markets we serve are emerging markets with very strong long-term growth potential and our technological advantage and deep industry relationships position us very well to remain the world’s leading supplier of high quality sapphire products. We are currently experiencing a reduction in the market demand, but I believe that when demand does come back it will come back strong.

I keep in constant contact with our customers and spend a great deal of time with leaders in the industry via trade shows and other forums. While frustrated with the current market, they all remain extremely optimistic. The adoption of LEDs for backlighting of notebooks, laptops and flat panel LCD televisions and displays is expected to grow even more rapidly in 2009 and beyond due to the significant performance advantages and declining LED product cost.

Many experts that I have talk to also feel that the advancements taking place in the LED industry will result in adoption of LEDs for general illumination applications sooner than many thought possible just a few months ago. So the promise of LED as the lighting source of the future is still very much alive. As the economy and our markets go through this period of realignment, it is our intention to stay close to our customers. Continue to control costs, introduce new products and continue to enhance our technology and improve our processes.

I would now like to turn the call over to Bill, who will provide you with greater details on the financial results for the fourth quarter and full year 2008.

Bill Weissman

Thank you, Raja. As Raja mentioned, revenue for the fourth quarter was $4 million. The continued softening of the LED market resulted in revenue for the quarter at the low-end of our forecasted range.

This compares to revenue of $11.8 million in the prior quarter and $9.5 million in the fourth quarter of last year. As expected, there were no shipments of product into the SoS market in the quarter and all of the remaining R&D revenue was recognized in the third quarter.

SoS market and R&D revenues accounted for over $4 million of the sequential decrease in total revenues. For the $4 million in revenue for our fourth quarter, $3 million was from the LED market and $1 million from the optical market. Revenue from the LED industry in the fourth quarter was down approximately 55% from both the prior quarter and from the fourth quarter of last year. 70% of our LED revenue in the quarter was from larger diameter material, which is 3-inch or greater as compared to 47% in the previous quarter. As demand for 2-inch material typically used in lower end applications was more severely impacted by the economic slowdown.

Our optical revenue continues to grow. Excluding R&D, our optical revenue increased 30% year-over-year and 6% sequentially. Revenue for the full year 2008 totaled $37.8 million and 11% increase over 2007. The increase was primarily the result of increases in larger diameter substrate sales to the LED market as well as increased sales to the SoS market.

Offset in part by lower 2-inch LED substrate sales. In the first half of ‘08, we did not have the capacity to fully address both large and small diameter substrate markets and our priority was in selling to the large diameter markets.

Gross margin for the quarter was slightly negative at $353,000, which reduced our full year 2008 gross margin to 32% versus full year 2007 gross margin of 35.4%. As Raja mentioned, we acted quickly last quarter to reduce our cost structure in light of the weakening demand.

We reduced staffing by one-third and are monitoring all areas of spending even more closely than ever. We also have a number of longer term cost reduction initiatives underway. Operating expenses in the fourth quarter totaled $1.8 million consistent with the prior quarter excluding the $1.2 million in loss on disposal of assets that was recorded in the third quarter of ‘08.

Operating expenses excluding loss on disposal of assets for the full year 2008 was $8.5 million versus $7.6 million for the full year 2007. The increase was primarily the result of a full year of public company cost and increased spending on sales and marketing activities. Diluted EPS for the fourth quarter was a loss of $0.9 per share and full year 2008 diluted EPS with a profit of $0.19 per share.

Turning to the balance sheet, we had $58 million in cash and investments at the end of the quarter with no debt. As we reported last quarter, our investment balance includes auction rate securities, which totaled $10.7 million and are covered under UBS element, which gives us the right to sell back those securities to UBS at par value starting June 30, 2010.

We have not yet liquidated our position in those securities. Also included in longer term investments is the $2 million investment in Peregrine preferred shares that Raja discussed earlier. DSO at the end of the fourth quarter was 57 days down five days from the prior quarter DSO of 62 days.

Our receivables remain of high quality. We did however add 485,000 to our allowance for doubtful accounts in the fourth quarter. As payments from some of our Asian customers have slowed as a result of macroeconomic conditions. The inventory increased by $2.3 million to $7.9 million in the fourth quarter. Of this $7.9 million inventory balance, $4.4 million is in raw material and $1.3 million is in Bull inventory.

We even reduced utilization of furnaces. This is the first opportunity we’ve had to create a bull inventory as you recall; our Sapphire bulls are product neutral as with few exceptions all of the products could be taken from any given bull. This inventory will give us the ability to respond quickly to increase in demand from our customers.

Capital expenditures in the fourth quarter were $2.9 million, which will primarily existing commitments for crystal growth expansion. On November 12th, we announced the authorization of our stock repurchase program, we have a buying back stock under that program and through year-end we repurchased approximately 731,000 shares at a total cost of approximately $3.1 million. So to summarize cash activity for the fourth quarter in round numbers, cash used in operations was $2 million.

We repurchased stock Rubicon stock for $3 million and spent $3 million on capital expenditures. As a result, our cash and investments balance excluding the Peregrine investment went down by $8 million in the quarter.

As a matter of convenience, the Peregrine investment was made in the cash listed transaction, which netted the cost of the investment against outstanding receivables. Had we not netted this transaction, our cash from operations for the quarter would have been slightly positive and there would have been a separate item listed in the cash flow statement for the Peregrine investment.

I will turn the call back over to Raja. As I mentioned earlier, due to the uncertain environment, we are not in the position to provide full year 2009 guidance at this time.

However, Raja would like to share with you our outlook for the first quarter, Raja?

Raja Parvez

Thanks Bill. I have just returned from visiting all of our key LED, SoS and optical customers. While these customers the overall market conditions remain very challenging. In the LED market, companies at all levels of the supply chain and in all geographic regions have seen demand drop considerably in the past three months. And the worst major economies have fallen into recession.

Based on my conversation, Q1 ‘09 will be a challenging quarter for Rubicon and it is my belief that it may represent the bottom of the demand cycle. Customers in Japan, Taiwan, Korea, Europe and the U.S. have begun to see small increases in orders in February and March.

Inventories are now slowly being depleted, but while the current demand remains weak, we hope to see orders begin to increase during Q2 ‘09. Significant development activities for 4-inch and 6-inch LED wafers have continued during these past few months. When demand comes back this will help exhibit expedite the ongoing shift to larger diameter LED wafer production in 2009, 2010 and beyond.

In the SoS market, RFIC products are utilized primarily in higher end devices such as smart phones and LCD TV’s. The smart phone segment is expected to be the only segment of the cell phone market to grow in 2009. Therefore, our SoS customer expects to be less effected by overall macroeconomic condition.

Our customers challenge remains the amount of inventory they need to consume before they begin buying higher volumes of sapphire wafers again. Our relationship remains very strong and we believe those orders will come in time.

Our optical business continues to have a good prospect. We’re making good progress in developing new relationships and new products and expect year-over-year growth in this business.

As I previously indicated, Q1 ‘09 will likely be a challenging quarter with reduced LED orders as inventory levels continue to decline this quarter. As a result, at the moment, we expect Q1 revenue between $2 million and $3 million. Based on this level of revenue, we expect a net loss for the quarter between $3 and $4 million.

We expect LED customer inventories to be substantially reduced this quarter and orders to begin picking up in Q2, but we will have to continue to monitor the situation closely.

In the mean time, we continue to invest in our technology and to invest in projects which will lower our long-term cost structure. We have a strong balance sheet with considerable cash and no debts. This allows us to move forward on these projects. This will ensure that Rubicon Technology is even better positioned to address our markets once the economic environment improves.

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

Question-and-Answer Session

Operator

(Operator Instruction). And your first question comes from Joseph Foresi - Janney Montgomery Scott.

Joseph Foresi – Janney Montgomery Scott

My first question here is, I wonder if you could just give us sort of a full update on the Peregrine relationship as far as, I know that they’d sort of stopped their orders. Is that picked up at all, has there been any increase in dialog with them. May be you could just talk about where that relationship stands right now. What you are expecting out of it in the next six to nine months?

Raja Parvez

First of all the relationship remains very strong, we continue to have a very good dialog I just returned from visiting them, try to understand what their market position is and how they are progressing, they are progressing very well. As we mentioned, we have resumed shipments for starting in January and approximately revenue for year 2009 will be about $2 million based on the depletion of the inventory and this situation could change depending on the market condition. But that’s the minimum based revenue that we have with them. But our relationship continues to be very strong.

Joseph Foresi – Janney Montgomery Scott

And then you mentioned sort of that you think that things may pick up in a quarter or two. I know you talked about inventories being depleted and the smart phones still having some demand behind it. I wonder if you could talk about just exactly why you think that’s going to happen in and will that be the beginning of what you think is going to be an increase in demand going forward?

Bill Weissman

Well the overall applications are continued to increase for LED chips. However, because of the inventory and the significant lower demand that’s why the revenues are lower. But I believe that based on my information from all the customers that I have visited in past about seven weeks. There is a collective belief that the market will start picking up in the second half of 2009 and we are seeing some small orders in different corners at our different customers. And I believe the applications for our laptops, notebooks and LCD TVs will continue to penetrate this year as they expect even larger penetration rates for all of these products.

Joseph Foresi – Janney Montgomery Scott

So just to be clear, is that based on the depletion of inventory or is it is based on the pickup in consumer demand or both?

Raja Parvez

I think it’s both. It is both.

Joseph Foresi – Janney Montgomery Scott

And then just finally, on sort of the energy efficiency, we’ve seen a lot of stuffs come through on the infrastructure package involving energy efficiency. I was wondering, any thoughts on where we stand on the lighting side of things, any potential place here given the fact that it is energy efficient, have you so you guys had any touch points in that area?

Raja Parvez

Yes. As a matter of fact, a fair number of industry leaders believe that general illumination may probably happen sooner than we all expected three, four months ago, because of the energy efficiency and also because of the advancement in the LED industry not only the chip level, but also the package and the fixture level. So there are a fair number of folks including myself believe that this will happen sooner than later because of the benefits.

Joseph Foresi – Janney Montgomery Scott

And the timeframe being mid next year or is it too early to tell?

Raja Parvez

I believe it will be at the end of 2010, beginning of 2011.

Operator

Your next question comes from Anil Doradla - William Blair & Co.

Brian Weinstein - William Blair & Co

Hi guys its Brian in for Anil. I just wanted to talk a little bit about the gross margin. Going forward, should we assume that you have maybe the same $4.4 million run rate in overhead costs in the COGS and if so, I think the guidance is implying a negative 75% gross margin? Is that kind of the right way I look at that?

Bill Weissman

Yes it is, that’s correct.

Brian Weinstein - William Blair & Co

And is there any cost that you can take out of either the COGS or if we do see more aggressive cost cuttings, would that be more on the OpEx line.

Bill Weissman

Well, it’s sounds as we’ve cut significantly and of courses a certain baseline of staff we need to maintain, we don’t want to cut into the core technology here, because that’s really were our IP is and I think we’re at that level already where we’ve gone as low as we can go in the COGS line and the operating expenses again we’ve already run of very lean ship and there are certain thinks we need to maintain in order to operate as a public company. So we’ve cut significantly, we are focused now on some longer term cost reduction initiatives that will pay dividends few quarters out. But in the short-term, we’ve taken some dramatic actions and I think we’re now operating close to the bare minimum.

Brian Weinstein - William Blair & Co

Okay. And then, so there isn’t any unusual items coming throw next quarter.

Raja Parvez

No, there is not.

Brian Weinstein - William Blair & Co

And then, can you just update us on the repurchase authorizations. How much is left on that and you where thinking on that going forward?

Bill Weissman

The program was authorized for $15 million, the Board continues to evaluate that on a regular basis, to-date, we’ve spent about $4.9 million and repurchased a little over 1 million shares.

Brian Weinstein - William Blair & Co

And then, I guess the last thing is just have you, I assume I mean there really is no backlog for the second half of the year at the end of the quarter. And if so, I mean to what degree have you seen order cancellations in the LED market?

Bill Weissman

The reality is right now, that is at the whole market is turned into kind of returns business, what the demand is so soft and things will pick up and then we will see shift back towards getting some longer term orders at some point. But, right now, it’s very much a returns business.

Operator

And your next question comes from Jiwon Lee - Sidoti & Co.

Jiwon Lee - Sidoti & Co

May be it’s a little bit early, but are there any capital spending goals for 2009?

Bill Weissman

Well, we are taking it a quarter at a time. Our CapEx for the first quarter is projected around $1 million and obviously beyond that we will see how things develop.

Jiwon Lee - Sidoti & Co

And in case the demand comes back at some point in 2009. How is your capacity aligned to handle that demand?

Bill Weissman

We have plenty of capacity; we have little over $15 million worth of revenue generating capacity installed right now. So that’s not a problem. We don’t expect to have to spend any additional CapEx on capacity expansion this year.

Jiwon Lee - Sidoti & Co

Okay and then the $2 to $3 million in sales that you are guiding for the first quarter is that sort of blending sequentially similar level of optical revenue and the rest on LEDs and little bit on obviously on the Peregrine side.

Bill Weissman

Yes. Some what similar, of course Raja mentioned that Peregrine orders have started in a similar base level. So, that will be will help some SoS revenue again in the first quarter. But essentially, it will be similar to the fourth quarter in terms of mix.

Jiwon Lee - Sidoti & Co

Okay. And then Bill, I missed your commentary on the gross margin for the 2009 or the first quarter, can you repeat that please?

Bill Weissman

Well, yes, the question was would it be in the neighborhood of a negative 75% and the answer is yes. It would be roughly in that neighborhood.

Operator

And your next question comes from Yair Reiner - Oppenheimer.

Unidentified Analyst- Oppenheimer

This is Mike (inaudible) Yair Reiner. My first question, you have an alliance with Samsung for 8-inch wafers I believe, when do you expect begin shipping those in quantities.

Raja Parvez

Mike, we don’t comment any specific alignments for our customers. But in general, we already shipped the 8- inch wafers to the SoS industry and some other industries.

Unidentified Analyst- Oppenheimer

Can you help us size the LED, LCD TV market opportunity for sapphire?

Raja Parvez

While we look, overall LED markets in minus the current dip is expected to still grow at least 15% to 20% year-over-year and the strongest applications are the laptops, notebooks and LCD TVs, whereas the notebooks and laptops be the leading indicators right now. But I would say that the LCD TV is still probably number three in that order.

Unidentified Analyst- Oppenheimer

Another question, do you have comments [Terry] or color on geographical break down and also if you have any 10% customer this quarter?

Bill Weissman

Yeah. We had three 10% customers as far as geographical break down; roughly 60% is in Asia and the rest is in Europe and U.S.

Unidentified Analyst- Oppenheimer

Okay. And just a real clarification on, is it the work force, is that total work force or just reduction staff?

Bill Weissman

That’s total.

Unidentified Analyst- Oppenheimer

Okay. And when should we expect to see those costs kick in or has it already happened?

Bill Weissman

Well, that we again, we took those actions very quickly. We did that in fairly early in the fourth quarter.

Operator

Your next question comes from Avinash Kant - D. A. Davidson & Co.

Avinash Kant - D. A. Davidson & Co.

A few questions. In your prepared remarks, you did talk about the realignment of your relationship with Peregrine and I didn’t catch it whether they have to buy at least 15% or 50% of the requirements?

Raja Parvez

At least 50%, 50.

Avinash Kant - D. A. Davidson & Co.

50? Okay. And another question on the tax rate, would you be able to take tax losses during ‘09 and at what rate?

Bill Weissman

Well, we fully reserve our loss carry forward. So, you wouldn’t see any P&L benefit from that.

Avinash Kant - D. A. Davidson & Co.

Mostly likely 0 taxes kind of, right.

Bill Weissman

Correct. That’s, right.

Avinash Kant - D. A. Davidson & Co.

Okay. And did you give the bookings number in the quarter, if at all there was any?

Bill Weissman

Well, again it’s, as I mentioned earlier, it’s really temporarily, it is a terms business. So, we are taking orders a month ahead of time. So it’s a very different environment than it was a year-ago, when we had a lot of long-term bookings. But that should change again once the market picks up.

Avinash Kant - D. A. Davidson & Co.

So, you exited the Q4 with what kind of backlog then?

Bill Weissman

Well, again, backlog in this environment becomes, I don’t want to seem meaningless, but certainly less important than it did before, because that really comes down to what customers can take at this point in time given their inventory levels and you don’t want to continue to force material on them. So, we are really not looking at backlog right now, so much as just looking at any given quarter and how the orders are coming in for that quarter.

Raja Parvez

I think the most important part is this, as I mentioned earlier we continue to maintain a very, very strong relationship with our customers. We continue to be close to them as soon as the market turns, I believe that those orders will start coming in.

Avinash Kant - D. A. Davidson & Co.

But if I remember correctly, I think your backlog at the end of the third quarter was roughly $12 million. So I should assume that you shipped from that backlog and nothing got build up pretty much, given the turns nature of the business.

Bill Weissman

Yes. That’s right.

Avinash Kant - D. A. Davidson & Co.

So, roughly $8 million will be the kind of backlog that you still have?

Bill Weissman

Yes.

Avinash Kant - D. A. Davidson & Co.

And in terms of your CapEx requirement, you did say that you will be doing almost $1 million in the current quarter. But if I understand it right, as you have almost $50 million worth of revenue, you could meet that kind of revenue level. You don’t need to spend much on CapEx going forward in ‘09, clearly?

Bill Weissman

That’s right. So what we will be spending is kind of a refreshing some of our older equipment and also some initiatives around the cost reduction.

Raja Parvez

And also introduce a new product.

Avinash Kant - D. A. Davidson & Co.

And that brings me to my next question. Rather, you were talking about adoption of larger wafers in LEDs. Could you talk a little about where is the percentage of adoption at this point compared to what we saw last year or so. Any rough idea there would be helpful?

Raja Parvez

Roughly right now, still about 50% to 55% of the LED we use still 2-inch. But I will say about 45% of 3 and 4 and some 6-inch. So the shift towards lager diameter is moving forward, actually in a good pace. In fact, the leading LED manufacturers throughout the world are working mostly all of the R&D and development efforts and ramp up efforts on the larger diameters. So this continues to grow.

Avinash Kant - D. A. Davidson & Co.

Okay. So larger diameters of course, you mean any thing above 2-inches, right?

Raja Parvez

Anything above 3-inches. 3-inches included.

Avinash Kant - D. A. Davidson & Co.

3-inches included?

Raja Parvez

3-inch, 4-inch or 6-inch.

Avinash Kant - D. A. Davidson & Co.

So larger is 3, 4 and 6-inches, right? Now, you also talked a little bit about the energy efficiency seems to be getting better and adoption could be earlier. Now, could you talk in terms of energy or in terms of cost where we have come over the last six months or so that people are more optimistic about the adoption sooner than later.

Raja Parvez

Well, due to more and more efficient chips are being introduced by the leading LED manufacturers in addition, more and more costs are being reduced throughout the supply chain. And third, energy prices are going up and the shortage remains there. So all these factors are leading towards more and more adoption of general illumination and our customers and other industry leaders believe that and also as you know these things are also being driven by legislatively too in different countries and states even here in U.S. So, a couple with all of those components then attributes, there is a collective belief that general illumination will happen sooner than we have thought 3, 4 months ago.

Avinash Kant - D. A. Davidson & Co.

Like, what I was looking for is may be if you could point out where the bulk of the innovation is coming from, is it from the chip side or from the packaging side or?

Raja Parvez

It is coming on both sides on the chip side more efficient, more light out from a given chip, and also on the back-end, where the package and fixturing is better overall in thermal management and also packaging cost and all. So it’s in both areas actually happening simultaneously.

Avinash Kant - D. A. Davidson & Co.

But the need to bring pricing down is it having an impact on you in terms of your margins and pricing?

Bill Weissman

Not really. I was actually substrate is really only, it’s certainly less than 10% of the chip cost. So at a device level, it’s a very small part of the overall cost.

Avinash Kant - D. A. Davidson & Co.

Okay, perfect. And if you could give your head count number at the end of the quarter, what was it?

Bill Weissman

100.

Avinash Kant - D. A. Davidson & Co.

100. So, that came down from, at the end of the previous quarter you had?

Bill Weissman

150.

Avinash Kant - D. A. Davidson & Co.

150, right. Okay and one final question just to clarify. You said your cost of goods was $4.4 million or so, and that will remain the same in March you said roughly?

Bill Weissman

Yes.

Avinash Kant - D. A. Davidson & Co.

Even with the reduced 70, right?

Bill Weissman

Right.

Avinash Kant - D. A. Davidson & Co.

And how should we think of SG&A, will it come down some or given that, I don’t know the timing when the headcount reductions took place.

Bill Weissman

It happened early in the fourth quarter. So it will be really roughly the same.

Avinash Kant - D. A. Davidson & Co.

Roughly the same. Okay, perfect. Thanks so much. I’ll come back if I have any follow up questions.

Operator

(Operator Instructions). And your next question comes from Jed Dorsheimer - Canaccord Adams.

Josh Baribeau - Canaccord Adams

Hi this is Josh Baribeau for Jed. Just a couple of questions, most have been answered by now. Raja, could you talk about, if you’ve had to make any significant ASP concessions to at least a 2-inch side, maybe in the other sides, because of the demand situations.

Bill Weissman

Most of the concessions happened earlier on in the third and fourth quarter. There were some additions like decreases later in the fourth quarter. But there really hasn’t been much change as of late.

Josh Baribeau - Canaccord Adams

Okay. And could you quantify if you can, your idea of how much inventory is actually in the channel or do you think most has been worked through already.

Raja Parvez

Well Josh, it is being worked out as we speak right now. But, if I have to have it throughout the supply chain, it’s probably three to four months.

Josh Baribeau - Canaccord Adams

Okay.

Raja Parvez

That is why based on the most recent businesses, all of our customer that we believe the second half start picking up and that translates about three to four months.

Josh Baribeau - Canaccord Adams

Okay. And would you classify your position as pretty stable in terms of market share or is some of this weakness unfortunately may be losing some market share or are you have been gaining some share.

Raja Parvez

Absolutely, we remain very strong and the key issue here is the demand is not a competition, we are very strong.

Josh Baribeau - Canaccord Adams

Okay. And just one house keeping question Bill. Can you just give that number for the bull inventory again, I missed that?

Bill Weissman

Yes the bull inventory was 1.8, I believe.

Josh Baribeau - Canaccord Adams

1.8. Perfect. That’s enough for me. Thanks.

Operator

And there are no further questions. At this time, I would like to turn the call back over to management for closing remarks.

Bill Weissman

Well, thank you for joining us on the call this morning. I hope our comments have provided some insight on the current challenges facing the business and on the actions we are taking to address these challenges and build long-term value. And we look forward just being with you all again soon. Thank you.

Operator

Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Rubicon Technology Inc. Q4 2008 Earnings Call Transcript
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