Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rubicon Technology, Inc. (NASDAQ:RBCN)

Q4 2013 Results Earnings Conference Call

February 19, 2014, 05:00 PM ET

Executives

Dee Johnson - Vice President, Investor Relations

Raja Parvez - President and Chief Executive Officer

Bill Weissman - Chief Financial Officer

Analysts

Jed Dorsheimer - Canaccord

Avinash Kant - D.A. Davidson

Andrew Huang - Sterne Agee

Andrew Abrams - JG Capital

Stephen Chin - UBS

Operator

Hello, and welcome to the Rubicon Technology Fourth Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dee Johnson, Vice President, Investor Relations. Please go ahead.

Dee Johnson

Thank you, Amy and good afternoon everyone. We are pleased you could join us today for Rubicon’s fourth quarter 2013 earnings conference call.

With me today are Raja Parvez, Rubicon’s President and Chief Executive Officer; and Bill Weissman, Chief Financial Officer. We’ve 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 more detail and discuss our outlook for the first quarter of 2014. We will then be happy to take your questions.

Today’s call is being webcast through the Investors Relations section of our website. The webcast and press release can be found at ir.rubicontechnology.com. A replay of this call will be available for one week and the webcast will be archived in the Investor Relations section of our website.

Before we begin, please be advised that certain statements in this presentation relate to future results that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate.

Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Raja and will Bill will report certain non-GAAP financial results. Investors are encouraged to review the reconciliation with these non-GAAP financial results to the most directly comparable GAAP results which can be found in the company’s earnings release issued earlier this evening.

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

Raja Parvez

Thank you, Dee. Good afternoon everyone and thank you for joining us today. The sapphire market continue to strengthen in the fourth quarter driven by the growing momentum of the LED market and demand from non-LED applications by mobile devices such as the sapphire home button in the new iPhone 5S as well as the sapphire camera lens cover and dual flash now being adopted by more smartphone manufacturers.

As a result we saw another sequential increase in pricing for 2-inch and 4-inch sapphire cores in the fourth quarter, which brought pricing for those products that to only a breakeven level.

As mentioned last quarter, demand from the LED market is now being driven primarily from the general lighting segment. The backlighting market continues to be the largest segment and other applications such as the dual flash in the mobile devices are adding demand.

But the general lighting segment appears to be the real growth driver and we believe that the demand from the general lighting segment will continue to grow and even accelerate for the foreseeable future.

According to a report from Strategies Unlimited, revenues for LEDs in lighting applications are expected to rise to a compound annual growth rate of 30% to $13 billion by 2017. The other major contributors to the increasing demand for sapphire are non-LED applications for sapphire in mobile devices.

Apple was the first company to adopt a sapphire camera lens cover and now other smartphone manufacturers are also including sapphire lens covers for their newer models. Apple’s latest iPhone model, the 5S incorporated a sapphire home button.

The switch to sapphire for their home button in the 5S was because sapphire is virtually scratch proof and offers improved touch capacitance, which are important characteristics to ensure the effectiveness of the fingerprint recognition security they have built into the phone. It is our expectation that other mobile device manufacturers will also add similar functionality soon.

Biometrics such as fingerprint recognition provides significantly greater security than a password and we believe it is likely to become increasingly popular in mobile devices, kiosks. Data security is becoming an increasing concern in society and the use of biometrics could increase dramatically in coming years which should drive additional demand for sapphire as a result.

While the adoption of LEDs in the general lighting market is now the real driver for LED growth, the backlighting market remains the largest segment of the LED market for the time being.

The backlighting market does have some seasonality associated with it with the first quarter typically being the weakest quarter. With the newer mobile device applications for sapphire, we may also see some quarterly fluctuations in demand based on the timing of new model introduction.

Regarding pricing for the first quarter, we’re seeing what we believe to be a temporary pass in sapphire price increases as a result of these factors. However, everyone we have spoken to in the market we serve, expects demand to strengthen at the end of this quarter and to be very strong throughout the year. Therefore, we expect first quarter pricing to be similar to the prior quarter, but expect price increases to resume in the second quarter.

Our revenue for the fourth quarter was $11.5 million, which was slightly higher than the prior quarter. Revenue from 2-inch and 4-inch core, sales increased 28% sequentially to $9.2 million in the fourth quarter from $7.2 million in the third quarter. Half of the sequential increase in core revenue was attributable to increased pricing and the other half was attributable to increased volume.

Our fabrication capacity for producing 2-inch and 4-inch cores has been operating at near full utilization for the past few quarters; however, we added some additional fabrication capacity towards the end of the third quarter. This additional capacity allows us to fabricate and sell all crystal produced in any given period regardless of the mix of the products ordered.

The increased revenue from our 2-inch and 4-inch cores was offset by reduced revenue from polished wafers which was lower sequentially by $1.3 million and was attributable to the lower sales into the SoS market.

Revenue from the SoS market totaled 500,000 in the fourth quarter versus $1.8 million in the third quarter. The lower revenue was due to the excess sapphire inventory and the technology changes at our SoS customer which we discussed in our last call.

While wafer revenue was lower in the fourth quarter, we continue to make good progress on our PSS wafer and polished wafer initiatives. We’re very pleased with the progress to-date on the PSS product introduction.

We announced the introduction of the PSS product in October and to-date, we already received request for samples from 60 different customers. In the fourth quarter, we shipped PSS wafers to nine of these customers.

Our tackling capability allows us to offer fully customizable sub-micron patterns with dimensional tolerances at one-tenth of a micron and with the industry’s smallest edge exclusion zone.

This provides customers with maximum usable wafer surface area. As a result, we’re shipping 4 and 6-inch wafers with a wide variety of patter types, densities and heights. In some cases, we’re providing multiple patterns to the same customer.

Based on the progress we have made in the past quarter, we’re confident in delivering our target PSS revenue of at least $15 million in 2014.

We also expect orders from existing customers of 6-inch LED wafers to begin picking up in the second quarter of this year. We’re also seeing an increased interest among LED chip manufacturers and a possible shift to 6-inch substrates now that their utilization rates are relatively high. I believe that most chip manufacturers that move to a 6-inch platform are likely move directly to purchasing pattern 6-inch wafers as appose to wafer that are just polished.

As we mentioned in our last call, we have decided to move into 4-inch wafer sales in addition to selling 4-inch cores for two reasons. First, while our plan for offering pattern substrates was primarily focused on the developing 6-inch market, we decided to offer 4-inch PSS, therefore, to increase utilization of the patterning infrastructure until the 6-inch market expands.

Second, since we will be polishing 4-inch wafers to [inaudible 10.58] or internal PSS operation, we decided to offer 4-inch polished wafers in order to increase utilization at our polishing operation in Malaysia, again until the 6-inch demand increases.

Good progress has been made on that initiative and we have received our first volume order for 4-inch polished wafers in the first quarter. So, things are developing nicely on the wafer side of the business, while wafer revenue growth will be gradual only this year and should accelerate in the back half of the year as we qualify PSS customers; see an increase in 6-inch polished wafer orders from existing customers and gain market share in 4-inch polished wafers.

Turning to our finished optical products and R&D activities, revenue totaled $1.6 million in the fourth quarter as compared with $1.9 million in the prior quarter. The decrease was due to lower R&D revenue. We had higher expenditures on our last R&D project in the third quarter as we took delivery on key furnace spot for the next-generation furnace in that quarter.

Revenue on this project is realized based on our expenditures for the project and will vary from period-to-period primarily based on the timing of equipment purchases. Regarding earnings for the quarter, our non-GAAP net loss per share for the fourth quarter was $0.22.

Consistent with our guidance, our non-GAAP net loss per share excludes the adjustment to establish the tax valuation allowance and applies our fourth quarter projected tax benefit rate of 45%. Bill will explain in greater detail in a few minutes.

Our operating loss in the quarter was reduced by approximately 600,000 sequentially due to an improvement in gross margin. The improving margin on 2-inch and 4-inch cores as a result of increased pricing and improved factory utilization was offset in part by weaker wafer sales and increased development cost.

A significant amount of the pressure on earnings continues to come from idled plant cost associated with low utilization, but that is changing. Our idle plant cost in the fourth quarter was $3.3 million as compared to $3.9 million in the prior quarter.

Given the high volumes of crystal we have selling in recent quarters, our boule inventory has come down to normal level. And we have been increasing crystal production in order to maintain the same level of shipments.

The 600,000 reduction in idle plant cost is due to the increased utilization in crystal growth. We will reduce the idle plant cost in the first quarter by at least an additional 400,000 as we will be running at full utilization in the crystal growth for nearly the entire quarter. This is ahead of schedule.

Reduction to the idle plant cost associated with our polishing operations will happen gradually over the course of this year as wafer volumes increase. 2013 was a challenging year; however, we saw the building of significant positive momentum in the sapphire market throughout this year.

That momentum was generated from two key areas, the acceleration of the adoption of LEDs in the general lighting market and the introduction of sapphire components in mobile devices. Both of which have absorbed excess capacity in the market and started the recovery of sapphire pricing.

Both of these market drivers are in their infancy and we expect very strong growth from these applications for years to come. We also saw some rationalization of the competitive landscape with a number of new entrants at various parts of the sapphire supply chain exiting the market after recognizing that they could not effectively compete. We believe that in 2014 we will see continued strengthening of the demand for sapphire from both the LED and mobile device market.

I have been to Asia several times already this year and everyone I have spoken with in the industry expects strong demand this year and believes that the more moderate demand that we have seen so far in the first quarter is due primarily to seasonality.

We also expect strong growth in our wafer business this year with the positive early feedback on PSS, greater 6-inch adoption, and our move into 4-inch polishing. With the improving factory utilization and pricing improvement, we expect considerable improvement in margins this year.

Throughout this challenging cycle in the sapphire market, we have focus and will continue to focus on product innovation and cost reduction. Over the course of 2013, we have added significant depth to our technical team, particularly in polishing and patterning. That investment has paid off with process improvement that have significantly lowered our wafer product cost and at the same time has allowed us to introduce PSS product ahead of schedule.

We perfected fully [rolled up] in-house raw material processing and streamlined our fabrication processes which has lowered our cost of 2 and 4-inch cores. We also added domain knowledge in epitaxy which will be focused on developing potential next generation products such as large-diameter templates and advanced optical products.

It is our continual focus on technological leadership, which has allowed us to a create vertically integrated model with differentiated processes and equipment at each step of the manufacturing process and has allowed us to first to make market on products like large-diameter polished wafers and now large-diameter PSS and soon large rectangular windows. And I believe that 2014 is a year in which we will begin to realize many of benefits of these investments.

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 our outlook for the first quarter.

Bill Weissman

Thank you, Raja. Revenue for the fourth quarter was $11.5 million as compared to $11.1 million in the prior quarter. Revenue from 2 and 4-inch core sales increased 28% sequentially, a result of increased pricing and volume as Raja explained.

Revenue from 2 and 4-inch cores in the quarter totaled $9.2 million as compared to $7.2 million in the prior quarter. While pricing for 2 and 4-inch cores is still very low compared with historical pricing, the steady rise in price throughout most of 2013 has brought the pricing for 2 and 4-inch cores back to around breakeven levels.

Revenue from wafer sales in the fourth quarter totaled approximately $800,000 as compared to $2.1 million in the prior quarter, due to reduced orders from the SoS market for the reasons Raja provided.

We’re confident that we will generate significant growth in our wafer business in 2014. We expect our 6-inch polished wafer orders to increase, our entry into the 4-inch wafer business should add considerable revenue, and our pattern wafer product is attracting a lot of attention.

Optical and R&D revenue totaled $1.6 million in the fourth quarter, as compared to $1.9 million in the prior quarter. As Raja mentioned, we took delivery on components of our new larger furnace for the last project in the third quarter, which drove R&D higher in that quarter as revenues recognized and expenses are incurred.

The furnace is now constructed and we’re currently in our first growth cycle in the development of the targeted dimensions of 36 inches by 18 inches rectangular windows.

Low plant utilization continues to be a drag on earnings; however, our idle plant costs are now declining. Idle plant cost totaled $3.3 million in the fourth quarter, a $600,000 sequential decline as a result of increased utilization of our crystal growth operation.

As Raja mentioned, our crystal growth facilities are now operating at full capacity at our idle plant cost from crystal growth will be down another $400,000 in the first quarter.

Utilization of our polishing operations will also improve as we ramp up production on PSS as we gain market share in 4-inch wafers and as 6-inch polished wafers orders increase during the year.

Operating expenses in the fourth quarter totaled 3.2 million, slightly higher than the prior quarter operating expense total of 3.1 million. Operating results were in line with our guidance. Our GAAP EPS was impacted by a non-cash tax adjustment related to establishing valuation allowance on our differed tax assets.

Due to a loss in the fourth quarter of 2013, we’re at a cumulative loss position for the past three years which is considered by the accounting standards to be significant negative evidence which is very difficult to overcome.

While our financial outlook for the company remains positive, under the accounting standards, objective negative evidence is given greater way than other subjective positive evidence such as our projections for future growth.

Consequently, this has led to the establishment of a valuation allowance in the current quarter. We will maintain the tax valuation allowance and no longer accrue tax benefits or tax expense on our income statement until an appropriate level of profitability is attained. As a result, GAAP EPS in the fourth quarter was a net loss of $0.67 per share.

Turning to the balance sheet and cash flow, we maintained a strong cash position with our cash in short-term investment balance of $35 million at December 31 with no debt. We raised an additional $40 million in January through the sale of common stock in order to ensure that we can expand capacity as the market strengthens.

We’re encouraged by the early interest in our PSS wafers and if that business progresses as expected, we will likely need to expand capacity later this year. We’re also working in a number of new products in R&D and need to be in a position bring those to market quickly successful.

Our DSO at December 31st remained very low at 28 days as we continue to require either partial or full prepayment from customers in certain regions. Our capital expenditures in the fourth quarter totaled $1.4 million, most of which was spent on our PSS infrastructure.

Regarding our outlook for the first quarter, we expect revenue to increase to approximately $13 million. As Raja indicated, first quarter pricing for 2 and 4-inch cores will likely to be similar to the fourth quarter, while we expect price increases to resume again in the second quarter.

Given that we’re at full utilization in crystal growth and core fabrication, first quarter core revenue is expected to be similar to the fourth quarter. Therefore, the sequential growth in revenue will be coming from our LED wafer and optical products.

LED wafer revenue will be a larger percentage of the total in the first quarter, but there will be development cost associated with the lower volume qualification wafers and initial 4-inch polished wafer orders.

For the mix shift, we’ll reduce margins in the near-term. However, reduction in idle plant cost should offset most of that impact. So, we expect the operating loss in the first quarter to be similar to the fourth quarter. As we move into production volumes, wafer cost will come down.

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

Raja Parvez

Thank you, Bill. We expect strong demand from sapphire in both the LED and mobile device market in 2014. We also believe that the LED market will be looking for more advanced sapphire substrates this year in terms of larger diameter, tighter specifications, and sophisticated patterns.

We believe that the market opportunities ahead of us are substantial and the work we have done throughout 2013 in product development and cost reduction positions us extremely well to benefit from these growing markets.

There’s a strengthening pricing environment and improving utilization of our production facilities, we expect to begin seeing strong improvement in operating results this year. I want to thank you all for joining us today and thank you for your continuous support.

And now operator may we take our first question?

Question-and-Answer Session

Operator

(Operator instructions) Our first comes from Jed Dorsheimer at Canaccord.

Jed Dorsheimer - Canaccord

Hey, thanks guys. Just a couple -- trying to reconcile a couple of your comments here. I guess the first being -- I too just returned from Asia actually last week meeting with many of your customers and so while it seems clear that Q1 pricing is relatively flat due to apprehension associated with demand for Chinese New Year, it seems as if demand is relatively strong for Chinese New Year and is resumed.

So I’m just curious in terms of pricing for Q2, would you say that the price increases that are being quoted in the market are similar to Q3 or Q4 type levels in terms of the increase?

Bill Weissman

We’ll be starting conversations with customers in about week or two around Q2, so it’s too early to tell. But clearly early invitations are that pricing increases will resume as you indicated, but to the extent how much they will increase is a little bit too early for us to tell.

Jed Dorsheimer - Canaccord

Okay. And then I guess I’m a little bit confused on the backlighting. From what we’re seeing, backlighting demand seems to be relatively strong. So, is that more as a function of who you are exposed to or maybe you could elaborate there?

Raja Parvez

No, we’re also seeing that the backlighting market is strong at -- even at this moment, it is the strongest, but we also see that as typically as you know, first quarter is the one where that because of this seasonality and the inventories, the customers have and also because of that, I think that's what we’re reflecting in our comments.

Bill Weissman

It’s always a more difficult for us to tell since we’re selling 2-inch and right now 4-inch material to polishers and -- so we don't have great visibility on the end customer. So, our comments are based as much on feedback we’re getting from other sources as much as from customers.

Jed Dorsheimer - Canaccord

Okay. Fair enough. Geographically speaking, as you introduced 4-inch, do you suspect this will be more in one particular region such as China for example, or Taiwan or Korea? Could you provide any -- on the wafer business that is -- could you provide any additional comment?

Raja Parvez

I believe that this 4-inch business will be more diversified across Asia region not on a one particular region.

Jed Dorsheimer - Canaccord

Okay. And then you mentioned mobile device, historically you haven’t participated to a -- how should I say, to a level that maybe some of your competitors have in the mobile market. Do you expect that to pick up in 2014? I was just -- or is that just comments more about the market in general?

Raja Parvez

No, we have seen now the strong growth in the mobile devices. We actually have been and currently providing a significant amount of smaller diameter cores into -- particularly into that market. And we believe that market will continue to grow.

In addition to that, as you know that traditionally we have supplied 2-inch and 4-inch core which has certain diameters, but we also have developed a capability to provide a rectangular shape or form factor specific to a given smartphone device. So, we’re also ready to provide core in that format as the market demands.

And the third thing we’re also working on is this -- some alternative technologies which we -- if proven that technologies we’ll be introducing at a certain time as well.

So, in other words, in mobile devices, we’re currently supplying the product into 2 and 4-inch core product. We offer a capability to provide into rectangular format and we’re working on alternative technologies as well. And if they are proven, we’ll provide more details later.

Jed Dorsheimer - Canaccord

And then on the 6-inch PSS, the greater than 15 million of revenue contribution from that business this year I think is what you mentioned. Do you expect -- so there’s going to be contribution in Q1, is this is a -- I assume this is back half weighted, but I just want to ask in terms of the progression how we should see -- how we should expect those shipments to increase as we look at the -- from an annual basis?

Raja Parvez

Yeah. It will be backend loaded and it will be 4-inch and 6-inch PSS by the way. Q1 and mostly Q2 would be kind of a qualification stage and we except production orders start to come in late Q2 and really start to kick in, in Q3 and Q4. So it backend loaded, but as Raja said, we had really good success in terms of getting customer interest up to this point with 16 customers requesting examples. So we’re really confident that we can deliver that $50 million this year.

Jed Dorsheimer - Canaccord

And sorry last question. Of the 16, how many are qualified?

Raja Parvez

Well, most of those customers as we've just started providing them samples and it could take up to six-month for the given customer to qualify. So there are different stages of it.

Jed Dorsheimer - Canaccord

And do you have a certain percent. Would you say that less than half are qualified at this point?

Raja Parvez

All of them are in the progress right now.

Jed Dorsheimer - Canaccord

Okay.

Raja Parvez

Remember, we introduced this product in October and since last few months we have request from few customers, 16 of them and out of them 16 – 10 of them are for 6-inch and nine of them for 4-inch. And to some customers, we have supplied multiple samples of different densities, different heights, different configurations and it could take up to six months for a given customer. But we are very confident that good number of these customers, which will be combination of 4-inch and 6-inch to turn into a production order mainly focused on the backend of the year.

Jed Dorsheimer - Canaccord

Great. Thank you, guys.

Raja Parvez

Welcome.

Operator

Next question comes from Avinash Kant at D. A. Davidson.

Avinash Kant - D. A. Davidson

Good afternoon Raja and Bill.

Raja Parvez

Good afternoon.

Bill Weissman

Hello.

Avinash Kant - D. A. Davidson

So, a few questions, first, could you give us a little bit color in terms of the margin profile of the sales that you’re having into the LED market versus the cell phone market?

Bill Weissman

No. We don’t break that out. And really the cell phone market is served through 2-inch and 4-inch cores and that pricing is going to be the same for LED and the mobile market. So it would be the same for us.

Avinash Kant - D. A. Davidson

Okay. And I may have missed a few numbers. So you said the LED, SoS and the optical sales were -- how much was that? I missed some of the numbers there -- LED sales?

Bill Weissman

Yeah. Well, the LED sales, wafer sales were all LED except for $500,000 which was the remaining SoS business and optical was $1.6 million.

Avinash Kant - D. A. Davidson

Okay. So of the 800k, 500 was SoS, right?

Bill Weissman

Correct.

Avinash Kant - D. A. Davidson

Okay. But you said, your 6-inch sales total, did you have the 6-inch wafer sales total?

Bill Weissman

Well, it would have been really not doing much in the way 4-inch in the fourth quarter, but it would have been essentially all 6-inch with the exception of some 4-inch PSS qualification revenue.

Avinash Kant - D. A. Davidson

Okay. So, the 4-inch products were just some qualification, very small.

Bill Weissman

Right. Small, yes.

Avinash Kant - D. A. Davidson

Okay. And when you talk about pricing you are talking about of course, stabilization in the current quarter and then improvements going forward into Q2. Once again the basis of that is your communication with the customers at this point?

Raja Parvez

Yes. Look, since beginning of the year I’ve been there several times talking to the customers especially during discussion for the Q1 bookings and we see a strong growth starting especially after the Chinese New Year, which is over now and slightly the tail end of the Q1, so we are very optimistic that pricing increase will resume starting in Q2.

Avinash Kant - D. A. Davidson

So Raja, I think Bill was saying that it’s based on the current pricing, you guys are kind of breakeven at this point, so clearly based on the pricing improvement that you see from Q2 onwards, when do you think that company could become profitable on an earnings basis?

Bill Weissman

We don’t give guidance one quarter out Avinash, but there’s a lot of leverage in the model as we increase utilization and we get some additional price increases.

Avinash Kant - D. A. Davidson

Do you think you can get profitable in the second half then or…

Bill Weissman

Again, we don’t give guidance beyond the next quarter, but we should see significant improvement in the second half, yes.

Avinash Kant - D. A. Davidson

Okay. Perfect. Thank you so much.

Bill Weissman

Thank you.

Operator

Our next question comes from Andrew Huang at Sterne Agee.

Andrew Huang - Sterne Agee

Thanks very much. On your commentary for Q1 you talk about operating losses being similar to Q1. But can you give us a little more detail on the gross margin line, because if your crystal growth capacity utilization is at 100% and your polishing utilization should increasing sequentially, shouldn’t the gross margins be improving sequentially?

Bill Weissman

Yes, we are -- we do have a lot of development cost associated with these qualification wafers and establishing the 4-inch line as well. So the cost in the wafering side are going to be quite high relative to what they should be in a production environment, so that’s a significant part of what's limiting the upside of greater utilization and well, just really greater utilization in the first quarter because there is no expected price increases in the first quarter.

Andrew Huang – Sterne Agee

But just to be clear with those qualification cost, are those in COGS or are those in R&D?

Bill Weissman

Yes, they are because we are producing product as we are incurring those.

Andrew Huang – Sterne Agee

So does that mean we should -- should I take that -- I mean that we should expect gross margin to be flattish sequential, when you take those qualification cost into consideration?

Bill Weissman

Yes, the gross profit will be flattish, yes.

Andrew Huang – Sterne Agee

Okay. And then I guess going back to one of the earlier questions about the PSS customers, Raja, do you say that nine of their 16 customers are on 6-inch and seven on 4-inch.

Raja Parvez

No, seven of them are for 6-inch and nine of them are for 4-inch.

Andrew Huang – Sterne Agee

Okay. And Is there…

Raja Parvez

…As you already know that 4-inch market is much larger than the 6-inch, so that’s why they are reflective of the market.

Andrew Huang – Sterne Agee

Right. And can you give us a sense of geographic breakdown for your PSS business? I guess that's more concentrated in Korea and Taiwan rather than China?

Bill Weissman

Well it’s 16, so you can imagine that it’s pretty much all over.

Raja Parvez

It’s very well diversified and they are…

Bill Weissman

There aren’t that many chip manufacturers.

Andrew Huang – Sterne Agee

Right. And I guess since you have these PSS wafers in qualification for more than a quarter now I guess, can you tell me like or share with us what kind of push back you would be getting from some of your key customers like what kind of problems they might have with your wafers?

Raja Parvez

Well so far -- so far we have been providing the sample to customers. As I said that we have provided even starting October, however, as you know when to introduce the new product there is no push back when there is new product because we provide a custom product of different shape, different densities, different configurations. So what they do is this, we provide several patterns to them of different kinds and they take one or two patterns, they want us to provide a multiple samples which we have provided.

So it is a development and R&D goes on between us and the R&D part of our customers. So this is just tuning of the processes, tuning up the configurations and the recipes to fix their particular requirements. As you know there are almost nearly all, if not all majority of the LED chip manufacturers do have the patenting capabilities in house. So what they are trying to do is this, we sometime match them, sometime we are exceeding their requirement, so it is a different feedback that we get as we provide different samples to them. It’s not a push back, it's just the modifications of their requirement what they want and then we will provide to them.

Andrew Huang – Sterne Agee

Okay.

Raja Parvez

And in many cases we provided multiple samples to them, so that they can choose and that’s why we have a wide variety of the pattern that we provide to them and multiple both 4-inch and 6-inches.

Andrew Huang – Sterne Agee

Right, okay. So for the quarter -- the December quarter that you reported, the bulk of your revenue came from 2-inch and 4-inch sapphire cores, correct? And when you talk about getting back to breakeven profitability sometime this calendar year, is that predicated upon the PSS business coming into your expectations or would you be able to get the reviewing profitability even without the PSS business?

Bill Weissman

Well, again we still have $3.3 million of idle plant, so it’s going to be difficult to get there without getting the plant utilization up. And the PSS production and polishing production are where most of that reside. So it’s important to get the volume up in the wafer business and see some additional pricing improvement on the core which obviously translates to the wafer pricing as well.

Andrew Huang – Sterne Agee

Right. Okay. Thanks and I’ll get back in the queue.

Operator

The next question comes from Andrew Abrams at JG Capital.

Andrew Abrams - JG Capital

Hi guys. If we look at the utilization for polishing, where were you in fourth quarter and where do you think that will be in the first quarter, just on the quicker side we are pretty straight on that.

Bill Weissman

Yes, we were well below 10% in the fourth quarter. We should be in the 10% to 15% range in the first quarter.

Andrew Abrams - JG Capital

Okay. And what about pricing for four inch in terms of polished wafers? It's obviously a more competitive market than six inches, but probably a little less so than two inch. Is it -- in order for you to establish yourself in that market, do you have to make some price concessions on kind of what would be the general pricing for four inch or do you provide enough of a service or enough of vertical integration that people will pay standard pricing to get you into the door?

Raja Parvez

Well as you said, that this is very competitive market and this is first time that we have decided to enter into the market, so we have to work in the market, but however the part of the reasons that we've been able to enter into this market is because of our vertical integration and also I'll point out that the trend right now in the LED industry is also is that if you have a credible reliable supplier, which has the capability which we do, especially we are the only one right now that I know of them providing the six inch PSS project.

So all these things are very important for our customers and we believe that many of these polished customers, both for the four inch and six inch will actually prefer to get more pattern sapphires because it provides them more flexibility and then they can start MOCVD growth as soon as they receive our wafers. So it's a combination of the factors, but obviously we have to be very competitive in this market and pricing is of course challenging in the four inch polished wafers.

Andrew Abrams - JG Capital

And in that same vein, how long do you think it will take for you if we don't look at PSS and we are just looking at four inch polished wafers to get back to what would be considered normal margins for the polishing side?

Raja Parvez

Well difficult to say, but it would probably take till the end of the year if we're relying on four inch polished wafers to get high utilization. So we are hoping to expedite that obviously with greater six inch and we are starting to see six inch orders improve and of course PSS, which is going to be in our view a major driver to get the utilization rate faster. And of course pricing is going to be dependent as pricing is not really separate from the core pricing. It's all related. So as core pricing increases, the wafer pricing will increase as well.

Andrew Abrams - JG Capital

And just lastly is there -- when you offer a pattern or a series of patterns to a customer, is there a differential if the customer comes back to you and says, gee, I like your patterns, but this is what I want you to do for me basically making that a custom pattern. Are there customers who are asking for that and is there a premium associated with that kind of specialty work in the pattern four inch and six inch?

Raja Parvez

Well first of all yes, that is the key area. Again, our knowhow that we have with developers most of the customers are asking actually the custom patterns. Now sometimes we don't know what their own patterns are, but we provide them enough choices that they take one or two and yet, majority of these patterns are really custom patterns and in some cases, multiple patterns.

Since we are in the beginning stages of providing the samples, we quite cannot tell which is the premium between one pattern and the other, but as times goes, moves forward, we will start supplying the different configuration, the different pattern types, we may know more about that.

Andrew Abrams - JG Capital

Got it. Okay. Thank you.

Operator

Our next question comes from Paul Coster at JPMorgan.

Unidentified Analyst

Yes. This is Marsh Strauss for Paul. Thanks for taking my questions. So once we get through some of these near term headwinds with the qualification cost, the under-utilization cost and assuming that the pricing kind of trends favourably, is there a scenario now such that you guys can point to in a very wide range is fine as far as with the margin profile could look like say $50 million in revenue versus $75 million in revenue versus $100 million, just kind of trying to get a bit better picture of the inherent leverage here.

Bill Weissman

Sure, well our target margin is still gross margin is still 35% to 40% and we said the way to get there is yes, you are going to have a certain amount of your product and commodities that may only own 20%, but staying ahead of technology and offering more unique products like larger diameter wafers and larger diameter pattern wafers is how you kind of get that from a commodity level to 30% to 40% range, but still our target, the timing for getting there and we have to see how things developed this year, but our goal is to get there obviously as soon as possible and hopefully going into next year, we'll be at that level, but we have to see how things develop this year.

Unidentified Analyst

Got it. Thanks and then just a quick follow-up Bill, I am sorry if I missed this, but the tax rate until you guys become consistently profitable whatever the terminology was how should we think about that in the near term?

Bill Weissman

It will be zero.

Unidentified Analyst

Got it. Okay. Thank you very much.

Operator

[Operator instructions] And our next question comes from Stephen Chin at UBS.

Stephen Chin - UBS

Hi thanks for taking my questions. My first question is about your market share, if you could give us some more color on where you stand globally and compare that to the share in China?

Raja Parvez

Well globally and as I said that our market share is about 10% to 15%, but we have this last 12 months plus we have made a significant improvement especially in China market supplying the products, but overall, our market share is between 10% and 15%, but we have significant market share in China as we speak.

Stephen Chin - UBS

Thanks. And then just a question about sapphire supply and demand. As you mentioned we’ve seen increasing use of sapphire in non-LED applications, could you just give us a little bit more color on the overall supply-demand for sapphire as these markets grow?

Raja Parvez

I believe that because of these mobile device applications and we have been providing a significant amount into that market in addition to the LED market and I believe that right now in the market what used to be an inventory, excess inventory that is already absorbed. And moving forward, we see that the demand from all these applications, non-LED applications, LED applications, 4-inch polish, 4-inch PSS, 6-inch polish, 6-inch PSS I think significantly improved and I think the demand and supply cycle should balance out much better in a favourable situation than it has been for us.

Bill Weissman

And the demand for the mobile device market really so far has been driven, but primarily by the one device manufacturer. So there’s this enormous potential there for growth from that application.

Stephen Chin - UBS

Okay. Great. Thanks guys.

Operator

Our next question comes from Brian Lee at Goldman Sachs.

Tom Daniel - Goldman Sachs

Hi. This is Tom Daniel calling in for Brian Lee. Thanks for taking my question. First, I was wondering, on the $50 million in PSS revenue, is there a way to think about the split between 6-inch and 4-inch in that makeup?

Bill Weissman

Well, our expectation is for this year it will be more heavily 4-inch, because the user base for 4-inch is much greater than 6-inch at the moment. And then going into next year hopefully we’ll start to see 6-inch grow much faster than the 4-inch.

Tom Daniel - Goldman Sachs

Got it. And maybe just on your core 6-inch product, I know you think that with capacity utilizations going higher that you’ll see a rebound there. But do you guys need to cut pricing and cut it significantly to get customers to come back or how should we think about pricing in 6-inch?

Bill Weissman

Well, 6-inch pricing right now is extremely low and that’s really mainly function of limited demand and the few sapphire manufacturers really can compete for that product. They are all desperate to qualify there because everybody knows that's the future of the industry. So that's driven pricing well below cost at the moment.

So that dynamic will change as we see broader adoption and as we said in prior calls our strategy is not necessarily resist that, but offer very competitive pricing and broaden the customer base so they can correct itself in time.

Raja Parvez

But as you know the LED market is improving. We have a differentiated product especially large-diameter only one and the PSS 6-inch and plus. And we have just released its new advanced product with PSS. We have had a strong interest from our customers and we have a actual data to prove it that we have 16 customers. So I think the combination of these sectors and the mobile devices will -- we believe that it will be a strong 2014 for the demand side of it.

Tom Daniel - Goldman Sachs

Understood. Thank you. And then just one last one, considering the Apple announcement and some of the exclusivity agreements around that announcement, is there an opportunity for Rubicon to go after some of the other bigger smartphone makers outside of Apple? And would you guys ever be willing to sign such a big agreement without a lot of volume off-tick or anything along those lines? Just trying to get a sense how aggressive Rubicon could be versus your now competitor out there?

Raja Parvez

Well, first of all we are -- we have been getting inquires from other smartphone manufactures. As I indicated earlier that currently we serve that market, we have been serving that market by providing core products. We also have a capability to provide the rectangular or different sizes of the products as well.

And we have a number of R&D initiatives to look for other technologies as well and if they are proven accurate and we can market and we will provide more details, but yes, and of course we always look for the opportunity to work with the customers if they are interested in long-term agreement and so forth. So we are open to those opportunities and we are getting inquiries from other smartphone manufactures and we are addressing it accordingly.

Tom Daniel - Goldman Sachs

Got it. Thank you very much. Those were all my questions.

Operator

Our next question comes from Andrew Huang at Sterne Agee.

Andrew Huang - Sterne Agee

Thanks for taking the follow-up. I guess my first question is if you did not have those PSS start up costs, can you give us a sense of what the gross margin would have been for the March – what’s the guidance would have been for the March quarter?

Bill Weissman

No, we don’t give pricing or margin by product and to be consistent with that, we wouldn’t give that information.

Andrew Huang - Sterne Agee

And then I meant if you didn’t have those start-up costs for PSS what would the overall company margin would have been?

Bill Weissman

Right I understand but that would provide core margins and more information that we will be comfortable giving.

Andrew Huang - Sterne Agee

Okay. But presumably they would be less negative correct?

Bill Weissman

Of course, yes.

Andrew Huang - Sterne Agee

Okay. Thank you. The second question is if you are 100% utilized in crystal growth capacity do you have plans to add additional furnace capacity this year?

Bill Weissman

Not at this time, the main emphasis is on converting in terms of sales obviously. Well Crystal we do have into wafer sales rather than core sales especially PSS sales and if we were to add capacity, we think it’s more likely they will add footprint in capacity in polishing and PSS in the near term.

Andrew Huang - Sterne Agee

Okay.

Raja Parvez

Our main -- of course our main objective is to provide large-diameter pattern substrates because by definition you have the polish into it, so I believe they will be moving -- migrating towards more as the demand increases and then we will get more qualified customers.

Bill Weissman

By selling the existing crystal and wafer forms particularly in pattern wafer forms, you get tremendous leverage on the revenue line from doing that. So we could have very significant growth without adding crystal capacity just by selling it in different form?

Raja Parvez

And as you know Andrew in the market that the trend right now mainly for the LED and chip manufacturer do more and more, get into buy patterns substrates because this gives them a lot of flexibility and that’s why we invested into this product. And of course we are also in a process of discussing with the customer to next generation what is after patterns have substrates like templates and other advanced products not only into the LED, but as well and also the optical side of it as well.

Andrew Huang - Sterne Agee

Okay. And along the lines of the crystal growth can you talk -- since you are fully utilized right now, what is your monthly crystal growth capacity in PIE?

Bill Weissman

Well, it's between -- on an annual basis, it's between $10 million and $12 million and it's been drawn on the product...

Raja Parvez

Million PIE. Sorry PIM.

Andrew Huang - Sterne Agee

Right. Okay. And just to clarify when you say that the tax rate is going to be zero going forward, the implication is that for if in our model, we had tax benefits, we were going to have zero benefits going forward for the -- while you had losses, but while we booked their modelling losses correct.

Bill Weissman

That's right and when we are profitable have zero expense.

Andrew Huang - Sterne Agee

Okay. Got it. Okay. Thank you.

Operator

At this time, we show no further questions and I would like to turn the conference over to Dee Johnson for any closing remarks.

Dee Johnson

Thank you. Amy and thanks everybody 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.

Bill Weissman

Thank you.

Operator

The conference has now concluded. Thank you for attending. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rubicon Technology's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts