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Rubicon Technology Inc. (NASDAQ:RBCN)

Q2 2008 Earnings Call Transcript

July 30, 2008 8:30 am ET

Executives

Raja Parvez – President & CEO

Bill Weissman – CFO, Treasurer & Secretary

Analysts

Jed Dorsheimer – Canaccord Adams

Stephen Chin – UBS

Andrew Huang – American Technology Research

Jeff Rosenberg – William Blair & Co.

Joseph Foresi – Janney Montgomery Scott

Jiwon Lee – Sidoti & Co.

Yair Reiner – Oppenheimer & Co.

Daniel Amir – Lazard Capital Markets

Pierre Maccagno – Needham & Co.

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Rubicon Technology Inc. earnings conference call. My name is Frances, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions)

As a reminder, this conference is being recorded for replay purposes. 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, Frances, and good morning everyone. Thank you for joining us today for Rubicon's second quarter 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 one hour for this morning’s call. Raja will discuss our second quarter 2008 highlights and accomplishments, and then I will review our financial results in detail and discuss our revenue and earnings guidance for the third quarter and full year 2008. Raja has some closing comment, and then we will conclude by opening the call to 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 section of our website.

Before we start, I will read our Safe Harbor statement and explain the basis of presentation of our financial results. Certain statements in this presentation will 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 expressed or implied include economic conditions and 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. I will reference non-GAAP operating margin, operating expenses and diluted earnings per share for the second quarter of 2008. We incurred significant expenses associated with the secondary offering that will be considered to be outside our normal operating expenses. Accordingly, we believe that non-GAAP margin, operating expenses, and diluted earnings per share, excluding those costs are meaningful measures for investors to evaluate our ongoing financial performance. Non-GAAP information should be considered as supplement to and not a substitute for financial statements prepared in accordance with GAAP.

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. Rubicon had another strong quarter of financial performance with earnings exceeding our expectations. GAAP EPS for the second quarter was $0.10 versus guidance of $0.09. Our diluted EPS, excluding cost incurred in our secondary offering was $0.12 per share versus guidance of $0.11 per share.

Excluding the secondary offering costs, our operating margin in the second quarter reached 20%, driven by strong gross margin of 37.6% and stringent control of operating expenses. Revenue continue to track as expected, growing 40% year-over-year and 10% sequentially with large diameter revenue increasing to 60% of substrate revenue, which is an increase from 42% of substrate revenue in the second quarter of last year, and an increase from 58% in the first quarter of this year.

Our LED revenue grew 14% year-over-year and 8% sequentially. We continue to expand our market share by increasing business with existing customers and we have added new key customers in Europe, Japan, Taiwan, Korea, and China. Applications for LEDs continue to expand and the LED market is expected to continue to grow 20% plus per year over the next several years.

High-performance LED applications such as large area backlight units and solid state lighting are growing rapidly. LED backlight units are penetrating into the notebook computer and LCD TV market faster than expected. For example, AUO recently announced that their goal of adopting LED backlighting for all of their LCD notebook panels by 2011 may be achieved one year earlier. These applications need larger diameter sapphire wafer to support the larger chip sizes necessary for higher brightness and also to optimize throughput to reduce cost. These applications are being supported by major LED chip manufacturers in Japan, Europe, and the U.S., and as a result our sales continue to increase in these regions.

We are also receiving orders for 6-inch sapphire products for the LED market to support next generation LED wafer development efforts by MOCVD equipment and LED chip manufacturers. We expect this large diameter development to ramp going forward as LED manufacturers continue to increase device performance and drive LED costs down to further penetrate lighting applications.

Taiwan and Korea are in early stage development for large diameter LED chip production and therefore remain largely focused on small diameter wafers. The LED market in Taiwan and Korea have been affected by worldwide macroeconomic conditions causing reduced rate of growth in cell phone and small display applications. Consequently, the rate of growth for lower and LED applications that utilize 2-inch diameter substrates has slowed in the past quarter. Slower than expected growth in Taiwan has increased pressure on pricing for smaller diameter products as customers strive to increase their market share.

In response to current market conditions, we are adjusting pricing as necessary on smaller diameter products. The market in Taiwan and Korea is expected to pick up in 2009 has demand for displays and general illumination increases and also as the largest display manufacturers such as AUO and Chi Mei enter the LED market and plan to install high volume production.

Our Silicon-on-Sapphire revenue grew 173% year-over-year and 18% sequential. The SoS market remains strong and the market data indicates that we can expect this market to grow approximately 50% per year over the next several years. Our customers’ SoS technology allows for a very high level of System-on-Chip integration for high frequency, radio frequency integrated circuits. As a result, these products continue to displace conventional solutions in the RFIC market.

In addition, we have provided 8-inch sapphire wafers to our customer for its next generation products. The 8-inch SoS RFIC is expected to provide considerable benefits to our customer and their customers in terms of the device performance and lower total cost of ownership.

We do, however, have a near-term challenge with the SoS business. Our key customer has recently moved to a fab-less model selling its internal wafer production facility and outsourcing its wafer production to external foundry partners. However, in the process of restructuring their initial [ph] foundry partner also purchased wafers from another supplier. As a result, we believe our customer is beginning to accumulate an inventory of sapphire substrates. We have a contract for the remainder of 2008. However, we believe this situation could impact new SoS orders for early next year. We believe our customer is addressing the issue in order to have better control over the sapphire procurement in 2009 and beyond. We are monitoring the situation very closely and are working with our customer to better understand the impact.

Rubicon remains the primary supplier of sapphire in this market and is viewed our customer as a very important strategic partner. From Rubicon’s perspective the SoS market is indeed a strategic market with strong long-term growth potential. We remain committed to continue as the dominant supplier of 6-inch and next generation 8-inch sapphire wafers.

Regarding the optical segment of our business, I am very encouraged by our progress to-date. As we have previously discussed, we have started investing more resources into this market. We are developing a pipeline of products and relationships with new optical customers that I believe will result in strong predictable growth with longer-term supply agreements. Rubicon’s high quality sapphire, stable U.S. based production and our focus on rapid product development will serve us well in the optical business. We are making good progress with new customers and prospects in the defense, sensor, and wafer carrier markets and have received multiple orders for product qualification.

New products can take several months to qualify but these qualifications are going very well and we have started receiving initial volume orders for several new customers as we move into the second half of 2008.

Regarding operations, manufacturing continues to deliver outstanding results. Our aggressive expansion plans remain on track with furnace installations at our new Bensenville facility ahead of schedule. We also continue to add capacity to the post crystal growth stages of manufacturing process. Throughout this expansion process, we have maintained our very high yields and exceptional product quality. I am extremely pleased with the excellent execution of the operations team in maintaining our high performance standards while keeping our expansion program on schedule.

I would now like to turn the call over to Bill who will provide you with greater details on the financial results for the second quarter and provide our outlook for the remainder of the year.

Bill Weissman

Thank you, Raja. As Raja said, we had a very strong second quarter with revenue up 40% over last year and increases in both gross and operating margins. Revenue for the quarter was up 10% sequentially with solid growth in both the LED and SoS segments. The optical and other revenue was consistent with the first quarter.

The revenue split remains at roughly the same mix of 60:30:10, 60% LED, 30% SoS, and 10% optical and other.

During the second quarter 60% of our substrate revenue came from large diameter products, which we define as 3-inch or greater. This compares to 42% in the same quarter of last year, and 58% in the first quarter of this year. The sequential increase reflects the increase in 6-inch wafers sold into the SoS market, and the increase in larger diameter sales to the LED market.

In the LED segment, three and 4-inch sales grew 9% sequentially while 2 and 2.5-inch grew 6% sequentially. Compared to the same quarter of last year, 3 and 4-inch grew 54% while 2 and 2.5-inch are down by 2%, reflecting our continued migration to larger diameter substrates.

Diluted EPS exceeded our expectation. GAAP diluted EPS was $0.10 in the second quarter and diluted EPS excluding secondary offering cost was $0.12. Our guidance for diluted EPS was $0.09, including the secondary cost and $0.11 excluding those costs.

The actual secondary offering cost totaled $544,000 in the quarter, or $0.02 per share. GAAP operating margin in the second quarter was 15.6%. Operating margin in the second quarter excluding secondary cost was 20.3%, up from 14.1% in the first quarter of this year, and 11.5% in the second quarter of last year. The strong operating margin was driven by solid gross margin of 37.6% and stringent control on operating expenses.

The second quarter gross margin of 37.6% was up from 36.8% in the first quarter of this year, and compares to 34.4% in the same quarter of last year. The year-over-year increase is reflective of the shift in product mix towards higher – larger diameter, higher margin products. The sequential increase was also primarily attributable to product mix.

GAAP operating expenses were $2.5 million in the second quarter. Operating expenses excluding secondary offering cost were $2 million in the second quarter, up $200,000 from the same period last year, but down $350,000 sequentially. The sequential decrease was due to lower cost in the period in a number of areas including professional, legal, and recruiting fees.

Other income in the second quarter was $441,000, down approximately $400,000 sequentially. As you know, interest rates are down sharply, with the Fed funds rate dropping more than half between the beginning of the year and April 30th. We have maintained a very conservative portfolio with average maturity of under one year. Since we are not long term with our investments our resetting rates does impact us.

Turning to the balance sheet, we had $68 million in cash and investments at the end of the quarter with no debt. DSO at the end of the second quarter was 59 days as compared to first quarter ’08 DSO of 49 days, and DSO of 42 days in the same period last year.

Our accounts receivable remain high quality, however, payments have slowed with tighter cash flow at some of our key customers as a result of the macroeconomic conditions.

As Raja described, we continued our aggressive expansion plan and are exceeding our targets in that plan. Our capital expenditures are on budget with second quarter CapEx of $6.2 million, bringing year-to-date CapEx to $10.7 million, as we wrap up the Bensenville crystal growth facility and add capacity to our post crystal growth operations.

Now, I would like to share with you our outlook for the third quarter and remainder of the year. While macroeconomic conditions are clearly having an impact on certain segments of the LED market, we are maintaining our full year 2008 revenue and EPS guidance of between $47 million and $49 million in revenue and between $0.45 and $0.47 diluted EPS. Again, as we said last quarter, that EPS target excludes secondary offering cost of $0.02 per share.

Regarding the third quarter, we anticipate revenue of $12.5 million and diluted EPS of $0.11 based on a projected diluted share count of $22.4 million shares. Interest income will likely continue to be lower than beginning-of-year estimates, and as expected Q3 will be a challenging one for us from a gross margin perspective.

Our energy cost will be up in the third quarter and our recurring R&D revenue on the 8-inch project rolls of in July. Utilities have been running around 10% of our total manufacturing cost or just over 65 of sales. Those costs have increased by approximately 20% effective in June with the expiration of our previous contract, which was negotiated at the time when energy prices were much lower. The third quarter will be the first full quarter of higher rates.

The impact on third quarter gross margin based on current rates would be around 130 basis points. In order to provide some protection against spikes in electricity cost in the summer months, in late June we hedged by locking in a rate on half of our usage for the rest of the year. Recently, rates have come down, and we have taken advantage of that to lock in rates for 2009 and 2010. Those rates are 13% lower than our current blended rate. This rate will be effective January 1, 2009, significantly reducing our utility cost.

We had previously indicated that gross margin may go to 35% in Q3 as a result of these factors. With the aggressive pricing environment right now on 2-inch products it is possible that gross margin may be slightly lower than 35% in Q3. However, our longer term outlook on gross margin has not changed. Our target range remains 36% to 38% with upside to that depending on the timing of adoption of solid state lighting applications and larger diameter substrates.

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

Raja Parvez

Thanks Bill. I remain very excited by the growth prospects for the markets we serve and by our competitive position in these markets. The LED and SoS markets are still in their early adoption stages with strong growth expected for many years to come. There remains no significant competitive threat to sapphire as the substrate of choice in these markets.

The development of our optical segment is progressing nicely. Our operating efficiency is second to none and most importantly our technology provides us with a strong differentiation particularly as these industries move to larger and larger substrates.

There are some short term challenges. Current macroeconomic conditions are clearly impacting certain segments of the LED market at the moment and we must be mindful of the SoS inventory situation. However, given the increasing rate of adoption of LEDs in many applications such as large area screen, backlight units [ph] and solid state lighting and of SoS, RFIC products. We expect continued growth even in this environment. The fact is our products are a critical part of the supply chain in emerging high growth markets and we are well positioned to maintain our leadership position.

Rubicon’s technology platform, high volume production, large diameter capabilities, and high quality materials are key to the advancement of the markets we serve. That is why we will continue to win in our markets.

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

Thank you. (Operator instructions) And your first question comes from the line of Jed Dorsheimer of Canaccord Adams. Please proceed.

Jed Dorsheimer Canaccord Adams

Hi, thanks. And congratulations on the quarter. Two real questions. I guess there is really two issue as I see it with your business right now and so the first one on the Silicon-on-Sapphire inventory build, the way that I understand it I think Peregrine has licensed three foundries and I am just curious as we look at this inventory build and you mentioned a second source, one, who is the second source? Is that Monocrystal that’s actually supplying the foundries? And could you provide some color on the volumes which Peregrine was actually doing? And then as we look at three foundries one being a major one in Taiwan what type of volumes we should be able to expect from those foundries? Thanks.

Raja Parvez

Well, thanks for the question, Jed. First of all, there are three foundries there currently our customer is working. One initial foundry is in volume production and they account for 95% of their volume. Two other foundries, one in Taiwan, and Korea are already in qualification, and our wafers are already in those foundries in terms of the qualifications. As for their revenues, the revenues continue to grow significantly and there are long-term prospects for us and for our customers as well.

Jed Dorsheimer Canaccord Adams

I guess, Raja, what I am trying to get at is Peregrine was – you know is – with one company supplying a very small portion of the market Silicon-on-Sapphire has become widely adopted. What are the volumes that you are anticipating of the three foundries? I am wondering if there is an offsetting factor to offset the fact that there is now a second source supplying these foundries of the sapphire.

Raja Parvez

Well, first of all, we remain the dominant player in this market and as our customers have told us they will continue to do so. As you already know that we already have a contract for – with this customer. And so we plan to continue to dominate this market and I believe that as we move forward in the long term I think the market will continue to grow and will continue to maintain our leadership position in these markets. And the SoS market is expected to grow 50% year-over-year for the long term and that’s the latest information that we have from our customers and from the market.

Jed Dorsheimer Canaccord Adams

Alright. And then maybe you could elaborate on pricing. I think, Raja, you’ve talked about sort of a blended 5% ASP pressure. Personally, I am forecasting a greater pressure than that just given the – what’s going in the 2-inch, but I was wondering if you can maybe talk to what’s baked into your expectations for this year as you are certainly seeing some greater pricing pressure on the 2-inch. Thanks.

Raja Parvez

Sure, the – you are right, the 2-inch pressure is more than we had build into the 5%. We are now looking at approximately 7% year-over-year ASP declines and most of that or virtually all of that additional incremental 2% is in the 2-inch business.

Jed Dorsheimer Canaccord Adams

Alright. And then, Bill, lastly, when you talk about margin pressure in the Q3 being slightly lower than the 35 at this point, could you define ‘slightly,’ I mean is that 250 bps, is it 100 bps? What–?

Bill Weissman

It’s about 100 bps. I am looking at about 34% right now.

Jed Dorsheimer Canaccord Adams

Alright. And then, one final question, Raja, as you tour or meet with your customers, could you provide any updates in terms of – a lot of focus is on Taiwan and Korea where the softness, what some of the other regions are looking like and how is visibility shaping up as you start to look into next year?

Raja Parvez

Well, first of all, the LED market continues to grow especially in the larger diameters as is evident from our numbers that we have just mentioned in our call. Japan, North America, and European markets continue to strong especially in the larger and larger diameters and as is reflected in our revenue and also our continued increase in revenue from those markets. Yes, Taiwan and Korean markets are slower at the moment and largely because they are focused largely on the smaller diameters. But all the indication in the market are that these markets, especially Taiwan and Korea is expected to pick up in 2009 whereas Japan, Europe, and North America continues to expand and continue to increase those applications because of their technology advancement and also their higher efficiency of the chips that they go into the backlight units for the laptop and also the large screen televisions.

Jed Dorsheimer Canaccord Adams

Great. I will pass it on. Thanks.

Raja Parvez

Thank you.

Operator

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

Stephen Chin – UBS

Hi, thank you, good morning. A couple of questions I wanted to sort of ask you on the 38% growth that was seen in inventories quarter-over-quarter I guess the first question is, is the majority of that inventory growth is that the SoS inventory build, or is the majority of that from raw materials within the factory? Can you provide some color first on what the big growth in the inventory was?

Bill Weissman

Yes, it is not a SoS inventory build. It’s a combination of raw material and just builds [ph] that were post crystal growth production.

Stephen Chin – UBS

Okay. And then a follow-up on the inventory. Bill, would you expect these inventories to continue to grow at the pace of quarterly sales since you are ramping the factory sooner than expected? Is that a trend that we should expect going forward for the next couple of quarters?

Bill Weissman

No, I don’t think – I don’t expect it to grow – outpace the growth of revenue, no.

Stephen Chin – UBS

Okay. So, we should model for inventory very similar to revenue growth?

Bill Weissman

Yes.

Stephen Chin – UBS

The second question I had is could you share with us what’s the second quarter new booking were? I think last quarter they were only about $1 million. What is the status on the new bookings, Raja?

Bill Weissman

We had 6.2 gross bookings and 3.1 of net bookings. Obviously, we are moving – in this environment you have to help customers out moving material around. So our total gross booking were 6.2.

Stephen Chin – UBS

Okay, so—

Bill Weissman

And again, this is an important metric that will make sure we highlight in Q3 and Q4 because given the seasonality of bookings in this business it is a very important metric to watch in Q3 and Q4, but less important, obviously, in Q1 and Q2.

Stephen Chin – UBS

What is the expectation of how back-end loaded is net bookings can be because it seems like if you look at some of our expectations about 2008-2009 the back-end loaded nature of the bookings is close to 70%-80%. Is that what was expected at the beginning of the year or is that – or has that materially changed because of the macro environment?

Bill Weissman

No, it hasn’t changed. We have a backlog of 27.1 million right now at the end of the quarter. 24.6 million of that is for delivering in ’08, 2.5 million is in ’09. So we have a couple of million for delivery in ’09 and that’s consistent with what we saw in the second quarter of last year. Second quarter of last year was only higher because we singed a large SoS deal in that quarter.

Stephen Chin – UBS

Okay. The last question I had is I know you have been tracking the new factory being ahead of schedule, but are there any capacity milestones that you can help share with us, Bill or Raja, that will help us keep track of how well you are achieving the milestones given how important this factory is?

Bill Weissman

Sure. I think I guess the most consistent thing we talked about is how much revenue generating capacity is being added. We expected to add around $20 million by the end of this year. We are a bit ahead of that, probably $22 million, $23 million we expect to add by the end of this year. And I think that’s a good indicator of where we are in terms of the build out that facility.

Stephen Chin – UBS

Okay. Thanks for the clarification.

Operator

Your next question comes from the line of Andrew Huang with American Technology Research. Please proceed.

Andrew Huang – American Technology Research

Thank you. I was just curious, if you look at your backlog for the remainder of the year has there been any kind of increase in the cancellations or price negotiations given the softness that you are seeing out of Taiwan and Korea.

Bill Weissman

Yeah, well certainly the price in the 2-inch, we have made some modifications to that. We signed very recently an amendment with our largest Taiwanese customer amending that price. Other than that we have not had any cancellation of orders at all. Occasionally, if a customer needs some help in – would like a little bit less material, as long as we can place it somewhere else we’ll do so. That’s kind of it. The result of the gross versus net bookings number that I gave you.

Andrew Huang – American Technology Research

Okay. So then when you gave the backlog numbers of 24.6 million for the remainder of ’08, is that – is that reflecting that repriced 2-inch – or those – the repriced 2-inch is on track?

Bill Weissman

Yes it does because even though that was just signed recently we made sure that for this call we went back and recalculated everything.

Andrew Huang – American Technology Research

Great. And then for your revenue growth guidance for the September quarter, can you give us some color on how much growth you expect out of maybe LED versus Silicon-on-Sapphire?

Bill Weissman

We see – we expect similar growth in terms of dollars from both of those segments. So, it will both grow similar to what they did in this quarter.

Andrew Huang – American Technology Research

Got it. And then how about optical, would you expect that to be flattish or–?

Bill Weissman

It will be slightly up.

Andrew Huang – American Technology Research

Okay. Thank you.

Operator

Your next question comes from the line of Jeff Rosenberg with William Blair. Please proceed.

Jeff Rosenberg – William Blair & Co.

Good morning. First, I just wanted to make sue I understand on the SoS situation. Are you allowing them to push out orders or is this – I though I heard you say that it’s really more of an effect you expect on orders for the beginning of ’09 and therefore revenue expectations from SoS are not really affected in the Second half. Could you – I just want to make sure I understand that correctly.

Raja Parvez

We are still trying to understand the full impact of the data and we are working very closely with our customers to understand more the data and what the impact will be, but at this point as we indicated we are trying to understand the data and if the inventory situation remains as it is right now, it could have an impact on new order for the early 2009.

Jeff Rosenberg – William Blair & Co.

But as it stands, what are you looking for in terms of sequential revenue in the SoS market that’s implied in your guidance?

Bill Weissman

Well, again, it’s – implied in our guidance is the contracted amounts which would be similar to the increase reflected in Q2. Until we get more, as Raja said, until we get more data there is – the only thing we have to go by is the contracted amount for ’08.

Jeff Rosenberg – William Blair & Co.

Okay. So at this point you haven’t renegotiated any different schedules for delivery?

Bill Weissman

No, we haven’t.

Jeff Rosenberg – William Blair & Co.

Okay. Second question I had was the 7% price decline that you talked about year-over-year for LEDs I mean is that – how would you say that – your best guess as to how that compares to what’s going on in terms of the market pricing in the spot market or just for a situation where someone doesn’t have this type of an order book?

Bill Weissman

Well, again, and I think it’s reflected in the sense that in the larger diameter LEDs we are not experiencing any erosion, but in the 2-inch where there is more competition and there is some economic challenges in Taiwan and there is pressure and I think it’s – our adjustments in that area are probably reflective of everybody else’s.

Jeff Rosenberg – William Blair & Co.

Okay. And then the last question I wanted to ask is if we look at your LED revenue, it looks like it – 10% of your revenue is from 3 and 4-inch wafers and 50% from 2-inch. Do you think that that is – how do you think that compares to the market? I mean in other words how much higher do you believe your share is in 3 and 4-inches versus your share in 2-inches if you have got a sense, just help us understand that.

Bill Weissman

You know about 60% of our LED revenue is from 2-inch and we estimate that the LED market uses more like 65% plus of 2-inch, so obviously we are a little less dependent on the 2-inch business than everybody else.

Raja Parvez

And we still remain the largest dominant player for the larger diameter in LED market as well, just as SoS. So we do have the majority market share in the larger diameter which – for the LED which we define 3-inch plus.

Jeff Rosenberg – William Blair & Co.

So, you think that for 3-inch and 4-inch wafers you have more than 50% share?

Raja Parvez

I believe so.

Jeff Rosenberg – William Blair & Co.

Okay, okay. Thank you.

Operator

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

Joseph Foresi – Janney Montgomery Scott

Hello. I just – my first question here is can you give us a rough idea what percentage of your full year bookings – is it 60, 70, 80, or 90 that comes during the third and fourth quarter, typically? So, if we were looking at ’09, what percentage of those bookings can we imagine or hope to see in the next two quarters?

Bill Weissman

Yeah, it’s about – it’s probably 90% based on our history, yeah.

Joseph Foresi – Janney Montgomery Scott

About 90%. And maybe you can give us an idea of how those are tracking your – almost into August? What are the indications versus what you saw last year versus this year on the bookings side?

Raja Parvez

Well, as we stated previously, it is a typical pattern with our customers that we start getting bookings for the next year, which is the tail end of Q3 and beginning of Q4. And we believe that that pattern will continue this year as well. However, you know, we will continue to monitor the overall macro conditions and we are working already with customers to make sure that we are ready for them when they are ready. So I think the pattern will remain as it was previously.

Joseph Foresi – Janney Montgomery Scott

So, the process hasn’t really started yet? I mean you are still waiting, (inaudible)

Raja Parvez

Joe, the process has already started with our customers. It’s just that we are working with our customers to plan ahead our capacity planning. Now since we are a little bit ahead of the schedule in term of the capacity, so we are already talking with our customers. But again the actual purchase order then agreements will commence tail end of Q3 and beginning of Q4.

Joseph Foresi – Janney Montgomery Scott

Okay. And you talked about sort of some of these issues being tied to the macro economy. How much – I am wondering do you feel like that – basically your idea that or your notion that things are going to potentially improve, is that based on macro economic issues improving or is that based on further penetration of the market or an increase in new orders? I wonder if you can give us some color on that.

Raja Parvez

Well, first of all, the answer is all of the above. First of all, the macro economics is generally impacting only the lower end application and lower end application in most cases use only the smaller diameter wafer. We are – that’s where not our focus is. So I think the – other than that I think the larger diameter applications are growing handsomely and that’s where we have a majority market share, and that’s where our differentiation is as well. And again, even in these market conditions, LED is the right technology and we are the technology in this one. So it is the – even in these energy cost, energy challenges still it is the right technology and we believe that on the long term it is a – it is a really, really high growth end markets that we are playing in LED, SoS, and also optical. So in the long term it’s a significant growth for us and then for the market.

Joseph Foresi – Janney Montgomery Scott

Okay. And then just finally on the new client front, I wonder if you can give us some idea of how many new clients you have picked up and sort of how that tracks versus where you were last year. Maybe you can even talk about what area those clients are coming in at.

Raja Parvez

Well, those clients – those new customers are in majority in LED and the optical areas. And they – I mean as you know for competitive reason we cannot name, but those are really very well established Tier 1 companies in the world and we are very delighted that we have them new customers and in many cases we have even displaced our competitors because of our high volume capability and very outstanding quality and the service we provide to the customers. And they are in different regions, they are in right regions consistent with wherever the products are and wherever the applications are. And so we are very, very happy that we have them. We already have the initial orders. Some of them are in the volume orders, some of them are in the qualification.

Joseph Foresi – Janney Montgomery Scott

Okay. And what general diameter are those new orders and has it picked up versus last year?

Raja Parvez

Majority of those orders are in the larger diameter, and yes it has picked up versus last year.

Joseph Foresi – Janney Montgomery Scott

Okay.

Raja Parvez

The market – if we compare market from last year versus now, the larger diameter continues to grow. As we mentioned in our discussion that we also have received orders from multiple customers even in 6-inch for R&D for LED, which was not really evident in the beginning of last year. So that’s a really healthy growth for us that our differentiation – key differentiation is actually in the larger diameter and that’s where the industry is going. That’s where the economics is, and that’s where our customers are going.

Joseph Foresi – Janney Montgomery Scott

Okay. Thank you.

Operator

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

Jiwon Lee – Sidoti & Co.

Good morning.

Raja Parvez

Good morning.

Bill Weissman

Good morning.

Jiwon Lee – Sidoti & Co.

Two quick questions. On this larger diameter competitive landscape, particularly in the 4-inch side, how many vendors right now are shipping any meaningful volume for LEDs capable of shipping in your sort of (inaudible)

Raja Parvez

Well right now we are – as I mentioned earlier, we are the majority supplier for the 4-inch diameter in the market and I believe that there is probably one more competitor who is also supplying into these markets as well. Now, your second part of the question was who could potentially I think there are potentially only two us and the other key competitor.

Jiwon Lee – Sidoti & Co.

Okay. Fair enough. And given the uncertainties surrounding your business at least in the near term, is there any ’08 CapEx revision?

Bill Weissman

No. We are continuing to build out according to plan.

Raja Parvez

And largely because there is long term growth of this market and the business continues to grow. So we are focused on the long term. That how we will continue to expand our capacity in all areas.

Jiwon Lee – Sidoti & Co.

Great. Thank you.

Operator

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

Yair Reiner – Oppenheimer & Co.

Hi, good morning. A couple of more questions in terms of SoS. First of all, in terms of the inventory, is it a matter of Peregrine still having to order materials from you and not using that right now so the inventory is building up at Peregrine? Am I understanding that correctly?

Raja Parvez

Yes.

Yair Reiner – Oppenheimer & Co.

Okay. And then, in the quarter was Peregrine’s contribution kind of in line with last quarter, which was about 15%?

Bill Weissman

We have a contract with them that require – that calls for increased volume each quarter.

Yair Reiner – Oppenheimer & Co.

Got it. In terms of the competition there, I think you have mentioned in the past that Kyocera is a major supplier. I mean does that who you are coming head to head with in that market right now?

Raja Parvez

Well, we are still the major supplier for this – into this market and we continue to be as we have also even recently shipped the next generation 8-inch sapphire materials also. And the – we certainly do not know exactly but I believe that if I have to guess one probably they are the one who are supplying the – as the second source into this market. But remember we do have a key differentiation in terms of our technology, platform, and process know-how. So our products are really state-of-the-art and we are very high quality products for this – which really have a very differentiated device performance and yield performance for our customers.

Yair Reiner – Oppenheimer & Co.

Fair enough. Now, when I look past this year, given let’s say the reduced visibility because of the macro – because of other issues, how does that impact the way you think about your capacity build out past the current facility that you are building? And does it change when you start working on kind of the third facility?

Bill Weissman

It really has not impacted our plans for expansions. As Raja said we are still extremely bullish on the potential for these markets and see this as a short-term issue. So there is no – we don’t think there is any reason right now for us to scale back our expansion plans.

Raja Parvez

Yeah, again, these challenges are short-term challenges. Already market continues to grow. Larger diameter continues to grow and we are focused on the long-term growth of this market and our business.

Yair Reiner – Oppenheimer & Co.

Okay. One final question from me. AUO I guess had been a little bit back and forth about if when to what extent they get into LEDs. Do you expect them to be a customer for you in the second half of this year?

Raja Parvez

Well, first of all, AUO and Chi Mei are making very good progress into the LED markets. I just came from those markets. And I believe that they will come – go into the volume production in early 2009, and yes we are already working with our key customers. Remember, we supply blanks to the polishing companies in the world who supply – and our customers are already working with some of those companies to provide – to be supplier for them. So, yes, for the long term, there is a significant growth for us and for our customers.

Yair Reiner – Oppenheimer & Co.

Okay. Thank you.

Operator

Your next question is a follow-up from the line of Jed Dorsheimer with Canaccord Adams. Please proceed.

Jed Dorsheimer – Canaccord Adams

Hi, thanks. Just a point of clarification because I guess I understand it differently. The inventory build, is this – this is a result of Peregrine ordering product and the foundries ordering from a second source or another source? In other words, where does the inventory actually lie right now?

Raja Parvez

So, first of all, currently Peregrine recently sold their internal fab and outsourced all of their – 95% of their production to an external foundry. Now – and in the process, they are also qualifying two other foundries, as I mentioned previously. Now, during this restructuring process their initial foundry also purchased material from the same source that we just previously discussed. And this has resulted in short term inventory situation partially with their foundry and partially with Peregrine. And so that’s what we are trying to address and understand the full impact of this data. But again, this is a short term challenge that we are facing and again in the long term this market has long term prospects and will continue to grow at a very significant growth rate.

Jed Dorsheimer – Canaccord Adams

Well, I guess what gives you the confidence that you will get the business back?

Raja Parvez

I believe the – first of all that we are a majority supplier to this customer and the customer has told us that we will continue to be the majority supplier to them and as you know we already have a contract and we have – we view our customers and we view this as a strategic partnership. So that’s one thing. The second thing is we do have a differentiated product that provides the customer more differentiation in terms of device performance and our high volume capability.

Jed Dorsheimer – Canaccord Adams

Is there any provision – so if Peregrine sold the business then it’s the foundry’s decision who to procure, correct?

Raja Parvez

No, Peregrine is maintaining the control of those supply chain to themselves.

Jed Dorsheimer – Canaccord Adams

Got you. Alright, thank you.

Operator

(Operator instructions) The next question comes from the line of Daniel Amir with Lazard. Please proceed.

Daniel Amir – Lazard Capital Markets

First of all, thank you for taking my question. A couple of things, first on the margin outlook, you’ve provided kind of the Q3 – Q4 margins do you expect them to be flat with Q3 or will they start increasing due to the contract hedging that you’ve done in the – end of June?

Bill Weissman

I expect them to be up slightly. Half of our electricity rate is floating and those rates should be a little lower in that quarter plus the continued migration to larger diameters will also help.

Daniel Amir – Lazard Capital Markets

Okay. And (inaudible) to the larger diameter what sort of mix should we be looking by year-end in terms of 6-inch, 2-inch kind of in your business?

Bill Weissman

Well as we said it will be a kind of a gradual migration this year. We expect that to pick up next year. So, similar kinds of metric as you saw this quarter where 3 and 4-inch pacing 2-inch by a bit and I expect that to pick up even more next year.

Daniel Amir – Lazard Capital Markets

Okay. Now with regard to 6-inch LED what needs to happen in the industry for LED to start adopting more 6-inch? It looks like those 2-inch pricing stays fairly low and there is ASP pressure. It may actually further postpone any adoption by 6-inch if the price differential stays high. What’s kind of your take on when 6-inch and LED does become some sort of meaningful I guess?

Raja Parvez

Well, first of all, there has been significant recent improvement – development in two areas of this technology advancement, first, that the MOCVD reactors which are used for initial epitaxial growth they have been now available into the market and several of LED manufacturers have already acquired those reactors which are capable of 6-inch epitaxial growth. Second thing is that there is a lot of back-end equipment available from the semiconductor market which is already available for the larger diameter wafers so which is more economical for LED manufacturers to use. And the third thing is as the applications of LED continue to grow the more and more brightness and higher performance is dictated by those applications. And the – in generally, the – higher the brightness is directly proportion to the size of the chip. So, therefore, more largest chip sizes are required in order to penetrate into those markets and thereby larger wafer sizes are required not to mention that also the larger wafer sizes also provide the more economy of scale. So I think that this is a very good trend. We are – every time we visit the customer, which is every four to six weeks, we see more and more interest by our customers and advancement of this area. Now, in terms of the volume, to answer your question, when the 6-inch volume – is probably again in the – this is my estimation that it is again 12 months to 18 months out when you will see a volume production. Remember that 4-inch has recently in last quarter or so has increasing production. So now following 6-inch. The more important part for us is this that we are currently as we mentioned, we have provided even an 8-inch sapphire to our SoS customer. So we are already three generations ahead of the LED industry, so we are already there when the industry is there and we believe this will continue to grow into the larger diameter.

Daniel Amir – Lazard Capital Markets

Okay, great. Thanks a lot.

Operator

And your next question comes from the line of Pierre Maccagno with Needham. Please proceed.

Pierre Maccagno – Needham & Co.

Congratulations on the quarter, Raja and Bill.

Raja Parvez

Thank you.

Pierre Maccagno – Needham & Co.

Most of my questions were asked but I will ask this one. Do you have the break down of sales by geography and any change that you expect in the following quarters?

Bill Weissman

Sure. 54% of revenue came from Asia, 44% from North America, and 2% from Europe. That’s fairly consistent with what it was last quarter. Obviously it’s a little higher in North America this year than last year given the growth in the SoS market.

Pierre Maccagno – Needham & Co.

Okay. And also did you give the break down of optical, SoS, and LED?

Bill Weissman

Sure. It’s – again, it’s 60:30:10.

Pierre Maccagno – Needham & Co.

Okay. And you expect that to continue at that rate?

Bill Weissman

Yeah, roughly, yeah.

Pierre Maccagno – Needham & Co.

Okay. Thank you.

Operator

And now I’d like to turn the call back over to Mr. Bill Weissman for closing remark.

Bill Weissman

Thank you. Well thank you very much for taking the time to listen to our call today and we look forward to speaking to you all in the future. Thank you.

Raja Parvez

Thank you.

Operator

And thank you all for your participation in today’s conference. This concludes the presentation. You may now disconnect, and have a great day.

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