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Executives

Raja Parvez – President & Chief Executive Officer

Bill Weissman – Chief Financial Officer

Dee Johnson – Vice President, Investor Relations

Analysts

Bill Peterson – JP Morgan

[Abinas Kahn] – D.A. Davidson & Co.

Jed Dorsheimer – Canaccord

Andrew Abrams – Avian Securities

Daniel Amir – Lazard Capital Markets

Steven Chen – UBS

Bill Ong – B. Riley & Company

Jiyuan Lee – Sidoti & Company

Brian Lee – Goldman Sachs

Andrew Wang – Sterne Agee

Rubicon Technologies, Inc. (RBCN) Q3 2012 Earnings Call November 6, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Rubicon Technologies, Inc. Earnings Conference Call. My name is Regina and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. (Operator instructions.) We will be facilitating a question-and-answer session after the presentation. I would now like to turn the presentation over to Dee Johnson, Vice President of Investor Relations. Please proceed.

Dee Johnson

Thank you, Regina. Good afternoon everyone. We are pleased you could join us today for Rubicon’s Q3 2012 earnings conference call.

With me today are Raja Parvez, Rubicon’s President and Chief Executive Officer, and Bill Weissman, Chief Financial Officer. We have allotted one hour for our call this afternoon. Raja will provide an overview of Q3 results of operations and discuss the current market environment, and then Bill will review our financial results in detail and then discuss our outlook for Q4 2012. We will then be happy to take your questions.

Today’s call is being webcast through the Investor Relations section of our website located at www.rubicon-es2.com. A replay of this call will be available for eight days and the webcast will be archived in the Investor Relations section of our website. As a reminder, our press release and preliminary financial statements are also available I 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 such statements is 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 statement whether as a result of new information, future events, or otherwise. Now, I’d like to introduce our President and CEO, Raja Parvez.

Raja Parvez

Thank you, Dee. Good afternoon everyone and thank you for joining us today. Revenue for Q3 increased 17% sequentially to $19.9 million from $17.0 million in the prior quarter driven by increased sales of six-inch wafers. We saw strong demand for six-inch wafers in Q3 from both the Silicon-on-Sapphire and LED markets resulting in a 62% sequential increase in six-inch revenue.

The revenue from six-inch wafers sold to the Silicon-on-Sapphire market in the quarter totaled $8.7 million, up 18% sequentially. The Silicon-on-Sapphire market continued to grow as did disruptive technology, which gained market share from the legacy solutions of radio frequency switches and other applications. Our Silicon-on-Sapphire customer reported a very strong Q3 and prospects for their continuing revenue growth are excellent based on its proprietary design and increasing content per device.

Revenue from six-inch wafers sold to the LED market increased to $7.7 million in Q3 from $2.7 million in the prior quarter. This increase is due to the resumption of sales to our largest LED customer after a pause in their project due to excess inventory which lasted most of the first half of this year.

We continue to be the largest provider of six-inch wafers to the LED market due to our strength in both large diameter crystal growth and large diameter polishing. The down cycle in the LED market has certainly delayed broader adoption of six-inch substrates by LED chip manufacturers and six-inch usage remains limited at this time. However, we continue to believe that large diameter substrates are the future of LED chip manufacturing and we are now beginning to see some chip manufacturers reengage their development work on six-inch wafers. We have also begun discussing eight-inch wafers with some of our customers.

One analyst said in September that they anticipate that within two to three years, 25% of the total sapphire wafer surface area processed will be on six-inch wafers, and in a few more years that number is expected to be 50%. We believe we will begin to see greater six-inch adoption in the second half of next year which will be a strong growth driver for us. However, in the near term we expect to see some pricing pressure on six-inch wafers given the limited demand and competitors trying to qualify for their business.

Turning to the smaller diameter side of the market, given the current weak pricing for two- to four-inch core, we decided not to sell those products in Q3 with a few exceptions. As a result, revenue from two- to four-inch cores in Q3 was $1.5 million as compared to $5.6 million in the prior quarter.

While there are pockets of strong activity the LED market in general remains fairly weak. High inventory levels and excess capacity in the sapphire part of the supply chain have kept pricing at record lows for two- to four-inch products. However, we are seeing some gradual improvement in the LED market with the general lighting segment beginning to add more meaningful demand.

Global consumption of LED in general lighting applications is expected to increase approximately 37% per year over the next few years before accelerating to an annual growth rate of over 50%. However, while the LED market is slowly improving we anticipate that it will likely be a couple of more quarters before we see some price improvement for two- to four-inch cores.

Optical and R&D revenue totaled $2.0 million in Q3 as compared to $1.2 million in the prior quarter. Q3 revenue included $422,000 in R&D revenue from our new LANCE project. As we announced in August, the Air Force Research Laboratories awarded us a contract totaling $4.7 million to develop large area sapphire windows. Sapphire is an ideal material for military and other high-performance applications due to its physical properties and transparency in the invisible and infrared spectrum. As a result, sapphire is ideally suited for infrared windows in extreme environments where material durability is just as important as optical clarity.

As a result, sapphire is increasingly engineered into newer military applications. However, existing sapphire growth technologies are incapable of generating windows in the dimensions required for certain demanding defense applications. In order to address this need, Rubicon has developed an entirely new growth platform specifically to produce very large, thick polished sapphire infrared windows. Developing this platform involved designing and building a unique crystal growth [firmness] and developing corresponding processes.

This project, which we call LANCE, standing for large area net-shaped crystal extraction, has successfully produced high-quality, large rectangular slabs of sapphire. The $4.7 million of funding being provided by the Air Force Research Laboratory will allow us to scale the technology up to the dimensions required. We are likely a couple of years away from production on this platform but this contract demonstrates yet again Rubicon’s leadership in sapphire technology.

Regarding our margins, gross margin in Q3 improved to 12% from break even in the prior quarter on the strength of the six-inch, an our operating loss reduced from $3.1 million in Q2 to $1.1 million in Q3. With the increase in demand for six-inch wafers, utilization of our polishing operations improved to around 65% in Q3. However, utilization of our fabrication operations was very low as a result of our decision not to sell two- to four-inch cores in the quarter. A gain on foreign currency translation and an additional income tax credit put us at a slightly positive net income for Q3.

During the current investing cycle we’ve focused on enhancing our competitive position by developing new products, adding intellectual property, and reducing our cost structure. In addition to the LANCE project we continue to develop large diameter wafer (inaudible) capability and expect to introduce that product by the middle of next year. We’ve continued to enhance our existing technology platforms and were recently awarded a patent for automating some of our fabrication processes.

We have a number of initiatives underway that will further reduce our product costs. We continue to refine our new raw material preparation process, and early next year we will be taking deliveries on the equipment needed to expand that capability to support most of our crystal growth operation with internally-processed material. This will result in a significant reduction in our raw material costs. We will also be relocating the remainder of our polishing production to our Malaysia facility early next year, resulting in a significant reduction in our polished wafer costs.

It has been a difficult cycle for the LED industry but the market is slowly improving while the Silicon-on-Sapphire market continues to grow. During this cycle we’ll continue to focus on extending our vertical integration and refining our processes in order to further extend Rubicon’s competitive position. I would now like to turn the call over to Bill who will provide you with greater detail on the financial results for Q3 and our outlook for Q4.

Bill Weissman

Thank you, Raja. Revenue for Q3 was $19.9 million which represented a 17% sequential increase. 83% of our revenue for the quarter was generated from six-inch wafers sold both to the LED and SoS markets. As Raja mentioned, given the current low pricing for two- to four-inch cores we decided to sell a very limited quantity of those products in the quarter.

Six-inch wafer sales increased 62% sequentially to $16.4 million in Q3. We saw another strong quarter of growth from the SoS market with sales of six-inch wafers increasing 18% sequentially to $8.7 million in the quarter. Our six-inch sales to the LED market were up considerably, growing from $2.7 million in Q2 to $7.7 million in Q3 with the resumption of sales to our largest LED customer in June.

Optical and R&D revenue totaled $2.0 million in Q3 as compared to $1.2 million in the prior quarter. Included in Q3 revenue was $422,000 of revenue from the R&D project, the LANCE project that Raja discussed. Revenue from this $4.7 million project will be recognized over the duration of the three-year contract as costs are incurred.

Our gross margin was 12.3% for the quarter, up from break even in the prior quarter. The sequential improvement was due in part to increased revenue from higher-margin wafer sales and improved utilization of our polishing operations. This was partially offset by lower utilization of our fabrication operations given the limited core sales.

Given the relative strength of the six-inch market we wanted to make sure our boule inventory was all capable of producing six-inch and high yield. After our (inaudible) we decided to reprocess some boules from inventory that may not have produced high six-inch yield. It has been our experience that boules put through a second growth cycle typically result in a very high-grade crystal. This decision added approximately $900,000 to cost of goods sold in the quarter.

Operating expenses in Q3 totaled $3.6 million as compared to $3.1 million in the prior quarter. The increase was primarily additional allowance for doubtful accounts which is a function of increased sales over the past few months. Our operating loss in Q3 was $1.1 million, reduced from the prior quarter operating loss of $3.1 million. After a foreign currency translation gain and income tax benefit which included additional state tax credits recorded in the quarter, our diluted EPS for Q3 was a positive $0.01 per share.

Our projected effective tax rate while in a profit operating mode remains at 30% to 35%. However, the rate of tax benefit accrued while in a loss mode will typically be higher and will vary based on the distribution of activity between our US and Malaysia operations. Turning to the balance sheet and cash flow, we maintain a strong cash position with $44 million in cash and short-term investments at September 30 with no debt. We used $10 million in the quarter; our CAPEX in the quarter was $3 million and our inventory balance increased by $6.7 million. Most of our increase in inventory was due to our decision not to sell two- through four-inch cores in the quarter, resulting in higher boule inventory; and an increase in six-inch wafers in work-in-process due to increased volumes.

Of our $46 million inventory balance, $30 million was in raw materials and boule inventory. Our safety stock of raw material is now more than sufficient. Purchase obligations will be fulfilled by the end of the year and we will begin drawing down raw material inventory levels at the start of next year. Accounts receivable remained at high quality and our DSO at September 30 was 57 days as compared to 50 days at the end of the prior quarter. The increase in DSO was due to sales mix more heavily weighted to our customers that have longer payment terms.

Regarding our outlook for Q3, we expect revenue to be similar to Q3 revenue with most of our revenue again coming from six-inch polished wafer sales. Pricing for two- to four-inch cores has not yet started to rebound so we will likely sell a limited volume of those products again in Q4. Gross margin will likely be in the high single digits as average pricing for six-inch wafers will be somewhat lower in Q4. Consequently, we expect a loss per share of between $0.02 and $0.05 in Q4 based on 22.5 million shares outstanding and a 50% tax benefit.

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

Raja Parvez

Thank you, Bill. While the recovery of the LED market is slower than expected we believe the strength of our technology has allowed us to outperform our peers by enabling us to take a leadership position in supporting emerging technologies like Silicon-on-Sapphire, large diameter LED substrates and large area optical windows. We continue to focus on enhancing our existing platforms and developing new products. Projects like the in-house raw material production and the continued move of our polishing operation to Malaysia will significantly reduce our costs once completed next year and further enhance our competitive advantage.

The markets we serve are very young and we will likely continue to see volatility. However by focusing on reducing costs and evolving our products through technology we intend to maintain our market leadership role and position the company to capitalize on market conditions when they later change. I want to thank you all for joining us today and thank you for your continued support, and now may we take our first question?

Question-and-Answer Session

Operator

(Operator instructions.) And gentlemen, your first question today comes from the line of Christopher Bledsoe with JP Morgan.

Bill Peterson – JP Morgan

Yeah, hi, this is Bill Peterson calling in for Chris. Thanks for taking the question. I’m wondering about the price pressure on six-inch wafers for LED. I believe you had a contract that was supposedly worth around $20 million – has there been some modification to the contract? And when do we expect based off this, if it is $20 million that was expected through this current contract?

Bill Weissman

Well no, there’s not been a modification to the contract. The contract and [fee], we’ll still have to follow general market pricing but there’s not been a change to that. The pricing will be down slightly quarter-over-quarter.

Bill Peterson – JP Morgan

Okay, and maybe as a follow-up directionally where do we see SoS trending and should we view this as a cyclical play based off of consumer electronics, or do you still expect continued growth through the next quarter or two?

Raja Parvez

Well I know our customer just supported very strong results and they see continued growth. I believe that we will continue to see growth. We have a significant market position with them and I believe that we’ll continue to grow our position with them and play a major role with them as well.

Bill Peterson – JP Morgan

Okay, thanks a lot guys.

Operator

Your next question is from the line of [Abinas Kahn] with D.A. Davidson & Co.

[Abinas Kahn] – D.A. Davidson & Co.

Good afternoon, Raja and Bill. In terms of the pricing, if you can give us some idea about what did you see in terms of sequential decline in pricing of two- to four-inch wafers and also six-inch wafers?

Bill Weissman

There was no change really in any of the products in Q3. The products were basically the same as they were, product pricing was the same as they were in Q2.

[Abinas Kahn] – D.A. Davidson & Co.

But you did talk about six-inch wafer pricing being down some, right, so what was the order of decline?

Bill Weissman

No, that’s part of our expectation for Q4, that pricing for six-inch will be a bit lower.

[Abinas Kahn] – D.A. Davidson & Co.

Okay. And would you like to give us any idea about the order of decline that you’re expecting?

Bill Weissman

It’ll probably be in the neighborhood of 7% on average.

[Abinas Kahn] – D.A. Davidson & Co.

But that’s only for six-inch; not for two- to four-inch, right?

Bill Weissman

Correct.

[Abinas Kahn] – D.A. Davidson & Co.

Okay. And tax rate, you said for the next year we should still be modeling 30% to 35%?

Bill Weissman

Yes, when we’re in a profit mode, yes.

[Abinas Kahn] – D.A. Davidson & Co.

Okay, thank you.

Operator

Your next question is from the line of Jed Dorsheimer at Canaccord.

Jed Dorsheimer – Canaccord

Hi, two questions: I guess Bill ,the first question is maybe just mindset and strategy in terms of choosing not to sell the two-inch and four-inch cores based on current market pricing. Should we read into that that current market pricing is below your cost basis? And if not, what’s the thought process in terms of choosing not to sell and running the fab lower loading level?

Bill Weissman

Well, the current pricing is difficult to make profit on those small diameter products. We’ve held back on selling them because we didn’t want to exasperate the problem with pricing but we will likely start selling those products again in Q1 at the latest. So we’re just trying to see if we can get some improvement in pricing before we release some of those products.

Jed Dorsheimer – Canaccord

Okay. And then Raja, I just want to go back to your comments to the previous question in terms of Silicon-on-Sapphire and your expectations that that market will grow; and the reason being is… Well, I guess I have a couple questions in here. What is your confidence level that your largest customer isn’t building or wasn’t building inventory into the iPhone 5 launch? And then two, where do you see this growth coming from, because it would seem as if the products are penetrated into about 500 million units based on your current run rate of about $34 million in revenue?

Raja Parvez

Well first of all, based on our discussions with our customer they always have a buffer stock but we have not seen, based on our delivery of the products to them that they were building any large amount of inventory – this is just the buffer stock they do. So we do not see that they have built a lot of inventory in that area.

The second, they just reported their results that they continue to expand their content per device, and I believe that they are launching new products; and based on that information we believe that this will be a continuous growth as they reported a few days ago in their market penetration as this technology, as you know, is disruptive and they’re getting more and more momentum with their customer base. And as you know, we have a very strong relationship with this customer from Day One. We were part of their growth strategy and I believe we’ll continue to have a strong position with this customer.

Jed Dorsheimer – Canaccord

And I was wondering if you could put any additional color on the potential of them expanding content beyond the switch into say, for example, the power amplifier market or such. How should we look at that from an area of sapphire or a six-inch wafer start perspective? Is this something that could potentially double, a 50% increase? How should we be viewing that in terms of your business?

Raja Parvez

Well, I cannot comment on the particulars there, the specifics, but what I do see is from the message we are getting from them and based on discussions at different levels that they continue to penetrate more and more applications; and based on that knowledge we believe that we’ll continue to grow with them as well.

Jed Dorsheimer – Canaccord

And then last question and I’ll jump back in the queue: just on the sapphire cover glass opportunity, I’m sure you’ve seen some of your competitors and you too may be serving this market. I was wondering if you could provide any commentary on you talked about large rectangular slabs of sapphire for Department of Defense-type and aerospace-type applications – what would Rubicon’s participation be in sapphire cover glass for the handset market?

Raja Parvez

Well first of all, we’ve continued to look for new opportunities and applications and at a very, very early stage – many, many customers, many applications. But specifically speaking with the cover glass, based on our knowledge of the bill of materials for many smartphones at this point the cover glass, the cost competitiveness for us is not there yet. However, we’ll continue to evaluate those opportunities and anytime we have any disruptive process platform changes or the product changes of course we’ll participate. But at this point, because of the cost requirement for especially the cover glass for the smartphones, the economics are not there for the sapphire material yet.

Jed Dorsheimer – Canaccord

Okay, thank you.

Operator

Your next question is from the line of Andrew Abrams with Avian Securities.

Andrew Abrams – Avian Securities

Hi guys. I wonder if you could talk a little bit about utilization. I think you mentioned that the Malaysian facility is running 60% to 65%. What was the actual sapphire fab and where would you expect that to be in Q4?

Bill Weissman

Yeah, polishing operations were around 64%, 65% in the quarter. That’ll likely be similar in Q4. Fabrication is quite low, probably 20%, 25% given we were processing limited number of cores, and that will likely be something similar in Q4. We are scaling back a little bit in crystal growth temporarily in Q4 so we’ll be producing a little bit fewer boules, which is why we wanted to make sure that our current stock of inventory was in very good shape to produce all the products we serve, particularly six-inch. So crystal growth could be a little bit lower in Q4 and will probably pick up again in Q1.

Andrew Abrams – Avian Securities

And would you expect any real substantial change in two- and four-inch inventory as you continue to… I suppose you still have to build for six-inch so would that change any material amount assuming you don’t sell any, or is it just a relatively small amount?

Bill Weissman

Not materially. As I said we’ll be producing less crystal in Q4 so I don’t see a lot of build-up – it’ll probably increase some. Our raw material contracts are expiring at the end of the year. We’ve scaled them back already so that will probably increase it a little bit more by the end of the year, but then we’ll start to see that come down pretty dramatically because we’ll be starting to draw down on the raw material inventory. We had a program in place to build a buffer stock and the buffer stock is well ahead of what we need given the current market conditions, so we can really start to bring down the raw material inventory starting the first of the year.

Andrew Abrams – Avian Securities

Got it. And lastly, on the six-inch contract, that renews at the end of the year. Is this a full renegotiation or is this just an adjustment of price and you’ll continue a similar contract for next year?

Raja Parvez

Well first of all currently, as Bill mentioned, there’s no change to the current contract. But given the market conditions customers will expect pricing to follow the market conditions, and that’s a reality. As far as the contract for next year, based on the current market condition most of the customers prefer going to a project order base because they have limited visibility. And so we’ll work with our customers as their demands are and as their needs are.

Andrew Abrams – Avian Securities

But would you expect the one contract to renew again or would you expect that to go to PO itself?

Raja Parvez

Well, as I said earlier, based on the current environment customers expect that they’d rather work off a project order because of their limited visibility. And we have to see it that way, yes.

Andrew Abrams – Avian Securities

Got it, thanks very much.

Operator

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

Daniel Amir – Lazard Capital Markets

Thanks a lot. A couple questions here: first of all, to your comment that you expect to start shipping to the two- and four-inch market in Q1, what gives you the visibility there that pricing will get better in Q1 given that this year, in the first half of the year you definitely thought that by the second half pricing would improve and it did not improve? So what gives you the confidence here that in a quarter or so things are going to improve?

Raja Parvez

Well, first of all we said that we are seeing some signs of improvement in the LED market, but we believe that in the market the pricing will still remain where it is today through Q1. But in order to maintain the relationships with the customers we’ll begin selling some two- through four-inch in Q1 and also reduce our inventory. But as the markets continue to slowly improve we expect that in a couple of quarters the pricing will start improving.

Daniel Amir – Lazard Capital Markets

So you could potentially be shipping in Q1 your two- and four-inch at the same pricing that you are right now.

Raja Parvez

That is correct.

Daniel Amir – Lazard Capital Markets

Okay. Now do you have any visibility you can give us on CAPEX for next year? Should we be looking at kind of the $3 million quarter-year as a reasonable quarter run rate?

Bill Weissman

Yeah, at the most. Really we’re not spending on expansion right now. We’ve got our facilities built out. What we’re spending on now is our raw material process and our PSS initiative, so it’ll be at most $3 million a quarter next year and probably less than that.

Daniel Amir – Lazard Capital Markets

Okay. And then the last question, I mean there’s continuing noise in the market about silicon as a substrate. Can you comment on that, what’s your opinion and whether you have customers talking to you about it and what does that mean?

Raja Parvez

First of all, no customers have talked to us on that. As you know, sapphire by its properties remains the choice of the substrates for LED manufacturing. Thirdly, there’s a lot of discussion in silicon for a number of years, for many years, but based on what we know technologically we still believe it is many, many years away from being at a production level. You will see it in an R&D level. But yet again, when this product materializes it will have its own space; it will have its own limited capability. But sapphire I believe remains the choice of substrate for a number of years to come because of its scalability, its properties and a significant amount of infrastructure around the globe has been deployed which is very suitable for sapphire as the choice of substrate.

Daniel Amir – Lazard Capital Markets

Okay great, thanks a lot.

Operator

Your next question comes from the line of Steven Chen with UBS.

Steven Chen – UBS

Hi, thank you for taking my questions. Can you elaborate on the reprocessing inventory for the second stage of boule growth? Is this for SoS or LED applications? And as a follow-up, how much inventory will you reprocess again in Q4?

Bill Weissman

Sure. As you’re aware of, we don’t have product-specific production. Our boule growth serves all of our products in all of our markets. We do have a larger than normal inventory right now so we always evaluate our inventory and make sure it’s very high-quality, and given that we’re scaling back crystal growth a little bit we want to make extra sure that all of our boules will give us high-yielding six-inch.

So there were some boules that accumulated that could possibly not yield very high six-inch, but it’s always impossible to tell until you core them out. But we decided to be safe and to reprocess those and [re-polish] them so we’re almost guaranteed a very high crystal quality. We’re not likely to do this again. I wouldn’t say it’s a once-in-a-lifetime thing but it’s a very unusual event since the six-inch demand is much stronger than the small diameters right now, and we want to make sure that all of our boule inventory is suitable for very high-yielding six-inch.

Raja Parvez

And in addition to that, with these boules we do not have any performance issues with them. These boules are perfectly good for two-inch material and some for four-inch material. We just want to try to maximize the six-inch yields, and when we reprocess these boules they go into a second process which is more clear and much more identified material, and it almost assures us of very high six-inch yield and throughput. And that’s why we’re doing it as a unique opportunity this time.

Steven Chen – UBS

Got it, thank you. Another question: can you share what your sales were to China in the quarter? And how should we think about your future sales to China? We’re wondering are they likely to remain small until China goes to six-inch?

Bill Weissman

Well, for the time being obviously we’re selling a limited number of two- or four-inch cores so it will be small. When we start shipping that product again it would be larger. And we sell a lot of material to China through other countries like Taiwan because remember, they used largely two-inch material. We sell two-inch in core form to polishers. But to answer your question, directly into China – we had about 4.5% of our revenue going directly into China in Q3.

Raja Parvez

Traditionally we have been selling material to the Taiwan market, and a significant portion of that are polish wafers for our polishing customers – they really do end up in the China market as well. But for the last year and a half we also started a direct sale to China and I believe that again as you know, both Taiwan and China are the highest users of two-inch materials and we believe our sales will actually dovetail when the market conditions rebound. We have now dedicated a full workforce in China in terms of the sales and we’re increasing more and more penetration into the China market in addition to over customers in the Taiwan market as well.

Steven Chen – UBS

Got it, thank you.

Operator

Your next question is from the line of Bill Ong with B. Riley & Co.

Bill Ong – B. Riley & Company

Yes, good evening everyone. We’ve seen a number of Chinese LED chip makers have sort of backed away from becoming more vertically integrated with sapphire (inaudible) crystal growth for internal use. Have you seen this trend occurring? And also, how many major LED wafer substrate makers are there globally, and what do you think is the right number of players in order to have a healthy demand/supply market?

Bill Weissman

Well, we’re not seeing any real meaningful crystal capacity in China yet; very little, actually. And the market is still largely dominated by the five incumbent sapphire producers, one or two other meaningful players out there and there’s a lot of small ones that are trying to get a foothold; and frankly, a lot of those have already kind of thrown in the tile, particularly some of the polishing partners we have in Asia that tried to vertically integrate to the crystal [build] that found that it’s really not working for them. So the market’s changed a little bit but still largely again that there’s the major players and we’re not seeing a lot of crystal capacity yet in China itself.

Bill Ong – B. Riley & Company

Do you think you need to see some consolidation among the five major players for the market to be more healthy, or do you think five is still a good number over the intermediate term?

Raja Parvez

It’s a great question. It depends on the market and how it evolves, and as you can still see, many of our competitors are still private companies so we can’t comment on that. But as we mentioned, the majority of the market is still meaningfully served by the five incumbent sapphire producers.

Bill Weissman

And those five have been around a long time, and the problem has been that all five added significant capacity at a time when the market slowed down and now we’re just waiting for demand to strengthen so we get more balance.

Bill Ong – B. Riley & Company

That’s helpful, thank you very much.

Operator

Your next question today comes from the line of Jiyuan Lee with Sidoti & Company.

Jiyuan Lee – Sidoti & Company

Thank you. I just wanted to ask you a quick question about the sapphire for optical windows. Specifically what is the extent of your work there and are you shipping for any volume programs or is it largely in the development phase? And what does the margin profile look like?

Raja Parvez

Well the first part of the question, as you know we have been working with our customer and since it is optical windows these are not high-volume products to begin with. But they are technologically very advanced and very unique, and we have demonstrated that a large window, all the way up to 14’x20’. But the requirement is to go up to 36” and that’s why we got this contract from Air Force Research, to continue to work and evolve over the next several years. And I believe it will be. We have developed an entirely new technology platform to enable that because the current technology platforms are not capable of producing the thick slabs of that size and vertical orientation.

But these kinds of products, optical windows and all these will be in a modest volume but they are valued more in terms of the quality performance. And as far as the margin performance is concerned we’re not going to answer that question.

Bill Weissman

Yeah, we don’t provide margin by product but generally those products are pretty high margin. We’ve been running at $1.5 million to $2.0 million of optical revenues per quarter and this latest project will be incremental to that once we get that platform moved into production a couple of years from now. But it’s good, steady business; it’s good high-margin business and we continue to focus on that and try to grow it.

Jiyuan Lee – Sidoti & Company

Okay, that’s helpful. Thank you.

Operator

Your next question today is from the line of Brian Lee with Goldman Sachs.

Brian Lee – Goldman Sachs

Hey guys, thanks for squeezing me in. I had two: first, how much of the incremental six-inch wafer LED revenue was from your largest customer this quarter and how much revenue is left under the contract for Q4?

Bill Weissman

Well, the vast majority of our six-inch revenue from the LED market is from that one customer because they’re really the only real high-volume user in the marketplace today. So I think we’ve given those statistics for last quarter and this quarter – you can see there’s significant growth because we had a full quarter’s worth of that contract and that contract should be fairly similar in Q4 as well.

Brian Lee – Goldman Sachs

So you’re going to see about a similar contribution in Q4 as you did in Q3 from that one customer?

Bill Weissman

It should be similar, yes.

Brian Lee – Goldman Sachs

Okay. And then just one last one: you’re guiding for growth in that segment in the back half of next year. Does that also apply in a year-over-year basis given how backend loaded you were this year? And do you have any sense of potential magnitude? Thanks.

Bill Weissman

Yeah, we would expect it to be over year-over-year because remember, the first half of this year was not very indicative because we had an inventory correction and our one large customer really wasn’t taking shipments. The second half of this year is a little bit more typical in terms of the volumes used by both the SoS and LED customer and as we have transitional LED customers using six-inch then it should be incremental.

Operator

(Operator instructions.) Your next question is from the line of Andrew Wang with Sterne Agee.

Andrew Wang – Sterne Agee

Thank you. Just some housekeeping questions: can you give us the percentage of two-inch core relative to the core business that you did in the quarter?

Bill Weissman

Sure, yes I can. Two-inch would have been about half of the core business for the quarter.

Andrew Wang – Sterne Agee

Okay, got it. And can you give us an update on your TIE capacity exiting the September quarter?

Bill Weissman

Our installed capacity remains at about 12 million TIE per year. We were operating at about 80% to 85% utilization; that’ll probably be down some, probably more like 70% to 75% by the end of the year. As I mentioned we’re going to slow that down a bit and then probably pick back up again early next year.

Raja Parvez

And remember, especially in our technology growth platform, even though we slow down for us to restart that capacity we start in a very short period of time because of the robustness of our technology platform. So we slow down and as the market rebounds and we need to [power] it back up we can do it very quickly and very efficiently as we have done for many, many times in the previous market conditions.

Andrew Wang – Sterne Agee

Okay, so just to be 100% clear, when you say 12 million TIE per year, that’s reflective of the capacity you have in place, not necessarily your utilization – correct?

Bill Weissman

That’s correct.

Andrew Wang – Sterne Agee

Okay. And I’m sorry if I missed this but did you quantify in terms of any pricing pressure for six-inch LED versus six-inch SoS? Or maybe any color there would be helpful.

Bill Weissman

It’s roughly the same. I mean the pricing will follow a similar path for both SoS and LED.

Andrew Wang – Sterne Agee

Did I hear a number like 7% sequential? Is that what you had said?

Bill Weissman

Yeah, that’s what we think it’ll be, roughly 7%.

Andrew Wang – Sterne Agee

Got it, okay. And then on your SoS customer there are two comments I heard on their conference call and I wanted you to address them if possible. The first is that they kind of talked about establishing multiple sources for every aspect of their supply chain. And then the second was yield improvements for SoS, so maybe you can talk about both of those points.

Raja Parvez

Well first of all, as you know, every company, every customer has multiple sources. And so that’s their enterprise and that’s part of it. However, we have worked with that customer as I mentioned and we have a very strong relationship at all levels, and I believe we’ll continue to be a significant portion of their supply chain and their second [regarding chips].

And that’s why Rubicon Technology has a strong leadership. Remember, we co-developed that Silicon-on-Sapphire with them since 2006. We have a significant amount of technology advantages and a significant amount of knowledge and experience. In fact, our devices have done extremely well in all the new generation and legacy products – I believe that is a significant advantage Rubicon has over all other competitors. And I believe that because of that relationship and our track record in that market I believe we’ll continue to have a leadership position.

And I think our products do provide them a really significant (inaudible) advantage because we have already delivered their product to them; we have demonstrated to them for many, many years.

Andrew Wang – Sterne Agee

Perfect, thanks.

Operator

Your next question is a follow-up question from the line of [Abinas Kahn] with D.A. Davidson & Co.

[Abinas Kahn] – D.A. Davidson & Co.

Hi there again, Bill, a quick follow-up: if you are to think of the industry environment and think of a recovery, do you see it coming from the semiconductor electronics side of the food chain or more on the general lighting side of the food chain?

Raja Parvez

I think that the overall industry with a mix of several applications coming through. General illumination is gaining a good momentum, has been gaining but I believe that the general industry will be a combination of display market, different applications, also general illumination and also to a degree from the automotive industry. I believe that all our market trend will be coming from all these markets as we move forward.

[Abinas Kahn] – D.A. Davidson & Co.

Maybe let me put it this way: when the market comes back would you see a larger share into one of these markets – general lighting or backlighting?

Raja Parvez

We don’t differentiate. We sell at (inaudible) and then our customers make LED chips in the factories and they send to different applications based on their product roadmap and their structures. We generally do not track what portion of our product goes to what application, but regardless, once the market improves and once the LED market improves then we should see a corresponding improvement in our sales to all of our different customers.

Bill Weissman

Yeah, the backlighting market has matured somewhat. There’s still growth there but the real catalyst on the LED side will be general lighting and a lot of the industry analysts think that at the end of 2013 going into ’14 is going to be very strong for general lighting. Also (inaudible) SoS applications, if they’re successful with their power amplifier could open up big new markets for us as well and we’ll have some additional optical revenue in coming years. So I think there’s a number of catalysts for growth once we get past this little down cycle here.

Raja Parvez

And you know, both silicon and sapphire and solid state lighting are young industries and there’ll be volatility. But the key part is that we have the technology, we have the know-how, we have the track record and the customer base and we’ll continue to focus on key activities with individual customers and continue to evolve over an [effective] infrastructure in crystal growth and post-crystal growth; and introduce new products. Then I believe once the market improves we are very well positioned.

[Abinas Kahn] – D.A. Davidson & Co.

One or two minor questions, though: your guidance for revenue in Q4 is flattish from Q3. Should we expect the same trends in different segments, like LED as well as in optical? Or there are some differences in the way the markets will react in the next quarter?

Bill Weissman

It’ll be fairly similar, [Abinas]. I mean a little bit of growth in each to offset some pricing decline is what it’s going to look like.

[Abinas Kahn] – D.A. Davidson & Co.

Okay. And also on the six-inch side, LED six-inch, LED qualifications to key customers – how is that coming along? Do you see other customers getting closer to adopting six-inch in their LED lines or it’s being pushed out? What’s the trend there?

Raja Parvez

Okay, now because of this long-term down cycle, the six-inch adoption has been delayed. But now we are seeing some real engagement of our current and existing customers to reengage our six-inch, so we are seeing that trend. And I believe that based on what we’re seeing today that we can see a small growth on the six-inch migration and adoption in the second half of 2013, now given the economics of six-inch still remains intact. As we stated in our prepared remarks, based on even analysts’ reports that the use of the six-inch in the whole industry will continue to improve and increase as we move forward because the economics are there. It’s just that when you’re in a down cycle many customers try to utilize the advantage of the installed infrastructure which are in some cases two inches, some cases four inches.

[Abinas Kahn] – D.A. Davidson & Co.

Thank you so much, Raja. Thanks Bill.

Operator

Ladies and gentlemen, this does conclude the question-and-answer portion of today’s event. I’d like to turn the call back over to management for some closing remarks.

Dee Johnson

Thank you. Thanks everyone for joining us today. We appreciate your interest and we look forward to speaking with you again soon. This concludes the Rubicon Q3 conference call, thanks.

Operator

And with that ladies and gentlemen you may all disconnect. Have a great day.

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