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Rubicon Technology, Inc. (RBCN)

J.P. Morgan LED General Lighting Symposium Call

August 30, 2012 9:45 am ET


William F. Weissman – Chief Financial Officer, Treasurer and Secretary


Unidentified Analyst

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So the next session is Rubicon, we have CFO, Bill Weissman coming up. Bill, thanks for coming. We are taking a long here, so we can keep things moving, we are little behind than we started.

Bill, I wanted to talk about a couple of things that seem to be top of mind for most investors. First, in your last earnings call, you’ve indicated that the sapphire inventory levels at your customers, the polishers, and the LED wafer makers had kind of come back down to normal levels, but there were still some sapphire at the sapphire makers themselves. You would indicate that or you largely imagine thought this will come down for the rest of the year, and hopefully improve the pricing dynamics. So you were at good margin since your earnings call, so could you give us maybe an incremental update on where you think sapphire inventory levels have been, and what kind of evidence you’re seeing that they continues to come down.

William F. Weissman

Sure, you’re right. What we see in the marketplace is inventory levels have been normalized, everywhere except for the sapphire producers themselves. And we believe there is another core or two, lots of excess inventory in the system, there’s not a lot of great transparency in this market, but our data comes from our customers and our customers, customers who have relationships with our competitors.

And the volumes picked up significantly in Q2, in fact, we saw a record volume of material in the second quarter, which is evidence that demand has improved and therefore a lot of this excess inventory is being absorbed. We're making a conscious decision in the third quarter, not to sell a small diameter product to focus more on large diameter sales, which are quite strong right now. So we don't exasperate the problem, give our competitors an opportunity to reduce their inventory levels, and hopefully get the pricing up sooner that way. We have a very strong balance sheet, we did clear a lot of our small diameter inventory in the second quarter, so we are in a position to do that.

Unidentified Analyst

When you think about these inventory levels, is it simply bulls, is it cores, as you know are these partially process type of materials out there or how just kind of get a feel for where you think this inventory sits?

William F. Weissman

It’s a combination of bulls and cores, the bulk crystal, there’s really not much wafer inventory out there as far as we know.

Unidentified Analyst

Okay. You mentioned that it’s very interesting that you had a record, not a volume go out in Q2 yet, obviously your revenue levels are greatly suppressed, and your margins were heavily impacted. Have you compared this downturn for sapphire and LED wafers versus even what happened in '09 or prior downturn is it similar, is it worse, how should we think about that?

William F. Weissman

The whole LED industry is new obviously so every cycle has been a little bit different. What's happened in the sapphire part of the supply chain in this latest cycle is, and we saw a very rapid ramp in the LED market throughout 2010. And then early in 2011, the chip manufacturers and therefore our polishing customers that buy our smaller diameter ingots really started to lose visibility. But yet I continue to buy sapphire, because sapphire pricing can be used to this sense of what the pricing did and what the demand change in demand was, pricing for a two inch ingot, back in '09 was about $8 a millimeter. It's shot up to about $25 a millimeter in 2011, which is why we’re generating 65% gross margins.

So our customers continue to buy the sapphire despite having lost its ability, because they couldn't get enough of it for a period of time. Until about halfway through 2011 and they still had no visibility, they had too much sapphire, so they just stop buying completely and price went from $25 to under $4 virtually within two or three months, which is a clear sign of an inventory correction. It’s not a change in the end markets or the competitive landscape, it’s just that the whole supply chain that completely out of work. So this cycle is a little bit different than in the previous cycles, it's taken a long time for inventory levels to come down, they first have to come down at the chip level, and then at the wafer level, and now need to come down at the sapphire producers level.

Unidentified Analyst

On a volume basis, how you compare the volume of sapphire in 2012 versus maybe the last two years?

William F. Weissman

Well, I think where we're now, I think volumes are probably similar to where they were, and about 12 months to 18 months ago obviously there’s more capacity that's come online. Utilization rates at the MOCVD level are improving quite high in Taiwan, but still probably only about 60% elsewhere. So as those utilization rates improve, they will need more sapphire and we’ll see the market tightening the pricing.

Unidentified Analyst

Back in 2011, when sapphire pricing was very high there was obviously a – there was this run for competition, people said, these prices are going to make it or I’m going to make it for myself in order to hedge my costs. I guess, we’ve seen a very dramatic turn of events, it’s difficult to make money selling sapphire right now. Couple of things, how you deal this competition today versus may be 12 months ago, are you more or less concerned about it. I guess maybe just ask what you’ve seen evidence of increased competition, reduce competition from new players.

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