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Rubicon expecting LED recovery in late 2012

24 Feb 2012

Manufacturer of sapphire wafers used in LED production will have a very weak Q1, with demand returning in the second half of the year.

Rubicon Technology, the US materials company that manufactures sapphire wafers used in the production of high-brightness LEDs, has warned that its financial results for the first quarter of 2012 will represent the low-water mark during the current period of overcapacity in the industry.

In a conference call to discuss full-year 2011 performance, CEO Raja Parvez told investors that the Illinois-headquartered company’s quarterly revenues are set to slump to just $8 million-$12 million in the current quarter – down from the level of $19.4 million in Q4 of 2011, which itself represented a 34% year-on-year decline.

The Q4 result was a 42% sequential decline from Q3 of 2011, the point at which the current slump began. The main difficulty for Rubicon is that the anticipated switch to LED production on 6-inch sapphire wafers has been delayed by key manufacturers – with only Germany’s Osram Opto Semiconductors believed to have made any major transition so far.

Rubicon says it has sold more 6-inch sapphire wafers to LED makers than all other suppliers combined, but a substantial chunk of its 230,000 shipments so far (a figure that includes a small percentage for radio frequency chip manufacturing) have simply built up in inventory at its major customer amid a market that has been flooded with overcapacity.

Customer dependence
Rubicon’s Q3 2011 results had also illustrated the company’s dependence on a single large customer for its 6-inch material, with 60% of revenues in that quarter derived from that source.

“Market conditions were very challenging in the fourth quarter,” said Parvez in the company’s prepared statement. “Demand was limited, for both sapphire wafers and cores, because of excess inventory in the LED supply chain.”

And while the company has benefitted in the past from rapid increases in the price of its sapphire products when demand has been strong, it is now seeing the flip side of that cycle. With very few orders in the closing months of 2011, Rubicon said that the average selling price of its 6-inch wafers slumped 30% in Q4 alone.

Sales of 6-inch wafers are set to remain extremely weak through the first half of 2012 said Parvez, although there will be a pick-up from Q3 thanks to a $20 million supply agreement signed with its major customer for shipments between June and December this year.

Some analysts are predicting that the price reductions seen throughout 2011 and the early part of 2012 will make LED-based lighting products much more competitive with current general illumination technology towards the end of this year. As such, 2013 is felt likely to mark the onset of a wave of mass adoption of the technology by the lighting industry, and Parvez sees Rubicon catching the wave as chip manufacturers gear up for that trend:

“We are confident that demand will be strong in the second half of 2012,” said the CEO. “The LED industry’s largest potential market, general lighting, is in its infancy, and the more established markets for LEDs, such as consumer electronics and the automotive industry still have plenty of growth opportunities as well.”

“We are early in the recovery,” Parvez told investors. “Much of the inventory correction is now behind us.”

Despite that, he warned that the current quarter would be “even tougher” than Q4 2011, illustrated by the fact that capacity utilization of the company’s wafer polishing facility in Malaysia was just 20% during Q4.

If the CEO’s feelers are correct, then demand for the company’s products will return late in Q2 of this year, with additional customers emerging for the 6-inch material as the overcapacity is finally digested.

By then, Rubicon should have been able to reduce its own raw material costs by 20% by introducing its internally developed raw material processing capability, while the relocation of more crystal-slicing capacity from Illinois to Malaysia should also push down costs.

• For the full fiscal year 2011, Rubicon still managed to nearly double its pre-tax profits, thanks to the demand in the first three quarters of the year. It posted a pre-tax annual profit of $54.6 million after sales revenues jumped 73% to $134 million.

Investors reacted negatively to the weak forecast for Q1, sending Rubicon's stock price tumbling close to 20% in early trading following the announcement.

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