Rubicon Technology Inc of Bensenville, IL, USA has reported Q2 2012 financial result, indicating that it achieved revenue of $17m, down 60% on $43m a year ago but rebounding by 67% from $10.2m last quarter due to stronger demand for both the LED and silicon-on-sapphire (SOS) markets.

Revenue from the optical market fell by a third from $1.8m to $1.2m. However, revenue from the LED market more than doubled from $3.9m to $8.4m, due to higher sales for both 6-inch wafers and smaller-diameter 2-4-inch cores. Specifically, revenue from 2-4-inch cores doubled to $5.3m as LED demand strengthened through increased utilization rates at most LED chip makers. As expected, substrate pricing remained low in Q2, particularly for 2-4-inch cores. LED demand has improved, but the industry is below full utilization in all regions, notes Rubicon. More importantly, at the major sapphire wafer makers (to which Rubicon sells its cores) inventory levels are being reduced but remain higher than normal, which continues to keep pricing low.

Nevertheless, revenue from 6-inch wafers for the LED market tripled from $0.9m to $2.7m. In particular, toward the end of the quarter Rubicon resumed shipping 6-inch wafers to its largest LED customer after a pause in their purchases due to excess inventory. The down-cycle in the LED market has delayed broader adoption of 6-inch substrates among LED chip makers, notes Rubicon. While most of the major LED chip makers continue development work on 6-inch, the focus recently has been on improving utilization of their existing platform.

However, overall 6-inch wafer revenue rose 84% sequentially to $10.1m (59% of total revenue). In particular, 6-inch sales to the silicon-on-sapphire (SoS) RFIC market continued to rise, growing 62% sequentially to $7.4m.

“We saw the beginning of a recovery of the LED market in the quarter along with continued strong demand from the SoS market,” summarizes president & CEO Raja Parvez.

Gross margin was break-even, up 33 percentage points on last quarter, driven by increased revenue from higher-margin, large-diameter wafer sales and a corresponding improvement in utilization of polishing operations (also, in Q1 Rubicon incurred extra scrap and rework expenses associated with changes to specifications for its largest 6” LED customer). However, utilization is still only 30-40% for polishing operations, and 80-85% for crystal growth. The weak pricing environment, particularly for 2-4-inch sapphire cores, continues to be a drag on margins but pricing is expected to improve once inventory levels at sapphire producers are reduced further.

Operating expenses have been cut further, from $3.9m a year ago and $3.2m last quarter to $3.1m. Operating loss was more than halved to $3.1m from $6.6m last quarter (although the latter included $1.8m of scrap expenses). Likewise, loss per share has been cut from $0.15 last quarter to $0.06 (better than the forecast $0.10-0.14), though still down on the profit of $0.41 a year ago.

Cash consumption was $3m during the quarter. In addition, capital expenditure was $1.8m and inventory balance rose by $6.5m, of which $5m was due to building a safety stock of raw material. Cash and short-term investments has hence fallen further, from $55m to $52m. However, Rubicon has no debt.

Pricing for 2-4-inch cores will likely remain low for another quarter or two as sapphire inventory levels continue to be worked down at a slower pace than originally expected. However, Parvez expects additional growth in 6-inch wafer business in second-half 2012. “Utilization rates have been gradually improving and we expect to see one or two more of the major chip manufacturers begin using 6-inch substrate in production in the next year,” he adds. “We are still in the early days of adoption of 6-inch wafers for the LED market and specifications for these wafers continue to develop as LED chip manufacturers gain more experience with these substrates and production.”

For third-quarter 2012, Rubicon expects revenue to rise to $18-21m, with a heavier mix of 6-inch wafers. Although it will most likely still not cover all operating expenses, gross margin should continue to improve. Likewise, loss per share should improve further, to $0.02-0.05.