Sapphire substrate maker Rubicon Technology (RBCN) reported fourth-quarter results after the bell yesterday, beating the Zacks Consensus Estimate of a loss of 40 cents by 4 cents. Shares were up more than 4% during the day and nearly another 2% in extended trading.
Revenues were up 10.9% sequentially and down 22.7% year over year, missing the Zacks Consensus by 10.9%.
The sequential increase was driven by a 272.9% increase in 2-inch sapphire cores, which are mainly used in consumer electronic devices. Apple (AAPL) uses sapphire from Rubicon, so some of this strength is surely coming from Apple. Management also said that the clearing up of excess channel inventory in the third quarter helped sales in the fourth.
Pricing remains weak and was impacted by the weaker ruble and yen. There is significant volatility in this market, so the same category accounted for most of the decline versus last year, with the R&D segment also contributing.
4-inch sapphire cores suffered from typical seasonality, but were up strongly versus last year. LED backlights, which make up a bulk of category revenue, are usually weak at this time because of the Chinese New Year.
PSS, or patterned sapphire substrate, is an area where Rubicon has a technological lead and high-volume capacity. The company scored a big win in the last quarter and expects to completely fill existing capacity by year-end.
The Optical segment continues to grow steadily from a mere 10% of revenue in the year-ago quarter to nearly 23% in the last quarter. Optical and R&D demand comes mainly from government or commercial customers, which adds stability to the revenue stream.
Operating expenses as a percentage of sales were up 779 bps year over year, with G&A accounting for most of the increase (up 804 bps), S&M also increasing and offset only by R&D (down 143 bps). The decline was mainly because of lower revenue in the just-reported quarter.
As a result its creditable that Rubicon was able to post a quarterly loss of 36 cents, which was consistent with the previous quarter, but up from a loss of 22 cents a year ago.
Guidance was unexciting, with revenue expected to be flat sequentially on higher volumes and persistently weaker pricing.
So while there are multiple drivers of the business that may be expected to spring into action this year, it’s apparent that the recent spike in share prices was not particularly related to this earnings report.
If we go back just a couple of days, Rubicon management announced a major breakthrough in the development of synthetic sapphire crystal development. The achievement of targeted size and thickness makes it ideal for defense applications.
The research work was financed under a contract from the United States Air Force Research Laboratory (AFRL) Electronic & Sensors Branch, Materials & Manufacturing Directorate, so should lead to a lucrative business. Management stated that the technology could also later find application in commercial and industrial products, which further expands the addressable market.
Apple decimated its GT Advanced Technologies and looks as close to Corning (GLW) as ever. But it’s also using sapphire from Rubicon. It is a big deal for this tiny company and could boost its consumer revenue.
Rubicon shares are only meant for the brave-of-heart however, as they carry a Zacks Rank #4 (Sell). Better options in the sector would be Cirrus Logic (CRUS), Exar (EXAR) or FormFactor (FORM), all of which carry a Zacks Rank #1 (Strong Buy).
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