As Reported By Investor's Business Daily Sapphire Wafer Maker's Secret Method Helps Light Up The World (Rubicon)
The old incandescent light bulbs are slowly being outlawed. But not everyone is crazy about going fluorescent. Fortunately, it's not the only choice. A few years down the road, a familiar technology may come to the fore: light-emitting diodes, or LEDs.
LEDs are already turning up in more places — ballparks, electronic billboards, the ball dropped in Times Square on New Year's Eve. Strategies Unlimited estimates annual market growth at 14%. That means more business for Rubicon Technologies. (RBCN)
Rubicon is in a very specialized part of the LED process. It makes wafers out of sapphire that form the substrate of the semiconductor diodes used to create the lights. Most microchip wafers are made out of silicon, but LED makers like to use sapphire because of its tolerance for the chemicals and the heating involved.
Like Silicon
"Sapphire is to LEDs what silicon is to microprocessors," said Chief Executive Raja Parvez. "Ninety percent of them use sapphire as a base material."
So far, investors have welcomed the stock. It went public Nov. 16 at 14, and now trades near 26. And the strength of the LED sector is certainly one reason.
"You're starting to see LEDs pop up everywhere," said analyst Joe Foresi of Janney Montgomery. "It makes sense from a technology perspective. We believe in the long-term fundamentals."
Rubicon is a very small company. In its recent report of 2007 results, sales totaled just $34 million. Still, that was a 64% increase over 2006. And it was the firm's first profitable year; it earned 19 cents a share.
The company's future growth depends on its special technique for making wafers, called the ES2 advanced Kyropoulos method. It's a trade secret, so no one outside the firm knows exactly how it works. But Rubicon says the process creates wafers with far fewer defects, which is very important to diode makers.
There is a certain organic roughness in diode making, since many elements aren't made, but grown. Rubicon starts by "growing" a mass of sapphire called a boule, out of which it carves ingots that are sliced into wafers. The chipmaker then exposes the wafer to gases created by heated metals, which crystallize to "grow" gallium nitride, the working LED ingredient. Sheets of material keep going on like layers of a cake, with the original wafer being partly or wholly eliminated in the process. But any flaws in the wafer can affect how the rest of it grows.
"(The ES2 method) adds to the yield of the LED manufacturer because the uniformity across the wafer is greater," said analyst Jonathan Dorsheimer of Canaccord Adams. "When you produce a chip on a wafer, every chip is not the same. (But) if you get more chips that are the same, the yield is higher."
Rubicon has been continuing to grow this market by offering larger wafers. Traditionally it sold 2-inch wafers, on which an LED maker could grow about 2,000 chips. But as LEDs migrate to bigger and brighter applications, the chips are getting bigger. Now Rubicon is phasing out its 2-inch line and focusing on 3- and 4-inch wafers.
A push into even bigger wafers is opening up a new market: radio frequency integrated circuits. These create the transceivers in mobile phones, TV boxes, satellites and military gear.
These chips are quite large because they are replacing four traditional chips. The insulating properties of sapphire virtually eliminate the "cross talk" problem that plagues mobile phones, Parvez says. The marginal benefits to Rubicon are clear: A 2-inch wafer goes for $20, but a 6-inch wafer can sell for up to $500.
Rubicon is also investing in infrastructure. Last month it opened a new facility near its home base in suburban Chicago, which the firm says will boost crystal growth capacity by 30% to 40% this year and ultimately double it.
So far, the strategy seems to be working. In the fourth quarter, profit blew past analyst estimates to 10 cents a share. Sales gained 58% to $9.6 million.
Analysts polled by Thomson Financial expect profit to jump 142% this year, to 46 cents a share. Over the next two years, they see profit continuing to grow in the mid-30% range.
Still, Foresi believes that Rubicon has to prove itself against a number of challenges. For one, customer concentration. The top three clients account for more than half of revenue, and three-quarters of all sales go to Asia.
Few Customers
Parvez thinks that's not a bug, it's a feature. Rubicon sells mainly to wafer polishers who themselves sell to a variety of clients. And their numbers have been reduced in the last few years as the weaker players have been weeded out.
"In reality, this is a very desirable thing," said Parvez. "The majority of our customers now are tier-one customers, publicly held companies."
Parvez also points out that a new application for sapphire has recently emerged: the laser diodes in Sony's (SNE) Blu-ray Disc. Those diodes are made exclusively with sapphire. And now that Blu-ray has won the format war, Rubicon could have a much-bigger end market.
Apart from the customer issue, Foresi says, Rubicon's main challenge is execution.
"They have to build out their capacity at a good pace," he said. "They have to produce and sell large wafers. The company does have to execute. So far, they're off to a very good start."
