Matt Margolis ( I am currently long GTAT and have no plans to add or sell in the next 72 hours)
The $1 here or $1 there change in GTAT’s share price of late is nothing compared to what will happen once the street understands just how fascinating and enormous this deal is for both sides. I joke that this is like Kobe Bryant and Lebron James joining forces in their prime, in terms of the intellectual property that both companies can bring together for one common purpose.
I’ll be open and honest because I always am. GT’s guidance for 2014, 2015 and 2016 is complete make believe. If you do agree with their sapphire range of 80% or $480-640M of revenue in 2014, I will ask the question how will they get that revenue? Home buttons and camera lenses don’t even generate $200m a year in revenue if GTAT took all of the business over from the Taiwan suppliers. The iWatch may sell 10 million units at maybe $3-4 a square – so now we have $40m of revenue and still need $440m-$600m to hit management’s guidance. The margin on the Apple business is around 25% +/- 2%.
GT begins repaying Apple’s $578m component prepayment in 2015 of $116M per year. If you assume the 25% margin on the $116m FCF going back to Apple then GT needs to book $464m a year in revenue to just pay Apple. However, GT needs to pay for employees, taxes and everything else.
Let’s assume GT will be running at $200m for all overhead next year and Apple accounts for half, so $100m of additional cash is needed.
Let’s the tax bill on net income is $120m and Apple accounts for half, so $60m of additional cash is needed.
So where are we, $116m to Apple, $100m for overhead and $60m for taxes is needed from the Apple business before GT collects 1 dime of FCF. All this totals $276m of cash needed to pay these obligations, taking the 25% margin that would translate into $1.1B of annual sales from Apple to just pay these obligations. Last time I checked the 2015 guidance is somewhere around $1.1B for all of GTAT’s business including Apple and everything else in the pipeline (forecast appears to be very silly from management). GTAT needs to generate some cash for themselves. Every $500m of Apple sales is worth $125 in net income but the tax man will take $47m of it, which leaves GTAT with $78m of FCF for every $500m (16%) of every Apple sales above $1.1B.
So my point is $1.1B a year in revenue from Apple will only give GTAT enough cash to pay Apple, employees, loans and the tax man. Apple needs GTAT to continue to invest in technology and GTAT needs Apple to buy more stuff. Based on the margin, structure of the prepayment and repayment terms and taking in account the cost to run the business this deal is worth Billions a year.
Time will tell who is right, but I know the analysts on the street can’t fathom what is occurring between these two companies. The deal will start with a sapphire migration strategy on every single Apple device but the “other” technologies GT has in it’s toolkit will be applied to across all of Apple’s devices as well. This deal is about intellectual property, which is something Corning cannot provide to Apple in this space.