Matt Margolis – 2/21/14 (I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours)
Courtesy of JP Morgan research sapphire ingot maker STC (Sapphire Technology Company), who doubled their capacity last fall to meet expected demand for applications of sapphire glass does not expect to make any sapphire screens for Apple.
Also, STC is expected an unseasonal 2Q2014 boost in demand versus 1Q2014. There is no reason for STC to expect a demand boost unless a new Apple product is being released during Q2 or early Q3.
The Obscure Analyst’s takeaway, GTAT will be producing 100% of Apple’s sapphire screens while the existing sapphire component makers (lenses and home buttons) will continue to fill components contracts. The anticipated uptick in STC 2Q2014 demand suggests that one Apple’s iPhone 6 releases might occur in June instead of September. Stay tuned!
Below is the note from JP Morgan Research
1Q14 is the bottom in 2014 – According to STC management, after a seasonal correction in Apple iPhone orders, STC sees 2Q14 demand being stronger than 1Q14. The comment contradicts a normal seasonal pattern in Apple’s iPhone shipment; we suspect this is due to an earlier preparation for iPad home buttons.
Setting a realistic expectation on sapphire iPhone cover – The management did not try to paint a rosy picture on business opportunities from iPhone covers. The management does not expect STC to participate in the first batch of iPhone sapphire cover production (if any in 2014), but the management remains confident that if Apple chooses to do this in the future, STC could still be a strong candidate and cost-effective producer for Apple or non-Apple smartphone customers.
No fund-raising plan unless sizable new business opportunities are secured – The management is content with the existing capacity and shows confidence in maintaining the majority of market share in existing items such as sapphire for home buttons. Even if there are sizable new business opportunities, STC will aim to finance it through advanced prepayments/loans from customers as first alternative. The company also will try to reduce the dependence on a single customer by increasing customer diversification.
Rubicon comment on pricing trend reaffirmed our view – Rubicon (RBCN.US, covered by Paul Coster) reported 4Q13 results on February 20, 2014, which was in-line with expectations. 1Q14 revenue guidance also aligned with market expectation. Rubicon management commented that its 2-4” cores are fully utilized and pricing is expected to resume its upward trajectory in 2Q14 following seasonal weakness in backlighting in 1Q. Of note, STC demonstrated more than 10% OPM in 4Q13 while Rubicon reported -78% OPM. STC’s 4Q13 revenue was ~USD21mn vs. Rubicon’s at USD11.5mn