Archive for February, 2014

Matt Margolis 2/23/14

Below are my top 10 items to watch for from GT Advanced Technologies during their 2013 Q4 conference call, scheduled for tomorrow morning at 8AM ET.  I omitted any prediction related to Q4 2013 results, because the real focus in 2014 is on delivering the goods to Apple and cultivating the all the “seeds” in the pipeline to make sure they are ready to bear fruit by the start of 2015.  I also went out on a limb and put out some bold predictions in #9 and #10, because I believe a nice “BIG” surprise might be coming as soon as tomorrow morning from GT Advanced Technologies!

#1 Updated 2014 revenue guidance and initial EPS guidance –  GT confirmed the $600-800m range on January 16, 2014 after Richard Gaynor (former CFO) announced his resignation.  From my own experience having an additional month of knowledge can change estimates significantly.  With that said, given Apple’s “cone of silence”  I do not expect GT’s management to up the 2014 revenue forecast unless they landed a sizable new contract outside of Apple that will hit in 2014 or a significant order will be recognized as revenue from their current backlog.  Assuming revenue guidance for 2014 will not be updated,  I’m expecting GT to guide 2014 earnings at a profit of $0.12 to $0.38 per share.  For comparison the Yahoo Finance Analyst average estimate for 2014 is $0.09 per share profit.  If management ups guidance above $800m, you can tack on $0.13 EPS per $100m of revenue to the top and bottom range of my estimate for 2014.

#2 Apple Sapphire Contract –  GT should give investors a general update regarding the tracking of the project against contractual terms.  It is highly unlikely that management will give any information related to project dates or reference sapphire cover displays.  I’m going to keep a close eye to see if GT reports or is asked about their current employee headcount, which is expected to grow substantially in Mesa, AZ.

#3 Q1 2014 EPS and Revenue Guidance –  I expect the company to guide Q1 revenue at $60m and a loss of $0.15 per share.  For the comparison the Yahoo Finance Analyst revenue range is $55m to $175m for Q1 with an average estimated loss of $0.08 per share.  I personally don’t expect any meaningful sapphire revenue from Apple to hit the books until late Q2 at the earliest unless Apple surprises everyone with a iphone June release.

#4 LED –  GT should give an update on the availability of their ASF capacity, industry utilization rates as well as pricing trends.  Last quarter GT reported that ASF capacity would be limited in the near term due GT’s dedication of a vast majority of their current ASF capacity to support Apple.  Sapphire equipment utilization rates were high and that  sapphire pricing showed improvement driven by LED and mobile lenses and other mobile device applications.

#5 Polysilicon – Last quarter GT stated that their pipeline in the Middle East continues to develop while prices and demand are coming into balance.  GT should give an update on OCI, who appears ready to begin the next buildout of their plant by 2H 2014.

#6 Hyperion – Based on the last conference call (see comments below) it appears GT is close to landing a few deals related to the Hyperion.  GT appears to be near a deal related to solar cells with an Asian manufacturer as well as a new deal related to composite glass and thin sapphire structures for consumer applications.

We expect our pace of development with Hyperion to accelerate as we now have our pre-production generation tool in operation. This tool is protected by over 50 issued and pending equipment and process patents and we believe this tool is the first of its kind in the world.

#7 HVPE – Last quarter GT was expecting to commercialize their HVPE for LED by the of 2014 (see below).  Just last week GT announced they had acquired exclusive rights to Kyma Technologies’ PVDNC technology, which will be compliment with GT’s HVPE system.  GT should be giving investors more information regarding the commercial availability and revenue expectations for HVPE.

#8 2014 Expenses – Keep an eye on overall operating expense including expenses related to the support of new technology development ($16m was set aside in 2013 for new technology including Hyperion, Silicon Carbide and HVPE Gan systems).  Capital expenditures for 2014 will also be closely scrutinized, it’s clear there has been some heavy lifting of capital equipment inside Mesa, but how much if any of it will be funded by GT?  Also, it will be interesting to see if the R&D forecast for 2014 will slow down from Q4 spending.  A slow down may shed some light on how far along GT is with the advancement of their ASF platform, which directly impacts the sapphire yield for Apple and pace of expansion of sapphire for LED, industrial and specialty sapphire businesses.  Management guided Op Ex at $54 million to $59m in Q4 which included $27 million to $32m of R&D expenses to focus on accelerating the development of their ASF platform.  (Final 2013 Op Ex guidance is below)

Based on our current plans and inclusive of restructuring costs, we now expect total operating expenses in the range of $185 million to $190 million which includes a higher level of R&D in the range of $83 million to $88 million as we have invested additional dollars toward accelerating generational improvements to our ASF platform.  Our fiscal ’13 CapEx is expected to be approximately $10 million to $12 million, the bulk of which is being directed at new technology investments.

#9 A “BIG” sapphire acquisition before the earnings call – I do expect GT to acquire another large player to expand sapphire for LED, industrial and specialty sapphire businesses.  I believe the fund raising completed in December will be used to acquire a significant player related to sapphire equipment or materials, the only question that remains is how soon?

Expanding Sapphire (1) In support of the new materials business, we have accelerated the development of our next-generation launch capacity, low-cost ASF furnaces. Not only will these efforts support our initiative with Apple, we expect that it will enable the expansion of our LED, industrial and specialty sapphire businesses, positioning GT and its equipment customers as the industry’s lowest-cost sapphire producers. We’re very excited about the opportunities that lie ahead for our sapphire business.

GT’s Comments on Cash Levels during the Q3 2013 Conference Call While we are confident that our projected cash levels are adequate to run the business for the foreseeable future, we regularly review financing alternatives to ensure we can support new technology developments and diversification initiatives.

#10  A “BIG” contract announcement before the earnings call –  The other type of “BIG” announcement we could hear before the earnings call tomorrow is a large contract.  GT’s CEO told investors last May, that GT will be moving “more and more towards a book-and-ship model,” my interpretation of this comment is GT is working towards less dependency on equipment business and managing backlog to a business model that leans heavily towards reoccurring revenue streams, similar to the sapphire materials contract GT signed with Apple in November.  It is also clear from the Apple deal that GT can run the equipment they sell like nobody else since Apple is handing the keys over to run and design the sapphire plant in Mesa, AZ.  The business model shift towards more materials business and less equipment dependency would also support GT’s focus on diversification.  Diversification could be defined as a shift between different lines of business or a shift of revenue sources within a line of business.   My complete list of potential near-term “BIG” deals is below complete with management’s comments,

Expanding Sapphire (1)In support of the new materials business, we have accelerated the development of our next-generation launch capacity, low-cost ASF furnaces. Not only will these efforts support our initiative with Apple, we expect that it will enable the expansion of our LED, industrial and specialty sapphire businesses, positioning GT and its equipment customers as the industry’s lowest-cost sapphire producers. We’re very excited about the opportunities that lie ahead for our sapphire business”.

Hyperion Solar Cells (1) “We have made significant progress producing ultrathin silicon wafers with this technology, and are working to develop applications for the solar industry with a well-known solar cell manufacturer in Asia.”

Hyperion Consumer Applications (1) “We have also made similar progress developing low-cost composite glass and thin sapphire structures that we believe will have broad use in consumer applications”.

Polysilicon in the Middle East (1) “With respect to our polysilicon business, we continue to be optimistic about our long-term opportunities as our pipeline in the Middle East continues to develop, supply and demand are coming into balance and pricing appears to have bottomed out, with an expectation that it will begin to rise over the next 6 to 9 months”. 

HiCz N-type Silicon Wafers for PV (1) “We also continue to advance the technical development of our HiCz n-type material solution. We recently demonstrated HiCz’s unique capability to grow high-quality, 10-meter long ingots, which is 3x to 4X the length that can be grown in a typical batch Czrochralski process. We will continue to optimize tool performance in preparation for bringing HiCz to market late in the second half of 2014. We believe that early traction for this product will come from outside of China”.

Silicon Carbide High Frequency High Power Devices  (1) “We’re currently seeking strategic partners to support our silicon carbide development. Given the high cost of silicon carbide wafers, the real opportunity for silicon carbide remains in pairing it with Hyperion, which should enable thin wafer cost structures that are nearly an order of magnitude below today’s state-of-the-art wafering processes. Such an advance would significantly expand this opportunity for GT”.

Full Disclosure : I am long GTAT and have no plans to buy or sell any holdings over the next 72 hours

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Matt Margolis – 2/21/14

Mark Shuttleworth, Canonical founder and the man behind the Ubuntu edge concept and design, confirmed Wednesday via a Canoical Town Hall interview that GT Advanced Technologies was engaged to make the sapphire displays for their upcoming Ubuntu Edge.  Tech enthusiasts will remember the Ubuntu Edge for their 4.5″ displays that would been the first non luxury mobile phone to sport sapphire cover glass.  However, the crowdfunding effort to kick off the production of the device fell $19m short of their $32m goal.

Shuttleworth’s comments can be heard by your own ears at approximately 30:48 into the video.  Shuttleworth was responding to a question on whether or not fans will ever see the Ubuntu Edge come to life and during his response   he stated this:

“Apple just snapped up three year’s worth of the supply of sapphire screens from the company that we had engaged to make the screens for the Edge”

There has been a lot of buzz around various blog sites trying to figure out how this comment relates to Apple’s sapphire display plans on their next generation iPhone 6 and Phablet.  Shuttleworth, make some additional comments that struck home and may shed some light on the Ubuntu Edge and the sapphire screen supply.  When he spoke of the Edge he spoke of the device in the past and how the device featured RAM, sapphire displays and desktop functionality that other manufacturers are now using.  He also discussed how the Edge did not make on this round of funding and that their focus will be on software development for devices of that caliber. Shuttleworth’s comment is below:

“for better or worse we are now focused purely on the software making for that kind of device”

The Obscure Analyst’s takeaway:

Apple has built a moat around the sapphire cover screen display marketplace.  Just like in medieval times, when castles and fortresses were built, a moat was dug immediately outside castle walls and filled with water.  The moat around the castle gave the walls unprecedented protection from battery rams, the weapon of choice during that period of time.  Just like digging a moat in medieval times, Apple has bought up the technology and know-how of GT Advanced Technologies.  GT Advanced is the only sapphire equipment maker or sapphire ingot producer on the planet today that can pull off producing sapphire crystal displays at a competitive price and deliver the volume Apple needs.  Apple has indeed dug a moat around sapphire cover displays and is pouring water all over the mobile phone industries plans to add sapphire displays to their devices at a competitive cost.

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Full Disclosure : I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours

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

Matt Margolis – 2/21/2014 (I am long GTAT and I have no plans to add or sell any holdings over the next 72 hours)

I pulled one amazing quote out of the archive from May 2, 2013 during GTAT’s Q1 2013 conference call. If there are any questions left as to what GTAT is selling Apple they can be put to bed now. The sapphire cover screen deal between Apple and GTAT was leaked by GTAT’s CEO on May 2, 2013.

Thomas Gutierrez – May 2, 2013 during the Q2 conference call Q&A

Oh, I mean, it’s all driven by adoption in the cover screen industry. I mean, we’re extremely pleased to, as Jed put it, to have established our first beachhead that demonstrates the value of sapphire in one of the served markets. And as we said in our prepared remarks, there’s is a very, very, very large players that would drive an extraordinary level of business for us. And then there are other players that have multiple models that could step into the market with a single premium model that has sapphire. And our belief is that those are the kinds of orders that will convert first. Because, quite honestly, the supply chain, to be able to serve those bigger players, is not yet in place and we don’t expect to see that start to occur until 2014.

Gutierrez described Apple as a “very, very, very large player,” that was interested in sapphire cover screens. Gutierrez officially tipped his hand on May 2, 2013 that the Apple sapphire cover screen deal was in the works. He told everyone, who was paying attention that sapphire cover screens for Apple would not be ready until 2014. He also informed everyone, that this massive sapphire cover contract would require more capacity than the entire sapphire industry.

The only question left to answer on this deal is how much annual revenue will an “extraordinary level of business” generate for GTAT from Apple’s cover screen contract?

$1B? $2B $5B? I guess the answer depends on your own definition of “extraordinary”.

I’ll leave you with one more telling quote from Gutierrez from May 2, 2013. He told everyone that GTAT will be moving “more and more towards a book-and-ship model”. My obscure analyst translation is that GTAT will be making a charge into additional materials’ contracts as a diversification strategy away from being just an equipment provider. I believe their first target is sapphire for LED and a deal in this space could be announced as soon as Monday (2/24/14).

Thomas Gutierrez

Our business will be shifting more and more towards a book-and-ship model. Even in poly, as we get perfunctory treatment of some of the technology that we’re shipping, it shifts more to a book-and-ship model. And so revenue converts to cash more readily as you move closer and closer to that type of business model.

A recent article titled “Solar Equipment to rise by more than 5 fold in 3 years” was published on February 19th courtesy of Wall Street Sector Selector.  The article’s source, Solarbuzz is projecting capital spending will reach $13B by 2017, which exceed the “solar boom” of 2011 that registered $11B in solar equipment spending.

The reasons for the predicted boom are fairly simple:

The main reasons for this optimism lies in the fact that:

a) Tier 1 companies have become stronger over the last one year due to consolidation and are profitable

b) Increased spending will have to be made on solar cell efficiencies

c) Demand catch-up to supply.

The biggest beneficiaries of the solar capital upgrade cycle will be thin film solar technology, which is sometimes referred to as CIGs (Copper indium gallium selenide).  Project scale, costs, and profitability will be extremely important for solar companies moving forward. As noted in the article, “CIGs technology has one of the best potential amongst PV technologies for improving efficiency and reducing costs”.  The article also points out that Tier 1 suppliers (Trina Solar (TSL) and Jinko Solar (JKS) have been increasing capacity by scooping up bankrupt Tier 2 suppliers.   The article recommends 3 solar equipment players to look at to take advantage of the upcoming solar equipment boom (Centrotherm, Applied Materials (AMAT) and GT Advanced Technologies (GTAT).

The Obscure Analyst’s takeaway:  This time is different.  The solar boom of 2011 and bust of 2013 as it relates to solar equipment has naturally corrected itself.  The supply side of the equation has regulated itself by reducing the amount of players, which will lead to a steady and more predictable supply of PV.   Oversupply that was created in 2011 will correct itself over the course of 2014 and the capital equipment upgrade cycle will begin in earnest by late 2H2014 as utilization rates are pushed to their limits.  Furthermore, after analyzing the Solarbuzz growth projections it appears as though the global solar installations will grow more evenly over the next several years.  The relationship between solar installs and solar equipment purchases should become more elastic and predictable.  The solar marketplace is beginning to resemble the memory space after the weakest hands went bankrupt and the strongest hands purchased several bankrupt supplier’s for pennies on the dollar.  Micron Technology’s 12-18 month chart represents just how quickly the memory space income statements improved after supply and pricing were under control after industry consolidation.

Micron Technology

Matt Margolis – 2/20/14 (I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours)

Below is my stance regarding the recent Canaccord Genuity investment report on GTAT that was issued on 2/18/14.

  • You stated GTAT is using the “$600m loan” from Apple to buy furnaces and finishing equipment but there are a few problems
    1. If indeed GTAT is spending upwards of $300m (1,000 furnaces at $300k each) of their own capital in 2014 with Apple’s money) the SG&A expenses (n your mode have not been updated to reflect $10m+ of depreciation expenses in 2014 (2013 vs 2014 YOY are flat)
    2. Over 250 completed furnaces were delivered in December 2013 along with at least 420 Sapphire Chambers. GTAT’s capital guidance was $2m for Q4 2013. If $300k per furnace is accurate it would indicate GT spent at least $75m on Cap EX in Q4 2013 versus guidance of $2m.
    3. GTAT needs to front the cost of raw materials and storage of sapphire screens. If GTAT is spending nearly all of the “$600m” from Apple on equipment and limited to $578m of Cap EX how would they fund the accumulation of inventory? If screens are indeed selling for $12 (25% margin would be yield a $9 cost). GTAT’s furnace operation began in February and they will be cranking out Boules that will be converted into sapphire screens around the clock. They will need to store millions of screens, even if the number of screens in inventory is low (20-40m screens) this would tie up $180-360m of cash that GTAT does not have available under your thesis, since GTAT spent almost all of Apple’s “loaned” money on Cap EX.
    4. Under the agreement it appears GTAT is responsible for designing the operations and ordering the Capital equipment. Apple will review the orders and present GTAT with a cash reimbursement every 2 weeks and take ownership of the equipment (furnaces). The equipment is owned by Apple and the contract limits where the sapphire produced from Apple’s equipment can be used. The $578m from Apple is being used as a revolving credit line to acquire capital equipment (furnaces) for Apple. Once GTAT receives the reimbursement from Apple the credit line becomes fully available. The number of furnaces is only limited by how much Cap EX Apple wants to spend and the space available inside of Mesa. Your calculation included 1,000 furnaces at $300k each for sapphire build out. However, GTAT’s purchasing power is not limited to $578m, but up to Apple’s approved Cap EX plan for this project ,which has been cited as high as $1.5B by the Arizona Commerce Authority.
    5. We will find out Monday what GTAT spent in Q4 2013 Capital and how they guide for 2014 but I’m very confident Apple is doing 99.99% of the heavy capital lifting and once the furnaces and equipment are in place the money received from Apple will be used for sapphire screen build out (raw materials and inventory accumulation). Additionally, the iPhone 6 may sell 80m units in 2014 alone between September and December which indicates that your unit forecast of 40m at $12 per screen for $480m in 2014 appears to be very conservative.
  • 2014 Revenue is being evenly distributed over 2014 @ $175m a quarter there are a few problems
    1. Sapphire production in Mesa did not begin until February and if the iPhone is being released in September GTAT will not have any meaningful deliveries of sapphire screen inventory to Apple’s assembler until June at the earliest but most likely July for production ramp up yet you have revenue split evenly over the four quarters in 2014.
    2. Since deliveries will not begin until June/July at the earliest the $480m projected for 2014 will be achieved mostly over Q3/Q4 (90% or better). This indicates the 2014 exit run rate for Apple’s business will be at least $240m a quarter headed into 2015.
  • 2015 Revenue from all sources is $1.1B but there are a few problems
    1. If September iPhone release date is accurate, 2014 revenue for Apple will exit at least $240m per quarter heading into 2015. $240m per quarter is an annualized amount of $960m versus full year estimate of $1.1B, but $960m for Apple does not account for any unit growth even at the industry growth rate or any additional products such as the iWatch ( 60m units in 2015), iPod, and iPad.
    2. GTAT will be launching several key products in 2015 (Hyperion, HVPE coupled with PVD for LED, Sic and HicZ (Solar) which are not accounted for in the $1.1B revenue estimate for 2015.
    3. Solar Equipment upgrade cycle is expected to resume by 2H 2014 or early 2015 which will add $100m+ in revenue in 2015
    4. Sapphire demand is expected to outstrip supply driven by mobile applications (outside of Apple) coupled by LED’s increasing appetite for sapphire wafers by late 2014 or early 2015. A large sapphire equipment upgrade cycle will hit in 2015 for LED/Sapphire Mobile and this is not factored into the $1.1B estimate for 2015.
    5. GTAT has $658m in backlog split Poly ($301m) and ASF ($355m) and PV ($2m). OCI represents a majority of the Poly backlog and they plan to start the next phase of factory development in Q4 2014 so much of this will be realized in 2015. ASF backlog has been deferred for much of 2014 to address Apple capacity needs so much of this backlog will be realized in 2015 due to LED (sapphire) demand outstripping supply.

My bottom line

Apple deal at a minimum represents well over $1B a year in 2015 even if it’s only on one product because 2014 will only have 6-7 months of revenue months. Apple will sell 200-250m iPhones in 2015 and a large % of those will be sapphire. Apple has relaunched the iPhone 4 in India and they plan to retire the iPhone 5c. The sapphire models should represent 60-70% of 2015 units sold. The iWatch is very likely to feature sapphire laminates and estimated sales unit sales are 60m units for 2015. If Apple adds the iPod (30m annual units) or the iPad (85m) annual units the 2015 revenue number for just Apple significantly exceed $2b.

The rest of GTAT’s core businesses are entering the sweet spot as they head into 2015. GTAT’s backlog of $656m should translate into $400m+ of recognized revenue in 2015. The solar equipment upgrade cycle will restart in 2015 as global demand outstrips current capacity for new installs. Hyperion Ion Implantar technology will be ready for commercial launch in 2014. Sapphire for LED will face severe under supply issue by the start of 2015, and GTAT can grow their business by signing a large sapphire material contract for LED and/or by selling ASF equipment. GTAT will be launching their Silicon Carbide for semi-conductors in 2015 paired with their Hyperion technology, which will undercut the market’s current prices.

I believe Apple deal is worth $2B+ in 2015 and GTAT’s other businesses combined with the revenue backlog that will be recognized in 2015 will yield an additional $1B+ in revenue. I’m expecting total revenue to be at or north of $3B in 2015 and EPS of nearly $3.00.

Contract language on ownership of Equipment

I included some of the key exhibits from the complicated contract between GTAT and Apple (bolded below). Apple is giving $578m to GTAT to acquire equipment, but they are also reimbursing GTAT every 2 weeks for purchases and acquiring exclusive rights to the equipment (furnaces). Apple ultimately will own every bit of capital equipment inside Mesa but GTAT will operate, inspect and maintain the furnaces, fabrication equipment, diamond saws, etc. The $578m Apple gave GTAT is a line of credit and after GTAT spends the first $100m on equipment (furnaces) Apple will pay them back and GTAT will still have $578m available to buy more equipment (furnaces). The amount of furnaces GTAT can buy for Apple is not bound by the $578m dollar limit but it only limited to the amount of space available for equipment inside Mesa. GTAT’s Salem, MA facility is 25,000 square feet and has well over 100 furnaces inside (perhaps you can fact check me!), the Mesa facility is 1,300,000 square feet, which means it could hold over 5,200 furnaces. Once the furnaces have been installed and producing sapphire boules GTAT will need to use the $578m to fund the build out of it’s inventory for Apple’s sapphire displays. The process for building sapphire screens as you know is a long one and will require GTAT to hold significant amounts of inventory both in terms of finished goods but raw materials including aluminum oxide and graphite which will easily tie up $300-500m of GTAT’s cash. The additional money GTAT raised in December was to improve their liquidity to limit’s Apples legal rights to obtain a secured interest in GTAT’s IP should something happen. The lions share of the money will be used to fund GTAT’s LED expansion. Step 1 was the Kyma Technologies PVD exclusive licensing deal and step 2 may be announced as soon as Monday in the form of a large sapphire (LED) materials contract or an acquisition of another Sapphire Equipment supplier. I bolded the key components of the contract in below

STATEMENT OF WORK #1

to

MASTER DEVELOPMENT AND SUPPLY AGREEMENT

# C56-13-02947

 

Apple and GTAT are entering into this SOW and the rest of the Collateral Agreements (as defined below) pursuant to which: (i) Apple will design and build the Mesa Facility that it will lease to GTAT; (ii) GTAT will grow and process sapphire boules into Goods which it will sell to Apple; (iii) Apple will make a prepayment to GTAT to fund the purchase of Furnaces (as defined in Section 1.6 below) and Equipment used to make the Goods and (iv) GTAT will grant Apple a security interest and provide Apple with other protective rights in recognition of Apple’s investment in the Mesa Facility and Apple’s prepayment to GTAT.  In connection with the foregoing, Apple and GTAT, or Apple’s or GTAT’s Related Entities, as applicable, are entering or will enter into the following agreements (collectively, the “Collateral Agreements”):

5.Apple-Owned Equipment.

5.1 GTAT will purchase the Equipment listed in Attachment 7hereto (collectively, “Apple Equipment”) and subject to the terms of this SOW, including Sections 5.2 and 5.4, Apple will purchase such Apple Equipment from GTAT and subsequently the Apple Equipment will be held by GTAT as a bailee for purposes of producing Goods for Apple.

5.2 GTAT will place purchase orders for the Apple Equipment only upon prior written approval by Apple with respect to the quantity, specifications and price of each item of Apple Equipment.  Upon request, GTAT will provide Apple up to three competitive quotes for each item.  Apple reserves the right to contact each vendor directly to validate and/or negotiate the terms of any order (and GTAT agrees to waive any confidentiality restrictions to facilitate such discussions). GTAT will promptly provide documentation of each such order to Apple.  The value of any direct or indirect benefit received by GTAT from any vendor that sells Apple Equipment to GTAT in connection with this SOW must be applied exclusively to reducing the cost of the Apple Equipment listed in Attachment 7.

5.3 GTAT will install and qualify the Apple Equipment at the Mesa Facility in accordance with the timelines set forth in Attachment 7.

5.4With respect to Apple Equipment purchased by GTAT, upon presentation of proof of delivery and proof that GTAT has paid for line items of Apple Equipment, and subject to the terms of this SOW, no more frequently than once every 2 weeks, GTAT may invoice Apple for such line items of Apple Equipment.  Apple will purchase the applicable Apple Equipment by payment to GTAT of the amount set forth in the actual Equipment vendor’s invoice and actually paid by GTAT to the Equipment vendor for the applicable Apple Equipment.  Upon such payment, Apple will become the owner of such Apple Equipment and GTAT hereby agrees to sell, assign, transfer and convey to Apple all of GTAT’s right, title and interest in and to such Apple Equipment.  GTAT hereby agrees that it will, at any time following Apple’s payment to GTAT for Apple Equipment, upon the request of Apple, execute, acknowledge, deliver or file, or cause to be done, executed, acknowledged, delivered or filed, any further acts, deeds, transfers, conveyances or assignments as may be reasonably requested by Apple to transfer, convey or assign to Apple any of the Apple Equipment. Apple will not be responsible for any other costs associated with the Apple Equipment.

5.5 Subject to Section 5.4, Apple owns all Apple Equipment.  The Apple Equipment is and will be held by GTAT as bailee on the terms and conditions set forth in this SOW.  Apple will at all times maintain full and exclusive ownership of and title to the Apple Equipment as bailor.  The term of this bailment arrangement will expire on the earlier of (i) such date as Apple

[***] Portions of this exhibit have been redacted pursuant to a confidential treatment request.  An unredacted version of this exhibit has been filed separately with the Commission

removes all of the Apple Equipment from GTAT’s premises and (ii) such other date on which Apple and GTAT may mutually agree in writing.

5.6 Apple is hereby authorized to file financing statements or other similar documents or notices in any filing office or other location that Apple deems necessary or desirable, including for purposes of confirming its status as bailor, for purposes of giving actual public or constructive notice of the existence of the bailment created under this Agreement or for any other purposes. Apple is also authorized to contact and, if necessary in Apple’s discretion, negotiate with GTAT’s secured lenders to waive or subordinate any such lender’s potential claimed interest in the Apple Equipment to the rights of Apple.

5.7 GTAT will not attempt to sell, lease or loan any of the Apple Equipment, nor assign, transfer, pledge or hypothecate the Apple Equipment in any manner, without the prior written consent of Apple, which Apple may withhold in its sole discretion.  GTAT will not cause or suffer to exist any lien, security interest or encumbrance to be placed on any of the Apple Equipment, except in favor of Apple and any attempt by GTAT to create any such lien, security interest or encumbrance (other than the security interest in favor of Apple) will be void ab initio.  GTAT hereby waives, and subordinates to the prior rights and interests of Apple in the Apple Equipment, in each case, to the maximum extent permitted under applicable law, any and all rights, interests or encumbrances, including, without limitation, any lien that GTAT has or may have or otherwise acquire in the Apple Equipment at any time during the term of this SOW.

5.8 GTAT will use best efforts to ensure that Apple has the benefit of all manufacturer’s warranties and indemnities for the Apple Equipment.

5.9GTAT will apply Apple asset tags provided by Apple to all Apple Equipment in accordance with the requirements, if any, provided by Apple.  Under no circumstances will GTAT move Apple Equipment from the location designated by Apple, without Apple’s prior written consent, or deny Apple, its agents or contractors access to the Equipment.

5.10 Immediately upon Apple’s request or termination of this SOW, GTAT will deliver the Apple Equipment to Apple Ex Works (GTAT’s facility), provided Apple has paid for any Apple Equipment purchased by GTAT.  GTAT agrees to return the Apple Equipment to Apple in the same condition as it was provided to GTAT, except for normal wear and tear.  GTAT will be responsible for physical loss of or damage to the Apple Equipment while in the possession or control of GTAT.

5.11GTAT agrees to use Apple Equipment solely for Apple’s benefit.  GTAT will not use Apple Equipment for any other purpose or permit a third party to use the Apple Equipment except as set forth in this SOW.

5.12 The Apple Equipment provided by Apple is provided to GTAT “as is” and Apple disclaims all warranties, express or implied, including the implied warranties of merchantability and fitness for a particular purpose.

5.13 GTAT is solely responsible for installing, testing, and maintaining Apple Equipment in its control in good working condition in compliance with applicable manufacturing specifications, for purchasing and maintaining spare parts to repair such Apple Equipment with a minimum of downtime, and for any risk of loss in connection with the Apple Equipment.

[***] Portions of this exhibit have been redacted pursuant to a confidential treatment request.  An unredacted version of this exhibit has been filed separately with the Commission


5.14 Apple reserves the right to inspect any Apple Equipment in GTAT’s control at any time.  Apple reserves all its rights and remedies under MDSA, this SOW, the Uniform Commercial Code and all other applicable laws, including, but not limited to, the right to lawfully enter the premises of GTAT and take possession as bailor of any and all Apple Equipment at any time without breach of the peace.

8.1GTAT will offer to sell additional Furnaces and Similar Furnaces to Apple at the [***]:

Upon Apple’s request, GTAT promptly will provide to Apple invoices and other documentation supporting such actual costs.  [***].

8.2 [***].

8.3Apple’s purchase of additional Furnaces and Similar Furnaces will be made under the terms of Apple’s Master Equipment Purchase Agreement (the “MEPA”).  Apple and GTAT will negotiate in good faith to execute the MEPA as soon as possible following the Effective Date, but in any event prior to the second Milestone Payment made under the Prepayment Agreement.

Norges Bank continued to up their stake in GTAT after adding 400,000 more shares in the period ending in Q4 2013. Norges Bank is one of GTAT’s largest institutional investors with nearly 7.3M shares shares long and strong as of 12/31/13.

File details can be found at Edgar.com

 

Matt Margolis – 2/19/14

Gigaom reported today that Canonical (the company behind the Ubantu Edge crowd funding effort) CEO Mark Shuttleworth made one very interesting comment related to Apple and Sapphire displays.

“Apple just snapped up the entire 3-year supply of the same sapphire display we wanted for the Edge”

From the GTAT sapphire display side could it be possible the Canonical had a deal in place with GTAT to provide sapphire displays for the Ubantu Edge in 2014?  Did Shutterworth’s comments infer GTAT is locked up with Apple and Apple only for sapphire displays for 3 years?  Or did he insinuate that GTAT and Apple have larger plans to expand the sapphire furnaces inside Mesa which will essentially tie up GTAT for 3 years?

One thing that does seem certain is Ubantu’s mobile handsets will most likely make their way into consumer’s hands in 2014.  The company did announce that BQ Meizu will be manufacturing Ubantu’s 2014 mobile phone.  The Ubantu edge still plans to feature the phone that can be used as desktop computer if it’s plugged into a monitor and keyboard.  Shutterworth also inferred that Apple and Google are also looking into making phone’s more flexible in this regard as well.  Courtesy of Gigaom

Shuttleworth is convinced that the two big beasts, Google and Apple, also have their eyes on a similar prize. He pointed out that, when Google sold Motorola Mobility to Lenovo, it hung onto the division that’s developing a concept called Project Ara, in which a cellular phone module – the core PC, if you will — can be plugged into a variety of other modules in order to build different form factors. And as for Apple, he highlighted how the company is now keenly describing its iPhone chipset as desktop-class.

Matt Margolis -2/18/14

Kyma Technologies Background: Kyma Technologies was founded in 1998 and is located in Raleigh, NC.  Annual revenues are estimated at approximately $3m per year and they have 17 employees.   Kyma Technologies has managed to survive over the last 16 years through various venture capitalists funds raisers as well as several relatively small contracts awarded to them.  In 2003, Kyma received $1.4M from GE Technology Finance in the form of a line of credit to build out their gallium nitride substrates business.  Later in 2003, Kyma received $4m of Series B (venture capitalist money), which included support from Digital Power Capital and Siemens Venture Capital.  In 2011, Kyma landed a deal to will work with Veeco Instruments on a next generation LED manufacturing project funded by a $4 million award from the U.S. Department of Energy.   Less than 6 months ago in October, Kyma received an additional $3.2M of venture capitalist funding.

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This morning GTAT announced they had acquired exclusive rights from Kyma Technologies, Inc. for its plasma vapor deposition (PVD) process technology and know-how.  Based on the reading the announcement I believe GT will be paying Kyma a royalty fee based on units sold or a similar methodology.  I thought it would be interesting to compare the press releases from both companies GTAT and Kyma to see if there are any differences and sure enough there are!  Announcement from Kyma & Announcement from GTAT.

Analysis of opening statement: GTAT makes it very clear that they have acquired “exclusive rights” for Kyma’s plasma vapor deposition (PVD) process technology and “know-how”.    It sounds like GTAT not only gets the rights to the PVD system but also the IP (intellectual property) behind the technology.  Based on this language it appears GT will be paying Kyma an ongoing royalty fee for each PVD tool sold.  Kyma on the other hand only indicates that it has “licensed” the technology but does not state that it is an exclusive deal.

Opening statement from GTAT’s announcement is below:

GT Advanced Technologies (Nasdaq:GTAT) today announced that it has acquired exclusive rights from Kyma Technologies, Inc. for its plasma vapor deposition (PVD) process technology and know-how. The PVD of nano-columns (PVDNC™) technology developed by Kyma deposits a high-quality growth initiation layer of aluminum nitride (AlN) on wafers prior to gallium nitride (GaN) deposition. GT plans to commercialize a PVD tool that will complement its hydride vapor phase epitaxy (HVPE) system, which is currently in development. The combined offering will provide LED manufacturers with a higher throughput, lower cost solution to produce gallium nitride (GaN) templates on patterned or planar wafers. GT already has a high volume prototype tool incorporating Kyma’s PVDNC technology and expects to offer a production-ready tool in the first half of 2015.

Opening statement from Kyma is below:

Kyma Technologies, Inc., a leading supplier of advanced materials solutions that promote safety and energy efficiency, announced today that it has licensed its nitride semiconductor plasma vapor deposition of nanocolumns (PVDNC™) technology to GT Advanced Technologies.

Kyma has a rich history of advancing PVDNC™ technology to create a cost-effective nanocolumnar crystalline AlN nucleation layer on flat sapphire and silicon substrates as well as on patterned sapphire substrates. The nanocolumnar AlN presents an excellent surface for subsequent nucleation and growth of GaN buffer layers which are important for GaN LEDs and power electronics. Kyma has offered PVDNC™ AlN templates to the market for many years and also employs such templates as a starting material for growing bulk and thin film crystalline GaN by hydride vapor phase epitaxy (HVPE).

Analysis of closing statement: GTAT states they manufacturers will be able to “increase the throughput of their existing LED production lines and lower the capital expenditures…” while Kyma says that the (PVDNC) technology has the “potential to double the throughput of today’s MOCVD tools.”  It’s very interesting that GTAT went light on the technology benefits but Kyma wanted to make sure everyone knew this could double the throughput.

Closing paragraph from GTAT is below:

Today, GaN deposition on epi wafers is done in slower and more expensive MOCVD tools. By utilizing the combined PVD and HVPE processes to create low cost GaN templates, manufacturers will be able to increase the throughput of their existing LED production lines and lower their capital expenditures because they will need fewer MOCVD tools.

Closing paragraph from Kyma is below:

PVDNC™ technology is an excellent complement to GT’s recently announced move into HVPE equipment. The combination of PVDNC™ AlN nucleation layers and HVPE GaN buffer layers has the potential to double the throughput of today’s MOCVD tools and to improve the performance and yield of devices. The result is higher throughput of improved devices made at lower fabrication cost, a triple win for the customer.

One more omission from the GTAT announcement completely that was in Kyma’s announcement was but “also into the nascent market for nitride based power electronics”.  GTAT only mentions this deal in relation to LED but it may be one of the “secret” weapons for Power Electronics which is one of the 4 business swim lanes.  Slides pulled from the recent corporate overview support my theory above that this deal with Kyma is for LED as well as Power Electronics related to Silicon Carbide Systems as well as end market Power Systems for Electric Vehicles.

2014 Slide 4

2014 Slide 4

2014 Slide 4

2014 Slide 4

The Kyma100 HVPE Specs are below

Kyma100 HVPE System Specs

Kyma100 HVPE System Specs

This is a interesting fact sheet from Kyma and their focus on Support of Wide Bandgap Semiconductor Power Electronics including  Silicon Carbide (SiC).

Screenshot - 2_18_2014 , 9_14_33 PM

My takeaways:

  • GTAT acquired exclusive rights for Kyma’s PVD Tool and IP (Intellectual Property) associated with it
  • PVD tool can double the throughput of today’s MOCVD tools
  • GT plans to commercialize this tool beginning in 2015 partnered with their HVPE system in development for LED
  • PVD tool will also benefit SiC and Nitride Based Power Electronics (Power Systems for Electric Vehicles)

Matt Margolis – 2/17/14

I spoke with local Mesa resident Brad W., who was kind enough to send some pictures along as well as to discuss what he has witnessed first hand outside of Apple’s sapphire plant in Mesa, AZ over the last several weeks.  Brad paid a visit the Mesa plant just after dusk on February 15th and he was able able to get a nice view of the inside and outside of the facility.  At the time of his visit, nearly all of the overhead doors were open and the overhead lights were on he was able to catch a illuminated view of the inside and he simply said it’s “looking full”.  The outside of the building was illuminated by exterior building lights as well as generator powered lighting to continue ongoing construction outside of the facility.  Unfortunately, his camera did not take night pictures very well so I sent him back on Sunday February 16th to take some updated pictures for me.  He described the eastern exposure of the building as spanning “at least 1/2 mile to 3/4 of a mile in length”, the building measured “about 45 feet tall” and the northern exposure of the building spanned “a good 1/4 of a mile in length”.   A few weeks ago during a previous visit he had seen what he thought to be a draining system on north side being installed, but just a few weeks later that area was completely covered over with dirt.  It was reported last week by Bloomberg that crews busy were installing new transmission lines to feed electricity to the plant last month.  Bloomberg also pointed out that new solar and geothermal projects are being built because of the project.  Previous media reports suggest the Mesa Sapphire plant will begin producing sapphire as soon as this month.  The recent reports and eye witness observations suggest Apple has been cranking around the clock to get work completed inside and outside of the facility.

Below is the aerial image of the Mesa Facility with Signal Butte Road running east away from the plant and Elliot Road running south towards the plant.  This aerial picture was taken prior to Apple’s purchase of the building from First Solar.

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Below are aerial shots of the Mesa Plant after First Solar completed the building versus the before pictures, these pictures were taken prior to Apple’s purchase of the building from First Solar.

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Brad provided several pictures of the building, which provide a glimpse of just how massive the 1.3 million square foot plant really is. Below is the eastern exposure that spans 1/2 mile to 3/4 of a mile along with the front entrance.

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Below is the northern exposure which spans 1/4 mile including an overhead door which.  The extensive above ground power lines shown in the pictures below are usually not seen in this area and they could be related to the new power substation that Mesa officials agreed to construct.  Most power lines in this area are buried underground and out of sight.

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The last picture is the west side of plant.  There are two giant water tanks with a massive crane soaring in the air above them.  To the left of the water tanks is a smaller crane that could be constructing the cooling system.  Further to the left is a massive dirt file that is approximately 45 feet high and over 200 feet long.  If you scroll back up to the before and after pictures of the Mesa facility you will realize that water tanks and the apparent cooling system have all been added to the building by Apple since acquiring it from First Solar.

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