Apple “Exclusivity” with GTAT is just Pure Sapphire?

Posted: March 9, 2014 by mattmargolis24 in Apple Investor Information, GTAT Investor Information, My Publications
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Apple “Exclusivity” with GTAT is just Pure Sapphire? – by Matt Margolis

I spend a lot of time just thinking and digesting information while attempting to figure out the likely outcome.  One of my reader’s has been filling my email box with questions and items to follow-up on.   I want to thank George because he may have helped me connect some significant dots to determine what is actually “exclusive” in GTAT’s deal Apple.  I have been under the impression that GT can only use full sapphire cover screens for the smaller devices like the iPhone, iPod and thought it would be out of scope for the iPad and MacBook.  But you know what?  I think I might be wrong.  It all comes down to form factor.  What is form factor?

Form factor refers to a mobile phone’s size, shape, and style, as well as the layout and position of the phone’s major components.  As always, I dig into my comment archive and pull out a few rabbits to digest from GT’s CEO and CFO dating back to Q4 2012.

Tom Gutierrez GTAT CEO Q4 2012

Well, quite honestly, the problem doesn’t change with form factor. The screens, the bigger they’ve gotten, the more prone to breaking and cracking and scratching they are. But honestly, because the larger form factors you stick in your pocket, you don’t hold out. And so our view is the form factor doesn’t change anything. The form factors that we know of, that are being considered by the OEMs that we’re talking to, are inside the range that can be accessed by the technology, both on the fabrication side that’s being developed, as well as our growth technologies. If — one thing probably, as they get bigger, our growth technology probably has preferential treatment because of the form factor of our boules relative to some of the other technologies that are out there. So we’re comfortable. Nothing that’s happening in the marketplace is diminishing our opportunity. In fact, it’s just the opposite.

Richard Gaynor GTAT CFO Q4 2012

Out of the benefit of the technology that we have is that it can actually change the form factor of the boules that you produce. And so you can actually customize the size of the boule to the application you’re trying to build for.

I feel like I have a very good understanding of sapphire cover screen process and how they are produced but I did not realize GT can “change the form factor of the boules that you can produce”.   So if Apple wants a new sapphire screen that will measure 4″ by 3′ that is roughly a 5″ screen GT has the ability to “customize the size of the boule to the application you’re trying to build for”.  This is significant, very significant.  I have been picturing a large boule that needs to but carved a like Halloween pumpkin in order to produce sapphire screens.  Instead GT could conceivably grow a large square of sapphire measuring just over 4″ by 3″ in the exact dimensions Apple needs and they would just need cut them with the diamond wire saw to the desired thinness and then they go through the rest of the finishing process to make a screen.  The amount of sapphire that is wasted (unusable) from a grown boule appears to be very minimal.  If GT can grow boules very closely to the desired shape and dimensions it’s possible that less than 5-10% of the boule is wasted using GT’s technology.

Large Boule

My takeaway: GT can produce far more sapphire cover screens per furnace because there is limited waste.  Dividing more yield over the same base case also reduces your unit cost to make a sapphire screen.

Motorola MP6000

GT announced a deal with Motorola on May 2, 2013 to produce sapphire glass for their MP6000 Multi-Plane Scanner.    I found a youtube video of the scanner in action and it was posted on February 11, 2013 almost 3 months before GT announced the deal.  The date of the video tells me that GT was making these long before the announcement of the actual deal, but what’s even more important is the size of the sapphire glass used in the scanner.    From the tech specifications below the sapphire glass on the scanner measures 5″ by 4″ which is a whopping 7.5″ screen size.   I have been thinking that full sapphire cover screens would only be feasible for smaller devices, but this whole form factor technology has thrown me for a loop.

Screenshot - 3_9_2014 , 12_37_30 PMScreenshot - 3_9_2014 , 12_38_02 PM

Obscure Analyst Takeaway:

If Apple’s Mesa, AZ sapphire plant has enough furnaces to cover all of the Apple iDevices in full sapphire cover screens they will do it and they will do it in 2014.  Yes 2014!  Apple’s iWatch will use sapphire laminates because it needs the flexibility feature.   I’ve been firmly in the camp, that sapphire laminates would only be used down the road for Apple’s iPad and MacBook.  My reasoning for this stance was because Hyperion, will not be ready in 2014 to make enough sapphire laminate screens for Apple’s iPad and MacBook in 2014.  However, now that I know GT can make pure sapphire screens to nearly any size with little waste using their form factor technology.  It really makes me wonder if sapphire laminates will only be used in Apple’s iWatch.  Perhaps Apple owns exclusive rights to pure sapphire for the performance upgrade it offers over reinforced glass?  It’s very interesting GT’s CEO would not elaborate on the benefits of sapphire during the conference call because they are not in the public domain.  The performance upgrades that pure sapphire offers over reinforced glass must be significant and key to Apple’s future innovation.  If these benefits are so significant and not in the public domain today it makes sense why Apple made this HUGE investment in sapphire.

I also believe GT and Apple went splits on the Mesa furnaces with reach buying roughly 2,000 furnaces.   GT has given us their side of the equation after deploying $180 in PPE and announcing that $500-600m would be spent in capital expenditures in 2014 which is ample money to support 2,000 furnaces at $300k each.  Additionally, the language in the contract is ambiguous enough to support my theory and Apple’s $10.5B capital budget in 2014 can easily cover $600m in furnaces.  I also keep going back to comments made from Mesa officials that Apple (not GT) will be investing $1.5B of capital into the plant.  The primary focus that we know of is this plant will grow sapphire.  It only makes sense Apple is using a significant amount of the $1.5B capital investment to buy furnaces and the agreement does mention “Apple  owned” equipment that GT “will operate”.

I’ll leave you with a few more comments from Tom Gutierrez, including one from the Q4 2013 conference call just 2 weeks ago.  Is it possible Tom is agreeing with me?  I mean he does say assuming Hyperion will be heavily involved in Mesa, AZ is not “necessarily a good connection”.  Tom’s comment 2 weeks ago is also consistent with his comments made during the Q4 2012 conference call.  During the Q4 2012 call he stated current fabrication techniques, excluding Hyperion, will support the adoption of sapphire in several applications including smartphones (Apple) and point-of-sale systems (Motorola MP6000)”.  Lastly, Tom also points out that sapphire laminates do not have all the features of full sapphire; Sapphire laminates are expected to have some, but not all, of the attributes of a pure sapphire solution and are expected to have a cost structure that rivals current cover glass products on the market today”.

Tom Gutierrez GTAT CEO Q4 2013

I think you are making a connection there between Hyperion and the Arizona project. And that’s not necessarily a good connection. Hyperion has an incredible number of applications outside of that area and the growth in Hyperion is dominated by those other applications in our projection through 2016.

Tom Gutierrez GTAT CEO Q4 2012

Hyperion could also have potential application in our sapphire business. Given the feedback that we’ve received from OEMs and early adopters, we believe that current sapphire fabrication techniques, excluding Hyperion, will support the adoption of sapphire in several applications including smartphones and point-of-sale systems. However, we also believe that there could be an incremental future market opportunity using Hyperion to create lower-cost sapphire laminates for broader mobile phone and aftermarket applications. Sapphire laminates are expected to have some, but not all, of the attributes of a pure sapphire solution and are expected to have a cost structure that rivals current cover glass products on the market today.

So what does all this mean?  I’m under the impression now that the “exclusivity” of the Apple deal is specifically for full sapphire cover screens, which will come with the “performance upgrades” that Apple wants and GT can deliver and no one can talk about.  The sapphire laminate market might be the next place GT is going.  If GT can offer a new product that is like reinforced glass, at the same price with better scratch resistance, GT might not only steal someone’s Turkey, but also the sides and dessert that came with the Thanksgiving meal.  If my argument does not sound convincing enough, you should read the comments directly GT on this topic.

Tom Guiterrez GTAT CEO Q4 2012

On the sapphire cover glass, I mean, you could imagine being able to create a laminate. Say, a 30- to 40-micron laminate that you can essentially bond to a substrate glass or polycarbonate or something like that, so it’s more of a broader — it’s a broader application than what we would consider to be the true smartphone area, where a pure sapphire solution is more likely, okay? And so it’s really expanding into the lower part of the market that wouldn’t normally consider using a sapphire because the technique that we’re developing would get you a sapphire surface on a polycarbonate or glass substrate. Not as good as a pure thing, but quite good compared to current solutions in terms of scratch resistance. And so that’s the objective, is to create a — to build another end to the business other than the high-end smartphone or the smartphone — the broader smartphone part of the marketplace.

Tom Guiterrez GTAT CEO Q3 2013

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

~Obscure Analyst 3/9/14

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

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Comments
  1. Varun says:

    There is one line TG said in Q3 2013 CC that has me wondering how exclusive is the deal with Apple?
    Q: why give up the upside of some higher-margin tool sales as the sapphire market is expanding into the mobile application market, given that this deal now gives exclusivity to Apple?
    A: Well, for — you’re making some presumptions about what that exclusivity means, and I won’t comment on that…There’s many opportunities for sapphire capital tools, beyond the agreement that we have reached. And so you shouldn’t presume that we have given up all opportunities for sapphire tools.

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