Pegatron Reportedly Starting iPhone 6 Production in Q2 – So What?

Posted: March 19, 2014 by mattmargolis24 in Apple Investor Information, GTAT Investor Information, My Publications
Tags: , , , , ,

Pegatron Reportedly Starting iPhone 6 Production in Q2 – So What? – by Matt Margolis

Latest reports surfacing everywhere including 9to5mac are suggesting that Pegatron (one of Apple’s 2 main manufacturers, Foxconn the other) is set to begin mass production of the device in Q2 2014.  The link to the Chinese new site is here, but last time I checked I barely made it through my mandatory language course requirement (Spanish) in college, so translating this one for accuracy is out of the question.

In comparison the production ramp up of Apple’s iPhone occurred around August 1, 2013 ahead of a September 10th debut.  Last year, Apple had significant yield issues with certain components and the availability of it’s iPhone 5s and iPhone 5c, was far from Apple-licious to say the least.

So what does a Q2 build ramp up do for release date and GT sapphire sales?

Well first off, Apple has diversified it’s manufacturing strategy by bringing in Pegatron to assist Foxconn with the assembly of the upcoming iPhone(s).  Last year, Apple’s manufacturers ramped up production approximately 45 days before product release.  It is has been widely speculated that the iPhone 6 may represent the biggest iPhone launch in Apple’s history.  One reason for the mega release, is that millions of people (including myself) skipped upgrading my iPhone 4s for the iPhone 5s, because it just wasn’t worth it.  The other major reason is because of the larger phone sizes that are widely anticipated.  I expect some fans of Samsung’s large devices to head over to Apple to enjoy their larger, sexy, new line of iPhones (no Justin Timerblake reference intended).

I’m going to assume Apple’s manufacturing partners only need 45 days to assemble enough devices ahead of the iPhone release.  I’m also going to follow the lead of Eric Virey from Yole Développement and assume that GT will sell sapphire bricks to one of Apple’s manufacturing facilities for slicing, polishing and finishing of the sapphire screens. I will assume that the process will take approximately 30 days for the dedicated plant to take sapphire bricks and convert them into sapphire phone screens.  So what does the data tell me?

Image

Based on the Q2 ramp up it looks like GT will need to sends sapphire bricks over beginning in March, April or May in order to allow for Pegatron to begin their assembly ramp up of the device by 4/1, 5/1 or 6/1.  What is even more interesting is a Q2 manufacturing ramp up would target the iPhone 6 release date between 5/16 and 7/16, if you split the difference the date is 6/15.  The 6/15 date is even more interesting, because Apple’s 2014 WWDC is already scheduled for June 10 to June 14.  Planning the release during the WWDC would certainly create some buzz and fanfare for Apple.  A June release would mark the first iPhone release since 2007 and if the iPhone 6 is going to be epic, I say why not? Go for it Apple! If you are wondering, a June iPhone would release would add approximately 30-40m more sapphire unit sales to my current 2014 estimates.

I know what you are thinking, how is it even possible GT could be ready by 3/1, 4/1 or 5/1 to ship sapphire bricks to Apple facility for processing to create sapphire screens.  The secret answer might come from what GT was doing back in September 2013, from their Salem, MA crystal growth facility.  Myself and others who follow the company closely, noticed GT was hiring 2nd and 3rd shift workers for their sapphire crystal area.  The Apple deal was still a few months away at that time and GT was forecasting to hit their 2013 year end revenue and earnings numbers.  As it turned out, 45 days later GT announced the sapphire deal with Apple and they proceeded to bomb their Q3 and Q4 revenue and earnings’ forecasts.  Overall in total, GT missed their 2013 revenue forecast by almost 50%.  So why did GT hire all those 2nd and 3rd shift workers if they didn’t generate any revenue for the business in Q4 2013?

I believe GT has been making sapphire boules using Apple’s form factor since last summer or even earlier from their Salem, MA facilty.  I also believe GT has been readying the deployment of their capital equipment needed for Mesa almost a year in advance.  The secret to GT meeting Apple’s sapphire screen needs by June 2014 could be boosted by the fact that GT has been prepping and readying for Apple’s iPhone 6 launch for the last 2 years.  GT’s CEO Tom Gutierrez, as back as far as May 2012 was already publicly commenting on what would need to be done to cover Apple’s phones in pure sapphire.

TG May 2012 Q1 CC

But if we’re working with one of the majors that is going to drive millions of phones, then we are probably talking anywhere from 6 to 12 months to build the supply chain to do it.

November 2012, TG speaks about producing a thinner sapphire wafer, which would yield cost savings and produce more screens per sapphire brick.  He also stresses the advantage of a sapphire brick and the fact that it; requires fewer fabrication steps for cover screens, lower surface finishing requirements and allows for much faster grinding and polishing with fewer material loss (much high screen yield per boule than previous methods).  GT also brought up the optimization (optimized boule size, cycle time and lower material cost) of their ASF furnaces. The ASF furnace advancements were completed in Q4 2013, ahead of the Mesa sapphire plant ramp up.  Also in November 2012, TG informed investors that GT would start laying down assets in the second half of 2013 and that a high volume phone with sapphire likely wouldn’t be seen until 2014.  GT deployed $180M of PPE in Q4 2013 and now Apple is widely expected to release high volume phones with sapphire screens on them in 2014.  Some of TG’s comments from November 2012 are below and I believe his responses give investors answers to a lot of the questions being raised today that can’t be answered by TG!

TG November 2012 Q3 CC

To the extent that a thinner sapphire wafer is possible, which is likely, given sapphire’s superior strength, this cost differential will be at least 30%. This does not reflect the other significant cost reductions that we believe can be achieved as we further optimize the ASF growth process for this application through adjustments, such as optimized boule size, shorter cycle times and lower cost consumables.

With regard to fabrication, we estimate that the cost to fabricate sapphire from a brick to a screen is at least 40% less expensive than from a core to an LED wafer. This results largely from the fewer fabrication steps required for cover screen processing, as well as the lower surface finishing requirements, which allow for much faster grinding and polishing, as well as less material loss.

And finally, several new technologies are being brought to market that will further drive cost reductions and optimizations. One such example is Meyer Burger’s recently introduced bricking wire saw, which is expected to make the harvesting of bricks from a sapphire boule economically feasible and significantly less expensive than the current rotary blade saw processes in use.

We’ll start laying down assets second half of next year, but you won’t see a high-volume phone with sapphire on it, I don’t think, until 2014 ($180m PPE Deployed in Q4 2013?)

It’s amazing what you can learn by looking at the past and then realizing where you are in the present and where you will be in the future.

My review of the past indicates that we have not arrived at the future. The present is a lot grander than anyone can understand today.

In the future we will learn what we missed from the past. We will learn that clues from the past were absolutely a sign of things to come.

~The Obscure Analyst 2/28/14

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

Tweet</a

Advertisements
Comments
  1. Awisecpa says:

    Excellent work again Matt! You are a great combination of analyst and sleuth!

    Like

  2. Josh says:

    Hello Matt, I have been following GTAT since the 11-12 region and have only recently discovered your blog. I wanted to let you know how helpful and insightful you are as an analyst and a writer. Your enthusiasm regarding GTAT allows me sleep much easier. Thanks again this should be a fun next couple quarters.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s