by Matt Margolis
Last week various Apple blog sites brought to light KGI Securities analyst Ming Chi Kuo report, who is known for supplying “more” reliable information on Apple’s product lineup compared to other Apple analysts. The KGI report also included Apple’s 2014 product roadmap which forecasts the release of Apple’s all-new designed iPhone 6 featuring 2 sizes and 2 separate release dates. Kuo is anticipating the 4.7″ iPhone 6 to be released in September and the 5.5″ iPhone 6 to be released in December. I’m going to defer comment on the other products listed on the launch and focus squarely on sapphire cover screens and the iPhone 6.
Kuo on Sapphire Cover Screens (courtesy of Yahoo)
The analyst claims that Apple will switch from Gorilla Glass to sapphire crystal to cover the iPhone’s displays, but possibly only on the high-end models with 64GB of memory. This is due to supply constraints, Kuo said, though ultimately Apple will supposedly move all of its iPhone models to sapphire.
Part of the reason for the shift to sapphire, Kuo said, is that Touch ID may soon be embedded in iPhone display panels rather than home buttons, and sapphire is needed to ensure fingerprint reading accuracy.
Kuo on Sapphire Cover Screens (courtesy of 9to5Mac)
Other iPhone 6 predictions state that only the 64 GB version of the 5.5-inch model will include a sapphire Touch ID cover due to supply issues.
Kuo’s Sapphire Takeaway
Kuo believes sapphire cover screens will only be used on the high-end 64 GB version of the 5.5 inch iPhone 6 model due to supply constraints. According to CNET, Kuo is estimate the more popular 4.7″ iPhone 6 will sell an estimated 60 million units in 2014. If the 4.7″ iPhone 6 is estimated to sell 60 million units the December The estimated release date of December suggests that he is only forecasting 8 to 10 million units sold of the 5.5″ iPhone 6. If sapphire is going to be only used on the 64GB version of the 5.5″ it would translate into maybe 2-3 million iPhones sold with sapphire screens in 2014. iWatch sales are expected to be up to 10 million units in 2014 and those are expected to feature a sapphire display. It takes approximately 3-4 iWatch screens to make 1 sapphire cover screen, if you convert 10 million iWatches to cover screens it would be 2-3 million sapphire cover screens. Kuo is estimated that GT Advanced Technologies can only supply Apple the equivalent of 4 to 6 million sapphire cover screens worth of material in 2014.
Does Kuo’s sapphire cover screen estimates stack up? Also, how does information like “supply restraints” become public knowledge since Apple and GT Advanced Technologies are performing the biggest cover up since the US governments close lips regarding Area 51.
Kuo’s Sapphire Estimate does not Stack up to GTAT’s 2014 Guidance
GT’s CEO Tom Gutierrez along with Apple’s CEO Tim Cook have both been grilled by various news agencies and stock analysts and neither one has said a word regarding the specifics of the project. GT gave out financial projections during their Q4 2013 conference call including expectations that 15% of total revenue will occur in the 2nd half of 2014 and sapphire will account for more than 80% of total revenue in 2014. If you take Kuo’s 6 million dollar sapphire cover screen equivalent and multiply it by $10 or even $20 per screen it only comes out to $60 to $120m in revenue, to put this simply Kuo’s sapphire prediction just doesn’t add up. GT’s guidance is below:
We expect that our revenue and profitability will be very back end loaded this year given that our sapphire materials business will be in ramp up mode. As we indicated on our last call, we expect revenues in 2014 to range from $600 million to $800 million, with approximately 15% of the total revenues occurring in the first half of the year. We expect our sapphire segment to account for more than 80% of total revenue in 2014. The sapphire segment includes the company’s ASF equipment and materials businesses in the LED, industrial and consumer electronics markets.
Furnace Deliveries are Estimated at over 1,500 through 3/10/14
Kuo is estimating that the equivalent of 6 million sapphire cover screens, just for kicks I wanted to know how many active ASF furnaces it would take to produce 6 million sapphire cover screens. The answer is roughly 50 ASF furnaces. GT’s Sapphire Production and R&D facility in Salem, MA has over 80 ASF furnaces inside its 50,000 square foot walls. The Mesa, AZ sapphire facility measures 1.3 million square feet or the equivalent of 56 of GT’s Salem facilities. Needless to say Apple is not going to waste over $2b in cash to produce the equivalent of 6 million cover screens that could have been grown from GT’s Sapphire Production and R&D facility in Salem, MA. Yet again, to put it simply Kuo’s sapphire prediction does not add up.
Since I love beating up others with facts, I want it to be known that the sapphire plant in Mesa went live with 140 tools (furnaces) on January 10th of 2014 within Module 1 of the Mesa sapphire plant, which measures just 12,500 square feet according to building permit records. I also want it to be known that by mid February GT had GT applied for a building permit to make changes to the medium voltage fuse to accommodate the tool load. My point here is GT had already ramped up the Mesa sapphire plant production by the middle of February and given GT’s track record they could have all 1,600 furnaces online and growing sapphire by of March 2014 without a problem. GT could supply 70 million iPhone 6 cover screens in 4 months or less with 1,600 furnaces active and growing sapphire. Even if only 800 furnaces were active GT could still deliver enough sapphire cover screens to meet Kuo’s total estimated iPhone 6 sales in 2014. Yet again, to put it simply Kuo’s sapphire prediction does not add up.
Larger Form Factor Equals More Scratched, Cracked and Broken Gorilla Glass Screens on Apple’s Devices
Perhaps the biggest issue being ignored by Kuo is why on earth would Apple introduce larger iPhones without changing the cover glass material from Gorilla Glass to sapphire crystal? One in four Apple iPhone owners are already walking around with a cracked or shattered screen and increasing the size of the display will only lead to more breaking and shattering of iPhone 6 displays made out of Gorilla Glass. Perhaps a comment from GT’s CEO Tom Gutierrez on this topic might be a little more convincing!
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. (Seeking Alpha GTAT Q4 2012 Conference Call)
CEO Tom Gutierrez made is very clear in the statement above that the larger the form factor (size of the phone) the more prone (Gorilla Glass) will be to breaking, cracking and scratching. Gutierrez also believes that the focus on larger screens will only increase GT’s market opportunity. Kuo has completely disregarded customer satisfaction or lack there of, that would result, if Apple introduced larger screens with Gorilla Glass that were even more susceptible to breaking, cracking and scratching. Yet again, to put it simply Kuo’s sapphire prediction does not add up.
I’ve made it very clear that Kuo’s sapphire prediction that sapphire covers will only be placed on the Apple’s 5.5″ 64 GB iPhone 6 simply does not add up. Not only will Apple cover the 4.7″ and 5.5″ iPhone 6 with sapphire alongside the iWatch but Apple may go ahead and cover the iPad and iPod as well. Sapphire yield is not a risk to Apple’s 2014 product lineup but might actually be a welcomed boon for Apple’s customers and shareholders.
I’ll leave you with one final comment from GT Advanced that dates back to May 2012, just 3 months before Apple and GT Advanced Technologies officially signed their confidentiality agreement. GT and Apple clearly believe in GT’s ability to quickly scale a sapphire operations and deliver quality, low-cost sapphire in unprecedented volumes.
We believe that GT is the only sapphire equipment company capable of quickly scaling to support the quick ramp of quality, cost and sizable volumes that the mobile device market could require as sapphire gains wider market adoption. (GT Advanced Technology Q1 2012 Conference Call courtesy of Seeking Alpha)
Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours