by Matt Margolis
After the market closed today GT Advanced announced that the company would be making its next generation 165 kg, which is an upgrade from the 115kg furnace. GT also announced the company has furnaces that can produce sapphire boules that are “significantly greater than 165kg and that the company intends to keep this more advanced ASF system captive for some extended period of time. What is the big secret about the advanced ASF system and how big is it?
In my March 29, 2014 post that was focused on the iPhone 6 margin I indicated that GT was using a 200kg + furnace to grow sapphire inside the Mesa, AZ facility.
GT in 2012 was pricing in the cost of sapphire screens using the previous generation ASF furnaces (115 KG) as well as the previous generation diamond wire saw from Meyers Burger. Additionally, the raw materials supply chain for Alumina had not been established. If we fast forward to March 2014, GT is now using a (200 KG+) furnace which represents an improved yield of 74% from the ASF 115 KG Furnace. GT will likely be using the next generation Meyer Burgers diamond wire cutting saws that will substantially reduce kerf loss and improve the fabrication costs to make a sapphire screen.
Some of you might be wondering how I would know the minimum size boule that would be produced by the “advanced ASF system”. My source of information of the company’s ASF furnace plans is based on GT’s comments to LEDinside.com prior to announcing the Apple contract. GT was responding to LEDinside’s questions regarding ASF demands driven by Non-LED applications.
GTAT predicts that sapphire substrate will be one of the growing markets in 2014. ASF currently produces 115 kg of the world’s sapphire. In regards to demand for LED and optical application, production capacity is already enough but sapphire substrate in non-LED applications including smartphone camera lens caps and home button covers, as well as the possible usage in smartphone displays by the end of 2014, demand for sapphire substrate is expected to rapidly increase. The company plans to increase sapphire furnace production to 200 kg. GTAT emphasized equipment purchased by clients can be directly upgraded, and thus reduce costs for clients as they do not need to purchase new equipments.
I pulled up a 2011 GT presentation on Sapphire and LED and I found it interesting that GT was growing 100kg and a 130kg sapphire boule in Salem, MA but was only selling ASF 115kg furnaces to customers.
GT delivered a few messages that are resonating clearly withe me based on today’s announcement.
#1 GTAT is using ASF furnaces that are capable of producing 200 to 230kg boules inside the Mesa, AZ facility, which would represent a “significant” ~ 40% increase over the ASF 165.
2013 YE Report
#2) GTAT has completed the ramp up of the Mesa, AZ facility based on the prepared comments made during the Q3FY13 earnings call. GT indicated in November that backlogged ASF furnaces would be available once capacity opens up again. This evening, GT announced that its ASF 165 furnaces will be commercially ready in Q3 2014 after previously announcing that ASF furnaces would not be ready until capacity opens up again. The capacity limitations that GT is referring to are not related to the building of the ASF furnaces since those are done by third parties but instead the capacity limits are driven by the availability of GT’s service personnel staff. GT’s service personnel “focus on final assembly, integration and testing of the ASF furnace at the customer site”. It would be extremely difficult for GT’s service personnel to perform these tasks if Mesa was still being ramped up,
2013 Year End Report
#3 This is not the first time that GT has been using larger ASF systems for their own use versus those sold in volume to customers.
#4 The 2014 “sapphire forecast” today’s announcement certainly muddies the waters and will make it even harder to figure out the sapphire mix between Apple and GT equipment.
#5 Today’s ASF furnace announcement just opened the door to GT to increase its 2014 revenue and EPS forecast due to sapphire and nobody will know if its driven by Apple material sales or ASF equipment sales.
Full Disclosure: I am long GTAT