The Obscure Analyst’s Breakdown of GTAT’s Q1 Results

Posted: May 7, 2014 by mattmargolis24 in GTAT Investor Information
Tags: , , , ,

by Matt Margolis

GT Advanced Technologies reported Q1 2014 earnings after the closing bell today.  GT reported revenue of $22.5 million and EPS of loss of $0.22, in line with the company’s forecast. GT’s overall revenue forecast of $600-800m as well as the mix of revenue that will be coming from the “sapphire segment” has remained unchanged since the company’s last quarterly update.  GT’s Q1 2014 conference call is scheduled for 8AM ET tomorrow and I expect GT’s management will provide additional information related to 2014 as well as 2015 and beyond.

GT’s Q4 2013 Guidance

During the first quarter of 2014, the company expects to generate revenues in the range of $20 million to $30 million with a non-GAAP loss per share of $0.20 to $0.25.

On an annualized basis, during 2014, the company expects revenues to range from $600 million to $800 million, with approximately 15% of total revenues occurring in the first half of the year. The company expects that its sapphire segment will account for more than 80% of total revenue in 2014. The sapphire segment includes the company’s equipment and materials businesses in the LED, industrial and consumer electronics markets.

The Arizona (Apple) sapphire project has advanced from the “build out” stage in Q4 2013 to the “ramp up” stage as of the end of Q1 2014.  GT’s “ramp up” stage refers to the company’s focus of increasing its sapphire production capacity ahead of an expected demand in product from Apple.   Lastly, GT’s investments in new technologies are still expected to drive growth in 2015 and beyond, which is consistent with its guidance issued after reporting Q4 2013 results.

 

GT Management Comment’s on Arizona (Apple)- Q1 2014

We continue to expect that 2014 will be a transformational and significant year for GT as our sapphire materials business ramps up and we continue to execute on our strategy of investing in new technologies that will help drive growth in 2015 and beyond.

With respect to our Arizona project, we have now received three of the four prepayments from Apple.  We continue to expect our sapphire segment to contribute meaningfully to revenue this year.

During the first quarter the company received its second prepayment from Apple in the amount of $111 million. Shortly after the end of the first quarter, the company received its third prepayment from Apple in the amount of $103 million, which is not reflected in the first quarter’s ending balance sheet. Inclusive of the third prepayment, the company has received approximately $440 million out of the $578 million total prepayments that it is eligible to receive under the agreement with Apple. The company expects that the total prepayments it receives from Apple will fully fund its capital outlays related to the project in Arizona.

GT Management Comment’s on Arizona (Apple)– Q4 2013

The company expects that 2014 will be a transformational year, one in which it builds a sapphire materials business while continuing to invest in the new technologies that will drive its equipment business in 2015 and beyond.

Our arrangement to supply sapphire materials to Apple is progressing well and we started to build out the facility in Arizona and staff the operation during the quarter.

While our primary focus during the balance of the year is to continue to execute on our commitments in Arizona, our aim is to position GT not only as an exceptional sapphire supplier to Apple but also as an unparalleled world-class supplier of sapphire material and equipment to a variety of customers.

 

GT’s Deferred Revenue Balloons to $176m in Q1 2014

GT’s headline financial results (revenue and EPS) met management’s expectations, which was expected.  There is some significant activity that was reported on GTAT’s Investor Financial Summary.  GT’s deferred revenue has risen from $62m at the end of Q3 2013 to $176mm as of the end of Q4, GT has added $113m to deferred revenue over the past 6 months.  GT’s deferred revenue is at the highest level since Q1 2012.  According to GT’s annual report the company defines deferred revenue as, “amounts of equipment that has been shipped to customers but not yet recognized as revenue and short-term contracts or sales orders for sapphire materials”.   The takeaway here is GT has either “recently shipped” equipment to customers and not yet recognized revenue or this amount represents sales orders from Apple for sapphire materials.

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GT’s Capital Expenditures related to Apple estimated at $439.5m

GT continued to the ramp up of capital expenditures that begin in Q4 2013, primarily related to the Arizona (Apple) sapphire project.  GT’s Q1 2014 capital expenditures totaled $152.3, which brings the total capital expenditures over the last 2 quarters to $188.5m.   GT indicated that they had deployed $180m of PPE in Q4 2013, mostly in Arizona.  GT also re-directed it’s sapphire equipment inventory and supply chain capacity in Q4 2013, the approximate value of the sapphire equipment that was deployed to Arizona totaled $71m.   I’m currently estimating that GT has accounted for $439.5m or 76% of Apple’s $578m prepayment that was designated for capital expenditures to build out the Mesa sapphire plant (see image below).  Assuming the average ASF furnace cost ranges from $225,000 to $275,000 per unit GT would be able to procure/deploy between 1,600 and 1,950 furnaces through March 29, 2014 for the Mesa, AZ project.

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Conclusion

GT’s reported revenue and EPS results aligned well with management’s previous guidance.  The Q1 2014 earnings press release indicates that GT is still anticipating that its “sapphire segment” will carry revenue in 2014.  Additionally, GT does not appear to be backing down on its investment in Research and Development or the company’s expectation that new technologies will drive growth in 2015 and beyond.  GT’s sapphire project is on-track and has progressed from the “build out” stage to the “ramp up” stage.  According to my analysis, GT has deployed/spent approximately 76% or $439.5m of Apple’s $578m prepayment amount that was designated for capital expenditures to build out the Mesa, AZ sapphire plant.   Lastly, I’ve estimated that GT has acquired/deployed approximately 1,600 to 1,950 furnaces inside Mesa, AZ through March 29th, 2014.

The key takeaway is that there is an elephant in the room, that no one can specifically talk about or provide clear guidance related to the timing of a specific new device.  If GT provided clear guidance it may hurt certain device sales related to one of GT’s key partners.  The elephant in the room will ultimately decide how significant GT’s 2014 revenue will be as well as the revenue distribution between quarters.

 

Full Disclosure: I am long GTAT

 

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Comments
  1. pat says:

    NDAs with Apple are sacred documents!!

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  2. Andy says:

    Good catch on the deferred revenue, I appreciate you taking the deeper dive on the numbers to ferret those things out. It seems highly unlikely that those are equipment sales because if they were then you wouldn’t expect 22 million in recognized revenue vs 103+ million deferred. Far more probable is that somewhere over one hundred million worth of shipments is still off books for the moment, and what shipments would they not recognize in the normal course of business? It had struck me that they would recognize revenue when sapphire left GTAT, but the contractual terms must be trickier than normal on when title transfers.

    Also, everyone is noting the insider sales, but did anyone notice the trade pattern where someone was soaking up all of the shares of people wanting to exit at $15.36 after hours? Looks like someone set a buy and picked up about 200,000 shares at the end of day. You can’t be sure, of course, but the price didn’t waver for the last 50 trades or so. Looks like someone put a few million dollars down on a bet that those fleeing the ship were making a mistake. Matt, you must be making more from the advertising revenue on this blog than I thought!

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    • The terms are sapphire is stored at an Apple approved facility near the manufacturer/fabricator until it is ready for processing/assembly. My add revenue is picking up but not enough for that kind of buy!

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      • Andy says:

        Thanks for the clarification on the contract terms, is that based upon GTAT statements or are parts of the contract in the public domain? I would still think that the sapphire is already in the process of being cut and polished, so that indicates to me that the title doesn’t transfer until final assembly, which implies that GTAT must be paying for that process and then the price to Apple is for a fully realized screen. So we should also see a bump in deferred expense, or am I missing something?

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      • From the contract. I still don’t know who is on first. GT could be growing boules and making the screens in AZ. Apple does want this all in house but they could still be going back to the traditional finishing partners in China.

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      • Andy says:

        I looked at the Financials you referenced, and deferred COGS was flat. Accounts Payable, however, jumped $57 million. That makes no sense to me that they would have that hike in deferred revenue and flat deferred COGS. A 57 million bump in deferred revenue with an associated 1 million bump in deferred COGS implies like a 98% gross margin on whatever they are deferring. Perhaps there is sapphire in the mix, but that one is a head scratcher.

        Do you participate in the calls?

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      • I don’t participate in the calls but may have to get in there soon.

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    • pat says:

      Also notice increased Inventory , equipment and Other assets. ALL pointing at increasing capacity .
      So for the skeptics the PLANT is ready , raw materials and finished goods are also real.
      It is just a matter of time before the sapphire screens appear . I have seen equivalent unbreakable / unscratchable products with spectacular results , BUT THIS will be even better!!!! We are few days away from JUNE 2nd WWDC when we will all have better info . After that the NEW iPhone would certainly be in production and leaks will confirm a game changer , new form factor amazing product.

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      • diamondinthesky says:

        You should definitely get on the calls! You have some some of the most in depth knowledge out of all people looking at GTAT

        Like

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