GTAT Backlog, Deferred Revenue and the Apple “Potential”

by Matt Margolis

GT ended Q1 2014 with a backlog of $609 million, consisting of 300 million of ASF orders, 296 million of Polysilicon and 13 million related to PV equipment. GT booked $29 million of equipment orders during the quarter, including 15 million in PV and 14 million in Sapphire that are have now been reported as part of the $609 million backlog. In addition, GT expects that the $58 million order for high temperature specialty furnaces will be reflected in Q2 reported backlog.

GT defines its order backlog as “amounts due under written contractual commitments and signed purchase orders for PV, Polysilicon and sapphire equipment not yet shipped to customers”. Essentially, GT’s back order represents open Purchase Orders (PO’s) for GT’s equipment that have not been shipped to customers.

Once items orders have been fulfilled from backlog they are shipped to the customers. However, if the equipment has been shipped to the customer and GT’s service staff has not completed the final assembly, integration and testing, the revenue from this shipment would be reported in “deferred revenue”. If GT has fulfilled sapphire materials and completed shipment but the product has not been “taken” for use by the customer it would also be reported as deferred revenue. Under the terms of the sapphire materials contract with Apple GT was expected to ship the goods to a defined facility for just-in-time production by Apple and GT bears the cost of storage. GT’s 10-K defines sapphire materials deferred revenue as, “short-term contracts or sales orders for sapphire materials”.

Once GT completes the servicing of equipment at a customer location GT will move the “deferred revenue” into recognized revenue during the related period. Sapphire materials once they are taken possession by the customer out of storage GT will move the “deferred revenue” into recognized revenue for the related period.

GT reported deferred revenue totaling $175.6 million in the quarter ending March 29, 2014 representing an increase over the last 6 months of $113.4 million. The amount of GT’s deferred revenue should be watched closely, as this represents the amount of goods that have been completed; either assembled and shipped equipment to customer locations or sapphire materials that have been grown, processed an d shipped to a defined storage location by the sapphire customer. Once GT completes the servicing of equipment at a customer location and the customer takes “final delivery” of the equipment GT will move the “deferred revenue” into recognized revenue during the related period. Sapphire materials revenue recognition is very similar, once GT’s customer takes “final delivery” out of storage GT will move the “deferred revenue” into recognized revenue for the related period. The release of Apple’s upcoming products that will feature sapphire are not known, however GT will be ramping up production and accumulating a significant amount of deferred revenue, which will only be recognized once Apple has taken “final delivery” of the goods. GT’s CEO mentioned during the conference call that the sapphire produced from Mesa will be fully utilized.

The annual revenue generated from Apple cannot be deduced by simply doubling the 2014 sapphire segment revenue but instead by examining the sapphire production capacity that will be produced from the Mesa, AZ facility. I am in the process of completing my production capacity analysis and my preliminary results indicate that GT can generate between $1.9B and $3.6B of annual sapphire revenue from the Mesa, AZ sapphire plant to Apple. This revenue range is based on a ASP (average selling price) of between $8 and $10 per 5” sapphire screen, 1,600 to 1,950 furnaces fully ramped furnaces, sapphire boules between 200 and 230 kg in size, days to grow a sapphire boule of 17 to 22 and an estimated loss from kerfing and grinding of 20%.

Full Disclosure: I am long GTAT