Posts Tagged ‘Sapphire Cover Screens’

by Matt Margolis

The smartphone innovation race seems to be in full gear. Apple is set to go sensor crazy and leverage their HealthBook App on their upcoming iPhone 6 and is expected to feature a nearly unbreakable and scratch resistant sapphire cover screen. I have read various speculation that Apple iPhone may even be able to measure the temperature in the air using very smart sensors. Over the 6 weeks the volume of 5s price cuts and leaked iPhone component images have significantly increased. Additionally, production of key components including displays, sapphire cover screens, A8 chips, DRAM memory and batteries have reportedly commenced. Apple is expected to begin selling its iPhone 6 sometime this summer between June and September.

So what is the competition adding to their device to differentiate its product line? According to Trustedreviews Samsug is looking to release a 4.5″ Samsung Galaxy S5 mini that features water resistance up to 1 meter deep and 30 minutes as well as a dust proof feature. The report indicates that the Samsung Galaxy S5 mini may debut by the end of May.

As well as capable of being submerged in water, an IP67 rating would mean the Samsung Galaxy S5 Mini would be dust proof – a feature which should make those summer time trips to the beach a little less tech troubling

According to screen grabs of the Samsung document – which has since been amended to remove reference of the upcoming phone – the S5 Mini will be capable of being submerged in up to a metre of water for as much as 30 minutes without suffering damage.

Full Disclosure: I own shares in GTAT, Apple’s newest sapphire materials provider

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· UBS checks indicate that GT shipped some small quantities of sapphire made in its Arizona fab to one of Apple’s partners in China who is in charge of making sapphire covers.

· Given the early success of starting shipments of small amounts of sapphire to China last month, UBS expects GT could raise its full year 2014 sales guidance to the upper end of its $600M-$800M range, with 80%+ still likely from sales of sapphire materials.

· UBS expects 4th and final prepayment will be made in May

· UBS is estimating 100 furnaces were turned on and running. They expect 400-500 sapphire furnaces to be turned on in 1Q14 and 900-1000 in 2Q14

· Sapphire cover screens margins expected to be around 25%

If you follow the Obscure Analyst, you would already know GT turned on 140 furnaces on January 10th, 2014 and UBS checks indicate that the “Quick Start 140” furnaces made their first delivery of sapphire ingot in to one of Apple’s partners in China who will make the sapphire covers. A sapphire ingot is a sapphire that is “cored” out of the boule that will need to be sliced into sapphire screens. UBS indicated that 2,200 kg of sapphire ingots were shipped to China for processing. I am estimating that approximately 100,000 to 115,000 sapphire screens could be produced from 2,200 kg of sapphire ingots. GT’s selling price per screen based on the information provided is falling into the range of $8.50 to $10 per screen.

I am slightly more optimistic than UBS as far as the sapphire furnace ramp up due to the fact that over 1,200 furnaces have been imported and delivered prior to the Mesa, AZ plant prior to March 3rd, 2014. Additionally, my 1,200 furnace count does not include any furnaces from GT that were taken out of equipment inventory in Q4 ($71m worth), or $180m worth of PP&E that was deployed in Q4 2013 (mostly in AZ). I believe that nearly all of the furnaces were ramped up by the end of March based on GT’s ability to ramp over 500 furnaces a month and given that fact that most of the furnaces were delivered between December and February.

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

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A photo taken today and shared with me an hour ago clearly indicates steam is coming out near the cooling systems by the electrical substation. Eye witness account indicated that the parking lot was very full overnight and a flock of employees arrived at 6am for work this morning. The eye witness also counted 21 sets of 3 phase electrical lines powering the facility.

This is the best evidence yet that the Mesa Sapphire facility is “full steam ahead” and is up and running and producing sapphire around the clock.

I had previously indicated that the Mesa sapphire plant was likely operating at or near full capacity by the end of March, just weeks after being granted approval to being full operations on 3/19/14 by the Federal Trade Zone (FTZ).

I will have additional images to share later.

Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings.

by Matt Margolis

Apple submitted two applications to the Foreign Trade Zone (FTZ) No. 221 for approval.  Apple’s application for Sub Zone designation at the Apple/GT facility was submitted to the FTZ office on December 17th, 2013 and Apple’s application for “Interim” Production Notification Application was submitted to the FTZ office on December 30th, 2013.  The Interim Production Notification Application indicated that Apple had an aggressive go-live timeline of February 2014.  The Apple/GT facility was granted a temporary C-of-O (Certificate of Occupancy) to commence with occupancy and production of Quick Start 140 area on January 10th, 2014.  Quick start 140 was located in Module 1 of the Mesa facility and contained 140 “tools,” which are also know as sapphire growth furnaces.

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Apple’s application for Sub Zone 221 designation was submitted to the FTZ office on December 17th, 2013. The Apple/GT facility was formally granted Sub Zone approval on March 19th, 2014.  The Sub Zone approval was the final step required before Apple and GT could begin in earnest to manufacture intermediate components for consumer electronics for exports as indicated in their original Sub Zone application.

Apple Inc./GT Advanced Technologies Inc., Mesa, AZ, 221A, approved 3/19/2014 (S-5-2014)

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Another interesting fact to point out is the Master Development and SOW agreement between Apple and GTAT is that the agreement requires any additional furnace purchases, would be negotiated in good faith prior to the second Milestone Payment made under the Prepayment Agreement.  GT reported during their Q4 2013 conference call on February 24th, 2014 that they had received the second Milestone Payment from Apple.  The receipt of the second Milestone Payment from Apple signals that the furnaces that were required to be purchased and deployed as part of this agreement were all ordered on or before February 24th, 2014.

According to Port Authority records, sapphire growth furnace deliveries began heading to Mesa, AZ on December 2nd, 2013 and the last known delivery was recorded on March 10th, 2014.  I have tracked 1,265 furnace deliveries that have passed through Port Authority.  Additionally, any and all domestic furnaces that did not pass through Port Authority (i.e. truck) would not be caught in my sapphire furnace fishing net.

I have assumed GT deployed $251m of PPE ($180m) and Inventory ($71m), which would account for 837 additional furnaces inside Mesa giving me a total confirmed/estimated of 2,102 furnaces.  The book cost that GT assigned to each furnace that was deployed and taken out of inventory could be substantially lower than $300,000 per furnace.  If, GTAT’s price per furnace is actually $30,000 lower than my estimate it would add almost 100 furnaces to my estimate, conversely a $30,000 increase would decrease my estimate by 100 furnaces.

Based on my correspondence with a sapphire industry expert, GT had previously touted their ability to ramp up 500 furnaces per month at ASF equipment customer locations.  However, GT has already informed investors that they dedicated a vast majority of their ASF capacity to the Mesa, AZ sapphire effort, which would likely drive their drive GT’s maximum furnace ramp north of 500 furnaces per month.  Based on the furnace delivery dates and GT’s touted ability to ramp up efforts and focus on Mesa I’m becoming hard pressed NOT to believe that the Apple’s Mesa Sapphire plant WAS  likely operating at or near full capacity just days after the receiving the official unlimited go-live approval from the FTZ on March 19th, 2014.

 Tracked Furnace Deliveries and Estimated GTAT Furnace Deliveries

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My Estimated # of Furnaces Purchased/Deployed in Mesa, AZ

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Apple’s purchase of additional Furnaces and Similar Furnaces will be made under the terms of Apple’s Master Equipment Purchase Agreement (the “MEPA”).  Apple and GTAT will negotiate in good faith to execute the MEPA as soon as possible following the Effective Date, but in any event prior to the second Milestone Payment made under the Prepayment Agreement. Prepayment Agreement

 

We have dedicated the vast majority of our current ASF capacity to support this multi-year commitment.  This has limited our ability to take additional ASF business in the near term and has restricted our ability to ship backlog on short notice (GTAT Q3 2013 Prepared Remarks)

 

GTAT 2012 Presentation on their Sapphire Equipment

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Apple’s Entire “Interim” Production Notification Application is Below

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Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings

 

As the iPhone 6 inches closer to its release date the volume of leaked photos will continue to rise. The latest edition of leaked photos from Weibo.com appear to show the front panel of the upcoming iPhone without a cover screen. The front panel appears to be longer and slightly wider than the iPhone 5 that is pictured next to it.

The leaked images align closely with news reports that various suppliers will begin ramping up production of various key components in Q2. If components are coming off the production press by late May then a late June release for the 4.7″ cannot be ruled out. Foxconn reportedly was producing 500k iPhone 5s models a day by late 2013 and I expect the addition of Pegatron to lift total capacity closer to 1 million phones per day. In March it was reported that Pegatron was going on a hiring spree to be ready to assemble units during Q2. The iPhone 6 manufactures could conceivable produce enough units of inventory to in just 30 days to support a iPhone 6 launch in late June or early July. Stay tuned as this could be a surprise to everyone.

Taiwan Semiconductor Manufacturing Company (TSMC) reported began production on the A8 chip in March.

Micron Technology announced that they begun ramping up production of their DRAM memory LPDDR4 which is also consistent with company comments made in January that they would land in mobile handsets later in 2014.

Reuters indicated that Japan Display Inc, Sharp Corp and South Korea’s LG Display Co Ltd will begin mass producing display touch panel screens as early as May.

Sapphire cover screen supplier GT Advanced Technologies, who is growing sapphire inside Apple’s Mesa, AZ sapphire plant has also begun to ramp up its production as well. 9to5Mac released information in January indicating that Apple wanted to go-live with the Mesa sapphire operations by February. Additional records pulled from the city of Mesa website and FTZ indicate that the facility has indeed begun production and the first line or 140 tools (ASF sapphire growth furnaces) went live on January 10th and was followed by another significant ramp up in Tools by the middle of February.

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Full Disclosure: I am long shares of GTAT and have no plans to buy or sell any holdings

by Matt Margolis

My unique research style includes sifting through various public information including articles, social media and the latest from the street.  I stumbled upon a very interesting article last night by accident while I was laser focused on finding something else.  I actually attempted to duplicate my search and find it a second time but was unsuccessful,  thank goodness for web browsing history.

Canaccord Genuity Conference August 17, 2012

The article dates back to August 18, 2012, which happens to be the next day following the Canaccord Genuity conference that was hosted on Friday August 17, 2012.  For the long-term shareholders they will remember this conference and the infamous upgrade from Canaccord Genuity’s analyst Jonathan Dorsheimer, who cited GT management’s body language regarding sapphire smartphone cover glass.  Jonathan’s note regarding the upgrade as reported by the Street.com is below:

“We are upgrading GTAT shares on increased buzz around potential smartphone applications…We believe that the smart phone cover “glass” opportunity for sapphire is becoming closer to reality based on our work in the supply chain and GT management’s body language.”

As it turned out, Jonathan was wrong on timing and the sapphire smartphone cover glass opportunity was not as close as he first thought.  But my biggest question is what did the Canaccord analyst notice from GT management’s body language.  I am the first to admit that there is tremendous value gained by observation and sometimes a person’s body language tells more of the story than the actual words spoken.

The August 18, 2012 Article

The August 18, 2012 article that might hold the key detail behind the Apple contract was published by Gulfnews.com.     The article is short and sweet and it covers the Canaccord Genuity conference.  The Canaccord Genuity conference was not focused on sapphire but focused on GT’s investment into continued growth and diversification (Sounds a lot like their Technology Conference in March!). The specific quote from the Gulfnews.com article is below,

Sapphires may replace glass on mobile phones and tablets, chief executive officer Thomas Gutierrez said at a Canaccord Genuity conference on Friday. GT Advanced, which makes tools to grow sapphires, has sought non-solar applications for its technology as a global glut of panels reduced demand for systems that make polysilicon and photovoltaic wafers, Gutierrez said in May.

GT’s CEO Tom Gutizerrez indicated on August 17, 2012 that sapphire may replace glass on not only mobile phones but also tablets.  I know what you are thinking right now.   Why would this have anything to do with Apple?  GT’s CEO made a generic statement why would this hold the key to the Apple deal?

The Power of the Mind and the Body

I think it’s very important to understand the context behind TG’s comment made on August 17, 2012 during the Canaccord Genuity Conference.  Why would TG say, “Sapphires may replace glass on mobile phones and tablets.”  Why would Canaccord’s analyst upgrade shares of GTAT based on “GT management’s body language” surrounding the sapphire cover glass opportunity?

In order to fully understand Canaccord’s comment and put some context behind TG’s comment I needed to find something that would explain what could possibly be going on with GTAT at the time of this conference.  TG has always been confident so he must have had his normal swagger and then some during this conference back in August 2012.  I believe the answer to this riddle, of the mind and the body was hidden in plain view, within a key document that would be released to the public 15 months later.    On November 4, 2013 GT Advanced Technologies and Apple announced a sapphire deal but the answer to this riddle lies within the Master Development and SOW agreement, which was signed on October 31, 2013.   As you can see from the image below, GT Advanced Technologies and Apple signed their confidentiality agreement on August 24, 2012.

The plot is now beginning to thicken as the dots get connected.  If we put ourselves back in time knowing that GT was in the midst of signing the confidentiality agreement with Apple for sapphire cover screens it would make a lot more sense why GT’s management could not withhold their excitement.  The sapphire cover screen was one of the primary focuses for GT’s management and they were going to be handed the key to Apple’s device empire.  Based on additional information provided from the Q3 2012 Conference Call GT hah been working closely with Apple for several months on sapphire cover screens.  According to GTAT, we have already gone beyond, “the NDA stage, we’ve delivered furnaces. We’ve delivered material now. We’ve delivered sample screens, actually, in some cases. And so it’s gone well beyond”.

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Q3 2012 Conference Call Transcipt

The last major spoke that spins this wheel can be found inside the Q3 2012 conference call transcript.  The conference call was held on November 7, 2012 just 11.5 weeks after GT signed the confidentiality agreement with Apple.  The biggest question is how will GT’s management handle the recent development with Apple and what will they say about the sapphire cover screen opportunity?  I have read this transcript numerous times but putting the Canaccord Genuity Conference body language, the comments made during the Canaccord Conference and the fact that GT and Apple signed the confidentiality agreement in August  just  a week after the conference might give you the chills.  The bullet points below came from GTAT’s Q3 2012 conference call transcript and can be read for free in its entirety at Seeking Alpha.

  • #1 High-volume, scalable, low-cost sapphire production is now possible with the commercial availability of our technology, and breakthrough fabrication technologies have and will continue to drive out significant costs.
  • #2 While we’re not able to reveal all of the details behind our published range due to customer and partner sensitivity, here are some important points to consider.
  • #3 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.
  • #4 There are some really innovative technologies that are being developed by ourselves and our fabrication partners that would bring the back end down very substantially in the fabrication area.
  • #5 As a result of these factors and several other proprietary data points that we’re not able to share, we are confident that the cost targets are achievable and acceptable.
  • #6 And unfortunately, with the big smartphone players, you won’t know until it happens.
  • #7 And that’s what they’re all about, it is out-surprising each other.
  • #8 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
  • #9 I think the other thing that’s gone beyond the NDA stage, we’ve delivered furnaces. We’ve delivered material now. We’ve delivered sample screens, actually, in some cases. And so it’s gone well beyond, “Let’s sit in a room with an NDA and talk about it.”
  • #10 There’s been a lot of discussion regarding the cost of sapphire for cover screens and question as to whether the cost range that we recently published of $10 to $20 above current glass solutions is achievable.
  • #11 But we’re confident, okay, that we can be inside that box. And we’re also confident that, that’s just the initial box, okay.

I want to address some of the bullet points and provide even more evidence that sapphire screens are coming to the iPhone and iPad and likely across everything else Apple makes.

 

Bullet #1  GT cites that, “High-volume, scalable, low-cost sapphire (screen) production is now possible with the commercial availability of our technology“.  This comment is nearly identical to the press release (see below) from GT Advanced announcing the Apple contract.  The language might be ambiguous but the statement is nearly identical to the Q3 2012 discussions related to sapphire cover screens.

GT has accelerated the development of its next generation, large capacity ASF furnaces to deliver low cost, high volume manufacturing of sapphire material.

Bullet #4 Innovative Fabrication Techniques – On September 20, 2012 Apple filed for their “Multi-Step Cutting Process” patent.  The patent covers Apple’s laser cutting techniques, which is an extremely innovative fabrication technique and was filed between the signed confidentiality agreement and GT’s Q3 2012 conference call.

Bullet #6 Big Smartphone Players – You never know when it happens and they like to suprise each other.  This sounds very similar to the comments TG made during his appearance on Fast Money on CNBC when asked by the host of the show when sapphire would start showing up.  Interesting!

Bullet #8 GT will start laying down assets the second half of year – GT announced during its Q4 2013 results that they deployed $180m of Capital Primarily in Arizona, which was consistent with plans GT announced nearly a year prior to lay down assets for sapphire cover screens production.

Bullet #8 You won’t see a high-volume phone with sapphire on it until 2014 –  The only known customer besides Apple that GT had lined up for sapphire screens was Canonical (Ubuntu Edge) and Apple is the only one of the two companies who would sell high volume phones with sapphire.

Conclusion:

Did GT’s management give away proof through their super confident body language that they were just a few days away from signing a confidentiality agreement, that they knew would lead to a multi billion dollar annual contract with Apple by the end of 2013?

Did TG spill the beans and clearly indicate that GT would be making sapphire cover screens for Apple phones and tablets during the August 17, 2012 Canaccord Genuity Conference?

Did GT’s management change their tune dramatically during the Q3 2012 conference call and shift significant focus on their recent sapphire developments specifically the signed Apple confidentiality agreement and how it would impact their operations in 2013?

Did GT’s management spend nearly half of their Q3 2012 conference call discussing; sapphire cover screens, sapphire NDA’s, cost of sapphire screens, laying down assets a year in advance and  introducing the expected timing of the first high volume sapphire screen?

 

My answer to all of these questions is YES! YES! YES! YES!   How about you?  But hey what do I know, I’m just the Obscure Analyst.

 

If you are interesting in following my tweets, asking me a question or just want to give feedback or say hello you can follow me @sapphirecover24 on Twitter.

 

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