GT Advanced Technologies Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.28.13 | About: GT Advanced (GTATQ)

GT Advanced Technologies (GTAT) Q4 2012 Earnings Call February 28, 2013 8:00 AM ET

Executives

Ryan Blair

Thomas Gutierrez - Chief Executive Officer, President and Director

Richard J. Gaynor - Chief Financial Officer and Vice President

Analysts

Stephen Chin - UBS Investment Bank, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Amir Rozwadowski - Barclays Capital, Research Division

Satya Kumar - Crédit Suisse AG, Research Division

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Nimal Vallipuram - Gilford Securities Inc., Research Division

Scott Reynolds - Jefferies & Company, Inc., Research Division

Operator

Good morning and thank you for standing by. Welcome to GT Advanced Technologies Fourth Quarter Calendar Year 2012 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. Now, I will turn the call over to Ryan Flame of GT Advanced Technologies Investor Relation. You may begin.

Ryan Blair

Thank you. As we begin, I would like to remind everyone that certain statements made during this call may be forward-looking for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. We may discuss our expectations regarding future events. In particular, these may be forward-looking statements regarding estimated future financial results for calendar 2013 and beyond, factors likely to affect financial results and other forward-looking statements regarding market conditions and factors which may affect the performance of each of our business segments.

In this connection, we direct your attention to the slide entitled Forward-Looking Statements, which is the final slide in the presentation accompanying this call. Important factors that could cause actual results to be different than our expectations are discussed in GT Advanced Technologies' filings with the Securities and Exchange Commission, including the statements under the heading Risk Factors in the company's quarterly report on Form 10-Q for the fiscal quarter ended September 29, 2012. Statements made during this call should be evaluated in light of these important factors. GT Advanced Technologies is under no obligation to and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

A webcasted replay of today's presentation will be available for 90 days beginning today at approximately 10:00 a.m. Eastern, and can be accessed on the IR section of our website. An audio replay will also be available through March 14. Please refer to the company's website and press release for details. Following today's call, we will be posting a copy of our prepared remarks to our website. [Operator Instructions]

With that, I will now turn the call over to Tom Gutierrez, President and CEO of GT Advanced Technologies.

Thomas Gutierrez

Good morning. With me today is Rick Gaynor, our Chief Financial Officer. Rick will report on our Q4 and calendar year '12 results, which came in largely as expected. He'll also provide details on our restructuring actions as well as our current outlook for calendar year '13, which also remains essentially unchanged from our prior guidance.

Before taking questions, I'll provide an overview of our new technology development programs including our just-announced partnership with Soitec. First, I'll provide some context with respect to our projections for calendar year '13.

We continue to expect that the challenging market conditions that we outlined in our mid-December call will prevail through the year. Although solar demand is forecasted to expand over the long term, current supply exceeds demand, which has created pressure on ASPs and profitability. As a result, many of our solar customers are facing liquidity issues and limited access to capital. In addition, international trade tensions in the solar sector remain unresolved and continue to create a high level of market uncertainty, keeping those who are prepared to invest on the sidelines until the playing field is better understood. While the adoption of more efficient solar technologies is inevitable, we expect that these market conditions will slow the pace at which next generation technology will be adopted.

We are also of the view that the potential for DSS multi-crystalline technology, or monocrystalline solutions, like MonoCast and traditional batch Cz, remains extremely limited, given the fact that these technologies cannot fully satisfy the need for lower-cost and higher efficiency that is evident in the marketplace. Given these circumstances, we expect that our DSS business, once a key driver of GT's revenue stream, will only represent approximately 1% of our total business in 2013.

And while we remain fully committed to our R&D investment in HiCz, and continue to work with our beta and cell technology partners to advance the technology at a rapid pace, we will be delaying any significant expenditure related to market introduction of our HiCz product until 2014, in line with when we believe the market demand will drive adoption. As such, our calendar year '13 guidance does not assume any revenue from our HiCz product line.

The profile of our sapphire business is different. Although sapphire market demand has remained soft, prices have stabilized and it is generally expected that the LED/sapphire sector will return to growth in the second half of 2013, as market demand improves. We also see evidence that our largest customers' access to government and commercial capital is likely to improve over the next several quarters. In addition, GT's efforts to drive down the cost of manufacturing sapphire and expand sapphire applications beyond the LED sector is expected to start bearing fruit later in the year.

In fact, feedback from our participation this week at the Mobile World Congress trade show in Spain and ongoing dialogue with OEMs and other value-chain partners continues to reinforce and validate our view that there is a need for a differentiated, better screen solution in the smartphone, point-of-sale and touchscreen market. Sapphire value proposition as a durable solution is being well-received by the OEMs that we are in discussion with.

We expect our sapphire business to contribute approximately 56% of the year's revenue, largely back-end loaded. We expect that about 2/3 of the year's sapphire revenue will be driven by LED and industrial opportunities, and that the remaining 1/3 will be driven by emerging sapphire applications in other sectors of the market. We expect that initial furnace demand traction in the non-LED sector is likely to come from early adopters, which could include select lower volume smartphone models, camera lenses, aftermarket applications and point-of-sale systems. We believe that furnace demand related to broader, mainstream smartphone volume is likely to ramp in 2014.

Our pipeline of non-LED opportunities continues to grow at a very rapid pace. The real question is timing, and GT's calendar year '13 guidance range differential of $100 million, from top to bottom, takes this uncertainty into account. With respect to our current ASF backlog, we believe that nearly $300 million of this backlog is at risk and we will likely debook this by the end of the quarter in order to better reflect the possibility that some of our customers may scale back their plans. In the event that we do debook this portion of the backlog, it is not our intention to cancel the related contracts, as there is still a possibility they would be delivered in due course.

Our Polysilicon business will remain a steady contributor in calendar year '13, albeit at a lower level than in calendar year '12, which was an outstanding year. We expect that approximately 42% of our total revenue in 2013 will come from our polysilicon segment. Our visibility on this business in 2013 is excellent as a significant percentage of it comes out of deferred revenue or is scheduled to ship by the end of the second quarter. Most of the poly business is with top-tier customers that remain largely committed to their plan to improve their competitive position.

OCI's Phase 4 order, which is represented in blue on the chart, comprises approximately $260 million of our backlog, and we continue to expect that we will start delivery on this order in the second half of 2014.

Lastly, I'll comment on the steps we've taken to streamline the business as we enter 2013.

We've taken several steps over the last few months to restructure the company to address the current downturn, manage our balance sheet and ensure that we're able to continue investing in the programs that will enable us to return to growth. These steps include a reduction of approximately 25% in overall headcount, the idling of our St. Louis HiCz pilot manufacturing facility and the development of a focused program to convert our slow-moving DSS inventory to cash.

In addition, we are redirecting our R&D spending to programs that we believe will provide new growth opportunities. We're reducing our capital spending by over 60% this year and we have elected to limit our M&A activities to licensing opportunities and deals that consume minimal cash, such as the just-announced Soitec partnership.

Rick will now provide more details on these initiatives as part of his overall review in 2012 results and 2013 projections. Rick?

Richard J. Gaynor

Thanks, Tom, and good morning, everyone. Before I provide details on our performance in the December quarter, I would like to remind you that full reconciliation of the GAAP and non-GAAP financial measures that we will be discussing today can be found in our press release as well as in the presentation accompanying this call, both of which can be found at gtat.com.

In addition to the charges that we have typically excluded from our non-GAAP results in the past, such as amortization, stock-based compensation, third-party acquisition charges, contingency consideration and noncash interest expense, we took several additional nonrecurring charges in the December quarter. These included a cash charge of $3.1 million for restructuring related to the workforce reduction we announced in October and our decision to idle our St. Louis pilot manufacturing facility.

In addition, there were several noncash charges including: $30.3 million of noncash asset impairment charges primarily related to the St. Louis facility; approximately $72 million for the write-down of inventory and vendor advances, primarily related to the DSS business; $57 million for impairment of goodwill related to our PV segment; and $2.5 million of charges primarily related to certain sapphire materials assets acquired with the acquisition of the business, which are now obsolete.

We believe that our restructuring actions will improve the company's strategic and financial positions as we enter 2013.

Moving on to the results for the fourth quarter and full year 2012, which ended December 31, 2012. Q4 revenue was $102 million. This included approximately $89 million of polysilicon, $7 million of PV and $6 million of sapphire revenue. Revenue for calendar year '12 came in at $734 million. The revenue split by segment for calendar year '12 was 63% polysilicon, 6% PV and 31% sapphire. The 31% in revenue from sapphire is an increase from 6% in calendar year '11, reflecting our efforts to diversify and grow the nonsolar portion of our business. The recent volatility in our served markets has supported our view that the diversification of our revenue streams continues to be vitally important.

Moving on to gross margin. On a non-GAAP basis, gross margin was 32.4% for the fourth quarter and 38.3% for calendar year '12, which excludes $74.3 million of noncash charges for the write-down of inventory and vendor advances and the early retirement of assets. The Q4 non-GAAP gross margin came in slightly below our guidance range due to an engineering change that we made to our ASF system to accelerate cost reductions. While the absolute amount was small, it had material impact given the low level of equipment revenue in the quarter. GAAP gross margin was a negative 40% for Q4 and a positive 28% for calendar year '12.

Operating expenses, before contingent consideration, restructuring, asset impairment and goodwill impairment, were $42 million in Q4, and $145 million for calendar year '12. Total operating expenses, including these charges, were $135 million in Q4 and $237 million for calendar year '12. R&D expenses were $23 million in the fourth quarter and $71 million for calendar year '12, reflecting our continued commitment to invest in new technologies that drive future growth and diversification. The tax rate for the quarter was a benefit of 13%. The change in the rate from previous estimates is due to operating losses incurred due to the write down of assets.

Now moving on to EPS. This slide provides a walk-through from our Q4 '12 GAAP EPS to our non-GAAP EPS. The complete reconciliation of GAAP to non-GAAP numbers can be found in the slide at the back of this presentation. When we provided our non-GAAP EPS guidance in December, we specifically indicated that we were excluding impairment charges that could not be estimated at that time related to goodwill, long-lived assets and restructuring assets related to the idling of our St. Louis facility.

Excluding the impact of these charges and the related tax effect, our Q4 '12 non-GAAP EPS would've been a loss of $0.08, which is within the $0.05 to $0.10 loss guidance range that we provided. Including the impact of these charges and related tax effect, our fully diluted non-GAAP EPS was a loss of $0.15 in Q4 and a positive $0.73 for calendar year '12. Fully diluted GAAP EPS was a loss of $1.34 for the December quarter and a loss of $0.53 from calendar year '12.

Moving on to our balance sheet. We ended the December quarter with approximately $418 million of cash and cash equivalents and $298 million of total debt, which included $140 million related to our credit facility, and $157 million related to our convertible bonds. In line with our expectations, we consumed $61 million of cash during the December quarter, including: $42 million of cash used for operations; $10 million to purchase certain assets of Twin Creeks, including the Hyperion ion implantation technology; approximately $4 million of capital expenditures; and $4 million in repayments of debt.

Moving on to our backlog. We entered the December quarter with a backlog of nearly $1.5 billion. During the quarter, we received orders totaling approximately $6.5 million, primarily related to the sapphire materials business. We recognized $102 million in revenue and had approximately $132 million of negative adjustments to our backlog, the vast majority related to our previously-announced intention to debook our DSS backlog. We ended the December quarter with a backlog of $1.25 billion, which included $529 million polysilicon, $3 million of PV and $716 million of sapphire.

Our total backlog security, as of the end of the December quarter, was approximately 25%. We had approximately $122 million in deferred revenue, $6 million in letters of credit, and $181 million in non-refundable customer deposits. As Tom indicated, we are considering debooking approximately $300 million of our ASF backlog, related to the 25% risk that we identified last quarter.

Now moving onto our guidance for calendar year '13. In addition to the charges that we typically exclude from non-GAAP, our non-GAAP guidance excludes the residual charge that we expect to take in 2013 related to DSS inventory and the idling of our St. Louis facility. And these include: approximately $8 million to $9 million of DSS Purchase Order cancellation fees; approximately $2 million to $4 million in lease exit costs for St. Louis; and any gain or loss associated with the disposition of the St. Louis facility.

Today, we are reiterating the calendar year '13 guidance that we provided on December 18, including revenue in the range of $500 million to $600 million. Assuming the midpoint of our range, we expect the split by business will be approximately 1% from PV, 42% from polysilicon, and 56% from sapphire and 1% from silicon carbide. The delta between the high and low ends of the revenue range is largely driven by our ASF business, as Tom described earlier. We expect approximately 40% of the year's revenue in the first half of the year and 60% in the second half; Non-GAAP gross margin is expected in the range of 35% to 37%, reflecting our expectations for lower volumes and different mix in calendar year '13. Inclusive of restructuring costs, total operating expenses are expected in the range of $154 million to $160 million. The calendar year '13 OpEx range reflects the addition of approximately $16 million of expenditures to support new technology development programs, such as Hyperion, silicon carbide and the recently-announced HVPE GaN system. We are able to add these targeted investments without significantly increasing our overall spending year-over-year because of the reductions we have made to our base operating costs.

R&D expenses are expected to be in the range of $75 million to $80 million. Our CapEx is expected to decrease by over 60% year-over-year to approximately $10 million to $14 million in calendar year '13, the bulk of this being directed primarily at new technology investments in our HVPE GaN system and our Hyperion exfoliation tool. We expect an effective tax rate of 27% for calendar year '13. And non-GAAP EPS is expected in the range of $0.25 to $0.45, assuming a diluted outstanding share count of 124 million shares for the year. We expect the majority of our total 2013 non-GAAP EPS will be generated in the second half of 2013, reflective of improved revenue and mix during that period. That said, with the significant rebound in revenue expected in the second quarter, we believe we will return to meaningful EPS in Q2.

Looking at Q1 more closely, we expect the following: revenue in the range of $50 million to $60 million; non-GAAP EPS in the range of a loss of $0.13 to a loss of $0.15, assuming a dilutive outstanding share count of 119 million shares for the quarter; and Q1 non-GAAP gross margin in the range of 24% to 28%.

I'd like to conclude with an update on an amendment to our credit facility as well as our expectations for cash this year. On Wednesday, we entered into an amendment to our credit facility with Bank of America. The amendment provides, among other things, that certain financial covenants be waived for the six quarter period, beginning with the quarter ending March 31, 2013 and ending with the quarter ending June 30, 2014. Through this action, we avoid the possibility of a breach to these covenants and we bolster our ability to continue to execute on our growth programs.

In connection with this amendment, we will pay down $40 million of term loan, our total revolver availability has been reduced by $50 million and the revolving credit facility has been restricted to use for letters of credit, and we have agreed that certain covenants relating to minimum liquidity and EBITDA levels.

Moving onto our expectations for cash. Based on our view of likely backlog roll-off and reflecting the pay-down of $40 million of the term-loan balance, we now expect our cash position by mid-year to be approximately $260 million to $285 million and $185 million to $235 million at the end of calendar year '13.

With that, I'll now turn the call back to Tom.

Thomas Gutierrez

Thanks, Rick. We remain optimistic about the future of our core business and are committed to our diversification strategy. Over the past 3 years, GT has moved beyond its original core business in solar, primarily through the -- our acquisition of Crystal Systems and the creation of the sapphire business.

In calendar year '12, approximately 30% of our business came from our sapphire segment, whereas in calendar year '10, solar accounted for 100% of our business. We expect that 2013 will be a year during which we continue to diversify and strengthen the foundation of our business. We have several initiatives underway that we believe will significantly expand the universe of growth opportunities available to GT. This includes the expansion of our solar portfolio with our HiCz solution, which we believe will be a key next-generation Solar 2.0 technology. We will also continue to develop new market opportunities for sapphire in the consumer electronics market, an area that we believe has very significant potential for growth. We're also expanding our business into new, growing markets like Power Electronics with the development of our silicon carbide systems.

We're planning a phased product launch of our silicon carbide furnaces, starting with the introduction of a 3-inch R&D beta tool by early Q2 of this year, followed by furnaces capable of growing 4- and 6-inch boules as we move into 2014 and '15.

While the business will be significant over the long term, our calendar year '13 guidance includes only a modest 1% revenue contribution from our new silicon carbide business, as we expect the ramp of this new business to be slow until we introduce our 4- and 6-inch solutions to the market. The HVPE technology that we're developing with Soitec, and which I'll expand on in a moment, has significant potential in the growing LED market and potential application in Power Electronics as well. And our Hyperion product, which I will also talk about in more detail, has substantial potential to reduce costs and drive business for GT in the Solar, silicon carbide and sapphire markets.

We're very excited about the recently-announced agreement with Soitec to complete development of and commercialize a revolutionary HVPE system for producing low-cost GaN templates. This partnership leverages GT's extensive experience in commercializing disruptive equipment technologies with Soitec's know-how in epitaxy technologies and GaN materials. The tool we are developing will be based on Soitec's alpha tool. We have already identified a high-quality beta customer and we are targeting commercial availability of the HVPE system in the second half of 2014.

While the primary strategy is to target the LED market, there are potential opportunities in other growth industries such as Power Electronics, where our HVPE solution could be used to create GaN template for medium voltage devices. A significant amount of development work has already gone into this technology and GT has significant technical know-how in this area as well, which gives us added confidence in the technology's potential.

The HVPE tool is expected to significantly lower the cost of LED production by providing a more efficient and optimal way to rapidly grow thicker, higher-quality n-GaN buffer layers on bulk sapphire substrates that can be accomplished in an MOCVD tool. We estimate that adding GT's HVPE system to the process can enhance MOCVD throughput by approximately 30% to 50%, depending on the customer's process. Combined with higher growth rates and lower precursor and process costs, we believe the HVPE technology, once commercialized, can lower the cost of the epi stack by approximately 25%, while also driving higher yields, higher quality and lowering the amount of CapEx required at the MOCVD level.

We have also made good progress with the development of the Hyperion technology that we acquired last November. Hyperion is an ion implanter device that enables the production of thin substrates with negligible kerf loss and lower consumables cost, replacing wire saw technologies in use today. Hyperion has a unique implanter design and a strong intellectual property portfolio currently consisting of 38 granted U.S. patents and over 30 pending applications covering the implanter itself, as well as PV cell and thin laminate.

It has already been proven to produce thin silicon solar wafers and we believe it will play a critical role in helping drive the solar industry to significantly lower cost. Hyperion may also be applicable for silicon carbide, and we have already started Hyperion trial runs on GT silicon carbide material. We believe that a 3x to 4x reduction in substrates costs is achievable using this technology. Combined with the increased access to silicon carbide that our merchant silicon carbide offering will drive, this could stimulate substantial end-market growth.

Hyperion could also have potential application in our sapphire business. Given the feedback that we've received from OEMs and early adopters, we believe that current sapphire fabrication techniques, excluding Hyperion, will support the adoption of sapphire in several applications including smartphones and point-of-sale systems. However, we also believe that there could be an incremental future market opportunity using Hyperion to create lower-cost sapphire laminates for broader mobile phone and aftermarket applications. Sapphire laminates are expected to have some, but not all, of the attributes of a pure sapphire solution and are expected to have a cost structure that rivals current cover glass products on the market today.

We have already produced R&D samples and are currently building a next-generation, full-scale Hyperion tool in our Danvers, Massachusetts facility to demonstrate the technology for this application. We expect that our test tool will be complete by the second half of calendar year '13. While R&D is still in its early stages, if Hyperion sapphire exfoliates prove to be viable, we would expect to be in a position to take this technology to market beginning in 2015.

I'd like to conclude by emphasizing that we believe the execution of our diversification strategy, coupled with the steps we're taking to strengthen our position in the core markets that we already serve, will provide the company with a path to resumed growth, cash generation and value creation for our customers and our shareholders in the years ahead. We've taken decisive action and prudent steps to protect the business, and as a result, we're well-positioned to weather the current downturn, while continuing to plant critical seeds that will drive our future growth.

With that, operator, we'll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

You talked about 20% of your revenue coming from non-LED sapphire applications. Can you talk about how much of that is from smartphone cover glass versus other applications and how do you see that going forward?

Thomas Gutierrez

Well, I think in the prepared remarks what I said is it's lower volume, smartphone applications, some point-of-sale applications and some general industrial, with the first 2 being the biggest opportunities. But we said 1/3 of our sapphire revenue for the year was going to come from those areas. And we have very strong line of sight to those opportunities, Stephen.

Stephen Chin - UBS Investment Bank, Research Division

Got it. And second question on gross margin for the first quarter. I thought Rick said 24%, 28%. Could you talk about what is driving it lower? Are there any special discounts to customers? Or do you see any pricing pressure?

Richard J. Gaynor

It's predominantly related to volume. We have a very low revenue quarter and that's being reflected in absorption rates and depressing the gross margin.

Thomas Gutierrez

And, Stephen, one of the things to realize is we still have a tremendous amount of variable cost in our cost structure, so we didn't cut down to the bone, even though we took, as we indicated, 25% of our headcount out. That's the nature of our model. Our decision not to go any further in those cuts is really driven by the fact that we want to be in a position to respond as the market recovers. And secondly, we're reserving capacity in order to make sure that we can accelerate our new technologies going forward. And so there's a little bit of a conscious decision, okay, not to take additional steps to the cost structure in order to preserve that capability.

Operator

Our next question is from Krish Sankar of Bank of America.

Krish Sankar - BofA Merrill Lynch, Research Division

I have 2 of them. Rick or Tom, when you look at you HiCz opportunity longer-term, do you think it's mostly coming from new geographies like Southeast Asia and Middle East? Or do you think your legacy DSS customers would also eventually move to the HiCz offering?

Thomas Gutierrez

I think -- I've spoken in general as to how I see this progressing over the next several years. I believe that the initial ramp of opportunities is going to come from outside of China, quite honestly, because I think the Chinese environment, because of liquidity issues and because of profitability issues and the massive amount of capacity that they have in multi-crystalline, is going to support itself in that manner for some time. And so the interest that we're seeing to ramp up these new technologies is coming from outside of China. It's inevitable that in the long term you have to go down this path, because you can't assume that prices are going to go up, and cost equals price today, and so that's inevitable. What's causing us to delay our introduction or the spending on the introduction part -- because we're spending, as usual, on the R&D side, is that there's so much uncertainty as to how the tariffs are going to develop that some of these potential customers are waiting to see where the tariff walls are put up, so that they can make decisions where to put their manufacturing facilities. And so there's a little bit of a chicken-and-egg thing going on here that, until it's clear how the tariffs are going to work, people are not going to put down capital and new factories to install this new equipment. I know it's a long answer, but I think it's worthy of -- just a yes or no.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. Got it. That's very helpful. And then a follow-up for Rick. In terms of the cost reduction activities that you're doing, at what point will you start seeing that impact the income statement? Is it going to be sometime in Q2, Q3? Or do you think it's going to be a longer-term opportunity?

Richard J. Gaynor

Okay. So the actions we took on the people front, we took at the beginning of the fourth quarter. However, you didn't really see any benefit in the fourth quarter as some of those costs unwound in Q4. So we actually are now seeing the impact -- the positive impact of those actions starting here in Q1 and will throughout the rest of the year. However, as we said on the earnings -- on the call, we have actually made investments back in some of these new high-technology areas and have invested a certain degree of OpEx back in to really offset the savings we've had. So what you're seeing is a significant investment in things like silicon carbide and GaN and Hyperion. They're not really driving up our OpEx significantly year-over-year and really being funded by the headcount actions and other cost actions we took last year.

Thomas Gutierrez

So point of reference is, we really took out about 30% of our headcount and we added back about 5% of our headcount in some of these new areas. And it will show itself throughout the year, particularly the people actions because they were single-point kind of actions. I think the volume -- as the volume recovers though, the absorption of overhead and all of that will start to leverage those cost reductions even further.

Krish Sankar - BofA Merrill Lynch, Research Division

Got you. And then the -- is it fair to assume the headcount reintroduction is all on the R&D line?

Thomas Gutierrez

Say that again?

Richard J. Gaynor

The headcount reduction we took in the beginning of Q4 was across-the-board.

Thomas Gutierrez

It was across-the-board.

Krish Sankar - BofA Merrill Lynch, Research Division

No. The reintroduction, the adding back of the...

Richard J. Gaynor

Oh, yes.

Thomas Gutierrez

Oh, yes. Yes, yes. The addition there is R&D.

Operator

Our next question is from Shawn Lockman with Piper Jaffray.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Tom and Rick, could you talk a little bit about -- when you were mentioning the potential debooking of ASF furnaces, can you talk what's ultimately going to impact the decision to do that, the likelihood of that and kind of an update of what's kind of driving the risk there?

Thomas Gutierrez

Well, I think, as we look at it, there's been such an overhang over the last 4 or 5 quarters about what's going to happen to that backlog, how quickly it's going to be delivered. And in fact, as we said on our call, those contracts aren't being canceled and the customers continue to tell us that they're going to take deliveries, but we're really considering putting a little bit of a cork in the discussion and eliminating the backlog and saying, okay, because those deliveries are so far out, okay, we're likely to consider debooking it, but not canceling the contracts in order to have a backlog that reflects more of what is highly predictable in the nearer-term. And so, I mean, we're pretty far down the pipe. We've already said that it's at risk, and so the action to take it out of backlog is really sort of perfunctory.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Okay. Very good. And talking about 2013 non-LED sapphire revenues, 1/3 of those revenues being from non-LED applications, are you anticipating that those are going to come from new orders or is that stuff that's already in the backlog?

Thomas Gutierrez

It's unclear 100%. I mean, it's possible some of it comes out of backlog, in which case, our debooking is probably less if we decide to do it. But there's also a fairly significant pipeline of opportunities that we're working on that -- and we said that, that's about a $100 million range that we've given for the year, $500 million to $600 million and most of it is made up of the risk in this sector. And our pipeline is probably 2x that number. But the decisions by the OEMs and the people that we're working with as to whether or not they're going to put the assets in place themselves, or they going to buy from the supply chain that we're creating is still unclear.

Operator

Our next question comes from Jed Dorsheimer of Canaccord.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

I have a couple of questions for you. I guess, first, on the sapphire, just to move through that. What was the -- or I guess, how much of the deposits were recognized as revenue in terms of the canceled backlog?

Thomas Gutierrez

Well, we haven't canceled the backlog and so as I...

Jonathan Dorsheimer - Canaccord Genuity, Research Division

No, the backlog -- I guess, the backlog that was -- where you see -- in the last quarter, was there any deposits on the sapphire that was recognized as revenue?

Thomas Gutierrez

No.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Okay. And just customer concentration in what you consider sort of higher risk of that sapphire backlog? Is that 1 or 2 customers, and if so, can you provide any more color on that? Is that from your largest customer in -- or your 2 largest customers in China?

Thomas Gutierrez

Jed, I thought you'd never ask that. But the -- we built it bottoms up, by customer, but it's fair to say that, I'd say, the bulk of it is one customer.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Okay. And then just on the HVPE acquisition, I'm curious in terms of your go-to-market strategy where this is going to sit. This -- there was another company that did try this. They weren't able to commercialize the tool, but it seems like you're -- you have probably a better shot on goal here as you have already relationships with the sapphire customers. So do you see this as enabling more of a template model with your sapphire customers to grow that -- the end GaN? But if you go with that strategy, how do plan to sort of convince the LED manufacturers that they're not giving up their special sauce in part of that stack.

Thomas Gutierrez

Well, there's -- first, let me address the point about somebody else has tried it. I think, that there's been one company that tried to put a cluster tool into the mix, much more complicated and much -- many more challenges than what we're doing. We're doing sort of a serial step here. And so you could conceive of this, being at the end of an epi line, where the wafer manufacturer is actually building the template or you could see it in the front end of a MOCVD -- in front of a MOCVD process. So we're not dictating where it's going to go, but our initial beta customer is an MOCVD, not a wafer guy, they're an LED manufacturing individual. And the real benefit here is, I mean, if you could increase the capacity of your MOCVDs by 30% to 50%, that's a pretty substantial improvement, especially since you're also now growing a thicker GaN layer, a higher-quality GaN layer, and you're getting some benefits out of the structure that go beyond the capital savings. But our view is, we'll let the market decide. We've got access to LED guys that have MOCVDs online, and that's where our first beta customer is coming from, as I said. And we have access to the -- our guys that are doing epi wafers. Both of them can be potential customers. You do have a point that some of the magic sauce is in the LED side, and it's more probable that it'll be on that end than on the wafer side.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Well, see, I'm -- yes, it seems that you'll have a greater likelihood of getting this adopted if you are going on the -- with the LED manufacturers there. So just on the Twin Creeks acquisition. I'm just curious in terms of your slide deck, you showed this sort of on the sapphire and on the silicon carbide. Is this primarily going to be used for cleaving-type technology to reduce cost, particularly on the sapphire cover glass?

Thomas Gutierrez

On the sapphire cover glass, I mean, you could imagine being able to create a laminate. Say, a 30- to 40-micron laminate that you can essentially bond to a substrate glass or polycarbonate or something like that, so it's more of a broader -- it's a broader application than what we would consider to be the true smartphone area, where a pure sapphire solution is more likely, okay? And so it's really expanding into the lower part of the market that wouldn't normally consider using a sapphire because the technique that we're developing would get you a sapphire surface on a polycarbonate or glass substrate. Not as good as a pure thing, but quite good compared to current solutions in terms of scratch resistance. And so that's the objective, is to create a -- to build another end to the business other than the high-end smartphone or the smartphone -- the broader smartphone part of the marketplace.

Right. And there's also a potential, Jed, just to sort of cap it off for you. An aftermarket, if you think of the laminates and the substrate that are out in the marketplace that you put on your phone on an after-market basis to protect it, there's a potential for creating an after-market laminate business here as well. And to make it clear, we're not going to make laminates. We make Hyperion cleaving tools that we will sell to people that let them do that.

Operator

Our next question is from Amir Rozwadowski of Barclays.

Amir Rozwadowski - Barclays Capital, Research Division

Just talking a bit sort of high-level with respect to how things -- you expect things to play out last year, when you talked a bit about your variability in your guidance, but obviously, we're looking at Q1 as sort of a low point. It seems as though you've derisked sort of your backlog in terms of the trajectory for 2013. But I was wondering sort of how should we think about the progression through the course of the year? And do you feel comfortable in terms of how much you've sort of derisked sort of the backlog and your ability to hit at least the low end of your guidance for the course of the year?

Thomas Gutierrez

Yes. We're obviously pretty comfortable. I mean, up until this quarter -- I think, we had 12 quarters of hitting our numbers, up until this last quarter, pretty close. And so we're generally more conservative than that. And so we've given a guidance range that we believe that we can drill. Now the risk is between the bottom and the top, as you indicated. The progression during the year that we talked about is 40% in the first year -- in the first half of the year with 60% of the business in the back half. But because of the skew of starting in a very low quarter in the first quarter, you're going to see most of the profitability and the leverage that this business has, manifest itself in the second half of the year. And so we expect to see a good second quarter and then progression through the balance of the year.

Richard J. Gaynor

The other thing that we need to remember is that well over 40% of our total revenue expectations is in the polysilicon business, and given the nature of that business, most of that is going to just roll out of backlog, so we've got a pretty good handle on that. So that's a real foundation to our -- building of our forecast for the year.

Amir Rozwadowski - Barclays Capital, Research Division

That's very helpful. And I guess, speaking on the polysilicon side. And Tom, you had mentioned some of the issues that's going around from a regulatory standpoint and questions about tariffs and so forth, it seems like there's a consistent moving target there when we're going to get some bubble of resolution. I was wondering what your thought process was in terms of where we could see some sort of action take place and at least provide some sort of certainty to the market as to which direction things are working.

Thomas Gutierrez

Sure. I'm going to step on to a little bit of thin ice because I don't necessarily do -- see this as a trade issue. I see it more as a political wrangling issue, okay, as to -- and I think, the reason you're seeing some delays on the polysilicon is because there is still back-of-the-room negotiation as to who's going to get the harder tariffs and whether or not Europe then puts tariffs on China. So this is as much a political wrangling contest here as it is a trade dispute. I fully expect that if tariffs get put in place, that the Chinese will also -- on polysilicon, that the Chinese will also create a bunch of trap doors associated with polysilicon coming into the country that's destined to be re-exported, perhaps being immune from the tariffs so that they don't hurt their own structure in China. And so there's so many questions to be answered that we've taken the view that it might create some new business opportunities for us in China in the hydrochlorination and some of the things that we do to help people improve their processes, but we're not going to assume it until the rules are very, very clear. But I think the delays from China are really driven by China waiting to see what Europe does on their tariff structure, from blocking products coming out of China.

Operator

Our next question is from Satya Kumar of Credit Suisse.

Satya Kumar - Crédit Suisse AG, Research Division

Just one clarification question on Slide 13. The covered portion of the backlog, is that mostly the poly part or is there any portion of the sapphire that's also covered?

Richard J. Gaynor

It's Slide 13. Can you repeat the question now that I've got the slide in front of me?

Satya Kumar - Crédit Suisse AG, Research Division

Yes. The slide that talks about 25% of the backlog being covered, is that mostly for the poly portion of the backlog? Or is that a portion of the sapphire backlog that also has some coverage?

Richard J. Gaynor

I can actually break that out for you. So the 25% that is secured, that would represent the $309 million of the total and the security is -- that breaks down, $40 million in -- round numbers here -- it's actually $40 million of sapphire, $265 million in polysilicon and some $3 million in PV. So the majority from poly.

Satya Kumar - Crédit Suisse AG, Research Division

Okay. The sapphire revenue guidance for the year of $300 million, give or take, what's the linearity between first half and second half for that?

Thomas Gutierrez

Pretty back-end loaded. I mean, our Materials business cranks out $5 million or $6 million a quarter if you look at it, and so you take that out and then the rest of it is the ASF furnaces. And that's, I'd say, back-end loaded.

Richard J. Gaynor

We do expect some of our Q2 and increase in revenue over Q1 to come from sapphire equipment, though. So we do start seeing it picking up in Q2 and then further strengthening in the back half of the year.

Satya Kumar - Crédit Suisse AG, Research Division

I have a question on the Soitec arrangement that you're talking about? What are you bringing to the table and what are they bringing to the table in the sense that, who's going to be responsible for improving the hardware of the system to make it do what you want to do for your customers? In the past, the type of system that you have developed, whether it was a DSS or a MonoCast or ICV [ph] or sapphire, or even Hyperion, they're really different in capability compared to the CVD system. How are you going to develop the core competency to do this? And where -- if the system is -- just one last point, if the system was really successful, could it actually also eat into the demand for sapphire wafers?

Thomas Gutierrez

Can it also what now?

Satya Kumar - Crédit Suisse AG, Research Division

Sapphire -- could it actually impact the demand for sapphire because people are getting more -- better performance than leading chips [ph] out of it?

Thomas Gutierrez

Okay. Let me answer it in pieces. Relative to what we bring to the party, the obvious part of it is we're an equipment house and Soitec is a materials house. And so we understand how to commercialize equipment, how to make equipment robust and repeatable and reliable and all those kinds of things. That's general capacity. We have a sourcing chain and a logistics chain that's enviable for producing equipment. That's one piece of it. The other piece of it is, we actually have a substantial amount of GaN technology in-house. I mean, we -- one of GT's heritage is that it was involved in silicon carbide and GaN and a variety of other tools long ago, and we have a lot of PhD's and a lot of people that are very familiar with the technology. What Soitec brings to it is they've developed a prototype tool that works at lower scale. And so our job is to scale it and then to take it to market as an equipment provider. And their R&D team will work hand-in-hand with our R&D team to ensure that the processes that are implemented on the tool itself are of the best performance. But it's truly a partnership in terms of the technology side of it. But we're not absent a fair amount of technology capability in GT.

The last question is the impact on the industry. I think, as you continue to drive the cost of sapphire down, and you continue to drive the cost of the downstream process using sapphire, to me, the thing you have to think about is, how much pressure does that put on GaN, on silicon and other technologies that are chasing the same rabbit, as they say, particularly since some of those technologies have lower performance in terms of brightness and all that. And so what I think what will happen is it will sustain and lengthen the time frame where sapphire continues to be competitive in those environments. And more importantly, the real leverage is, if the price of LEDs comes down and the ease of manufacturing them comes down and all that general illumination has a better chance of taking off faster, and that will drive volume, which is what this is all about.

Operator

Our next question is from Jeff Osborne with Stifel.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Tom, I just wanted to dig into the comment that you made about your largest customer on the sapphire side potentially receiving government or commercial financing. Is that the same customer that's in question about being debooked -- the potential...

Thomas Gutierrez

Rick -- I'm not going to sort of go there in terms of -- I have several large customers that -- and I think it would be wrong for me to sort of single any one of them out as being an issue. I think, our 2 largest customers, having said that, have significant access to government funding versus just commercial sources of funds. And so that line of sight gives us a little bit more confidence in the timing of the furnace installations that we see later in the year. And some of those customers have done a good job in these tough times in the LED side of it, coming up with some incredible opportunities for industrial applications of sapphire. And at least one of them is making a strong headway in the aftermarket for sapphire in the smartphone area.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

I guess, I'm just confused. I thought in response to Jed's question, you said the $300 million potential debookings in sapphire was largely concentrated with one customer. If my memory is right, you only had one customer that was north of that Shenzen FuYuan Holdings of $460 million, which proceeded nicely with their initial rollout. But so -- and then now you're saying your 2 largest customers have access to government funding. So how do I reconcile those statements?

Thomas Gutierrez

Well, the way to reconcile that is, I'm not going to name the customer because I think, again, I think, that would be inappropriate, but I think your logic is not incorrect. But having said that, I'm not wiping out any customer. I mean, I'm just basically saying, if it isn't going to be delivered in the next 12 to 15 months, then I'm going to assume it's at risk.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Got you. If hypothetically the $300 million is debooked, but potentially could be shipped in the future, when you're left with $400 million and change, how do we think about the potential customer concentration with that? Is that a -- is there 5 or 6 customers in that mix? Or is that down to 1 or 2?

Thomas Gutierrez

Of what we're going to ship? Yes, there's multiple customers in that. That's a combination of basically all of our customers that will be receiving bookings this year -- receiving shipments this year.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just lastly, quickly on just general financing. And now that's the new government's in place in China, you highlighted this as a risk 6 months ago. Would you say things are better, worse, the same, just in terms of access to capital for both solar and LED?

Thomas Gutierrez

As is always the case, it depends on who you are. And what -- and our view is that a couple of our customers have gotten into better favor as a result of the shift. And one, in particular, is in very good position relative to their -- how they're viewed by the government. And so as all these things, it depends on the individual customer, but things have gotten better for at least 2 of them.

Operator

Our next question is from Nimal Vallipuram of Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Tom, Rick, I have 2 questions. Number one is to bring back to your cash levels. Just on the 18th of December you indicated the midpoint of the cash levels by end of 2013 will be $250 million, and a couple months later you're indicating the $210 million. Is that decline of $40 million solely due to the pre-payment of part of your revolver, or can you just talk us through how that's going to work this year?

Thomas Gutierrez

It's a pure mathematical. We paid down $40 million, it reduced the range by $40 million. There's nothing else behind it.

Richard J. Gaynor

Yes. Our cash models did not change at all.

Nimal Vallipuram - Gilford Securities Inc., Research Division

So just from 2 months ago, you expect, other than the $40 million prepayment, your cash to be as exactly as you said on 18th of December.

Thomas Gutierrez

Yes.

Richard J. Gaynor

Yes.

Nimal Vallipuram - Gilford Securities Inc., Research Division

The second question would be, given what's going on in the smartphone space, where the phone factor seems to be in a state of flux. Either we're going to go with the Apple form factor [ph] , so the 10-point factor [ph] and also the iPad mini, some sort of a mini catalyst coming in. In the midst of paying, is it best [ph] -- the sapphire screen one, is that going to impact -- how is that going to impact the sapphire screen demand? Is it going to be positive or negative for the sapphire screen demand, since form factors are changing this rapidly.

Thomas Gutierrez

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.

Richard J. Gaynor

Out of the benefit of the technology that we have is that it can actually change the form factor of the boules that you produce. And so you can actually customize the size of the boule to the application you're trying to build for.

Nimal Vallipuram - Gilford Securities Inc., Research Division

All right. And just a final question, if I may. Where it gets for you [ph] and the policy you have discussed to some extent -- to the extent you can about the end market demand on the PV side. Given what you're doing in the DSS side, taking very radical steps, which I think, is pretty good -- I mean, is pretty bold. Can you give us an idea how this is going to play out in terms of when does -- or how does the new orders for equipment come in and at what efficiency? I mean, is this going to be HiCz? Or you have to add some of the new technology to be relevant in the next couple of generations?

Thomas Gutierrez

I think, it's a whole value chain that you have to look at. And so thin wafers, HiCz materials that are very uniform, end-type materials, and there are a lot of people outside of China, and 1 or 2 in China, working on a variety of different end-type cells that are required. But I think, you have to sort of step back from the question and say to yourself, how does this problem resolve itself? Cost is equal to price right now. Price can't go up because that diminishes end-market demand, and subsidies are going away. And so you're in a box unless you do something about driving the cost down. And we are talking to enough solid technology players and enough people that are seeing the problem the same way that we do that they have to shift the value chain to newer technology that drives the lower cost. But as I said, it's going to be mostly by some of the technology leaders that are working on end-type cells that are going to do this. And that's why we're saying, look, this problem is not going to get solved in 2013. This problem is -- this is a 18- to 24-month gestation period for the ramp up of some of this new technology to occur. And the players that are in the marketplace today can't continue to bleed that cash at the rate in which they're bleeding it without doing something about it.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Can you rank as to what would -- who would be the -- do you see the existing competition competing with you? Or do you see a completely new set of players competing with you in a couple of years time for CV panel or via such kind of front assistance [ph] ?

Thomas Gutierrez

No. I think, we've made it clear what we think is going to happen to multi-crystal and DSS technology. And quite honestly, I don't see anybody that's anywhere near competing with us right now, on next-generation technologies that we're developing. The Hyperion, nobody's got that. The HiCz, nobody has it. And we've got a couple of other tricks up our sleeve that we'll talk about in due course. But I appreciate your question. Hopefully, we'll continue to dialogue off-line.

Operator

Our next question is from Scott Reynolds of Jefferies.

Scott Reynolds - Jefferies & Company, Inc., Research Division

Just a quick question. We had talked about last year, potential for some polysilicon orders and then potentially, this year from the Middle East. I don't know if you could give us an update on that?

Thomas Gutierrez

Sure. I mean, I've got a team in Saudi right now, as we speak. As we've said, we expect to see the engineering orders towards the tail end of this year and then reactor orders following, assuming the projects move forward in 2014 and beyond. We're in very good competitive position. Our lone European competitor of any merit, as you know, is just coming out of bankruptcy. Nobody's going to bet their future on that. And we still have the best technology around. And so we're in very good position and we're moving at the pace in which the decision making in Saudi is going to move. So -- but I think, it will probably be second half for the engineering orders now versus first half, based on the pace at which those projects are moving.

Scott Reynolds - Jefferies & Company, Inc., Research Division

Are we still looking at order in the size of $300 million to $500 million, potentially?

Thomas Gutierrez

The opportunities are $300 million to $500 million, yes.

Scott Reynolds - Jefferies & Company, Inc., Research Division

And the way they're looking at is, is this a way for the Saudis to address local content requirements that they're looking at? Or is there a -- is this -- do they view this as something that they do and be competitive? Or they're looking at it some other way?

Thomas Gutierrez

I think, it varies by project. Some projects are aimed internally. But I think, more and more, there's a belief that using some of the new technologies that we've developed, and others have as well, that they could be competitive on the world stage. And so I think, it's a combination of both. I'd -- and there's -- it's not just one customer we're talking about. They have different endpoints.

But I want to thank everybody for taking the time and asking good questions, exercising me well today. And I look forward to talking to each of you off-line to answer any additional detailed questions that you have. Thank you very much.

Operator

Ladies and gentlemen, this conclude today's conference. Thank you for your participation and have a wonderful day.

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