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GT Advanced Technologies (NASDAQ:GTAT)

Q1 2013 Earnings Call

May 02, 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

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Thomas Yeh - BofA Merrill Lynch, Research Division

Stephen Chin - UBS Investment Bank, Research Division

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

Satya Kumar - Crédit Suisse AG, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Nimal Vallipuram - Gilford Securities Inc., Research Division

Weston Twigg - Pacific Crest Securities, Inc., Research Division

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

Paul Leming - Soleil Securities Corporation

Operator

Good morning, and thank you for standing by. Welcome to GT Advanced Technologies First Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. Now I'll turn the call over to Ryan Blair Flame of GT Advanced Technologies Investor Relations. You may begin.

Ryan Blair

Thank you, and good morning. 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 report on Form 10-K for the transition period ended December 31, 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 at approximately 10:00 a.m. Eastern today and can be accessed on the IR section of our website. An audio replay will also be available through May 16. Please refer to our website 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 Q1 results, which came in slightly better than expected. He'll also provide details on our current outlook for calendar year '13, which remains unchanged from our prior guidance. First, I'll provide some context with respect to our performance in Q1, and then I'll update you on our existing and new business initiatives.

As we've noted before, we have good visibility with respect to how our polysilicon business is expected to develop over the next several years. Our poly backlog is comprised largely of orders with top-tier customers, and we expect that while the business is somewhat lumpy due to revenue recognition considerations, the current $491 million of poly backlog will provide a solid base to our overall business through 2015. We expect that approximately 41% of our calendar year '13 revenue will come from our poly business, and that nearly all of the remaining poly revenue for the year will come out of deferred revenue and from an order for reactors that we expect to complete shipping by the end of Q2.

Looking forward, we're very encouraged by the MOU that we recently announced with Taiwan-based poly producer Powertec. Powertec expects to commence their next expansion in 2014. Under their schedule, we had expect to begin booking-related orders in the second half of 2014 with revenue contribution in 2015 and beyond. Powertec's current plans are to add an additional 20,000 metric tons of capacity most likely in several stages. Assuming the project is split into 2 equal phases, we would expect the value of the initial order to be over $100 million.

We also remained involved in a number of Middle East projects and are highly confident of our ability to win a significant portion of this business if the projects move forward. These opportunities are incremental to the Powertec business and could represent an additional $300 million to $500 million of revenue for GT in 2016 and beyond.

In PV, business has remained limited in line with our long-held view that challenging solar market conditions will persist into 2014. We now expect approximately 4% of the year's revenue to come from PV as a result of the better-than-expected success we have had in converting DSS inventory to cash albeit at low margins. In Q1, we booked approximately $9 million worth of DSS orders primarily to a leading PV manufacturer in China who remains committed to investing in multi-crystalline technology. Subsequent to the close of the quarter, we booked an additional $4 million of DSS business with a Taiwanese customer.

We have also continued to make good progress on the development of our HiCz solution and have now completed the transfer of HiCz R&D and know-how to our New Hampshire location from St. Louis. We continue to target introduction of our HiCz product in 2014 with an expectation of initial order traction in the second half of 2014 if the market strengthens and new N-type cell designs start to ramp as expected. In all cases, we do not expect HiCz to be a significant contributor to GT's business until 2015.

In 2013 and 2014, we expect our sapphire business to be our primary growth driver with approximately 55% of this year's revenue expected to come from our sapphire segment. We're starting to see signs of improvement in the LED market as 2-inch and 4-inch sapphire prices has stabilized and many of our active ASF customers are reporting utilization rates on the store units which, on average, exceeds 70%.

Given the improving pricing environment, continued growth of non-LED industrial applications, improved utilization rates and our own progress in helping customers lower their operating costs, we continue to expect the ramp of our traditional sapphire business in the back half of this year. In addition, momentum has continued to build with respect to our initiatives in the cover and touchscreen markets, and we believe we can begin to see traction for related ASF sales as soon as the second half of 2013. The agreement that we announced this morning for GT to supply Motorola Solutions with sapphire screens for their new bioptic scanner marks the first deployment of GT sapphire in the point-of-sale market.

Our pipeline of opportunities involving smartphone OEMs also continue to build. We have seen a groundswell of excitement and interest amongst users and potential customers about the use of sapphire for cover screens. Sapphire's durability, scratch resistance and improved touch sensitivity, when combined with the elegant nature of sapphire, make it a viable and desirable solution. There's also growing evidence that sapphire's value proposition exceeds its incremental cost. And that the differential we are projecting will not deter its commercialization. We have made significant progress working with fabrication partners to further refine the process for effectively fabricating sapphire into screens. Our most recent analysis suggest that first generation screens could be manufactured for $10 to $15 above the cost of strengthened glass. We expect this cost will drop quickly thereafter as our partners and customers achieve higher volume and improved efficiencies.

In addition, we believe that, over time, our Hyperion solution, currently in the R&D phase, could enable further cost reductions that could bring sapphire solutions to cost parity with strengthened glass, further broadening the array of applications and actually increasing the demand for sapphire. Our early progress gives us added confidence that Hyperion will achieve these milestones.

The question continues to be the timing of sapphire adoption in the smartphone screen market. We've taken this into account with our calendar year '13 range differential of $100 million from top to bottom. We've moved that initial traction for our ASF furnaces in this market as likely to come from smartphone players that have multiple models in their lineup and can commit a single model to sapphire, as well as rugged device manufacturers and makers of accessories and point-of-sale systems. We believe that furnace demand related to adoption of sapphire screens by leading high-volume smartphone OEMs is not likely to develop until 2014, and that Hyperion-related opportunities will start to develop in 2015 and beyond. It is clear to us that adoption of sapphire in the cover screen market is no longer the question. It's now all about timing.

Before turning the call over to Rick, I'd like to provide additional color in 2 of GT's other high potential diversification and growth initiatives: HVPE and Hyperion. We remain excited about the HVPE technology that we are developing with Soitec, as it further enhances our LED equipment portfolio. Our alpha tool is in operation at Soitec's labs in Phoenix. And we have started work with our initial beta customer. We have seen very strong interest in our HVPE tool from several leading LED players since our announcement in February, and we remain on track for an HVPE product and process introduction in the second half of 2014.

While we believe Hyperion's application potential with sapphire is very significant, we also believe that Hyperion will have broad application in the solar and silicon carbide markets where it has potential to significantly lower cost. We believe Hyperion can have a substantial impact on growth for our solar and silicon carbide business beyond 2014, potentially expanding the market for silicon carbide business and enabling next-generation solar solutions that can thrive in an environment with shrinking subsidies. We currently have the second-generation Hyperion system running in our development lab, and expect to have the third-generation production configuration system in place by the end of this summer. We continue to expect to be in a position to take the technology to market and begin generating meaningful revenue in 2015. While we will not be covering our silicon carbide project today in detail, we remain on track with this development.

With that, I'll turn the call to Rick to review our Q1 results and calendar year '13 guidance.

Richard J. Gaynor

Okay. Thanks, Tom. And good morning, everyone. Before I provide details on our performance in the March quarter, I would like to note 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 typically exclude for our non-GAAP results, we took nonrecurring charges in the March quarter related to the restructuring initiatives we commenced at the end of last year. These included approximately $1.8 million of charges related to the lease of our idle St. Louis facility, approximately $400,000 of residual restructuring charges related to our workforce reduction, and approximately $500,000 for PO cancellation charges related to our DSS business.

Moving on to the results for the first quarter 2013 which ended on March 30. Q1 revenue was $58 million, at the top end of our guidance. This included approximately $38 million of polysilicon revenue, $4 million of PV and $15 million of sapphire revenue. The polysilicon revenue was primarily related to a hydrochlorination equipment order that we announced in January 2012 from SMP, a joint venture between Samsung and MEMC. The sapphire revenue was a combination of sapphire materials and ASF systems.

Moving on to gross margin. On a non-GAAP basis, gross margin was 24.4% for the first quarter. The non-GAAP gross margin excludes approximately $500,000 of DSS PO cancellation fees. Non-GAAP gross margin by segment in Q1 was as follows: a negative 19% for PV, reflecting our success in converting some DSS inventory to cash at very aggressive pricing; a favorable 35% for polysilicon; and 12% for sapphire, reflecting low ASF equipment volumes, the current pricing environment to sapphire materials and the conversion to cash of some high-cost excess feedstock we had in our Salem operation.

Operating expenses before contingent consideration and restructuring, were $37 million in Q1. Total operating expenses including these charges were $40 million. R&D expenses were $16 million.

Now moving on to EPS. The Q1 fully diluted non-GAAP EPS was a loss of $0.07, which came in better than our guidance range, primarily due to favorable OpEx spending and a tax benefit in the quarter.

Moving on to our balance sheet. We ended the March quarter with approximately $320 million of cash and cash equivalents and $260 million of total balance sheet debt. The debt included $100 million related to our credit facility and $160 million related to the fair value of our convertible bonds.

In line with our expectations, operations consumed approximately $54 million of cash in the March quarter. In addition, we used $40 million to pay down part of our term loan, and we used approximately $2 million for capital expenditures.

And moving on to backlog. During the quarter, we received orders totaling approximately $16 million, which included $9 million related to the DSS inventory we have previously written down and $7 million for sapphire material. While we remain confident that emerging cover screen opportunities and improving LED conditions will result in new orders and the conversion of a meaningful portion of our ASF backlog, we have decided to adjust our backlog downward by approximately $356 million for ASF orders we have previously identified as at risk. The sapphire capacity associated with these orders is principally intended to the LED industry, and as a result of the industry's overcapacity condition, these shipments continue to slip out. While the orders have not been canceled and the customers remain contractually obligated, we believe these orders are not likely to convert to sales in the foreseeable future. As a result, we concluded that leaving them in our reported backlog was no longer a good indicator of our revenue potential. Following the removal of these orders, we now have $352 million of sapphire backlog, 9% of which is covered by customer deposits.

We are now reporting a March ending reported backlog of $851 million. This includes $491 million of polysilicon, $8 million of PV and $352 million of sapphire. Our total reported backlog security as of the end of March quarter was approximately 35%, with approximately $146 million in deferred revenue, $8 million in letters of credit and $143 million in nonrefundable customer deposits.

Now moving on to our guidance for calendar year '13. As a reminder, in addition to the charges that we typically exclude for non-GAAP, our non-GAAP guidance excludes the residual charges that we may take in the balance of 2013 related to any gain loss associated with the disposition of the St. Louis facility.

We are reiterating our calendar year '13 revenue guidance of $500 million to $600 million. Assuming the midpoint of our range, we now expect that the split by business will be approximately 4% from PV, 41% from polysilicon, 55% from sapphire and less than 1% from silicon carbide. Slight shift in segment mix is largely driven by the better-than-expected demand we have seen for our DSS product. The $100 million delta between the high and low ends of the revenue range is largely driven by the timing of converting cover screen ASF business. We expect revenue in the second quarter to be in the range of $160 million to $180 million driven largely by our polysilicon business. Most of the polysilicon revenue in the second quarter relates to expected perfunctory recognition of SDR 400 shipments. We are reiterating our non-GAAP gross margin for calendar year '13 in the range of 35% to 37%. We currently expect Q2 non-GAAP gross margin in the range of 32% to 34%.

Inclusive of restructuring costs, total operating expenses are expected in the range of $150 million to $155 million, down from our prior guidance of $154 million to $160 million. The calendar year '13 OpEx range reflects approximately $16 million of expenditures to support new technology development programs such as Hyperion, silicon carbide and HVPE. R&D expenses are now expected to be in the range of $70 million to $75 million, down from our prior guidance range of $75 million to $80 million. Our CapEx is expected to be approximately $10 million to $12 million in calendar year '13, the bulk of which is directed primarily at new technology investments. We expect an effective tax rate of approximately 27% for calendar year '13. And we are also reiterating our non-GAAP EPS range of $0.25 to $0.45 for calendar year '13, assuming a diluted outstanding share count of 121 million shares for the year. We continue to expect the majority of our 2013 non-GAAP EPS will be generated in the second half of the year, reflective of improved revenue and mix during that period. Q2 non-GAAP EPS is expected in the range of $0.07 to $0.10, assuming a diluted outstanding share count of 121 million shares for the quarter. Our cash expectations remain unchanged from previous guidance in the range of approximately $260 million to $285 million by midyear, and $185 million to $235 million by the end of calendar year '13.

And with that, I'll turn the call back to Tom.

Thomas Gutierrez

Thanks, Rick. I'd like to conclude by emphasizing a few points. First, our diversification strategy, which we embarked on in 2010, is continuing to yield results and several of the projects we discussed today are aimed at furthering that diversification. Just 2 years ago, solar accounted for essentially 100% of our business. In 2012, it accounted for only 70%; and in 2013, we project solar will be less than 50% of the business. Our objective is not to exit the solar business, as we remain believers in the long-term growth potential of that market, and our poly business remains strong. Our goal is to diversify our business outside the solar space, while working to solidify our position as a solar market leader and bringing new technologies to market that help to significantly lower cost per watt and improve solar's viability as a cost-effective, renewable energy source, particularly as subsidies fade away. Our ability to invest has been enhanced by the actions we took last year to create a leaner organization, and we remain confident that our balance sheet is strong enough to allow us to make targeted investments that strengthen our position and serve markets, as well as in growth initiatives that further diversify the business.

With that, operator, I will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jed Dorsheimer of Canaccord.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

I guess the first question is maybe just lessons learned in terms of the LED with respect to deposits. As you look to commercialize the cover glass opportunity for ASF, are you -- do you plan to take a different strategy in terms of the amount that you're looking to secure from customers, so that maybe you don't get into the -- a possible similar situation with write-down in the backlog? And then I have a follow-up.

Thomas Gutierrez

Yes, Jeff, that's a fair question. I think, the strategy we took with -- in the LED sector when we started out with our sapphire furnaces was to take an initial deposit, and then to allow customers to add to that deposit level before shipment. And in practice what happened is, as the market changed, those subsequent deposits didn't occur. And to a large extent, taking that $356 million out of backlog relates to not only delayed shipments, where we don't see a shipment date anytime in the foreseeable future, but also we didn't receive those incremental deposits. And so most of that business was uncovered. As it relates to the cover screen market, we're dealing with different kinds of players that have considerably different balance sheets and are not generally start-up players. And so our view is that, yes, we will expect to take much more substantial deposits on sapphire furnace orders that relate to that industry.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Great. And then my follow-up question is -- I'm unfamiliar with the point-of-sale market from a scanner perspective, and I didn't hear a lot of commentary in terms of the size of that market, the opportunity, sort of how many furnaces that will require. Could you help us better understand how you're looking at this? Is it just sort of a beachhead opportunity to validate in point-of-sale? Or do you think that this could drive meaningful furnace sales and maybe quantify that?

Thomas Gutierrez

Motorola Solution here is quite revolutionary in terms of its performance and in the use of sapphire. But it is a beachhead to a large extent. And as we said in the announcement, it is an exclusive arrangement between GT and Motorola. And we'll be supplying the volume out of our own operation in the U.S., which was important in Salem. Yes, to the extent that, that business with Motorola grows beyond the capacity that we have in Motorola, we have the ability to then reach into our supply base from our customers to expend. But this is really a demonstration for us because, look, this is the first and it's quite important from our view, demonstration that the value of sapphire is important in those kind of markets. But the market is rather huge for other types of scanners. We would not intend, given the exclusive relationship, to service all the other scanner opportunities that exist in the market out of Salem. We'd expect our customers to do that. But I'm not prepared to put a number on the number of furnaces that might be involved as our customers address the follow-up [ph] market. But I think the statistics on the size of the scanner market and all that are readily available in the public domain.

Operator

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

Thomas Yeh - BofA Merrill Lynch, Research Division

This is Thomas Yeh calling in for Krish Sankar. Regarding the adjustment you made to backlog for the ASF orders, can you give us some color on what were the circumstances during the quarter that sort of resulted in that position? And was it a broad-based set of customers or a particular group experiencing some issues?

Thomas Gutierrez

We sort of flagged, last quarter when we had our call, that we were considering doing this. And we completed a very thorough analysis of the backlog as it relates to our sapphire furnace orders. And a couple of circumstances. In the case of this $356 million, we couldn't identify a shipment date in the foreseeable future. And secondly, we didn't have a deposit backing up those orders. But we do have a contract, and the contracts are enforceable. But what we decided was that if we couldn't identify shipment date in the foreseeable future, and we didn't have a deposit against it, that we would take it out of reported backlog. We haven't canceled the orders. This was not a broad-based number of customers. This is predominantly related to a single customer who, no, I will not name. But hopefully that gives you the response you're looking for.

Thomas Yeh - BofA Merrill Lynch, Research Division

Yes, very helpful. And as a follow-up, Tom, could you say that the bottom and lower -- the bottom and the higher end of the full year guidance range is largely driven by the timing of sapphire mobility adoption during the second half? And maybe you can go over some of the puts and takes of what could get us to the higher end of that range.

Thomas Gutierrez

Oh, I mean, it's all driven by adoption in the cover screen industry. I mean, we're extremely pleased to, as Jed put it, to have established our first beachhead that demonstrates the value of sapphire in one of the served markets. And as we said in our prepared remarks, there's is a very, very, very large players that would drive an extraordinary level of business for us. And then there are other players that have multiple models that could step into the market with a single premium model that has sapphire. And our belief is that those are the kinds of orders that will convert first. Because, quite honestly, the supply chain, to be able to serve those bigger players, is not yet in place and we don't expect to see that start to occur until 2014. But all of the $100 million is really related to our assumption on when any 1 or 2 of the many discussions that we have going on converts into an order for additional furnaces. Then, I stress that we are talking to quite a few players at this stage that have not only expressed an interest, but are in the sampling stage or in the putting the process in place to go to market. But timing is critical towards the tail end of the year.

Operator

Our next question is from Stephen Chin of UBS.

Stephen Chin - UBS Investment Bank, Research Division

First question, you beat EPS by $0.07, but you haven't raised your guidance for the full year. Are you just being conservative for the second half?

Thomas Gutierrez

If I was being conservative for the second half, I wouldn't be able to tell you, Stephen. But no, there's puts and takes, okay? And one of the things that has happened here is, I mean, we're converting our DSS inventory at a pretty nice clip into cash. I mean, that's really important to us, and that's driving margins down. And so, yes, to a certain extent, we're being conservative. On the flip side of that, we're being aggressive about how much of the DSS inventory we can convert to cash for the rest of the year. But the mobility of opportunities from one quarter to the other is pretty significant in this business, as you know. And so it's -- the fact that we beat it in this quarter does not drive us to believe that we're going to exceed our range. And our range is rather wide, if you really look at it. And so we feel comfortable that we're well inside that range, up side and bottom.

Stephen Chin - UBS Investment Bank, Research Division

Got it. And as a quick follow-up, maybe you shared that most -- almost all of the de-booking is from the one customer. And if I remember correctly, they had about $430 million backlog with you. How much of sales in 2013 are you expecting from that one customer?

Thomas Gutierrez

I didn't name the customer, and I can't connect the dots for you, Stephen, as you were essentially doing in the question there. And so I can't confirm who the customer is and what they've taken and what they would take for the balance of the year. I said, it was predominantly one customer, but not all one customer.

Operator

Our next question is from Jeff Osborne of Stifel.

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

Tom, just had a couple of quick questions here. In the past, you talked about access to financing as a challenge for your customers. Has that kind of cleared up and is less of an obstacle going forward?

Thomas Gutierrez

It's seems to be less of an obstacle but predominantly because the money is not coming from commercial banking institutions, the -- our sales for the balance of the year with customers that have access to more government-type funding. And so it's not as much of an issue as earlier or late last year when we were sort of counting on customers that needed to get their funding from the commercial banks. So not as much of an issue. The market conditions are more the driver in our penetration of this smart screen market, or touchscreen market, is the key driver in our range.

Richard J. Gaynor

I think in the past, we talked about the liquidity availability being somewhat sector specific, and we're not -- we're still seeing pressure in the DSS environment. There seems to be, still, a lack of liquidity for expansion on the PV side that does not apply on the ASF side.

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

Got you. Great to hear. Just 2 other quick ones here. Is the scope of Salem shifting here, I mean, not only with the Motorola award but potentially with these kind of lower-volume, higher-end touchscreen phones, would you folks be doing that? Or when you talk about the $100-million range for sapphire, is that more on the material side where you would be doing it? Or do you anticipate more equipment sales? I'm just trying to make sure that you're not actually becoming a producer and, to a greater extent, competing with your customers.

Thomas Gutierrez

No, we have 0 desire to become a materials player in the large sense, and so we're basically consuming the capacity that we have in Salem. And as our customers have moved into some of the industrial applications and LED applications, the national -- the natural shift for Salem is to move into these kind of beachhead opportunities, and an application like Motorola's could potentially consume our consumer Salem capacity. But we're not planning on expanding beyond that footprint at all for the very reason that you noted.

Richard J. Gaynor

In fact, this is very much in keeping with our original strategy for the facility, which was to do some work for the LED market, but mostly to establish proof of concept and be at the leading edge of technology. But that the factory itself will be more of specialty markets type.

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

Perfect. And then, Rick, just a quick one for you. I'm trying to reconcile the improving gross margins in the second half. Obviously, you have a mix shift, but with that in place, less poly, I would assume, and more sapphire based on the guidance and commentary. But the cash usage is pretty pronounced. How do we kind of look at that? Is that just the receivables that you expect will be longer tailed relative to the recognition of the deferred in the first half?

Richard J. Gaynor

Yes, there's multiple elements that move the cash needle in the second half, Jeff, so it's hard to make it extremely crisp for you. But some of the primary drivers are in the second half of the year, we do have payment terms associated with some of the revenue that we will be recognizing in the year. So some of those payments will be received in the January, February time frame, because we are back-end loaded. And secondly, we do have to position some inventory for those ASF shipments in the back half of the year, which made some of those payments will fall into the year. So it's predominantly driven by the timing of receipts and payments.

Thomas Gutierrez

I think the other point, Jeff, is that we're -- our business will be shifting more and more towards a book-and-ship model. Even in poly, as we get perfunctory treatment of some of the technology that we're shipping, it shifts more to a book-and-ship model. And so revenue converts to cash more readily as you move closer and closer to that type of business model.

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

Great. Last, one quick one. There's no more backlog at risk. You didn't mention that here, but I assumed you've kind of scrubbed it and with this last purge, there's nothing left?

Thomas Gutierrez

I mean, our view is that our backlog is quite solid and of very high quality based on the actions that we've taken.

Operator

Our next question is from Satya Kumar of Crédit Suisse.

Satya Kumar - Crédit Suisse AG, Research Division

I was wondering if you can help me reconcile the change in the covered backlog and the revenue numbers. So there was an increase in the amount of revenue that you are getting from the unshipped portion of the backlog this quarter. I think it was about $45 million, $46 million or so, and that's an increase from the last 3 quarters. I was wondering if that is coming from new shipments or is just a reflection of the sale of the PV inventories that was happening.

Thomas Gutierrez

I'm not 100% sure I comprehend your question, Satya. Can you...

Richard J. Gaynor

Neither do I.

Thomas Gutierrez

Can you rephrase the front end of that?

Satya Kumar - Crédit Suisse AG, Research Division

So if I look at your change in the backlog that's covered by deferred and deposits and LCs, that change is about $12 million this quarter, which means that there was $46 million or so of revenue that came from new shipments in the quarter. And if I look at that number over the last couple of quarters, it was really low, $11 million and $15 million was the amount that came from new shipments. I was wondering if this $46 million was -- I mean, what part of that was sale of -- is it turning to written-off PV inventories? Or there is movement happening to new shipments that's helping you...

Thomas Gutierrez

I think, clearly, Satya, as I said earlier, I mean, our model is shifting toward more book and ship, and so DSS is book and ship right now. We book it, we push it over the edge of the dock and ship it and collect it right away. So you won't see the deposits flowing through the backlog security area. And even in some of the ASF areas, the business is book and ship as well. And so given that we've not taken a lot of new orders, we're not adding to those deposits. Now there's a shift here because by taking out $356 million of essentially uncovered backlog, the statistics on how much security we have changed. And those are the only puts and takes that I can think of relative to your question.

Richard J. Gaynor

Yes, if you look at the mix of business in the first quarter, the DSS units, that's a book-ship business now. We get an order, you pay us, we ship you the inventory. Sapphire is composed of some ASF units, but also composed of the sapphire materials, and that's very much a book-ship business. So the mix of book-ship is probably trending up, if that helps you.

Satya Kumar - Crédit Suisse AG, Research Division

Okay that helps. That helps. And then a quick question on the EBITDA covenants. I think there was change in your credit agreement, I guess, in February and I noticed that there was an EBITDA covenant for, I believe, $68 million for this calendar year. But if I just looked at the EBITDA level that you're looking at for this year, it seems to me, perhaps, it may be a little bit lower than that covenant level. I was wondering if you could discuss the cash relative to the EBITDA covenants and if -- how we should think about that for the second half.

Richard J. Gaynor

Yes, I can't bring you to the detail in the call, maybe we can do so on a follow on. But if your concern is regards to the amendment that we did in the first quarter in the new covenants and the most significant are perhaps the EBITDA covenant and the liquidity/cash covenant, and we are still forecasting the year unchanged as we did last quarter. And so all of our models show us easily, at this stage, clearing all of those covenants. So we have no concern about any covenant compliance at this point in time.

Operator

Our next question is from Pavel Molchanov of Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

One more on the Motorola relationship. What sort of time frame do you envision for rolling this out? I mean is it 12 months, 24 months? And, I guess, what might the ramp up be as you talk to the customer?

Thomas Gutierrez

[indiscernible] The product, and we're shipping sapphire. So it really is driven by their penetration of the marketplace versus the business is beyond start-up at the moment.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. When did you start making the deliveries?

Thomas Gutierrez

Recently, in the last quarter or so.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then a question about some of the tariff issues in the headlines. I know in the past, you've talked about the prospect of a European tariff against China, Chinese tariff against Europe, I guess your related thoughts on that and how you are factoring those uncertainties into your guidance.

Thomas Gutierrez

Well, the -- I think you correctly characterized it as uncertainties. But we're in both the pleasant position and the unpleasant position of not caring too much in the short term because we have 0 business in the PV sector, which is the most impacted. And the nature of our customers in poly, we don't expect to be immediately impacted there as well. But my view on the tariffs is, there's a lot of discussion going on between China and Europe and the European Union. Whether that ends up in a constructive settlement or not remains to be seen because there's many factions in the EU that are rabidly against any kind of settlement, as there are many that are on the opposite side of the [indiscernible]. What's clear to us is that it will be some level of tariffs, whether they're high or low is uncertain, whether the EU skates by and it's Korea and the U.S. that get the bulk of it, is all up in the air. But -- and the last thing that's still really unknown is what type of workarounds will there be in the rules. For example, I've heard of a potential scheme or poly that gets shipped into China that is destined to be shipped back out in the form of cells or wafers will be exempt from the tariffs, which, to a certain extent, really helps some of the players that we're doing business with. And so it's unclear. I mean I think the moving forward of the Powertec business and the business that we have in other regions that we're shipping to right now could potentially give us some opportunity, if indeed the current players are blocked from shipping into China. But I continue to not understand the logic because China can't support itself in high-quality production of polysilicon. And if they put tariffs on polysilicon, they're going to increase the cost of their already profitless wafer and cell manufacturing industry, and so it defies logic.

Operator

Our next question comes from Shawn Lockman of Piper Jaffray.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Just wondering if you could -- I was just wondering if you could talk a little bit more about the Motorola opportunity. I know it's a materials win. Do you guys see any possibility of that sort of converting at some point to furnace sales or at least kind of opening up the avenue in the industry for that just as it's kind of proven, but specifically with Motorola and then -- and maybe if could speak to other customers as well.

Thomas Gutierrez

Yes, well -- I mean, the point-of-sale market is actually not huge, okay? To us, the value is this is an American supply source for that particular opportunity. But it's really a proof point. It proves that sapphire has value beyond its cost in applications like that. This as a pretty good-sized piece of sapphire that's being used here. I think 24 square inches or something like that, I think, is the number that I saw, which is akin to a smartphone screen size in some of the smaller ones. And so I don't see it driving a huge amount of ASF sales. I think it's a signal that says we're working with some fairly serious players. And this is an initial, as I said, proof point that sapphire does have value. And so I wouldn't go pencil in hundreds of millions of dollars of sales of ASFs associated with this, but I think it's a precursor to applications in other areas.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Great. And if I could just kind of come back to the question earlier about the, Rick, that you addressed about the $68 million EBITDA covenant. I mean, if I do the math quickly, it looks like it will require around $80-plus million in EBITDA for the rest of the year in order to hit that. Can you talk a little bit more specifically about how you guys intend to hit that and what it will take to do that?

Richard J. Gaynor

All I can tell you, I mean, EBITDA is not a number that we discussed publicly. So if you look at the numbers that we do discuss publicly, you take our $500 million to $600 million range, take the midpoint on that, we've given you an EPS number, take the midrange of that and then try and convert that into -- yourself into an EBITDA number, you should easily come to the conclusion that we will be well in excess of the requirement under the covenant.

Operator

Our next question comes from Nimal Vallipuram of Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

I've got 2 questions, if I may. Briefly, if you look at your supply chain and if you look at your downstream, if you look at what we are hearing from the downstream market in terms of solar, there seems to be renewed strength, at least in some geographies, the solar demand has come back and so in some measure, reflected by the valuation of those companies who are playing in the downstream. If you look at the sapphire market, there seems to be some scuttlebutt in the industry that the sapphire pricing has, clearly, to some extent, firmed up compared to what it was a few quarters ago. Given this is true, whether it is real or not, can you give us some idea how would that be reflected on your numbers, a.k.a. backlog within the context that you have said; except for poly, for the DSS as well as for the sapphire, you are moving more into the book-and-ship model. Does it mean that your backlog numbers are not necessarily going to reflect how the business is going to be going forward? Is it going to be less important than it was, at least within the financial market, because investors tend to look at your backlog numbers in the past. Can you give us some idea within the context?

Thomas Gutierrez

Okay. There's about 3 or 4 questions buried in whole, but I'll start with the solar demand. I don't look at end-market solar demand as a particularly good indicator right now because what's happening is solar demand installations per se, are doing quite well. And the installers are making good money. But in our view, that's driven by the fact that the prices being charged for modules and the component parts that go into modules and all that are close to, if not in some cases, below cost, okay? And so I've held for quite some time that 5x the demand of something that you can't make money on doesn't improve the dynamics for the downstream players. Certainly, and you have to draw a line between what the installers see and what the end-market demand is, and whether or not people that are making the products, in downstream or even in the crystalline area, can make any money at it. And so my long-held belief is, great, the market is elastic, and you can sell more if the prices are low. But the industry has got to lower its cost. And it has to go down by a factor of 30% to 50% from where it's at right now and that means new technology. So we're not counting on any significant new orders. In solar, we're seeing a ramp based on the adoption of new N-type cells and all that. And even for solar, as you had noted has been in the press recently, has moved into N-type crystalline applications in terms of driving efficiency, next-generation technology. So that's my response in the solar chain. It doesn't change anything of what we've said because the end-market dynamics don't fix the basic problem that manufacturers can't make money at these prices. On sapphire pricing, yes, as the sapphire prices continue to stabilize and expand, that leads to our LED sapphire customers being able to make money, which we're going to also help them by continuing to lower the cost. And that will show up in our revenue. Now the last question is probably the most important that you're asking. That is, what happens to our backlog? And I said earlier today that we're shifting to much more of a book-and-ship model where the bookings come in the backlog and exit backlog almost immediately. Our ASF business is mostly book and ship. The only scenario that I can see where our backlog would significantly spike for some period of time would be a big massive order related to smart screens that we would have to work off over time. But in general, it's a book and ship business. The DSS business is book and ship. And even the poly business, to a certain extent, is not going to reside in deferred revenue for very long anymore because we've got perfunctory or we're working toward perfunctory treatment of most of the technology that we've got in the marketplace. So as we shift towards a book-and-ship model, backlog becomes less and less important. I still believe that backlog aiming around 1 year's worth of revenue relative to current guidance. It's about the range that you should be in to have a healthy business unless you move fully to book and ship. And we're above that point even where we're at today.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Do you -- I mean, I don't want to ask you to make in a comment in that, as you said that -- I mean, the backlog number being close to 1-year expected sales for the next 12 months or so, I mean, that would imply -- again, I don’t want to put words here, that would imply that the backlog numbers would continue to be worked off of the current level. Is that a fair statement?

Thomas Gutierrez

I don't think I can sort of respond to it, but I would tell you that I also said that as we penetrate the smart screen market, I expect to see some sizable orders related to that, that won't be worked off overnight. And so there's a lot of puts and takes here as to where the backlog grows. I was just -- my comment is really intended to say, do we need a $2-billion backlog to have a healthy business? The answer to that is, no. It can be closer to revenue and the fact that we're moving more quickly towards a book-and-ship business than that. And that affects the backlog. But you've asked about 5 questions.

Operator

Our next question is from Wes Twigg of Pacific Crest Securities.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

First, just wondering if you could help us understand that $100 million delta in guidance that you said was related to sapphire demand for cover screens. Can you help us understand, would that be for 1 phone model or several or just sort of a number penciled in to hit any of the above?

Thomas Gutierrez

If I look at the opportunities that we're working on, there are some that are bigger than that number. There are some that are about that number. And there's multiple of them that it would take 1 or 2 or 3 of them to equal the number. And so the $100-million number is a target based on the number of opportunities that we have. What I was trying to say on the call was that my expectation is that it's going to be a couple of different entities versus 1 large entity ordering $100 million worth of product, that the bigger opportunities relate to people that need a supply chain that isn't quite in place yet.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Okay, good, that's helpful. And then I'm also wondering if you can help us understand your framework, the one that you use, for expected incremental furnace demand for, say, x number of phone units.

Thomas Gutierrez

Well, I think, we said that...

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Say 1 million phone units.

Thomas Gutierrez

I think we said that about 5% penetration of the smartphone volume -- worldwide volume would equal around 3,000 furnaces.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Okay. And then just one more question. I think there was a comment about Q2 polysilicon revenue. I'm not sure, I didn't hear the number around it. Could you clarify that?

Thomas Gutierrez

Yes, we didn't put a number on it. What we did say is that quite a bit of it is related to the recognition of revenue associated with sales of a product that we will -- that we expect to be given perfunctory treatment during the quarter.

Richard J. Gaynor

Yes, we will -- we're shipping SDR units to a customer. We have a fairly significant sample size in the field. And the only question is, will we, as a company, feel comfortable at the end of the quarter that we have achieved perfunctory accounting recognition on those or not? And right now the evidence suggests that we will be able to recognize those this quarter. If not, it's just a timing issue. It will fall into a later quarter, but we feel relatively comfortable right now.

Operator

Our next question is from Scott Reynolds of Jefferies.

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

If you look at the bottom end of your range, that assumes, or at least according to your comments, it assumes very little or any cover glass opportunity. And looking at the rest of the overall revenue recognized in sapphire, how much of that is, since you're moving to a book-and-ship business, how much of that is coming from your backlog and how much of it is assumed new orders? And when you talk to your customers, what is it that gives them confidence that they will be taking equipment orders in the back end of the year for you folks to hit your guidance?

Thomas Gutierrez

There's varying models, Wes, and I think it becomes, really -- Scott, and it becomes difficult to sort of predict here. And so there's a couple of models. There's some players that will actually vertically integrate and take the equipment themselves. And so those are not our existing customers. There's some business models where they expect to buy from our existing customers, in which case it would firm up shipments out of backlog to the tune that we're talking about. And there's some mixed models in between that makes sense. And so I can't pinpoint for you, which is going to be the case. But if it's players that aren't going to themselves vertically integrate, then more than likely, they'll be buying from our customers and that will increase shipments out of backlog. If indeed it ends up being players that put in their own supply chains, then we're going to see a bunch of new orders to fulfill that shipment in it quick. But our number of $100 million top to bottom doesn't pick one of those models. It basically is independent of which path is taken.

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

I think I'm more referring to the customers that are more -- that you already have in backlog, which -- what gives you confidence or when you speak with them, what gives them confidence that they're going to be taking acceptance of equipment in the back end of the year?

Thomas Gutierrez

Well, I think the utilization rates that we're seeing in these customers are rather significant right now. We've got our key customers right now are operating at 70% plus and some of them are running flat out even in this environment. And some of that is because they penetrated nontraditional markets with some of their output and some of them are having luck in the primary LED industry. So as I look at utilization and I look at what's happening in those customers, and I look at what they're doing to put facilities in place and all that towards the back end of the year, I feel pretty comfortable. We've even got 1 customer that is planning on entering, in conjunction with a partner, the aftermarket for sapphire screens, and that will probably be the first smartphone product that you'll see in the marketplace.

Paul Leming - Soleil Securities Corporation

And then on the covered offside, when you talk to customers and you work through the development phase of these things, typically you have smartphone introductions that happen sometime in 1Q, 2Q, and then you have at the back end of the year at 3Q. So can you walk us through the development time line for how your major customers are looking at rolling out these screens and have they indicated how long it would be to work through where they would feel comfortable introducing a product.

Thomas Gutierrez

Probably the best way to respond to the question is to say, the smaller players or not the smaller players, the players that are -- that have multiple models in their lineup that can afford to have a premium model and not commit their entire line, we can respond to those kind of opportunities in 3 to 6 months. In other words, that's small enough. We can support a launch stream unstopped; a little bit bigger, 6 months out. But if we're working with a -- one of the majors that is going to drive millions of phones, then we are probably talking anywhere from 6 to 12 months to build the supply chain to do it. And so our view of needing to put capacity in place at the tail end of this year is driven by the view that the initial players would be the ones that are able to commit a single model, and that we can respond in 3 to 6 months to put the capacity in place, which would imply, tail end of this year, starting to put in capacity for 2014 early shipment. Hopefully, that's responsive to your question.

This is the last question operator. And I want to thank everybody for joining us today. I appreciate the interest. We're excited about the long-term future of the company. We have many exciting and innovative products in our lineup. The uncertainty of the markets are tough in the short term, but we believe we are well positioned to develop growth as we move into 2014 and beyond. Thanks again.

Operator

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

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