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Executives

Ryan Flaim

Thomas Gutierrez - Chief Executive Officer, President and Director

Richard J. Gaynor - Chief Financial Officer and Vice President

Analysts

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Brandon Heiken - Crédit Suisse AG, Research Division

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

Nimal Vallipuram - Gilford Securities Inc., Research Division

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

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

Andrew Hughes - BofA Merrill Lynch, Research Division

Mark J. Heller - CLSA Limited, Research Division

GT Advanced Technologies (GTAT) Q3 2013 Earnings Call November 4, 2013 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to GT Advanced Technologies Third Quarter Calendar Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now I will turn the conference over to Ms. Ryan Flaim, Vice President of GT Advanced Technologies, Investor Relations. You may begin.

Ryan Flaim

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 in 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-Q for the quarter ending June 29, 2013.

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 7 p.m. Eastern and can be accessed on the IR section of our website. An audio replay will also be available through November 12. Please refer to the company's 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 afternoon. With me today is Rick Gaynor, our Chief Financial Officer. After my opening remarks, Rick will report on our Q3 financial results and our current outlook for the year. I'll conclude with a strategic business update, as well as a discussion of our long-range outlook. We're very pleased to have entered into the multi-year supply agreement that we announced today to provide Apple with sapphire material. This is a significant milestone in GT's diversification strategy, and it provides a path to add a recurring revenue stream to our otherwise cyclical equipment business model.

Under the terms of the agreement, Apple will provide a facility in Arizona, where GT will own and operate ASF furnaces and related equipment. GT will be employing approximately 700 people to run the operation. We're very pleased to be creating these new manufacturing jobs in the U.S.

Apple will also provide a prepayment to GT of approximately $578 million. We'll reimburse Apple for this investment over a 5-year period starting in 2015. We have dedicated the vast majority of our current ASF capacity to support this multi-year commitment.

This has limited our ability to take additional ASF business in the near-term, and has restricted our ability to shift backlog on short notice. In addition, we'll be subject to certain exclusivity obligations that will limit GT's range of future business outside of the LED, industrial and specialty markets it currently serves. We have revised our guidance for 2013 to reflect this. Although the agreement does not guarantee volumes, it requires GT to maintain a minimum level of capacity. We have confidence in the long-term value of this opportunity, given the financial and technical resources that both parties are dedicating to the project. While the gross margins from this business will be lower than historical levels, we expect this arrangement to be cash positive and accretive to earnings starting in 2014.

In support of the new materials business, we have accelerated the development of our next-generation launch capacity, low-cost ASF furnaces. Not only will these efforts support our initiative with Apple, we expect that it will enable the expansion of our LED, industrial and specialty sapphire businesses, positioning GT and its equipment customers as the industry's lowest-cost sapphire producers. We're very excited about the opportunities that lie ahead for our sapphire business.

Before turning the call over to Rick, I'll make some brief comments on business conditions in the third quarter. Overall, sapphire market conditions continue to improve. Sapphire demand has shown strength, driven largely by general lighting and the emerging use of sapphire in camera lenses and other mobile device applications. As a result, we're seeing improved pricing in the end market and our ASF customers continue to operate at a high utilization rate, increasing our confidence that ASF equipment customers are likely to start taking delivery of backlog at a faster pace, as our capacity opens up again. In the short-term, our focus will be on successfully delivering on our agreement with Apple.

Our PV and poly businesses performed largely inline with our expectations in Q3. Although we remain encouraged by improving fundamentals in the solar market, we continue to believe that the next major PV capital equipment cycle is not likely to begin until late 2014 at the earliest. And until then, we expect limited contribution from our PV business. Since the close of the quarter, we have continued to book new DSS orders as certain customers continue to capitalize on the opportunity to buy DSS650 furnaces as well as our new DSS850 technology at competitive pricing as we convert inventory to cash.

We also continue to advance the technical development of our HiCz n-type material solution. We recently demonstrated HiCz's unique capability to grow high-quality, 10-meter long ingots, which is 3x to 4X the length that can be grown in a typical batch Czrochralski process. We will continue to optimize tool performance in preparation for bringing HiCz to market late in the second half of 2014. We believe that early traction for this product will come from outside of China.

With respect to our polysilicon business, we continue to be optimistic about our long-term opportunities as our pipeline in the Middle East continues to develop, supply and demand are coming into balance and pricing appears to have bottomed out, with an expectation that it will begin to rise over the next 6 to 9 months. We also see China's preliminary ruling on silicon tariffs as being quite favorable for our largest customers, and particularly for OCI, whose Phase 4 expansion remains in our backlog. In the near-term, while polysilicon opportunities exist, we do not expect any appreciable increase in bookings until 2015, and polysilicon revenues are likely to remain light through 2014. With that, I'll turn the call over to Rick to review our Q3 financial details and updated 2013 guidance. Rick?

Richard J. Gaynor

Thanks, Tom, and good afternoon, everyone. Before I provide details on our September quarter performance, I would like to note that a full reconciliation of the GAAP and non-GAAP financial measures that we will be discussing today are included in our press release and in the presentation accompanying this call, both of which can be found at gtat.com.

Moving on to the results for the third quarter of 2013, which ended on September 28. Q3 revenue was $40 million. This included approximately $29 million of polysilicon revenue, which included over $7 million related to an order with an industry incumbent, and approximately $18 million related to revenue from a TCS contract that we terminated during the quarter due to the customer's failure to perform. As we have done in the past, we took the customer's nonrefundable deposit to revenue upon termination.

Q3 PV revenue was $4 million and sapphire segment revenue in the third quarter was $7 million. Revenue for the first 9 months of fiscal '13 was $266 million, including $217 million for polysilicon, $20 million for PV and $29 million for sapphire.

Moving on to gross margin. Our Q3 gross margin was approximately 44%. Gross margin by segment was as follows: 70% for polysilicon, reflecting the high gross margins related to the polysilicon contract that we canceled during the quarter; 66% for PV; and we had a negative gross margin for our sapphire segment as a result of the low level of ASF revenue and its impact on overhead absorption.

Our year-to-date gross margin was 34%. Q3 operating expenses, before contingent consideration and restructuring, were $45 million. Including contingent consideration and restructuring, operating expenses were $54 million. The increase of contingent consideration in the quarter was due to the $6 million fair value upward adjustment related to Hyperion technology acquired from Twin Creeks, and $4 million restructuring charges for asset impairment, related to our St. Louis facility. R&D expenses in Q3 were $21 million, up slightly from Q2.

Year-to-date total operating expenses, including contingent consideration and restructuring, were $131 million, which includes $56 million of R&D.

Moving on to EPS. The Q3 fully diluted non-GAAP EPS was a loss of $0.16. Non-GAAP EPS for the first 9 months was a loss of $0.09.

Moving on to our balance sheet. We ended the September quarter with approximately $258 million of cash and cash equivalents. At the end of the quarter, we had approximately $261 million of total balance sheet debt, which included approximately $96 million related to our credit facility and $165 million related to the carrying value of our convertible bonds.

Moving on to our cash flow. In the September quarter, operations consumed approximately $33 million of cash. In addition, we used $1.8 million of cash to pay down part of our term loan, and we used approximately $1 million for capital expenditures. Subsequent to the close of the quarter, we used approximately $96 million of cash to pay down our credit facility. We chose to terminate our credit agreement in order to eliminate restrictions that would have impeded our ability to pursue the sapphire materials agreement announced today. While we are confident that our projected cash levels are adequate to run the business for the foreseeable future, we regularly review financing alternatives to ensure we can support new technology developments and diversification initiatives.

Moving on to bookings and backlog. Orders in the third quarter were approximately $7.2 million, which included $3.3 million for DSS, $2.6 million for sapphire and $300,000 for polysilicon. We debooked approximately $11 million of backlog in the third quarter as a result of the termination of the polysilicon TCS contract. Our quarter-ending reported backlog was $658 million, which included $301 million at polysilicon, $2 million of PV and $355 million of sapphire. Our total reported backlog security as of the end of the September quarter was approximately 24%, with $62.3 million in deferred revenue, $4.4 million letters of credit and $89.8 million in nonrefundable customer deposits. After the close of the quarter, we modified in the range but with a particular ASF customer, which had a net effect of reducing reported backlog by $43 million.

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 guidance also excludes any asset impairment and the residual charges that we may take in the balance of 2013 related to any gain or loss associated with the potential disposition of our facility in St. Louis. Given the impact of our shift from ASF equipment sales to building ASF capacity for our own internal use as we prepare to service the Apple agreement, we are revising our fiscal '13 guidance as follows: Revenue is now expected in a range of $290 million to $320 million. This implies Q4 revenue in the range of $24 million to $54 million. Assuming the midpoint of our new range, the split by business for fiscal '13 is now expected to be approximately: 10% from PV, 73% from polysilicon and 17% from sapphire. We are also revising fiscal '13 gross margin guidance to a range of 30% to 32%, down from 35% to 37%. Based on our current plans and inclusive of restructuring costs, we now expect total operating expenses in the range of $185 million to $190 million, which includes a higher level of R&D, in the range of $83 million to $88 million, as we have invested additional dollars towards accelerating generational improvements to our ASF platform. Our fiscal '13 CapEx is expected to be approximately $10 million to $12 million, the bulk of which is being directed at new technology investments. Based on our updated projections, we now expect a full year tax benefit of $24 million.

In accordance with the new revenue levels expected in the second half of the year, we are resetting our fiscal '13 non-GAAP EPS guidance to a range of a loss of $0.40 to a loss of $0.50. This assumes a diluted outstanding share count of 120 million shares for the year. We expect the year ending cash balance in the range of $340 million to $380 million. Our cash balance forecast takes into account the effects of the arrangement with Apple, as well as operational cash flow expectations. As noted earlier, we are exploring financing alternatives and intend to seek additional capital over time. This is not reflected in our year-end cash expectations.

With that, I will turn the call back to Tom for a strategic update and a review of our preliminary outlook for 2014 and beyond. Tom?

Thomas Gutierrez

Thanks, Rick. The expected strength from our sapphire materials and equipment business is really important to us, but it's not the entire diversification and growth story at GT. We continue to make investments in other proprietary technologies within the LED, power electronics, thin substrate and next-generation solar markets that will fuel growth in 2015 and beyond. Our work is focused on bringing technologies to market that lower the cost of manufacturing and enable new applications. This has long been the hallmark of GT. I'd like to provide an update on these initiatives and provide a framework for how we believe these programs will contribute to GT's business over the next several years.

One of the most exciting new technologies in our portfolio is Hyperion, which has applications across a broad spectrum of crystalline materials. We have made significant progress producing ultrathin silicon wafers with this technology, and are working to develop applications for the solar industry with a well-known solar cell manufacturer in Asia. We have also made similar progress developing low-cost composite glass and thin sapphire structures that we believe will have broad use in consumer applications. While still in the early stages, we also have begun to develop the exfoliation techniques necessary to create a thin, relatively inexpensive silicon carbide wafer, which would have promise in the power electronics industry, where 4-inch wafers cost upwards of $1,000 a piece. We expect our pace of development with Hyperion to accelerate, as we now have our preproduction generation tool in operation. This tool is protected by over 50 issued and pending equipment and process patents, and we believe this tool is the first-of-its-kind in the world.

We continue to target market availability of Hyperion in the 2015 time frame. We continue to believe that once mature, Hyperion could rival the size of our PV business in its peak.

We're also positioning GT to participate in the downstream LED manufacturing process through the development and commercialization of an HVPE epitaxy system, that we believe will lead to lower cost and more efficient use of capital in the manufacture of LEDs. We introduced our HVPE initiative in February of 2013 in partnership with Soitec, and have continued to receive very positive feedback on the solution for market leaders and LED manufacturers in Asia. The technical development for HVPE is progressing well. We are targeting commercial availability at the back end of 2014, and continue to expect HVPE revenue to ramp gradually starting in 2015.

Our silicon carbide initiative has been in progress for over a year. We have made excellent headway, and based on direct feedback from potential customers, it is clear that the market is looking for a full silicon carbide solution complete with process recipes. We believe that the differentiated process recipes that we are developing will provide a path to producing lower-cost silicon carbide. GT is on target to release a 4-inch solution in the first half of next year and to follow that up with a 6-inch solution by the end of 2014. We're currently seeking strategic partners to support our silicon carbide development. Given the high cost of silicon carbide wafers, the real opportunity for silicon carbide remains in pairing it with Hyperion, which should enable thin wafer cost structures that are nearly an order of magnitude below today's state-of-the-art wafering processes. Such an advance would significantly expand this opportunity for GT.

Further to my earlier comments on HiCz, there are other opportunities for GT in the solar industry. It is clear that any sustained industry recovery rests with the advent of new technologies that can drastically lower the cost of manufacturing. In addition to the work we're doing with our next-generation HiCz tool, we continue to work on advanced polysilicon reactors and several other technologies not yet disclosed, that we believe will make a difference.

However, we're still of the opinion that the solar capital equipment market is not likely to show significant opportunity until 2015. As the solar industry returns to health, we expect to play an important role in helping our customers lower cost throughout the process of manufacturing solar cells. Solar will continue to be a part of our portfolio. However, as our diversification initiatives get traction, we expect that it will become a smaller percentage of our business in the coming years.

I'd like to wrap up with some commentary as to what this all means with respect to the shape of our business going forward. Given the change in mix that we expect over the next few years, we thought it'd be useful to provide a general sense of our expectations for our business model going forward. In 2014, we expect our total revenue to be in the range of $600 million to $800 million. Our sapphire segment will likely comprise 80% of our total revenue in 2014. As a reminder, our sapphire segment will include our ASF equipment business, its LED, industrial and specialty materials businesses and the new materials business with Apple. On a consolidated basis, overall gross margins are expected to be in the range of 25% to 27% for 2014, which reflects the greater level of sapphire materials business. We expect positive earnings on a non-GAAP basis in 2014, representing a significant improvement over 2013. We'll be providing a non-GAAP EPS guidance range on our Q4 earnings call.

In the longer-range, we expect revenues in 2015, which will benefit from the introduction of many of the new equipment products that we discussed today, to exceed $1 billion. During 2015, we expect the contribution from our other equipment businesses to increase on a percentage basis as they gain traction. By 2016, driven largely by the incremental strength from our equipment businesses and continued contribution from our sapphire materials business, we expect our revenue to nearly double from 2014 levels. We expect that in 2015 and 2016 our consolidated gross margins will be in the 25% to 30% range given our new mix of business, and that our tax rate, given our increased tax presence in the U.S., will remain in the 35% to 40% range.

Taking all factors into account, we expect to deliver substantial year-over-year earnings growth over the next 3 years. By 2016, we expect our non-GAAP EPS to be over $1 per share.

Before we begin the question-and-answer session, I'd like to note that, as is our usual practice, we will not be providing detailed information about specific customers or contracts. With respect to the agreement that we announced today, all of the information we're able to share is included in our filings and commentary. We're not in a position to provide additional color beyond that. With that, operator, we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jed Dorsheimer from Canaccord.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

So first question, I was just wondering if you could comment on if this is specific for cover glass application or camera lens or all of the above, in terms of the sapphire manufacturing? And then, how we should look at capacity here?

Thomas Gutierrez

Well Jed, as I indicated earlier on, I mean, all the information that we're at liberty to disclose about our agreement with Apple has been disclosed, and I'm not at liberty to provide any additional color on what applications are involved.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Okay. And then in terms of -- given the fact that Apple's giving you this -- or you have this prepay with them, I'm wondering if pricing and therefore, margins are structured as part of the agreement? I'm not asking what they are. I'm wondering if those are part of the agreement that you do have with Apple.

Thomas Gutierrez

Yes, the agreement obviously includes all those elements.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Okay, and in terms of the exclusivity, does that just include material or does that also include exclusivity around tools at the ASF furnaces?

Thomas Gutierrez

Again, Jed, I'm going to have to decline responding to that question in any detail.

Operator

And our next question comes from Stephen Chin from UBS.

Stephen Chin - UBS Investment Bank, Research Division

Just wanted to clarify, so when you talk about the 2014 sales guidance from Apple, is that all material sales, Tom? Or are there furnace equipment sales in that? Just trying to clarify what the definition was there.

Thomas Gutierrez

Sure. Just to be clear, Steven, I actually did not speak to the revenue coming from the Apple agreement. I spoke to the segment, and our segment revenues next year are going to be 80% of what we believe is our total, but that includes equipment sales to others, that includes materials in our industrial and specialty markets, as well as the revenue coming from the Apple opportunity. And so you'll not find us disclosing specific customer revenue numbers or numbers associated with this particular contract going forward.

Stephen Chin - UBS Investment Bank, Research Division

Okay, so and then maybe just to follow-up on the question on capacity, could you just share some color on your capability of ramping up these sapphire furnaces? Is it kind of a small capability here in the fourth quarter? And then maybe you have the ability to ramp a few hundred more tools early next year and maybe start shipping in the middle of the year? Is that kind of the way to think about this ramp?

Thomas Gutierrez

Yes, I would say that the -- I'm not going to provide you enough information to allow being able to sort of build the ramp structure of what this is going to look like, but I think our capacity as an equipment provider is well documented in the past and I would point you towards our traditional capabilities in that area. But I'm not at liberty to provide you with ramp-timing information.

Operator

And our next question comes from Brandon Heiken from Crédit Suisse.

Brandon Heiken - Crédit Suisse AG, Research Division

I was wondering if you could talk about your visibility with other sapphire equipment shipments. Has that visibility improved since last quarter?

Thomas Gutierrez

Well, we have lots of opportunities in the sapphire industry, ranging from other equipment opportunities to opportunities in industrial and other materials, and we have fairly decent visibility, sufficient to give us comfort and providing a range of revenue for the coming year. Obviously, we're going to be busy initially servicing our new customer, but our ability to increase capacity and to service some of those other opportunities is still there.

Brandon Heiken - Crédit Suisse AG, Research Division

Okay. And you mentioned your outlook for polysilicon pricing improving here over the next few months. I was wondering, with the SDR tools, at what prices do you think that your customers would be persuaded to move forward, either in converting capacity or with new additions?

Thomas Gutierrez

Yes. I think there's more to it than just the pricing, because I think our customers are profitable as it is. I think it's a matter of the tariff structure that's been put in place. Puts some customers in a difficult situation, because shipping into one of the largest markets in the world is going to be wrought with penalties associated with importing polysilicon into China. And others are less -- are more fortunate. For example, I've noted OCI. And so I think that there's somewhat of a wait-and-see point of view from most of our customers waiting to make sure that the tariff structure does stay the way that it is. And secondly, waiting for the moment at which supply and demand come much closer together, which is expected by most to happen late this coming year. And so in our view above -- of our -- in our projections for next year and all that, we have not assumed any significant new revenue stream coming from our polysilicon business. We remain of the view that real revenue in polysilicon from some of these new opportunities and some of our backlog, large backlog, won't happen until 2015 and beyond.

Brandon Heiken - Crédit Suisse AG, Research Division

Okay, and can you talk about your goals for additional capital? And then can you explain what you mean by that you'll seek additional capital and you're exploring additional financing agreements?

Thomas Gutierrez

Yes, I think that was probably a little bit of a -- maybe wrong connotation there. What we really meant to say is, we're in a good position now. We expect to have a fair amount of flexibility. But as a company that's continuing to look for ways of diversifying and continuing to drive growth, we hold back the option of looking for more capital. And I think that's really what the statement was intended to say is that you shouldn't presume that because we are in a good capital position, that due to opportunities that we may look at, that we won't raise additional capital. That was the intention.

Richard J. Gaynor

Partly our position on that was, we did declare that we paid down the existing term loan facility. And so we said, even though we paid that down, we may be on the outlook for further capital raises in the future, but we don't have anything on this horizon right now.

Operator

And our next question comes from Weston Twigg from Pacific Crest.

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

Can you give us a little more idea on the thinking behind your agreement with Apple? And I'm just -- I'm wondering, more specifically, why give up the upside of some higher-margin tool sales as the sapphire market is expanding into the mobile application market, given that this deal now gives exclusivity to Apple?

Thomas Gutierrez

Well, for -- you're making some presumptions about what that exclusivity means, and I won't comment on that. But what I will say is, as a strategy for GT, for some time, we've been looking at and whether or not it made sense to create a recurring revenue, base from upon which to basically manage our cyclical equipment business. And so we've been looking at the idea of recurring -- a long-term recurring revenue stream and, obviously, we've concluded that, that is a superior model to the model of just selling equipment. There's many opportunities for sapphire capital tools, beyond the agreement that we have reached. And so you shouldn't presume that we have given up all opportunities for sapphire tools. And obviously, it's a strategic move towards what we think is a healthier, long-term business model.

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

Okay, and then just real quickly, a while back, you had talked about -- and when estimating sapphire for mobile phones that had 5% of the cellphone market, GT was estimating there'd be demand for around 3,000 sapphire furnaces. Is that still an estimate we could use?

Thomas Gutierrez

Well, I won't confirm to you what you should use in your models, but what I'll say is, I mean, we've been working on sapphire and I've been talking about sapphire and its properties and the exceptional qualities that it has for quite some time, and our position in general, as to what the world opportunity is for sapphire and many different applications has not changed.

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

Okay, and that estimate, you just won't say if that's a valid estimate to use at this point?

Thomas Gutierrez

You are correct.

Operator

And our next question comes from Nimal Vallipuram from Gilford Securities.

Nimal Vallipuram - Gilford Securities Inc., Research Division

Tom, I have a couple of questions, mostly on the strategic side. You don't have to, you can hopefully answer some of these questions. First is that GT as a company, was essentially an equipment company, and as you said, you're looking for more recurring revenue. You are getting into somewhat downstream. Clearly from a financial point of view, that has some impact on your margin structure, which you have explained on a near to longer term. Can you talk in detail about something else which might change due to this transformation for GT as a business?

Thomas Gutierrez

I'm not sure what else. I mean, the movement to more materials business -- we have an extraordinary technical team, and we have an extraordinarily talented management team with a lot of experience prior to GT in the materials world, and we're going to obviously be adding additional talent. And our end objective is to have a very viable and robust equipment business alongside a materials business that provides that base from which to grow on. And we've talked about the markets that we are interested in. We're interested in the downstream LED industry. We're interested in the power electronics industry. A lot of the things that we work on are green technologies, technologies intended to enable green power use or green power generation. And so, beyond that -- and as you know, Hyperion has many, many applications in those areas. Beyond that, there's not much else that I can tell you.

Nimal Vallipuram - Gilford Securities Inc., Research Division

All right. Just on the second side, on the solar exposure, I'm not sure that it is an accurate way to categorize your comments, but if that is not, please do correct me, that you seem a bit muted when you talk about that market, given that while the market has been on a lot of pressure in the last 2 years, I mean, clearly this year, worldwide the solar market has come back very, very strongly. Yes, it is a quite a fall from capacity being -- the demand being anywhere close to capacity, but in a cyclical market, it would be somewhat difficult to forecast that the orders -- new orders, there's a possibility of new orders coming back and surprising you in the upside, but you don't believe -- that doesn't seem to be the case. Am I reading it correctly? Or are you -- you continue to be pretty bullish on that market on the longer term?

Thomas Gutierrez

I think I'm -- many questions in one question here, but I'm bullish in solar in the long-term. I've been fairly explicit about my belief that this is not a supply-and-demand downturn that we're seeing, that the fundamental issue is that the prices in the end market are quite good. Therefore, it's driving end market growth of solar panel installations and all that. But that the cost structure of the manufacturing base behind those panels is essentially at the price level. And so not very many people are making money in this. As a matter of fact, most are losing money. And the only break that we believe can happen is, the cost has to substantially be decreased, and that isn't going to happen because of scale. Scale's already there. It isn't going to happen because of consolidation because that doesn't really help the situation. It has to be new technology. And so we are very focused on next-generation technologies that improve sell cost structures, efficiencies and the cost of making polysilicon and the cost of converting polysilicon into wafers. And so it's not a lack of belief in solar. It's a view that what it's going to take, as it takes in many industries, is a breakthrough in cost structure to really continue to drive the end market. So that's probably a broader set of comments than I made in my script, but I think it's consistent with what I've been saying for the last year.

Operator

And our next question comes from Jagadish Iyer from Piper Jaffray.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Two questions, Tom. First, how would your customers respond now that you are moving more downstream into the -- supplying sapphire materials directly sort of equipment? Do you see potential kind of backlash that they might try to switch to other vendors? And then I have a follow-up.

Thomas Gutierrez

Okay well, #1, that we really don't have much competition, technologically. And by the time we're through this next series of technological updates, we're probably going to be creating an even more significant lead, technically. But irrespective of that, I think your question is, are we competing with our customers and are -- as a result, are they likely to move to others or move downstream? And my response to that, this was a U.S. opportunity. This is an opportunity to manufacture and build jobs in the U.S. And so our Chinese customers really could max us that opportunity. So to a large extent, we're taking business, not away from them, we're -- but we are putting ourselves in a position where we can, from a cost structure standpoint, and from our ability to service them in the markets that they can have access to, to make them much more competitive. And so I think our customers will find -- our existing customers will find that we become an even stronger partner than we were before, as a result of having this series of new capabilities.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

And as a follow-up, I just wanted to -- you address this concept of this exclusivity. Does it mean that, now potentially, if there are Apple's competitors, could you be not selling it to them at some point of time or the other? Or how should we think about the exclusivity here?

Thomas Gutierrez

I'm not at liberty to define exactly what that the exclusivity is and what it will impact. What I can tell you is that we have a significant amount of opportunity to continue selling equipment and materials and defectors of the market that make sense for us to penetrate. And so my view is the exclusivity, undefined as it is, does not really restrain us from continuing to grow the business.

Operator

And our next question comes from Pavel Molchanov from Raymond James.

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

So in the past, you guys have obviously been pretty adamant that you would not become a materials manufacturer. You've changed your mind in relation to sapphire. Are you also looking to do something analogous with any other of your business segments?

Thomas Gutierrez

I think the -- I won't comment on what we may or may not do in the future. What I will tell you is as we've done in the 4.5 years or so that I've run the company, is we are constantly looking for ways to diversify the company and to add growth potential to the company. And so I won't say we won't consider adamantly anything else at the moment. We don't have anything under consideration, other than servicing the agreement and doing a great job at it with our new customer, but we'll always continue to look for ways of differentiating GT.

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

Okay, and then in relation to the guidance for 2014, are you planning any headcount reductions as part of this new strategy or any other cost savings to get you to positive non-GAAP EPS?

Thomas Gutierrez

We are adding 700 employees, as I indicated. So our opportunity to use some of our talent base as part of that and our opportunity to drive to a positive EPS is driven by a variety of different factors that I'm not going to talk about. But we are committed to the product line that we expect will make a huge difference for us in 2015. And so we're not going to be penny wise and pound foolish in terms of our R&D efforts, but by the same token, you've known us for a while, that we say that we believe that we can get the positive, significant improvements over 2013 and EPS, we have a path.

Operator

And our next question comes from Krish Sankar from Bank of America.

Andrew Hughes - BofA Merrill Lynch, Research Division

This is Andrew Hughes on for Krish. With respect to the Apple deal, can you just talk briefly whether or not you are still able to sell Thermal Technologies' KY, and EFG solutions to other mobile customers?

Thomas Gutierrez

We don't generally break out our subsegments and such, in terms of what we're doing with each of those businesses. We stated what our strategy was going to be when we acquired Thermal Technologies and to a large extent, none of that has changed.

Andrew Hughes - BofA Merrill Lynch, Research Division

All right, and can you just talk a little bit about competitors in the sapphire for mobile segment, who the main players are, and what do you think your share is and whether the dynamics are similar to the LED vertical, for instance?

Thomas Gutierrez

I appreciate the opportunity to talk about it, but I'm not going to talk about it. I'd rather not discuss competition or competitors in that space, and now there's a presumption behind the question that, that's the area that I'm working in, and that's just a presumption.

Operator

And our next question comes from Jed Dorsheimer from Canaccord.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Just 2 follow-up questions. I guess first, I just -- I would assume that since you will be owning this equipment that the increases in PP&E would be the tools at cost, and that Apple would be continuing to own the facility. Is that at the right presumption based on what you've outlined in the context there?

Thomas Gutierrez

Apple is providing the facility. We've not been explicit about what the prepay covers.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Okay, and then in terms of -- is there any roadmap provision in terms of cost? And basically I just want to find out what the risk would be. If there is a cost that's not achieved, would you end up basically owning this facility and would allow Apple to walk away? Would you mind just commenting on that?

Thomas Gutierrez

I would say that any customer that enters into such a broad agreement with a supplier, and a supplier that's involved must have a fairly high degree of confidence that they can get to where the targets are.

Richard J. Gaynor

On both sides...

Thomas Gutierrez

On both sides.

Richard J. Gaynor

Of the equation.

Operator

And our next question comes from Mark Heller from CLSA.

Mark J. Heller - CLSA Limited, Research Division

A few of them. First, on OpEx, it looks like it's obviously ramping substantially into the fourth quarter. How should we think about OpEx into next year, especially with the employee count going up a lot?

Thomas Gutierrez

Well the -- we obviously have modeled some of that into next year, but we refrain from giving EPS guidance and earnings guidance this particular call. As we're understanding the tax implications and we're understanding the number of programs that we are or are not going to add to our R&D load, both as part of this project that we're undertaking in the rest of our business. And so we're really not in a position to sort of provide you with additional guidance on OpEx other than, at a minimum, you will not see a significant increase, if at all, in our operating expenses going forward.

Richard J. Gaynor

The fact is, Mark, we would not typically give that level of detail at this time in the year, and that would be something that we would typically give in the -- at the end of the fourth quarter in our earnings call next February. And we would expect to give you much better color at that time, but we did try to give you more long-range clarity than we would typically do at this time, just so that you'd understand broadly where the company's going, what our model looks like in terms of margins, et cetera in the next 2 to 3 years.

Thomas Gutierrez

Sure.

Mark J. Heller - CLSA Limited, Research Division

Okay, and 2 questions on the deal with Apple. One is, will GT be the exclusive provider of sapphire to Apple? Or will Apple source from multiple sapphire suppliers? So that's question #1. And then the second question is, will you also be responsible, in addition to making the cores or the ingots, will you be also be doing the wafering and polishing activities for Apple as well?

Thomas Gutierrez

This is going to be a very efficient answer, because the answer to both questions is I can't give you any additional detail on either one of them. And again, there are some presumed -- presumptions you made in your question about what we would and wouldn't be doing that I'm not confirming.

Mark J. Heller - CLSA Limited, Research Division

Okay, can -- maybe one more question on the sapphire. You gave 80% of sales from sapphire for next year. Is there any color you can give in terms of mix between equipment and materials?

Thomas Gutierrez

No, not that this moment.

Okay. That was the last question. I want to thank everybody for joining us today and for your questions. Today's announcement about our new customer represents a really important step for GT, GT's diversification. We're extraordinarily excited about working with such a high-class customer, and we look forward to staying in touch with you in the months and quarters ahead. Thank you very much for joining.

Operator

Ladies and gentlemen, thank you for participating today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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