I spend a lot of my time trying to figure out where things are going and how did we get there. On May 2, 2013 GT Advanced Technologies (GTAT) CEO Thomas Gutierrez made a colorful remark during GTAT's Q1 2013 conference call during the analysts Q&A section.
Thomas Gutierrez - May 2, 2013 during the Q2 conference call Q&A
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.
First off, the "very, very, very large player" that Gutierrez was referring to on May 2, 2013 is Apple (NASDAQ:AAPL). GT Advanced and Apple entered into a master supply and development agreement on October 31, 2013, which was announced to the public on November 4, 2013. As indicated by Gutierrez above the Apple deal will "drive an extraordinary level of business for us."
Two days ago, Mark Shuttleworth, Canonical founder and the man behind the Ubuntu Edge concept phone and design, confirmed via a Canonical Town Hall interview, that GT Advanced Technologies was engaged to make the sapphire displays for their upcoming Ubuntu Edge. Shuttleworth's comments can be heard by your own ears at approximately 30:48 into the video. Shuttleworth was responding to a question on whether or not fans will ever see the Ubuntu Edge "come to life" and during his response he stated this:
Apple just snapped up three year's worth of the supply of sapphire screens from the company that we had engaged to make the screens for the Edge
Gutierrez stated in May 2013 during GT's 2013 Q1 conference call, that the supply chain at that time was not in place to support the Apple sapphire cover deal. As a result, GT and Apple needed to engage the supply chain to prepare them for Apple's upcoming sapphire cover deal. It now makes complete sense why Shuttleworth stated that Apple just snapped up three year's worth of sapphire screens. Shuttleworth was actually being very conservative in his 3 year supply consumption estimate. According to Yole Developpement's research report issued May 2013, it would require "five times more capacity than is currently installed worldwide" to build out the supply chain for iPhone (Yole's complete statement is below). The Yole report also estimated that the cost to build out the iPhone supply chain at $1.5B of capital spending:
The report includes an extensive supply chain analysis, revealing that adoption in the next iPhone would require five times more capacity than is currently installed worldwide. That would need $1.5 billion total capital expenditure, which Yole feel is too great a strain to currently be viable.
The only answer to solution to address the supply chain issue is to get in front of the equipment makers very early and leverage Apple's $159B of cash on hand. Evidence of strategic planning between GT and Apple emerged on September 20, 2013, when Rich Bieglmeier, published GT Advanced Technologies Inc: A Gem That's About to Shine? The article was not very long, but there was one bit of juicy information in this article, that gives evidence of how Apple and GTAT are getting around Yole's supply chain concern. Rich cites a very important finding by UBS Analyst, Stephen Chin:
"We expect this trend to accelerate as shown in a recently published patent on new ways to incorporate sapphire on display covers by Apple. GT is the largest sapphire equipment supplier and likely beneficiary of this inflection point in mobile devices. . . Our own industry checks last week in Asia found a first ever Tier-1 customer is now set to ramp its sapphire content significantly in 1H14 with 500 furnaces from GT which we believe is for a phase 1 cover screen build out"
I think Chin jumbled the industry check information from Asia just a bit but he was not far off the mark whatsoever. Knowing what I know today, the 500 furnaces on order from Asia for a first ever Tier-1 customer were for Apple, purchased by GTAT and were delivered to Apple's Mesa facility in time for GTAT to "ramp its sapphire content significantly in 1H14" as cited by Chin (above). The contract between Apple and GTAT was not effective until October 31, 2013 but Apple and GTAT were wheeling and dealing months before the deal was consummated. The import records indicate that furnaces were delivered from several Asian equipment makers and Chin's findings prove that orders were likely placed months in advance of a signed contract between Apple and GTAT for sapphire cover displays. The sapphire cover plan between GT and Apple is becoming a little more crystal clear each and every day.
Apple and GTAT have been having ongoing discussions regarding sapphire cover screens for quite some time. The contract between the companies was effective October 31, 2013, but Stephen Chin found evidence of a 500 unit furnace order months before the Apple and GTAT deal was signed. The import records I have in my hand today, likely confirm that the 500 furnaces for a first ever Tier-1 customer made their way from Asia to Apple's sapphire plant located in Mesa, AZ. It's safe to say that Apple and GTAT have been strategically planning and working with sapphire equipment suppliers to lock up furnaces from manufacturers around the globe for months. The smartphone market size is set to double from 1B units today to over 2B units by 2018 (IDC). I'll keep the math simple, Apple will go from selling roughly 150m units a year in 2013 to approximately 350m units by 2018 based on 17% market share. If Apple is going to be selling 2-3x more iPhones by 2018, then it seems very logical to assume they will continue to scoop up every available furnace from the current supply chain for the foreseeable future. If Apple, has bigger plans to move their entire product line to sapphire glass, they will only add more pressure on the sapphire equipment supply chain to deliver the goods for the foreseeable future.
Disclosure: I am long GTAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no plans to buy or sell any holdings in the next 72 hours.