I listened avidly to the Corning (NYSE:GLW) Q2 earnings conference call this morning, not because I'm particularly interested in the company but for any hint as to the fate of Corning's Gorilla Glass as an indicator of Apple's (NASDAQ:AAPL) plans for its future iPhones. However, I didn't discern the kind of impact to Gorilla Glass sales I would have expected if Apple were switching to sapphire for the iPhone 6 launch.
The Sapphire Debate
By now, everyone following Apple has heard/read/seen the rumors of sapphire cover glass for the forthcoming iPhone 6. There has been an ongoing debate about the pros and cons of sapphire, and whether Apple would actually incorporate it into iPhone 6.
The news that Apple had invested in GT Advanced Technologies (GTAT) and a sapphire production facility in Arizona has fueled bullishness about GTAT and sapphire for the iPhone. MacRumors continues to insist that sapphire will be on iPhone 6, and this has become almost an article of faith among the Apple zealots.
I've been on the fence with respect to sapphire. Sapphire's material properties make it ideal as a smartphone cover glass (okay, its a crystalline material, not really a glass for you tech mavens). Sapphire is so hard that almost nothing will scratch it except diamond. But the very features that make sapphire desirable also make it difficult and expensive to produce. And make no mistake, as it stands right now, sapphire is definitely more expensive than glass, according to a recent MIT article.
Sapphire bulls such as William Feng have pointed to "technological innovations and economies of scale" that will supposedly bring the price down to the level of Corning's Gorilla Glass, currently a factor of 10 less expensive, according to the MIT article. I've been a little uncomfortable with such articles because they're a little short on specifics.
What innovations? The process that GTAT uses for growing single crystal boules of sapphire was developed at the Army Materials Research Lab in 1967. What economies of scale? A single GTAT crystal growth furnace will accommodate about a 100 kg boule. If you want more production, you build more furnaces. The cost to produce each boule will still be about the same, so where's the economy of scale? Probably not in the production of the furnaces. Each furnace has to be hand built and installed at the production facility, since they're a couple of stories tall.
And then there's the energy cost difference, which could be a big driver for production cost. As far as I can tell, the physics driven energy cost difference is about a factor of 3, due to the crystalline nature of sapphire. This cost difference of itself probably isn't enough to account for the MIT's production cost difference, but may suggest an upper bound to the cost savings hypothetical innovations could achieve.
If this theoretical upper bound can be achieved or even approached in production, then sapphire probably can be made competitive to glass through doing things such as what Apple is reportedly doing in Arizona: building a large solar farm to power the plant. However, the current production method probably doesn't get close to this theoretical limit.
This has to do with the crystal growing method, which requires that the furnaces be maintained at the melting temperature of sapphire (about 2000 C) for a period of about two weeks. The heat that leaks out of the furnace is wasted energy. How much leaks out? I don't know, but Corning's recent statement that sapphire cover glass production is about 100 times more energy consuming than the equivalent Gorilla Glass, as self-serving as it was, is probably correct.
Could GTAT/Apple have achieved innovations that would bring the energy cost closer to the theoretical limit? Absolutely, and this is the big wild card that makes projecting Apple's use of sapphire so... interesting. By the way, Apple's patent on a laminated sapphire/glass screen and GTAT's reported acquisition of technology to produce ultra-thin wafers don't address the issue of energy cost for bulk production of sapphire.
Looking for Clues from Corning
It was because I couldn't really come up with a determination regarding Apple's sapphire plans based on technology considerations alone that I turned to the Corning earnings report for clues. Based on the questions that were asked at the conference call, it seems that every analyst involved had the same thing in mind.
Repeatedly, analysts probed sales expectations for Gorilla glass and were met with what I would characterize as tense waffling by Corning execs. The tension was palpable. Clearly they're worried, but specific statements, to the extent specifics could be elicited, were inconsistent.
The very first analyst question was about the reason for lower Gorilla Glass guidance. Was it due only to tablet demand declines or was there an impact from smartphone "alternative materials?" The answer was that the lower guidance was indeed due to lower tablet sales, but Corning believed that Gorilla Glass would continue to be the material of choice for branded smartphones.
Then, a few minutes later, an analyst asked if lower expectations for Gorilla Glass were due to lower expectations for smartphone sales. Corning conceded that lower expectations were due to smartphone sales. And so it went.
The last thing Corning would do was say anything that was directly traceable to Apple.
The earnings report itself isn't much help either. You would think that if Corning had lost a major customer such as the supplier of screens for the iPhone that it would show up as a significant impact to revenue. As far as I can tell, there is no such impact. Revenue for the Display Technologies Segment grew substantially year over year for the quarter by 56% to $987 million. This was primarily an artifact of Corning's buyout of a joint venture with Samsung and the inclusion of the joint venture's revenue in its results. So, it's hard to tell if there has been a revenue impact due to a loss of iPhone business.
Here, looking for sequential changes may be more revealing, since Q1 results also reflect the impact of the Samsung buyout. Display Technologies Revenue grew by 6% sequentially to $987 million. Once again, if Corning was about to fall off an Apple cliff, I would have expected it to show up by Q2. By Q2, parts suppliers had to be in production in order to feed the supply chain for iPhone 6 production, assuming a late Q3 launch.
Also, Corning specifically reaffirmed its guidance that Gorilla glass volume would be up 20% for the year.
What do I make of all this? I think Corning's results indicate that sapphire has simply missed the production window for iPhone 6, so that Apple was obliged to go with Gorilla Glass in order to hold the schedule for the late Q3 iPhone unveiling. But the orders weren't as big as they had hoped, indicating that screen suppliers cut the orders to the bare minimum with the expectation that sapphire would arrive roughly by the end of the year.
This was basically my prediction for iPhone 6 back in March. I may be reading into the Corning earnings what I expected to find, but really, if there had been a noticeable impact to Display Technologies revenue, I would have been more than happy to declare that the era of the sapphire screen had arrived.
An Era Delayed
In fact, based somewhat on Corning's earnings, I believe that era is only delayed. Apple's investment in sapphire, its clear technical superiority, and the potential (at least) for cost-saving innovation all convince me that a sapphire screen iPhone is on the way. But the sapphire plant's initial production this year will go first to iWatch.
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