Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

GT Advanced Technologies (NASDAQ:GTAT)

Q3 2013 Earnings Call

November 07, 2012 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

Krish Sankar - BofA Merrill Lynch, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

Amir Rozwadowski - Barclays Capital, Research Division

Jonathan Dorsheimer - Canaccord Genuity, Research Division

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

Farhan Ahmad

Mark J. Heller - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Operator

Good morning, and thank you for standing by. Welcome to GT Advanced Technologies September quarter financial results. [Operator Instructions] As a reminder, this call is being recorded.

Now I will turn the call over to Ryan Blair-Flame [ph] 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 2012 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 and the final slide in the presentation accompanying this call. Important factors that could cause actual results to be different than our expectations are discussed in GT Advanced Technologies' filings with the Securities and Exchange Commission, including the statements under the heading Risk Factors in the company's quarterly report on Form 10-Q in the fiscal quarter ending June 30, 2012.

Statements made during this call should be evaluated in light of these important factors. GT Advanced Technologies is under no obligation to and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

A webcasted replay of today's presentation will be available for 90 days beginning today at approximately 10:00 a.m. Eastern and can be accessed on the IR section of our website. An audio replay will also be available. Please refer to the company's website for details. In addition 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. I'll start with an overview of the current state of our business and the markets we serve, along with a summary of recent actions we've taken as we navigate through the current environment and continue to prepare for the significant longer-term growth opportunities that we've identified. Rick will then review financial details for the third quarter. As noted in our press release last night, we will hold an additional conference call in mid-December to discuss our quarterly outlook in view of 2013.

The severe downturn in the solar industry, which first became evident early this year, is having a significant impact across the entire value chain. The financial performance of many Asian solar companies, some of them our customers, has continued to deteriorate as evidenced by the increasing reports of turmoil in the industry. Tensions over the PV trade disputes that have developed between China, the EU and the U.S. continue to escalate, and there is growing uncertainty over the outcome of the various trade investigations that are underway.

In addition, we've seen accelerated efforts led by the Coalition for American Solar Manufacturing to expand the scope of the current tariffs in order to remove the exemptions for Chinese solar modules produced with cells manufactured outside of China. Given the rhetoric coming out of China and the recently initiated trade investigation into polysilicon imports from the U.S., Korea and the EU, there's a growing concern that a broad trade war could develop.

Most agree that the issues in the solar industry are structural: too much capacity, pricing at or approaching cost levels, barriers to consolidation and an industry cost structure that makes it challenging for anyone to make a profit absent significant technological advancements. Perhaps, the most severe issue facing many of our Asian customers and one that unexpectedly impacted our third quarter is the difficulty that many of them are having in accessing credit.

With the backdrop of a slowing Chinese economy, many Asian banks with significant balance sheet exposure to solar are severely limiting access to new credit. The impact of this liquidity crunch has not been limited to solar, rather it has begun to have a broader impact on nearly all equipment purchases in our served markets in Asia.

Our PV business remains very soft. The sale of our DSS products, which peaked at $240 million of quarterly revenue in late 2010, were only $2 million in the third quarter. While we've seen potential opportunities developing in the Middle East, the order pipeline is otherwise limited and no one is adding significant multi-crystalline or MonoCast capacity. Given our view that there is more than enough multi-crystalline capacity in place, even if China accelerates internal deployment of solar projects, and the belief that the market will slowly shift away from multi-crystalline structures as the next generation of high-efficiency solar cell technologies evolves, we are considering all strategic options with respect to the DSS segment of our business.

Looking forward, despite the current solar industry and macro challenges we've described, we continue to expect that the solar sector will rebound in late 2013 or early 2014, driven in large part by the adoption of new technologies that provide critical cost-per-watt reductions. We are continuing to invest in technologies that we believe will help solve the industry's cost issues and drive business opportunities and growth for GT.

This includes the development of our HiCz product, the technology that we believe is key in addressing some of the industry's critical cost and performance challenges. Our pilot facility in St. Louis is now complete, and material samples are being shipped to select customers who are developing next-generation, high-efficiency cell structures. We continue to increase the throughput of the system, and HiCz advanced N-type material that has been manufactured into cells by our customers and development partners has demonstrated efficiencies that consistently outperform traditional batch Cz wafers.

While we continue to target an introduction of this revolutionary technology in 2013, we're carefully assessing the market's readiness for it and what impact, if any, the current macro environment will have on the timing of market adoption and initial orders. While we have an active pipeline of interested HiCz customers, we have seen some of our current and prospective customers outside of China put expansion plans on hold, pending resolution of current trade proceedings. Beyond HiCz, we're actively evaluating and working on other downstream PV technologies that we believe will have a significant impact on the solar cost structure.

Our polysilicon business continues to hold up well, with equipment and services from that business comprising over 85% of the quarter's revenue. Despite a backdrop of oversupply and pricing pressure in the poly market, we continue to expect the segment to contribute meaningfully to our business in 2013 and 2014 as top-tier producers remain focused on improving their market positions.

We have good visibility into our polysilicon revenue stream over the next 12 to 18 months. We have a significant level of deferred poly revenue related to equipment we have already shipped, and most of the polysilicon equipment scheduled to ship in the balance of 2012 and 2013 is for projects that are already underway and unlikely to be halted. Based on the extensive work already completed, we are also confident that the order for reactors that we booked with an incumbent late last year remains on schedule to ship by early calendar year '13.

Furthermore, based on OCI's current schedule, we expect to start shipment for their Phase 4 project in 2014. We also continue to make progress in negotiations on several new poly projects in Southeast Asia and the Middle East and expect to convert one or more of these into engineering contracts by mid 2013. We expect the reactor orders associated with these engineering projects would likely follow in late 2013 or early 2014 and could represent $400 million to $500 million of additional bookings.

Beyond these projects, the pipeline for new polysilicon opportunities is limited given the current environment. The focus in the polysilicon market, given low prices, is shifting rapidly to cost reduction. Advancing our technology to help polysilicon -- our polysilicon customers reduce cost remains a key differentiator for GT in today's environment of falling prices.

We remain on schedule for introduction of our next-generation poly reactor in 2013. This new reactor will be capable of producing 1,000 metric tons per year at a cash cost structure below $14 per kilogram. This will complement our recently announced high-volume FBR Hydrochlorination Solution for making TCS that lowers the cost of ownership over current TCS production methods by approximately 20%.

In sapphire, several of our ASF customers are running at high utilization levels as they have had success supplementing their LED business with non-LED demand. In our own sapphire materials business, we're seeing renewed interest in large diameter 6-inch substrates. While our ASF customers are fully capable of producing 6-inch and larger cores, the market for these sizes remains limited as downstream processes are much more challenging and the economics remain less attractive given the rapid decline of prices at the 2-inch or 4-inch levels.

Additionally, the adoption of the PSS process, which improves brightness, has made the smaller diameters harder to displace. That said, we welcome the renewed interest in larger diameters as our ASF technology is well suited to address this opportunity as it develops.

While our ASF customers remain largely committed to their plans, several of them have significant exposure to the solar industry, and this has begun to hamper their ability to fund non-solar investments. In addition, soft sapphire pricing is also presenting near-term uncertainty, and at the end of our third quarter, several ASF customers had difficulty securing the financing needed to take deliveries as expected. This had a significant impact on our third quarter. We continue to work closely with our customers to assess when these deliveries will likely take place.

We expect to see stronger sapphire demand in 2013 as the adoption of LEDs for general lighting accelerates and new end market applications develop. On that note, we remain very enthusiastic about the cover and touchscreen markets for sapphire. Although manufacturers have been investigating sapphire as a possible touchscreen material for many years, only recently has it gained real traction as a viable replacement option. This is largely because the paradigm has recently changed. Sapphire pricing has come down significantly. High-volume, scalable, low-cost sapphire production is now possible with the commercial availability of our technology, and breakthrough fabrication technologies have and will continue to drive out significant costs.

There's been a lot of discussion regarding the cost of sapphire for cover screens and question as to whether the cost range that we recently published of $10 to $20 above current glass solutions is achievable. While we're not able to reveal all of the details behind our published range due to customer and partner sensitivity, here are some important points to consider. First, LED sapphire costs are not a proxy for sapphire screen cost. The requirements of the sapphire cover screens are very different than for LED wafers. Cover screens, for example, require rectangular form factor, have lower crystal quality requirements and are exposed to far less strenuous temperature environments than LED wafers. These differences all have favorable impact on cost.

The total cost for sapphire cover screen can be divided into 2 categories: crystal growth and fabrication, with each currently representing about 50% of the total cost. This ratio is likely to shift as processes are further optimized and costs come down. We estimate that on a per-screen basis, the preprocessing cost of ASF sapphire for a cover screen is at least 20% lower versus the cost of sapphire of an equal thickness for a 4-inch LED-grade wafer.

To the extent that a thinner sapphire wafer is possible, which is likely, given sapphire's superior strength, this cost differential will be at least 30%. This does not reflect the other significant cost reductions that we believe can be achieved as we further optimize the ASF growth process for this application through adjustments, such as optimized boule size, shorter cycle times and lower cost consumables.

With regard to fabrication, we estimate that the cost to fabricate sapphire from a brick to a screen is at least 40% less expensive than from a core to an LED wafer. This results largely from the fewer fabrication steps required for cover screen processing, as well as the lower surface finishing requirements, which allow for much faster grinding and polishing, as well as less material loss.

And finally, several new technologies are being brought to market that will further drive cost reductions and optimizations. One such example is Meyer Burger's recently introduced bricking wire saw, which is expected to make the harvesting of bricks from a sapphire boule economically feasible and significantly less expensive than the current rotary blade saw processes in use. Through our partnership, we're also aware of several other fabrication technology improvement and second-generation techniques currently in development that could have a very significant impact on the cost of producing sapphire screens.

As a result of these factors and several other proprietary data points that we're not able to share, we are confident that the cost targets are achievable and acceptable. We continue to receive feedback from several prospective customers and downstream partners that GT's ASF process and the fabrication processes being developed by our partners can meet all of the critical requirements needed to drive adoption into this market.

As a result, momentum in this space has continued to build and several opportunities are developing, including a project in the point-of-sale market, which we believe will materialize by mid-2013. We have now delivered ASF machines or materials to several key smartphone players, including a maker of lumenized phones and their manufacturing partners, as well as downstream fabrication players as they validate the processes that will be used once ASF sapphire is adopted. This activity has increased our confidence that the sapphire cover and touchscreen device opportunity will translate to a significant inflow of ASF orders in the second half of calendar year '13.

The chart on this slide shows our assessment of the potential demand for sapphire growth equipment from the LED and mobile phone markets. Even with a very low-single digit mobile phone adoption rate, we believe that 3,000 or more sapphire growth furnaces would be needed over the next several years to address the mobile phone opportunity. This would represent about 2x the number of furnaces currently projected to be needed to support the current LED demand forecast. It is important to note that this scenario does not consider potential adoption by other cover screen applications, like point-of-sale devices, navigation systems and music players, that could drive additional sapphire furnace demand.

We remain committed to our other business development and diversification efforts as well. We're making very good progress with our development of a silicon carbide furnace. Our first wafer level results indicate our furnaces are capable of producing material quality on par or better than industry incumbent leaders. We remain on track to release our first commercial silicon carbide offering in the first half of next year.

We continue to evaluate additional M&A opportunities, with a focus largely on next-generation technology bolt-ons in the areas of GaN and next-generation solar solutions that could significantly bring down cost per watt. We also continue to look at ways to capture the aftermarket potential our products create.

The workforce reduction that we announced last week, which will save us approximately $13 million annually, may be seen on the surface as a classic case of restructuring, driven by market dynamics in a desire to quickly improve short-term profitability at any cost. This interpretation would be wrong. While the workforce reduction does reduce cost, the primary driver of our action was to allow us the flexibility to make additional investments in growth and diversification projects without putting further pressure on our financial performance in the short term. We expect to reinvest the cost savings as our objective remains to grow long-term shareholder value through the development of additional growth opportunities and to enhance our competitive position as the markets we serve today return to growth.

We have taken several other steps recently to bolster our position to make important strategic investments. In September, we completed a convertible debt offering, which raised net proceeds of $196 million, enhancing our ability to continue to support the core business and execute on strategic M&A, as well as technology development initiatives.

We also implemented a new organizational structure that consolidates our existing business units and worldwide operations into a single business group under the leadership of Dan Squiller. As you may recall, Dan, who worked for me at Invensys, where he ran a $1 billion-plus division within my group, joined GT earlier this year.

The consolidation of our business units provides synergies that enable us to continue to run the business effectively, following the 25% reduction in force. With Dan focused on running the operations of the business on a day-to-day basis, this allows me to focus more of my time on our business and technology development teams, as well as critical strategic growth and diversification initiatives. We remain committed to building on our core strength as a technical innovator. This is the foundation of the company and will ensure GT's future as an industry leader in both our served and new markets.

With that, I'll turn the call over to Rick to review our September quarter financial results.

Richard J. Gaynor

Okay. Thanks, Tom, and good morning, everyone. Before I provide details on our performance in the September quarter, I would like to note that we will be discussing both GAAP and non-GAAP numbers today. A full reconciliation of GAAP to non-GAAP financial measures can be found in our press release, as well as the presentation accompanying this call, both of which can be found at gtat.com. Also, in keeping with our usual practice, we have published an investor financial summary on the IR section of our website.

Moving on to the results for the third quarter of calendar year 2012, which ended September 29, 2012. Revenue was $110 million in the third quarter. This included approximately $96 million of polysilicon revenue, $2 million of PV revenue and $13 million of sapphire revenue. The year-over-year decline in quarterly revenue is directly related to the market-driven erosion of the PV segment.

We came in at the lower end of our revenue range in the September quarter primarily due to sapphire and DSS shipments coming in at the low end of our expectations. As Tom noted, the sapphire performance is reflective of the ongoing difficulty many of our ASF customers are having in securing letters of credit to take shipments.

Looking at our performance over a 9-month basis. Revenue for the first 3 quarters of calendar year '12 came in at $631 million compared to $720 million in the same period last year. As shown on this slide, we grew the sapphire business from approximately $23 million in the first 9 months of 2011 to $218 million in the first 9 months of 2012, reflecting our efforts to successfully grow the non-solar portion of our business.

Our gross margin for the September quarter was 31.8%. The polysilicon gross margin was 37%. PV gross margin did not meaningfully impact the overall gross margin, but was negative as we were unable to absorb our fixed period cost for these very low PV revenue levels. While the overall sapphire gross margin was 26%, the gross margin for our ASF equipment business was largely in line with our long-term 40% target. The sapphire gross margin was negatively impacted by a higher proportion of sapphire materials business in the quarter. As a reminder, we run the sapphire materials business largely as an R&D facility, not as an optimized material business, which adversely affects the overall sapphire segment gross margin.

Overall OpEx in the September quarter was $29.9 million, down from $35.6 million in the June quarter. During the quarter, we recorded a $9.9 million credit to our P&L as certain payout milestones associated with the Confluence acquisition were not met. Nonetheless, the build-out of the St. Louis facility is complete. We continue to make good technical progress with HiCz, and our schedule for commercializing HiCz remains on track.

Consistent with our stated strategy, we have continued to make significant investments in R&D. In the September quarter, we spent $18.8 million in research and development, bringing calendar year '12 spending to approximately $48 million, a 64% increase over the same period last year. The September quarter R&D was largely targeted at continued investments in HiCz, ASF and silicon carbide technology developments. Our year-to-date tax rate as of the end of the third quarter of calendar year '12 was 32%.

Now moving on to EPS. Fully diluted EPS in the September quarter was $0.02 compared to $0.12 in the prior quarter and $0.29 for the year-ago quarter. Non-GAAP fully diluted EPS in the September quarter was $0.01 compared to $0.16 in the prior quarter and $0.35 for the year-ago quarter. On both the GAAP and non-GAAP basis, we had a profitable quarter at $110 million of revenue, which indicates a breakeven on an annualized revenue level below $440 million. Taking into account the impact of our recently announced 25% headcount reduction, our breakeven revenue point would be approximately $400 million if we did not reinvest these savings.

Moving on to our balance sheet. We began the quarter with $332.4 million of cash and cash equivalents and $145 million of total debt. During the September quarter, we invested approximately $7 million of CapEx primarily to support the final build-out of our HiCz facility. We also completed a convertible debt offering in the September quarter. In connection with the convertible bonds, we entered into bond hedge and warrant transactions, which had the effect of raising the effective conversion price to $9.93 per share. The net proceeds were $196 million after all the transaction fees, including the purchase of bond hedges and the sale of warrants.

We ended the September quarter with $479.2 million of cash and cash equivalents and $298 million of total debt. Because the convertible debt may be wholly or partially settled in cash at the company's discretion, we are required to separately account for the liability and equity components of the notes. In accordance with GAAP, the total proceeds of $220 million were allocated between debt for $154.9 million and stockholders equity for $65.1 million, with a portion in stockholders equity representing the fair value of the option to convert to debt. The debt discount related to the convertible debt is being amortized over the expected life of the notes ending on October 1, 2017.

Excluding the proceeds from the convertible, we consumed $49 million of cash during the third quarter, $7 million of which was for CapEx. If business activity were to stay at current levels, we would expect to continue to consume cash until we begin to convert our backlog at a faster pace and our auto rates recover as we introduce new products in 2013.

Moving on to our backlog. We entered the September quarter with a backlog of nearly $1.6 billion. During the quarter, we received orders totaling approximately $49 million, which included $11 million of polysilicon, $5 million of PV and $32 million of sapphire orders. We recognized $110 million in revenue and had approximately $56 million of negative adjustments to our backlog. This related primarily to the termination of a polysilicon contract with a start-up Chinese player, which we have indicated in previous earnings calls was likely at risk.

We ended the September quarter with a backlog of $1.5 billion, which included $618 million of polysilicon, $141 million of PV and $718 million of sapphire. Our total backlog security as of the end of the September quarter was approximately 27%, with approximately $93 million in deferred revenue, $53 million in letters of credit and $250 million in nonrefundable customer deposits.

Now with that, I will turn the call back to Tom to wrap up. Tom?

Thomas Gutierrez

Thanks, Rick. As I indicated earlier, market and macroeconomic headwinds in our served markets have intensified and affected our business in the third quarter. There continues to be volatility and uncertainty with respect to the balance of this year and how 2013 will evolve. It is unclear, with banks increasingly limiting their financing and protecting their own balance sheets, how our customers will fare in the near to midterm as they attempt to finance their own diversification or expansion plans.

We do have clear visibility into a large portion of our near-term polysilicon business, $44 million of which has already been shipped, is in deferred revenue and will convert to revenue in the December quarter. In addition, there is a $37 million polysilicon order currently scheduled to ship late in December. However, the timing of that shipment is largely dependent on deliverables from the supplier and as such, could slip into the first quarter. We also have several ASF and PV customers scheduled to take significant deliveries at the back end of this quarter, which are dependent on those customers' ability to obtain the necessary financing.

To the extent that we're able to convert all of these business -- all of the business just discussed in the December quarter, we would be in a position to be within our previously provided revenue range for the year. However, factors beyond our customers' control could potentially impact our ability to perform within this range, and given the level of volatility and evolving liquidity issues we have described, we're not in a position to provide a meaningful guidance range for the December quarter without additional due diligence.

To be clear, we are not withdrawing, reiterating or updating guidance at this time. We believe it's prudent to spend additional time with our customers and suppliers, carefully assessing the situation. After doing so, we'll hold a conference in mid-December to provide our view on the December quarter, as well as our preliminary outlook for 2013. On that call, we'll also provide a more detailed and updated view on our backlog security as we move into calendar year '13.

While we're cautious about the near term, we remain confident that our served markets will recover, and we remain committed to investing on strategic R&D and technology and bolt-on initiatives in order to advance our competitive leadership position and continue to diversify our business. We're realistic about the challenges in front of us, but we're excited and prepared for the opportunities ahead.

With that operator, we'll open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

I had a couple of them. Rick or Tom, number one is I understand, with regards to the challenging solar business environment, the liquidity issues. I'm just kind of curious what kind of leading indicators are you looking at before you decide to provide a guidance in December. Is it just the trade disputes, module pricing, poly pricing and the liquidity situation? Or is there something else going on beyond those?

Thomas Gutierrez

Well, I think the new and really significant factor has been the sudden freezing up of liquidity and the banks stopping their lending. We've never before been really in a situation where we have to worry about our good customers telling us that they're going to put an LC in place and then not being able to do it because the banks don't come through. And so there's an added level of complexity here where I'm going to be personally spending and am spending personal time with each of the key customers, understanding the liquidity issue. That's really the driver here because some of these customers -- and we were mostly impacted by ASF customers not being able to put LCs in place in the quarter. Most of these customers are committed. They want to expand, they want to take their deliveries, they're just having difficulty with their banks. And so it's diving into the middle of the liquidity issue. We're taking sort of a little bit of an attitude of "show me the money" before we sort of conclude whether or not this is going to have a continuing impact or not.

Krish Sankar - BofA Merrill Lynch, Research Division

Got you. I mean that makes sense, Tom. So along those lines, so we are seeing this issue surface on the solar side of the business. Is there any reason to think you might start seeing such issues down the road on your sapphire business, too?

Thomas Gutierrez

No. I mean, in the third quarter, we saw this spill over into the sapphire side of the business because what happened was the banks are -- the banks in Asia, and largely in China, have really exposed balance sheets, and so protecting the balance sheet doesn't mean that they're letting -- acting freely in terms of letting cash out the door for other investments. They're being very, very tight in terms of exposing their balance sheet to any additional risk. And so in the third quarter, which was the surprise at the end of the quarter, it spilled over into our sapphire business.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. And then just a final question from my end, I'm kind of curious when I look at your PV segment and looking at the gross margin profile, is there any way to figure out how many PV units do you need to ship in a given quarter to break even in the business.

Thomas Gutierrez

It's not a calculation we've done. But I think it's probably a number that's so far above the number that we shipped in the quarter that it's not really relevant. And I think the other thing, Krish, that we're pointing to is to say we don't necessarily believe that other than opportunities that we have in the Middle East and in other parts of the world that multi-crystalline will ever come back to the kind of levels that we had last year.

Richard J. Gaynor

And while we have, obviously, skinnied up on our headcount, as Tom talked about during the call, we do have to keep a certain level of infrastructure in place to service existing customers, as well as to be positioned for the HiCz product when it comes out next year.

Operator

Our next question comes from the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

Tom and Rick, just a follow-up question on trying to model the fourth quarter sales right now. So it sounds like, Tom, a worst-case scenario, as you see it now, is December sales could be $44 million just from polysilicon, and that assumes some of these other potential risky scenarios in sapphire or PV don't play itself out. I just want to make sure I kind of heard that correctly.

Thomas Gutierrez

Stephen, I'm not providing that kind of guidance. What I'm saying is that at the moment, one, we have demand, and we have customers telling us that they're going to take sufficient product for us to be in our range. We're sort of taking a "Doubting Thomas" position here and saying we need to understand the liquidity issue a little bit more. And so we'll be providing firmer direction in the mid-December call once we've completed this additional due diligence. But at the moment, really that's the issue. We can't give you meaningful guidance.

Richard J. Gaynor

Stephen, you shouldn't latch onto that number too significantly. We do have other pieces of business that continue to flow through like, for instance, we've got materials business in sapphire that will continue to produce revenue. So that is one data point in isolation; you shouldn't overly rely on it.

Thomas Gutierrez

Right.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And then my follow-up question, Tom, is just a follow-up question on the financing that some of the LED customers are having challenges with. How long are you willing to wait for these customers to get the financing resolved before it becomes a risk that we might have to de-book them from the backlog?

Thomas Gutierrez

That will be something that we'll discuss in detail in mid-December, and that's part of the assessment that we're doing.

Operator

Our next question comes from the line of Ahmar Zaman with Piper Jaffray.

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

My first question is around your break-even level. You mentioned on your prepared remarks that your break-even level is about $400 million. Is that on a cash basis or on an earnings basis?

Richard J. Gaynor

It's on a revenue basis.

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

So on a revenue basis. Can you tell us what your break-even level is on a cash basis?

Richard J. Gaynor

That's not a number that we've -- are prepared to issue at this point.

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

Okay. And then just one quick follow-up. On ASF, you mentioned last quarter that there was about $50 million that was pushed out into the fourth quarter. Is the issue you're having with that $50 million still or is it much more broadly distributed across your 7 ASF customers?

Thomas Gutierrez

Okay. I understand. I mean the range that we've provided for the quarter included that $50 million, which, depending if -- because we always are looking at whether or not there's going to be a shift from the end of one quarter to the beginning of the next quarter. I think that $50 million, obviously, dropped out of the quarter. However, what we've noted is it isn't the normal quarter end, quarter beginning cycle. The pattern that we saw at the end of the quarter was more of customers wanting to take the product but not being able to get the cash to put the LCs in place. And that, obviously, has broader implications, which is why we're going to take some additional time to really consider that and its implications as we move through the end of this quarter but also, more importantly, to provide a better view of calendar year '13, which we'll do in mid-December as well.

Operator

Our next question comes from the line of Amir Rozwadowski with Barclays.

Amir Rozwadowski - Barclays Capital, Research Division

Tom, I mean, recognizing that it's still early stage of what you're seeing with sort of Chinese lending activity, I think it's been -- you folks have already expressed that there is a lot of overcapacity in the market over there. I was wondering if you could give a bit more insight as to whether or not you think that this is the start of some sort of rationalization and if we get to the other side of sort of that type of rationalization, if you can see sort of a pickup in activity for you folks once we get some of that sort of overcapacity situation resolved.

Thomas Gutierrez

Okay. This requires a little bit broader answer because I see the issue as being structural in the sense that it's not just too much capacity, okay? And so there are barriers to consolidation that have cropped up. And what's happened is employment is the supreme ruler of everything in China, and what we're seeing is players that should go out of business basically being propped up by the local governments, as well as the government in general. And so there's some barriers to consolidation that are -- that tell me that consolidation is going to be slower rather than faster. Secondly, if there was consolidation and capacity went out of the market, you still have the issue that the cost of manufacturing is about equal to the prices in the marketplace. And as you know, prices have continued to come down. And so our view is, and why we're taking a really close look on a strategic basis to our DSS businesses, that the future is all about next-generation technologies, HiCz, as well as some of the other technologies that we're working on because the cost has to come down in order for solar to continue to grow. To the extent that prices come down and costs don't come down, you've got the same liquidity and profitability issue and the same tsunami of bad results coming out of players in Asia that we've continued to see over the last couple of quarters. And so it is -- you can't look at this as a capacity issue. This is a structural cost issue first, capacity and consolidation second or third.

Amir Rozwadowski - Barclays Capital, Research Division

That's actually very helpful, Tom. And then if I think about you -- you mentioned sort of strategic options for the DSS business. Just so I can understand sort of the thought process, it seemed like that's very much a focus on ramping technology and sort of driving some of that cost curve down. We shouldn't interpret that as other sort of strategic initiatives. Perhaps taking a step back and whether or not you want to continue along that business line.

Thomas Gutierrez

Actually, I think it's the latter, okay? We are going to look at the business from the standpoint of, "Do we continue to invest in it? Do we shut it down? Or do we sell it?" Now we're talking about the DSS business, not the PV business. We're still very positive about HiCz and the other PV technologies that we're working on. This is strictly a strategic look at DSS and say, given our belief that this is not capacity, that there's already enough capacity in the multi-crystalline world, even if the Chinese government turns on their local market, what it means is that we really need to think carefully about what's the return on investment to continue to invest in this business, albeit we have some good opportunities in the Middle East and other areas that are developing. We just need to take a blank sheet of paper and say, "Do we want to be in this business or not?"

Operator

Our next question comes from the line of Jed Dorsheimer with Canaccord Genuity.

Jonathan Dorsheimer - Canaccord Genuity, Research Division

So 2 here. I guess, the first, Tom, I really want to sort of -- the sapphire opportunity sounds great, but I'm struggling a bit on the costs. And so in particular, depreciation and amortization for front end and for back end and sort of getting it within that $10 to $20 range. And how I'm looking at is, if I just use sort of the current cost of a furnace, let's call it $500,000, you get to a depreciation cost of $10. If you just look at it on a per-unit basis, maybe $6. And so even if that comes down, it would seem that the front-end and back-end depreciation would be at least the lower end of that range, and then you'd have to have consumables and other costs that go in there. So do you think you could provide us some additional color on how you're calculating that $10 to $20 range? And understanding that you do have NDAs, but maybe just in general ranges so that we can get more comfort or confidence around this opportunity. And then I have a follow-up question, too.

Thomas Gutierrez

Okay. I think the advantage we have, obviously, is that we know what the selling prices will likely be for the types of equipment that we'll sell into that environment. And so I'm not confirming or denying what the price point might be. I'm just saying that, that's a factor what the throughput of the furnaces might be in terms of cycle time, what the cost of the consumables might be, et cetera. There are already a lot of tools in the fabrication area that will have application, that are either depreciated significantly or are already in place and some of those operations that we'll support. There are some really innovative technologies that are being developed by ourselves and our fabrication partners that would bring the back end down very substantially in the fabrication area. And as I indicated on my comments, I expect that the ratio between the crystal growth side and the fabrication side to change substantially as these technologies get put onboard. It is a difficult position to be in, Jed, not being able to put all this detailed information out there because of the NDAs and all that. But we're confident, okay, that we can be inside that box. And we're also confident that, that's just the initial box, okay. Over time, as some of these things start hitting daylight in terms of what some of these fabrication technologies are going to be, that cost differential can continue to be brought down. You've asked me before about events, okay. So today we talked about -- we'll be able to talk about a point-of-sale event midyear. We're talking to a ruggedized phone player, that will be faster than what you would expect would happen with the big smartphone players. And unfortunately, with the big smartphone players, you won't know until it happens. It's sort of like nobody would confirm from any of those players that they were going to use sapphire for their camera lens, and they surprise the market. And that's what they're all about, it is out-surprising each other. So we've maintained that smartphone application. And I think I've read your note, you are correct. It's not a near-term opportunity. We'll start laying down assets second half of next year, but you won't see a high-volume phone with sapphire on it, I don't think, until 2014. And so that's consistent with the time line that we've put in place.

Richard J. Gaynor

Another thing, Jed, is this is not just talk. I mean we talked during the earnings call about the fact that we're significantly investing in research and development in our sapphire business, and it's -- a lot of that is focused on this opportunity. We talked about Meyer Burger has clearly made investments in this space as well with their announcements, and we're talking to players right throughout the whole value chain. Everybody's very excited, and everybody's investing in terms of making this a market reality. So people are putting money into this space because they all see a line of sight to success.

Thomas Gutierrez

I think the other thing that's gone beyond the NDA stage, we've delivered furnaces. We've delivered material now. We've delivered sample screens, actually, in some cases. And so it's gone well beyond, "Let's sit in a room with an NDA and talk about it."

Jonathan Dorsheimer - Canaccord Genuity, Research Division

Yes. I guess, what we're trying to get a handle of is not whether or not there's a lot of interest in R&D activity, but that it gets commercialized. So I do appreciate the commentary. It's helpful. Just one follow-up. Tom, you put the pink issue to rest in the LED industry by doing some studies and sort of getting the LED industry onboard with the fact that it didn't have any effect on manufacturing growth of the LEDs. There has been a lot of controversy over the use of the sapphire in the iPhone 5 with this purple haze issue. I just wanted to sort of get your perspective as to whether or not that has anything to do with the sapphire. And in particular, is that a function of absorption of UV light with a particular type of sapphire?

Thomas Gutierrez

All the feedback that we have and all the experience we have, some of it through our partners, is that the transmission and the wavelengths of which have nothing to do with that. Our sapphire performs as well, if not better, than some of the others. The purple haze comment that you just made, that's something I just recently heard is going on. I think there's a lot of speculation that it has something to do with the camera design itself perhaps. But we use sapphire in many other applications where the optical requirements are far above what's required in a camera or something. We've got some Department of Defense applications and other applications where we're certain that the optical characteristics aren't an issue. There is something else going on, it sounds like, but it's not tied to our sapphire. And by the way, the pink has the same issue as it is in LED. You -- once you polish and grind, you have to anneal. The annealing process is about the same. The pink is not a factor.

Operator

Our next question comes from the line of Pavel Molchanov with Raymond James.

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

I want to go back to your comments about the sudden change in bank lending practices in China. Are you getting the sense that this is mandated by Beijing at the highest levels and is part of some integrated policy? Or is it just a lot of people in the banking sector suddenly made the same decision all at once?

Thomas Gutierrez

If I think of it logically, a lot of exposure on those balance sheets, billions and billions of dollars exposed to a solar industry that's largely having difficulty making profits, as we all know. The diligence that I've got to do still between here and mid-December is to make sure that I understand whether or not there's something else behind this freeze in liquidity other than just the logic of people protecting their balance sheets. So I can't comment as to whether there's general policy or not. But I will say that we are in a tit-for-tat dangerous trade conflict situation between China and everybody else at the moment in solar with the EU and all that. And so would it surprise me? No, okay? Do I have specific knowledge? No.

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

Okay. Let me also ask about the balance sheet. In the past, I cannot recall a time when you have had this much leverage on the balance sheet. Are you -- is your comfort level kind of at the current amount of debt? Do you think you can sustain more? And would you like to return to a debt-free balance sheet over time?

Thomas Gutierrez

I think it's always nice not to have debt to any extent. I mean we're not concerned about our liquidity to fund operations and to fund our bolt-on investments, which are modest-sized anyway, with the level of liquidity that we have on hand, and so it is unlikely that we would seek additional leverage. But over time, as our new products are introduced and we start generating significant cash again, we would expect to have that come down.

Operator

Our next question comes from the line of Satya Kumar with Crédit Suisse.

Farhan Ahmad

This is Farhan asking a question on behalf of Satya. I wanted to ask you about the cover glass opportunity for mobile. You mentioned that there is a significant cost of processing sapphire post the growth. I was wondering if there is any specific effort that you are putting in place to reduce those costs.

Thomas Gutierrez

We're working with many downstream fabrication partners and doing our own internal work as well to identify technologies that can -- as I said, the $10 to $20 range is what's visible now. We would expect that, over time, we and our partners will pressure on that to bring it down further.

Farhan Ahmad

And can you provide the portion of the backlog for sapphire that is covered?

Thomas Gutierrez

Rick?

Richard J. Gaynor

The portion of sapphire that is covered by security, is that the question?

Farhan Ahmad

Yes, covered by LC deposits and deferred.

Richard J. Gaynor

Okay. So the total sapphire backlog is $718 million. Deferred revenue is approximately $6.5 million. Deposits are $37.7 million, and currently, we have no outstanding LCs. So total security is $44 million or about 6%.

Operator

Our next question comes from the line of Mark Heller with CLSA.

Mark J. Heller - Credit Agricole Securities (USA) Inc., Research Division

I was wondering, Rick, I know you're not giving financial guidance, but I didn't quite catch -- so it sounds like even with the restructuring, there won't be a change in the OpEx. I was just wondering if you could give us some clarity on the OpEx in the December quarter and as we look into 2013.

Thomas Gutierrez

Well, let me respond to that. I mean, Mark, we've obviously taken -- the action is not a speculative action. We've taken the bulk of the action already. We've released $13 million of expenses. What we're saying is that we won't shy away from reinvesting some of that and planting seeds that will give us future growth. And so we're not committing to basically banking the $13 million. We're saying that we may reinvest some of it. We're not definitely saying we are, but it becomes part of our bank for planting future seeds.

Mark J. Heller - Credit Agricole Securities (USA) Inc., Research Division

Okay. Got it. And then I think you mentioned OCI Phase 4 on the call. I sort of missed exactly what you said. But when do you expect that to ship now and turn to revenue?

Thomas Gutierrez

Phase 4 is expected to ship in 2014. And then the turn into revenue is dependent on revenue recognition, and that varies on what portion of those shipments are new products and what portion of those shipments are products that already have perfunctory behavior. So we're not ready to release what that revenue stream looks like yet, but we would expect to ship significant amount of that order in 2014.

Mark J. Heller - Credit Agricole Securities (USA) Inc., Research Division

Okay. Got it. And last question is, I think, on prior calls, you discussed sort of backlog risk within poly, PV and sapphire. I was wondering if you could give an update on that as well this quarter.

Thomas Gutierrez

We're going to provide that update as part of our December 15 because I think this new reality that we're dealing with relative to liquidity issues puts us in a position where we have to go back and rethink that to some extent.

Operator

Our next question comes from the line of Patrick Wu [ph] with Battle Road.

Unknown Analyst

I just wanted to get a little bit more color for Q4. Are you guys willing to provide me maybe just sort of worst- and best-case scenario in terms of margins for the quarter, just so we can get a flavor of what you guys are expecting to see?

Thomas Gutierrez

Not today. As I indicated, we're not withdrawing our guidance. We're not reiterating it or updating it in any way. And in mid-December, we'll provide much more explicit guidance to the quarter once I've completed the process I've talked about.

Unknown Analyst

Okay. Regarding the sapphire backlog, the $718 million, about what percentage of that would you say could potentially be at risk given the credit crunch you guys did mention in China?

Thomas Gutierrez

I think that's, again, something that we'll be better prepared to discuss mid-December.

Unknown Analyst

Fair enough. Just I guess, just last -- one last one then. In terms of total headcount for the quarter, what was it? And obviously, are you guys planning on maybe further -- looking at further restructuring efforts going into 2013? Or is it more at a stagnant pace right now going into Q4 and 2013?

Thomas Gutierrez

We've taken out -- we were at 600-plus, 625. We've already taken out about 130 people or thereabouts, and so we're just shy of 500 now. Speaking to the broader question that you asked, I doubt that we could take an action of this size again without impacting our business operations. But okay, we continue to look and we'll always continue to look for ways to streamline and make ourselves more efficient, and so no guarantees that there won't be small actions in the future. But I think the size of this action was made possible by the streamlining of the operation and the reorganization that we did, and I don't anticipate an action of this size happening again.

All right. Thank you for joining us today and for your questions. We look forward to staying in touch in the weeks and months ahead. We'll be presenting at the UBS Global Technology Conference in New York next week, and look forward to updating you in mid-December on our outlook for the quarter and for 2013. Thank you.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: GT Advanced Technologies Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts