Polysilicon: GTAT's equipment is installed at 7 out of 9 of the highest polysilicon producers in the world. Current customers include:
1) OCI of South Korea
2) GCL-POLY (China)- the largest polysilicon producer by output in the world
3) LDK (China)- No revenue from LDK since 2010. LDK's financial woes not material to GTAT backlog or future revenues
OCI and GCL-POLY are both long term customers of GTAT. Both companies have expressed a focus on further reducing the cost of production as polysilicon prices continue to fall. This will be the only way they can preserve margins as there is excess manufacturing capacity currently. New generation SDR reactors and TCS products will facilitate this. GTAT equipment is already capable of producing polysilicon with 10-N and 11-N purity (semiconductor grade and beyond)
PV: GTAT has provided equipment to 4 out 5 of the largest PV wafer manufacturers. Customers include:
1) Trina Solar (China)
2) LDK - former customer. No revenue from LDK since 2010. No backlog at risk from LDK's issues
3) Yingli (China)
4) Jinko Solar (China)
5) Nexolon of South Korea
6) Green Energy Technology of Taiwan
GTAT was fundamental to China, Taiwan, South Korea build-out of PV production over the last several years. GTAT equipment helped China dominate low cost polysilicon and PV production. GTAT has heretofore dominated the multicrystalline polysilicon production with their technology. They have shipped/installed more than 3200 furnaces. However, technological advancement has progressed beyond multicrystalline to monocrystalline technology which increases efficiencies (19-20% range on average) and lowers cost. Recognizing the inevitable transition, GTAT developed an upgrade to allow existing furnaces to be upgraded to mono cast (monocrystalline). They also bought Confluence's HiCz techonology which further lowers cost of production and improves efficiencies up to 24%. There is no upgrade path to HiCz for existing customers, and new equipment will need to be purchased for those willing/able to move up to the newest technology. Given the prior massive investment by the Chinese customers into multicrystalline technology over the preceding 10 years, GTAT does not expect these customers to be early adopters of the HiCz products. They expect a new wave of customers (outside of China or new players within China) to step up. The rate this will happen is the real question. The push in the industry is for higher efficiency and lower cost of production and GTAT's technology appears to be in the sweet spot. Their equipment is capital intensive and the next phase of industry build-out is subject to limitations from the the macroeconomy and credit markets. The ion cannon technology will enable further cost reductions for wafer manufacturers which will be a quantum leap forward in cost reduction for the industry. We'll see come 2014...
2) Haotian Optoelectronics
This business segment is just getting started. OCI is a long established customer and is moving aggressively into LED/sapphire. They have stated goals of expanding to capture 20% of the LED/sapphire market over the next 4 years. That will take a lot of ASF furnaces to accomplish. The LED market is growing rapidly and new potential applications for sapphire are announced monthly. LED lighting is the primary application currently, but point of sale screens, smartphone screens, navigation screens, to name a few are on the horizon. The company expects more than 3000 ASF furnaces may be needed just to meet an adoption rate of 5 % among the smartphone market alone. The macroeconomy and credit markets may slow down rates of build out here as well. Time will tell.
Silicon Carbide is just getting moving and the potential for this market should begin to materialize by late in 2013.
A FEW OTHER POINTS TO ADDRESS ALLEGATIONS BY BASHERS:
1) According to the SEC filings, the company collects the same deposits and "backlog security" for ASF furnaces in the sapphire business segment as they do for their other equipment.
2) 90% of funds are collected by the time the equipment is shipped for the PV and Sapphire equipment and 100 % for the polysilicon equipment. The remaining 10 % is collected once the equipment is in place and operating at acceptable performance metrics.
3) The "Negative Cash Flow" complaints in the last quarter appear to be related to "deferred revenue" in the PV segment of about $100,000,000. As we know from the 10Q, all of the revenue shortfall last quarter came solely from the PV segment. "Deferred revenue" becomes "recognized revenue" upon shipment/delivery. The backlog in the PV segment is/was 10% of the total backlog of 1.5 billion, thus about 150 million total. Once the customer accepts delivery, then this will become recognized revenue. The company is clearing out the old PV backlog and has whittled it almost to nothing. This is backlog for the older generation DSS multicrystalline furnaces primarily. As they have just released the monocast upgrade in early 2012 and have HiCz coming out in 6 months, I am not surprised by the drop off in orders in this segment. Why would there be new orders for soon-to-be obsolete technology now that the company has displaced with new technology? The company has basically said that they have rendered the multicrystalline equipment obsolete and do not expect much in the way of new orders for any of it and will phase it out. They have put company resources and future sales expectations on the newer monocrystalline products.
4) The credit agreement with Bank of America replaced the one they had with Credit Suisse last year. The company has drawn on most of the available credit at this point, but the sum total is nearly the same as what they had on the Credit Suisse account before they paid it off.
5) The senior notes were issued for additional working capital and acquisitions at very favorable terms (3%). The company did not want to repatriate foreign profits due to the tax ramifications. Borrow at 3% to avoid paying 35%. Makes sense to me. The company intends to repay this with cash when the notes mature as stated in the 10Q.
6) At a paltry $10 million initial investment and royalties of future sales, the Hyperion cannon is a shrewd purchase. And, there is no way that this acquisition will bankrupt the company at these terms. It appears that the company strategically took over the assets of Twin Creeks with very little future risk. The Cannon has been sufficiently developed such that Twin Creeks had already commercialized it and there are other such products in use already. As it turns out, this happens to be the best. GTAT is in a much better position to commercialize this product than Twin Creeks, as recognized by Twin Creek's creditors.
7) GTAT has 480 million in the bank to ride out the current uncertainties in Asia. They have reported that annual revenues of 400 million are sufficient to keep them at break-even. The company appears at no short or intermediate risk of running out of money. Those that claim that they are going to run out of cash in the next 12 months are delusional.
Chelle, how do you answer the complaints about managements over compensation? I really have appreciated your knowledge of gtat in your comments. I am starting add at this level, but that is one concern I have about management. With this kind of unbalanced compensation, the goal could be more about keeping the horse running than winning the race.
1) 2012 Total worldwide GW is expected to finish approx. 31GW. 2013 demand was supposed to be higher, but considering the tarrif isssue, we may not break 40GW next year which isn't enough to clear the over capacity. China simply has not stepped up, although they have the resource to install 10GW a year now, question is, will they and what happens to clear out the excess. The good news is it will put a choke collar on the Tier 2 and 3 companies and BK most if not all of them by the time 2013 is over.
2) Silicon Poly Price spot price is 15.8 for G1 and 14.9 for G2. If this keeps coming down the way its been falling with the oversupply, the new tools won't help save anyone money in the near term. This was supposed to bottom at approx. 22 and we are way lower than that. The foercast was for this to rebound in Dec. and Jan. and then flatten in 2013. Have to see if it happens buf if it keeps falling rapidly with no demand increase, this isn't good short term. Long term it helps grid parity come faster, but not good short term with everyone on a cash crunch.
3) Sapphire supply and demand is not in a sweet spot. RBCN has struggled and with it its stock price. The demand for 6 inch was reported to be up 60% by RBCN this past quarter, which is great for GTAT as they are targeting 6 inch cost reduction for future purposes. But like the Chinese banks, how long do major companies wait with relationship to cost reduction and savings to stay on board with the 2 and 4's before going with 6 before we see sharp demand increase.
4) Obviously working with Cell Phone companies and potentially penetrating this market is huge, this stock would fly hard with any report of an actual sale with cell phones getting out of gorilla glass. Nam Tai went from like 4 bucks to 15 in about 2 months or so with Apple demand. Shorts would get crushed if this happened, but like anything, whats the time frame here. To me $15 bucks for a phone upgraded window that would never crack is well beyond worth it, but again, whats the time for this to get going. 2013 they are supposed to have 1 small sale for sure, but for actual market penetration of 3000 additional furnaces for phone adoption for a very small thin slice of the pie, which is worth I think approx 300Million in revenue to GTAT, how long is this. 2014, 2015, how close or far are we. No one knows including any analyst trying to forcast the time horizon here. The idea is fantastic, however.
5) Silicon Carbide is supposed to kick off in 2013 and generate approx. 400 mil in revenue, is this still the case? We have not really heard anything positive or negative in relation to this in any of the recent conference calls. Obviously the SIC is going to also be huge in the future, but how far are we away from actual market penetration.
Gtat's business model is strong getting into markets with potential major demand in the future. But time means everything, and time means money. What is the actual turn time for Solar and LED markets to turn around before profits are restored to businesses outside of GTAT. There isn't a single Chinese solar maker making any money right now, and most of them are going to be fighting just to stay alive a year from today. GTAT's stock potential is huge in time, well beyond 20 50 or even $100 dollars a share if these markets come together with new generated sales taking place. Everyone long on this stock is buying time that it happens. The diversification by GTAT mgmt into multiple fields to generate sales is a wise and aggressive move. Im all for spending money to grow, but considering profit margins could potentially be on the lower side for some time, it may be wise to be slightly aggressive and somewhat conservative. GTAT's mgmt to me is looking pretty aggressive with spending cash and trying to get into new markets. They are taking on extra debt and borrowing for growth. The insitutional ownership in this company is incredible at 120%. And with that high of IO right now the Short Interest has to be massive in the next report, which is why the stock got brought down as far as it did. Im not worried at all about GTAT's stock price at 7, 5 3, 2, or 1. I bought for the long hall based off what America got established with, new innovation and technology which always kept us ahead of everyone else. I believe in GTAT product, I just dont want them to overstep themselves with cash spending in the next 6 quarters until we market rebound in 1 or both or Solar and LED and we get penetration from another market.
Sentiment: Strong Buy
Unfortunately, Chelle's effort continues to be futile. You can't swim upsteam against a strong current no matter how well you know the river. Chelle may drown before he realizes this - he has been sinking steadily with no life ring in sight. He may be washed out to the Dead Sea, fodder for the sharks.