GT Advanced Technologies inks game-changing deal with Apple

The $500m agreement represents a major shift in strategy for the company

Merrimack-based GT Advanced Technologies has signed a deal with Apple Inc. that could be worth more than $500 million.

Under the deal, GTAT will supply the computer giant with durable sapphire glass at Apple’s new facility near Phoenix, Ariz.

The agreement represents a major shift in strategy for the company, which had previously focused on manufacturing the means of production, not production of the commodity itself.

The deal is expected to provide a steady steam of revenue, and it further diversifies GTAT away from its solar business, which is currently losing money. Indeed, the Apple deal overshadowed another disappointing GTAT earnings report: a net loss of $38 million, or 31 cents a share, for the third quarter, bringing the losses for the year to $45 million. Quarterly sales were down to $40 million, a fourth of what they were a year ago, bringing sales year to date to $266 million, a $365 million drop from last year.

The agreement announced Monday caused GTAT stock to soar by 20 percent Tuesday, closing at $10.10.

Under the agreement, GTAT will lease an Apple-owned facility in Mesa, Ariz., filling it with 700 workers. (Ironically, the site was vacated by First Solar Inc., a casualty of the troubled solar industry.)

Apple will prepay GTAT some $578 million in four separate installments over a five-year period.

The agreement is more a loan than a sale. Apple is not committed to buy anything, just advance the money, which will be paid back by GTAT in product and cash, under terms that were not disclosed. But GTAT seems confident enough in the arrangement to pay down a $96 million balance on a revolving loan from the Bank of America.

GTAT would not disclose exactly how Apple will use the durable scratch-resistant glass.

How the job growth in the Southwest will affect the company’s overall headcount – much less that of its New Hampshire headquarters and its Merrimack facilities – was not disclosed, but the company did release this prepared response to an NHBR inquiry:

“The new agreement will not directly impact our operations in New Hampshire. Our facility in Merrimack remains an important center of research and development for the company as well as our corporate headquarters.”

GTAT forecast that 80 percent of it sales will now come from its sapphire business, a major diversification from a company that went public in 2008 as GT Solar Technologies. GTAT did not break down how much it expects from Apple sales, but last quarter, sapphire equipment sales totaled $7.3 million, some 18 percent of sales, though the company claims some $355 million of its $658 million backlog comes from sapphire equipment.

Although GTAT said it would supply the material “exclusively” to Apple and granted Apple “certain” intellectual property rights in connection with its sapphire growth technologies, it would not say what the restrictions or rights were.

CEO Tom Gutierrez said that GTAT can still sell sapphire equipment to LED manufacturers, as well as those using the material to manufacture industrial and specialty sapphire businesses, but he steered clear of discussion whether the company can sell its equipment to Apple competitors or anyone manufacturing glass for consumer electronics.

The company said it would pursue other opportunities, and is specifically looking at going “downstream” when it comes to LED lighting and produce the equipment to make lower-cost materials for solar and electronics uses.

GTAT enjoys greater margins making the technology – furnaces and crystallization equipment – as opposed to manufacturing the products themselves. But the glut of solar cells, accentuated by a U.S. trade war with China, pushed the company to diversify.

Gutierrez thinks that both industries will come back, especially if his company can find ways to lower manufacturing costs. 

“I’m bullish on solar in the long run,” said Gutierrez, according to a transcript of an earnings call provided by the Seeking Alpha website, but “not very many people are making money in this. As a matter of fact, most are losing money.”

He said he felt a need to move away from the ups and downs of massive equipment sales.

“We've been looking at whether or not it made sense to create a recurring revenue base upon which to basically manage our cyclical equipment business,” Gutierrez explained in the earnings call. “And so we've been looking at the idea of a long-term recurring revenue stream and, obviously, we've concluded that that is a superior model to the model of just selling equipment.”

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