The iPhone 6 continues to be a hot topic, and the implications of Apple Inc. (NASDAQ:AAPL)’s recent deal with GT Advanced Technologies Inc (NASDAQ:GTAT) regarding sapphire glass are quite tremendous. But could Apple really use sapphire in the iPhone 6, and if so, to what extent might it be used? Bernstein analysts examine the possibilities in a pair of reports today.
How the iPhone 6 might feature sapphire glass
Currently Apple Inc. (NASDAQ:AAPL) uses sapphire glass to protect the camera and the fingerprint sensor in the iPhone 5S. However, Bernstein analysts note that the amount of sapphire listed in the agreement between Apple and GT Advanced Technologies Inc (NASDAQ:GTAT) suggests that Apple has much greater ambitions for the glass. They estimate that the capital expenditures required for producing 100 million 5-inch iPhone 6 screens would be between $500 million and $1 billion, depending on yields and the thickness of the screen.
In part because of these high costs, they have a difficult time seeing Apple Inc. (NASDAQ:AAPL) using sapphire glass for the iPhone 6 screen. They say it certainly is harder to scratch, but it’s unclear whether sapphire would reduce screen breakage, which is a far bigger complaint of iPhone users and one of the main drivers of Apple’s warranty costs.
Apple could compromise on sapphire for the iPhone 6
The Bernstein team suggests that Apple Inc. (NASDAQ:AAPL) might decide to choose the best of both worlds by using a sapphire laminate rather than a full sapphire cover screen. The analysts said this would cut down on scratches and breakage as well while also offering a lighter weight. They point to one of Apple’s patent applications regarding sapphire laminate technology, which involves using 1 millimeter sheets of sapphire fused together or around glass. However, it’s not clear if the process of doing this is ready to use.
How gross margins impact Apple
If Apple Inc. (NASDAQ:AAPL) was to use a full sapphire glass display, they believe the cost would be $13 to $18 per device at high production levels, compared to $3 for Gorilla Glass. This would weigh on iPhone gross margins by about 200 basis points and Apple’s overall gross margins by about 130 basis points. If the cost was higher—like around $30 per device—then the negative impact would be even greater, reaching as high as 400 basis points or more on gross margins for the iPhone and 270 basis points for Apple overall.
In general, they note that for every 100 basis point of iPhone gross margin decline, Apple Inc. (NASDAQ:AAPL) sees an 80 cent to $1 reduction in annual earnings per share. In addition, since the iPhone 6 is expected to have a bigger screen, they already expect its bill of materials to be higher, even before sapphire glass is included. They note that with the slightly larger screen on the iPhone 5, iPhone gross margins fell by about 900 basis points.
In addition, the Bernstein team also points out that if Apple Inc. (NASDAQ:AAPL) was able to reduce screen breakage rates, then its gross margins would be lifted. They estimate that a 33% decline in screen breakage rates could actually raise iPhone gross margins by about 40 basis points. They’re unsure if using sapphire would draw more buyers, thus increasing Apple’s share of the high-end smartphone market, however. So they say that in order to be gross margin neutral, Apple must sell an incremental 3.5 million smartphones to make up for every 100 basis points of erosion in iPhone gross margins.
What about Apple’s iWatch?
On the other hand, there have also been speculations that Apple Inc. (NASDAQ:AAPL) might use the sapphire glass in its rumored iWatch. The Bernstein team estimates that this would require capital expenditures of between $50 million and $200 million. They say it’s possible that Apple might use the sapphire glass for the iWatch while continuing to test sapphire glass for iPhone screens.
iPhone 6 could launch in July
Another analyst firm provided a possible launch date for the iPhone 6. Mizuho Securities analyst Abhey Lamba expects to see the iPhone 6 and its larger companion in July instead of September or October. The analyst based this expectation on checks of Apple Inc. (NASDAQ:AAPL)’s Asian suppliers, which suggest that manufacturing for the handset is ramping up earlier than expected.
He did say, however, that it is possible that manufacturers are simply ramping up efforts earlier just to make sure that there will be enough supply when it does come time for Apple to launch the iPhone 6.