Apple Inc. (NASDAQ:AAPL) has signed a deal with GT Advanced Technologies Inc (NASDAQ:GTAT) to supply sapphire material for its devices. Shares of GT soared in early trading on Tuesday, climbing more than 23% after the announcement was made.
GT releases details about Apple contract
Daniel Eran Dilger of Apple Insider reports that the contract with Apple Inc. (NASDAQ:AAPL) is worth $578 million, and GT Advanced Technologies Inc (NASDAQ:GTAT) will create the sapphire material at a new plant in Arizona. Governor Jan Brewer said recently that the plant will create 1,300 construction jobs and 700 long-term positions at GT as the company produces sapphire material for exceptionally low prices. GT announced the deal in its earnings report this week.
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Apple will prepay to pay for GT to accelerate the development of its Advanced Sapphire Furnace, a new piece of technology which will have “large capacity” and produce high quality materials for low prices. Apple is paying for the facility to be built, and then over the course of the five-year contract, GT will pay Apple back. The payments are expected to begin in 2015. According to the contract, GT must produce a minimum amount of sapphire material which will only be supplied to Apple Inc. (NASDAQ:AAPL).
GT expects to see lower margins on sapphire
Management at GT Advanced Technologies Inc (NASDAQ:GTAT) said they expect margins to be much lower on their sapphire material after the new facility is built. After the company announced the deal with Apple, GT, provided a restatement of its 2014 revenue guidance, saying that it now expects revenue for 2014 to be between $600 million and $800 million.
GT said the sapphire division is expected to contribute about 80% of next year’s revenue, and it expects to see 2014’s revenue double within two years.
The importance of sapphire for Apple
This deal is important not just for GT but also for Apple Inc. (NASDAQ:AAPL) because the company uses sapphire in its camera lenses and also the fingerprint sensor for the TouchID home button on the iPhone 5S. Sapphire is also used to produce LEDs and can be used in the production of a glass alternative which cannot be scratched. Sapphire is also able to be made thinner and lighter, although in the past it has been more expensive. This new facility is aimed at lowering the price of sapphire, which should give both GT’s and Apple’s margins a boost.