• Apple’s key iPhone X augmented reality component supplier, Lumentum (LITE), reported better than expected Jun-18 quarter results ($301M vs expected $287M).
• Upside in the quarter was driven by sooner than anticipated ramp in the AR/3D sensing business.
• The company continues to anticipate order volume to significantly accelerate in Sep-18 and guided revenues ($340M – 350M) above Street expectations ($336M).
• What this means for Apple: given the expected ramp in VCSEL arrays, we believe this fall, Apple will offer 3 iPhone models (up from 1 today) that include AR/3D sensing. This should provide slight upside to the Street’s iPhone ASP in Sep-18 ($731) and Dec-18 ($790).
• iPhone X demand remains healthy.
• Apple remains committed to augmented reality.

What Lumentum said

Lumentum is Apple’s primary vertical-cavity-surface-emitting laser (VCSEL) supplier (75% market share), a key component going into the flood illuminator and dot projector on the face of the iPhone X. These technologies allow for 3D sensing and enable augmented reality applications such as facial recognition. The company reported 3D Sensing revenues of ~$60-65M, which continue to be compressed due to seasonality. However, at the end of the Jun-18 quarter, the company began shipping higher volumes to key customers (aka Apple), which exceeded Management expectations. More importantly, the company continues to anticipate order volume to significantly accelerate in Sep-18 and Dec-18 quarter. While the company announced new 3D sensing wins with Android manufacturers, we believe a high percentage of these orders were secured by Apple.

What this means for Apple

Given the sooner than expected ramp in VCSEL arrays, we believe this fall, Apple will have 3 (including iPhone X) iPhone models with the VCSEL laser. This should be a slight positive for ASP’s in Sep-18 and an increasingly positive in Dec-18 as production of these new phones ramps. Furthermore, Lumentum results suggest current iPhone X demand is healthy. Most importantly, Lumentum results and guidance are evidence that Apple continues to be committed to augmented reality. We anticipate 3D sensing will only be front-facing on the new iPhones and believe Apple will be incorporating this technology in new product categories such as the iPad.  Given Lumentum and other VCSEL suppliers continue to be capacity constrained, we believe Apple has once again secured the majority of all VCSELs produced in 2018, further expanding their lead in AR.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.