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Suppliers Heavy Hints on the Next iPhone with Meaningful AR Implications
Apple, Augmented Reality

Last night, Finisar (FNSR) reported the Apr-17 quarter and made comments that all but ensure they will be one of two or three suppliers of VCSEL lasers for the high-end version of the next iPhone. Based on timing comments, we expect the next iPhone to be announced in September and ship in October. VCSEL lasers will add advanced 3D sensing capabilities for augmented reality applications.

What They Said. On last nights earnings call, Finisar management did not mention Apple by name, but they highlighted they expect to see volume VCSEL orders in their second fiscal quarter, which is the October quarter end of this calendar year. The company anticipates shipping “millions” of units during the quarter, but management also went on to say they anticipate unit shipments to be in the “10s of millions” in future quarters, which gives us further confidence 3D sensing and AR applications will be one of the focus features in the next generation of iPhones. In May of this year, Lumentum was the first VCSEL supplier to announce they anticipate volume shipments to begin in the second half of 2017.

We also want to highlight Finisar acknowledged they are shipping VCSEL lasers to multiple customers, but one customer (aka Apple) is accounting for the majority of total demand. We believe Finisar and others supplying VCSEL lasers are supply constraint and shipping everything they can manufacture. We believe Apple has secured a high percentage of all VCSEL lasers created, which we view as a large competitive advantage and will make Apple a leading AR player in the smartphone space.

Advanced AR. Apple is putting the hammer down in AR. The company already has more than 100m AR-enabled iPhones (iPhone 7) in use today, and all versions of the next iPhone will be AR-enabled. Incorporating these high-end VCSEL lasers into the iPhone will enrich the augmented reality experience. Coupled with the release of the ARKit at WWDC in early June, Apple is positioning itself to become a leader in this next generation tech movement. Separately, Apple is cornering the market for the VCSEL sensors.

Higher Margins. We also believe the iPhone enabling 3D sensing will be positive to the company’s bottom line. We anticipate the high-end iPhone SKU will incorporate a low-end and high-end VCSEL laser. The low-end will be front facing, while the high-end laser will be on the back side of the device. We believe the low-end lasers will cost $2 – $3, while the high-end lasers will range from $3 – $4. When factoring in manufacturing costs the total bill of materials could cost ~$20. We believe the high-end iPhone will market for ~$950, which the company will have added ~$100 to the price to incorporate 3D sensing. This nets in an 80% gross margin  up sell to the AR rich iPhone, compared to Apple’s overall gross margin of ~40%.

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.

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