Special thanks to Austin Bohlig for his work on this note.
Following upbeat Sep-17 quarter results from Apple’s leading vertical-cavity surface-emitting laser (VCESL) supplier this morning, Lumentum (LITE), we believe initial demand for iPhone X is on track to drive 2-3% upside to Apple’s overall Street revenue in FY18 (details below). We believe Lumentum is one of two company’s supplying Apple with VCSEL arrays, but due to qualifications issues with the second supplier, LITE is currently supplying 100% of all VCSEL arrays. As shown in the picture below, VCSEL arrays are a key component going into the flood immolator and dot projector on the face of the iPhone X, which allows for 3D sensing and enables augmented reality applications such as facial recognition.
What LITE Said? Despite manufacturing bottlenecks that occurred early in the Sept-17 quarter, Lumentum highlighted 3D sensing revenues rapidly ramped in the quarter and the company continued to receive significant amount of new orders. The company indicated these bottlenecks have since been resolved, which we believe was evident by LITE recording more 3D sensing revenues in the the month of Oct than they did in the entire Sept-17 quarter. The company recorded $40M in 3D sensing revenues in Sep-17 quarter, which is up from $5M in the Jun-qtr.
What This Means For Apple? These data points, as well as current iPhone X lead times (see here), suggest iPhone X are tracking ahead of investor expectations. We believe comments from Lumentum imply 60-70m (25-29% of expected iPhone’s next year) iPhone X units in FY18, compared to our estimate of 55m and investors expectations of closer to 50m. If the best case of 70m units plays out, that would imply 2-3% upside (additional $6B in revenue, $300 additional per phone of 20m phones) to Street FY18 revenue estimates, depending on mix of 64GB vs. 256GB.
How We Back Into 60-70m iPhone X Units For FY18. There are two front facing VSCEL arrays on an iPhone X. One within the flood illuminator and a second related to a dot projector (see image above). We believe the total cost of both of these lasers are about $7 per phone. On today’s call, Lumentum suggested the current $40m per month in orders it has for VSCEL arrays will be sustained, suggesting $480m best case per year in total orders. Dividing $480m by $7 gets us to 69m iPhone X units in FY18. We believe ~70m is best case given demand will likely slow as we get into next summer, and feel a range of 60-70m is the best way to think about iPhone X units next year.
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