Finisar (NASDAQ: FNSR) reported fiscal second-quarter results earlier this month, and the company continues to ramp production of vertical-cavity surface-emitting lasers (VCSELs). These VCSEL arrays are a key component of Apple's (NASDAQ: AAPL) new TrueDepth camera system that enables 3D sensing, and Finisar is one of two to three suppliers.
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VCSEL bottlenecks have been one constraint for the iPhone X ramp, and progress made in recent weeks has allowed the new flagship device to ramp incredibly fast. New iPhone X orders placed on Apple's online store now ship within a matter of days. Here's what Finisar said about its VCSEL ramp -- and what it means for Apple.
Good news for the iPhone X ramp
If you recall, Finisar had yet to receive Apple's approval to commence volume production at the end of the fiscal first quarter, which was not a good sign. But Finisar is now ramping very aggressively after obtaining that approval. The company is even adding a new manufacturing facility that will bolster production capacity next year, CEO Jerry Rawls reported on the earnings call:
Also during the second quarter, we began shipping production quantities of our VCSEL arrays for 3D sensing. In addition, after the end of the quarter, we acquired an approximately 700,000 square-foot facility in Sherman, Texas, for $20 million. This new site will be used to expand our manufacturing capacity for VCSELs using 6-inch wafers. We plan to begin volume production in our new Sherman facility in the second half of calendar year 2018.
CFO Kurt Adzema noted that adjusted gross margin took a hit because Finisar didn't reach production volumes until late in the quarter: "Non-GAAP gross margin was 30.3% compared to 34.9% in the first quarter, primarily due to lower revenue levels, unfavorable product mix, and under-absorption of manufacturing cost at our Allen, Texas, VCSEL fab. This under-absorption was primarily due to our shipping production quantities of our VCSEL arrays late in the quarter."
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By "under-absorption," Adzema means that costs ended up higher than expected while volumes were still low, spreading out those expenses over a smaller number of units and hurting profitability. Rawls expects VCSEL revenue to grow sequentially in the fiscal third quarter. When asked by an analyst to confirm that Finisar had "achieved qualification at a key customer," referring to Apple, Rawls said Finisar has "nondisclosure obligations that really limit what we ought to say about any customer in that market right now" but the company is shipping everything it can produce.
Overall, Finisar is targeting production capacity that would translate into $100 million in quarterly VCSEL revenue. For context, the Datacom segment (which includes VCSEL sales) brought in $256.6 million in total revenue last quarter, and total VCSEL revenue last quarter was in the "low single-digit millions," so that incremental upside in the VCSEL business is meaningful. For Apple, the iPhone X production situation continues to improve every week, which paves the way for the Mac maker hitting its ambitious guidance for the holidays.
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