Something peculiar happened yesterday as Apple (NASDAQ: AAPL) was unveiling its iPhone X. The shares of its two expected suppliers for vertical-cavity surface-emitting lasers (VCSEL) -- Finisar (NASDAQ: FNSR) and Lumentum Holdings (NASDAQ: LITE) -- reacted very differently to the announcement of a new TrueDepth camera system that would use depth mapping for 3D facial recognition. There were clues in the companies' recent conference calls over the summer that suggested that they would be splitting the VCSEL design win.
Apple did not specify by name that it was using VCSEL sensors (pronounced "vixel"), but there should be little doubt that the "Dot projector" is indeed a VCSEL array. In its July 2016 patent (originally filed in July 2014) that describes a structured light projector, it notes that the projector is "typically a laser diode." VCSELs are laser diodes with small apertures that allow for greater accuracy, can be tuned to nearly any wavelength (including invisible infrared, like Apple is using), and enable 3D-sensing technologies. Yet shares of Lumentum fell during the presentation, while Finisar shares enjoyed modest gains.
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It should have been the other way around
The divergent investor reactions are more puzzling considering the fact that Finisar reported earnings last week alongside a soft outlook. Total revenue for the fiscal second quarter is expected to be in the range of $322 million to $342 million, a sequential downtick at the midpoint compared to fiscal first-quarter sales of $341.8 million -- and at a time when Finisar is attempting to ramp 3D sensing. CEO Jerry Rawls attributed delays to a change in the VCSEL manufacturing process:
When asked if the delays could risk the "flagship lead customer" to shift to a "sole-source situation," Rawls downplayed that possibility. When asked a related question of whether Finisar had missed a window for the initial launch, Rawls again brushed aside the risk, clarifying that it was just a process change intended to improve the VCSEL product's performance and reliability.
This all means that Lumentum could have the upper hand initially, at least until Finisar is able to ramp production, according to Piper Jaffray analyst Troy Jensen and Raymond James analyst Simon Leopold (via Tech Trader Daily). The VCSEL content in iPhone X is estimated at around $4 to $5, and Lumentum said last month that it has received $200 million worth of VCSEL orders -- roughly enough arrays for 40 million iPhone X units.
Finisar has been more ambiguous, merely saying that production units will be "millions of units" after having shipped a few hundred thousand so far. Finisar is now awaiting Apple's approval, which it expects to obtain this quarter. After Finisar gets the green light from Cupertino, the company foresees "a relatively low level of [VCSEL] revenue in the quarter."
Overall, both Finisar and Lumentum appear positioned to capitalize on Apple's big move into 3D sensing in the quarters ahead. But with Finisar running into a manufacturing hiccup, it's odd that shares jumped on the official announcement while Lumentum, which appears to be executing just fine, saw its shares dip briefly.
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