One of the big new features in Apple's (NASDAQ: AAPL) iPhone X is its 3D-sensing capability, which will enable 3D facial recognition and deliver superior augmented reality (AR) experiences. The new TrueDepth camera system -- which uses a vertical-cavity surface-emitting laser (VCSEL) array to project infrared (IR) dots that are subsequently read by an IR camera -- has the potential to be a game changer, especially over time as third-party developers discover innovative new use cases.
As is often the case, once either Apple or the Android camp comes up with a new breakthrough feature, the other side scrambles to catch up. However, Android original equipment manufacturers (OEMs) might have a hard time catching up in the 3D-sensing department.
Word on the Street
There are currently two Android phones on the market that support Alphabet subsidiary Google's Project Tango, the Lenovo Phab 2 Pro and ASUS ZenFone AR. These devices likely use similar VCSEL arrays, but unlike iPhone X these are low-volume devices that aren't necessarily intended for the mainstream. Tango is still in the early innings, and initial reviews are mixed about the AR experiences. But with Apple about to catalyze the adoption of 3D sensing by including the feature in its new flagship, it will inevitably push the market forward.
VCSEL manufacturing capacity is still rather immature within the industry right now, and suppliers are currently working hard to ramp production. Here's the thing: Apple might have already locked up most of this early capacity through exclusive supply agreements, according to Rosenblatt Securities analyst Jun Zhang (via Tech Trader Daily). In addition to Finisar (NASDAQ: FNSR) and Lumentum (NASDAQ: LITE), Zhang believes that II-VI (NASDAQ: IIVI) is also in the VCSEL supplier mix. Zhang notes that Apple has been building up a robust patent portfolio around 3D sensing technologies (thanks to its PrimeSense acquisition), which will buy Apple some time before rivals come up with their own implementations that can offer a comparable balance of accuracy, performance, and power efficiency.
Zhang believes that Android OEMs will start to adopt 3D sensing in earnest in the first half of 2018, although the initial solutions' performance will probably be "far below Apple." Adoption at the OEM level should accelerate in late 2018, particularly as overall manufacturing capacity ramps.
Capacity is coming online
Investors know that Finisar is experiencing some delays related to a manufacturing process change, but it expects to start ramping significantly in its fiscal third quarter (November through January).
Lumentum is working as hard as it can to ramp, which is currently the limiting factor for its growing 3D-sensing business. In August, Lumentum CFO Aaron Tachibana said, "3D sensing revenue will increase materially in Q1 and is only limited by our ability to ramp faster." The company will continue ramping through 2018. "So in terms of OpEx, I would anticipate us being somewhere between the 21% to 22% range as we go through FY '18 and as we continue to ramp 3D sensing, the incremental spend will not grow as fast as the top line, but you can see us get down into the 21% range," Tachibana added.
II-VI is also adding capacity. CEO Vincent Mattera said in August that the company has over 10 active design engagements with 3D-sensing customers in the consumer electronics and automotive markets, and should be in full production by the end of 2017:
Those orders for millions of VCSEL arrays did come from a single customer, Mattera acknowledged.
Finisar, Lumentum, and II-VI are among the market leaders in VCSEL arrays, and Apple does appear to have the initial capacity ramp locked down in the short term. As suppliers ramp production to meet growing demand, eventually there will be some arrays available for the Android camp.
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