VCSEL Supplier Confirms Strong Demand for iPhone X

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.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.

AMS AG Results Positive for iPhone X Mix

Following positive Sept-17 results from an Apple supplier, AMS AG, we continue to believe the mix of iPhone X remains favorable and will drive overall iPhone ASPs 15% higher (Street up 8%) in FY18.

Who is AMS. AMS is a European semiconductor company, which supplies optical components to Apple that enables 3D sensing on the iPhone X. 3D sensing is a premium feature going into the iPhone X, which will allow facial recognition and other augmented reality applications.

What AMS Said. AMS reported q/q revenue growth of 45% in the Sept-17 quarter, but more impressively, guided Dec-17 revenues to be up 68 – 83% q/q (mid point up 75%), which was meaningfully stronger than analyst expectations. The company implied the better than expected guidance was due to their 3D sensing optical business which is in the iPhone X. The start of high volume shipments began middle of the third quarter, but given the better than expected Dec-17 guidance we believe demand will continue to increase.

What Does This Mean For The Apple Model? Directionally its positive for the mix of iPhone’s that will be in the form of the iPhone X. Since the AMS component is new, we can not build a growth rate off of the Dec-17 guidance to better triangulate iPhone X demand. That said, upside to AMS Street estimates do suggest Apple has a more favorable outlook to iPhone X demand than analysts have been projecting.

iPhone ASP Barrier A Fallacy. As we highlighted in a Apple preview note this morning, we believe these data points further indicate strong demand for iPhone X, which will lead to better than expected ASP acceleration in 2018. At first take the $1000 starting price iPhone feels like a deal breaker. We think that’s a fallacy, and consumers will take a step function jump in what they’re willing to spend on an iPhone. The average ASP (unweighted) for the iPhone X is $1074, compared to $809 for the iPhone 7, a 33% increase, and the average iPhone 8 ASP of $824, 2% above the iPhone 7.  It’s been well documented an increasing number of iPhone buyers are moving to monthly installments, whether through the iPhone upgrade program, or similar programs from most global carriers.  In total we estimate about 75% of new global iPhones are purchased via installment programs. Last year using the iPhone Upgrade Program, the iPhone 7 plus 128GB was $40.75 per month, compared to the iPhone X 64GB at $49.91 per month. This translates to a $9.16 monthly increase, and an ASP increase from $849 (iPhone 7 Plus 128GB) to $999 (iPhone X 64GB), up 17%. We think 22% of iPhone buyers will view the $9 monthly increase as an acceptable monthly increase to get the latest iPhone.

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.

Feedback Loup: Early iPhone AR Apps

Since the launch of iOS 11, we’ve been testing popular AR apps available on the App Store. We’ve had fun, and found some useful new tools, but it doesn’t seem like we’ve unlocked the true utility of AR – yet.

After testing out a a few of the more popular AR apps, we have four takeaways:

  1. AR apps offer a new, semi-immersive experience. What began with Pokemon Go has expanded to an entire category of apps; AR enables an entirely new app experience, particularly as it relates to gaming. These apps have consumers using iPhones and iPads in an entirely new way, as a window into a mixed reality.
  2. AR apps demonstrate the novelty of AR but don’t provide true utility – yet. Outside of measuring distances and placing furniture, there is little utility value available in these early AR apps. iPhones and iPads can only provide a window into an augmented reality, not a fully augmented reality. Until some form of wearable technology comes along, we won’t have a seamless AR experience.
  3. AR apps are meaningfully better on the iPhone 8 and (soon) iPhone X. Right now, AR apps leveraging iOS 11 work on iPhone 6S and newer models. But while these apps can run on older phones, the experience isn’t the same. Older iPhones have a harder time picking up surfaces and objects.
  4. Don’t Forget About Audio AR. iOS 11 and ARKit have spawned a new category of AR apps layering digital objects on horizontal planes, but we view audio (not just visuals) as a huge opportunity for our devices, like AirPods, to augment our realities. Imagine a co-worker speaking to you in Mandarin, but hearing English in real-time translation.

Here are some of the AR applications that we reviewed:

Follow Me Dragon – The VR Company. Follow Me Dragon gives users their own imaginary dragon that follows them around. At one point, Magic Johnson even tweeted about Follow Me Dragon’s success.

My Very Hungry Caterpillar AR – StoryToys Entertainment Limited. I’ve been playing My Very Hungry Caterpillar with my 4 and 7 year-olds and they’re enthralled. More than a few times, they’ve looked around my iPhone to see the AR caterpillar directly, only to find that it’s not really there.

TapMeasure AR Utility – Occipital, Inc. One of the higher utility apps that we used, TapMeasure, allows users to measure distances with their iPhones. We used TapMeasure to help confirm that we were illegally parked – but just barely. Ultimately, though, distance measurement will be just one ingredient that developers will use to create killer AR apps.

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.

iPhone Survey Shows 28% Interest in iPhone X; Positive for ASPs

Intent to upgrade survey shows promise for the iPhone X, and higher ASPs. In addition to surveying consumers in launch lines, we surveyed a broader base of 511 consumers this week regarding their intent to purchase the upcoming iPhones. We found that 23% of respondents intend to purchase a new iPhone within the next year compared to about 25% a year ago. Of that those planning on purchasing an iPhone, 28% are planning to buy the iPhone X, and 40% an iPhone 8 or 8 Plus. We continue to model for 20% of FY18 iPhone units will be iPhone X, given we expect the U.S. to over index to iPhone X. It’s important to note that the most current iPhone typically accounts for 50-60% of overall iPhone unit sales. This survey suggests the most current iPhones will account for 68% of iPhone unit sales. This increases our confidence that ASPs for the iPhone will move higher in FY18. We are modeling for a 6% increase in ASPs in FY18 versus a 1% increase in FY17, and expect our ASP assumption will end up being on the conservative side.

There have been many reports expressing fear that demand for new iPhones is wavering, signaled by low initial sales numbers and short lines for the iPhone 8. However, it must be pointed out that we currently have only partial data. While the release of two devices with slightly different launch dates is unique, the iPhone 8 and iPhone X should be viewed more as a single cycle. Factoring in strong demand for iPhone X and higher ASPs, we believe this cycle will exceed last year’s in both revenue and unit shipments, modeling for iPhone units in FY18 to increase 9% and iPhone revenue to increase by 16%, compared to 3% and 4% in FY17.

Additional Survey Details

  • Total sample size: 511 U.S. consumers
  • iPhone 7 users: 87 of 511 (17.0%)
  • iPhone 6s users: 66 of 511 (12.9%)
  • iPhone 6 users: 65 of 511 (12.7%)
  • Other iPhone users: 38 of 511 (7.4%)
  • Android users: 255 of 511 (49.9%)
  • Users planning to upgrade iPhone in the next year: 119 of 511 (23.3%)
    • Users planning on upgrading to iPhone X: 32 of 116 (27.6%)
    • Users planning on upgrading to iPhone 8: 23 of 116 (19.8%)
    • Users planning on upgrading to iPhone 8 Plus: 23 of 116 (19.8%)
    • Users planning on upgrading to other iPhone: 38 of 116 (32.8%)
  • More interest in AR: 105 of 503 (20.9%)
  • Unchanged in AR: 314 of 503 (62.4%)
  • Less interest in AR: 84 of 503 (16.7%)
  • 18-29 (19.3%)
    • iPhone users: 56 of 97 (57.7%)
    • Purchasing the next iPhone: 26 of 97 (26.8%)
      • Users planning on upgrading to iPhone X: 8 of 26 (30.8%)
      • Users planning on upgrading to iPhone 8: 5 of 26 (19.2%)
      • Users planning on upgrading to iPhone 8 Plus: 6 of 26 (23.1%)
      • Users planning on upgrading to other iPhone: 7 of 26 (26.9%)
    • More interest in AR: 26 of 97 (26.8%)
    • Unchanged interest in AR: 59 of 97 (60.8%)
    • Less interest in AR: 12 of 97 (12.4%)
  • 30-44 (27.2%)
    • iPhone users: 70 of 137 (51.1%)
    • Purchasing the next iPhone: 36 of 137 (26.3%)
      • Users planning on upgrading to iPhone X: 9 of 35 (25.7%)
      • Users planning on upgrading to iPhone 8: 9 of 35 (25.7%)
      • Users planning on upgrading to iPhone 8 Plus: 7 of 35 (20.0%)
      • Users planning on upgrading to other iPhone: 10 of 35 (28.6%)
    • More interest in AR: 35 of 137 (25.6%)
    • Unchanged interest in AR: 80 of 137 (58.3%)
    • Less interest in AR: 22 of 137 (16.1%)
  • 45-59 (28.0%)
    • iPhone users: 82 of 141 (58.2%)
    • Purchasing the next iPhone: 34 of 141 (24.1%)
      • Users planning on upgrading to iPhone X: 9 of 33 (27.3%)
      • Users planning on upgrading to iPhone 8: 4 of 33 (12.1%)
      • Users planning on upgrading to iPhone 8 Plus: 6 of 33 (18.2%)
      • Users planning on upgrading to other iPhone: 14 of 33 (42.4%)
    • More interest in AR: 24 of 141 (17.0%)
    • Unchanged interest in AR: 91 of 141 (64.5%)
    • Less interest in AR: 26 of 141 (18.4%)
  • 60+ (25.5%)
    • iPhone users: 48 of 128 (37.5%)
    • Purchasing the next iPhone: 21 of 128 (16.4%)
      • Users planning on upgrading to iPhone X: 4 of 20 (20%)
      • Users planning on upgrading to iPhone 8: 5 of 20 (25%)
      • Users planning on upgrading to iPhone 8 Plus: 4 of 20 (20%)
      • Users planning on upgrading to other iPhone: 7 of 20 (35%)
    • More interest in AR: 20 of 128 (18.8%)
    • Unchanged interest in AR: 84 of 128 (65.6%)
    • Less interest in AR: 24 of 128 (18.8%)
  • Male (46.9%)
    • iPhone users: 112 of 236 males (47.5%)
    • Purchasing the next iPhone: 50 of 236 (21.2%)
      • Users planning on upgrading to iPhone X: 14 of 49 (28.6%)
      • Users planning on upgrading to iPhone 8: 10 of 49 (20.4%)
      • Users planning on upgrading to iPhone 8 Plus: 10 of 49 (20.4%)
      • Users planning on upgrading to other iPhone: 15 of 49 (30.6%)
    • More interest in AR: 58 of 236 (24.6%)
    • Unchanged interest in AR: 141 of 236 (59.8%)
    • Less interest in AR: 37 of 236 (15.7%)
  • Female (53.1%)
    • iPhone users: 144 of 267 (53.9%)
    • Purchasing the next iPhone: 67 of 267 (25.1%)
      • Users planning on upgrading to iPhone X: 16 of 65 (24.6%)
      • Users planning on upgrading to iPhone 8: 13 of 65 (20.0%)
      • Users planning on upgrading to iPhone 8 Plus: 13 of 65 (20.0%)
      • Users planning on upgrading to other iPhone: 23 of 65 (35.4%)
    • More interest in AR: 47 of 266 (17.6%)
    • Unchanged interest in AR: 173 of 266 (64.8%)
    • Less interest in AR: 47 of 266 (17.6%)
  • Plan to purchase next iPhone 119 of all 511 U.S. consumers (23.3%)
    • iPhone users: 91 of 119 (76%)
    • More interest in AR: 47 of 105 (40.2%)
    • Unchanged interest in AR: 49 of 105 (41.9%)
    • Less interest in AR: 21 of 105 (18.0%)
  • Not planning to purchase next iPhone 392 of all 511 U.S. consumers (76.7%)
    • iPhone users: 165 of 392 (42.1%)
    • More interest in AR: 58 of 386 (15.0%)
    • Unchanged interest in AR: 265 of 386 (68.7%)
    • Less interest in AR: 63 of 386 (16.3%)

It’s important to note that demographic information was not available for all respondents. In addition, some respondents did not complete the survey. For example, 119 out of 456 respondents shared that they intend to upgrade their iPhone in the next year, but only 116 specified their decision further.

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.

Survey Suggests Higher Demand for iPhone 8 and X; but Brace for Short Lines

Survey suggests better than expected demand for iPhone X and iPhone 8, but lines will be shorter tomorrow.  This week we surveyed 388 consumers in the U.S. across all demographics and found that of those planning to buy an iPhone in the next year, 25% plan on purchasing an iPhone X and 39% and iPhone 8 and 8 Plus. We are modeling for iPhone X to be 20% of units over the next year, and iPhone 8 and 8 Plus to be 25% of units over the next year. Said another way, the survey suggested 64% of iPhones in the next year will be either the iPhone X, iPhone 8, or 8 Plus, compared to our current model of 45%. While we are encouraged by this survey, we are keeping our iPhone mix estimates unchanged to err on the side of conservatism.

Expect shorter lines this year. We will be making our annual pilgrimage to a handful of Apple retail stores to count lines and more importantly, survey people regarding their intended purchases. The lines have been declining over the past two years. For example, the line at the 5th Avenue New York store declined from 1,880 people in 2014, to 650 in 2015, and 400 last year. Given the most current version of the iPhone is split between the iPhone X and iPhone 8, and more people are purchasing their phones online or through the iPhone upgrade program, our best guess is that lines will be less than half as long as we observed in 2016. In addition, the 5th Avenue New York store is undergoing major renovations, and has been moved to an adjacent building which will likely impact the 5th Avenue line count. These shorter lines don’t change our expectation that iPhone unit growth for this next cycle will be 9% versus 3% for FY17.

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.