Spoiler Alert: Apple Event Products Leaked

Late on Fri. night, the iOS 11 GM (golden master) software build was leaked to two Apple rumor sites, confirming several new Apple products:

  • iPhone 8 and iPhone 8 Plus: Updated versions of Apple’s 4.7″ and 5.5″ iPhones with LCD displays and the traditional home button.
  • iPhone X: An all new 5.8″ iPhone with an edge-to-edge OLED display, no home button (instead using Face ID for unlocking), advanced AR-related sensors and cameras, and potentially wireless charging.
  • Apple Watch with LTE: A new Apple Watch with iPhone-less connectivity and dramatically increasing usability.  We believe this will add about 2% to our Apple growth rate in FY18. Details below.
  • AirPods: Minor updates to Apple’s wireless headphones, perhaps to increase production output and/or yield, and approach supply/demand equilibrium faster.
  • Bonus: New Wallpapers (here) to show off the new OLED display on the iPhone X.

image source: iDrop News

Augmented Reality Capabilities. While the new hardware will draw the most attention, the most significant change with long-term implications is the addition of 3D sensing capabilities that enable augmented reality applications (also likely to be included on new iPhone and iPhone Plus models). While AR applications will be backward compatible to the 2015 iPhone 6s, the addition of designated 3D and computer vision hardware on the iPhone Pro would be a big step toward putting AR in the hands of everyday users. It would also a big step toward the next generation of computing – beyond the smartphone.

 

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.

Apple Supplier Experiences Delay, but Believe iPhone Launch Unaffected

Special thanks to Austin Bohlig for his work on this note. 

We have updated comments regarding the upcoming iPhone launch following Finisar’s (FNSR) FQ1 earnings results, which we believe is one of Apple’s VCSEL array suppliers. Vertical-cavity surface-emitting lasers (VCSEL) are a key technology that adds 3D sensing capabilities and enables advanced augmented reality applications.

Finisar VCSEL Array.  Source: Laser Diode Source

What They Said. Finisar reported Jul-17 results today after the bell, and while they talked up the opportunity of VCSEL array demand from one of their customers (aka Apple), the company experienced a delay in customer approval for their VCSEL production units. Due to the delay, Finisar was forced to push out production shipments to Oct-17. That said, the company anticipates this problem will be solved by the end of Oct-17, and to begin shipping much larger quantities in Jan-18 and following quarters. Finisar expects VCSEL revenue to be in the low-single-digit millions in Oct-18, but believe sales can grow to “tens of millions” of dollars per quarter beginning in Jan-18 and beyond, which is in-line with management’s previous comments. We do want to highlight, the company indicated they do not expect revenues to be in the “hundreds of millions” per quarter, but once they are at full capacity they will see revenues reaching $30M.

We also would like to point out that Finisar and other VCSEL array suppliers continue to talk about one customer (Apple) driving demand for VCSEL arrays. We believe Apple has secured a high percentage of all VCSEL lasers created, which we view as a large competitive advantage that will make Apple a leading AR player in the smartphone space.

What This Means For Apple? If Finisar can resolve this problem in the upcoming quarter, we do not believe this will not affect the iPhone launch. Lumentum, which we believe is supplying Apple with 75 – 80% of their VCSEL arrays, announced a $200M order last quarter (more from us here). With Lumentum shipping everything they can produce, we believe Apple will have a sufficient supply of VCSEL arrays to support initial demand for the iPhone incorporating this technology. However, given how capacity constrained Lumentum is for VCSEL arrays, if Finisar issues extend beyond Oct-17, we do believe it could delay iPhone orders.

We continue to anticipate the iPhone Pro being the only phone incorporating these advanced VCSEL arrays for 3D sensing that will enable augmented reality applications. We expect Apple to ship 133M units in the back half of CY17, of which, 43% will incorporate 3D sensing. Looking into 2018, we believe Apple will ship a total of 239M iPhones and 67% of them will include 3D sensing capabilities.

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.

Apple Event Preview

We don’t expect many surprises at Apple’s September 12th event (see our expectations detailed below). That said, the event will mark an important new chapter for Apple centered on augmented reality, which will eventually replace the smartphone over the next decade. Give credit to Apple for overcoming the innovator’s dilemma and pointing their product roadmap toward the future.

Expect Investor Optimism to Be Tempered with Concern Near Term. Over the past year, investors have been anticipating a shift in the iPhone growth from flatfish in FY17 to high single digits in FY18 (we’re modeling for 8% iPhone unit growth in FY18).  Shares of AAPL have risen 54% during that time driven by this improved iPhone growth outlook along with a more optimistic view that Services growth will be sustainable in the 15-20% range through 2020. For the balance of 2017, we expect history to repeat itself and optimism around the next iPhone to be tempered with concern about the iPhone cycle’s tail, specifically wavering investor confidence in iPhone growth in the Mar-18 and Jun-18 quarters (iPhone cycles are made or broken in the March & June quarters).

Don’t Let Short-Term Distractions Minimize the Long-Term Apple Story. Despite near term shifts in investor optimism, we remain positive on Apple’s story long-term. Over the next year, we expect to see two camps emerge on the Apple story: The first camp will remain positive on Apple despite little to no iPhone growth over the next few years if Services meets Cook’s goal of y/y growth in the high teens. The second camp will be more pragmatic, wanting to see Apple make a push into AR & auto to set the stage for higher growth over the next decade.  We remain optimistic that Apple will be a significant player in the shift to AR-driven computing with potential growth from Apple’s car project representing option value.

image source: iDrop News

Our Expectations for Sept. 12th
  • iPhone and iPhone Plus. We expect updates to the iPhone 7 and iPhone 7 Plus, traditionally the S-branded models, but we think they will be called simply “iPhone” and “iPhone Plus,” in keeping with both the iPad and MacBook lineups.
  • iPhone Pro. In addition to the typical iPhone updates, we expect a Pro model this year, with a level of innovation (and price) that we have not seen from Apple’s iPhone line in recent years. With an edge-to-edge display, no home button (instead using facial recognition for unlocking), advanced AR-related sensors and cameras, and potentially wireless charging, the iPhone Pro will be the biggest step forward in iPhone technology that we’ve seen since the original device launched ten years ago. Per the mockup above, we expect the iPhone Pro’s screen to be 5.8″ – larger than that of the iPhone 7 Plus (5.5″) but housed in a smaller form factor. This design feat is accomplished by, among other feats, removing the home button in favor of a software-based home button and navigation interface and facial recognition technology for unlocking the device. The new floating dock in iOS 11 also seems to hint at major changes to the navigation and control of apps and the iPhone home screen. One quibble with almost every mockup of the new iPhone: We don’t think Apple will allow developers to use the screen real estate to the left and right of the front speaker and cameras for content. We think that real estate will be dedicated to the menu bar with a black background. Finally, we expect the iPhone Pro to be capable of inductive charging and come with new cameras and 3D sensing capabilities for new augmented reality applications.
  • Augmented Reality Capabilities. While the new hardware will draw the most attention, the most significant change with long-term implications is the addition of 3D sensing capabilities that enable augmented reality applications (also likely to be included on new iPhone and iPhone Plus models). While AR applications will be backward compatible to the 2015 iPhone 6s, the addition of designated 3D and computer vision hardware on the iPhone Pro would be a big step toward putting AR in the hands of everyday users. It would also a big step toward the next generation of computing – beyond the smartphone.
  • Apple TV. Recent rumors point to the possibility of Apple announcing an updated Apple TV with support for 4K video, which wouldn’t surprise us.
  • Apple Watch. Other rumors suggest Apple may introduce Apple Watch Series 3 with the option of LTE connectivity, which would surprise us a bit.
  • Apple Campus 2. The new product we’re most excited to see on Sept. 12th is the Steve Jobs Theater. Apple’s new campus was, in many ways, Steve’s last product – one that captures his legacy and the impact he’s had on the world. We’re eager to see how Apple honors Steve at the event.
Apple suppliers may offer insight into iPhone capabilities. Finisar reports earnings on Sept. 7th. We believe they are 1 of possibly 3 companies supplying VCSEL lasers to Apple, enabling 3D sensing capabilities on the iPhone. Lumentum, which we believe is the largest VCSEL supplier, announced a $200M order last quarter (more from us here), which we believe went mostly to Apple. We expect Finisar to comment on VCSEL laser demand, which will give us incremental color on the number of new iPhones that will incorporate 3D sensing. To date, we believe advanced 3D sensing capabilities will primarily be incorporated in the iPhone Pro, but given the large order Lumentum announced, the technology could be incorporated into the iPhone and iPhone Plus models as well.
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.

ARCore + ARKit Make Augmented Reality Ubiquitous

On Tuesday, Google released a developer preview of ARCore, a platform for developers to build augmented reality apps for Android. ARCore brings augmented reality to the world’s largest mobile operating system, starting with just the Pixel and Galaxy S8, but will expand to other existing and upcoming Android devices. The announcement comes on the heels of Apple’s ARKit, made available to developers in June. The introduction of both platforms blankets the mobile device market and will eventually make AR as ubiquitous as the devices themselves.

How does it work? Three basic components make up the technology that enables ARCore:

  1. Motion tracking – uses internal sensors and the phone’s camera to identify features and determine your position and orientation as you move through space
  2. Environmental understanding – detects the size and location of flat horizontal surfaces like tables and walls
  3. Light estimation – blurs the lines between the real and augmented world by helping virtual objects cast accurate shadows

What about Tango? Augmented reality is not a new area of interest for Google. Over three years ago, Google released Tango in an attempt to bring AR to smartphones and tablets.  Google’s custom hardware requirements, however, left Tango with little mainstream appeal. ARCore forgoes some of Tango’s power for increased accessibility. Fortunately for consumers, as AR becomes a core capability of devices going forward, hardware will catch up in the form of more sensors and better cameras, benefitting mobile AR as a whole.

Déjà vu. In July 2008, Apple opened the App Store with a total of 500 apps. One year later, it had seen over 2 billion downloads, and by 2011, the App Store was home to over 350,000 apps with 10 billion total downloads. The Android Market (later Google Play Store) was announced 3 months after the App Store, and although it had a slower takeoff due to smaller market share, it surpassed the App Store by 2014, both in terms of number of apps available and total downloads. The Google Play Store currently offers 2.8 million apps, compared to Apple’s 2.2 million. Just as smartphone apps erupted into existence, augmented reality will soon be a core technology available to millions of users. Google expects that by ARCore’s public launch, 100 million Android devices will support AR applications, and our research suggests over 200 million iPhones will become AR-enabled with the introduction of ARKit.

AR is here to stay. The two major device platforms are now wholeheartedly embracing and investing in augmented reality. Microsoft and Facebook have also heavily invested in AR’s future, further confirming AR’s position as a pivotal technology. We have previously written about the gold rush of AR applications on the App Store, which will only be amplified by the addition of ARCore. While the race for the pole position in AR heats up, there is one clear winner – the consumer. Aside from putting useful and fun new apps in our hands, expanding the user base of the underlying technology will accelerate the adoption of the next generation of computing.

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.

Massive VCSEL Laser Order Confirms Apple Continues To Bet Big on Augmented Reality

Following encouraging comments from Apple’s leading VCESL laser supplier, Lumentum (LITE), on their FQ4 conference call this morning, we have become incrementally more upbeat on Apple’s next iPhone launch, and specifically the number of phones that will have advanced 3D sensing capabilities enabling augmented reality applications. We believe Lumentum is one of two to three company’s supplying Apple with VCSEL laser diodes, which is a key technology that adds advanced 3D sensing capabilities.  Given Lumentum’s comments around $200m in bookings for the rest of CY17 (up from $5m in FQ4), as well as demand trends throughout 2018, we have become incrementally upbeat on the impact Apple’s next iPhone launch will have on the company and on the augmented reality industry. In total, we expect 55m 3D sensing enabled iPhone’s in 2017, going to 160m in 2018.

What They Said. In the June-qtr, Lumentum recorded $5M in 3D sensing revenue, but more impressively they received over $200M in bookings in the quarter, which they believe will all be shipped by CY17. We believe the majority, if not they entire order, is all being shipped to Apple. We believe these comments further confirms 3D sensing (and in-turn AR applications) will be a focus feature in the next iPhone. In addition, Lumentum highlighted they have increased VCSEL laser capacity by 25 – 30% from what they anticipated only one quarter ago.  Given the uptick in Management’s demand forecast, we believe advanced 3D sensing capabilities will be integrated in more iPhones than what most were previously expecting.

We also want to highlight Lumunetum acknowledged they are working with multiple customers, but one customer (aka Apple) is accounting for most of the demand. We believe Lumentum and others supplying VCSEL lasers are supply constraint and shipping everything they can manufacture. We believe Apple has secured a high percentage of all VCSEL lasers created, which we view as a large competitive advantage and will make Apple a leading AR player in the smartphone space.

September iPhone Launch Update. We believe Apple’s next iPhone launch remains on track to be released in September. We anticipate the company will ship 133M units in the 2H of CY17. Assuming Lumentum controls ~50% of the total consumer VSCEL laser market, the majority of all VCSEL lasers produced are going to Apple, and the total VCSEL laser cost (high and low-end) is ~$6 – 7, we believe 55M new iPhones (43%) will incorporate VCSEL lasers, enabling advanced 3D sensing capabilities. Given Lumentum’s comments about demand for VCSEL lasers growing in the coming quarters, as well as well into 2018, we believe this technology will be embedded in a higher-percentage of phones in CY18. Given all VCSEL suppliers are capacity constraint, we believe ~40% of iPhones shipped in 1H of CY18 will include VCSEL lasers, but as VCSEL laser manufacturing capacity is added, we believe ~85% of the new iPhones shipped in 2H of CY18 will incorporate 3D sensing capabilities. Based on these assumptions, we believe Apple will ship a total of 239M iPhones in CY18, of which 160M or 67% will include 3D sensing.

3D Sensing Financial Impact For Apple (Higher Margins). We also believe the iPhone enabling 3D sensing will be positive to the company’s bottom line. We anticipate the high-end iPhone SKU will incorporate a low-end and high-end VCSEL laser. The low-end will be front facing, while the high-end laser will be on the back side of the device. We believe the low-end lasers will cost $2 – $3, while the high-end lasers will range from $3 – $4. When factoring in manufacturing costs the total bill of materials could cost ~$20. We believe the high-end iPhone will market for ~$950, which the company will have added ~$100 to the price to incorporate 3D sensing. This nets in an 80% gross margin  up sell to the AR rich iPhone, compared to Apple’s overall gross margin of ~40%. In addition, given Lumentum’s comments about increasing laser capacity more than what they expected one quarter ago, we believe these lasers may be embedded in more that just the high-end SKU.

3 Key Takeaways. Following, these positive data points, we have three key takeaways regarding the upcoming iPhone launch. 1) The next iPhone launch remains on track to be released in September. 2) Advanced 3D sensing technologies are likely going to be integrated in more phones that previously anticipated. 3) This, coupled with the release of Apple’s ARkit in June at WWDC, is evidence that Apple continues to bet big on AR.

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.