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 Results & Guidance a Non-Event; Clear Sailing to iPhone X

Expect Slight Upside In Mar-17 From Easy Comps and Typical Conservative Guidance for Jun-17. Apple reports Mar-17 quarterly results tomorrow, May 2nd. Despite shares at an all time high, investor optimism for an iPhone X super cycle this fall remains high, which should continue to push AAPL’s multiple higher into the fall. There appears to be little risk from the Mar-17 results or Jun-17 guidance that would change iPhone X anticipation. Fast forwarding to the fall, shares are setting up to enter a range-bound period as investors playing the iPhone X trade will likely unwind positions.

If Apple guidance midpoint is 1-3% below our Jun-17 estimates, we will likely maintain our estimates.

Mar-17 & Jun-17 Expectations. We expect Apple’s Mar-17 quarter slightly ahead of Street consensus numbers given the 17pps easier comp, vs the Dec-16 quarter, and the Street is generally looking for similar iPhone growth from Dec-16 to Mar-17.  As for the June quarter guidance, we expect a typically conservative outlook. This is understandable given investors are expecting a step up in iPhone growth from around 7% in Mar-17 to 13-15% in Jun-17. Part of the step up in iPhone Jun-17 growth is due to the 5pps easier comp in the Jun-17 quarter.

On The Call. We will be paying close attention to the following topics:

  • Super Or Typical Cycle? Investors will be tuned into any unlikely commentary from Apple to help answer the question of whether we are entering a super cycle with the iPhone X (reason for accelerated upgrades) or just a modest step up in iPhone growth. We’re not expecting much color from Apple, but are encouraged by our estimates that this fall the 2-year old or older iPhone base should exceed 300m units, a strong base of potential customers to fuel investor expectations of the  unit sales between 235-245m phones in FY18 during the iPhone X cycle.
  • Services Potential.  Apple will continue to be heavy on the services growth message. We expect CEO Tim Cook to reiterate comments from the Dec-16 call that he expects the Services business to double in the next four years, implying annual growth of about 19%. We expect services to grow from 14% of revenue in FY17 to 20% in FY22.
  • AR & Auto Ambitions. Related to AR, Cook has made six public comments in the past 9 months and we expect him to continue to emphasize that Apple will be a winner in AR. It’s been widely reported that one version of the iPhone X will have 3D mapping capabilities.  We see the iPhone as the AR device for the next 5 years. As for automotive, recent news of Apple’s permit to test self-driving cars in California should not have come as much of a surprise given the poorly kept secret of Project Titan. The permit does beg the question of whether Apple is building a car or just building software for a car. Our take Apple is almost certainly exploring how it could build an entire car, but as we learned the hard way with Apple television, exploration does not mean a product comes to market.

What To Expect With The iPhone X. Read our thoughts on iPhone X and the features we expect to advance Apple’s lead in AR-enabled devices.

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.

Google Earnings Reiterates AI, VR, AR Ambitions

Google CEO Sundar Pichai used tonight’s Q1 call to double-down on his “AI-first” mantra.  Several areas were highlighted, where Google will lead and define its mission to organize the world’s information with machine learning.  Beyond AI initiatives to enhance core consumer products like search, mail, maps, and Google Play, increased machine learning investment was highlighted in at least two segments of Google’s ad model.  These include ‘Smart Bidding’ where machines predict in real-time how an ad should perform in front of a particular target and adjust advertiser bids to maximize ROI.  Separately, in Google’s highly profitable app install ad business, namely Universal App Campaigns, machine learning is being used to best promote developer apps across Google properties including Search, YouTube, and the Display Network.

Management also made a couple of callouts on VR.  Google’s VR platform Daydream is seeing more than half its usage consuming video, with YouTube VR being its #1 app by time spent.  At a recent event, we heard from Google that people are using the Daydream headset to “hold the phone” for them as they watch video laying down.  While not an exciting VR use case, we heard that users are spending multiple hours in VR this way, so it is getting users comfortable with the experience.  VR investment near-term still appears focused on mainstream products like Daydream and accompanied VR produced content such as YouTube VR, Google Earth VR, and Tilt Brush.  We suspect Google is also experimenting with advanced VR and AR hardware, although no mention was made on the earnings call.  We continue to believe Google is the best positioned player to provide the AR operating system of the future, and the company’s leadership position in machine learning and AI only reinforces that view.

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.

AirPods Are More Important Than The Apple Watch

At this point, it might not even be that crazy to say it, but we think AirPods are going to be a bigger product for Apple than the Watch. After using AirPods for the past month, the Loup Ventures team is addicted. The seamlessness in connecting and disconnecting with our phones and enabling Siri has meaningfully improved the way we work and consume content. AirPods are a classic example of Apple not doing something first, but doing it better. And they look cool. We think there are three reasons that AirPods are more important than the Apple Watch.

AI-First World
Google has been talking about designing products for an AI-first world for about a year now. In our view, an AI-first world is about more natural interfaces for our screen-less future. Speech is an important component of the next interface. Siri, Alexa, Google Assistant, and Cortana are making rapid improvements in terms of voice commands they understand and what they can help us with.

We view AirPods as a natural extension of Siri that will encourage people to rely more on the voice assistant. As voice assistants become capable of having deeper two-way conversations to convey more information to users, AirPods could replace a meaningful amount of interaction with the phone itself. By contrast, using Siri on the Apple Watch is less natural because it requires you to hold it up to your face. Additionally, the screen is so small that interaction with it and information conveyed by it is not that much richer than an AI voice-based interface.

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VR Over The Holidays: What To Expect For Oculus and Vive Sales In Q4

VR headsets may not have been the “it” gift of the holiday season, but there was definitely a pick up in consumer interest. Based on our analysis of Google Trends data, we believe that Oculus sold about 55k Rifts in Q4 and HTC sold about 65k Vives. We note that based on Facebook’s quarterly reports in Q2 and Q3, Oculus was selling around 40k units per quarter.  Thus the holiday season appears to have brought about a 40% increase in unit volume for Oculus.

While Facebook does not report Oculus unit sales (we back into them), management will likely offer some additional VR related commentary on February 1st. We would expect management to maintain their consistent commentary that VR is still early. Beyond that, we may get an updated number of Gear VR users (the company reported 1 million monthly actives at the Q2 call) or additional color on future VR investment (they announced an incremental $250 million in VR investment during the Q3 call). Net-net, we expect Facebook’s Q4 update to be a modest positive to the VR ecosystem.

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.