Lumentum Holdings (LITE 2.16%) has risen impressively on the stock market this year based on speculation that it would be one of the suppliers for Apple's (AAPL 0.39%) new iPhones. This rumor now seems to have turned into reality, as the optical components specialist is reportedly the sole supplier of the laser dot projector hardware (technically known as vertical-cavity surface-emitting laser, or VCSEL) that's used to enable the Face ID feature in the iPhone X.
Lumentum could win big from Apple
Lumentum recently offered up guidance that backs up the speculation that it landed a design win at Apple. The chipmaker expects $360 million in revenue during the December-ended quarter at the midpoint of its guidance, which is well ahead of the Wall Street estimate of $345 million. Additionally, its projected earnings per share of $1.05 to $1.25 comfortably exceeded the consensus expectation of $1.00 per share.
By comparison, Lumentum pulled in $265 million in revenue in the prior-year period, which means that its December quarter revenue is set to rise almost 36% year over year. This wouldn't have been possible without a contract from Apple, which has reportedly given Lumentum $300 million worth of orders for 3D sensing chips since April.
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In fact, Lumentum's 3D sensing chip shipments for the month of October exceeded the total volumes that it shipped in the September-ended quarter. That makes sense as iPhone X production was ramping up.
KGI Securities analyst Ming-Chi Kuo forecasts that Apple could make around 250 million iPhones in 2018. If a third of this production run is allocated to the iPhone X, Lumentum's robust top-line growth will last well into the next year. Analysts forecast that the company's top line could grow almost 24% in fiscal 2018. Given that the chipmaker has solved the bottlenecks that it was facing with respect to 3D sensing capacity, it looks set to hit this target.
More catalysts to watch
The market for VCSEL arrays is expected to grow rapidly over the next few years. According to one estimate, revenue from sales of VCSEL arrays and related 3D sensing parts could grow from an expected $1.5 billion this year to $14 billion in 2020 as Android smartphone OEMs (original equipment manufacturers) jump onto the bandwagon.
However, it might take some time for the Android-related VCSEL revenue to kick in as Apple reportedly has a 2.5-year technology lead over Android smartphone OEMs in this space, according to Kuo.
For instance, the facial recognition feature seen in Samsung's flagship Galaxy S8 earlier this year is open to vulnerabilities and doesn't seem to be as secure as fingerprint scanning. Apple, on its part, has spent considerable effort to integrate the feature seamlessly into its iPhone ecosystem.
Therefore, Samsung will definitely try to step up its game in this area to get back at Apple, which will be a boon for Lumentum as this move will expand its addressable market. And good news for Lumentum is that Apple is reportedly redesigning the iPad Pro to incorporate facial recognition.
Last quarter, Apple's iPad sales rose 11% year over year to 10.3 million units, and its total iPad unit sales for the entire year stood at just under 44 million. The iPad Pro has played a critical role in helping Cupertino accelerate the device's sales, and Apple will try to make it even better with this feature.
The potential deployment of Face ID in the iPad could add another $220 million to Lumentum's annual addressable market (as each VCSEL array costs $5). This is substantial considering Lumentum has generated around $1 billion in revenue over the past year.
Lumentum has been grappling with weakness in its core business of supplying optical components to telecom companies. As it stands, optical component demand has been weak in China this year, and a turnaround appears to be shaky as prices of these components have taken a hit.
Lumentum's revenue in the last-reported quarter fell 6% year over year, but the company's outlook and Wall Street estimates suggest that it is on track to achieve massive revenue growth in the current financial year thanks to 3D sensing.
