Wells Fargo: Apple under pressure after Lumentum cuts

Wondering why Apple fell into the 190s this morning? This will do for a start.

From a note to clients by Aaron Rakers than landed on my desktop this morning:

Apple shares are under pressure this morning (11/12) following a negative preannouncement by key supplier, Lumentum (LITE). Lumentum is a provider of 3D sensing solutions (VCSELs and edge emitting lasers) for mobile devices – most notably Apple’s iPhone. Lumentum has disclosed that Apple accounted for ~30% of total revenue in the company’s recent FY ending June 2018. We would also note that Lumentum’s 10-Q disclosures highlight that Customer A (presumably Apple) accounted for 30.5% of total revenue in the September quarter – compared to 19.4% and 16.3% of total revenue in the prior and year ago quarters, respectively. Customer A accounted for 49.8% of Lumentum’s December 2017 quarter revenue.

Lumentum’s preannouncement notes that the company has “…recently received a request from one of our largest Industrial and Consumer customers for laser diodes for 3D sensing to materially reduce shipments to them during our fiscal second quarter for previously placed orders that were originally scheduled for delivery during the quarter.” The company has updated its F2Q19 revenue guide from $405-$430M to $335-$355M – a 17%+_ reduction at the guide midpoint. We think investors could consider Lumentum’s updated guide as reflecting as much as a 30% cut in Apple orders. Lumentum is scheduled to present at an investor conference today (11/12) at 12pm PT. As a reminder, Lumentum had reported its F1Q19 results and provided a F2Q19 outlook on November 1st.

Maintains Market Perform rating and $210 price target. 

My take: Could be a bad sign. Could be that Apple has many suppliers and plays them off against each other.

UPDATE: A friend of the blog dug up this press release from last December, when Apple invested a few hundred million in one of Lementum’s chief competitors: Apple awards Finisar $390 million from its Advanced Manufacturing Fund

11 Comments

  1. Fred Stein said:

    LITE sells about $125M annually to Apple based on data above. LITE just announced a cut of about $75M. That drop must have bigger causes. It cannot equate to 60% decrease in iPhone X series sales. Most likely one of their competitors is taking business. It also suggests that their management is out of touch.

    2
    November 12, 2018
    • Andrew Cannon said:

      Good point. Don’t forget the fact that the new iPad Pro will contain FaceID – soon to be followed by Macs and MacBooks.. Finisar (FNSR) is up big over the last few weeks as chips have been getting crushed.

      0
      November 12, 2018
  2. Robert Paul Leitao said:

    In my experience, the best way to participate in Apple’s success is through a direct investment in Apple, not by investing in Apple’s many suppliers. This doesn’t make Apple suppliers a “bad” investment. However, share prices of suppliers can be more vulnerable to rumors and speculation about Apple’s component orders than the share price of Apple. This is due in part to how widely Apple is held versus its many publicly-traded suppliers.

    Apple reported September quarter results on November 1st and guided to revenue for the December quarter that was below the expectations of many analysts. In addition, Apple has decided to change its reporting on a quarterly basis and will no longer be providing explicit information on device unit sales.

    Unfortunately, this has created an environment of uncertainty on Wall Street. Although Apple guided to record revenue in the December quarter and the 10-K reveals Apple’s supply orders have remained strong, any hint of disappointing sales by Apple and any hint of disappointment by Apple’s suppliers is apt to put pressure on several of the publicly-traded enterprises in the company’s supply chain.

    There are no indications from Apple’s December quarter guidance released on November 1st or Apple’s planned purchases as documented in the 10-K for FY2018 that there is any significant pullback expected in unit sales in any of the company’s major device lines.

    There is economic pressure in emerging markets due in part to rising US interest rates and the high value of the dollar. It’s well documented Apple’s reported global revenue is negatively impacted by foreign-exchange challenges at this time.

    The fact remains Apple released December quarter guidance a full month into the quarter. If there are any significant and material challenges to Apple’s revenue performance in the December quarter that were unforeseen as recently as 11 days ago when the company issued guidance, I would expect a warning to be issued by Apple. I’m not overly concerned by reports from the company’s supply chain about significant order reductions. In my view, Apple’s supply chain is far too massive and complex to extrapolate anything meaningful by reported order reductions from a few or even a handful of suppliers.

    The market doesn’t like uncertainty. Apple’s decision to cease reporting device unit sales in favor of more relevant metrics has created uncertainty that may not be resolved until the release of December quarter results and March quarter revenue guidance in late January.

    Again, Apple is guiding to record revenue in the December quarter. In the meantime, the share repurchases continue…

    4
    November 12, 2018
  3. T R said:

    Two of LITE competitors IIVI and FNSR recently merged… “a year ago, Apple invested $390 million in Finisar.”

    One of the now merged companies reportedly had production coming online in Texas. I’ll look into this some more tonight, but I think this could simply be Apple moving some production away from LITE, to the company they invested $390M in.

    Could it be that the merged company has production capability coming online or excess capacity, and Apple moved some of LITEs business? Maybe IIVI nor FNSR are in a black out period due to the buyout/merger.

    http://redirect.viglink.com?key=bbb516d91daee20498798694a42dd559&u=https://www.thestreet.com/technology/apple-supplier-finisar-snapped-up-for-3-2-billion-14775686

    One of Apple Inc.’s (https://www.thestreet.com/quote/AAPL.html) suppliers of laser and optical equipment, Finisar Corp. (https://www.thestreet.com/quote/FNSR.html) , reached a deal to be bought for about $3.2 billion by II-VI Inc. (https://www.thestreet.com/quote/IIVI.html) .

    Shares of Finisar closed up significantly at 15.4% higher to hit $21.79 on Friday. II-VI’s stock closed down nearly 19% at $38.01.

    Under the deal, II-VI is buying Finisar in a “merger” agreement of cash and shares of II-VI common stock. The transaction values Finisar at $26 a share, or about $3.2 billion in equity value. Finisar shareholders would own nearly a third of the combined company.

    II-VI is a maker of electronics components, developing engineered materials and opto-electronic components.

    Just a year ago, Apple invested $390 million in Finisar to increase the company’s research and development and production of a type of laser used in Apple’s iPhone X camera.

    With the Finisar buy, II-VI said the company would become a “formidable” industry leader in photonics and compound semiconductor products for communications, consumer electronics, military, industrial processing lasers, automotive semiconductor equipment and life sciences.

    1
    November 12, 2018
  4. T R said:

    excerpt: ‘has been under renovation since December 2017 and is on target to commence production by the end of this calendar year.”

    July 2, 2018 at 5:00 AM EDT
    Finisar to Expand 3D VCSEL Production Capacity with its new Sherman, Texas Facility

    SUNNYVALE, Calif. and SHERMAN, Texas, July 02, 2018 (GLOBE NEWSWIRE) — Finisar (NASDAQ:FNSR), a world leader in 3D Sensing VCSEL (Vertical Cavity Surface Emitting Laser) technology, today announced an upcoming ribbon-cutting ceremony to celebrate its new manufacturing facility in Sherman, Texas. Finisar will use the site to increase production capacity of its VCSELs and related 3D Sensing technologies, used in a wide range of applications. The ribbon-cutting event will be held on Monday, July 9th with speakers from Finisar’s executive management team, including CEO Michael Hurlston, as well as local community leaders.

    Finisar has been working diligently to prepare the site for operations. The building, formerly owned by MEMC and SunEdison, has been under renovation since December 2017 and is on target to commence production by the end of this calendar year. It is currently certified as clean room operational and the first production tooling has been installed and qualified. The company has hired nearly 200 employees, including the operations and support staff necessary to begin production. Finisar expects to expand hiring further later this year to support the anticipated ramp to high volume production.

    1
    November 12, 2018
    • Gregg Thurman said:

      Apple helped finance this facility. Instead of beating down AAPL on Lumentum’s poor guidance, the market should be rewarding Apple/AAPL for securing VCSEL supply at (probably) industry best prices.

      It’s quite possible Apple’s engineering team has VCSEL specs they want Finisar to manufacture to that others won’t have.

      Like Cook has said on several occasions, you can’t make Apple performance assumptions based on supply chain “intelligence”.

      1
      November 12, 2018
  5. Gregg Thurman said:

    Relative to Apple’s moves in VCSEL production agreements, I’ve been thinking about Apple’s cellular radio strategy once the litigation with Qualcomm is concluded.

    I think Qualcomm’s double dipping licensing agreements will be a thing of the past. Firms will no longer required to buy Qualcomm radios when they license Qualcomm’s patents. Further, those patents will be deemed by the courts as “essential” requiring essential technology licensing rates.

    Apple’s engineering teams can then build, as required, on Qualcomm’s technology to make A-Series SOCs more capable and simultaneously more power efficient.

    In a world of “me too” handsets this could prove game, set, match.

    0
    November 12, 2018
  6. T R said:

    By extension:

    Apple low earth orbit satellite constellation, minimal latency, with iPhone and CarPlay CarDrive reception; backstopped /integrated with carriers 5G deployment. The latency is the gotcha.

    0
    November 12, 2018
    • Gregg Thurman said:

      What would you give to see Apple’s 5-year roadmap?

      1
      November 12, 2018

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