Finisar/II-VI: Elongated 3D Sensing Ramp

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At least a few analysts on the Street are asking: Why is the time for Finisar and II-VI seemingly so extended out for a considerable ramp-up in production of 3D-sensing VCSEL bare die? After all, both of these vendors have already made major investments in new manufacturing plants, and so, at least theoretically, they should be able to just start producing in a much bigger way, at a minimum, sooner than present expectations. Of course, in the past, we have discussed the challenges of the six-inch VCSEL size, which is intrinsic at the epi layer, and there is also the fragility of the wafers themselves. Another major hurdle appears to be that Apple has created a paradigm alteration with VCSEL suppliers being treated as me-too foundries, and thus, there is not much, if any, value placed on technology differentiation. In contrast, there is a great need for VCSEL gear in the traditional data center space to have tremendously more reliability. Consequently, for both Finisar and II-VI, by far the key to success could easily be unattractively limited in nature — dealing with a large amount of overhead each month, while hopefully having the necessary volume to support that expense. We are beginning to think that moving too aggressively on a ramp-up is hardly without some amount of risk, particularly if it is not in concert with the supply schedule for a buildout of new smartphones by a significant supplier.

In hindsight, historic intimacy with VCSEL technology has actually been more of a limiting factor than an enabler in producing the six-inch substrates. Although Lumentum will continue to have the problem with margin stacking (especially when there will be ample competition), by utilizing Win Semiconductors, the external fab company was not as hindered in being overly obsessed about the technological hurdles.

As already a huge, well-established supplier of six-inch Gallium Arsenide wafers in the RF sector, Win Semi viewed the situation with VCSELs as more of a generic challenge. The firm did not see the production of the required number of wafers for Apple as being a formidable task, as it also surrounded itself with the necessary resources in order to make it workable. Similarly, IQE was not exceptionally engrossed by the technical issues, as it was willing to make a huge investment in bringing up the epitaxy capability.

Both of these companies were motivated more by the potential rewards in being successful. Without this mentality, the crisis apparently last summer, experienced by Apple in dealing with those all-too-real technology challenges in working with Lumentum, would not have resulted in a satisfactory outcome.

So, some industry observers might make the argument that in retrospect, Finisar stayed with the four-inch size too long, and was not initially thinking in big enough terms. Nevertheless, it was not a bad bet by Finisar, as Lumentum still evidently came in just under the wire with the initial delivery of those six-inch VCSEL wafers.

Regarding II-VI, despite what we perceived to be initial problems, we understand that it is currently providing a fair number of the illuminator type of VCSELs to Apple. fibeReality also presently thinks that it is possible that even with the need for the second type of VCSEL in the iPhone for structured light, the customer may stay with only two primary vendors, along with a secondary one in order to ensure an adequate quantity of chips for itself, while maintaining sufficient control of the supply chain.

As always fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]