II-VI vs Lumentum: 3D Sensing Challenge

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Several days ago, fibeReality wrote an article referring to intelligence we acquired around the middle of last month and we stated Lumentum Holdings “has maintained at least somewhat of a leadership posture in 3D sensing technology development over II-VI.” More specifically, it appears that the former has been able to increase its yields more substantially than the latter.

Consequently, Lumentum’s income has been able to rise, while on II-VI’s last earnings call, the supplier had to grapple with a question concerning its “consumer business…grow[ing] sequentially in the December quarter, but not as much as a year ago.” II-VI’s Chief Strategy Officer, Giovanni Barbarossa, did his best to blame it on an ASP drop of shrinking laser chip/die sizes, a phenomenon that has been occurring in the 3DS space for the last five years, and given that situation, its results were called “remarkable.”

Conversely, on Lumentum’s most recent quarterly earnings call, its “3D sensing revenue in the first half of fiscal 2022 [was] higher than that of the first half of fiscal 2021.” fibeReality believes that II-VI is still struggling at its Sherman fab plant to some extent based on a combination of lost technical talent, integration matters, and execution difficulties.

On the first issue, fibeReality had addressed the rather steady loss of key VCSEL engineering executives at the original Finisar, going back even before the announcement of the merger with II-VI. We understand that VCSEL expertise was further gone after the combination was completed as well.

At the Needham Growth Conference (Virtual) in January, Barbarossa kind of spun “the [job] openings in Sherman,” not exactly the most attractive place on the planet to make a move, as a positive sign for its business. Regarding the last two aspects, the Sherman endeavor still has its share of challenges in continuing to pull off a complete, vertically integrated plant.

Yet, while any technical concerns can be theoretically dealt with in a relatively quick way, the political obstacles seem to be more acute. There is a fight for a greater share among the local Finisar/II-VI people, the managers based in California, as well as the folks from Laser Enterprise Zürich.

A related point is that execs at the director level at both II-VI and Lumentum tend to be responsible for implementation of business plans in general. Yet, fibeReality has heard that the individuals at this level of the management chain at II-VI sometimes leave something to be desired, particularly regarding Sherman (while the VPs at the corporation are viewed as quite competent).

Interestingly, as we explained in our market brief, “Lumentum’s VP of Operations, 3D sensing, Chun Lei, was quickly promoted to that position from Senior Director of Engineering, 3D Sensing…. Her biggest strength seems to be her role as a rigid taskmaster internally that is likely a requirement for any virtual vertical integration model, without direct control of the principal assets.”

In addition, we were told last month that that II-VI did not qualify for all types of laser chips used in 2021. We had heard that the supplier did not even make an attempt to produce a particular product, resulting in Lumentum presently being the lone vendor. Perhaps II-VI will be able to qualify that specific solution this year.

Turning to Lumentum’s rhetoric, CEO, Alan Lowe, while apparently has never been made to suffer for discussing projected margins for 3DS at the beginning of the marketplace takeoff, angering Apple immensely, obviously does feel comfortable in his current position in making remarks about the current strengths of his company relating to the very secretive customer. On that Q2 2022 earnings conference, he at least indirectly mentioned there has been no loss in market share so far, refencing Lumentum as “really” being Apple’s “launch partner” in “the first half of our fiscal year.” II-VI’s Barbarossa confirmed the state of affairs at the Needham event by saying, “…I wouldn’t make it too much of a share gain…”

The potentially good news for II-VI was Lowe’s assertion on the financial call: “…I don’t believe there’s going to be further die size or shrinkage of componentry from the 3D sensing in handsets.” Another possible benefit for II-VI, as always, will be that Apple truly wishes for improvement from the supplier and will continue to actively help it to becomes on a par with Lumentum in order for the buyer to get its internal costs significantly lower.

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