What Lumentum didn't give any indication of, however, is whether the iPhone XR is solely, or at least mostly responsible for its revised outlook, or whether the iPhone XS is playing a meaningful role as well. Lumentum supplies lasers that are used by the iPhone XS and XR's TrueDepth front camera system to power its Face ID facial recognition feature.
However, the timing of Lumentum's announcement, together with some other data points, suggest that demand for the XR played an outsized role. And while softer-than-expected iPhone XR demand isn't good news for Apple, it wouldn't be as bad as a shortfall for the costlier iPhone XS and XS Max.
Lumentum says it now expects December quarter (fiscal second quarter) revenue of $335 million to $355 million and non-GAAP EPS of $1.15 to $1.34, well below initial guidance of $405 million to $430 million and EPS of $1.60 to $1.70, which had been issued just 11 days earlier.
Lumentum's shares are down 32% in Monday trading as of the time of this article, and have taken shares of merger partner Oclaro (OCLR) lower with it. Apple is down 4.3%, and is now down 12% from where it traded prior to its Nov. 1 earnings report, which featured both a September quarter sales/EPS beat and a light December quarter sales outlook.
Many other Apple suppliers are also off sharply. II-VI (IIVI) , which both supplies lasers for TrueDepth cameras on its own and is set to buy fellow laser supplier Finisar (FNSR) , is down over 15%. Other Apple suppliers seeing major declines on Monday include Cirrus Logic (CRUS) , Universal Display (OLED) , Broadcom (AVGO) and Qorvo (QRVO) . The losses come amid a 2.2% drop for the Nasdaq.
Lumentum's warning has been immediately dismissed by a subset of Apple fans who react with hostility to any supply chain-related report or announcement that points to softer-than-expected demand for Apple hardware. Nonetheless -- even if one leaves aside how supply chain data can be positive as well as negative for Apple and in many cases has fit well with the results or guidance that Apple would later provide -- Lumentum's commentary leaves virtually no ambiguity regarding Apple's role in its guidance cut.
Like most other Apple suppliers, Lumentum doesn't mention Apple by name in its public commentary. However, the company did say that its guidance cut is due to "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."
Apple is the only buyer of "laser diodes for 3D sensing" capable of having such a massive impact on Lumentum's top line through an order cut. Android phones still generally don't use laser-based 3D sensing for face-recognition -- Apple's TrueDepth system, which debuted in 2017 on the iPhone X, appears to have about a two-year lead on rivals -- and Lumentum's other big laser clients tend to be in the telecom, data center and industrial end-markets.
But which Apple product or products were responsible for the giant order cut that Lumentum saw? There are strong reasons to think that the iPhone XR played an outsized role.
Last week, Japan's Nikkei reported that top iPhone contract manufacturer Foxconn is using only 45 production lines to make the iPhone XR, after having originally prepared nearly 60 lines. And shortly before Lumentum issued its warning, Apple display panel supplier Japan Display cut its fiscal 2018 (ends in March 2019) revenue growth outlook, while blaming "significant volatility" for its small/medium display business.
Japan Display provides LCD displays for Apple hardware, but not OLED displays. The iPhone XR, as many readers likely know, features an LCD panel, while the XS and XS Max feature OLED panels.
In addition, on Monday morning, well-connected Apple analyst Ming-Chi Kuo said he now expects 70 million iPhone XR shipments from calendar Q4 2018 to Q3 2019, down from a prior outlook of 100 million. Notably, Kuo still expects total Q4 iPhone shipments to be in a range of 75 million to 80 million (that's in line with an analyst consensus of 77 million), but is cutting his Q1 forecast by eight million to a range of 47 million to 52 million.
The timing of Lumentum's warning also deserves some attention: The company reports getting a major order cut around three weeks after Apple began taking iPhone XR pre-orders, and around two weeks after it began reaching customers' hands. With iPhone XS pre-orders and deliveries having begun back in September, it's hard to believe that Apple's flagship phone would be primarily responsible for such a drastic order cut, rather than a cheaper model that just began shipping.
It's possible that some of Lumentum's December quarter shortfall is baked into Apple's quarterly guidance. On the Nov. 1 earnings call, CFO Luca Maestri said Apple's guidance accounts for "uncertainty around [the] supply and demand balance" for recently-launched products, as well as macro uncertainty (particularly in emerging markets).Regardless, even if the order cut that sparked Lumentum's guidance cut wasn't fully baked into Apple's outlook, it's worth noting that Apple's shares are being sold off in a way that implies demand for all of its new iPhones is weak. And given what's known and has been reported, it's quite possible that this isn't the case.