Apple iPhone gives little-known suppliers long-awaited payday

Bloomberg

It was the late 1990s, and entrepreneurs Steven Abramson and Sidney Rosenblatt were pitching an electronics giant on their new flat-screen technology. It didn’t go well. The product was unproven, and, given that the startup had a pittance in the bank, the manufacturer had doubts about its long-term viability. “You want us to bet the future of our company on your technology?,” the would-be customer said after the presentation. “Steve and I looked at each other and said, ‘He has a point’,” Rosenblatt said in a recent
interview. He didn’t identify the manufacturer he was pitching.
Almost 20 years and half a billion dollars in research and development later, the pitch finally paid off. Apple Inc. will soon release a new iPhone using the organic light-emitting diode, or OLED, technology that Abramson and Rosenblatt toiled on for so long. The company they run, Universal Display Corp., is valued at $5.4 billion, almost double a year ago — a rally fueled by winning the world’s most valuable company as an end customer.
As Apple fights to maintain its technology leadership in smartphones, it’s turning to little-known suppliers that have spent years or even decades developing components in the hope they might one day enjoy widespread adoption. Like Universal Display, other companies including Lumentum Holdings Inc. and AMS AG are also poised to benefit
from the next version of Apple’s bestselling device.
The iPhone 8, as analysts tentatively dub it, is the most significant upgrade to Apple’s handset lineup since at least 2014. Smartphones have evolved from communication devices into portable hubs for identity, payments, entertainment and new experiences like augmented reality. That requires major hardware upgrades, forcing Apple to scour the global electronics supply chain for
tools and services that often had narrower uses until now.

MISSILES TO PHONES
In addition to the OLED display, the new iPhone will have a front-facing 3-D sensor that uses facial recognition to unlock the screen, people familiar with the plans have told Bloomberg News. That will provide a boost to a tech niche whose greatest success to date is Microsoft Corp.’s Kinect motion-sensing system in the Xbox gaming console. The iPhone market dwarfs that.
Lumentum makes lasers used in 3-D sensors and controls about three-quarters of that market, according to Alex Henderson, a Needham & Co. analyst. The Milpitas, California-based supplier expects to deliver $200 million worth of lasers this year, most of which will end up in iPhones. Prior to July, Lumentum’s total cumulative revenue from that market was around $5 million, according to Henderson.
“Lumentum has been working on this stuff for at least a decade,” Henderson said. He expects the 3-D laser market to be worth as much as $2 billion by 2020. Lumentum shares are up 65 percent over the past year. A Lumentum spokesman declined to comment.
Viavi Solutions Inc., what was left when JDS Uniphase spun off Lumentum into a separate business, will provide 3-D laser filters for the iPhone, according to a person familiar with the contract. These components were primarily used in laser-guided missile systems, but when smartphone-makers considered them for
face-recognition systems, Viavi designed a smaller version. It expects $35 million to $45 million
in 3-D sensor-related revenue
in fiscal 2018. Viavi stock is up
38 percent in the past year.

‘WHOLE PACKAGE’
Other sensor companies stand to benefit too. Austria-based AMS recognized the potential of optical sensors in 2011 when it acquired Texas Advanced Optoelectronic Solutions Inc. That deal gave it components that adapt iPhone screen brightness to ambient light conditions and detect whether the handset
is being held against the ear,
deactivating the touchscreen.
Apple’s 2013 purchase of Israel’s PrimeSense Ltd. showed it was serious about 3-D sensor technology. AMS responded by accelerating its push into the space. It spent more than $600 million to acquire Heptagon Micro Optics Pte. and Princeton Optronics Inc., adding sensors that receive signals from the lasers Lumentum and rivals churn out.
AMS already gets about 20 percent of its revenue from Apple, according to Bloomberg supply chain analysis. Analysts expect further orders from the Cupertino, California-based company
to help sales to almost double
to more than 1 billion euros
($1.2 billion) this year.
“They now have the whole package,” said Guenther Hollfelder, a Baader Bank analyst. “Even in the short term, the 3-D sensors business will rise significantly because of the relationship with Apple.” Before the sensor acquisition spree began in 2011, AMS stock had languished around 10 Swiss francs ($10.26) for years, with products focusing
on industrial and automotive
applications. It’s now at 70 francs.
Investment in new manufacturing facilities to meet Apple demand means some suppliers are spending while revenue hasn’t climbed much yet.