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Technology is moving ahead despite global macroeconomic uncertainty and price wars

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Global sales of optical transceivers used in communication networks declined by 3% in the first half of 2012, compared to the same period of 2011. This minor decline in the total market hides a few significant developments:

  • H1 2012 sales of SONET/SDH and WDM transceivers were down by 33% and 13%, respectively, compared to H1 2011. A very slow first quarter and steep price declines were the main factors negatively impacting these market segments.
  • Sales of datacom products, including optical interconnects, Ethernet and Fibre Channel transceivers, were up by 13% in the first half of 2012. Demand for 8 Gbps and 10 GigE modules remained steady, and the ramp-up in shipments of higher data rate products accelerated in early 2012.
  • Shipping volumes of 40 GigE and 100 GigE transceivers increased by 50% per quarter this year. Several suppliers also reported sharply higher demand for active optical cables.

Strong demand for high data rate modules correlated with Intel’s release, in early 2012, of the Romley processor, which stimulated demand for optical connectivity in high-performance computers, high-end datacenters and, potentially, the wider datacom market. This trend is confirmed by financial filings of Mellanox and Semtech, which reported sharply higher revenues from FDR infiniband switches and 40/100G chip sets, respectively.

The sharp decline in the SONET/SDH market segment was partly because of a drop in sales of 40G short-reach (less than 10-km) modules, which may be temporary. However, the steep price declines for many types of telecom components and modules truly impacted heavily both SONET/SDH and WDM market segments.  For example, total unit shipments of SONET/SDH transceivers in Q2 2012 were up 11%, compared to Q2 2011, but total quarterly sales dropped by 28%! Apart from continuing price pressure from customers, LightCounting suspects that increasing competition among transceiver vendors pushed the average selling prices to new lows.

It is very likely that many small and mid-sized Chinese suppliers of components and modules, who are often blamed for price erosion in FTTx market segment, have started selling SONET/SDH and WDM products, impacting the business of more-established vendors. Many Chinese companies do not share their confidential sales data with LightCounting, so estimating their success quantitatively can be difficult, but price declines do offer an indirect indication of it. Several of the Chinese component and module suppliers are planning for IPOs in next 6 to 18 months, and demonstrating continuously growing sales and diversification across several market segments to potential investors is critical for these suppliers. Profitability is much less of a concern for them. Needless to say, this trend will make it much harder for established vendors to maintain a grip of the market in the next few quarters.

In contrast to the telecom product prices, those of datacom transceivers were relatively stable in the first half of 2012. The datacom equipment market has certainly performed better than telecom in 2012 so far, and demand for components remained steady.  It is possible that higher entry barriers for datacom component and module manufacturers also helped to reduce price pressure and sustain the market’s growth.

LightCounting’s “Market Update Report and Quarterly Sales Database” released this week, includes sales data on more than 100 product categories covering the period from Q1 2011 to Q2 2012 for SONET/SDH, Ethernet, Fibre Channel, CWDM, DWDM, and FTTx transceivers and optical interconnects. It also discusses guidance for the rest of 2012 and potential changes to LightCounting’s market forecast published in June 2012. Data for the report was provided by more than 20 leading module and component vendors.
The report also includes analysis of the latest product announcements and publicly reported revenues of equipment vendors. The most important developments in this market include the following:

  • Alcatel-Lucent reported an 8% increase in Q2 2012 sales, partially compensating for a steep 27% drop in Q1 sales. The company announced further cost reduction plans to conserve cash while next-generation products are gaining traction in the market.  In a significant move, Verizon announced in May 2012 they will jump ship from Cisco and will deploy ALU’s new 7950 XRS core router said to be five times faster than Cisco’s flagship CRS-3.
  • Ericsson, Huawei, NSN, and Tellabs also had a very slow first half of 2012, reporting sequential and year-over-year declines in sales of networking products.
  • Ciena had a good first quarter of 2012, reporting double-digit growth, both sequentially and compared to the year ago quarter. However, sales in the quarter ended July 31 were flat, and guidance for the rest of the year was cautious.
  • ZTE reported an industry-leading increase of 18% in sales in the first half of 2012, compared to the same period of 2011. The company continued to gain share in optical networking and broaden its global reach, often at the expense of Huawei.
  • “Big data”, “the cloud” and “Infrastructure as a Service” are the focus of many datacom and storage vendors signaling major changes in corporate IT thinking and spending. 
  • Cisco continued solid performance in the first half of 2012, with Q1 and Q2 revenues increasing by 7% and 4%, respectively, compared to the year ago quarters.
  • EMC reported its tenth consecutive quarter of double-digit year-over-year growth for consolidated revenue.
  • HP won a legal battle, forcing Oracle to keep porting its software to Intel’s Itanium platform.  The news is expected to reverse some of the hit HP had taken in his high-end server line that was seen as a $5 billion business opportunity before the Oracle announcement to halt support.
  • Servers and storage together now make up only 15% of total IBM revenue.  IBM’s software business is now as large as Oracle. 
  • Brocade is delivering its first software defined networking products to allow IT managers to move a virtual machine and its middleware from one server to another under programmable control. 

Analysis of publicly reported revenues of equipment vendors combined with confidential sales data of optical components and modules, collected by LightCounting, offers a unique insight into market dynamics. The latest report also presents analysis of network bandwidth growth calculated from data on shipments of opto-electronic interface modules employed in telecom, enterprise, and storage area networks. This approach to tracking the market offers an effective method for identifying the timing and scope of infrastructure upgrade cycles, technology transitions, and even product life cycles.

All of these data points, combined with guidance from component suppliers and system vendors, suggest that numerous network upgrade projects continue worldwide, but fierce competition among suppliers and continuing macroeconomic uncertainly cloud the industry outlook for the rest of 2012. Majority of service providers and network operators reported reductions in capital expenditures for the first half of 2012, but many of them are planning to accelerate their investments in the second half of this year. Even minor improvements in the macroeconomic situation may have a significant impact on the rate of upgrades to networking infrastructure. It is very likely that completion of power transition in China and presidential elections in the United States in late 2012 will add certainty and brighten the market outlook for 2013 and beyond.

www.LightCounting.com/reports.cfm

About LightCounting
LightCounting, LLC is a leading optical communications market research company, offering semi-annual market update, forecast, and state of the industry reports based on analysis of publicly available information and confidential data provided by more 20 leading module and component vendors. LightCounting is the optical communications market’s source for accurate, detailed, and relevant information necessary for doing business in today’s highly competitive market environment. For more information, go to: http://www.LightCounting.com or follow us on Twitter at: http://www.twitter.com/lightcounting.
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© Copyright 2012 by LightCounting. No portion of this newsletter may be reproduced in whole in or part without the prior written permission of LightCounting any written materials are protected by United States copyright laws. LightCounting offers no specific guarantee regarding the accuracy or completeness of the information presented, but the professional staff of LightCounting makes every reasonable effort to present the most reliable information available to it and to meet or exceed any applicable industry standards. LightCounting is not a registered investment advisor, and it is not the intent of this document to recommend specific companies for investment, acquisition, or other financial considerations.

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