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Optical component profits up significantly in 2016, but is it sustainable?

 

LightCounting releases State of the Optical Communications Industry Report

 

 

Profitability of the optical components vendors was the lowest across the industry supply chain for the last 15 years, but this changed in 2016, as illustrated in the figure below. Sales-weighted average profitability of publicly-traded optical component and module suppliers reached 9% in 2016 and exceeded the average net profits of Communication Service Providers (CSPs) and suppliers of networking equipment – their main customers. Profit margins reported by Internet Content Providers (ICPs) and Semiconductor IC vendors remained much higher in 2016. Many of the ICPs are now new customers of optical component and module vendors and this contributed to the financial improvement of these suppliers.

Figure: Sales-weighted Average Profitability across the Industry Supply Chain
Source: Financial reports

In terms of dollars, aggregate net income of the publicly-traded optical component and module vendors tracked by LightCounting went from a $22 million loss in 2014 and $72 million gain in 2015, to positive $422 million in 2016, led by big increases at Acacia, Finisar, Lumentum, and Oclaro. Of the 10 companies operating independently in 2016, 9 reported positive net income for the calendar year, and the last, NeoPhotonics, was essentially at breakeven. Applied Optoelectronics and Innolight reported solid profits while doing most of their business with the Cloud companies.

Profitability of the network equipment vendors fell by 26% in 2016 as compared to 2015. Reduced mobile network spending due to the completion of major LTE deployments in China and North America in 2015 was the main reason for the absence of revenue growth. The largest changes in net income for individual companies were reported by Nokia ($2.4 billion change) and Ericsson ($1.4 billion change), both heavily dependent on mobile RAN equipment sales. Cisco and Brocade also reported big declines in net profits: $500 million and $232 million, respectively. Arista and Ciena both bucked the trend and reported higher net income in 2016. 

Demand for 100GbE optics exceeded supply in 2016, limiting price reductions and competition. This helped optics suppliers to reach record profitability. Many vendors reported record revenues for multiple quarters during 2016 as well. Weak demand for optics in China will lead to slower market growth in 2017, negatively impacting supplier’s profitability. However, demand for optics from the Cloud companies remains very strong and this will help to keep profits well above break-even in 2017 and improve in 2018, as demand in China picks up again.

State of the Optical Communications Industry Report provides a holistic analysis of the global communications industry, during a period of unprecedented growth in demand for broadband connectivity and the rise of Cloud companies. It examines business strategies of traditional telecom service providers and Cloud companies, as well as their suppliers of networking equipment, optical and electronic components.

A detailed analysis of revenue growth and profitability across different levels of the industry supply chain in 2010-2016 is used to identify challenges and opportunities for the future. The report also includes a review of the latest mergers and acquisitions and their impact on the market landscape.

This report takes a deeper look at suppliers of optical components and modules, providing market shares of leading vendors sorted into the several categories (top 3, top 4–6, top 7–10, and other vendors). It includes data on diversification of the top 12 leading suppliers of optical transceivers in the SONET/SDH, Ethernet, Fibre Channel, WDM, FTTx, Wireless, and Optical Interconnect market segments. Many of the leading component vendors shared confidential sales data with LightCounting to support this study.

The success of Chinese equipment and component suppliers is evaluated and 11 Chinese component vendors are profiled.

More information on the report is available at: https://www.lightcounting.com/SOTIR.cfm

Subscribers to this report are invited to join LightCounting webinar scheduled for 1:30 pm EDT on June 7th. The webinar will present highlights of the report followed by a Q&A session.  Please email Renee@LightCounting.com for the registry link.

 


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LightCounting is a leading optical communications market research company, offering semiannual market updates, forecasts, and state-of-the-industry reports based on its analysis of primary research with dozens of leading module, component, and system vendors as well as service providers and other users. LightCounting is the optical communications market’s first choice source for the accurate, detailed, and relevant information necessary for doing business in today’s highly competitive environment. For more information, visit: www.LightCounting.com or follow us on Twitter at @LightCounting.