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Decline in Q1 2019 Spending by the Cloud Companies Raises Concerns for the Global Optical Communications Market

 

LightCounting Releases June 2019 Quarterly Market Update Report

 

Infrastructure investments by the Cloud companies supported the sales growth of optical communications equipment, modules and components since 2010. Combined spending of the top 15 Cloud vendors tracked by LightCounting set a new record of close to $100 billion in 2018, but a sharp decline in spending reported in Q1 2019 raises concerns.

The figure below illustrates the changes in quarterly spending of the top 15 Cloud companies since 2011, showing a decline in Q4 2011 and a slowdown in Q4 2015, prior to this most recent drop in Q1 2019. If history repeats itself, the spending trend should bounce back upward in Q2 2019. However, the drop in Q1 2019 may prove to be the start of a longer-term slowdown in spending by the Cloud companies.

The previous drops in quarterly data (Q4 2011 and Q4 2015) were mostly due to fluctuations in spending by Google. Subtracting Google’s contribution to these numbers brings the trend back to growth of 20-25% in both Q4 2011 and Q4 2015. This was not the case in Q1 2019. A drop in Google’s spending contributed to the decline, but this spending decline was much more broad-based. Out of the top 15 Cloud companies 9 reported declines in spending including Alibaba, Apple, Microsoft and Tencent.

Combined revenues of the Top 15 Cloud companies were up 11% in Q1 2019, compared to Q1 2018, despite seasonal sequential declines. However, the changing economic outlook must be impacting the investment decisions of these companies along with an expected increasing tax burden, fines for mishandling data and monopolistic practices, and further looming regulation.

The Chinese economy is clearly slowing down and prospects for growth around the world are more uncertain. The escalating trade war between China and the US is clearly taking its toll. It is very unlikely that these two countries can reach a trade deal in 2019-2020. The US-imposed sanctions against Huawei was a clear declaration of war and neither side is likely to compromise given the raging nationalistic moods on both sides of the Pacific.

Suppliers of semiconductor ICs, led by Intel, anticipated a decline in sales for the first half of 2019 back in the end of 2018. Their latest forecasts for the whole year were revised further down and Huawei’s ban is partly to blame. Broadcom reduced guidance for their fiscal year ending in the fall of 2019 by $2 billion, attributing about $0.5 billion of that to the loss of sales to Huawei and the rest to “very, very nervous customers” concerned about the global economy. Broadcom did comment that their wireline networking and switching business is still growing despite steep declines in all other market segments.

Decline in sales of optical components and modules to Huawei from the US-based suppliers will have a minor impact on the transceiver market. Huawei manufactures most of the transceivers and many of the optical components internally, working closely with the local suppliers. However, the indirect negative impact of the sanctions against Huawei and the escalating trade war on the global economic growth and the demand for optics will be much more significant.

Continuing contraction in spending by the Cloud vendors may result in a significant decline in optical transceiver sales in 2019. The Cloud companies accounted for more than 30% of the global optical transceiver market in 2018, as will be detailed in the Mega Datacenter Optics report, scheduled for publication on July 16, 2019.

The June 2019 Quarterly Market Update report offers more information on guidance from the Cloud companies on their spending for the rest of 2019, which remains positive. However, these plans may change, if the economic situation continues to deteriorate. We have seen an example of this in the past. Back in 2008, Google sharply reduced purchases of 10GbE SFP+ optics at the onset of the financial crisis and did not resume them until after the crisis.

In contrast to the Cloud companies, leading telecom service providers do not cancel their infrastructure upgrades projects abruptly. Slower economic growth in China is likely to lead to more government funded infrastructure projects, including 5G deployments. These will have a direct positive impact on transceiver sales in 2019, compensating for a potential decline in sales to the Cloud companies.

The Quarterly Market Update report provides an easy-to-digest snapshot of optical transceiver growth trends, backed up with detailed quarter-by-quarter sales data collected via LightCounting's proprietary vendor survey. Performance metrics and commentary for top-tier Telecom and Internet service providers, network and Datacom equipment makers, and Optical component, and Semiconductor vendors are also included, to provide an understanding of what drives sales trends at the transceiver level. 

Each quarterly report consists of approximately 90 PowerPoint slides with many charts and tables suitable for reuse in client presentations. An Excel spreadsheet is also included with the report, providing the latest 8 quarters of shipments, prices, and revenues for ~100 products spanning the Ethernet, Fibre Channel, WDM, Wireless, and FTTH segments. Quarterly revenue and spending data for 30 top CSPs and ICPs, and quarterly revenues for 22 equipment makers, 14 optical components vendors, and 17 semiconductor manufacturers is also included.

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

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