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The Industry Supply Chain Can Hardly Keep Up with the Strong Demand for Optics in 2014. Should We Expect This to Continue in 2015-2018?

LightCounting Market Research releases optical communications market forecast and database for 2015-2018.

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Revenues and CapEx spending of leading service providers look set to grow strongly in 2014. Revenues are forecast to grow by 5% while CapEx spending could be up by as much as 11% this year. However, this estimate could change: 7 of the 15 operators have still to report 2Q results. These figures are also boosted by the weak dollar, and the forecasted growth could be tempered if the dollar strengthens in the year's second half. 

Softbank's revenues are up significantly in 2014 now that it includes Sprint, while growth continues among Chinese and, more modestly, among Japanese and US operators. Signs are that Europe is returning to growth but it will be a lengthy process.   
   
CapEx spending also benefits from the currency fluctuations, but the underlying trend is one of increased actual spending.  Service providers continue to spend on transforming their networks to all-IP, and roll outs of LTE and fiber. Investment projects such as AT&T's Project VIP, Vodafone's Project Spring, and Deutche Telekom's upgrades are all in full stride.

Companies in the LightCounting Internet Index reported aggregate revenue growth of almost 13%, and spent 20% more than last year on property and equipment.  Even more telling is the fact that Amazon, Baidu, Google, Facebook, Netflix, and Twitter all reported spending increases between 59 and 183% compared to 2Q13. Juniper was one beneficiary of this increase, with three of its five top customers in Q2 2014 in the Web 2.0/cable category. Infinera reported record revenues in the most recent quarter and stated that 2 of its top 5 customers were Internet content providers.

Huawei and ZTE also reported very strong results in the first half of 2014. These vendors are the main beneficiaries of China Mobile’s lavish spending on LTE network upgrades, but both of these companies also commented on stronger international business. Offering networking solutions to domestic and foreign enterprises, including the Internet companies is another growing market addressed by Huawei, ZTE and many other equipment vendors.

Suppliers of optical components and modules are reporting record performance as well. Accelink cited very strong demand for its optics used in wireless infrastructure as the main reason for all time high revenues in Q2 2014. Finisar also benefitted, growing Datacom segment sales by 39% and adding manufacturing capacity to keep up with the demand. Neophotonics also reported an expansion of its production base, acknowledging solid bookings for the second half of the year.

For the rest of this year, we expect the component market to see continued strong demand from several  different segments – large datacenters, which are expanding capacity at a furious pace, mobile x-haul (front- and back-haul), driven by ongoing LTE rollouts and capacity increases in existing networks, and metro networks, driven by demand for higher speed backbone connections between datacenters. The High Performance Computing market, which has been slumping for the past several quarters, may start to pick up again as contracts are signed for the next build cycle.

LightCounting’s July 2014 Market Forecast report projects close to a 15% increase in 2014 sales of optical components and modules. However, we expect the market growth rate to average around 10% per year in 2015-2018.

This market growth outlook in 2015-2018 is consistent with the latest guidance from service providers in China, which estimates that investment into Mobile Networks in China will remain steady in 2015-2016, but that the annual growth rate will decline from more than 20% in 2014 to 5% in 2015-2016. This will directly impact sales of optics for wireless applications and it may take a few years for other mobile operators around the world to compensate for a potentially slowing demand for “wireless optics” in China.

Accelerating deployments of 100G DWDM transport systems in both long-haul and metro applications is another factor contributing to rapid growth of the market in 2014 and it will continue in 2015-2018 (http://www.lightcounting.com/News_071614.cfm). However, strong demand for this technology from early adopters has yet to be followed by a broader range of customers. This is very likely to happen in 2015-2018, creating another long term business opportunity suppliers.

Last, but not the least – success of 10GbE optics in datacenters in 2010-2013 is being reproduced by 40GbE in 2014. At least two of the leading Internet companies are planning of deployments of 100GbE in 2015-2016 and we expect the broader market to follow starting in 2017.

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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 conducted 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 accurate, detailed, and relevant information necessary for doing business in today’s highly competitive environment. Privately held, LightCounting is headquartered in Eugene, Oregon. For more information, go to http://www.LightCounting.com, or follow us on Twitter at http://www.twitter.com/lightcounting