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Optical Transceiver Market is Growing Despite a few Localized Headwinds

LightCounting releases its December 2018 Quarterly Market Update Report

The global market for optical transceivers eked out respectable year-over-year growth (+8%) in Q3 2018 despite headwinds faced by several vendors.  Strong year-over-year sales growth was reported by II-VI (+20%), Accelink (+18%), Innolight (+18%), Lumentum (+49%), Neophotonics (+15), and Sumitomo (+12%), while quality issues at AOI (down 36% y-o-y), and incomplete recoveries from ZTE’s 2Q18 shutdown at Acacia (down 10% y-o-y, despite being up 46% vs. Q2) and Oclaro (down 15% y-o-y, while up 9% sequentially) tamped down the market average.

This ying and yang market dynamic was also present in company guidance for Q4 2018, which ranged from strong growth to seriously disappointing.  II-VI continues to benefit from strong demand for ROADMs and 980 nm pump lasers, and guided for 20% y-o-y growth.  Acacia and Neophotonics guided for mid-teens growth in sales on the back of new CFP2 and 600G products (Acacia) and increased sales to Huawei (NeoPhotonics).

Lumentum had guided for 14% growth, but had to revise that to minus 15% after ‘a large consumer electronics customer’ (i.e. Apple) called to say it wouldn’t need nearly so many VCSEL arrays in 4Q as it first thought.  And AOI is still struggling with a quality issue that is limiting its ability to ship everything customers want.

Figure: Q4 sales guidance of optical components manufacturers

The fundamental drivers of growth in the optical components datacenter segment remain strong.  Internet Content Providers (ICPs) spent 66% more on property plant and equipment in the first three quarters of 2018 than in the same period in 2017.  Datacenter storage, server, and switch makers benefited from this largess, growing sales 14% year-over-year through September, despite the continuing migration towards open systems and white box manufacturing. And while sales for datacom equipment vendors as a group were down 3% sequentially in the third quarter of 2018, seven – Arista, Dell, Extreme, Inspur, Lenovo, Mellanox, and NetApp – reported double digit sales growth compared to 3Q17. Sequential growth was more mixed, indicating that although ICPs are spending at a new higher level in 2018, they are not increasing spending through the year.   

Communications Service Providers held capital expenditures flat in the first three quarters of 2018, on a year-over-year basis. While commercial 5G services were launched in September 2018 by Verizon, its four city rollout and other operators’ equally small initial deployments are not yet of a scale to require an appreciable increase in capex. China’s 5G rollout is about a year behind Verizon’s. Publicly reported sales figures from telecom equipment makers were down 2% year-over-year through September 2018, in part because of ZTE’s forced shutdown in 2Q18. Like the optical component market, though, the average belies a wide range of performance. Ciena and Infinera both reported double-digit y-o-y sales growth for 2018 through the end of September, while ZTE was down 20%, and Ericsson and Fujitsu sales were also lower this year compared to 2017.

DWDM port shipments, a more direct indicator of optical component demand in the CSP segment, rose 48% year over year in 100G port-equivalents.  While 100G ports only grew by single digits, 200G-capable ports rose 189% and 400G-capable shipments, though still small, increased by 272% compared to 3Q17.

The outlook for 2019 is for continued growth with the occasional pothole.  Our recent 5-year market forecast calls for double-digit growth in revenues for the Ethernet, WDM, and wireless transceiver segments, as well as in Active Optical Cables.  The need for speed continues to drive adoption of higher priced modules in all three segments. Products expected to have particularly strong growth in 2019 include 100GbE Ethernet transceivers in several flavors, 200G DWDM (CFP2 ACO, CFP2 DCO), and 25G SFPs for 5G fronthaul.

Near term, the biggest threat to 2019 market growth is the deteriorating U.S.– China trade relationship, strained to the breaking point by the recent arrest of Huawei’s CFO. If Huawei gets hit with a sales ban like ZTE, the impact could be as bad or even worse the ZTE shutdown. More generally, trade tariffs or just the threat of tariffs could disrupt existing supply chain relationships, as companies move manufacturing or change suppliers from one country to another to eliminate tariff costs. Our forecast assumes the industry is able to weather this storm without suffering a significant impact, but we also know some potholes are unavoidable, despite our best intentions.   

The newly published Quarterly Market Update provides data and commentary on the Q3 2018 financial results of CSPs, ICPs, networking hardware, optical components, modules and semiconductor chipmakers. It also includes shipment data through Q2 2018 and estimates for Q3 and Q4 2018, for more than 100 optical transceiver and WSS products, obtained via LightCounting’s proprietary vendor shipment survey. LightCounting subscribers can access the report and database at: www.lightcounting.com/login.cfm.



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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.