Sept. 17, 2020

LightCounting releases Quarterly Market Update Report

Sales of optical transceivers set a new record in Q2 2020 reaching close to $1.8 billion and beating the previous record set in Q4 2019 by 10%. The market was certainly catching up on a slow start of the year in Q1, but the combined Q1/Q2 2020 sales are still 16% higher than H1 2019 and just a bit higher than H2 2019. This is not bad, given everything that is going on!

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Quarterly sales of Ethernet transceivers were just under $1 billion – up 23% from the previous record set in Q4 2019. Sales of 2x200GbE and 400GbE transceivers exceeded $100 million – doubling from Q4 2019 and growing by 35% sequentially. Deployment of these modules by Google and Amazon are slightly ahead of our forecast for the year. Sales of 100GbE optics also set a new record and should hold steady for the rest of the year.

A resurgence in the sales of 40GbE, 10GbE and even 1GbE transceivers was the most surprising survey finding, but this is likely to be temporary. Suppliers and their customers were catching up on a slow Q1 disrupted by COVID-19 related shutdowns. Product shortages and uncertainly about the global pandemic forced customers to beef up their inventory reserves, also contributing to a surge in Q2 sales. These effects are temporary and we are likely to see declines in sales of 40GbE and lower speed Ethernet products in the rest of 2020.

In the longer term, accelerated growth of Internet traffic caused by wider use of Cloud services bodes well for sales of high speed Ethernet transceivers and growth of other market segments, including FTTx and DWDM optics, which are just starting to recover from the COVID-19 disruptions. For example, Lumentum, one of the leading suppliers of 10G tunable and coherent DWDM modules, has just recently returned to normal operations and offered reassuring guidance for Q3 sales.

Demand for optics supporting 5G deployments added close to $300 million to the transceiver sales in Q2 2020, but this segment is expected to decline in the second half of the year. Service providers in China met their deployment targets for 2020 ahead of the onset of restrictions on Huawei imposed by the US government. Plans for 2021 depend on how and when the Huawei situation is resolved, but we are optimistic that a compromise will be found soon after the presidential elections in the US, regardless of who is the next president. Huawei is the pride of the Chinese people and they are determined to do whatever it takes to keep it this way.

Apart from the Huawei situation, the main concerns for the rest of 2020 are sharply lower spending by enterprise customers and telecom service providers in the US and Europe. If this proves to be a longer term trend, suppliers of optics will certainly be impacted, but a few quarters of slower spending will not impact the global transceiver market significantly. For example, Ciena commented on lack of new projects for DWDM transport systems, while experiencing strong demand for line cards going into the systems deployed previously. These linecards require DWDM and high speed Ethernet transceivers and sales of these products to telecom customers should remain steady in the rest of 2020, while demand from the Cloud companies is likely to increase.

A slowdown in the Enterprise market will negatively impact demand for 10GbE transceivers, but these do not contribute much to the total anymore. It will also hit niche markets like Fiber Channel, which was down sharply in H1 2020 with no signs for recovery, but it is less than $50 million in quarterly sales.

As long as the US and China find a compromise on Huawei, Cloud giants continue to invest in optics, while the global community makes progress in the battle with COVID, the market should be just fine for the rest of this year and demand in 2021 may pleasantly surprise us. We will hope for the best, but the uncertainly is definitely higher than usual.

More information on the report is available at: http://lightcounting.com/products/qmuq320/

LightCounting is very grateful to the following suppliers for sharing their sales data: Acacia, Accelink, APAT, Applied Optoelectronics, Broadcom, Eoptolink, Fujitsu, Gigalight, Intel, HGG, Hisense, Innolight, Linktel, Lumentum, NEC, NeoPhotonics, OE Solutions, Sont, Source Photonics, Sumitomo and Xgiga.


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