LightTrends Newsletter

Strong growth continues in Q2 2021, but so do supply challenges

August 2021

LightCounting publishes Research Note on preliminary Q2 2021 results.

Partial results for Q2 2021 are in and while the world reels from record heat, floods, resurgent COVID, and the Taliban takeover of Afghanistan, the optical industry continues to ride out the bumps while moving in a generally positive direction. The US economy continues its strength de-spite a resurgence of COVID-19 in some states due to resistance to mask wearing and vaccinations. Trillions more in stimulus money appears close to being approved, which may fuel extant shortages of goods and materials and worsen fears of long-term inflation.

Against this backdrop cloud services and ICP spending continued to experience rapid growth in Q2 2021, and western CSPs also showed strong revenue growth and increased equipment purchases compared to 2020. This translated into strong showings by many OC vendors in Q2 2021 as well. Particular areas of strong demand mentioned by optical component makers include 400G transceivers and coherent modules, ROADMs, pump lasers, and 3D-sensing chips.

A spike in demand for pump lasers, reported by both II-VI and Lumentum, suggests a new wave in deployments of optical transmission lines. Optical amplifiers (which incorporate pump lasers) are deployed in the early stages of these projects. This news bodes well for future shipments of optical transceivers to “light up” the new fiber lines.

Deployments of 200GbE optics at Facebook appear to be meeting our expectations, as II-VI re-ported 60% growth in sales of these products. 50% growth in sales of EML chips reported by Lumentum suggests that deployments of 400G Ethernet transceivers at Amazon and Google are also accelerating in line with our forecast. Upcoming reports by Eoptolink and Innolight will be a more direct indicator of 400GbE deployments.

On the downside, component shortages continue to present challenges for many in the industry. Here are some of the impacts reported in Q2 2021:
•    Fabrinet said supply constraints impacted Q2 2021 revenue by $25-30 million, and they expect to see similar impacts in Q3 and the following few quarters.
•    Lumentum said it’s Q3 sales of modules would be reduced by $30 million due to semiconductor component shortages
•    Neophotonics said Q3 2021 sales will be reduced by $8 million due to chip supplier ‘timing de-commit’
•    II-VI said it was facing a $40 million sales hit from component shortages but managed to avoid any negative impact.

At the equipment level, Infinera said component shortages cost it $30 million to $35 million in sales in H1 2021. Arista reported semiconductor lead times in the range of 40-60 weeks, roughly double pre-pandemic levels. Juniper said it anticipates extended component lead times and elevated costs to last throughout the year. The consensus view seems to be that it will take several more quarters before chip and component shortages are completely resolved.

It seems that II-VI continues to outperform Lumentum in dealing with pandemic related disruptions. The company had reported no disruptions last year and managed to avoid lost revenues in Q2 2020 as well. Lumentum’s production was disrupted for about 6 months in 2020 and the company is reporting more challenges in 2021. Some of these are related to disruption at Fabrinet – a contract manufacturer for Lumentum.

The other continuing headwind in 2021 is China. AAOI, Lumentum, and Neophotonics all mentioned that demand from Chinese customers was ‘soft’, despite significant growth in revenues by the big three Chinese CSPs.

Internet Content Providers continued to rack up impressive gains in revenues in the second quarter of 2021. For the top 5 infrastructure spenders – Alibaba, Alphabet, Amazon, Facebook, and Microsoft revenues grew 8% compared to Q1 2021, with three growing more than 10%. All five scored double-digit gains over Q2 2020 which was impacted by COVID. Q2 2021 spending showed greater variability among the Top 5, with Alibaba growing 81% sequentially, Amazon and Microsoft growing by double digits, while Facebook increased by 7% and Alphabet fell by 7% relative to Q1 2021 levels.

Cloud services continued to drive revenues at Alibaba, Alphabet, Amazon, and Apple and Microsoft, for the group growing 9% sequentially and 35% year-over-year, and each one of the five growing 30% or more compared to last year. Amazon reported record-high cloud sales for the 32nd quarter in a row.  Alphabet’s cloud business reported record sales but posted an operating loss of $1.4 billion.

A more detailed analysis of the final results for Q2 2021 will be provided to LightCounting clients in the next Quarterly Market Update report, to be published in September.

LightCounting subscribers can access the full text of this research note by logging into their online accounts.

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