LightTrends Newsletter

The Year of the Ox Begins with Enthusiasm

January 2021

The main surprise of the last quarter of 2020 was more substantial than expected demand for the semiconductor chips used in the automotive market. Consumers are getting ready to travel more in 2021 or as soon as the pandemic is over. Consumer spending picked up across several segments and the global supply chain shortages range from huge shipping containers to tiny semiconductor chips, but this is an excellent problem to have at present.

Demand for optics in the telecom and datacom markets remains strong, as indicated by the latest reports from II-VI and Lumentum. Several semiconductor suppliers set new records in revenues for the last quarter. This includes AMD, Inphi, Maxim Integrated and Maxlinear. We will probably see more records as other companies report in the next few weeks.

Intel’s Q4 revenues came very close to the record set in Q4 2019. The company’s datacenter group revenue was down 16% y-o-y because of continuing weakness in the cloud, enterprise and government segments. In contrast, AMD reported record sales of server processors to Cloud and Enterprise customers. AMD’s total revenues were up 52% from Q4 2019 at $3.24 billion.

Another record, confirming strong demand from the Cloud companies (also known as ICPs), chip-maker Innovium announced shipments of over 1 million 400G TERALYNX® switch ASIC ports in 2020. The 12.8Tbps TERALYNX 7 ASICs are equipped with 256 50Gbps SerDes, which can be used as 32 400Gbps connections, and the majority of the ports are used in combination with 400G optics. The company reported increasing demand for these products in Q4 2020, which means that shipments of 400G Ethernet optical transceivers will ramp up in Q1 2021. The switching ASIC chips are usually shipped and installed just ahead of the optics, so it is a good leading indicator.

Amazon should have qualified several new suppliers of 400G transceivers at the end of 2020 and all of them will see a pick-up in their sales of these products. II-VI was among the first to report that, but we expect a few more vendors will follow. The bad news is that more suppliers often leads to sharply lower prices. This assumption was already built into our forecast, but the magnitude of it that occurs in reality may surprise us yet again. The good news is that shipping volumes may be higher than we have expected.

ICP revenue set new records in 4Q 2020, but spending did not. Alibaba, Alphabet, Amazon, Facebook, and Microsoft are the five largest ICPs in the world in terms of capital spending, comprising 85-90% of the top 15 that we keep track of globally. All five reported new record high revenues for Q4 2020 (Table 1), as pandemic weary consumers avoided brick and mortar establishments of all kinds, and consumed more goods and services online. The results reflect just how significantly the COVID-19 pandemic has accelerated the move to the cloud by businesses, schools, and individuals.

Over the years infrastructure spending growth has tended to move in concert with revenues, so one might have expected new records for spending in the fourth quarter also, but that was not the case. Although all five increased spending by double digit rates versus Q3 levels, compared to Q4 2019 Alibaba and Alphabet actually spent less, while Facebook and Microsoft grew spending but fell short of new records. And while Amazon did spend a record amount, a good deal of the increase was in support of its logistics and fulfillment operations, not its Cloud business.


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