Market outlook is a turbulent mix of high growth opportunities, intense price competition, capacity constraints, and sanctions
2015 optical components revenues ended up at 7% growth
In our December 2015 market update, we predicted the optical components market would grow by 14% overall in 2015. Since then we received proprietary shipment and revenue data from components vendors covering 3Q and 4Q 2015, as well as Q4 financials for most of the large components vendors. Based on this new information we now estimate that actual 2015 market growth was 7%. Most of the forecast shortfall was due to lower than expected sales of Ethernet, FibreChannel, and Optical Interconnects in Q4 2015. This was driven in part by a rather abrupt drop off in the volume of 40G module sales, and also by greater than expected price declines in 10G and 40G products. These declines were partially offset by greater than expected shipments of FTTx and Wavelength Selective Switch (WSS) modules in Q4 2015.
Momentum shifted from datacenter to telecom spending in 2H15.
For the past several years, many component vendors have been focused on large datacenter customers, whose meteoric increases in users and traffic drove them to push vendors to the bleeding edge of optical module speed, power consumption, size, and cost per gigabit. This focus has paid off for some vendors, who have seen strong growth in sales after catching a ride on one of the hyperscale datacenter construction waves.
Infrastructure spending by the top tier internet companies has been growing so fast it looked like it might even surpass the top tier service providerscapex a few years down the road. In 2015, however, market dynamics changed; datacenter spending growth slowed in the second half, while telecom service provider spending growth accelerated. The following chart clearly shows this shift in momentum between the two market segments.
Some of the causes of this momentum shift are short term in nature. One contributing factor to the high growth in telco spending in 4Q15 was abnormally low spending in China in the early part of 2015, brought about by the government’s anti-corruption campaign. Chinese companies turned on the purchasing taps in 4Q15, and telcocapex/revenue for Tier 1 operators surged to 21%, well above the long term average of 15%.
Conversely, one reason cloud infrastructure spending growth cooled off in 4Q15 was that hyperscale datacenter operators deferred purchases of 40G modules in anticipation of 100G QSFP28 modules becoming available in 2016. This spending will recover only gradually in 2016, though, as some vendors are capacity constrained in 100G devices at the moment, and adding capacity takes time.
Some telecom products will continue to see strong demand in 2016
Not all of the 2H15 increase in telecom spending was due to short-term factors, however. Telecom operators and their equipment suppliers have been studying and trialing SDN and NFV capable equipment for some time, and it now appears that commercial implementation is beginning. One of the fastest-growing component products recently has been WSS modules used in ROADMs, a key enabler of Flex-Grid optical transport systems. Finisar reported that WSS sales were 1/3 of its telecom segment sales in 4Q15. Lumentum reported that ROADM revenues increased by 44% sequentially and 103% year-over-year in 4Q15. LightCounting believes demand for WSS and ROADMs will be ramping up significantly in 2016, catching up on a few slow years and exceeding the records set back in 2010-2011.
Another key component of Flex-Grid transport systems is 100G CFP2-ACO (Analog Coherent Optics) modules, and sales of these are starting to ramp also. The market potential for 100G DWDM transponders was clearly illustrated by the success of DCO (Digital Coherent Optics) products last year, as Acacia (the leading supplier of DCOs) reported close to $240 million in annual sales - up 63% compared to 2014.
Shipments of CFP and CFP2 100G LR4 modules, used as client side interfaces on DWDM transport systems and core routers also increased sharply in the second half of 2015. Demand for these products is expected to remain strong in 2016 even as CFP4 and QSFP28 modules start to gain market share. Source Photonics reported shipping more than 10,000 units of QSFP28 modules by mid-January 2016. LightCounting estimates that most of these were shipped in the end of 2015 for both telecom and datacenter applications.
Pinning the tail on the donkey: 2016 outlook
What does this all mean for 2016? Well clearly there are some great opportunities in telecom products; however, it is increasing deployments of 100G optics in Mega Data Centers that are expected to lead the market growth in 2016. Several suppliers indicated that shipments of 100G QSFP28 optics to Amazon, Google and Microsoft are ramping fast in early 2016 and there is much more to come in the rest of the year. Smaller vendors serving these customers offered very strong guidance for Q1 2016: Applied Optoelectronics expects 70% revenue growth (year-over-year). Guidance for Q1 2016 from Finisar (the largest and the most diversified vendor) was flat compared to Q1 2015, but the company also confirmed starting deployments of 100G in datacenters.
Oclaro guided for 20% increases in 1Q 2016 sales, compared to Q1 2015, but this was prior to the US government’s recent decision to impose sanctions on ZTE, forbidding U.S. -based companies from selling optical components (and semiconductors) to ZTE. Presumably other non-U.S. companies will benefit from this, and it may be a net wash on overall market demand, but the changes in supply may further exacerbate shortages in some product areas. Plus there is worry that sanctions might be extended to Huawei, which would have a much larger impact on some U.S. based suppliers.
These are just some of the issues we have to consider while updating our forecasts. Meanwhile, although our full market forecast update is not yet complete, our preliminary view is that public components vendor revenue in total for 2016 will be in line with our previously forecast growth of 15% compared to 2015, putting revenues for the group in the range of $6.65 billion.
Our Ethernet market forecast refresh will be published in a few days, in conjunction with a new report on Mega-Datacenters. The LightCounting forecast for the total optical components market will be published in April.