© Copyright Ovum. All rights reserved. Ovum is part of the Datamonitor Group. 1 Optical communications outlook through the lens of optical components market

© Copyright Ovum. All rights reserved. Ovum is part of the Datamonitor Group.1

Optical communications outlook through the lens of optical components market

Karen Liu, PhD

[email protected]

September 2011


Outline

What has happened to the optical networking market since the recession?

Why was the optical components market growing so much in 2009 – 2010 when optical network equipment revenues were shrinking?

And why is the optical components market down now that optical networking is growing?

What is the outlook?


Service providers

System vendors

Subcomponent and material

Optical componentsAvago, Finisar, JDSU,

Sumitomo, Oclaro, Opnext, Source Photonics...

Alcatel-Lucent, Brocade, Cisco, ECI, Ericsson, Huawei, Juniper, Motorola, NEC, Nokia/NSN, Nortel, Tellabs,

ZTE...

America Movil, AT&T, BT, China Mobile, China Telecom, FT, DT, NTT, Saudi Telecom, Sprint,

Telefónica, TI, Verizon, Vodafone, Zain...

Source: Ovum* Includes only optical and datacom components

*Ovum does not track subcomponents quarterly and

does not track materials.

3-tier view of the telecom optical market

2Q11 annualized revenues $1.86 trillion, up 5% 2Q11 vs. 2Q10

Optical networking 2Q11 annualized revenues $15.3 billion up 8% 2Q11 vs. 2Q10

Optical Component 2Q11 annualized revenues* of $6.2 billion, up 30% 2Q11 vs. 2Q10


Operator revenues back but capex reflects caution

$0

$100

$200

$300

$400

2000 2005 2010

Mil

lio

ns

Mobile operatorsFixed operators Cautious

spending

Source: Ovum “1Q11 capex report”

Global capital expenditure

$0.0

$0.5

$1.0

$1.5

$2.0

2000 2005 2010

Tri

llio

ns

MobileoperatorsFixedoperators

Global revenues

Global quarterly capital expenditure

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1Q09 3Q09 1Q10 3Q10 1Q11

Ch

ang

e o

ver

year

-ag

o q

uar

ter Fixed

operatorsMobileoperators

Capex growing since 4Q10 for mobile, 1Q11 for fixed


Optical networking market recovered late 2010

Optical networking vendor revenue

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1Q08 1Q09 1Q10 1Q11

Y-Y

ch

ang

e

3Q10 turning point

1Q11 vs 1Q10

•Optical transport +7 %

2010 vs 2009

•Optical networking -2 %

Source: Ovum “Network Infrastructure market share”

Optical networking recovered later than other infrastructure segments


Optical component market had 2 strong years but pulls back in 2011

$-

$1

$2

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

$ b

illi

on

s

$-

$1

$2

$3

$4

$5

$6

$7

$ b

illi

on

is

RevenuesAnnualized

1Q09 – 4Q10 at 27% CAGR

Components outpaced optical networking through 2010

1H2011 inventory correction as well as cautious carrier spending cited


Why does the component market look so different from the system market?

Bullwhip effect: oscillations are amplified at lower tiers of value chain

Different dynamics in access and datacom end markets

New product bright spots are not immune to market turmoil—quite the opposite


Optical component revenues no longer tracking steady growth?

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Rev

enue

s ($

mill

ion)

OCON normalizedCapex normalizedPON normalized2 per. Mov. Avg. (OC)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fttx: unsustainable optical costs

?

2003-2008: Components track optical networking and capex.

Growth is remarkably linear

2009-2011: Components grow faster, partly from rapid growth of PON


Three vertical markets for OC

Service providers (SPs)

FTTx System OEM

Materials

OC vendors

Neophotonics, OKI , Sumitomo, Source

Photonics...

Alcatel-Lucent, Fiberhome, Fujitsu, Huawei, Mitsubishi, Motorola, Sumitomo, ZTE...

AT&T, BT, China Telecom, FT, DT, NTT, Verizon, ...


FTTx System OEM

Materials

OC vendors

Neophotonics, OKI , Sumitomo, Source

Photonics...

Alcatel-Lucent, Fiberhome, Fujitsu, Huawei, Mitsubishi, Motorola, Sumitomo, ZTE...

AT&T, BT, China Telecom, FT, DT, NTT, Verizon, ...

•Makes up 15- 20% + of OC revenues

• Optics make up larger % of BOM, especially for ONU/ONT side. Intense pressure to reduce cost

$$$$

$

FTTx

Datacenter Operators

Networking OEM

Materials

OC vendors

Avago, Emcore, Finisar, JDSU, Santur,Sumitomo,

TE Connectivity…

Arista, Brocade, Cisco, EMC, Extreme, Force10, IBM, HP, Mellanox, Qlogic

AT&T, BT, Verizon, ...Amazon, Google, Facebook, NYSE Euronext

Datacenter Operators

Networking OEM

Materials

OC vendors

Avago, Emcore, Finisar, JDSU, Santur,Sumitomo,

TE Connectivity…

Arista, Brocade, Cisco, EMC, Extreme, Force10, IBM, HP, Mellanox, Qlogic

AT&T, BT, Verizon, ...Amazon, Google, Facebook, NYSE Euronext

$$$$

$

LAN/SAN

•Makes up 15- 20% + of OC revenues

• Faster to shut off but also faster to turn on spending

•Mega-datacenters and cloud computing drives growth and mix shift


ON & IP System OEM

Materials

OC vendors

Finisar, Sumitomo, JDSU, Oclaro, Avago, Opnext,

Source Photonics...

Alcatel-Lucent, Brocade, Cisco, ECI , Ericsson, Huawei, J uniper, Motorola, NEC, Nokia/NSN,

Nortel, Tellabs, ZTE...

America Movil, AT&T, BT, China Mobile, China Telecom, FT, DT, NTT, Saudi

Telecom, Sprint, Telefónica, TI , Verizon, Vodafone, Zain...


ON & IP System OEM

Materials

OC vendors

Finisar, Sumitomo, JDSU, Oclaro, Avago, Opnext,

Source Photonics...

Alcatel-Lucent, Brocade, Cisco, ECI , Ericsson, Huawei, J uniper, Motorola, NEC, Nokia/NSN,

Nortel, Tellabs, ZTE...

America Movil, AT&T, BT, China Mobile, China Telecom, FT, DT, NTT, Saudi

Telecom, Sprint, Telefónica, TI , Verizon, Vodafone, Zain...

$

$$$$

Optical

Networking

•Typically up 60%+ of OC market but fell to 56% in 2008

•2 major segments are Transmission and Transport (common equipment). Transport hard hit by ROADM inventory


Dynamics of three end markets appear to account for much of the components gyrations

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

OC revenue weighted system revenue For each $ spent at system level, this model claims:

• $0.18 to OC if from WAN optical network

• $0.50 to OC if from FTTx

• $0.15 to OC if from LAN/SAN*

No attempt was made to quantify inventory


Contrast between datacom vs telecom dynamics

Optical component vendor revenue from short-reach (< 1 km) transmission products

0%

5%

10%

15%

20%

25%

2Q09 4Q09 2Q10 4Q10 2Q11

Q/Q

ch

ang

e

IT spending on servers and switches resumed mid 2009 and continues to grow each quarter. These products are ordered as needed

Optical component vendor revenue from ROADM & filter products

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2Q09 4Q09 2Q10 4Q10 2Q11Q/Q

ch

an

ge

In early 2010, system houses worried about component shortages, order long-lead time items such as ROADMS

By early 2011, a combination of slower-than-expected carrier spending and deliberate inventory caused dramatic slowdown in ROADM orders


-20%

-10%

0%

10%

20%

30%

40%

50%

1Q08 1Q09 1Q10 1Q11

Mar

gin

Operating margin

Gross margin

OC challenged to hold onto improvements in margin

Source: Financial statements from AFOP, Avago, Avanex, Emcore, Finisar, JDSU, NeoPhotonics, Oclaro, Oplink, Opnext, and Source Photonics.

Industry aggregate gross and operating margins topped out in late 2010.

Despite recent decline, gross and operating margins are still near historic highs.

Revenue decline but also increased R&D cited as causes


New technology dominates outlook… for good and bad

Optical packet: converged packet optical functionality showing up in multiple system product types

ROADM: high penetration of ROADM functionality in metro and long-haul systems

Inventory correction on existing component products (e.g. 1x9 WSS)

New versions in the pipeline (e.g. larger 1x20, smaller 1x2, flex-grid)

40G/100G: 40G ports ramping since mid-2008,100G since mid-2010

Merchant line- and client-side transponders with roadmaps to decrease power, size and cost

Hot products not without their own troubles

Existing ROADM components (e.g. 1x9 WSS) have long leadtimes, made bullwhip worse through inventory

Next-gen WSS in the pipeline costs R&D (e.g. larger 1x20, flexgrid)

Multiple entrants into tunable XFP increases competition

40G modules also having inventory issues


100G: strong growth just starting

Merchant 100G transponder revenue

$0

$200

$400

$600

$800

$1,000

2009 2010 2011 2012 2013 2014 2015 2016

Mil

lio

ns

Client

Lineside


100G: strong and growth continues

Merchant 10G transponder revenue

$0

$200

$400

$600

$800

$1,000

2009 2010 2011 2012 2013 2014 2015 2016

Mil

lio

ns

Client

Lineside

10G not over yet: tunable SFP+, full reach tunable XFP…


100G: strong growth plus access penetration driven by datacom 10G

Merchant 10G module revenue

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

$2,600

2009 2010 2011 2012 2013 2014 2015 2016

Mil

lio

ns

Datacom

Fttx

Client

Lineside

10GbE replacing GbE as “unit of currency” in datacenter


Outlook is for continued steady growth in optical components

Optical components and modules market

$0

$2

$4

$6

$8

$10

$12

1999

2001

2003

2005

2007

2009

2011

2013

2015

mill

ion

s

Forecast

Actuals

But competition will be particularly fierce for hot products


Summary

Carrier capex, optical networking and optical components have now recovered from 2008 recession

Different parts of industry recovered at different times. Carrier capex finally up compared to year-ago quarter in Q1 and Q2 of 2011.

Optical components contracted 2Q11 after outpacing networks

“hot products” vulnerable to inventory issues due to long lead time and buyer response to scarcity (ROADM WSS, 40G).

Yet to come: tunable XFP price competition, further FTTx cost reduction

Positive long-term outlook persists and strong end-user demand for bandwidth continues


Thank you!

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© Copyright Ovum. All rights reserved. Ovum is part of the Datamonitor Group. 1 Optical communications outlook through the lens of optical components market