Optical communications outlook
through the lens of optical
components market
Karen Liu, PhD
karen.liu@ovum.com
September 2011
1
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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?

2
What is the outlook?
© Copyright Ovum. All rights reserved. Ovum is part of the Datamonitor Group.
3-tier view of the telecom optical market
Service providers
2Q11 annualized
revenues $1.86 trillion,
up 5% 2Q11 vs. 2Q10
Optical networking 2Q11
annualized revenues $15.3
billion up 8% 2Q11 vs. 2Q10
America Movil, AT&T, BT, China Mobile, China
Telecom, FT, DT, NTT, Saudi Telecom, Sprint,
Telefónica, TI, Verizon, Vodafone, Zain...
System vendors
Alcatel-Lucent, Brocade, Cisco, ECI, Ericsson, Huawei,
Juniper, Motorola, NEC, Nokia/NSN, Nortel, Tellabs,
ZTE...
Optical Component 2Q11
annualized revenues* of $6.2
billion, up 30% 2Q11 vs. 2Q10
Optical
components
Avago, Finisar, JDSU,
Sumitomo, Oclaro, Opnext,
Source Photonics...
Subcomponent and
material
*Ovum does not track
subcomponents quarterly and
does not track materials.
Source: Ovum
* Includes only optical and datacom components
3
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Operator revenues back but capex reflects caution
Global revenues
$2.0
$1.0
$0.5
$0.0
2000
$400
2005
2010
Global capital expenditure
Mobile operators
Fixed operators
$300
Cautious
spending
Change over year-ago quarter
25%
Trillions
$1.5
Mobile
operators
Fixed
operators
Global quarterly capital expenditure
20%
Fixed
operators
Mobile
operators
15%
10%
5%
0%
-5%
1Q09
3Q09
1Q10
3Q10
1Q11
-10%
-15%
Millions
-20%
$200
-25%
$100
$0
2000
2005
2010
Capex growing since 4Q10 for
mobile, 1Q11 for fixed
Source: Ovum “1Q11 capex report”
4
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Optical networking market recovered late 2010
25%
Optical networking vendor revenue
20%
Y-Y change
15%
1Q11 vs 1Q10
3Q10
turning point
10%
•Optical transport +7 %
5%
2010 vs 2009
•Optical networking -2 %
0%
1Q08
1Q09
1Q10
1Q11
-5%
-10%
-15%
Source: Ovum “Network Infrastructure market share”
Optical networking recovered later than other infrastructure segments
5
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Optical component market had 2 strong years but
pulls back in 2011
$2
$7
Revenues
Annualized
$6
$4
$1
$3
$ billionis
$ billions
$5
$2
$1
$-
$1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
Components outpaced optical networking through 2010
1H2011 inventory correction as well as cautious carrier spending cited
6
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Why does the component market look so different
from the system market?
7

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
© Copyright Ovum. All rights reserved. Ovum is part of the Datamonitor Group.
Optical component revenues no longer tracking
steady growth?
$4,000
OC
ON normalized
Capex normalized
PON normalized
2 per. Mov. Avg. (OC)
Revenues ($ million)
$3,500
$3,000
Fttx: unsustainable
optical costs
$2,500
?
$2,000
$1,500
$1,000
$500
$1999
8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

2003-2008: Components track optical networking and capex.

Growth is remarkably linear

2009-2011: Components grow faster, partly from rapid growth of PON
© Copyright Ovum. All rights reserved. Ovum is part of the Datamonitor Group.
Three vertical markets for OC
Service providers (SPs)
Networking OEM
FTTx System OEM
$$$$
Alcatel-Lucent, Fiberhome, Fujitsu, Huawei,
Mitsubishi, Motorola, Sumitomo, ZTE...
OC vendors
OC vendors
Finisar, Sumitomo, JDSU,
Oclaro, Avago, Opnext,
Source Photonics...
Neophotonics, OKI,
Sumitomo, Source
Photonics...
$
Materials
9
AT&T, BT, Verizon, ...
Amazon, Google, Facebook, NYSE Euronext
AT&T, BT, China Telecom, FT, DT, NTT,
Verizon, ...
ON & IP System OEM
Alcatel-Lucent, Brocade, Cisco, ECI, Ericsson,
Huawei, Juniper, Motorola, NEC, Nokia/NSN,
Nortel, Tellabs, ZTE...
Datacenter Operators
Service providers (SPs)
America Movil, AT&T, BT, China Mobile,
China Telecom, FT, DT, NTT, Saudi
Telecom, Sprint, Telefónica, TI, Verizon,
Vodafone, Zain...
$$$$
Arista, Brocade, Cisco, EMC, Extreme, Force10,
IBM, HP, Mellanox, Qlogic
$$$$
OC vendors
Avago, Emcore, Finisar,
JDSU, Santur,Sumitomo,
TE Connectivity…
$
Materials
Materials
$
•Typically up 60%+ of OC market
but fell to 56% in 2008
•Makes up 15- 20% + of
OC revenues
•Makes up 15- 20% + of OC
revenues
•2 major segments are
Transmission and Transport
(common equipment). Transport
hard hit by ROADM inventory
• Optics make up larger %
of BOM, especially for
ONU/ONT side. Intense
pressure to reduce cost
• Faster to shut off but also
faster to turn on spending
•Mega-datacenters and
cloud computing drives
growth and mix shift
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Dynamics of three end markets appear to account for
much of the components gyrations
$1,700
OC revenue
weighted system revenue
For each $ spent at
system level, this
model claims:
$1,600
$1,500
• $0.18 to OC if from
WAN optical network
$1,400
$1,300
• $0.50 to OC if from
FTTx
$1,200
• $0.15 to OC if from
LAN/SAN*
$1,100
$1,000
$900
No attempt was made
to quantify inventory
10
11
10
1Q
10
4Q
10
3Q
10
2Q
1Q
09
4Q
09
3Q
09
09
2Q
08
1Q
08
4Q
08
3Q
2Q
1Q
08
$800
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Contrast between datacom vs telecom dynamics
Q/Q change
25%
Optical component vendor revenue from shortreach (< 1 km) transmission products
20%
IT spending on servers and
switches resumed mid 2009 and
continues to grow each quarter.
These products are ordered as
needed
15%
10%
5%
0%
2Q09
25%
20%
4Q09
2Q10
4Q10
2Q11
Optical component vendor revenue from
ROADM & filter products
Q/Q change
15%
10%
5%
0%
-5% 2Q09
-10%
-15%
-20%
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In early 2010, system houses
worried about component
shortages, order long-lead time
items such as ROADMS
4Q09
2Q10
4Q10
2Q11
By early 2011, a combination of
slower-than-expected carrier
spending and deliberate
inventory caused dramatic
slowdown in ROADM orders
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OC challenged to hold onto improvements in margin
50%
40%
Operating margin
Gross margin
Margin
30%
20%
10%
0%
-10% 1Q08
1Q09
1Q10
1Q11
-20%
Source: Financial statements from AFOP, Avago, Avanex, Emcore, Finisar, JDSU,
NeoPhotonics, Oclaro, Oplink, Opnext, and Source Photonics.
12

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
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New technology dominates outlook… for good and bad


13
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
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100G: strong growth just starting
$1,000
Merchant 100G transponder revenue
Client
Lineside
$800
Millions
$600
$400
$200
$0
2009
14
2010
2011
2012
2013
2014
2015
2016
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100G: strong and growth continues
$1,000
Merchant 10G transponder revenue
Client
Lineside
$800
Millions
$600
$400
$200
$0
2009
2010
2011
2012
2013
2014
2015
2016
10G not over yet: tunable SFP+, full reach tunable XFP…
15
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100G: strong growth plus access penetration driven
by datacom 10G
$2,600
Merchant 10G module revenue
$2,400
Datacom
Fttx
Client
Lineside
$2,200
$2,000
$1,800
Millions
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2009
2010
2011
2012
2013
2014
2015
2016
10GbE replacing GbE as “unit of currency” in datacenter
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Outlook is for continued steady growth in optical
components
Optical components and modules market
$12
millions
$10
$8
$6
$4
Forecast
Actuals
$2
20
15
20
13
20
11
20
09
20
07
20
05
20
03
20
01
19
99
$0
But competition will be particularly fierce for hot products
17
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Summary

C
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.
D
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
C
18
Positive long-term outlook persists and strong end-user demand for
bandwidth continues
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Thank you!
19
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