8 Reasons to Feel Good about Optical Components in 2020
LightCounting has published its December 2019 Quarterly Market Update
As a somewhat rocky 2019 draws to a close, our current assessment is that optical components market demand has started to pick up, and will show solid growth in 2020.
That may sound surprising since the Ethernet transceiver market – the largest transceiver market segment by far - has had a lackluster 2019, declining by 9% in the second half and by 16% over the full year. Multiple factors seem to be at fault for this: a longer than expected transition to 100G at one hyper-scaler, an ominous-sounding “change in procurement strategy” at another, resulting in dramatic changes in its equipment forecast, a slowdown in infrastructure spending among several others, in China and elsewhere. And then there is the ongoing uncertainty over how far and how long the U.S. will continue its trade war against China.
In light of all that gloom, we’re happy to report our latest reading of the tea leaves finds lots of good news, and we believe that growth trends across several segments are pointing up. So as we head into 2020, here are “Eight Reasons to Feel Optimistic about the Components Market in 2020.”
- Hyperscale datacenter spending growth was positive in 3Q19 and the trend is up. Spending has been very cyclical historically, and the group appears to be heading into the high-growth phase of the next cycle. We expect more spending in 2020 than in 2019.
- Datacom equipment revenue growth was less negative in 3Q19 and the trend is heading toward positive growth in 4Q19. Two companies in that segment that we track, H3C and Inspur, had revenue growth of 39% and 23% respectively in 3Q19, versus 3Q18.
- Optical components vendors group revenues will likely set a new record in 4Q19, based on company guidance and estimating the contribution Finisar will make to II-VI’s revenues. We estimate 13% growth in H2 2019 versus H2 2018, and are predicting 19% growth in 2020.
- Broad commercial 5G deployments began in Q3 and Q4 2019, led by China Mobile, China Telecom, China Unicom, Korea Telecom, SK Telecom, LG Uplus, Verizon, AT&T, and T-Mobile. Demand for 10G and 25G grey and WDM fronthaul transceivers grew substantially in the latter half of 2019, and deployments will continue for another several years at least. We currently expect full-year 2019 wireless revenues to more than double compared to 2018, and to grow at more than 20% annually through 2024.
- Our data suggests that DWDM transceiver’s second-half sales were 11% higher year-over-year, and for the full year will end up 7% higher than 2018. The main driver for growth in this segment is DCI applications, which consume increasing numbers of ColorZ and coherent modules. Demand for 10G DWDM for applications in access networks is also strong.
- Some of the market revenue growth is being driven by the adoption of newer, faster, and higher-priced versions of existing products, such as Fibre Channel customers adopting 64 Gbps devices, and service providers widely deploying XG-PON instead of GPON.
- Our estimates put the optical interconnect segment’s growth at 14% in H2 2019, and at 27% annually over the next five years. Although datacenter interconnects between servers and top-of-rack switches are the highest volume application this segment is characterized by a high level of product and customer diversity, with multiple customers and applications in high-performance computing, core routing/optical transport, datacenter interconnects, military/aerospace, and industrial applications. Our latest report on this segment with a freshly updated forecast covering 20 different products will be published imminently. For more information please refer to our upcoming report.
- Sensing applications for optical components continue to multiply. Lumentum has benefited greatly from its early lead in VCSELs for 3D Sensing for smartphones, and II-VI is hot on their heels with capacity coming online in a matter of weeks. Demand continues to grow as more smartphone makers add facial recognition and AR/VR features to a growing number of smartphones. Automotive LIDAR is another sensing application that appears ready for takeoff in the medium term. For more information on this topic see our recent report.
Our just-published Quarterly Market Update for December 2019 consists of a detailed Excel database and a ready-to-use PowerPoint slide deck, providing quarterly historical data and analysis on optical components, semiconductors, networking and datacom equipment, CSPs and ICPs. The database also contains the product-level quarterly shipment data compiled by LightCounting through its proprietary vendor survey through 2Q 2019 with estimated shipments, ASPs, and revenues for 3Q and 4Q 2019. LightCounting publishes the Quarterly Market Update in March, June, September, and December. For more information see https://www.lightcounting.com/products/december-2019-quarterly-market-update-report_52/