June 18, 2020

LightCounting releases Quarterly Market Update report and comments on the market outlook for 2020.

LightCounting’s new Quarterly Market Update summarizes financial data through Q1 2020 and guidance for Q2 2020. First-quarter 2020 revenues of optical transceiver and component vendors declined by 12% sequentially, after reaching a new high in Q4 2019. And while no one predicted the coronavirus pandemic, the good news is that companies generally met their revised guidance issued midway through the quarter, and there were no ‘downside surprises’.

Companies located in China were more heavily impacted in Q1 because of the complete shutdown of factories and construction in many parts of the country. Alibaba, for example, spent considerably less than in Q1 2019, simply because planned construction could not proceed, and equipment was in short supply. Huawei lost some share in 100G port shipments, and Accelink and HG Genuine, located in Wuhan, saw revenues plummet by 30-50% sequentially. The good news here is that most cities in China have emerged from lockdowns and factory operations, and construction activities have resumed. We expect a strong recovery in Q2 and Q3 by those most affected in Q1.

Outside of China, pandemic lockdowns began in mid-to-late March, continued in Q2, and are likely to continue in Q3 to a certain degree in some regions. The top 5 ICPs, based in the U.S., spent record or near-record amounts on infrastructure in Q1, but then Alphabet and Facebook lowered capex guidance for the full year, based on expectations of reduced construction levels and equipment supply constraints. Microsoft said the opposite, guiding for an increase in capex as supply constraints begin to ease.

We remain confident that ICP spending will continue to be a strong driver of growth in the optical transceiver market. The most recent data shows that cloud revenues of the hyper-scalers continue to grow faster than other business segments, and operate at higher profit margins – ICPs would be extremely foolish to starve their cash cows of needed infrastructure.

The big question remains: What should we expect for the rest of the year? Company revenue guidance for year-over-year growth in the current quarter (Q2) was a mixed bag - ranging from double-digit growth to double-digit declines. However, sequential growth versus Q1 2020 levels was guided by every company we track except Lumentum, who cited a combination of supply disruptions and a drop in smartphone sales which impacts its VCSEL business. Our Quarterly Market Update also includes estimates for Q1 and Q2 shipments and revenues made at the product level across six segments. When all the product level estimates are added up, our estimated sales total for Q2 shows significant growth over Q1, to near Q4 2019 levels. This is shown in the figure below.

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Looking longer-term, LightCounting recently updated its 5-year forecasts, and in total we are projecting a 9% increase in optical transceiver revenues in 2020 vs. 2019. The 9% total market growth rate is driven by strong double-digit sales growth in wireless transceivers and optical interconnects, and modest growth in Ethernet, while CWDM/DWDM, FTTx, and Fibre Channel segments will be nearly flat.

2020 has thus far been a year of surprises and challenges for the industry, for governments, and for individuals as we all grapple with the coronavirus pandemic - an escalating trade war and period of unrest. We are all hoping for a gradual and peaceful resolution of the problematic outcomes of the pandemic - and no more surprises! Nevertheless, only time will tell how things will turn out.

More information on this report can be found here: http://lightcounting.com/products/2Q20QMU/


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