Dec. 12, 2018

LightCounting releases its December 2018 Quarterly Market Update Report

The global market for optical transceivers eked out respectable year-over-year growth (+8%) in Q3 2018 despite headwinds faced by several vendors.  Strong year-over-year sales growth was reported by II-VI (+20%), Accelink (+18%), Innolight (+18%), Lumentum (+49%), Neophotonics (+15), and Sumitomo (+12%), while quality issues at AOI (down 36% y-o-y), and incomplete recoveries from ZTE’s 2Q18 shutdown at Acacia (down 10% y-o-y, despite being up 46% vs. Q2) and Oclaro (down 15% y-o-y, while up 9% sequentially) tamped down the market average.

This ying and yang market dynamic was also present in company guidance for Q4 2018, which ranged from strong growth to seriously disappointing.  II-VI continues to benefit from strong demand for ROADMs and 980 nm pump lasers, and guided for 20% y-o-y growth.  Acacia and Neophotonics guided for mid-teens growth in sales on the back of new CFP2 and 600G products (Acacia) and increased sales to Huawei (NeoPhotonics).

Lumentum had guided for 14% growth, but had to revise that to minus 15% after ‘a large consumer electronics customer’ (i.e. Apple) called to say it wouldn’t need nearly so many VCSEL arrays in 4Q as it first thought.  And AOI is still struggling with a quality issue that is limiting its ability to ship everything customers want.

Figure: Q4 sales guidance of optical components manufacturers

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The fundamental drivers of growth in the optical components datacenter segment remain strong.  Internet Content Providers (ICPs) spent 66% more on property plant and equipment in the first three quarters of 2018 than in the same period in 2017.  Datacenter storage, server, and switch makers benefited from this largess, growing sales 14% year-over-year through September, despite the continuing migration towards open systems and white box manufacturing. And while sales for datacom equipment vendors as a group were down 3% sequentially in the third quarter of 2018, seven – Arista, Dell, Extreme, Inspur, Lenovo, Mellanox, and NetApp – reported double digit sales growth compared to 3Q17. Sequential growth was more mixed, indicating that although ICPs are spending at a new higher level in 2018, they are not increasing spending through the year.   

Communications Service Providers held capital expenditures flat in the first three quarters of 2018, on a year-over-year basis. While commercial 5G services were launched in September 2018 by Verizon, its four city rollout and other operators’ equally small initial deployments are not yet of a scale to require an appreciable increase in capex. China’s 5G rollout is about a year behind Verizon’s. Publicly reported sales figures from telecom equipment makers were down 2% year-over-year through September 2018, in part because of ZTE’s forced shutdown in 2Q18. Like the optical component market, though, the average belies a wide range of performance. Ciena and Infinera both reported double-digit y-o-y sales growth for 2018 through the end of September, while ZTE was down 20%, and Ericsson and Fujitsu sales were also lower this year compared to 2017.

DWDM port shipments, a more direct indicator of optical component demand in the CSP segment, rose 48% year over year in 100G port-equivalents.  While 100G ports only grew by single digits, 200G-capable ports rose 189% and 400G-capable shipments, though still small, increased by 272% compared to 3Q17.

The outlook for 2019 is for continued growth with the occasional pothole.  Our recent 5-year market forecast calls for double-digit growth in revenues for the Ethernet, WDM, and wireless transceiver segments, as well as in Active Optical Cables.  The need for speed continues to drive adoption of higher priced modules in all three segments. Products expected to have particularly strong growth in 2019 include 100GbE Ethernet transceivers in several flavors, 200G DWDM (CFP2 ACO, CFP2 DCO), and 25G SFPs for 5G fronthaul.

Near term, the biggest threat to 2019 market growth is the deteriorating U.S.– China trade relationship, strained to the breaking point by the recent arrest of Huawei’s CFO. If Huawei gets hit with a sales ban like ZTE, the impact could be as bad or even worse the ZTE shutdown. More generally, trade tariffs or just the threat of tariffs could disrupt existing supply chain relationships, as companies move manufacturing or change suppliers from one country to another to eliminate tariff costs. Our forecast assumes the industry is able to weather this storm without suffering a significant impact, but we also know some potholes are unavoidable, despite our best intentions.   

The newly published Quarterly Market Update provides data and commentary on the Q3 2018 financial results of CSPs, ICPs, networking hardware, optical components, modules and semiconductor chipmakers. It also includes shipment data through Q2 2018 and estimates for Q3 and Q4 2018, for more than 100 optical transceiver and WSS products, obtained via LightCounting’s proprietary vendor shipment survey. LightCounting subscribers can access the report and database at: www.lightcounting.com/login.cfm.

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3D Sensing for Self-Driving Cars Reaches the Peak of Inflated Expectations

LightCounting releases a new report addressing illumination in smartphones and automotive lidarIn 2019, the market for VCSEL (vertical cavity surface-emitting laser) illumination in smartphones will exceed $1.0 billion – now nearly triple the size of the market for communications VCSELs. That’s quite remarkable for a market that didn’t exist three years ago.3D sensing in smartphones felt like an overnight sensation, but the technology foundations were laid down years ago with Microsoft’s Kinect – a motion-sensing peripheral for gamers released in 2010 but discontinued in 2017 after lackluster sales. Lumentum supplied lasers to the Kinect almost a decade before the iPhone opportunity emerged; the company was ready to profit from the iPhone X opportunity when Apple decided to launch 3D sensing for facial recognition in September 2017.

Figure: 3D depth-sensing meets the Gartner Hype Cycle

3D Sensing

Source: Gartner with edits by LightCounting

If all technologies follow the Gartner Hype Cycle, shown in the Figure above, then 3D sensing in smartphones is now moving up the slope of enlightenment. Android brands raced to add 3D sensing to their flagship phones in 2018 – the Xiaomi Mi8 Explorer and Oppo Find X phones were first – although these only sold in single digit million quantities. Huawei also brought out new phones with 3D sensing, but the ongoing U.S. export ban on the Chinese company must be hurting the company’s traction outside China. Apple continues to dominate the market as all new iPhones released by Apple since 2017 have included 3D sensing on the front of the phone. Apple is expected to introduce 3D sensing for ‘world-facing’ applications in 2020, which adds another laser chip to every phone.

Last year illumination for lidars were not included in our market forecast since LightCounting considered it unlikely that lidar would penetrate the consumer market to any great extent over the forecast period. All indicators now point to a market for lidar illumination ramping up in 2022 and beyond. Optical components firms are now shipping prototypes and samples of VCSELs, edge emitters and coherent lasers to customers developing next-generation lidar systems – many of them building on their expertise in illumination for optical communications and smartphones.

As was the case with smartphones, the foundations for lidar technology were laid down much earlier – in this case with the DARPA Challenge 2007, where the winning vehicle used a 64-laser lidar system from Velodyne Acoustics (now Velodyne Lidar). Lidar is considered by the majority of the industry to be an essential part of the sensor suite required for autonomous driving, helping the vehicle to navigate through the environment and detect obstacles in its path. The first commercial deployments have begun. In Germany, lidar on the Audi A8 enables the car to drive itself for limited periods under specific conditions. In Phoenix, Arizona, you can hail a ride in a Waymo robotaxi.

Investor enthusiasm for lidar is undeniable with nearly half a billion dollars invested in lidar start-ups in 2019 according to our analysis of publicly available investment data. Notable deals include $60 million for U.S. company Ouster in March, Israel’s Innoviz Technologies Series C round of $132 million in the same month, and $100 million for U.S.-based Luminar Technologies in July. Interestingly, these examples illustrate the variety of lidar approaches: each company is building a different type of lidar based on a different wavelength: 850nm for Ouster, 905nm for Innoviz and 1550nm in the case of Luminar. There’s an open technology battle and they can’t all be winners.

The automotive lidar market seems to be close to the peak of ‘inflated expectations’. It’s easy to understand why. The automotive industry is enormous, with nearly 100 million vehicles (including trucks) produced annually. Players like Baidu, GM Cruise and Waymo are backed by deep corporate pockets, and new entrants like Aurora and Pony.ai are attracting hundreds of millions in investment. Intel’s $15.3 billion purchase of Mobileye in 2017 was also directed at autonomous driving. Sensor company AMS is in a $4.8 billion battle to acquire German semiconductor lighting firm Osram with its eye firmly on lidar.

However, signs indicate that the descent into the trough of disillusionment could have already begun. Waymo has yet to roll out its robotaxi services more widely – and this summer admitted that its vehicles needed more testing in the rain. GM Cruise has delayed launch of commercial services for self-driving cars beyond 2019 and is reluctant to commit to a new timescale, with its CEO Dan Ammann observing that safety is paramount; automotive is not an industry where you can “move fast and break things” he said. A casualty of the slow pace was optical phased array lidar developer Oryx Vision, which closed its doors in August and started to hand money back to investors.

While lidar is being deployed commercially today, prices are not conducive to mass production, and there are open questions around regulation, safety, ethics and consumer acceptance. Do local laws prohibit self-driving cars? Will they really be safer than humans? Who is responsible for a crash? LightCounting remains skeptical about the pace of adoption of autonomous vehicles, but will be watching the market closely and with optimism.

More information on the report is available at: https://www.lightcounting.com/Sensing.cfm.


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