LightTrends Newsletter

Looking at Supply Chain Impacts in Q3 2021 and Beyond

November 2021

LightCounting publishes Part Two of a Research Note on preliminary Q3 2021 results

While we normally publish a single Research Note on early financial results each quarter, we are publishing it in two parts this quarter. Part One focused on ICPs and CSPs, and Part Two on the equipment and components makers that sell networking products to them.

Many companies have now reported on Q3 2021, and optical components vendors reported a variety of supply chain constraints and impacts, in the form of parts shortages and longer lead times, higher prices, higher shipping costs, and shipping delays. ROADM sales were especially hard hit, according to both II-VI and Lumentum, due to the heavy semiconductor content of these products.

II-VI however also said the supply chain problems impacted telecom products only, and that no datacom product shipments were delayed.

Lumentum reported that its Industrial and Consumer product lines and its Commercial Lasers segment revenues more than offset the impact of semiconductor supply chain shortages in its Telecom and Datacom product lines.

Datacom and optical networking equipment makers also reported a variety of supply chain ills, including parts shortages, higher prices for parts and shipping, and long lead times. Arista reported lead times on certain components extending to 50 weeks or more.

“Continuing supply chain headwinds” has been a frequently used phrase on earnings calls since Q2 2020, and suppliers expect issues to continue well into 2022. We are 100% certain, however, that sooner or later it will end. What will the market look like once the supply starts to exceed demand?

Supply chain disruptions rarely end well. Too much inventory can turn from treasure to trash overnight. When demand starts to slow down, newly built production capacity often exceeds demand, suppliers fight for market share and prices plummet. This is what history tells us will happen. 100G CWDM4 optical transceivers are a recent example. Customers could not get enough of them in 2017, but demand started to slow down in the end of 2018. Prices declined by 50% in 2019, and the rest is history.

Will history repeat itself when the current demand/supply imbalance flips? (By the end of 2022?) Yes, it will, but this time is different. Wait, don’t we always say that?

Yes, we do, but we sincerely believe it is different this time!

It is hard not to get overexcited with Meta’s new plans, and increasing investments supporting them, and Nvidia’s financial results and its vision for the future of AI. Even if only 10% of all these expectations materialize over the coming decade, the impact will be huge. Demand for networking and optical connectivity will surge beyond our expectations. It will not be a smooth ride for the market, and there will certainly be a few bumps on the road. This is the real world, not a metaverse.

Yet, we do believe that the overall prospects for our industry have never been better. The quarterly sales of II-VI and Lumentum look flat, but the industry momentum is clearly positive. We expect a lot more growth in the next several quarters. Our latest market forecast report explains why.

Part One of this Research Note was published November 4, 2021, and a thorough analysis of the complete results for Q3 2021 will be provided to LightCounting clients in the next Quarterly Market Update, to be published in December.

LightCounting subscribers can access the full text of this research note by logging into their online accounts.

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