Oct. 18, 2017

LightCounting Reports from Ciena’s Analyst Day

Ciena’s financial performance might have been overshadowed by success of Huawei and ZTE, but the company has been reporting steadily growing revenues for several years now. Ciena exceeded $2 billion in annual revenues back in 2013 and it is on target to reach close to $3 billion this year.

New business opportunities with leading Internet Content Providers (ICPs) deploying optical networking systems certainly contributed to Ciena’s success, but it remains a small part (only about 10%) of Ciena’s direct business.  The Company estimates that another 5% to 10% is through carrier managed services. “Spending of ICPs on optical networking contracted in 2017,” commented James Frodsham - SVP & Chief Strategy Officer at Ciena. “Price per port compression is greater than the bandwidth increase”.

Optical networking equipment sales growth has been mostly driven by demand from China – a country that Ciena does not sell to. Excluding sales to China, the market for optical networking equipment was flat in 2014-2016 and is projected to decline by 5% in 2017. Yet, Ciena’s annual revenues are likely to grow by about 7% this fiscal year. The company is clearly gaining market share in a very competitive environment, as detailed in our latest Quarterly Market Update Report.

Are there too many companies in the optical networking market?

A well-developed market typically includes 3 large vendors, with combined market share of at least 80%, and several small vendors, chasing niche opportunities too difficult for the larger companies to keep track of. The global optical networking market clearly does not have this structure, at least not yet.

One problem is that the global market for optical networking is fragmented by government policies. China is effectively a closed market, where FiberHome, Huawei and ZTE are given preferential treatment. The US market is closed for these Chinese suppliers. Free competition exists only outside of China and the US, but it is not an even playing field. The Chinese government offers direct financing of infrastructure projects in many countries and often uses indirect incentives for doing business with Chinese suppliers. Huawei and ZTE offer very aggressive pricing, limiting opportunities for other vendors. Many of these vendors are clinging to the US market, where Huawei and ZTE are not competing.

It is unlikely that 3 dominant global vendors can emerge in this situation. A more realistic market landscape would consist of 3 vendors dominating the Chinese market and another 3 vendors controlling the US market. Three of these six vendors may have leading positions in the rest of the world, unless we see new barriers protecting domestic suppliers.

Are we converging on this model? The leaders in the Chinese market are well defined. Ciena and Cisco are doing well in the US, while Coriant, Fujitsu, Infinera and Nokia are competing for the remaining place among the top 3. Juniper added optical transport capabilities with its acquisition of BTI Systems in 2016. Huawei and ZTE gained share in the rest of the world, but some feel that there must be limits to their influence.

A well needed western alternative

Ciena and Nokia are doing good business in India now, which has finally started upgrading optical networking infrastructure after many years of delays. Huawei and ZTE were not able to secure large contracts there because of geopolitical concerns. Relations between India and China are tense. Both countries are making efforts to expand trade, but the government in India is not comfortable with Chinese vendors building their optical networks.

Potential security concerns stimulate emergence of domestic networking equipment suppliers in India and other countries. Tejas Networks is still small, but the company reported a 50% increase in Q2 2017 revenues. The Russian government introduced a policy for encouraging domestic suppliers of networking equipment in 2016. IPG Photonics – a major US based supplier of high power fiber lasers, founded by a Russian engineer – expanded their business to provide optical networking solutions in Russia. Padtec – a vendor based in Brazil does good business in this country and in the Latin American region.

Gary Smith, CEO of Ciena, talked a lot about the strength of the Chinese vendors and influence on Ciena and the rest of the market, particularly the smaller vendors that are attempting to catch up. Given the current state of the industry he feels that Ciena is best-positioned to be the western alternative in countries concerned about the growing influence of China.

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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