LightTrends Newsletter

LightCounting publishes its December 2022 Quarterly Market Update

With all companies’ earnings now reported for Q3 2022, the results show that the optical components industry continued to benefit from strong demand, despite supply issues constraining sales for many. Guidance for the current quarter from Coherent and Lumentum is flat, but we expect a decline in Q4 2022. As we reported earlier, 2023 will be challenging as well.

At the top of the food chain, Internet Content providers (ICPs) continued to increase capex in Q3 2022 – up 14% compared to the same quarter in 2021. However, the growth rate of ICP’s capex has been slowing down over the past several quarters.

Spending by Communication Service Providers (CSPs) declined by 5% in Q3 2022, but mainly due to currency exchange rate fluctuations. Both CSPs and ICPs have implemented cost reduction measures in anticipation of a further slowdown in 2023.

Infrastructure upgrades, including datacenters, are a priority, but these will not remain fully immune to the slowdown.

Datacom equipment makers collectively reported 13% year-over-year (y-o-y) sales growth in Q3, with IBM and Arista, posting 74% and 67% growth, respectively. Lenovo’s datacenter group was up 33%, Dell’s servers, networking and storage group was up 12% and Cisco’s infrastructure group increased 9% y-o-y. However, guidance for the current quarter was flat to negative.

Telecom network equipment makers, reporting sales growth in the double and triple digits, included Adtran (up 147% due inclusion of ADVA), Calix (up 37%) and Infinera (up 17%). However, Nokia was up only 2%, Ciena was down 7%, Huawei (Carrier and Enterprise) is estimated to be down 7% in Q3 2022. Ciena and Infinera guided for 13% and 9% growth in Q4 2022 sales y-o-y, respectively.

Suppliers of networking equipment and optical transceivers have huge backlogs of orders, accumulated because of the supply chain shortages. The backlog offers a buffer for early 2023 when the demand is expected to weaken.

Another side of re-balancing in the supply chain will be excess inventory and it may be significant. Shortages in the supply of ICs started in the end of 2019 and some of these parts will continue to be scarce into 2023. All customers must have accumulated reserve inventories of ICs and other parts, including the optics, just in case. Once the shortages are gone and demand weakens, everyone will have to take a closer look at their reserve inventories and adjust their purchases accordingly.

It remains to be seen how significant the inventory correction is going to be, but it is long overdue.

The semiconductor industry is notoriously cyclical. It is well into the transition from boom to bust in the memory segment, which is not covered by our research. Of the 12 semiconductor vendors tracked by LightCounting, nine reported double-digit y-o-y growth in Q3 2022. However, Intel’s Datacenter Group sales declined 27%, Nvidia is down by 17%, and Semtech is down by 9% in the last quarter. Almost all of the suppliers, including AMD, Broadcom, Qualcomm and Marvell, offered a negative outlook for Q4 2022.

The market correction has clearly started. Chip vendors are the first to see it, including laser chip suppliers, like Lumentum. Optical transceiver vendors are next in line and the equipment manufacturers will probably be hit in early 2023. The order backlogs may help to offset a temporary slowdown in demand, but it is not a cure for navigating a prolonged recession.

If your customers are reducing their costs, you should do so as well. No need to panic yet but having a plan for operating during a recession is a must.

LightCounting’s Quarterly Market Update (QMU) is a detailed analysis of the most recent quarter reported by companies in the optical communications industry. It consists of a PowerPoint slide deck and an Excel workbook with quarterly sales for many companies in the industry, including CSPs, ICPs, network equipment markers, and optical and semiconductor components vendors. The QMU also contains the latest results of LightCounting’s proprietary optical transceiver vendor shipment survey, with units, prices, and revenues of more than 150 transceiver product types.

The Quarterly Market Update is available to LightCounting clients at: www.lightcounting.com