Optical market looks to build on 2007 momentum

0801lwe Hardy

Market researchers suggest that when the final numbers are counted, 2007 will have been the best year for optical communications hardware since 2001. Most of these analysts limit the hardware market to SONET/SDH, WDM in all its forms, switches, and the nascent packet optical network platform. However, the same good news has come from those measuring the optical access space.

Such prosperity has taken its time in reaching the component/subsystem market. Fortunately, new research suggests that life may finally become more pleasant—and profitable—for companies in this niche as well.

The systems market came out of the gates strongly last year. Infonetics (www.infonetics.com) estimated first quarter sales at $3 billion, a 24% increase over the same quarter in 2006. Ovum RHK (www.ovum.com) put the increase at 22%, led by Ethernet and 10 Gbit/s transmission, as well as metro and multireach WDM.

“As predicted, the pause in spending in North America in the second half of 2006 ended in 1Q07, with strong spending gains in all product segments except legacy long-haul DWDM,” Dana Cooperson, vice president and practice leader of network infrastructure at Ovum RHK, said at the time she released her 1Q07 numbers.

The market gained further momentum in the second quarter, which is when the analytical community began to predict big things for 2007 overall. Infonetics put quarterly revenues at $3.5 billion, touting the figure as the highest quarterly benchmark since the fourth quarter of 2001. Metro optical equipment revenue posted a 14% quarterly gain to lead the way.

“Most manufacturers in the optical network hardware market posted gains in the second quarter,” said Michael Howard, principal analyst at Infonetics. “Because of the strong trends we’re seeing with growing broadband, corporate, mobile telephony, and mobile data traffic, we’ve upgraded our forecast for 2007 and long term by about $1 billion per year.”

Ovum RHK also estimated quarterly sales at $3.5 billion, which the company said represented a quarterly spike of 14% and a year-on-year increase of 20%. Ovum RHK added that metro WDM and backbone DWDM spending set quarterly records.

Dell’Oro Group (www.delloro.com) also took note of the second quarter’s success. The market research firm estimated that optical equipment sales rose 8% versus the first quarter to reach the highest quarterly total in five years. Dell’Oro also credited metro WDM sales as the biggest mover.

While only Infonetics had released third-quarter estimations at the time this issue went to press, market growth appears to have continued. The quarter saw a 3% rise in revenues to $3.6 billion, the market research says, putting the space on track for its biggest year since 2001. “Despite quarterly fluctuations, the optical network hardware market is based on strong underlying trends, namely the rapid increases in all kinds of voice, video, and data traffic,” according to Howard.

Those trends also have benefited the optical access space. After finishing 2006 at a level Infonetics put at $965 million (a 71% increase over 2005), PON sales continued to grow last year. First-quarter numbers increased 9% to reach $336 million, and an additional 3% in the second quarter, when companies in the niche earned $396 million.

Ethernet point-to-point FTTH equipment sales also enjoyed a good year, according to Infonetics. First-quarter numbers grew 10% sequentially, to $81 million, and the next quarter saw a 9% bump on $88 million in sales.

But if 2007 turns out to have been a boom year for the optical transport space, the companies involved decided not to share the wealth with their suppliers immediately. Thanks to the advent of lean inventory procedures, the rising tide that floated all system boats threatened to swamp the component/subsystem companies.

But even a difficult year had its bright points. For example, Ovum RHK noted that first-quarter revenues of $980 million, while down 4% from the last quarter of 2006, still represented an 8% increase from the same quarter the year previous. Daryl Inniss, vice president and practice leader for communication components at the research and analysis firm, cited support for “customer-driven initiatives” for the revenue decline and predicted market expansion through the rest of the year.

That expansion hadn’t kicked in by the second quarter. In fact, revenue declined to $930 million, thanks once again to “customer-based inventory and manufacturing initiatives,” in the words of an Ovum RHK press release. Inniss again forecasted better times ahead, noting the increasing health of the optical transport market.

While Ovum RHK hadn’t released its third-quarter numbers by press time, others indicate that such optimism may finally be warranted. LightCounting (www.lightcounting.com) said in December that sales of optical transceivers reached a record $526 million in the third quarter of 2007; the company also predicted that the market will likely exceed $560 million in the fourth quarter. DWDM modules and SONET/SDH transceivers accounted for most of the growth; both enjoyed a 24% increase. The SONET/SDH space enjoyed its best quarter since 1Q04, according to Vladimir Kozlov, PhD, LightCounting’s founder.

Despite the welcomed news, LightCounting suggests that profitability will remain an elusive goal for many transceiver suppliers. The company cites consolidation among the systems houses as a primary hurdle.

Those equipment suppliers that remain on their feet through 2008 should continue to operate in a growing market, at least over the next 12 months. Dell’Oro has predicted that 2008 will represent a near-term peak, with revenues around $10 billion before the optical transport market flattens.

However, others express more optimism. IDC (www.idc.com) has predicted the optical networking market will reach $13.7 billion by 2011. Infonetics suggests this market will cross the $13 billion threshold in 2010. The increase in demand for high-speed Ethernet pipes will offer one driver for such growth, says Infonetics. The company suggests that port counts will jump from 300,000 in 2006 to more than 3 million in 2010.

Now if system companies would just let some of that revenue trickle down to their component/subsystem brethren, the overall optical communications market would be a healthy place indeed.0801lwe Hardy

Stephen Hardy is the editorial director and associate publisher of Lightwave.

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