In its latest State of the Optical Communications Industry report, market research firm LightCounting finds that in 2016 profitability for optical component and module suppliers rose substantially to 9%, compared with around 2% in 2015 and 0% in 2014, having previously dropped from 5% in 2010 to negative 2% in 2012, recovering to 2% in 2013.
LightCounting reports that the sales-weighted average profitability of publicly-traded optical component and module suppliers reached 9% in 2016, exceeding the average net profitability of communication service providers (CSPs) and suppliers of networking equipment, their main customers. Meanwhile, profit margins reported by Internet content providers (ICPs) and semiconductor IC vendors remained higher in 2016 at around 17% and 13% respectively.
The research firm notes that many ICPs have recently become customers of optical component and module vendors, which contributed to the financial improvement for the segment.
In monetary terms, aggregate net income for the publicly-traded optical component and module vendors tracked by LightCounting progressed from a $22 million loss in 2014 to a $72 million gain in 2015 and positive $422 million in 2016, driven by large increases at vendors Acacia, Finisar, Lumentum and Oclaro.
LightCounting states that of the ten companies that were operating independently in 2016, nine reported positive net income for the calendar year, while NeoPhotonics essentially achieved breakeven. In addition, Applied Optoelectronics and Innolight reported significant profits, with most of their business conducted with the cloud companies.
Meanwhile, profitability for the network equipment vendors declined by 26% in 2016 to around 9% from 12% in 2015, having risen steadily from 5% in 2012. Lower mobile network spending with the completion of major LTE deployments in China and North America in 2015 was the main factor affecting revenue growth.
More specifically, LightCounting reports that the largest changes in net income by vendor were reported by Nokia (with a $2.4 billion change) and Ericsson ($1.4 billion change), both of which are heavily dependent on mobile RAN equipment sales. Cisco and Brocade also reported significant declines in net profits of $500 million and $232 million, respectively, while Arista and Ciena bucked the trend and reported higher net income in 2016.
The research firm notes that demand for 100 Gigabit Ethernet optics exceeded supply in 2016, limiting price reductions and competition and helping optics suppliers to reach record profitability, with a number of vendors also reporting record revenue for multiple quarters in 2016.
However, LightCounting forecasts that weak demand for optics in China will lead to slower market growth in 2017, negatively affecting supplier’s profitability, although demand from cloud companies is expected to remain strong, helping to keep profits significantly above breakeven in 2017. It also expects profitability to improve further in 2018 with the return of demand in China.
