Wow, that was fast! It's time for another trip to Europe to visit OFC's typically smaller, European fraternal twin. Yes, we're off to ECOC, the Danny DeVito to the Arnold Schwarzenegger that is OFC.
It seems like just yesterday I was shaking off jet lag in Rome and wondering why it took four conference staff to set up a projector. This year, we head to Dublin, Ireland. For me, it's exciting as it's the first time I'm going representing market intelligence firm LightCounting instead of an investment bank... I've left the "dark side," as they say!
Let me first say how difficult it is to say something clever and original about this year's venue without parading some pretty tired tropes and stereotypes related to Irish culture -- Leprechauns, Lucky Charms, pots of gold, the "fighting" Irish -- I am going to show some literary restraint here and (mostly) spare you that. However, I'd like to home in on an expression that I think has particular relevance for the optical industry.
What I'm talking about is the "Irish Goodbye." Of course, this refers to the practice of leaving a party or gathering without announcing one's impending departure. The idea is to spare oneself of the inconvenience and awkwardness of being cajoled to stay. Some find it rude... some find it an indispensable social tool.
I submit to you that the optical industry is used to "Irish Goodbyes," particularly by its customers. Around the time of ECOC last year, we saw the first signs of a slowdown in spend by the hyperscale players, and that slowdown has spread and extended into 2019. Did the cloud companies give vendors lots of notice that this was coming? They sure didn't! They "pulled the chute" and left optical vendors standing alone and conversing awkwardly with investors, who understandably want to know when the ever-popular hyper-squad is coming back. Even worse, the hyperscale folks haven't been the only ones to leave the party early; Huawei is now absent from portions of the optical components market as well (Though, technically, it was the Trump administration that pushed Huawei out onto the cobblestone street.)
When is the next party for the industry? The industry's answer right now appears to be 2020 (always in the second half, right!) as demand for short reach 2 X 200GbE, 4 X 100GbE, 400GbE and 400G ZR/ZR+ ramp. Increasing momentum of 5G deployments and an eventual trade deal with China would also really help.
How's the industry doing now? The optical industry seems hardy, resilient. LightCounting estimates that the industry grew at 14% CAGR from 2003-2016 after the Great Fiber Famine of the early 2000's. While there were many fits and starts, that's a pretty respectable long-term growth rate. Also, despite the trade issues faced by Huawei and the ongoing cloud slow-down, Q2 earnings season wasn't so bad. Robust demand for ROADMs continues, and 3D sensing continues to show reasonably strong growth prospects. (As an aside, it's interesting to see that Robert Blum of Intel is giving a talk at ECOC about 3D sensing in consumer and automotive applications.)
Optical vendors have reason to be hopeful over the longer-term. Optical assets continue to prove scarce and valuable. (Just ask the management teams of Luxtera and Acacia.) These acquisitions have also reignited a debate about vertical and photonic integration. As a former financial analyst, it's also natural to wonder what companies might seek additional acquisitions in the optical space.
Arista CFO Ita Brennan made it very clear that they aren't really interested in going down the M&A road, stating at an investor conference on September 5 that the "team believes that if this is a long-term strategic effort where you're looking at kind of on-boarding of optics and silicon longer term, that's something we would look to the merchant chip industry to do, right?" On Arista's earnings call, Arista's co-founder and industry luminary Andy Bechtolsheim similarly stated, "I mean, we do understand that certain people are excited about co-packaging, but there's so many problems with co-packaged optics, I don't even know where to start. So, I'll leave it at that."
It seems likely we can cross Arista off that list of potential acquirers in optics. That said, there are plenty of other companies that have shown more willingness to vertically integrate in optical components, including Juniper and Ciena, and there is no guarantee that Cisco is done adding to its optical war chest. Of course, there's still room for component vendors such as Lumentum and II-VI to driver further consolidation, but it feels like that both are still pretty busy with integrating (Lumentum) or getting deal approval (II-VI).
Arista's comments also potentially suggest that it would support Broadcom or one of its other ASIC vendors to lead efforts in photonic integration. While Intel's past success in networking is arguably spotty, its recent acquisition of Barefoot could put even more pressure on Broadcom to do something here, potentially in the silicon photonics space. Of course, Broadcom still has a lot of optical capabilities in-house from its Avago heritage and CyOptics acquisition.
At any rate, while it's hard to anticipate when another acquisition might occur, one never knows -- perhaps some cash-flush company or fund will step up at ECOC to an optical vendor and say, "Kiss me, I'm Irish!" Or maybe they'll leave without saying goodbye.
- Avago Buying CyOptics for 40G/100G
- Cisco Looks to Acacia for Optics & Flexibility
- Roller Coaster Ride for Lumentum
- Intel Bolsters Data Center Portfolio With Barefoot Acquisition
— James Kisner, Consulting Analyst, LightCounting