State of the Transceiver Industry Report

SUMMARY

"To date the optical transceiver industry has been largely unaffected by the disruption among carrier and system vendors because the carriers' network transformations - such as next-generation OSS, service delivery platforms and IP Multimedia Subsystems (IMS) - are taking place in the network layers above transport," noted Dr. Roy Rubenstein, research director, LightCounting. "Inevitably, such change must have an impact, and though years of downturn have left technology and industry resources spread thin, if anything, the importance of optical transceiver players as fundamental network enablers will only grow in coming years." says Rubenstein.

The profitability of the optical transceiver business remains questionable despite the steady growth in revenues. Very few vendors maintained a decent 30-40% growth margin and posted profits in 2007. Average gross margin of publicly traded transceiver vendors remains at 25%, while optical equipment manufacturers and service providers commonly maintain 40-60% margins. Fierce competition among numerous optical component and transceiver vendors, selling into a consolidated optical networking equipment market, will continue to limit profitability. Despite several mergers and acquisition made in 2006-2007, the optical transceiver industry needs further consolidation. Looming economic recession in the U.S. adds urgency to this process.

This report outlines the state of the transceiver industry and examines industry dynamics across several market segments including SONET/SDH, Ethernet, Fibre Channel, WDM, FTTx transceivers and optical interconnects. Confidential sales data reported to LightCounting by leading transceiver vendors was used to analyze industry consolidation. The report also discusses profitability and diversification of transceiver vendors, their key customers and suppliers. Different scenarios for imminent industry consolidation are presented in the report, offering guidance to vendors involved in this market.

TABLE OF CONTENTS

Chapters:

• Executive Summary
• Optical Transceiver Industry Dynamics
• Optical Transceiver Market Structure and Segmentation
  • State of the SONET/SDH Market Segment
  • State of the Ethernet Market Segment
  • State of the Fibre Channel Market Segment
  • State of the WDM Transceiver Market Segment
  • State of the FTTx Transceiver Market Segment
  • State of the Optical Interconnects Market Segment
  • State of the Contract Manufacturers
  • State of the Optical Component Suppliers
  • State of the Communication Semiconductor Vendors
• State of the Telecommunication Industry and its Likely Impact on Optical
• Appendix A. Net Income of Publicly Traded Transceiver Vendors
• Appendix B. Gross Margins of selected companies across the Optical Networking Supply Chain
• Appendix C. Summary of recent mergers and acquisitions (M&A) and IPOs
• Appendix D. LightCounting Optical Transceiver Vendor Database

Tables:

• Table 1. Market capitalizations of leading telecom providers
• Table 2. Market capitalization of leading optical networking equipment vendors
• Table 3. Market capitalizations on optical component and transceiver vendors
• Table 4. Diversification of top 10 transceiver vendors in 2007
• Table 5. Optical segment revenues of publicly reported transceiver vendors

Figures:

• Figure 1. Global sales of optical transceivers: historical and forecasted
• Figure 2. Average profitability of publicly traded transceiver and optical component vendors
• Figure 3. Average gross margins across the optical networking supply chain
• Figure 4. Fragmentation of global transceiver market between 2005 and 2007
• Figure 5. 2006-2008 Market shares of optical transceiver applications
• Figure 6. Optical transceiver industry structure
• Figure 7. Transceiver sales by market segment: historical and forecasted
• Figure 8. Fragmentation of SONET/SDH market between 2005 and 2007
• Figure 9. Fragmentation of Ethernet market between 2005 and 2007
• Figure 10. Fragmentation of the Fibre Channel market between 2005 and 2007
• Figure 11. Fragmentation of the WDM market between 2005 and 2007
• Figure 12. Fragmentation of the FTTx market between 2006 and 2007
• Figure 13. Wireline and Wireless broadband evolution

State of the Transceiver Industry Report Questions To Be Addressed:

• How profitable have transceiver vendors been and why? If ever?
• How do transceiver vendor's gross margins compare to the whole optical networking industry including communication IC vendors, system vendors, telecom carriers and content providers?
• What does the market capitalizations of telecom providers, networking equipment and transceiver vendors tell us?
• What are the survival tactics and activities at work, besides cost cutting?
• How did the wave of M&A activities in the last two years affect the transceiver market? Was it enough?
• Are partnerships and supply agreements new solutions?
• What could be the consequences of a recession in the U.S.?
• What is the structure of optical transceiver industry? Who and how many transceiver vendors are competing [with each other] for different applications?
• Who are the top vendors in the industry (i.e: OC mfg, Carriers, System Vendors, Contract Mfg, Semi/DC vendors, and such) and in each segment?
• How is the competition evolving for the top 3, 4-6, 7-10 and the rest of the vendors in each segment? Who lost market presence and who gained in 2007?
• How is the diversification of top 10 vendors structured? What are the pros/cons of diversification?
• What is the current state and what will drive the growth of each segment?
• What are the most recent trends in the contract manufacturers', optical component suppliers' and communication semiconductor vendors' arenas?
• How are the key trends - service convergence, carrier consolidation, Fixed Mobile Convergence (FMC), VoIP, IP multimedia subsystem (IMS) and service delivery- driving the telecommunications industry and what are the consequences on transceiver manufacturers?