Looking beyond ZTE to Bring 2018 Optical Networking into Focus
The US government embargo of optical components for ZTE during Q2-2018 resulted in reduced revenue for component suppliers like Acacia as well as ZTE shipments to service provider and enterprise customers in the quarter. As the historical #2 global supplier of optical networking equipment, the halting of ZTE shipments in the quarter resulted in a 4.7% Y-Y decline in total optical networking revenue. As the clear majority of ZTE’s revenue is in the APAC region (predominately China), the largest regional impact is in APAC (followed by EMEA and LATAM) with a 13.6% Y-Y decline in quarterly revenue.
With an artificially constrained ZTE in Q2-2018 and the issue that previously halted ZTE’s shipments now resolved, what is the “real” state of the optical networking industry and how should one interpret the results from Q2-2018?
It’s meaningful to consider APAC’s performance outside of ZTE. When we do this, we see that the APAC market grew 10.3% Y-Y in Q2-2018. If we consider the first 6 months of 2018, APAC outside of ZTE increased 11.3% Y-Y. We do not see evidence that competitive vendors picked up ZTE’s business in Q2 in its home market of China. To put this in context, the average APAC growth rate for the past 4 years is 9.5% with 2017 and 2016 producing 19.8% and 10.0% Y-Y growth, respectively. The point here is that 10−11% growth for non ZTE suppliers in APAC/China in the first half of 2018 does not appear unusual. We thus expect ZTE’s APAC/China backlog to ship in 2H-2018.
We should also look at optical networking performance outside of the APAC region. After many years of revenue of flat or declining in EMEA, optical networking grew 8.1% Y-Y in Q2-2018 and +5.8% Y-Y for the first 6 months of 2018. In addition, although the Americas declined 2.9% Y-Y in the first half of 2018, both NAM and LAM exhibited Q-Q revenue growth (as is seasonally expected) with the combined America’s market up 1.8% Y-Y in Q2-2018.
So where does that leave the optical networking forecast for 2018? We remain optimistic about achieving mid-single-digit Y-Y optical networking growth in 2018 as the ZTE issue is resolved, 1H-2018 APAC/China demand appears in alignment with historical levels (outside of ZTE) and the EMEA market is showing growth. NAM and LATAM may prove to be the wildcards in our analysis, but the modest Q2 Y-Y growth in the Americas provides some encouragement for 2H-2018.
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