LightCounting: Little profit in 40-Gbps-modules

Monday, 02 August 2010 14:55

In a note issued late last week, Vladimir Kozlov, founder and CEO of market research  firm, LightCounting, LLC wrote that “it’s not surprising the excitement is wearing off” of the 40-Gbps module market. This lack of buzz comes against a backdrop of continued positive forecasts for 40-Gbps module demand, Kozlov noted. As evidence of the niche’s less than glamorous image, Kozlov noted that valuations of 40-Gbps module vendors are decreasing. He noted that recent 40-Gbps company acquisitions averaged only 2X sales and near or below VC-invested capital. These included: * Stratalight was acquired by Opnext in January 2009 for $170 million, on annual sales estimated at under $80 million. * Cisco acquired CoreOptics in May 2010 for $99 million, on estimated annual sales of $50 million. * Oclaro acquired Mintera in July 2010 for $12 million plus an additional amount based on Mintera’s revenue over the next 18 months. If Mintera generates $70 million in revenue over the next 18 months, the maximum additional payment would be $20 million. * Even in the best-case scenario, with Mintera generating $70 million in sales over the next 18 months, the acquisition valuation of Mintera is well below annual revenues, Kozlov asserted. Meanwhile, forecasts for 40-Gbps deployments -- including LightCounting’s -- remain upbeat. So why are 40-Gbps module vendors struggling? Kozlov pointed to several factors. First is the well known alphabet soup of modulation formats offered to the market -- an expensive game of technological leap-frog among companies such as Mintera, CoreOptics, and StrataLight that failed to generate profits. For example, market data collected by LightCounting shows that sales of 40-Gbps DWDM transponders reached only $54 million in 2009. While the economic downturn was a temporary factor limiting shipments of 40-Gbps modules, the main problem is that leading system vendors, including Alcatel-Lucent, Ciena, and Huawei, design and manufacture 40-Gbps DWDM interfaces internally instead of relying on transponder vendors. LightCounting estimates that more than 60% of 40G DWDM ports shipped in 2009 were based on interfaces manufactured internally by system vendors. While transponder sales are likely to increase in 2010, Kozlov predicted, they will probably account for only 30% of the total 40G DWDM ports, marginalizing the market opportunity for transponder vendors. Transition to 100 Gbps products is unlikely to improve this situation, Kozlov noted, as even higher percentages of 100-Gbps ports will be made internally. In these circumstances, it would make more sense for companies such as Mintera to find a buyer among other system houses -- similar to the Cisco/CoreOptics matchup -- focused on high-data-rate transport, such as Fujitsu Networks or Nokia Siemens. Visit LightCounting