Paul Silverstein - Cowen and Company - Analyst
Let's move beyond China. You've noted that your view of Verizon was that it would be a second-half event, and here we are speaking in June, the second-half is not far off. In curtain form, it's not just Verizon who certainly gets the most attention in terms of coming 100 gig metro build-outs, but there's AT&T and there's quite a number of others. Can you share some incremental insight of what you expect for the second half of this year outside of China and into 2017? What would be the key drivers there? I assume it's going to be principally 100 gig Metro along with DCI before we start talking about specific products?
Greg Dougherty - Oclaro, Inc. - CEO
I think the DCI and Metro will be huge growth opportunities for us as we go out the end of this year and into next year. And as I mentioned, what's nice is that the majority of that is the 200 and 250 gigabits, not just 100 gigabits, which the higher the speed, the more it plays into our sweet spot. So the more differentiated we are as it moves up in speed and that's in Metro. That's in the long-haul, and that's inside the data center, which would be the second driver for us.
So the client-side optics, the QSFP28 market, has been stronger than we anticipated. We are actually -- probably my fault we didn't put enough capacity in fast enough, and so we are scrambling now to catch up. We are finding great opportunities for both the 10 kilometer distance called LR4, and then also the 2 kilometer distance, which is the CWDM. So we feel we are well positioned there. All coming back to the fact that we make our own laser chips and the fact that not many companies actually can make chips that work at 100 gigabit applications.
Remember that Bookham was a UK company that was merged into Oclaro.
Oclaro has both R&D and a fab in the UK so a 10% devaluation in the UK Pound versus the US dollar will decrease costs 10%.
This cost decrease goes directly to the bottom line as profit.
Cloud services and internet-related companies such as Alibaba, Alphabet (Google), Amazon, Apple, Baidu, Facebook, Microsoft, Twitter, and Yahoo spent 54% more on property, plant, and equipment in the first quarter of 2016 than they did in the year-ago quarter, reports LightCounting in its new "Quarterly Market Update Report." Optical technology, particularly 100-Gbps ports, benefited significantly from this largesse.
The market research firm says the companies listed above, along with the rest of the 16 web companies the firm also tracks, spent a total of $14.5 billion on infrastructure during the quarter. Apple, Facebook, and Tencent more than doubled their outlays year-on-year. Microsoft spent a record $2.3 billion. Amazon, eBay, LinkedIn, and Microsoft all increased spending by double digits, LightCounting says.
LightCounting previously had reported record sales of 100G DWDM optics during the quarter (see "Telecom 100-Gbps optical component sales strong to start in 2016: LightCounting"). Among the webscale companies, sales of 10-km 100GBASE-LR4 ports led the way, followed by sales of 100-m, 0.5-km, and 2-km 100 Gigabit Ethernet (100GbE) optics
LightCounting predicted in its March 2016 "Mega Datacenter Optics" report that sales of 100GbE optics to cloud companies will reach $300 million in 2016. The market research firm says recent interviews suggest continued strong sales in the second half of the year, which the firm says bodes well for its year-long sales prediction.
Please see the Barrons article above for an answer to the question about the Infinera weakness.
Basically Infinera has a product transition issue from Gen 3 to Gen 4, so this is not a general issue of weakness in optical.
By the way I see the greeting in your message above. Where are you located?
Do you realize that qray1808 sound like gray1808?
"Shares of fiber-optic networking equipment firm Infinera (INFN) are down 17 cents, or 1.4%, at $11.98, after MKM Partners’s Michael Genovese reiterated a Neutral rating and cut his price target to $13 from $15, after cutting estimates for this year and next, with increased competition in the “metro” market for gear, and low visibility.
Genovese has been making some “checks” of the market and thinks visibility for the September-ending Q3 is low:
Orders are solid but visibility is not high since the company’s average lead times are under four weeks. Infinera has built up some inventory of product with Gen 3 PICs in front of the transition to the Gen 4 technology platform. In addition, the company will likely begin to exhibit more traditional industry seasonality of up only slightly sequentially in 3Q16 given its larger size and higher European exposure post the Transmode acquisition.
He thinks revenue estimates on the Street for Q3 for $274 million may be too high, as he cuts his own estimate to $263.8 million from $271 million.
Genovese digs deeper into the sources of uncertainty across the portfolio:
We believe long haul continues to be solid for Infinera, although the company pulled some demand forward into 1Q16 and out of 2Q16 to make up for the Transmode shortfall. Longhaul should be okay in 3Q16, but the major Web 2.0s know the company has Gen 3 inventory available and are generally not providing much forecasting visibility."
I just read the FNSR earnings call transcript.
FNSR confirms the strong customer demand for 100G products.
The FNSR forecast for the remainder of 2016 is for increased sales and margins.
The optical components industry is in a strong up cycle now.
Broadband China—National Strategy
Targets for 2015 and 2020
End of 2015
Fixed BB bandwidth:
4Mbps in rural area;
20Mbp in urban area; 100Mbps in large cities
Mobile BB (3G/LTE)
BB(Fixed or Mobile) coverage: 95%
End of 2020
Fixed BB bandwidth:
12Mbps in rural area;
50Mbps in urban area;
1Gbps in large cities
Mobile BB (3G/LTE)
BB(Fixed or Mobile) coverage: 98%
Another question at the Stifel Conference was about the Metro rollout.
OCLR replied that the 100/200G CFP2ACO sales in 2016 will mainly be for the US and European carriers and the metro rollout which will continue into 2017.
The China CFP2 ACO sales are expected to begin in mid-2017 with similar metro applications.
While Soros can be bearish on China, what does this mean for OCLR?
China is making an economic transition from heavy industry, export manufacturing, and massive building to services and technology.
Many other Asian countries have made this transition with Korea (South) being an example.
A basic infrastructure requirement for this economic transition is telecom with fast internet available to the entire population. China has a 5 year program 2016 - 2020 to build out a world class telecom infrastructure equivalent to Korea.
The China government has committed to a massive investment in the optical backbone and 2016 is only Year 1 of this 5 year program.
I cannot see the Chinese government cancelling this program since it is basic infrastructure for the new economy.
The Stifel Conference webcast is on the OCLR Investor Website.
Q & A discussion
1. Strength and length of the optical cycle? - Stronger than 2000 cycle with current cycle having better economics for the datacenter operators and carriers.
2. OCLR differentiation for 100G QSFP28 module? - OCLR focused on longer distance QSFP28 where OCLR can differentiate based on laser technology and performance leaving the short distance market to the commodity vendors.
3. OCLR differentiation for 100/200G CFP2ACO modules? - OCLR is first to market, only vendor in production now, and have software integration done for all 7 DSP's. OCLR is now Number 1 CFP2ACO vendor.
4. OCLR forecast for CFP2ACO modules? - OCLR forecast shipments of $20 million in December 2016 quarter. In 2017 calendar year the CFP2ACO market is forecast at $200 - $400 million and OCLR expects to be the number 1 vendor.
5. Will the China demand continue? - OCLR explained that there is a large backlog with fixed orders and prices for the next several quarters. There is a China government plan 2016 - 2020 to build out the China optical network so we are only in Year 1 of this program. OCLR does not think that US government export restrictions will affect the ZTE or Huawei business.
6. Can OCLR increase production to meet demand? - OCLR is building out substantial capacity now mainly for test and measurement. The OCLR fabs can meet any potential demand so the fabs are not a constraint. The new revenue from this production build out will become evident later in 2016 and in 2017.
7. Can OCLR increase margins from 27% to 35%? - OCLR has a goal to increase margins to 35% in 2017 as the production volumes increase. A major factor in the better margins will be better utilization of the OCLR fabs.
Cisco has released the latest version of its Visual Networking Index (VNI). And it should come as no surprise that the "Cisco Visual Networking Index (VNI) Complete Forecast for 2015 to 2020" predicts that global IP traffic will nearly triple, with a compound annual growth rate (CAGR) of 22%, over the next five years. Global broadband speeds will nearly double, from 24.7 Mbps in 2015 to 47.7 Mbps by 2020.
The traffic growth will derive from a combination of the addition of 1 billion new internet users, as many as 10 billion new devices and connections (much of these machine-to-machine), and increasing consumption of video. In fact, internet video will account for 79% of global internet traffic by 2020, according to the new Cisco VNI, up from 63% in 2015.
Overall, global IP traffic will hit 194.4 exabytes per month by 2020, according to the VNI, up from 72.5 exabytes per month in 2015. That will make the global annual run rate 2.3 zettabytes by 2020, up from 870 exabytes in 2015.
Much of this traffic will come from Asia Pacific. That region will drive 67.8 exabytes/month by 2020 (a 22% CAGR) and will see three-fold growth. Other regional predictions include:
•North America: 59.1 exabytes/month by 2020, 19% CAGR, two-fold growth
•Western Europe: 28.0 exabytes/month 2020, 20% CAGR, two-fold growth
•Central Europe: 17.0 exabytes/month by 2020, 27% CAGR, three-fold growth
•Latin America: 11.6 exabytes/month by 2020, 21% CAGR, two-fold growth
•Middle East and Africa: 10.9 exabytes/month by 2020, 41% CAGR, six-fold growth
Concerning OCLR, the entire Chinese optical network needs upgrading and this is a long term project.
The Chinese government is making a major investment in the optical network and internet in a multi-year program
When you hear the recent comments from OCLR management that demand in China is strong for at least the next 12 months, keep in mind this NY Times article.
NY Times -June 3, 2016
This week, an online report published in China Daily, a state-run, English-language newspaper, said that China, the world’s second-largest economy, ranked an abysmal 91st in the world in internet speed, with the average broadband connection scored at a mere 9.46 megabits per second, or Mbps. There are nearly 200 countries in the world.
The report ranked the top five countries in internet speed as South Korea, Sweden, Norway, Japan and the Netherlands. The average broadband speed in South Korea was reported as 26.7 Mbps. In Sweden, it was 19.1 Mbps.
The data was part of a broader report that was aimed at boasting of China’s internet connectivity, under the title “Evolution of the Internet in China.” The report listed as its sources the China Internet Network Information Center, an agency under the Ministry of Industry and Information Technology; the website of People’s Daily, the Communist Party newspaper; the Broadband Development Alliance, a research group; and Akamai Technologies, a content delivery network and cloud services provider based in Cambridge, Mass.
The report promoted the fact that China now has 688 million people online, about half the population; that it added 40 million new internet users in 2015; and that 90 percent of users can get online via their mobile phones.
Yesterday at the Cowen Conference, the OCLR CEO spent considerable time answering questions about China and the US export policies.
He said that the ZTE export ban received considerable media attention but had not adversely affected the OCLR business.
Currently, OCLR has the 100G products on allocation so any short term interruptions caused by the Commerce Department results in OCLR shifting the shipments to other customers.
This news about Huawei and ZTE makes headlines but has little impact on the OCLR sales.
I would not expect the US Commerce Department to follow the ZTE playbook since the export ban had to be reversed in 3 weeks after political pressure.
HONG KONG — Huawei Technologies has become China’s most successful international technology company, in part by tapping markets as varied as Britain, India and Kenya.
But it also moved into markets like Syria, where American officials have imposed limits on sales of technology that could be used to commit human rights abuses, and into Iran, where sanctions have only recently been eased. And its presence in such countries is now coming under greater scrutiny.
The United States Commerce Department is demanding that the company, based in the south China city of Shenzhen, turn over all information regarding the export or re-export of American technology to Cuba, Iran, North Korea, Sudan and Syria, according to a subpoena sent to Huawei and viewed by The New York Times. The subpoena is part of an investigation into whether Huawei broke United States export controls.
Sent to Huawei’s American headquarters in the Dallas suburb of Plano, the subpoena called for Huawei to turn over information related to shipments to those countries over the past five years. It also sought evidence of shipments to the countries indirectly through front or shell companies. The subpoena directed company officials to testify last month in Irving, Tex., or to provide information before then; it was not clear whether the meeting took place.
Huawei has not been accused of wrongdoing. In a statement, the company said it was committed to complying with laws and regulations where it operated. The document, which was issued by the Commerce Department office that investigates export violations, is an administrative subpoena, meaning it does not indicate a criminal investigation.
Still, the scrutiny over Huawei’s dealings with those countries is emblematic of growing discord between the United States and China over control of global communications technology. It also illustrates how technology companies from both countries have been pulled into the high-stakes geopolitical contest over cybersecurit
I just listened to the Cowen and Company Oclaro Q&A at the Oclaro Investor Relations website.
45 minutes of solid information on customer demand and competitive issues.
Bottom line is that Oclaro is a market leader with a solid backlog and tremendous growth projected.
I just listened to the B Riley conference webcast at the Oclaro Investor Relations site.
Dr. Adam Carter (OCLR Chief Commercial Officer and ex-Cisco GM of the Optical Component Group) gave an update on the prospects for the next fiscal year starting in July 2016.
He said that OCLR is well positioned as a leader in a hot market of 100G/200G with several new products just starting to entering mass production. There is such a strong demand that the customers are willing to sign long term contracts with fixed pricing.
Concerning China, Dr. Carter just returned from a China trip and he sees no issues with continued growth and strong demand including ZTE.
Perhaps the most interesting comment from Dr. Carter was that he has been in this business a long time and this is the first time that the strong demand has put Oclaro in such a good position as the vendor with the right products at the right time with fab and manufacturing capacity.
Fibe Reality Blog
Concerning the need for more of a sexy, potentially high-growth story for the Street, Acacia’s “Silicon Photonics” (“SPs”) transceivers will undoubtedly be heavily promoted. While they are evidently designed quite well, (and as Intel is still striving to save face by extensively promoting the viability of its own “SPs”), the optics on Acacia’s devices apparently do not set them apart from other componentry in the business, other than to be additional window dressing for the DSPs. (At least in the past, Acacia implied that one would see integrated photonics at 400G instead of 100G – now it is not really making much of a distinction between integration and “SPs.”
At the end of the day, it still comes down to Acacia’s request for additional capital based on the vague requirements in its S1. In lacking a CFP-ACO, the company has begun selling its DSPs externally, not only weakening its revenue model, but leading to concerns about the actual potential of that business for processors. So, something like spinning a new 16nm chip would probably not lead to a tremendous amount of excitement with public investors. (There is also the constant challenge, especially with a smaller firm, regarding the ability to deliver a sufficient number of modules to its customers.)
[written by Mark Lutkowitz]