Introduction: The data center market has been recovering since mid June, and the pace of market recovery for leading enterprises clearly has a first mover advantage. The rapid increase in market demand for high-speed 400G+has also led European and American companies to return to the manufacturing of optical modules.
Entering the "Golden Nine Silver Ten" era, the optical communication market is gradually recovering. The new demand in the optical communication market brought about by AI is gradually being realized. According to the third quarter reports recently released by various listed optical communication companies, the top optical communication companies have achieved rapid growth in performance.
Overall, the data center market has been recovering since mid June, and the pace of market recovery for leading enterprises clearly has a first mover advantage. Especially Coherent, Xuchuang Technology, and Tianfu Communications, which were the first to win orders from AI related data center businesses such as INVIDA, have shown outstanding performance.
AI demand realization and market share concentration towards the top
Coherent achieved sales of $1.0531 billion in the third quarter, slightly higher than the expected midpoint. Last quarter, it was $1.205 billion, compared to $1.345 billion a year ago. However, Coherent believes that starting from the second quarter of fiscal year 2024 (Q4 2023 for the natural year), based on order conditions, it is expected that the growth of the digital optical module business will return, driven by AI and inventory returning to normal. From the data of the third quarter, high-speed optical modules with a capacity of over 200G have accounted for over 70% of the total sales of digital optical modules in Gaoyi, with sales of 800G optical modules increasing by 200% month on month.
Figure 1: Coherent Quarterly Revenue Trend
***Remark:FY24 Q1 is natural annual 2023 Q3
The total operating revenue of Zhongji Xuchuang in Q3 2023 reached 3.026 billion yuan, a year-on-year increase of 14.9% and a month on month increase of 39.64%; In the third quarter, the profit attributable to shareholders of the listed company reached 682 million yuan, a year-on-year increase of 89.45%; A month on month increase of 88.15%.
Figure 2: Quarterly revenue changes of Zhongji Xuchuang
Tianfu Communication's quarterly revenue in Q3 2023 was 542 million yuan, reaching a historic high with a year-on-year increase of 73.62% and a month on month increase of 43.77%; The net profit attributable to shareholders of the listed company was 203 million yuan, a year-on-year increase of 94.95% and a month on month increase of 40.97%. Since the second quarter, Tianfu Communication has continuously achieved record high revenue, mainly benefiting from the growing demand for optical engines and high-speed components brought by AI.
Figure 3:Quarterly revenue changes of Tianfu Communication
In addition, influenced by the demand for high-speed optical modules, the demand for high-density and micro connection related products such as MT plugs, MPO/MTP connectors, MT-FA, MT-MT, MT Jumper, Mux/DeMux has also continued to reach new highs. Some leading enterprises have continued to expand production since June, with production capacity reaching new highs.
Mergers and acquisitions reshape the competitive landscape of the high-end market
However, the current optical communication market is undergoing structural adjustments due to various factors such as the new incremental market of AI big models, changes in traditional data centers and telecommunications metropolitan area network structures, and acceleration of new technologies. Among them, the most obvious feature is consumption upgrading, with a high rate of 400G+market demand rapidly increasing. Whether it is the trend of telecommunications metropolitan area networks towards 400G wavelength division or the trend of data communication markets towards 400G/800G interconnection, both have significant changes. Therefore, it has also attracted European and American companies to return to the manufacturing of optical modules.
On the morning of October 30, 2023, Intel announced the divestment of its silicon photonics based plug-in optical module manufacturing business, which will be taken over by Jabil. Intel still retains its ability to manufacture silicon optoelectronic chips. There are various opinions in the industry regarding this matter. C&C believes that Intel's initial choice of silicon optical module manufacturing route was also a validation of silicon optical technology, at least proving the maturity of silicon optical technology to commercialization. However, Intel's accumulated experience in process product lines due to mass production of silicon optical modules will become Intel's core asset. But does Jabil's takeover mean the addition of an independent optical module manufacturer? It is not yet known, as Jabil was positioned as a large contract manufacturing enterprise in the past, and Intel was the main driver of commercialization of silicon optical modules. Between 2018 and 2022, Intel's silicon optical modules accounted for 20% to 30% of the market share in the 100G CWDM4 market, breaking through multiple internet giants.
Another acquisition case has further boosted the industry's confidence in the high-speed optical module market. Lumentum acquired Cloud Light Technology for $750 million in cash. It should be noted that four years ago (March 2019), Lumentum sold its digital optical module business to Cambridge Technology, focusing on the more challenging DWDM coherent optical module and VCSEL/EML laser chip businesses. This large-scale acquisition of Yunhui Technology and its return to the digital optical module manufacturing market has filled the industry with imagination for the future competition in the optical module market. Yunhui Technology was spun off from TDK in 2018. Its headquarter is located in Hong Kong, China. It has R&D centers in Hong Kong, China and Taiwan, China, China. Dongguan is the production base, and has production and manufacturing layout in Southeast Asia. In the past, Yunhui Technology mainly benefited from breaking through Google and selling 100G/400G SR optical modules to it, starting from the 100G SR4 a few years ago to the 400G SR8 in the past two years. Lumentum's move, based on its chip manufacturing, increases Yunhui Technology's high-speed optical module manufacturing capabilities, and is expected to gain a competitive advantage in supplying 800G SR8 optical modules to NVIDIA, or break the pattern of only sharing NVIDIA high-speed optical module orders with Coherent and Xuchuang Technology in the past.
Perhaps, few industries have experienced rapid changes like the optical communication market in 2023. Firstly, the capital market is keen to quickly tap into the market demand brought by AI, allowing optical communication related stocks to continue to reach historic highs in the first half of 2023, and creating the first optical module stock to exceed 100 billion yuan in the market (Zhongji Xuchuang broke through the market value of 100 billion yuan on June 14, 2023). Secondly, the demand for AI in the optical communication industry truly emerged in June 2023, while the future increment is still constantly improving and gaining favor from more edge market enterprises.
On November 6, 2023, Haomei New Materials, a national key high-tech enterprise engaged in technological innovation and industrial application of lightweight materials for automobiles, as well as product integration of building door and window systems, plans to participate in the D round investment of Sols Optoelectronics with a total investment of 40 million US dollars (approximately RMB 290 million), accounting for approximately 5.79% of the diluted share capital of Sols Optoelectronics after equity incentive exercise. For this move, the company expressed great optimism about the sustainable development prospects of the optical module field. At the end of November, Beijing Wantong New Development Group Co., Ltd. announced that it was planning to purchase a controlling stake of no less than 51% in Source Photonics Holdings (Cayman) Limited. This demonstrates the confidence of the outside world in the prospects of the high-end optical communication market.
For the high-speed optical communication market, in the process of new demand transformation, new technologies are constantly emerging: silicon optical technology, thin film lithium niobate technology platform reserves; Breakthroughs in LPO/CPO technical capabilities; The integration of the supply chain and the timing of new solutions are full of challenges. As more European and American companies return to manufacturing optical modules, the competitive landscape in the high-end market seems to be being disrupted.
Tag: data center, optical module, optical communication, DWDM, MPO, 800G, CWDM