Recently, LightCounting released the latest edition of its market report. With all companies reporting for the first quarter of 2022, the results show that the optical device industry continues to benefit from strong market demand, despite supply issues that have constrained sales for many companies. Several suppliers provided solid guidance for the quarter, indicating another record second quarter of 2022.
For Internet content providers (ICPs), they had a "poor" quarter, with revenues down sequentially but up 11 percent year-over-year. At the same time, ICP capital expenditures were down slightly from the fourth quarter, but still up 28% compared to the first quarter of 2021, and will likely continue to slow in the second quarter of 2022 and the second half of 2022.
In April, Amazon acknowledged that its big investments in warehouses and infrastructure have led to overcapacity as e-commerce growth begins to slow. The company expects revenue to fall 2 percent in the second quarter of 2022. Alibaba and Tencent announced layoffs, and Google and Meta suspended hiring.
Overall sales for optical device suppliers rose 10 percent year-over-year, but fell 7 percent sequentially. sales at II-VI, Optotron, Brocade, New EaseUS, Hisense Broadband, Huagong Zhengyuan, Xutron and New Fetion increased by double-digits year-over-year.
However, New EaseUS and Asahion Technology reported lower year-over-year sales in the first quarter of 2022, which must be related to lower-than-expected sales of 400G DR4 products to Amazon, which deployed more than 1 million 400G DR4 optical modules last year and plans to triple those deployments in 2022. It appears that these plans were revised in the fourth quarter of 2021, and Amazon's demand for 400G DR4 is now significantly lower than expected.
Is this an indication that Amazon is beginning to scale back its investment in infrastructure?
LightCounting notes that the 2008-2009 recession had a significant impact on sales of optical modules for cloud computing companies, as shown in the chart below. At the time, Google was the only cloud company deploying optical modules, a project that had just begun in late 2007 and was put on hold when signs of a recession began to appear. The peak reached in the first quarter of 2008 was only $15 million, so the impact on the overall market was negligible. By comparison, Google is spending nearly $1 billion on optics in 2021, and Amazon is spending more than that. If cloud computing companies were to suspend deployment of optical systems now, the $8 billion market for optical modules would collapse.
Will this time be different?LightCounting thinks so. Light connectivity is critical to the data centers that support the cloud computing company's massive business. AWS is by far the most profitable part of Amazon's business, and the development of new applications based on artificial intelligence is critical to future growth. These projects will be among the last to be shelved by Amazon, Google and Meta if a recession or fear of recession forces them to make significant cuts.
Demand for optics remains very strong at Google and Meta, and LightCounting expects Amazon to accelerate its deployment of optical connectivity in the second half of 2022. Several of the largest cloud companies expressed strong support on the call for continued investment in data centers and artificial intelligence.
Amazon said it expects overall sales to grow 3 percent to 7 percent in the second quarter of 2022 compared to the second quarter of 2021 due to "impressive net sales growth in the first half of Q2 2021" and the shift of Prime Day from the second quarter to the third quarter this year. But they also noted that AWS sales grew 37 percent year-over-year in the first quarter, with annualized sales of nearly $74 billion. "We also continue to build out our infrastructure to better serve AWS's millions of customers."
Meta said, "We expect total revenue to increase 1% year-over-year and 4% sequentially in the second quarter of 2022. capital expenditures in 2022 will be between $29 billion and $34 billion (up 64% compared to 2021). Expense growth in 2022 is expected to be driven primarily by the Applications segment, followed by Reality Labs."
Microsoft's sales guidance for Smart Cloud in the second quarter of 2022 is between $21.1 billion and $21.35 billion (up 22 percent year-over-year and 11 percent sequentially). "Revenue will continue to be driven by Azure, which is driven by strong growth in our consumer business."
Alphabet did not release revenue guidance, but said "Google Cloud's performance in the first quarter reflected growing transaction volumes across multiple industries and regions. Given the tremendous market opportunity we see, we will continue to invest aggressively in cloud computing."
The optical module market will not be immune to a prolonged economic downturn, but demand for optical devices from leading cloud companies should be stable.
Communications service provider (CSP) revenues in the first quarter of 2022 were essentially flat compared to the first quarter of 2021 and were lower than the fourth quarter due to seasonality, in line with expectations. capital expenditures for CSPs were also seasonally lower than the fourth quarter, but 6% higher than the previous year's quarterly total, which was an above-average growth rate.
Network equipment makers' sales were also down sequentially, but up 8 percent year-over-year overall. adtran, adva, ciena and beacon communications all reported double-digit year-over-year growth. ciena, infinera, juniper, nokia and ribbon all said sales would have been higher had they not been constrained by supply shortages.
Among datacom equipment vendors, overall sales saw a seasonal decline but an unusually high 11 percent year-over-year increase. arista, dell, new huasan, IBM and wave saw double-digit sales growth in the first quarter of 2022, with arista setting a new record of $725 million and sales up 8 percent over the fourth quarter of 2021.
Semiconductor manufacturers as a group achieved the best results among the six market segments tracked by LightCounting, setting another sales record with 31.6 percent year-over-year growth compared to $45.5 billion in the fourth quarter of 2021. Of the 13 companies in this group, all but MACOM and Intel set new sales records. Skeptics may argue that semiconductor manufacturers are taking advantage of the current market environment of imbalanced supply and demand to maintain or increase product prices.
