The average net margin of publicly-traded optical component and module suppliers moved into positive territory in only three out of the last seven years, as illustrated in the chart below. In contrast, the market growth rate remained positive for six out of the last seven years. Can these vendors maintain profitability in 2014-2015 if the market’s growth remains steady?

If that answer is yes, as suggested in the shaded area of the chart, this will be the first time that average net margin remained positive for two consecutive years. After reaching into positive territory in 2008 and 2010, the profitability of suppliers declined sharply in 2009 and 2011 due to the economic crisis and a slower than expected recovery, respectively.

The macroeconomic environment will continue to impact the business of optical component and module suppliers, but these companies are much stronger now, compared to even two-to-three years ago. Consolidation of Opnext into Oclaro and subsequent restructuring of the combined entity was one of the main factors in improving average profitability. The merger of Accelink and WTD, as well as, Emcore’s divesture of its VCSEL business has also strengthened the industry.

The solid performance of Finisar and JDS Uniphase in 2013 helped to off-set losses reported by several smaller vendors. Guidance from these vendors for 2014 supports our expectations for continued market growth and sustainable profitability.

However, the optical components and module vendors remain a very small part of the global optical communications industry supply chain and their business is likely to remain volatile. Our latest state of the industry report analyzes changes in the supply chain and their impact on the component suppliers in more detail.

This report also offers an in-depth look at the structure of the optical component and module industry across several market segments, including SONET/SDH, Ethernet, Fibre Channel, WDM, FTTx, Optical Interconnects and Wireless transceivers. This analysis includes data on market shares of leading vendors sorted into the several categories (top three, top four-to-six, top seven-to-ten, and other vendors), illustrating the fragmentation of these market segments. Data on diversification within the top ten leading suppliers of optical transceivers presented in the report suggest that most component suppliers have remained highly specialized. Leading module vendors shared confidential sales data with LightCounting to support this study.

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