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Optical spending shrinks: is Europe catching a cold?

12 June 2012
The poor economic news coming out of Europe is casting a shadow over the optical networking industry.  Market research firms Infonetics Research and Ovum both reported that the optical network hardware market had a bad quarter in Q12012.
Infonetics reports that the first quarter of this year saw a drop in optical network systems revenues of 23% worldwide to $2.8 billion. The market shrinkage was particularly acute in Europe, which suffered its “worst optical communications capex quarter in five years”, the firm asserts.
Ovum analysts found that revenues declined 9% from the year-ago quarter, again with the worst fall in Europe where sales declined about 15% quarter over quarter. Due to differences in methodologies, the absolute numbers do not agree but the trends are quite clear.
Is the situation really as bad as it appears?  Infonetics points out that the overall picture looks worse than it might because of the market’s strength in the previous quarter (see Infonetics: Optical network equipment market up 8% in 4Q11)
One explanation Ovum is giving for the poor 1Q12 result is that the seasonal weakness expected in late 2011 was delayed and is happening now. “4Q/1Q market seasonality is becoming more pronounced as spending and spending growth shifts to Asia-Pacific and South and Central America, in which case sales should rebound more than is typical in 2Q12,” said Dana Cooperson, practice leader of Ovum’s network infrastructure practice.
Both Infonetics and Ovum expect the situation to improve.  Ovum is still forecasting modest 4% growth in the optical hardware market this year to reach $16.2 billion. Andrew Schmitt, principal analyst for optical at Infonetics, is cautiously optimistic about the market overall.
"Conversations with vendors and carriers lead us to believe that spending in North America will resume moderate growth and we are forecasting solid gains in optical spending in China this year in large part due to our recent visits with Chinese carriers,” he said. “But Europe is a tough call, with macroeconomic trends there not providing much hope."
Schmitt remains concerned about a continuing slow down in Europe. "The most alarming development is that year-over-year in EMEA – particularly Europe –spending on WDM optical equipment decreased faster than spending on legacy SDH equipment," he noted. "This is not the behavior of a region experiencing only a minor quarterly pullback. By contrast, the trend in North America was the opposite, with carriers cutting spending year-over-year but allocating towards forward-looking technology investments like WDM equipment and ROADMs."
As is always the case, some companies performed better than others during the quarter. For example, Fujitsu and Ciena outperformed competitors in North America, while NEC and Fujitsu increased their market share in Asia. Other vendors that outperformed the market were smaller companies such as Infinera, ADVA, and Transmode, according to Infonetics.
By Pauline Rigby