The emerging demands in the optical communication market, driven by AI, are gradually materializing. Based on the recent third-quarter reports of various publicly listed optical communication companies, top-performing enterprises have experienced rapid growth.
Overall, the data center market has been on the rebound since mid-June, with leading companies enjoying a clear advantage in market recovery. Particularly noteworthy is the outstanding performance of Coherent, InnoLight, and TFC, which secured orders, including those from AI-related data center businesses such as INVIDA.
Realization of AI Demands and Concentration of Market Share
Coherent achieved sales of USD 10.531 billion in the third quarter, slightly surpassing the midpoint of expectations. In the previous quarter, sales were USD 12.05 billion, and a year ago, they were USD 13.45 billion. Coherent anticipates a return to growth in its optical module business from the second quarter of the 2024 fiscal year (Q4 2023 in the natural calendar year), attributing it to AI-driven demand and normalized inventory levels. Notably, high-speed optical modules of 200G and above accounted for over 70% of Coherent's total optical module sales in the third quarter, with 800G optical module sales experiencing a 200% sequential increase.
Additionally, the demand for related high-density connection and micro-connection products, such as MT cores, MPO/MTP connectors, MT-FA, MT-MT, MT-Jumper, and Mux/DeMux, has remained consistently high due to the influence of high-speed optical modules. Several leading companies have expanded production since June, achieving record-high production capacity.
Mergers and Acquisitions Reshaping the High-End Market Competition
However, the current optical communication applications market is undergoing structural adjustments influenced by factors such as the new incremental market from AI's large models, changes in traditional data center and telecom metropolitan network structures, and the acceleration of new technologies. Consumer upgrades and the rapid increase in demand for the 400G+ high-speed market are especially prominent. This shift is observed in both telecom metropolitan networks transitioning to 400G wavelength division multiplexing (WDM) and the data communication market moving towards 400G/800G interconnections. This has prompted European and American companies to re-enter the optical module manufacturing sector.
On the morning of October 30, 2023, Intel announced the divestiture of its silicon photonics-based pluggable optical module manufacturing business, which will be taken over by Jabil. Intel retains its capabilities in silicon photonics chip manufacturing. Industry opinions vary regarding this move. Some view Intel's initial choice of silicon photonics module manufacturing as a validation of silicon photonics technology's maturity, while others see Intel's accumulated experience in mass-producing silicon photonics modules as a core asset. The acquisition by Jabil raises questions about the emergence of an additional independent optical module manufacturer. Historically positioned as a large contract manufacturer, Jabil's acceptance of this role contrasts with Intel's role as a major driver of silicon photonics commercialization. In the 2018-2022 100G CWDM4 market, Intel's silicon photonics modules held a market share of 20-30%, breaking through several internet giants.
Another acquisition has ignited confidence in the high-speed optical module market. Lumentum acquired Cloud Light for USD 750 million in cash. Notably, four years ago (March 2019), Lumentum sold its data communication optical module business to Cambridge Industries (CIG), focusing on the more challenging dense wavelength division multiplexing (DWDM module) coherent optical module and VCSEL/EML laser chip businesses. This significant acquisition marks Lumentum's re-entry into the data communication optical module manufacturing market. Cloud Light, spun off from TDK in 2018, is headquartered in Hong Kong, with research and development centers in Hong Kong and Taiwan, a production base in Dongguan, and manufacturing facilities in Southeast Asia. Cloud Light has primarily benefited from breakthroughs with Google, selling 100G/400G SR optical modules. Lumentum's move, leveraging its chip manufacturing capabilities, enhances Cloud Light's high-speed optical module manufacturing capacity, potentially gaining a competitive advantage in supplying 800G SR8 optical modules to NVIDIA. This may disrupt the past pattern where only Coherent and InnoLight shared orders for high-speed optical modules from NVIDIA.
In the rapidly changing optical communication market of 2023, few industries have witnessed such swift transformations. Capital markets, being astute, swiftly recognized the market demands arising from AI, resulting in optical communication-related stocks reaching historic highs in the first half of 2023. Notably, the first optical module stock with a market value exceeding USD 100 billion, Zhongji InnoLight, achieved this milestone on June 14, 2023. Furthermore, AI's actual demand for the optical communication industry emerged in June 2023, with continuous upward revisions in future increments, garnering increased attention from more edge-market enterprises.
On November 6, 2023, Haomei New Materials, a national key high-tech enterprise specializing in automotive lightweight materials technology innovation, industrial application, and integrated building door and window systems, plans to invest $40 million (approximately CNY 290 million) in Source Photonics' Series D funding round, representing approximately 5.79% of Source Photonics' equity after the dilution from stock incentive exercises. The company expresses great optimism about the sustained development prospects in the optical module sector. At the end of November, Beijing Wantong New Development Group Co., Ltd. announced plans to acquire no less than 51% of the controlling stake in Source Photonics Holdings (Cayman) Limited. This illustrates the industry's confidence in the outlook for the high-end optical communication market.
For the high-speed optical communication market, amidst the ongoing transformation of demand, numerous new technologies are emerging. These include the reserve of silicon photonics technology, thin-film lithium niobate technology platforms, breakthroughs in LPO/CPO technology capabilities, and the challenges of supply chain integration and the strategic timing for new solutions. With more European and American enterprises re-entering the optical module manufacturing sector, the competitive landscape in the high-end market appears to be undergoing a significant shift.