Knock on wood (if you are superstitious), but it seems like the worst is over for the Optical Transport market as we enter 2023. To recap…. in 2022, there was a pandemic with city-wide COVID lockdowns in China, war in Ukraine with economic sanctions placed on Russia, rampant inflation with spiking fuel prices, global economic slowdown, and component shortages. It was, in short, a tumultuous year.
While in most years the occurrence of one or two of these events would cause a sharp decline in the optical market, no such incident occurred this time. Through it all, the Optical Transport market at the global level held strong, and we are predicting it will decline at most by 1% in 2022. Things are, of course, different at the regional level, considering the war occurring in Europe and COVID lockdowns in China. Based on results for the first nine months of 2022, we believe Europe is on track to decline by roughly 15% and China by approximately 3%. We should note that most of the decline in Europe is due to a lower currency exchange rate compared to the US dollar. Therefore, on a constant currency basis, the market contraction in Europe was actually small. Offsetting much of the declines in these two regions is the higher revenue in North America, which we expect will grow at a double-digit rate.
For 2023, we remain somewhat optimistic that optical revenue will increase even as global macroeconomic conditions worsen. Specifically, we are expecting that component constraints will ease, and vendors will be able to fulfill customer orders that have been placed into their swelling backlog. Even in the Western European region, which is under a large amount of distress because of the war and high price of energy, there does not seem to be a significant slowdown in 2023. In fact, many optical vendors have stated that they do not see an impact from the eroding macroeconomic conditions in Western Europe at this time. Also recently, the rate of inflation is decreasing, and China has moved away from a zero-Covid policy, which should end the city-wide lockdowns that slowed the country’s economy and amplified certain supply issues.
Our biggest concern with 2023 is the uncertainty of vendor backlog. While backlog has grown and orders have exceeded revenue for the past few quarters, it is not clear to us what the duration of the backlog will extend to. That is, will customers begin to delay system delivery to a later period when their concerns of supply wane later this year?
In addition to having the worst of the conditions behind us, we are excited about the entry of a new higher-speed capable coherent DSP. Cisco, through its Acacia acquisition, is planning to have a single wavelength 1.2 Tbps-capable module available in early 2023. We have not heard what either Ciena or Infinera have planned for their next-generation coherent DSP, but we expect some news in early 2023—something to look forward to.
Although I am not superstitious, I am knocking on wood, to help ensure the worst is over.
