Financial results for the second quarter of 2023, as disclosed by companies in the optical industry, reveal that the "Bullwhip effect" continued to trouble optical component suppliers during this period. High levels of inventory among equipment manufacturers and end customers have restrained sales growth at the component level. However, sales data for optical transceivers collected by LightCounting indicate the first signs of recovery in demand for Ethernet transceivers and High-Speed Active Optical Cables (AOC).
The chart below illustrates the state of the entire industry supply chain. Sales of telecom optical components (DWDM, FTTx, and WFH) decreased by 33% year-on-year and 14% compared to the previous quarter. Sales of datacom optical components (Ethernet, fiber channel, and AOC) also saw a 15% year-on-year decline, but Ethernet transceiver sales increased by 5% compared to the previous quarter, with expectations of more significant growth in the second half of 2023. AOC sales experienced a sharp decline in the first quarter but quickly rebounded in the second quarter of 2023. The majority of this growth can be attributed to the demand for optical connections in artificial intelligence clusters. This analysis excludes direct sales of optical components by NVIDIA, which could easily add another 10% to Ethernet transceiver sales and a 30% boost to AOC sales.
Similar to the previous two quarters, Internet Content Providers (ICPs) and Communication Service Providers (CSPs) have reported a slowdown in growth in key business areas, with ongoing layoffs. Most anticipate a slowdown in expenditure growth for 2023. Particularly concerning is the continued trend of slowing cloud service sales growth among four major data center operators in the second quarter of 2023. This trend persists despite the apparent dominance of the "artificial intelligence arms race."
In contrast to the sharp decline in optical component sales, sales of network equipment in the second quarter of 2023 remained stable, with a slight decline of 0.4-0.5%. The reason for this unusual phenomenon is the backlog of equipment orders from 2021-2022 when many components were in short supply. Currently, equipment suppliers are still working to fulfill orders from over a year ago.
In terms of outlook for the third quarter of 2023, Amazon, Meta, Calix, and Ciena all anticipate double-digit sales growth compared to the third quarter of 2022. Coherent and Lumentum, however, expect double-digit declines due to ongoing inventory issues with their primary customers, primarily telecom equipment suppliers. Recovery in telecom component demand is unlikely to occur in 2023.