Market research

Components Crunch Time

Excess inventory, slow sales, and pricing pressures helped put optical component vendors behind the eight ball this year. Now the inevitable consolidation has just begun, and the question being asked is, how far away are we from recovery?

That’s the key question addressed by "Components Crunch Time," the latest report from Optical Oracle, Light Reading's paid subscription service. By reviewing the state of public and private companies in the sector and identifying key trends, the report sizes up the situation and maps out the likely progress of recovery.

In short, the answer is: We're many months, if not years, away from the return to a healthy components industry.

Progress won’t come easy. Propelled by generous amounts of funding back in the boom times of 2000 and early 2001, startups flooded the components sector with products. More than a year after the inventory correction began in earnest, the industry is still saddled with too many suppliers and too few buyers.

What’s more, recent activity shows that companies are still plagued by bulging inventories and sluggish sales. Indeed, inventory is still rising in relation to the amount of product companies are selling, or cost of goods sold -- the exact opposite of what needs to happen.

Given this state of affairs, companies in the sector are faced with the choice to merge or get bought by larger players -- or face almost certain demise. Going forward, the number of vendors will be whittled down dramatically, and while some will be acquired, literally hundreds will simply go out of business.

Companies that do survive will be those that gain extra capabilities through mergers and acquisitions. They’ll be the ones to develop a wider range of components, so that systems vendors can find everything they need off the shelf, from as few suppliers as possible.

So who will survive? The report analyzes the financials, inventory, liquidity, and overall prospects of the leading public companies in the sector:

The report also looks at Intel Corp. (Nasdaq: INTC) and Nortel Networks Corp. (NYSE/Toronto: NT), which have sizeable components businesses but whose financials are not broken out in those specific operations. There's also coverage of key startups that have garnered sizeable recent funding.

These are the key players in the upcoming consolidation. The past year has already seen a considerable amount of M&A activity, which is documented in the report. And more is sure to follow, perhaps instigated by companies outside the immediate sector -- most notably Intel, which has been rumored to be considering moves large and small (see Would Intel Buy JDSU?).

In choosing which companies to partner with, buy, or be sold to, component makers will need to consider the changing product landscape. What appeared to be the hottest optical components on offer last year aren't selling right now. While carriers continue to say they'd like all-optical components, tunable lasers, and 40-Gbit/s transceivers, there's a huge disparity between what's deployed in the ground and what's on the carriers' wish list.

Cash-strapped carriers have new sets of priorities, and these do not include huge expenditures for major network upgrades. Even as capex continues to decline, carriers are becoming interested in technologies that will allow them to further reduce operating expenditures.

This shift means carriers are interested in things like lower electrical power consumption, smaller size (because they have to pay for space in colocation centers), and any innovation that allows them to monitor and provision equipment quickly and remotely, without having to send out an engineer. These are some of the features component makers will need to consider buying or selling to partners in planning for the future.

— Mary Jander, Senior Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
newguy 12/4/2012 | 10:11:56 PM
re: Components Crunch Time I thought Opnext was big in some areas. Also, Oki and CEL/NEC? All 3 are Japanese companies though Opnext claims it is American after its spinoff from Hitachi.

BobbyMax 12/4/2012 | 10:11:53 PM
re: Components Crunch Time There is not much activity in the optical world. Almost over 10,000 VCs roaming our land and they manage to sprout over 650 companies. Probably about 80% are gone. The remainder are still there, but these bogus and serial investors will be goneas the venture capital is gone.

It is sad the VCs , on their own, became technology expert and marketing expert by just saying so althogh they did not have any education/exposure in these areas.

We are paying a heavy price because of attepts on the part of the serial investors to create markets althogh none existed.
opticalfuneral 12/4/2012 | 10:11:48 PM
re: Components Crunch Time
did you forget about Agilent?
light1der 12/4/2012 | 9:55:14 PM
re: Components Crunch Time I was under the impression that Agilent was a T&M equipment manufacturer; a very expensive one at that. I would think the report would have sense to distinguish these companies (EXFO included) from those supplying components.


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