In search of sustainable profitability for optical component vendors

Date: September 22, 2010
Pages: 16
US$ 895.00
Publisher: Ovum
Report type: Strategic Report
Delivery: E-mail Delivery (PDF)

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In search of sustainable profitability for optical component vendors
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Like video game players who must conquer successively fiercer opponents at each level, optical component (OC) vendors have fought to the brink of profitability only to face an even harder challenge. Many costs have already been trimmed; R&D spending relative to revenue was cut almost in half from 2005 to 2009. Further progress towards profitability will require a new strategy. The need is urgent, as the telecom network’s growth is demanding investment in new technologies for 100G and beyond.

Executive summary
In a nutshell
Ovum view
Recommendations for players
Optical component vendors and their investors: don’t cut R&D and fixed costs to unsustainable levels
Innovators: integration remains the wild card
Carriers, OEMs, and component vendors: cooperate in seeking sustainable business models
OC business model evolution
Three phases point to path of future profitability
Financial data analysis
Gross margin and operating costs typical to the segment
Metrics calculated as percentage of revenue
Gross margins struggle to reach 40%
Variable cost of goods sold limits margin gains from increased revenue
Excess fixed costs are no longer the problem
Trimmed operating costs responsible for improvements since 2005
Further profitability gains must come from reducing variable cost of goods sold
Variations between companies
Gross margin gains due to weeding out weak performers
R&D highly variable across companies
Subsystems command higher margins but cost more R&D
Research methodology statement
Rationalizing OC vendor financials


Figure 1: Improvements in core OC business over time
Figure 2: Quarterly cost of goods sold as a function of revenue
Figure 3: Decline in COGS over time
Figure 4: R&D and SG&A intensities declined from 2005 to 2010
Figure 5: Distribution of quarterly gross margins in 2005, 2007, and 2009
Figure 6: Comparison of line items included and excluded from analysis
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