While China isn't (yet?) an important market for Applied Opto, there is lots of talk about a resurgence of Chinese demand for optical networking gear. This is an issue that is much wider than the datacenter market (it's mostly telecom related) so it's tangental to Applied Opto. The softness in demand has plagued numerous optical networkers. A first ray of light at the end of August? From Barrons:
Lumentum, Finisar: Street Still Trying to De-Riddle China Mobile Optics Order
The Street is still uncertain about the exact nature and impact of an apparent large order for fiber-optic components put forward by China Mobile last week. It may help some suppliers such as Lumentum, but details are still puzzling to those following the component names.
Analysts today continue to assess the importance of an apparent large order put forward for fiber optic components from China’s largest telco, China Mobile (CHL) last week, which has been a source of some debate on the Street as to its impact on Lumentum (LITE), Finisar (FNSR), and other component suppliers.
You’ll recall that several analysts pointed out on Thursday that there were details missing from the China Mobile tender that are important to gauge the value of the potential contract. Jefferies & Co. analyst Edison Lee wrote, however, that it does appear to be the “100G” deal that several were waiting for.
B. Riley & Co.’s Dave Kang, who follows Oclaro (OCLR), and rates its stock a Buy, and who sounded a cautious note on Thursday, today reports on having spoken with management of the company about the deal, in which “the primary topic of discussion was the implications of the recently-announced China Mobile tender for 42k ports."
Basically, there’s still a lot of uncertainty:
OCLR was quick to point out that the tender was very preliminary and that both size and mix were critical factors as to magnitude of the development. Furthermore, Greg stressed that Telco customers regularly communicate with their OEM vendors and thus, it is unlikely this tender wasn't at least partially accounted for in OEM's forward demand projections. Management also noted that both China Telecom (CHA; N/R) and China Unicom (CHU; N/R) tend to announce similar (albeit smaller) tenders following CHL's procurement announcements. Last, the major difference between the current tender vs. the late 2015 tenders is that the 2015 tenders were asked to be shipped within 4 months (driving subsequent capacity expansion) whereas the current one could be stretched over 4 quarters.
"Overall, we believe our conversation with Mr. Dougherty supports our initial 'wait and see’ stance on tender enthusiasm,” concludes Kang, “while also reinforcing our belief that OCLR's quarter appears to be tracking to expectations."
Also today, Rosenblatt’s Jun Zhang, writes that the Street is misunderstanding the language of the order from China Mobile: It’s for “sets” of equipment, not “ports,” and therefore perhaps less than what it might appear.
Our industry research suggests Huawei has not increased its current Q4 fore- cast after China Mobile’s (CHL:NR) tender release. Our initial research around China Mobile suggests the tender is being misunderstood—42K is the number of sets of equipment, not port numbers, and one set of equipment could include both 10G and 100G as well as support more than one port. Normally, one set of equipment includes 100G line side and 10X10G client side (now we believe China Mobile needs to also deploy 100G client side). We think 42K sets of equipment are mostly line side. We believe the mix will be more 100G port loaded, even if the tender includes GE and 10G ports. We believe this is only a small part of Phase 13 with more 2018 100G tenders likely coming since China Mobile has plans to become the largest broadband service provider in 2018.
Zhang writes that despite the confusion, this actually can help some suppliers, but it specifically won’t help Finisar and Oclaro:
We believe China Mobile could start testing equipment for the first round of Phase 13 procurement in mid-September and could complete it by mid- November. In our view, demand from this tender will be small in Q4 and ramp more into 2018; therefore so far, it is difficult to gauge the effect in incremental orders for Huawei and component suppliers in Q4. But, based on Huawei’s current forecast (excluding China Mobile’s tender), we believe many component suppliers (except Finisar and Oclaro (OCLR) could see an order recovery in Q4 from Huawei, likely better than the June quarter and slightly below the March quarter levels. We also expect NeoPhotonics (NPTN), Lumentum (LITE) and driver suppliers to return to March quarter levels, and for Acacia’s (ACIA) December quarter shipments to ZTE to grow 15-20% sequential after a large pickup in Q3.