Optical component vendor earnings showed that the market continued to benefit from strong demand during the third quarter, according to research firm LightCounting, but it anticipates a decline in Q4 with continuing challenges through 2023.

The firm presented an array of sales growth results across chip vendors, optical transceiver vendors, and equipment makers, but “the guidance for the current quarter was flat to negative.”

“The market correction has clearly started," LightCounting stated. "Chip vendors are the first to see it. … Optical transceiver vendors are next in line and the equipment manufacturers will probably be hit in early 2023. The order backlogs may help to offset a temporary slowdown in demand but it is not a cure for navigating a prolonged recession,”

The firm warned enterprises “if your customers are reducing their costs, you should do so as well. No need to panic yet, but having a plan for operating during a recession is a must.”

The warning followed recent projections for a weaker optical component market next year, but an ultimate rebound to hit $20 billion by 2027. That forecast, updated from a report published in October 2021, projected global sales across segments of optical transceivers from 2016 to 2027. The segments included: FTTx, wireless backhaul, wireless fronthaul, course wavelength division multiplexing (CWDM)/dense wavelength-division multiplexing (DWDM), optical interconnects, fibre channel, and Ethernet.

According to LightCounting’s release on the market's eventual rebound, “the optical communications industry entered 2020 with very strong momentum.” The firm found demand for DWDM, Ethernet, and wireless fronthaul was already booming before the initial waves of the pandemic at the end of 2019. COVID-19 only accelerated that demand due to the shift to remote work and schooling that reigned across the globe in 2020 and 2021.

“While supply chain disruptions continued, the industry was able to largely overcome them,” the analysis firm noted.

The recent Q3 update suggests optic demand is still strong across all market segments, but “continuing bottlenecks in the global supply chain negatively impacted sales of 400G DR4 and 100G DR1+ transceivers to Amazon in the first 9 month[s] of 2022.”

Another contributing factor to the predicted market decline was Meta’s considerable reduction of optics deployments anticipated for 2023 – despite having “increased its deployments of optics sharply this year.”

“We suspect that Amazon and other cloud companies may moderate their investments in 2023 if the current economic slowdown continues to negatively impact their advertising, streaming, and retail businesses,” LightCounting added.