Investment Trends and Opportunities in Optical Network Technology Mike Powell (Partner)
What is the talk about 1) A new era of data consumption 2) Optical network market overview Consumer Enterprise 3) Technology and market trends 4) M&A and investment market activity 1
Who we are Global Investment Bank Bay Area and London M&A International Cross-border M&A and corporate finance advisory Hardware Photonics, Communications, Semiconductors and Materials Software and Internet Services Life Sciences Founded in 2001: over $10 billion in transaction value 5 fiber communications deals in the last 2 years WCP Research providing research on Enterprise IT and Communications to institutional clients 2
What is driving dataflow 1) A new era of data consumption 2) Optical network market overview Consumer Enterprise 3) Technology and market trends 4) M&A and investment market activity 3
A new era of consumption Secular Shifts TMT Sector Themes Product Proliferation End-User Applications New media distribution growing Mobility Industrial revolution of data Digitization of content Network quality Affordability Product proliferation Government commitment Emerging markets coming online Mobile products Corporate and industrial world Internet of things Public spaces Home TMT sector is responding to deliver voice, data and video in real time to their end-users, no matter where they are and no matter on what device 4
Performance drivers Increasing bandwidth (no upper limit) Network utilization improvement Performance drivers Significant increase in backhaul (no upper limit) Quality of service (buffering not a universal solution) Low latency 5
What does the network look like 1) A new era of data consumption 2) Optical network market overview Consumer Enterprise 3) Technology and market trends 4) M&A and investment market activity 6
Transport ecosystem Management Control Plane NMS SDN Static and dynamic control Packet Packet Integration (ETH, MPLS) Packet-based network layers OTN Optical Transport Network Allows for data structuring, monitoring and sub-lambda aggregation over DWDM Optical Edge Connection Signals, are handed-off to clients usually in optical format Source: Ericsson AB 2013 7
The physical network Optical Transceivers Market reached $3.4 bn in 2012 * Internet Cloud Mobile data Wifi/ p-cell Control layers? Backhaul Servers IPTV Video content DWDM WDM WSS (ROADM) DWDM WSS (ROADM) Core Network GigE Metro Network GigE POP FTTx FTTH or deep fiber GigE/AOC GigE AOC Data Centers FTTB * Optical Communications Market Forecast 2013 - LightCounting 8
How is the data monetized Enterprise Monthly rental of big pipe bidirectional connections low latency Monthly rental for mobile connection on the move payments - roaming pay what you eat Monthly Wifi access bundles Pay per consume for cloud services Consumer Monthly mobile Monthly rental big pipe access (affluent areas) - still asymmetric and undefined latency Access and content bundles (i.e. BT, Virgin) Consumption payment for services Advertising, consumer profiling 9
Evolution or revolution 1) A new era of data consumption 2) Optical network market overview Consumer Enterprise 3) Technology and market trends 4) M&A and investment market activity 10
IP traffic is growing at 23% p.a. (PB/month) Consumers / Enterprise Massive increase in datacentre storage Significant increase in wireless connection 140,000 Consumer and Enterprise IP Traffic 120,000 100,000 80,000 60,000 40,000 Mobile data Managed IP Internet 20,000 0 2012A 2013F 2014E 2015E 2016E 2017E Source: Cisco VNI, 2013 11
Consumer traffic growth drivers (PB/month) 80,000 Global Consumer Internet Traffic (by sub-segment) 70,000 60,000 50,000 40,000 30,000 Online gaming File sharing Web, email, and data Internet video 20,000 10,000 0 2012A 2013F 2014E 2015E 2016E 2017E Source: Cisco VNI, 2013 12
Data compared to cost per bit and revenue per bit 1200 1.60 1000 1.40 1.20 800 1.00 600 0.80 400 0.60 0.40 200 0.20 0 0.00 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Year Total traffic Cost per bit Revenue per bit No more cost reduction from move to low-cost labour countries Network is infrastructure-intensive. Each infrastructure decision locks-in a technology for 10 years or longer, with only backwardly compatible upgrades possible 13
Themes for fiber optics To become as ubiquitous as digital electronics and RF Port volumes scaling to millions per month volumes Network efficiency Higher data rates everywhere Size reduction Less power consumption Survive the heat of nearby processors and drivers Software control layer improvements 14
Capital Activity 1) A new era of data consumption 2) Optical network market overview Consumer Enterprise 3) Technology and market trends 4) M&A and investment market activity 15
M&A trends Verticalisation of the OEMs to control key technology Legacy component provider shake-out Emergence of Software Defined Network (SDN) and Storage techniques Technology sweet spots Hybrid integration Si-Photonics Tuneable photonics Software control 16
Exit return drivers Value Financial Value Product launch Market acceptance & validation Strategic Value Prototype scaling Ideating Patents Time 17
Return to M&A value 14 12 10 8 6 4 2 0 Optical Components for Communications # of M&A Transactions Distressed consolidation Acquisition of strategic value 2006 2007 2008 2009 2010 2011 2012 Consolidation/divestiture Acquisition of key defensible technology driven by high strategic value Both trends likely to continue growing Asian companies looking to acquire IP and off-shore European entities often have strong political dimension US companies still dominant acquirers 36% Optical Components M&A Deal Size Break-down 22% ($millions) < 20 20-100 100-1,000 42% Source: Capital IQ 18
M&A in Si Photonics Replication of high value components in Si Sort of interesting Higher levels of integration. Reduced cost, footprint, power. Enables existing network architectures to be extended More interesting Wafer scale integration actives and passives. All current devices effectuated in or on Silicon Properly interesting New device types that are not available today. Will enable new connection architectures. Transformative. 19
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