Part 3; Focus on the future!
We expect that successful implementation of our designs into component prototypes, combined with the cost advantage inherent in Optical Interposer-based solutions, will lead to additional funding for other projects, as well as to contracts for the delivery of production devices, once fully qualified.
The immediate consequence of our decision to work with leading industry partners on 400G transceivers was to give priority to the acceleration of the development of higher performance lasers, modulators and detectors needed for 400G, at the expense of our programs for 100G. Another factor in our decision-making process was that the market for 100G transceivers has flattened in terms of revenue and appears to be maturing much faster than the industry anticipated. Industry total revenue for 100G transceivers in 2019 is expected to be flat or lower than 2018. With unit volume going up, pricing is down and therefore margins are squeezed even more heavily than during 2018.
Our plan to deliver 400G devices is essentially unchanged from prior plans, which targeted the release of Transmit and Receive (TROE) Optical Engine prototypes to customers for qualification2 in the second half of 2019. Our revised plan calls for all of the required active components, waveguides for certain standards, and core integration processes to be far enough along to allow the Company to produce both 400G prototypes and 100G prototypes late in 2019 and into early 2020.
We expect to be able to introduce the less complex standards, such as DR4 for 400G and Parallel Single Mode 4-fiber (“PSM4”) for 100G somewhat earlier than the more complex FR4 for 400G and Coarse Wavelength Division Multiplexing (“CWDM”) standards. In each case we have multiple parallel programs aimed at these prototype products, utilizing both internal and external development resources. Further, while we had forecasted the completion of a Receive Only Engine (ROE) for 100G as our first planned prototype, we now expect that there will be little demand for a separate ROE, since customers will be able to qualify a full TROE instead, performing one rather than two qualification cycles for a more complete solution.
However, a 100G TROE with a CWDM filter represents the second generation of transceivers being adopted and a standard which is expected to be dominant in the 100G datacom market in China. Early adopters of 100G transceivers in the United States utilized PSM4, a standard that does not incorporate the highly complex CWDM filter. The inherent cost advantage of an Optical Interposer-based 100G Optical Engines should still allow entry into the 100G market, but the level of penetration will depend on how far pricing will have fallen by year-end and into 2020. Nevertheless, because of the size of the market and the need for transceiver module suppliers to address margin concerns, an offering of a 100G CWDM TROE could still have major impact on POET’s datacommunications revenue over the next one to two years. Overall, we believe that our revised development roadmap represents a sound foundation for growth in 2020 and beyond. In recent quarters,
POET has taken major steps to advance its development of Interposer-based new products, including through the purchase of equipment, improvement of facilities and the strengthening of its engineering team with more highly qualified talent and larger staff, all represented in POET’s consolidated financial statements through additions to fixed assets and increased operating expenses. Certain additional capital equipment may be needed to enhance our development and production capabilities, but we expect only marginal increases in operating expenses over the quarter, as we are able to address the needs of our customers with our existing engineering staff and production facilities. Following the separation of the two companies, we will continue development of active devices at DenseLight at least through mid-2020. The next several quarters will be devoted to the successful completion of funded development programs, the introduction of new devices into qualification cycles with customers, and preparation for higher production volumes in subsequent quarters.
As a result of the contractual commitments to demonstrated certain aspects of the performance of the Optical Interposer, its components and sub-assembly prototypes, we anticipate additional Optical Engine prototype orders in late 2019 and into early 2020, fielded by our newly established Singapore subsidiary company, POET Technologies Pte Ltd (“POET Singapore”). Although the markets for photonic devices have been flat during the first half of 2019 due to global trade uncertainties, we remain optimistic that DenseLight will remain on a trajectory to meet forecasted revenue in the range of approximately $8 to $10 million. Gross Margins should increase as a result of the proportion of higher margin development contracts for Non-Recurring Engineering (NRE) that utilize DenseLight’s existing engineering and operations staff. Negotiation efforts and transition activities related to the separation of the two companies have both required serious management attention. Nevertheless, we continue to plan for success in product development, with an intention in early 2020 to expand projects to markets beyond data communications for our Optical Interposer technology, such as telecommunications, Automotive LIDAR, and integration with Application Specific Integrated Circuits (ASICs), including switches and graphics generators.