What happened

Shares of optical interconnect provider Acacia Communications (NASDAQ:ACIA) slumped on Friday following the release of the company's fourth-quarter report. While Acacia beat analyst estimates for both revenue and earnings, the company's first-quarter guidance fell well short of expectations. At 11 a.m. EST, the stock was down about 12.5%.

So what

Acacia reported fourth-quarter revenue of $142.4 million, up 108% year over year and about $2.7 million above the average analyst estimate. The company pointed to strong demand for its 100G and flex-400G products, as well as the ramping of new customers, as drivers behind its impressive growth. An unnamed hyper-scale cloud and content provider was added as a customer during the quarter.

Data cables plugged into servers in a data center.

Image source: Getty Images.

Non-GAAP EPS came in at $0.94, up from $0.36 during the prior-year period and $0.04 higher than analysts were expecting. Revenue grew far faster than operating costs, which expanded by 55%, leading to the major expansion in profitability.

While Acacia's fourth-quarter results were solid, its guidance for the first quarter of 2017 left a lot to be desired. The company expects revenue to be in the range of $108 million to $114 million, a 32% year-over-year increase at the midpoint. This guidance represents a dramatic slowdown, and is well below analyst expectations of $137.4 million.

Earnings guidance also disappointed, with Acacia calling for non-GAAP EPS between $0.63 and $0.70. Analysts were expecting $0.78.

Now what

Acacia CFO John Gavin talked up the company's diversification beyond its core group of customers, stating, "During the fourth quarter, we experienced year-over-year revenue growth of 108%, further diversified our revenue base, with sales to newer customers outside our original eight 2011 customers increasing to 35% of our total revenue from 14% in the first quarter of 2016. We believe our market strategy and business model are strong, and position us for further growth."

With Acacia still highly dependent on a small group of customers, its revenue growth is becoming more volatile as it becomes larger. The days of extremely rapid growth appear to be over for now. Investors didn't take the news well, sending the stock plunging on Friday.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.