What happened
Stock in high-speed optical interconnect technology manufacturer Acacia Communications, Inc. (ACIA +0.00%) fell 10.2% last month, according to data from S&P Global Intelligence.
So what
As I discussed this summer in an article on one of Acacia's competitors, Oclaro, Inc. (OCLR +0.00%), demand from China for optical network infrastructure products has declined in 2017. Last month, Acacia shares came under pressure as investors fretted over this reduced demand, as well as the potential lingering effects of a quality issue that delayed Acacia's product shipments during the second quarter of 2017.
Indeed, the company's third-quarter 2017 earnings, released on Nov. 2, revealed that revenue decreased 22% to $46.1 million versus the prior year, and that net income plunged 47% to $18.5 million. Investors were prepared for these numbers, and in fact the top- and bottom-line results were within guided expectations. More significantly, however, while Acacia made progress on its quality issue, visibility into Chinese demand hasn't improved much.
In particular, Acacia has been waiting this year for a major customer, China Mobile (CHL +0.00%), to extend a network buildout into multiple Chinese provinces. In the organization's third-quarter earnings conference call, management relayed that the timing of the provincial buildouts was still uncertain, and that China Mobile might proceed more gradually than initially anticipated. Of course, product demand uncertainty often creates stock price malaise. Including a post-earnings drop, shares have extended the October decline by another 18 percentage points from the beginning of November to date.
Image source: Acacia Communications, Inc.
Now what
In addition to the issues listed above, Acacia's stock faces at least one more headwind in the form of shareholder lawsuits filed in the wake of the quality issue from the second quarter. But the company can point to a few positive developments. Customer revenue concentration, a significant weakness, is gradually easing. In the third quarter, sales to the company's "new customer group," which excludes Acacia's eight original major customers, comprised 31% of total revenue.
In addition, Acacia has aggressively pushed new product development this year. For example, according to management, recent launches of the company's CFP2-ACO and DCO products will make up 10% of total company revenue in the second half of 2017. Nonetheless, in the near term, investors should maintain a cautious attitude toward these shares -- at least until greater clarity emerges on supply, demand, and legal issues over the next few quarters.
