Shares of Acacia Communications (NASDAQ:ACIA) plummeted on Monday after the U.S. Department of Commerce banned the sale of components to ZTE Corp., a Chinese telecommunications equipment company. This follows ZTE's guilty plea last year for conspiring to violate U.S. sanctions. Acacia stock was down about 36% at 12:45 p.m. EDT.
American companies are now banned for seven years from selling components to ZTE. This action stems from ZTE's failure to comply with the terms of its guilty plea last year; ZTE pleaded guilty to conspiring to violate U.S. sanctions by illegally shipping U.S. goods to Iran. The company paid a total of $890 million in fines and penalties, and it promised to fire and discipline certain employees. But ZTE failed to discipline 35 employees, prompting the seven-year ban.
Acacia generated 30% of its revenue from ZTE in 2017, with 70% of its revenue coming from its five largest customers. The company's risky strategy of depending on a small number of customers has led to disaster.
Acacia was already having issues with demand from China prior to this ban. Revenue tumbled 19.5% in 2017, with a 39.2% decline during the fourth quarter. CFO John Gavin said in the fourth-quarter earnings release that the company sees signs of improving market conditions in 2018. The ZTE ban ensures those revenue declines will continue.
The steep drop in Acacia's stock is a painful reminder that revenue concentration risk should not be ignored.