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Why Acacia Communications, Inc. Fell 27% in April

By Asit Sharma – May 10, 2018 at 5:29PM

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The optical networks component maker learned the risks inherent in holding a significant customer concentration.

What happened

Stock in optical interconnect products provider Acacia Communications (ACIA) fell 26.8% in April, according to data from S&P Global Market Intelligence 

So what

Acacia's stock slumped drastically on April 16 as the U.S. announced a seven-year ban on sales by U.S. companies to Chinese telecommunications-equipment manufacturer ZTE (ZTCOY). ZTE is alleged to have lied to the U.S. government about its equipment sales to Iran, in violation of U.S. sanctions.

Acacia immediately suspended affected transactions -- and its stock felt immediate pain. As my colleague Leo Sun pointed out when analyzing this news in April, ZTE accounted for 30% of Acacia's sales in 2017.

While this is a significant blow for the transmissions specialist, shareholders were able to obtain some perspective on Acacia's prospects from management in early May, when the company released first-quarter 2018 results on May 3. During Acacia's post-earnings conference call, CEO Murugesan Shanmugaraj acknowledged that the immediate loss of revenue will be painful for the company, but pointed to a few bright spots and provided a game plan for the current year.

Shanmugaraj reported that several product lines were exhibiting relative health. For example, the company's CFP2-DCO module continued to experience wide acceptance from new and existing customers and accounted for more than 10% of Acacia's revenue during the first quarter. On a more general note, Shanmugaraj sought to reassure investors that Acacia's niche of converting optical interconnect technology to silicon-based technology still holds much market potential -- despite the ban on business with such a significant customer.

As for dealing with the ZTE situation, management has indicated that it will decrease its targeted year-over-year operating expense growth in light of the lost revenue. But Acacia intends to pursue new business opportunities with other Chinese manufacturers, and executives somewhat surprisingly contend that revenue may increase in the second half of 2018 against the prior year. Finally, Acacia announced a $60 million share-repurchase program that will run through the end of 2018 in an additional step to assuage investor fears. 

Colorful, bright rendering of fiber optic cables.

Image source: Getty Images.

Now what

Acacia's travails demonstrate the risks that are often masked in young, fast-growing companies that rely on a few large customers to propel their expansion. Yet the organization may well weather this adversity. Acacia revealed that in the first quarter of 2018, ZTE accounted for only 20.4% of revenue, underscoring management's implication that the company may rebound more quickly than investors expect.

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

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