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Acacia Communications, Inc. (NASDAQ:ACIA): Growth Story Reignites with Legs

Acacia Communications, Inc. (NASDAQ:ACIA) just announced financial results for its third quarter ended September 30, 2018. It was second straight nice beat and raise for the company, and the market is finally starting to pay off the idea that this is returning to growth-story form. In addition, if we see a deal with China and some healing in Chinese markets, the final weight may be lifted off this one.

“I am pleased with our strong third quarter results, which exceeded the high end of our guidance on revenue, non-GAAP net income and non-GAAP diluted earnings per share and included solid quarterly profitability,” said Raj Shanmugaraj, President and Chief Executive Officer of Acacia Communications. “In the third quarter, newer customers contributed 43% of our total revenue and a Tier 1 switch and router customer contributed greater than 10% of revenue for the first time. We believe there are several industry trends that are driving the adoption of DCO modules, reinforcing Acacia’s market vision and playing to our strengths.”

Acacia Communications, Inc. (NASDAQ:ACIA) promulgates itself as a company that develops, manufactures, and sells high-speed coherent optical interconnect products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific region.

Its products include a series of low-power coherent digital signal processor application-specific integrated circuits and silicon photonic integrated circuits that are integrated into families of optical interconnect modules with transmission speeds ranging from 100 to 400 gigabits per second for use in long-haul, metro, and inter-data center markets.

The company sells its products through a direct sales force to network equipment manufacturers, network operators, and cloud service providers. Acacia Communications, Inc. was founded in 2009 and is headquartered in Maynard, Massachusetts.

“In the third quarter of 2018, increased demand for our newer products, along with a favorable shift in product mix, contributed to an increase in non-GAAP gross margins of 300 basis points relative to the prior year period,” said John Gavin, Chief Financial Officer of Acacia Communications. “At the midpoint of our revenue guidance range, we anticipate year-over-year revenue growth in the fourth quarter. Moreover, we are pleased to reinstate our long-term financial targets which are unchanged from the targets we had in place prior to the ZTE ban.”

 

Tales from the Sell Side

Riley FBR: Strong 4Q Visibility due to New Product Ramp, Return of ZTE; Raising/Lowering ’18/’19 EPS Estimates.

Needham notes Acacia delivered solid CY3Q18 results and better than expected 4Q18 guidance. The strong outlook reflects increasing traction with new products including ACIA’s CFP2 DCO, AC1200 and silicon PIC solutions, customer diversification with a growing number of 10% customers and the resumption of shipments to ZTE, which is expected to ramp in CY4Q. We believe ACIA remains ahead of the competition in the CFP2 DCO, 600G per lambda (AC1200) and silicon PIC segments and expect the ramp of these products to drive strong revenue growth and margin expansion leading to estimated 2019 and 2020 NG EPS of $1.34 and $1.84, respectively. This puts ACIA at 20x EV/E on estimated CY19 and 15x on CY20. With ACIA trading at ~$39.63 after hours, they don’t see enough upside to change their Hold rating.

DA Davidson notes Acacia released Q3 results above the consensus expectation for both revenue and earnings. With ZTE turning back on, this key China-based network equipment manufacturer resumed ordering from ACIA. The higher revenue over a fixed manufacturing base drove higher gross margin, which was matched with some one-time benefits in R&D spending to drive significantly improved operating margin. ACIA continues to make progress selling its CFP2-DCO products, which contributed over 20% of revenue in the quarter (versus 20% last quarter). ACIA indicated that it believes the ZTE inventory ‘catch up’ will continue into Q4 but should moderate in Q1. The company is also seeing signs of increased China demand for optical components, but no obvious tender offers as of yet. Sales to key customer Coriant remain solid in the short term, but visibility is poor longer term given its recent purchase by Infinera (INFN) (closed October 1st); Neutral

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