Acacia is scheduled to report earnings on August 11th, and this will be the company’s first quarterly report since completing its recent IPO. In April 2016, Cignal AI examined Acacia’s business and S-1 filing in detail and provided our analysis on the company (see Acacia Communications – IPO Analysis).

ADVA’s recent quarterly results hint at what to expect from Acacia’s 2Q16 results announcement. In the following, we provide relevant excerpts on Acacia from our just-posted ADVA 2Q16 notes so that we may share this Active Insight with our wider client and end-user audience, who may not necessarily be subscribers to our Optical Hardware reporting.

Some followers of the market are anticipating flat revenue results from Acacia in Q2.  Based on our analysis, we think this expectation is too conservative.

ADVA’s strong results should be an exceptional leading indicator for Acacia, which we believe to be ADVA’s exclusive supplier of coherent 100G+ technology. During Q2, ADVA recorded robust results in shipments of optical equipment, led by exceptional growth in sales to North America Cloud and Colo customers. ADVA mentioned that DCI customers have historically been in the 12% range but that this number doubled to around 25% during this quarter.

We believe this revenue surge resulted in record shipments of 100G interfaces and estimate total 100G shipments by ADVA tripled QoQ. These shipments were based on the Acacia coherent CFP product used in the FSP3000.

As noted in our earlier Acacia note, ADVA was Acacia’s second largest customer and accounted for 22% of Acacia’s revenue in 2015. On an absolute basis, ADVA purchased about $15M of product from Acacia for each of the past 5 quarters – including 1Q16.

ADVA’s growth in 100G shipments during 2Q16 was not reflected in Acacia’s 1Q16 results. Specifically, while ADVA’s shipments probably tripled in 2Q16, Acacia’s sales to ADVA showed no such jump in 1Q16. Therefore, Acacia’s ADVA-driven revenue should increase sharply in upcoming 2Q results. Expect Acacia sales to ADVA to climb from $15M in 1Q16 to at least $30M in 2Q16, perhaps more, depending upon the price reductions that ADVA received for increased volume.

ADVA, ZTE and Coriant together represented 3/4’s of Acacia’s business in 1Q16 and their activity provides the biggest leading indicators for Q2. Here are some of our assumptions:

  • While ZTE was accountable for a large portion of Acacia Q1 revenue (46% $38.9M), it is not clear if it would have been an even larger amount but for the US Department of Commerce Import Ban (see USA Stops All Exports to ZTE). It’s also possible that ZTE took as much material as possible in advance of the ban, and burned off inventory in the following Q. We think it is reasonable to estimate that Acacia revenue to ZTE was flat QoQ in 2Q16.
  • ADVA was Acacia’s second largest customer in Q1 (18% $15.2M). In addition to a potential jump in CFP purchases during 2Q16, ADVA also ramped production of the FSP3000 Cloudconnect, which uses Acacia’s next generation AC400 flex family. While ADVA didn’t recognize revenue for the FSP3000 CC, it is clear that there is a great deal of pre-production shipments and sampling. This represents an additional revenue tailwind beyond our estimated $30M in ADVA purchases from Acacia.
  • Coriant (12% $9.7M), like ADVA, is ramping up production with Acacia 400G technology, though Coriant is taking a DSP only approach. We don’t see any reason to expect that this revenue declined in Q2.
  • Huawei is the wildcard in Acacia’s 2Q results. The company is by far the largest provider of 100G coherent links, driven by massive Chinese shipments. It has not been a 10% customer historically, but it is preparing to shift 100G coherent technology formats. Specifically, this involves a shift from discrete components to pluggable CFP format. Acacia is almost certainly going to play a role in this transition. Huawei also expressed that it does not expect this shift to happen until it has a second source, most likely found in using its own internal DSP. This Huawei transition is coming – though likely not yet in 2Q16.

We look forward to Acacia’s first investor call, only days away now, to shed more light on the nature of its ZTE business and the outlook for Huawei’s shift to CFP.  We believe we may also hear of a significant upside surprise in revenue from ADVA.