Acacia Communications Inc. reported third-quarter 2016 non-GAAP earnings (including stock-based compensation) of 86 cents that comfortably beat the Zacks Consensus Estimate by 16 cents and was well ahead of the 28 cents reported in the year-ago quarter.

Acacia reported revenues of $135.3 million, up a massive 106.8% year over year and ahead of the Zacks Consensus Estimate of $132 million. The solid growth was driven by increasing demand for the company’s products in the data-center interconnect (DCI) market.

Acacia continues to penetrate the rapidly growing DCI market, which is anticipated to grow at a CAGR of 32% over 2015-2020 as per data from ACG Research.

Further, the company noted Facebook’s recent announcement that it used Acacia’s AC400 product in developing Open Packet dense wavelength division multiplexing (DWDM) technology.

Metro market growth continues to be driven by continuing broadband investment in China (as part of the government’s broadband initiative) and the U.S. carriers, who are now focused on upgrading their metro network. The company expects further growth in China as carriers’ transition from back-bone and provincial back-bone networks to provincial metro and axis networks in 2017.

The continuing investment will drive strong demand for Acacia’s CFP-DCO product is expected to drive top-line growth. Additionally, the company is expected to benefit from higher demand of its products in the long-haul market.

During the 12-months ending in third-quarter, the company’s customer base expanded from eight in 2011 to 25. In the reported quarter, revenues from these newer customers surged 37% sequentially as compared to 11% from original eight customers.
 

Acacia recently announced the launch of a CFP-DCO product for the long-haul market. The company most recently announced that it has started sampling of the new coherent CFP2-DCO product.

Operating Details

Gross margin (including stock based compensation) was 46.8%, up 820 basis points (bps) on a year-over-year basis.

Operating expense as percentage of revenues increased 30 bps to 19.6%, primarily due to higher selling, general & administrative (SG&A) expense (up 100 bps), partially offset by lower research & development (R&D) expense (down 70 bps).

As a result, operating margin surged 800 bps from the year-ago quarter to 27.2%.

Balance Sheet

As of Sep 30, 2016, cash and cash equivalents were $122.9 million.

Guidance

Acacia expects fourth-quarter revenues in the range of $136–$141 million. Non-GAAP earnings are anticipated to be in the range of 85–92 cents for the quarter.

Zacks Rank & Key Picks

Acacia has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space are KVH Industries Inc. (KVHI Quick QuoteKVHI - Free Report) , Arista Networks Inc. (ANET Quick QuoteANET - Free Report) and Airgain Inc. (AIRG Quick QuoteAIRG - Free Report) . While both Arista and Airgain carry a Zacks Rank #2 (Buy), KVH sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, the consensus estimate for KVH’s current year has been revised upward by dime to 30 cents in the last seven days.

Similarly, the consensus estimate for Arista has been revised upward by 11 cents to $2.49 in the last seven days.

Lastly, the consensus estimate for Airgain has remained steady at 31 cents in the last seven days.

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