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Bear of the Day: Acacia Communications (ACIA)

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Acacia Communications, Inc. (ACIA - Free Report) , a Zacks Rank #5 (Strong Sell) designs, develops, manufactures and markets communication equipment. The Company offers coherent optical interconnect products for cloud infrastructure operators and content and communication service providers. It operates primarily in the Americas, Europe, the Middle East, Africa and the Asia Pacific region. Acacia Communications, Inc. is headquartered in Maynard, Massachusetts.

Recent Earnings Report

The company reported Q1 2018 results in the beginning of May where they beat the Zacks consensus earnings and revenue estimates.  But revenues fell by -36% year over year while earnings came in at -$0.03 compared to $0.86 in the year ago quarter.  

Headwinds Facing ACIA

The Trump administration put a ban on China’s ZTE from purchasing US components because the company did not honor a previous deal.  The US Commerce Department put the ban on after ZTE admitted that it violated sanctions against both North Korea and Iran.  ZTE accounted for 20.4% of revenues for ACIA which is a huge blow to the top line for the company.  While the administration has a potential deal on the table to reinstate ZTE’s ability to purchase U.S. components, the long term impact on ZTE’s orders is expected to be significant.   

Management’s Take

According to Raj Shanmugaraj, President and CEO, “While first quarter revenue, non-GAAP income and non-GAAP diluted EPS were in the high-end of our guidance ranges, the recent activation by the U.S. Department of Commerce of the denial order against ZTE is disappointing. Although the denial order will have an adverse impact on our business for the foreseeable future, we are prioritizing several initiatives and opportunities that we believe will help mitigate that impact. We continue to believe that the strength of our balance sheet, technology and product portfolio position us well for opportunities that are key to our future success.” Management also stated that “Our second quarter 2018 outlook assumes no revenue contribution from ZTE after the effective date of the ZTE denial order.”

Price and Earnings Consensus Graph

As you can see in the graph below, ACIA has not come close to its all-time highs in more than a year and a half.  The recent revenue losses due to the ZTE issue has caused both the stock price and future earnings estimates to fall.

Acacia Communications, Inc. Price and Consensus

Acacia Communications, Inc. Price and Consensus | Acacia Communications, Inc. Quote

Detailed Earnings Estimates

Over the past 30 days, estimates for Q2 18, Q3 18, FY 18 and FY 19 have all been negatively revised; Q2 18 fell from $0.10 to -$0.07, Q3 18 dropped from $0.22 to $0.05, FY 18 plummeted from $0.66 to $0.21, and FY 19 was trimmed from $1.28 to $0.76.  

Bottom Line

The loss of one of its biggest customers is a huge hit for the company.  Unfortunately, this sort of situation happens in the business world, yet many companies have bounced back from similar situations like this.  But this rebound will most likely take several quarters to bring the company’s revenues back to where they were.

If you are inclined to invest in the Communication Components segment, you would be best served by looking into Turtle Beach (HEAR - Free Report) who currently carries a Zacks Rank #1 (Strong Buy), or AudioCodes a Zacks Rank #2 (Buy) stock.

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