For a while, we have been addressing the matter of what Acacia Communications can do for an encore with its DSP business. Despite Acacia introducing new products, including its CFP2-ACO and -DCO solutions, as well as a larger capacity ASIC, it has nevertheless felt compelled to offer its PIC component part separately, which one may assume could easily result in lower margin generation. Certainly, there are several factors involved in the vendor’s current situation, which have resulted in what appears to be a less than a desirable change in strategy, such as the over-the-top enthusiasm in the industry regarding the impact of Facebook’s Voyager concept on public service providers. Most vitally, the very closed nature of the ultimate decision making on capital expenditures in China results in optical component suppliers outside the country seeming to be fairly close to blind on the actual levels of future growth there, regardless of the extent of the historic relationships or of the perceived importance of the relevant technologies.
On this last point, Acacia is one of the major US optical componentry vendors heavily reliant on sales to China. With also such a high level of dependence in recent times on its DSPs by a large number of DCI system houses around the world, resulting in a high likelihood that some of them would at least be tempted to stock up beyond existent demand, it has the biggest vested interest in striving to get the most accurate information possible on the need for future supply, especially by Chinese customers, which may have been easily inclined to warehouse a large number of these devices as well.
While there are always the usual caveats in terms of the language used at earnings conferences, Acacia stated on the Q4 2016 call the following: “We don’t see any inventory build-up there. I think we see product demand quite strong and we have indications when we shipped to them is not staying there very long. So, we believe 2017 will be strong China growth for us.” Of course, the very next quarter the vendor mentioned the “softening demand from the China market.”
Concerning Facebook’s Voyager scheme, as late as March 1, 2017, at the Morgan Stanley Technology, Media & Telecom Conference, Acacia’s CEO gave the impression that it was still a viable business “model” for the vendor in which to play a part. However, only about two months later, during the last earnings call mentioned above, he was much less bullish in asserting: “[T]his is a white-box concept and it takes time to adapt and again some of these are taking time not just from a product deployment, but…there is additional software platform development that the customers need to do….”
The Acacia executive was also not sure if the Voyager initiative would result in “meaningful” revenue for itself even in 2018. fibeReality has expressed its doubts in the past about the extent to which white boxes and open line systems would occur in the public network sphere.
Another possible reason for Acacia for quickly shifting to selling PICs is that the firm may look to take advantage of its ball-grid array packaging perhaps even before its AC1200 offering is generally available. At its Investment Community Meeting in March, Ciena more than implied that along with its three partners, that they were well-positioned to produce the best mixture of performance and miniaturization in the merchant DSP space. (For our view, on this new Ciena distribution strategy, please click here.)
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[written by Mark Lutkowitz]
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