In January, we first discussed Acacia Communications, which filed for its IPO confidentially in August of last year, and then rather quietly, but publicly, notified the SEC towards the end of December of last year of its plan to go public early this year. Although there was at least a little speculation at OFC 2016 that the vendor would not necessarily go through with the offering, it finally issued a press release announcement for the pricing this month. While Acacia has been a solid company technologically, there are still questions on what it can demonstrate to investors in order to wow them towards a higher valuation. So far, it appears that the supplier is just continuing to heavily push its Silicon Photonics (SP) development to the Street.
Even assuming it has substantial leverage with this kind of integration, which we have had our doubts about in the past, the term, SP, as we have also noted previously, has been sorely overused, as it has been applied to just about anything that is nonstandard optics. Therefore, even some financial analysts have apparently reached a point in which calling something SP has been so watered down, it will not be automatically accepted, at least on its face, as a significant advantage over competitors.
The ability of Acacia to clearly separate itself from the pack, as it has to date with its DSP capabilities, would have been impossible otherwise in a market that will be indefinitely dominated with data rates no higher than 100G. With the 100-gig market already being so well defined from a technology perspective, the only way for some other vendors to differentiate themselves is to engage with the other players in a cost war.
Our recent intelligence gathering indicates that a large number of customers are claiming that Acacia’s gear results in gaining a competitive edge with their products. Although we are aware of some past feature slips, we understand that its present solutions are operating well. While it has more or less maintained the benefits of a technology leader, we are cognizant of at least one customer that has chosen to wait for a competitor’s upcoming release.
Even if Acacia were successful in making an initial case for, say, a 400G/SP combination (it is also touting development of a terabit per second), such as assuming it has adequately dealt with any loss problems, at the end of the day, SP has always been about providing the secret sauce in lowering cost, and thus, it ultimately falls apart without the necessary volume.
Regarding the environment for technology companies going public, it is only getting worse as Acacia is only the second to do so this year. Of course, another strike will be getting spurned specifically as an optical components firm, which is obviously in a space with heavy competition and low margins.
While Acacia has been greatly dependent on ZTE lately, all of the optical componentry vendors have benefited from the extensive build-outs of high capacity infrastructure by big service providers in China. It would not be surprising if such sales to that market start to bottom out before US government trade issues with the Chinese vendor potentially becomes problematic.
[written by Mark Lutkowitz]