Acacia: Three Quarters in a Row of Estimate Cuts Damaging, Says Needham

Shares of fiber-optic component supplier Acacia Communications (ACIA) are up 28 cents, or 0.7%, at $39.28, in early trading, bouncing back from a 6% sell-off on Friday, after the company announced a big shortfall in its Q2 revenue and profit, citing a "quality issue identified at one of our three contract manufacturers" that it had previously disclosed in late May.

Analysts this morning see risks to Acacia's reputation, and perhaps the patience of investors and customers.

Acacia now expects $77 million to $79 million in revenue, and EPS of 17 cents to 20 cents, excluding some costs, which was well below the average estimate at the time of $91 million and 47 cents per share. The outlook for this quarter is also lower, with Acacia projecting $95 million to $110 million, and 25 cents to 40 cents, versus consensus for $108 million and 47 cents per share.

CEO Raj Shanmugaraj said the company was disappointed, but that it expects to resolve the quality control issues this quarter:

As we previously announced, we identified a circuit board cleaning process as the likely root cause of the quality issue. This cleaning process was eliminated and manufacturing at the impacted contract manufacturer resumed. Although we began to ramp manufacturing capacity with our contract manufacturers during the quarter, we experienced supply constraints as capacity was used to both build replacement units and to meet new demand from customers for our AC400 and CFP units. We anticipate completing our remediation efforts with respect to the remaining impacted units during the third quarter of 2017.

Needham & Co.'s Alex Henderson, reiterating a Buy rating on the shares, this morning cuts his price target to $50 from $65, writing that the outlook this quarter is a little better than he'd feared, but "the damage to investor perceptions of reducing estimates three quarters in a row can't be ignored."

"We are trimming our estimates to reflect the negative pre-release and trimming our target price to reflect the combined impact of the miss and estimate cuts, as well as the hit to investor confidence in the stock and likely in management."

Cowen & Co.'s Paul Silverstein, reiterating an Outperform rating, cuts his price target to $57 from $66. Even though he still sees "attractive long-term risk reward," he sees risk that customers will seek to diversify their suppliers away from Acacia:

Beyond the near term, while ACIA is not the first and certainly will not be the last optical communications component company to have experienced product quality issues, we suspect that, at a minimum, by tarnishing what has been to date ACIA's highly impressive track record of commercially launching high performance solutions--that are critical to coherent optical communication systems--at a remarkable cadence, this incident will increase the risk that more than one customer will move, or will move faster, to reduce their dependence on ACIA by dual sourcing. Beyond the impact on ACIA's reputation and possibly risking customer relationships, we do not see this product quality issue as posing a meaningful threat to ACIA's strong balance sheet of over $320M.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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