About 18 months ago, I made a bearish case for Acacia Communications (ACIA) based on the timing, pricing, and nature of a secondary stock offering that was sandwiched between ACIA’s optimistic earnings guidance and subsequent news that major customer ZTE Corp. significantly reduced its guidance. The stock has never been the same and has drifted lower ever since.

The drift turned into a fresh rout this past week when the U.S. Commerce Department banned Chinese telecommunications-gear maker ZTE from buying American technology for 7 years. The Commerce Department concluded that ZTE violated the terms of a sanctions settlement. From the press release:

“In March 2017, ZTE agreed to a combined civil and criminal penalty and forfeiture of $1.19 billion after illegally shipping telecommunications equipment to Iran and North Korea, making false statements, and obstructing justice including through preventing disclosure to and affirmatively misleading the U.S. Government. In addition to these monetary penalties, ZTE also agreed a seven-year suspended denial of export privileges, which could be activated if any aspect of the agreement was not met and/or if the company committed additional violations of the Export Administration Regulations (EAR).

The Department of Commerce has now determined ZTE made false statements to BIS in 2016, during settlement negotiations, and 2017, during the probationary period, related to senior employee disciplinary actions the company said it was taking or had already taken. ZTE’s false statements only were reported to the U.S. Government after BIS requested information and documentation showing that employee discipline had occurred.”

Acacia plunged 36.0% on the news given the ban on ZTE will cause a large revenue gap or ACIA. The company’s latest 10K filing outlines the high dependency on just a few customers like ZTE (emphasis mine):

“In 2017, 2016 and 2015, our five largest customers in each period (which differed by period) collectively accounted for 70%, 78% and 74% of our revenue, respectively. In 2017, 2016 and 2015, ADVA Optical Networking North America, Inc. accounted for 15%, 26% and 22% of our revenue, respectively, and ZTE Kangxun Telecom Co. Ltd., or ZTE, accounted for 30%, 32% and 28% of our revenue, respectively. In addition, during 2017 and 2015, Coriant, Inc. accounted for 11% and 13% of our revenue, respectively. Coriant, Inc. accounted for less than 10% of our revenue in 2016.”

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