July 9, 2019

Why Acacia is Looking for an Exit?

LightCounting Comments on Acquisition of Acacia by Cisco

Cisco announced today that it has reached an agreement to acquire Acacia for $2.6 billion, which is a very respectable value for a company of 400 people and implies a more than 40% premium to Acacia’s previous stock price. Yet, it is only about half of the company’s peak valuation, which was reached in 2016 soon after the company completed its IPO. Some of this discrepancy is clearly because of the price run-up due to post-IPO excitement, but more recently the changing market situation has also made an impact.

The trade war between the US and China limited the growth of Acacia’a business in 2017-2018. The ZTE ban in April 2018 and Huawei ban in May 2019 had direct negative impacts on the company valuation. ZTE remains Acacia’a largest customer and it is very likely that FiberHome is using Acacia’s products as well. The long term risk associated with doing business in China is a significant problem for the company.

Apart from direct restrictions on sales to China, the risk includes changes in strategies of Chinese equipment vendors. ZTE and FiberHome are clearly following the example of Huawei in developing internal manufacturing of semiconductor ICs, optical components and modules to ensure a secure supply of these products. The Chinese government is also prioritizing domestic manufacturing of IC and optical chips, including coherent DSPs, and investing heavily in start-ups, such as Wingcomm – profiled in LightCounting’s research note on OptiNet China.

Another trend limiting Acacia’s market is the continuing dominance of large companies in the global market for optical transport equipment.  Figure 1 shows market shares of the leading suppliers in this market, calculated in terms of number of coherent DWDM ports shipped in 2018. All the leading suppliers have internal manufacturing capabilities for DSP chips and even transponders. The “All other” category includes equipment vendors that rely on merchant market coherent DSPs and coherent transponders.

This data suggests that the merchant market accounts for just 15% of the total number of coherent DSPs deployed. If merchant suppliers had access to the whole market, their business opportunity would increase by about a factor of almost 7, which is very unlikely given the continuing dominance of the larger vendors. Cisco was the only vendor with internal DSP manufacturing that started using the latest Acacia DSP chips in its products. Infinera started using Acacia’s product after acquiring Coriant in 2018, but their long term strategy is focused on internal sourcing of all optical and DSP chips.
In an effort to limit the scale of merchant DSP suppliers, Ciena, Huawei and Infinera also plan to start making and selling pluggable DWDM transceivers, competing with Acacia and other module vendors.

Figure 1: Market shares of the leading DWDM transport equipment suppliers

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Source: LightCounting report titled “Emerging Market for PAM4 and Coherent DSPs” February 2019

Scaling up the volume of DSP chip sales is critical. Development of these complex ASICs costs tens of millions of dollars, while manufacturing them in higher quantities is relatively easy. Suppliers who achieve the highest scale will have more resources for the development of next generation products and will gain market share. Acacia may reach larger scale being part of Cisco’s business.

Longer term market opportunities for Acacia’s coherent DSPs and transceivers included shorter reach modules, starting with 120km reach 400ZR and even 10km reach 800G optics. However, there is more uncertainty with the timing for these products, given slower than expected demand for high speed optics from Cloud companies in late 2018 – early 2019. LightCounting will comment more on this situation next week in its Mega Datacenter Optics report.

Considering all these risk factors, Acacia’s management made a prudent decision to join forces with Cisco.

LightCounting clients can access full text of the research note at: https://www.lightcounting.com/login.cfm

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3D Sensing for Self-Driving Cars Reaches the Peak of Inflated Expectations

LightCounting releases a new report addressing illumination in smartphones and automotive lidarIn 2019, the market for VCSEL (vertical cavity surface-emitting laser) illumination in smartphones will exceed $1.0 billion – now nearly triple the size of the market for communications VCSELs. That’s quite remarkable for a market that didn’t exist three years ago.3D sensing in smartphones felt like an overnight sensation, but the technology foundations were laid down years ago with Microsoft’s Kinect – a motion-sensing peripheral for gamers released in 2010 but discontinued in 2017 after lackluster sales. Lumentum supplied lasers to the Kinect almost a decade before the iPhone opportunity emerged; the company was ready to profit from the iPhone X opportunity when Apple decided to launch 3D sensing for facial recognition in September 2017.

Figure: 3D depth-sensing meets the Gartner Hype Cycle

3D Sensing

Source: Gartner with edits by LightCounting

If all technologies follow the Gartner Hype Cycle, shown in the Figure above, then 3D sensing in smartphones is now moving up the slope of enlightenment. Android brands raced to add 3D sensing to their flagship phones in 2018 – the Xiaomi Mi8 Explorer and Oppo Find X phones were first – although these only sold in single digit million quantities. Huawei also brought out new phones with 3D sensing, but the ongoing U.S. export ban on the Chinese company must be hurting the company’s traction outside China. Apple continues to dominate the market as all new iPhones released by Apple since 2017 have included 3D sensing on the front of the phone. Apple is expected to introduce 3D sensing for ‘world-facing’ applications in 2020, which adds another laser chip to every phone.

Last year illumination for lidars were not included in our market forecast since LightCounting considered it unlikely that lidar would penetrate the consumer market to any great extent over the forecast period. All indicators now point to a market for lidar illumination ramping up in 2022 and beyond. Optical components firms are now shipping prototypes and samples of VCSELs, edge emitters and coherent lasers to customers developing next-generation lidar systems – many of them building on their expertise in illumination for optical communications and smartphones.

As was the case with smartphones, the foundations for lidar technology were laid down much earlier – in this case with the DARPA Challenge 2007, where the winning vehicle used a 64-laser lidar system from Velodyne Acoustics (now Velodyne Lidar). Lidar is considered by the majority of the industry to be an essential part of the sensor suite required for autonomous driving, helping the vehicle to navigate through the environment and detect obstacles in its path. The first commercial deployments have begun. In Germany, lidar on the Audi A8 enables the car to drive itself for limited periods under specific conditions. In Phoenix, Arizona, you can hail a ride in a Waymo robotaxi.

Investor enthusiasm for lidar is undeniable with nearly half a billion dollars invested in lidar start-ups in 2019 according to our analysis of publicly available investment data. Notable deals include $60 million for U.S. company Ouster in March, Israel’s Innoviz Technologies Series C round of $132 million in the same month, and $100 million for U.S.-based Luminar Technologies in July. Interestingly, these examples illustrate the variety of lidar approaches: each company is building a different type of lidar based on a different wavelength: 850nm for Ouster, 905nm for Innoviz and 1550nm in the case of Luminar. There’s an open technology battle and they can’t all be winners.

The automotive lidar market seems to be close to the peak of ‘inflated expectations’. It’s easy to understand why. The automotive industry is enormous, with nearly 100 million vehicles (including trucks) produced annually. Players like Baidu, GM Cruise and Waymo are backed by deep corporate pockets, and new entrants like Aurora and Pony.ai are attracting hundreds of millions in investment. Intel’s $15.3 billion purchase of Mobileye in 2017 was also directed at autonomous driving. Sensor company AMS is in a $4.8 billion battle to acquire German semiconductor lighting firm Osram with its eye firmly on lidar.

However, signs indicate that the descent into the trough of disillusionment could have already begun. Waymo has yet to roll out its robotaxi services more widely – and this summer admitted that its vehicles needed more testing in the rain. GM Cruise has delayed launch of commercial services for self-driving cars beyond 2019 and is reluctant to commit to a new timescale, with its CEO Dan Ammann observing that safety is paramount; automotive is not an industry where you can “move fast and break things” he said. A casualty of the slow pace was optical phased array lidar developer Oryx Vision, which closed its doors in August and started to hand money back to investors.

While lidar is being deployed commercially today, prices are not conducive to mass production, and there are open questions around regulation, safety, ethics and consumer acceptance. Do local laws prohibit self-driving cars? Will they really be safer than humans? Who is responsible for a crash? LightCounting remains skeptical about the pace of adoption of autonomous vehicles, but will be watching the market closely and with optimism.

More information on the report is available at: https://www.lightcounting.com/Sensing.cfm.

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