Newly Public Acacia Targets Data Centers, Wants to Be the Next Intel

They are the few, the proud, the tech companies that have gone public this year.

Acacia Communications is one of them. The Maynard, MA-based networking company (NASDAQ: ACIA) raised $103.5 million in its IPO in May. That remains the Boston area’s only tech IPO of 2016. Meanwhile, San Francisco-based software firm Twilio went public in June, raising $150 million. And Redwood City, CA-based Talend, a data-integration software company, had a $95 million IPO last month, as did Seattle-based Impinj, a radio-frequency identification tech company, which raised $67 million.

Acacia’s first quarterly report as a public company is expected Thursday. So it seems natural to ask whether the firm has much in common with other recent-IPO companies.

“We are a different kind of animal,” says Murugesan Shanmugaraj, Acacia’s president and CEO. “We are more like Intel.”

He’s talking about the fact that Acacia delivers hardware—specifically, optical networking modules that help wireless carriers and cloud infrastructure providers run data communications over long distances and between data centers. (The comparison also has to do with delivering silicon-based products, but we’ll get to that in a minute.)

Acacia is also different from most newly public tech firms in that it has been profitable for the last two years (what a concept). The company reported profits of $13.5 million and $40.5 million in 2014 and 2015, respectively, on revenues of $146.2 million and $239 million. Acacia’s stock is currently trading at around $69 a share, which is triple its IPO price of $23. The company had 228 employees as of the end of the first quarter.

Shanmugaraj

Shanmugaraj

In a recent interview, Shanmugaraj couldn’t comment on Acacia’s latest financial performance, citing the company’s SEC-mandated quiet period, but he shed light on some lessons learned from 30 years in the telecom industry, as well as his company’s strategy in optical communications—and why it’s important to the broader tech world.

Acacia was founded in 2009 by Benny Mikkelsen, Christian Rasmussen, and Mehrdad Givehchi. The trio of engineers collectively had experience from Bell Labs (previously owned by Alcatel-Lucent), Mintera, and Sycamore Networks. Shanmugaraj joined Acacia in early 2010. He says he first met the founders over an espresso at the firm’s offices, in a building once occupied by Digital Equipment Corporation.

Shanmugaraj, who goes by “Raj,” provided a business spark. He was coming from Alcatel-Lucent, where he had been vice president of business development in the optical networking division. Before that, he was CEO of Astral Point Communications, which was bought by Alcatel in 2002. Shanmugaraj bonded with the Acacia founders over their experiences in telecom—and their vision for the new company.

Acacia saw an opportunity to “siliconize” optical communication systems—meaning bring the benefits of the silicon chips at the heart of computers and electronic devices to the field of photonics. The idea was to make optical interconnect equipment (such as line cards and circuit boards) faster, smaller, more energy-efficient, and easier to build. The applications could be in everything from big telecom providers’ networks—think Verizon and AT&T—to Web infrastructure companies like Amazon and Google and their ever-growing data centers.

Silicon photonics has been a hot research area since the early 2000s. But it took many years for technical hurdles to be cleared and for the commercial market to develop. “Optical networking is a difficult space. It’s quite lumpy and there are lots of big players, but we did a lot of right things,” Shanmugaraj says. “We built credibility right away. That’s hard to build, and easy to destroy.” Still, he says, “we knew this was going to be a bit of a slog.”

Shanmugaraj and his team had lived through the telecom crash of 2001-2002. “We saw the goods and the bads,” he says. “We learned what to do differently—set low expectations, under-promise, and over-deliver in terms of products.”

One thing that helped Acacia in the early days was that big networking companies hadn’t yet invested a lot in silicon photonics. People had been saying, “there’s too much fiber, too much bandwidth, nobody needs it,” Shanmugaraj says. “Once we came out, we didn’t see another competitor forming that is going to take over.”

That all changed with the explosion of smartphones, online video, cloud computing, and big data analytics. Suddenly everyone wanted more bandwidth. The optical networking industry talks about gigabits per second—the rate at which data can be transmitted between systems. The current standard is 100 gigabits per second, and that’s mostly where Acacia sits. (The next frontier is 400 gigabits per second, which should be reached in a few years.)

The company’s products connect fiber-optic networks to data centers, cell towers, and other facilities that provide data service to metro areas and large businesses. Part of what the technology does is process the data so it can be sent reliably over long distances—80-100 kilometers, say, or even across the ocean.

Shanmugaraj says optical networking devices that traditionally were the size of pizza boxes can now be made into “modules the size of an iPhone, by doing this in silicon and making it into two chips.” One of those is an application-specific integrated circuit chip, and the other is a silicon photonic chip with 50 optical functions, he says. “It makes it easier to build networks,” he says. “What used to take weeks, now you do it in a matter of minutes.”

More than two-thirds of Acacia’s business comes from outside the U.S.—mostly in Europe and the Asia-Pacific region. Shanmugaraj says the firm’s technology is “deployed in a majority of the large carriers worldwide,” and that networking systems that connect across data centers (that’s the fastest-growing market segment) all use similar products.

Other companies that compete in optical networking systems include Finisar, Oclaro, and Ciena.

As it built its business, Acacia raised more than $32 million in venture capital from investors including Matrix Partners, Commonwealth Capital Ventures, and Summit Partners. Those investors look to make out well, as Acacia’s stock has risen since its May IPO, and its market capitalization currently stands at $2.57 billion.

Which brings us back to Acacia’s timing for going public, even as most later-stage tech startups are staying private.

“We were ready,” Shanmugaraj says. The company’s profits “put us in a strong fundamental growth position,” he says, adding that “you don’t see many companies coming out with good top line and bottom line” results.

Asked which companies he sees as role models, Shanmugaraj names Intel, Broadcom, and Qualcomm. Each of those “converted a lot of analog into digital” systems, he says, and “sold lots and lots of chips.” Starting tomorrow, we’ll see how Acacia follows in their footsteps as a public company.

Gregory T. Huang is Xconomy's Editor in Chief. E-mail him at gthuang [at] xconomy.com. Follow @gthuang

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