Overview

Acacia Communications (ACIA) mission is to deliver high-speed coherent optical interconnect products that transform communications networks, relied upon by cloud infrastructure operators and content and communication service providers, through improvements in performance and capacity and reductions in associated costs. By converting optical interconnect technology to a silicon-based technology, a process the company refer to as the siliconization of optical interconnect, the company believe Acacia Communications is leading a disruption that is analogous to the computing industry’s integration of multiple functions into a microprocessor. The company's products include a family of low-power coherent digital signal processor application-specific integrated circuits, or DSP ASICs, and silicon photonic integrated circuits, or silicon PICs, which Acacia Communications has integrated into families of optical interconnect modules with transmission speeds ranging from 100 to 400 gigabits per second, or Gbps, for use in long-haul, metro and inter-data center markets. Acacia Communications is also developing its AC1200 module that will enable, across dual wavelengths, transmission capacity of 1.2 terabits per second (1,200 Gbps). The company's modules perform a majority of the digital signal processing and optical functions in optical interconnects and offer low power consumption, high density and high speeds at attractive price points. Through the use of standard interfaces, its modules can be easily integrated with customers’ network equipment. The advanced software in its modules enables increased configurability and automation, provides insight into network and connection point characteristics and helps identify network performance problems, all of which increase flexibility and reduce operating costs.

The company's modules are rooted in its low-power coherent DSP ASICs and/or silicon PICs, which Acacia Communications has specifically developed for its target markets. The company's coherent DSP ASICs and silicon PICs are manufactured using complementary metal oxide semiconductor, or CMOS. CMOS is a widely-used and cost-effective semiconductor process technology. Using CMOS to siliconize optical interconnect technology enables it to continue to integrate increasing functionality into its products, benefit from higher yields and reliability associated with CMOS and capitalize on regular improvements in CMOS performance, density and cost. The company's use of CMOS also enables it to use outsourced foundry services rather than requiring custom fabrication to manufacture its products. In addition, its use of CMOS and CMOS-compatible processes enables it to take advantage of the technology, manufacturing and integration improvements driven by other computer and communications markets that rely on CMOS.

The company's engineering and management teams have extensive experience in optical systems and networking, digital signal processing, large-scale ASIC design and verification, silicon photonic design and integration, system software development, hardware design and high-speed electronics design. This broad expertise in a range of advanced technologies, methodologies and processes enhances its innovation, design and development capabilities, and has enabled it, and the company believe will continue to enable it, to develop and introduce state-of-the-art optical interconnect modules, coherent DSP ASICs and silicon PICs. In the course of its product development cycles, the company engage with its customers as they design their current and next-generation network equipment in order to gauge current and future market needs.

The company sell its products through a direct sales force to leading network equipment manufacturers, network operators and cloud service providers. The number of customers who have purchased and deployed its products has increased from eight in 2011 to more than 30 during 2017. The company's revenues for the years ended December 31, 2017, 2016 and 2015 were $385.2 million, $478.4 million and $239.1 million, respectively. The company's net income for the years ended December 31, 2017, 2016 and 2015 were $38.5 million, $131.6 million and $40.5 million, respectively. As of December 31, 2017, 2016 and 2015, its total assets were $611.3 million, $516.9 million and $130.7 million, respectively.

Industry Background

Growing Demand for Bandwidth and Network Capacity

Global Internet Protocol, or IP, traffic is projected to nearly triple from 3.2 exabytes per day in 2016 to 9.1 exabytes per day in 2021, representing a 24% compound annual growth rate, or CAGR, according to Cisco’s Visual Networking Index Complete Forecast Highlights, dated June 2017, or the VNI Report. This rapid growth in IP traffic is the result of several factors, including:

Increased data and video consumption. Over the last decade, the proliferation of new technologies, applications, Web 2.0-based services and Internet-connected devices has led to increasing levels of Internet traffic and congestion and the need for greater bandwidth. Video traffic, in particular, is growing rapidly, and placing significant strains on network capacity. The VNI Report estimates that video traffic will represent 82% of all global consumer IP traffic by 2021, reaching 232.7 exabytes per month, up from 78.2 exabytes per month in 2016.Growth in mobile and 4G/LTE communications. The increasing demand for data- and video-intensive content and applications on mobile devices is driving significant growth in mobile data and video traffic and has led to the proliferation of advanced wireless communication technologies, such as 4G/LTE, which depend on wired networks to function. According to Cisco’s Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2016-2021 White Paper, dated February 2017, global mobile data traffic grew 63% in 2016 from the prior year and is expected to increase nearly seven-fold from 2016 to 2021, a 47% CAGR.Proliferation of cloud services. Enterprises are increasingly adopting cloud services to reduce IT costs and enable more flexible operating models. Consumers are increasingly relying on cloud services to satisfy video, audio and photo storage and sharing needs. Together, these factors are driving increased Internet traffic as cloud services are accessed and used. Global cloud data center traffic is expected to reach 19.5 zettabytes, or ZB, per year by 2021, up from 6.0 ZB per year in 2016, a 27% CAGR, and represent 95% of total data center traffic by 2021, compared to 88% in 2016, according to the Cisco Global Cloud Index, dated February 2018. The worldwide public cloud services market grew 28.6% year over year in the first half of 2017, with revenues totaling $63.2 billion, according to new results from the International Data Corporation’s Worldwide Semiannual Public Cloud Services Tracker, November 2017.Changing traffic patterns. Content service providers and data center operators are increasingly building their own networks of connected data centers to handle the increasing amounts of data generated by today’s modern applications that require more complex processing. The architectures of these connected data centers dramatically increase the amount of data being transmitted within these data center networks. For example, virtual assistants like Amazon’s Alexa and Apple’s Siri require significant processing in the cloud. As a result, the East-West, or E-W, traffic created in response to processing these incoming requests are expected to be greater than the North-South, or N-S, network utilization. As a result, enterprises are moving from an 80/20 mix of N-S/E-W traffic to a 20/80 mix with five times more E-W traffic than that between the servers and the requesting devices, such as desktops, mobile devices and IoT devices, among others, as indicated by Cisco Visual Networking Index, September 2017.Adoption of the “Internet of Things.” Significant consumer, enterprise and governmental adoption of the “Internet of Things,” which refers to the global network of Internet-connected devices embedded with electronics, software and sensors, is anticipated to strain network capacity further and increase demand for bandwidth. The VNI Report estimates that globally, there will be approximately 27.1 billion networked devices in 2021, up from 17.1 billion such devices in 2016.

Importance of Optical Interconnect Technologies

Optical equipment that interfaces directly with fiber relies on optical interconnect technologies that take digital signals from network equipment, perform signal processing to convert the digital signals to optical signals for transmission over the fiber network, and then perform the reverse functions on the receive side. These technologies also incorporate advanced signal processing that can monitor, manage and reduce errors and signal impairment in the fiber connection between the transmit and receive sides. Advanced optical interconnect technologies can enhance network performance by improving the capabilities and increasing the capacities of optical equipment and routers and switches, while also reducing operating costs.

The key characteristics of advanced optical interconnect technologies that dictate performance and capacity include:

Speed. Speed refers to the rate at which information can be transmitted over an optical channel and is measured in Gbps.Density. Density refers to the physical footprint of the optical interconnect technology. Density is primarily a function of the size and power consumption of the technology.Robustness. Robustness refers to the ability of an optical interconnect technology to compensate for the signal impairment that accumulates through the fiber network and prevent and correct errors introduced by the network.Power Consumption. Power consumption refers to the amount of electricity an optical interconnect technology consumes. Lower power consumption permits improved density and product reliability, and results in lower operating expense for electricity and cooling.Automation. Automation refers to the ability of an optical interconnect technology to handle network tasks that historically were required to be performed manually, such as activation and channel provisioning.Manageability. Manageability refers to the ability of an optical interconnect technology to monitor network performance and detect and address network issues easily and efficiently, which helps increase reliability and reduce ongoing maintenance and operational needs.

As they build their network service offerings, cloud and service providers and network equipment manufacturers weigh these characteristics differently based on the particular demands and challenges they face. For example, cloud or service providers operating long-haul networks that transmit large amounts of data between Boston and San Francisco have relatively few connection points in their networks and may be more sensitive to speed and manageability of the optical interconnect and less focused on power consumption. In contrast, metro network operators or cloud or service providers operating inter-city or intra-city networks may face space and power constraints, as well as constantly changing workload needs, and be most focused on density, power consumption and automation.

Improvements in these characteristics can lead to reductions in development costs for network equipment manufacturers, who might otherwise need to develop their own optical interconnect technologies. In addition, improvements in these characteristics can lead to reductions in acquisition and development costs for network equipment manufacturers who incorporate third-party optical interconnect technologies into their equipment, which in turn can reduce capital costs for cloud and service providers. Further, improvements in power consumption, automation and manageability can result in reduced operating costs for cloud and service providers.

Coherent Interconnect Technologies

Traditional techniques for transmitting information via light signals over a fiber optic network used simple “on/off” manipulation, or modulation, of the light signal. These traditional techniques are adequate for transmission speeds up to 10 Gbps, as separate optical equipment can be used to monitor the fiber connection and to compensate for the degradation of the light signals when they travel through the fiber. At transmission speeds in excess of 10 Gbps, however, it becomes increasingly difficult to compensate for the degradation of light signals using traditional techniques. In addition, these traditional techniques require cumbersome and expensive equipment and do not meet network operators’ demands for high-quality signals. In the mid-2000s, advanced modulation techniques enabled by coherent communications techniques and digital signal processing were introduced to increase transmission speeds above 10 Gbps. However, these advanced modulation techniques required significant changes in the underlying optical interconnect technologies and architecture.

Coherent communications is a more complex method of transmitting and receiving information via optical signals. Coherent technologies enable greater utilization of complex formats that manipulate both a signal’s amplitude and its phase to yield a higher data transmission rate with better resilience to signal degradation. Coherent communications enables powerful digital signal processing to counter digitally the effects of signal degradation that were previously managed through an array of discrete components and costly techniques, such as optical dispersion compensation. By taking advantage of coherent communications technologies, some cloud and service providers are able to operate networks at transmission speeds of up to 400 Gbps today and are increasingly adopting technologies that enable 1,000 Gbps and above transmission speeds. These providers require advanced coherent interconnect solutions.

Digital signal processing in coherent interconnect technologies takes place in an application-specific integrated circuit known as a coherent DSP ASIC. Building a coherent DSP ASIC is a multi-disciplinary undertaking requiring advanced knowledge of several complex technologies, such as optical systems, transmission, communications theory, digital signal processing algorithms and mixed signal design, and the development and verification of complex communications ASICs. To complete an interconnect solution, the coherent DSP ASIC must be used in conjunction with a number of photonic functions, such as modulation and transmission/reception. These functions have traditionally been performed by several discrete, bulky, expensive components that must be purchased by a network equipment manufacturer and designed into custom interface circuit boards before deployment. The development of a photonic integrated circuit, or PIC, enables dramatic improvements in size and cost by tightly integrating multiple photonic functions into a small integrated circuit.

Solution—The Siliconization of Optical Interconnect Technology

Acacia Communications has developed several families of high-speed coherent interconnect products that reduce the complexity and cost of optical interconnect technology, while simultaneously improving network performance and accelerating the pace of innovation in the optical networking industry. The company build these advanced optical interconnect products using silicon, by converting optical interconnect technology to a silicon-based technology, a process the company refer to as the siliconization of optical interconnect. The siliconization of optical interconnect allows it to integrate previously disparate optical functions into a single solution, leading to significant improvements in density and cost and allowing it to benefit from ongoing advances in CMOS. The company's optical interconnect solution includes sophisticated modules that perform a majority of the digital signal processing and optical functions required to process network traffic at transmission speeds of 100 Gbps and above in long-haul, metro and inter-data center networks. The company's modules meet the needs of cloud and service providers for optical interconnect products in a simple, open, high-performance form factor that can be easily integrated in a cost-effective manner with existing network equipment.

The company's optical interconnect products are powered by its internally developed and purpose-built coherent DSP ASICs and/or silicon PICs. The company's coherent DSP ASICs and silicon PICs are engineered to work together, and each integrates numerous signal processing and optical functions that together deliver a complete, cost-effective high-speed coherent optical interconnect solution in a small footprint that requires low power and provides significant automation and management capabilities. The company believe that its highly integrated optical interconnect modules, which are based on its coherent DSP ASIC and silicon PIC, were, at the time of market introduction, the industry’s first interconnect modules to deliver transmission speeds of 100 Gbps and higher. Prior to the introduction of its highly integrated optical interconnect modules, the company believe that these transmission speeds were not possible in modules in an industry standard form factor without sacrificing signal quality or other performance characteristics. For example, its CFP- and CFP2-DCO modules, which are based on the industry-standard CFP and CFP2 form factors, enable cloud and service providers to easily upgrade their existing metro and inter-data center networks to 100 Gbps and 200 Gbps using their existing, deployed equipment chassis or newly designed network equipment with CFP slot capabilities. Furthermore, by providing an integrated solution that incorporates digital signal processing and optical functionality required to process and transmit data through a high-speed optical channel, its optical interconnect products reduce the resource requirements of the network equipment manufacturers necessary to build and service equipment with high-speed optical interconnect functionality.

The company believe the company were the first independent vendor to introduce at commercial scale both a coherent DSP ASIC and a silicon PIC integrated into an optical interconnect module. By designing its silicon PIC in CMOS, which is widely used in the semiconductor industry and generally does not require special packaging, Acacia Communications is able to reduce cost, increase reliability and take advantage of the ongoing improvement of CMOS technology, as well as contract with foundries for the manufacture of many of its products. The company's silicon PIC incorporates several key optics functions, including modulation and transmission/reception functions, and supports transmission distances for long-haul, metro and inter-data center applications. The company believe that its silicon PIC was the first commercially available PIC to include all of these functions over a broad range of transmission distances. By building both its coherent DSP ASIC and its silicon PIC in CMOS, the company can improve the performance and efficiency of the optical interconnect and benefit from engineering synergies.

The advantages of its solution include:

Industry-leading speed, density and power consumption. The company believe that its coherent DSP ASICs, silicon PICs and 100 and 400 Gbps optical interconnect modules consume less power and have higher density than comparable optical interconnect products. The company's modules perform functions that have traditionally been provided by several discrete pieces of network equipment.Breadth of integration. By integrating many photonic functions into its silicon PIC and further integrating its silicon PIC in its modules, the company enable simplified network equipment designs and reduce the amount of development and optical engineering its customers would otherwise do internally, thereby freeing up their engineering resources to focus on other networking functions.Software intelligence. The company's products incorporate software intelligence that automates tasks, such as channel provisioning, and increases manageability through a high level of software features, including increased monitoring and optimization.Cost-efficiency. Acacia Communications is able to offer its products at attractive price points as a result of the scale and process benefits of its CMOS platforms. In addition, the performance capabilities of its products permit greater flexibility and can reduce both design cost for the network equipment manufacturer and network design and ongoing operational cost for the cloud or service provider.Ease of deployment. By leveraging industry-standard interfaces, its modules enable cloud and service providers to immediately increase the speed and capacity of their networks by replacing their legacy 10 Gbps or 40 Gbps components with its 100 Gbps, 400 Gbps and above modules in their existing equipment. The company's modules can also easily be deployed in next generation network equipment.

Competitive Strengths

The company's goal is to maintain and extend its competitive advantages through rapid innovation delivering industry-leading high-speed interconnect products to its customers by focusing on the following key areas:

Leading provider of high-speed integrated optical interconnect modules. The company believe the company were the first independent vendor to introduce at commercial scale both a coherent DSP ASIC and a silicon PIC integrated into an optical interconnect module capable of transmission speeds of 100 Gbps and above. The company's modules solve many of the shortcomings of existing interconnect solutions and meet the majority of a cloud or service provider’s interconnect needs in a standard and compact form factor that can be easily integrated with other network equipment. The company's coherent DSP ASICs and silicon PICs enable it to offer advanced optical interconnect products with desirable features such as high density, low power and high performance.Track record of rapid innovation driven by advanced design methodologies. The company maximize the pace of innovation through a number of measures, including the creation of an expanding tool box of digital signal processing algorithms, ASIC implementations, CMOS-compatible optics subsystems and related intellectual property, which enable it to develop complex products at an increasing pace by reusing and expanding existing solutions. The company's development, verification and test infrastructure and methodologies involve extensive automation, which increase the speed and quality of its development. The company's ability to innovate at a rapid pace enables it to offer products purpose-built for different applications and based on the newest CMOS technology. The company believe these design, innovation and development capabilities have enabled it, and the company believe will continue to enable it, to develop and introduce state-of-the-art optical interconnect modules, coherent DSP ASICs and silicon PICs for use in applications across multiple markets, including long-haul, metro and inter-data center.Leveraging the strength of CMOS for photonics. The density and cost of high-speed optical interconnect products have traditionally been determined by the photonic components. Implementing the photonic components in CMOS, and using CMOS as the platform for the integration of multiple discrete photonics functions, enables it to significantly reduce the density and cost of its optical interconnect products compared to traditional approaches, which typically rely on complex materials such as lithium niobate, which does not permit the same level of integration, and does not benefit from the ongoing advances in CMOS technology driven by the entire electronics industry.Proprietary software framework enables simplified configuration and deployment. Acacia Communications has made substantial investments in the software components of its products, which the company believe is key to increasing the performance and reducing the capital expenditures and operating expenses associated with high-speed networks. The company's software framework also facilitates the integration of the many complex digital signal processing, ASIC, hardware and optical functions required in high-speed interconnect technologies and enables its customers to integrate its products easily into their existing networks. Through the use of software, Acacia Communications is able to configure the same product to be deployed in various network types with different needs and requirements, without the need to modify or reconfigure the network’s architecture, providing it with significant development and manufacturing efficiencies.Customer collaboration provides deep understanding of market needs. The company collaborate closely with network equipment manufacturers, as well as directly with many cloud and service providers, and solicit their input as they design their network equipment and as the company design its next-generation products. This provides it with deep insights into the current and future needs of its customers and the market, which in turn enables it to develop and deliver products that meet customer demands and anticipate market developments.Strong management and engineering teams with significant industry expertise. Acacia Communications has deliberately built its management and engineering teams, of which its founders remain a key part, to include personnel with extensive experience in optical systems and networking, digital signal processing, large-scale ASIC design and verification, silicon photonic integration, system software development, hardware design and high-speed electronics design. As of December 31, 2017, approximately 76% of its employees are engineers or have other technical backgrounds, and approximately 48% of its employees hold a Ph.D. or other advanced degree. Each element of its solution is developed by experts in the relevant field. The company's collaborative development culture encourages employees with diverse experiences and expertise to work together to create innovative solutions.

Strategy

The company's goal is to become the leading provider of high-speed interconnect technology that underpins the world’s data and communication networks. To grow its business and achieve its mission, Acacia Communications is pursuing the following strategies:

Continue to innovate and extend its technology leadership. The company's coherent DSP ASICs and silicon PICs are at the heart of its products’ abilities to deliver cost-efficient high performance. The company intend to continue to invest in its technology to deliver innovative and high-performance products and to identify and solve challenging interconnect needs. The company expect that its continued investments in research and development will enable it to expand and enhance the capabilities of its CMOS-based products in order to continue to develop higher-capacity and higher-density software-enabled products. For example, Acacia Communications is also developing its AC1200 module that will enable, across dual wavelengths, transmission capacity of 1.2 terabits per second (1,200 Gbps). The company also plan to continue to invest in silicon PIC innovation and its optimization with its coherent DSP ASICs in order to serve the growing demand for bandwidth.Increase penetration within its existing customer base. The company focus heavily on the needs of its customers and frequently innovate in partnership with them to deliver cost-effective products that meet their specific needs. As the company continue to enhance and expand its product family, and as its existing customers seek to expand and improve their network equipment technology, the company expect to generate additional revenue through sales of existing and new products to these customers.Continue to expand customer base. Acacia Communications has increased the number of customers who purchase and use its products in each of the last seven years, and the company believe there continues to be unmet need for high-speed, cost-efficient interconnect products among cloud and service providers. In 2017, the company sold its optical interconnect products to more than 30 customers. Historically, its sales have been primarily to network equipment manufacturers that do not have internally developed coherent DSP ASICs. Acacia Communications has had some success in marketing and selling its products to network equipment manufacturers that have internally developed their own coherent DSP ASICs. The company believe that the benefits of its solution, supported by the success of existing customers as references, will drive more network equipment manufacturers to purchase their interconnect products from it. The company plan to continue to acquire new customers through expanded sales and marketing and brand recognition efforts.Grow into adjacent markets. The company believe that growth in fiber optics-based communications is likely to accelerate, partly driven by the cost and density advantages of its CMOS solution, and that this growth, together with expansion in other markets that depend on high-speed networking capabilities, as well as adjacent markets, such as access aggregation in 5G, Multi-System Operators and Fiber to the x, and intra-data center networking, will result in demand for additional applications for its products. By continuing to reduce the size, design complexity and power of the interconnect and the ease of integration into the equipment, the company believe the company can create opportunities to serve new types of customers that may seek to incorporate high-speed optical interconnect technologies into their products, including companies that do not have sufficient optical engineering expertise to develop systems using current interconnect technologies.Selectively pursue investments, acquisitions or other strategic transactions. Although Acacia Communications is focused on expanding its market share organically, the company may pursue investments, acquisitions or other strategic transactions that complement its existing business, represent a strategic fit and are consistent with its overall growth strategy.

Products

The company's families of optical interconnect technology products consist of high-capability, scalable, cost-efficient optical interconnect modules that are rooted in its coherent DSP ASIC and silicon PIC components. The company's products are built to meet the specific needs of various networks and support transmission capacities between 100 Gbps and 400 Gbps per module. Acacia Communications is also developing its AC1200 module that will enable, across dual wavelengths, transmission capacity of 1.2 terabits per second (1,200 Gbps). The company's module products incorporate its proprietary advanced system-in-a-module software, which, through a standardized interface, enables seamless installation, configuration and operation and a high level of performance monitoring. Acacia Communications is also offering its coherent DSP ASIC as a standalone component to customers designing their own internal coherent modules and line-cards. In addition, Acacia Communications is increasingly offering its silicon PIC as a standalone component for these applications.

Acacia Communications has developed and manufacture, sell and support the following high-speed coherent interconnect modules:

AC100-MSA Product Family

The company's AC100-MSA product family supports 100 Gbps transmission speeds over distances of up to 12,000 km in an industry-standard 5” x 7” form factor. The modules in its AC100-MSA product family rely on advanced soft decision forward error correction, or FEC, and are mainly used in metro and long-haul applications. This product is approaching the end of its volume life cycle.

AC100-CFP Product Family

The company's AC100-CFP product family supports 100 Gbps transmission speeds over distances of up to 2,500 km in an industry-standard, pluggable CFP form factor. The modules in its AC100-CFP product family utilize its internally developed silicon PIC technology and are mainly used in metro, inter-data center and long-haul applications.

CFP2-DCO Product Family

The company's CFP2-DCO product family supports up to 200 Gbps transmission speeds, using QPSK, 8QAM and 16QAM modulation, over distances of up to 2,500 km in an industry standard CFP2 form factor. The module supports interoperable staircase FEC, as well as Acacia proprietary soft decision FEC, and is mainly used in inter-data center, metro and long-haul applications.

CFP2-ACO Product Family

The company's CFP2-ACO product family supports transmission speeds of up to 200 Gbps over distances of up to 2,500 km using an industry-standard, CFP2 pluggable form factor that was designed in accordance with the Implementation Agreement defined by the Optical Internetworking Forum. This module has an analog electrical interface and a linear optical transmitter and receiver that supports multiple modulation formats and transmission capabilities of 100 Gbps and 200 Gbps based on the selected format. The company's CFP2-ACO offers an optics-only solution for customers who currently rely on in-house DSP capabilities.

AC400 Flex Product Family

The company's AC400 Flex product family supports transmission capacities ranging from 100 Gbps to 400 Gbps per module in a 5” x 7” form factor. Modules in its AC400 Flex product family are software configurable to optimize transmission speeds, fiber capacity, compensation for signal impairment and power consumption for multiple applications, including inter-data center, metro, long-haul and subsea applications spanning transmission distances up to 12,000 km and greater.

DSP ASICs and Silicon PICs

The company's module products are enabled by its coherent DSP ASIC and silicon PIC technology. The company's coherent DSP ASICs incorporate its proprietary signal processing algorithms to meet the power and performance requirements of the inter-data center, metro, long-haul and subsea markets. The company's coherent silicon PICs incorporate multiple coherent optical functions, such as transmission and reception, in a single package. Acacia Communications is also offering its coherent DSP ASIC as a standalone component to customers designing their own internal coherent modules and line-cards. In addition, Acacia Communications is increasingly offering its silicon PIC as a standalone component for these applications.

AC1200

The company's AC1200 product family, currently under development, has been designed to utilize two wavelengths, with up to 600 Gbps capacity each, and support transmission capacity of up to 1.2 terabits per second (1,200 Gbps). The company's AC1200 module, which the company anticipate will begin sampling in the first half of 2018, is designed to be software configurable to optimize transmission speeds, fiber capacity, compensation for signal impairment and power consumption for multiple network applications, including DCI, metro, long-haul and submarine.

Sales and Marketing

The company market and sell its products through its direct sales force consisting of sales personnel and centralized and field-based technical customer support. The company's sales force also works closely with its product line management personnel to support strategic sales activities.

The company's products typically have a long sales cycle, requiring discussions with prospective customers in order to better understand their network and system level requirements and technology roadmaps. The company's customers are predominantly network equipment manufacturers, network operators and cloud service providers and Acacia Communications has discussions with them regarding the requirements of their end customers, which provides its sales force with insight into how its products will be integrated into its customers’ solutions and how these systems will be deployed in the networks of their end customers. This sales process requires it to develop strong customer relationships. The period of time from its initial contact with a prospective or current customer to the receipt of an actual purchase order is frequently a year or more. Prospective customers perform system and network level testing before equipment is deployed in a network carrying live traffic. Customers require it to perform extensive reliability and verification testing based on industry standards. This phase of its sales cycle can take several months and purchase arrangements may not be entered into until after this phase is completed. In addition, once the first purchase order is placed by a customer, it may take several months or longer for that customer to increase the volume of its purchases.

The company invest time and resources to meet with leading carriers and cloud service providers to understand network system performance issues. These efforts provide it with a deep understanding of the challenges faced by carriers and cloud service providers which, in turn, enables it to focus its future product and technology development efforts to address those challenges. For example, understanding that several of its customers are planning to adopt technologies that enable up to 1,000 Gbps and higher transmission speeds, Acacia Communications is currently developing products to satisfy these requirements.

The company's in-house sales personnel also assist customers with orders, delivery requirements, and warranty returns. The company's technical support engineers respond to technical and product-related questions, provide simulation tools to enable customers to optimize their optical link design, and provide application support to customers who have incorporated its products into their systems. In general, Acacia Communications has centralized its technical support operations at its corporate headquarters in Maynard, Massachusetts. The company's centralized customer support operations allow its technical customer support personnel to work directly with its research and development and operations personnel on first-line as well as escalated specialized technical support, which reduces the time it takes to identify and address its customers’ issues and helps its personnel maintain and improve upon their technical skills. The company also provide first line technical support to its international customers on-site from its offices in California, China and Germany.

Customers

The number of customers who have purchased and deployed its products has increased from eight in 2011 to more than 30 during 2017. The following table sets forth its revenue by geographic region for the periods indicated based on the country or region to which the products were shipped, which in certain instances may be the location of a contract manufacturer rather than its end customer:

Acacia Communications has historically generated most of its revenue from a limited number of customers. In 2017, 2016 and 2015, its five largest customers in each period (which differed by period) collectively accounted for 70%, 78% and 74% of its revenue, respectively. In 2017, 2016 and 2015, ADVA Optical Networking North America, Inc. accounted for 15%, 26% and 22% of its revenue, respectively, and ZTE Kangxun Telecom Co. Ltd., or ZTE, accounted for 30%, 32% and 28% of its revenue, respectively. In addition, during 2017 and 2015, Coriant, Inc. accounted for 11% and 13% of its revenue, respectively. Coriant, Inc. accounted for less than 10% of its revenue in 2016.

Manufacturing

The company utilize a range of CMOS and CMOS-compatible processes to develop and manufacture the coherent DSP ASICs and silicon PICs that are designed into its modules. The company select the semiconductor process and foundry that provides the best combination of performance, cost and feature attributes necessary for its products.

The company contract with three third-party contract manufacturers to test, build and inspect modules incorporating its coherent DSP ASICs and silicon PICs for high-volume production of its modules. The company's contract manufacturers also implement many customer-specific configurations and packaging before customer shipments. The company build the test systems used by its contract manufacturers. The company also directly manufacture prototype products and limited production quantities during initial new product introduction. The company believe its outsourced manufacturing model enables it to focus its resources and expertise on the design, sale, support and marketing of its products to best meet customer requirements. The company also believe that this manufacturing model provides it with the flexibility required to respond to new market opportunities and changes in customer demand, simplifies the scope of its operations and administrative processes and significantly reduces its working capital requirements, while providing the ability to scale production rapidly.

The company subject its third-party contract manufacturers and foundries to qualification requirements in order to meet the high quality and reliability standards required of its products. The company's engineers and supply chain personnel work closely with its third-party contract manufacturers and fab foundries to increase yield, reduce manufacturing costs, improve product quality and ensure that component sourcing strategies are in place to support its manufacturing needs.

Research and Development

The company's engineering group has extensive experience in optical systems and networking, digital signal processing, ASIC development and design, silicon photonic integration, system software development and high-speed electronics design. As of December 31, 2017, approximately 76% of its employees are engineers or have other technical backgrounds, and approximately 48% of its employees hold a Ph.D. or other advanced degree. The company utilize its hardware and software expertise to integrate coherent DSP ASICs and silicon PICs into high-speed interconnect products that are compatible with industry-standard form factor, interfaces and power consumption requirements. The company participate in industry groups such as Optical Internetworking Forum to help drive the industry towards standardization that allows its customers to more easily integrate its products into their systems. In addition, the company offer its integration expertise to its customers to help expedite their adoption of new products.

The company use simulation tools at many levels of product development, reducing the number of design errors and the need for costly and time consuming development cycles. The company's simulation environment makes use of industry standard computer aided design tools as well as models and tools that are developed internally. The company's simulation tools also allow it to make efficient tradeoffs between power consumption, size and performance early in the development cycle. The company believe this contributes to the ability of its products to deliver superior performance with low power consumption.

The company's research and development facilities are located in Maynard, Massachusetts, Holmdel, New Jersey, San Jose, California, Ottawa, Canada, Bengaluru, India and Wooburn Green, United Kingdom. Acacia Communications has devoted approximately 87,000 square feet of space to its research and development facilities, which the company expect to increase in the future. The company's research and development facilities are equipped with industry standard test equipment, including optical spectrum analyzers, high-speed sampling oscilloscopes, logic analyzers, wafer probes, wafer saws, optical network and Ethernet test sets, thousands of kilometers of optical fiber and associated optical amplifiers and other optical test equipment. The company use these facilities to conduct comprehensive testing and validation procedures on internally produced chips, components and products before transferring production to its contract manufacturers for commercial, higher-volume manufacturing.

As research and development is critical to its continuing success, Acacia Communications is committed to maintaining high levels of research and development over the long term. The company incurred research and development expenses of $92.0 million, $75.7 million and $38.6 million during the years ended December 31, 2017, 2016 and 2015, respectively. Intellectual Property

The company's success and ability to compete depend substantially upon its core technology and intellectual property rights. The company generally rely on patent, trademark and copyright laws, trade secret protection and confidentiality agreements to protect its intellectual property rights. In addition, the company generally require employees and consultants to execute appropriate non-disclosure and proprietary rights agreements. These agreements acknowledge its exclusive ownership of intellectual property developed for it and require that all proprietary information remain confidential.

The company maintain a program designed to identify technology that is appropriate for patent and trade secret protection, and the company file patent applications in the United States and, when appropriate, certain other countries for inventions that the company consider significant. As of December 31, 2017, the company had 49 patent applications pending in the United States, six patent applications pending under Patent Cooperation Treaty filings, 20 foreign patent applications and 37 patents granted in the United States, which expire between 2027 and 2036. Although its business is not materially dependent upon any one patent, its patent rights and the products made and sold under its patents, taken as a whole, are a significant element of its business. In addition to patents, the company also possess other intellectual property, including trademarks, know-how, trade secrets, design rights and copyrights. The company control access to and use of its software, technology and other proprietary information through internal and external controls, including contractual protections with employees, contractors, customers and partners. The company's software is protected by U.S. and international copyright, patent and trade secret laws. Despite its efforts to protect its software, technology and other proprietary information, unauthorized parties may still copy or otherwise obtain and use its software, technology and other proprietary information. In addition, Acacia Communications has expanded its international operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.

Companies in the industry in which the company operate frequently are sued or receive informal claims of patent infringement or infringement of other intellectual property rights. Acacia Communications has, from time to time, received such claims from companies, including from competitors and customers, some of which have substantially more resources and have been developing relevant technology for much longer than it. As the company become more successful, the company believe that competitors will be more likely to try to develop products that are similar to ours and that may infringe its proprietary rights. It may also be more likely that competitors or other third parties will claim that its products infringe their proprietary rights. Successful claims of infringement by a third party, if any, could result in significant penalties or injunctions that could prevent it from selling some of its products in certain markets, result in settlements or judgments that require payment of significant royalties or damages or require it to expend time and money to develop non-infringing products. The company cannot assure you that the company do not currently infringe, or that the company will not in the future infringe, upon any third-party patents or other proprietary rights.

Competition

The optical communications markets are highly competitive and rapidly evolving. The company compete with domestic and international companies, many of which have substantially greater financial and other resources than the company do. The company encounter substantial competition in most of its markets, although the company believe Acacia Communications has few competitors that compete with it across all its product lines and markets. The company's principal competitors in one or more of its product lines or markets include Finisar, Fujitsu Optical Components, Inphi, Lumentum Holdings, NEL, Neophotonics, Oclaro and Sumitomo Electric Industries. The company also compete with internally developed coherent interconnect solutions of certain network equipment manufacturers, including Ciena, Huawei and Nokia (formerly Alcatel-Lucent). Finally, the company face competition from optical interconnect modules that are the result of joint developments among certain of the competitors listed above. Consolidation in the optical systems and components industry has increased in recent years, and future consolidation could further intensify the competitive pressures that the company face.

The principal competitive factors upon which the company compete include performance, low power consumption, rapid innovation, breadth of product line, availability, product reliability, reputation, level of integration and cost, multi-sourcing and selling price. The company believe that the company compete effectively by offering high levels of customer value through high speed, high density, low power consumption, broad integration of photonic functions, software intelligence for configuration, control and monitoring, cost-efficiency, ease of deployment and collaborative product design. The company cannot be certain the company will continue to compete effectively.

The company also may face competition from companies that may expand into its industry and introduce additional competitive products. Existing and potential customers and strategic partners are also potential competitors. These customers may internally develop or acquire additional competitive products or technologies, which may cause them to reduce or cease their purchases from it.

Employees

As of December 31, 2017, the company employed 354 full-time employees, consisting of 178 in research and development, 85 in operations, which includes manufacturing, supply chain, quality control and assurance, 91 in executive, sales, general and administrative, and five part-time employees. Acacia Communications has never had a work stoppage, and none of its employees is represented by a labor organization or under any collective bargaining arrangements. The company consider its employee relations to be good.