Optical component suppliers brace for ZTE export ban effects

The U.S. Department of Commerce today added ZTE and three affiliates to the "Entity List," which bans U.S. companies from selling technology to the Chinese communications systems company because the Department has concluded "that the four entities are acting contrary to the national security or foreign policy interests of the United States." Foreign companies would also be restricted from selling products with "significant" U.S.-sourced content. The action likely will cut off the supply of components critical to ZTE's current system designs. It likely also means a loss of revenue for several optical component and subsystem vendors.

The Commerce Department imposed the ban because it believes ZTE sold communications systems to Iran that contained U.S. technology in violation of an economic embargo the U.S. had placed on the Middle Eastern country. ZTE apparently at least considered creating shell companies to avoid getting caught (see "ZTE faces export sanctions from US Department of Commerce").

Oclaro was first to acknowledge the likely impact of the sanctions. "ZTE purchases multiple products from Oclaro. Oclaro is currently reviewing the impact of this action by the Department of Commerce on our ability to continue to ship products to ZTE and intends to fully comply with the Department's final rule," the company said in a statement.

"Revenues to date from ZTE are currently projected to exceed 10% in Oclaro's third fiscal quarter of 2016. Oclaro currently expects its results for the third fiscal quarter to be at the low end of the guidance ranges it provided on February 2, 2016," the statement concluded.

However, Oclaro won't be the only company to feel the bite of the Commerce Department's ruling. According to Andrew Schmitt, founder of Cignal AI, sales to ZTE represent about 25% of coherent optical transceiver vendor Acacia Communications' revenues. The loss of revenue could affect the company's plans for an IPO (see "Acacia Communications IPO a referendum on optical subsystems space?").

"The impact of this decision is very hard to predict, but in the near term it certainly is negative for Acacia's IPO plans as ZTE was their largest customer in 2015," says Schmitt.

NeoPhotonics also has significant exposure to China, with Huawei its principal customer there. NeoPhotonics CEO Tim Jenks referenced ZTE as a customer as well during the question and answer portion of the company's analyst call to discuss its second quarter 2015 results, according to a transcript from Seeking Alpha. A query to NeoPhotonics requesting comment is awaiting a response.

Other optical component and subsystems companies likely supply parts to ZTE as well. We'll add their names to this story as they are identified.

UPDATE: Along these lines, Lumentum (NASDAQ:LITE) released a statement late on March 8, stating that the "Company’s sales to ZTE were less than one percent of the Company’s total sales during the first half of fiscal 2016 and recent business levels have not been material."

UPDATE: NeoPhotonics Corp. (NYSE:NPTN) issued a similar statement March 9. "NeoPhotonics revenue to ZTE during fiscal year 2015 were approximately one percent of total revenue [sic], and the company does not anticipate materially different revenue from ZTE in the first quarter of 2016 or in the 2016 fiscal year," read the statement. "This event has caused no change to the outlook for the quarter ending March 31, 2016 provided in the company’s quarterly financial results press release of March 1, 2016."

The ban also will affect companies that supply optically related semiconductors to ZTE. AppliedMicro likely is one such company. The firm received a "Supplier of the Year" award in 2013 from ZTE related to Optical Transport Network (OTN) and high-performance PHY chips. PMC-Sierra, now part of Microsemi, also had supplied OTN semiconductors to ZTE.

The overall impact of the export ban remains unclear. "Critical demand from Chinese carriers can be soaked up by Huawei and Fiberhome in the absence of ZTE supply," Schmitt says. "The key question is what impact this has on Chinese macro demand – do customers wait for ZTE to return to the table or do they move forward with other vendors?"

For more information on optical subsystems and suppliers, visit the Lightwave Buyer's Guide.