ZTE's U.S. Pain Isn't Worth a $1 Billion Overreaction

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(Bloomberg Gadfly) -- News of a ban on sales of U.S. products to ZTE Corp. sent shares of some suppliers through the floor. Mostly, that was an overreaction.

Qualcomm Inc., which dropped 1.7 percent, might be hardest hit at a nominal level but not in relative terms.

ZTE isn't among clients accounting for 10 percent of the U.S. chip company's revenue (interestingly, Oppo/Vivo did fall in that category), according to Qualcomm's annual report. A look at ZTE's filings, however, shows that its biggest supplier last year accounted for 3.17 billion yuan ($505 million) of purchases. This may not be Qualcomm, and if it's not, then Qualcomm is more likely to represent about $296 million in sales for ZTE, according to Gadfly calculations based on supplier data.

A $1.4 billion drop in Qualcomm's market cap overnight can't be wholly attributed to the ZTE ban since the bigger headache could be Qualcomm's pending acquisition of NXP Semiconductors NV.

Little-known Acacia Communications Inc. was worst hit by the prospect of losing a key customer, plunging 36 percent for a $577 million drop in market value. Maynard, Massachusetts-based Acacia has the largest exposure to ZTE, but that slide looks overdone.

Acacia, which makes networking semiconductors, generated $108 million in revenue from ZTE for the fiscal year ending June 2017, down from $153 million the period prior, according to Bloomberg Gadfly calculations based on company filings. Its 28 percent exposure won't be easy to make up, yet the company itself noted in February that orders from the Chinese telecom-equipment maker in the fourth and first quarters were lower than normal, indicating some preexisting weakness.

As ZTE's customers switch to rivals such as Cisco Systems Inc., Huawei Technologies Co. or Coriant Operations Inc., it's likely Acacia will be able to shift some of its orders across, too. The task for CEO Raj Shanmugaraj will be to provide the technical support those clients need to test and verify his offerings in order to minimize disruption. A revenue and earnings drop this year is probably unavoidable, but unlikely worth a half-a-billion-dollar hit.

At $105 million, Oclaro Inc. has the second-largest exposure to ZTE, according to filings from the San Jose-based maker of networking components. That's 18 percent of last year's revenue, a huge jump from 10 percent, or $42 million, the year before. However, Oclaro's $243 million decline in market cap may also be unwarranted.

Complicating things for Oclaro is its pending acquisition by Lumentum Holdings Inc., itself a likely ZTE supplier. But there's no reason this ZTE development should put that merger in jeopardy. At the same time, the Chinese company isn't a major customer for Lumentum. It's not among the top three -- Ciena Corp., Cisco, Huawei -- listed as accounting for 10 percent of revenue, which means ZTE provides no more than $100 million of sales. Hence Lumentum's $365 million decrease in market value also seems disproportionate.

Finisar Corp.'s 4.1 percent drop wiped off $75.6 million. Not as bad as its rivals, but then again, Finisar received no more than $65 million in revenue from ZTE last year, Gadfly calculations show.

While losing a major customer is always going to be a financial headache for those four smaller players, the fallout isn't worth a collective $1.02 billion drop in market value.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

©2018 Bloomberg L.P.

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