Good morning, thank you for standing by. I'd like to let all participants know that today's call is being recorded. If you have any objections, you may disconnect at this time. You've been placed in listen-only mode until the question and answer session of today's call. If you would wish to ask a question, please press star one. Please make sure that your phone is unmuted and record your name clearly when prompted. Thank you. You may begin with your host, Ms. Carol Villazon, with Cisco Investor Relations.
Good morning, everyone. This is Carol Villazon with the investor relations team at Cisco. I'd like to thank you for joining us today to discuss our announcement of Cisco's intent to acquire Acacia Communications. This morning, I'm joined by Bill Gartner, Senior Vice President and General Manager of the Optical Systems and Optics business at Cisco, and Raj Shanmugaraj, President and CEO of Acacia Communications. A press release with information on today's announcement can be found on the websites of both companies at www.cisco.com and www.acacia-inc.com. A replay of this conference call will be available until midnight Pacific Time on July 23rd. For callers in the U.S., the replay number is 800-568-4204. For all other callers, the replay number is 203-369-3290. The replay will also be available on the investor relations sections of both companies' websites.
The matters that both companies will be discussing today include forward-looking statements, and as such, are subject to risks and uncertainties. These risks and uncertainties include those risk factors discussed in the most recent reports on forms 10-Q and 10-K filed by each company, as well as those discussed in the joint press release announcing this acquisition. These and other risks and uncertainties could cause actual results to differ from those contained in our forward-looking statements. Unauthorized recording of the conference call is not permitted. I would like to remind the audience that today's call will pertain strictly to Cisco's agreement to acquire Acacia. None of the comments in this call should be viewed as an update on either Cisco's current quarter or Acacia's current or recently completed quarter. I'd like to turn the call over to Bill.
Thanks, Carol. Good morning, everybody, thanks for joining us today. We are really excited about today's announcement and bringing Acacia in as part of Cisco. As you may know, Acacia is a market leader in high-speed optical interconnect technologies, addressing a wide range of applications across data center, metro, regional, long-haul, and undersea networks. By bringing together our teams, complementary technologies, and shared commitment to innovation, I believe this acquisition is going to further strengthen our leading market position in networking. Let me talk a little about the strategic rationale. Silicon optics and software have been and continue to be strategic and foundational to our success in the market, providing clear differentiation for our core networking products. Over the last several years, we've been investing organically to build a strong portfolio built on these technologies and driving continued innovation in Cisco's routers, switches, and intent-based networking portfolio.
We've also expanded our partnerships and completed strategic acquisitions such as Lightwire, CoreOptics, and Luxtera, which take advantage of the rapidly growing demand for coherent optical technologies, silicon photonics, 100G and 400G solutions that augment Cisco's comprehensive breadth of optics capabilities. Exponential growth in internet users, data and video content delivery, social networking, and demanding business applications have created significant demand for high-speed network infrastructures that are open, programmable, and automated. We believe these dynamics are creating an environment where our customers are needing to increasingly adopt faster speed networking technologies, 100G, 400G and higher to support higher bandwidth demands. We're seeing this inflection in very short-reach environments such as data center, as well as fiber-scarce and longer-reach environments such as WAN, metro, long-haul, and subsea markets, where our customers need to address network infrastructure constraints, including density and power requirements.
The acquisition of Acacia further enhances our silicon and optics portfolio. By combining Cisco's comprehensive portfolio of optical systems and optics solutions, which support web scale customers, service providers, and data center operators with Acacia's optical technology portfolio, we'll be able to further simplify our customers' network operations and reduce complexity. Cisco's also committed to supporting Acacia's current business, including Acacia's existing and new customers. Together, we believe we'll be able to address the data center, interconnect, WAN, metro, regional, and long-haul network providers' demand for superior levels of performance, scale, and efficiency. I'm pleased to introduce Raj Shanmugaraj, Acacia's president and CEO, to tell you a little bit more about Acacia.
Thanks, Bill. My team and I are looking forward to the integration of Acacia with Cisco and the combined benefits we believe that we can both bring to our existing and new customers. As Bill mentioned earlier, Acacia is a market leader in the high-speed coherent optical interconnect market. By implementing optical interconnect technology in a silicon-based platform, or what we refer to as siliconization of optical interconnect. We are able to offer products at higher speeds and density with low power consumption. Our technology is designed to meet the needs of cloud and service providers and can be easily integrated in a cost-effective manner with existing network equipment. We offer a complete portfolio of embedded modules, digital signal processors or DSP, photonic integrated circuits or PICs, and pluggable technologies that enable coherent transmission of optical signals over a range of applications, from edge DCI to submarine.
Acacia brings industry-leading expertise and innovation in all the key technology areas of coherent optics applications, algorithm development, ASIC design, and verification for the digital signal processing, RF design, and module packaging and integration. Cisco plans to support Acacia's current merchant business, including our existing customers and new customers that want industry-leading coherent optics modules, DSPs, PICs, and transceivers for use in networking products and data centers. By integrating Acacia's technology and Cisco's operational scale, we believe we can accelerate the trend towards coherent technology and pluggable solutions while accommodating a larger footprint of customers worldwide. I'm looking forward to working closely with Bill and the rest of the Cisco leadership team as we continue in the journey to develop the best technology for our customers. I will hand it back over to Bill.
Thanks, Raj. To wrap, I want to reiterate some of the reasons we believe Acacia and Cisco combination above others is very compelling. Together, Cisco and Acacia intend to lead the transition for customers moving from optical chassis-based systems to pluggable technology, which will reduce network complexity and simplify operations for our customers. With Acacia's leading-edge coherent interfaces, Cisco will continue to drive innovation into its routing and optical platforms. Finally, Cisco and Acacia teams have a history of working well together and culturally are focused on the same values, which we believe is always necessary to build a good foundation. The opportunities we've identified in this combination are compelling, and we are confident in our ability to build upon the existing performance with the acquisition of Acacia. I'm really pleased to welcome all Acacia employees to the Cisco family. Now I'll turn the call back to Carol.
Thank you, everyone. Missy, we'd like now to open for questions, as that's being done, I'd like to remind the audience to please ask only one question. I would also like to reiterate that you please limit your questions to only those directly related to this transaction.
Yes. Again, if you would wish to ask a question over the phone, please press star one. Please make sure that your phone's unmuted, record your name when prompted. Thank you. First question comes from Rod Hall. Your line is now open, sir.
Yeah. Hi, guys. Thanks for taking the question. Congratulations on the deal, by the way. I guess the biggest question for us is, I know you're saying you're going to continue to support existing customers, if you're continuing to do that long term, how big a business do you think that optical components might be for Cisco? Does that foreshadow Cisco wanting to be a supplier to third parties of this sort of technology and maybe other technologies? Is there a time in the future when maybe it makes sense to just keep this technology private for Cisco? Can you just comment or expand a little bit more on this whole idea of supporting customers and how you guys intend to go forward in the market?
We today, as you know, have a very significant optics business within Cisco that has traditionally served our routing and switching and intent-based networking portfolio. Today, we offer those optics for customers who want to use them as third-party solutions, and we're expanding that with our customers today. We see this as a very natural progression of that trend, where optics technologies, whatever form they come in, whether it's a pluggable or a component like a PIC, would be available to the broader market, including third parties.
Great. Okay. Thank you, Bill.
Thanks, Rod. Okay, operator, next question.
The next question comes from Tejash Venkatesh. Your line is now open, sir.
Thank you. I had a follow-up to the previous question. Given that you compete with other Acacia customers at a systems level, and some of them may not be thrilled about buying DSPs from a competitor, I wanted to get your thoughts on whether Cisco intends to continue being an optical systems vendor, given it's a somewhat smaller business, and whether longer term it makes sense to be a module and a semiconductor supplier. Relatedly, it'll be interesting to get your thoughts on how big you think the module market can become. Thank you.
Yes. I think the answer is yes. We intend to remain in the systems business and offer components and optics to customers as well, which is what we do today. We feel that model can work, and we feel we've demonstrated that with optics today, and we can expand on that with the acquisition of Acacia. In terms of the market size, the coherent market today, if we look at all ports, is a multibillion-dollar market, and we expect as that transitions from chassis-based solutions to pluggables, that market will continue to expand. We're looking at this as a multibillion-dollar TAM for coherent solutions in general.
Thanks, Tejash. The next question?
Yes, ma'am. It comes from Paul Silverstein. Your line is open, sir.
Bill, I apologize if you already said this. I've been cutting in and out, did I hear you say that Acacia will continue to sell modules and components to third parties, including your competitors, such as Arista?
Yes, that's right, Paul. We expect that Acacia is going to have a long-term relationship with these customers as they have developed, and Cisco will continue to support that.
All right. Clearly by acquiring them, you're internalizing a key asset in terms of Acacia's leadership in coherent optics. Presumably, you will have preference in your ability to integrate and to improve your systems above and beyond what third parties can and are able to do.
No, I don't think that's true, Paul. I think if we're going to make this successful, we have to make sure that we're providing the technology to third parties that they want to consume at the time they want to consume it at the right performance and price point. I don't think we could make this successful more broadly if we give Cisco a preference on any of those parameters.
Thank you.
Next question comes from Jim Suva. Your line is open from Citi Investment Research.
Thanks very much. It's pretty clear that you're going to continue to sell to other customers beyond Cisco. It brings it back to the original thing of what is actually the benefits of being combined with Cisco, because it seems like that there could be risk of some of the customers not being pleased with this relationship. What's really the benefit of Cisco owning Acacia?
I think one is having this technology in-house provides us with some vertical integration benefits. We use this technology today in our optical systems and our routing portfolio. Secondly, as this technology shift occurs from chassis-based solutions where the technology's typically incorporated onto a line card that's plugged into an optical system or a router into pluggables, then it becomes really part of a routing solution or a switching solution that we sell to customers in much the same way that we sell optics to customers today. We want to make sure that we have the right technology to offer customers at the right price point and at the right time. We feel having this technology in-house is really the right way to do that.
Okay. Thank you very much.
Thanks, Jim.
Next question comes from Simon Leopold. Your line is open, sir, with Raymond James.
Great. Thanks for taking the question. Just one quick clarification, then the question. The clarification is whether or not this particular deal will require Chinese regulatory approval. In terms of the trending question, I wanted to see if we could get a better understanding of really the market priorities that you see coming to you because of this acquisition. I guess what we're struggling with, is this driven by motivation for the DCI market or telco metro 5G? I'm just looking for a better understanding of what are sort of the needle movers within this opportunity. Thank you.
Yeah. Thanks, Simon. To answer your first question, yes, we'll have to go through a standard regulatory approval process that includes China. To answer your second question, I think there's a number of needle movers. One is that Coherent is a significant spend category for our customers, we want to make sure that we've got the right technology to serve their needs, whether it is a telco application or a DCI application. The other needle mover for us is that this technology is migrating from chassis-based solutions, whether it's a DCI platform or a platform that's targeted at metro or multi-haul applications. It's migrating into pluggables, like 400G ZR as an example, or CFP2, DWDM pluggables that are offered today.
That starts to look more like an optic play for us, where we would position optics with our routers and switches and make them available to customers who are purchasing our routers and switches, but also third-party routers and switches. Longer term, we see this migration from chassis-based solutions to pluggables as playing very well into our optics strategy.
Great. Thank you very much.
Thanks, Simon. Next question, please.
Next question comes from Alex Henderson from Needham & Company. Your line is open, sir.
Thank you very much. I was hoping you could talk a little bit about the longer-term play here in terms of the combination of the move to ZR, which is obviously an open standard, but also the integration onto the board as optics start to move past pluggables and start to need to be directly connected to the internal chipsets along the lines of your move with Luxtera. How does this integrate with Luxtera?
Yeah. Good question. Luxtera, one easy way to think about this is what happens inside the data center versus what happens outside the data center or in the near vicinity of the data center. Luxtera's technology plays inside the data center for 100G, 400G type applications, whereas Acacia's technology plays outside the data center for things like data center interconnect, metro, regional, long haul, and even undersea applications. The big differences in those two applications are inside the data center, the distances are short, typically less than 10 kilometers, and fiber is plentiful, meaning every router port gets its own fiber. Outside the data center, fiber is scarce, meaning you have to find a way to put many signals onto one fiber, and the distances are longer. That requires a more complex technology, which is really where Acacia excels with coherent technology for these applications.
There is very clear distinction between where Luxtera plays and where Acacia plays. To answer your question about the coming together of silicon and optics, we do believe that that is something we will see. We talked about that as part of the Luxtera acquisition, where they've developed some very significant mind share in that area. Acacia has also got some really thinking in that area as well. The industry is still, I think, thinking through what that architecture looks like at the chip level and also what comes off the chip, what's the form of the optic that comes off the chip. There's a lot of work and heavy lifting still required in the industry to really figure out what that right long-term architecture is.
I feel between Luxtera, some of the internal capabilities that Cisco already had, and certainly on the silicon side, as well as now with Acacia, we've got all the piece parts to basically drive that in any direction that the industry wants to see it go.
Thanks, Bill.
Great. Thanks, Alex. Next question, please.
Comes from Mitch Steves from RBC. Your line is open, sir.
Hey, guys. Thanks for taking my question. I wanted to focus a bit more on the technical side here. I know you guys are messaging that opticals are going to be a much more important part of components of, say, 400G and beyond. Was this more of a transaction to get you guys ahead of the competition over the next several years in terms of the optical content that's going to go in? Or is this more of a revenue synergy type deal? It sounds like it's more on the cost side, but I just want to be clear about that. What exactly here specifically, I guess, can benefit Cisco over the next several years from an optical standpoint?
Yes, I'd say it is both. It's not one or the other. There's certainly a cost benefit here because we have vertically integrated technology that was and is in Cisco's portfolio. Longer term, we certainly see a market opportunity. We don't play, for instance. Our optics business today is primarily addressing what's happening inside the data center. Short reach optics, 1G, 10G, 40G, 100G, but all short reach. We don't have a portfolio today that really addresses what happens outside the data center for pluggables. That's largely speaking because pluggables are just really at nascent stage. As we see that market develop, we think that there's certainly a top-line expansion that we can effect as well. Furthermore, I think as we think about technology shifting from line systems that are chassis-based into pluggables, we have to think about network architectures and how that might evolve.
We want to be in a position to basically influence network architectures for customers as well.
Perfect. Thank you.
Thanks, Mitch. Mitch, your next question.
Next question comes from Jeffrey Kvaal from Nomura.
Hi. Thank you very much for taking the question. This is one for you, Bill. We do think of your optical portfolio primarily as a web scale play, you can correct us if we're wrong. You don't talk as much as we would like about it anyway, that would be great. Can you tell us if you think that this deal was driven by something that your web scale customers are asking for and therefore it's part of the broader strategy to deepen your relationship with the web scale customers? Or is this more you trying to ensure your product roadmap over time that would allow you to push more into the web scale community? If that makes sense. Thank you.
Sure. First of all, let me just say that the optical portfolio is deployed in over 2,000 customers today. It's certainly a much wider deployment than web scale, we do focus on web scale as well as the traditional service provider market and even some of the large enterprise markets. I would say this is not driven by a web scale player saying, "We want you to go do this," or this is necessarily a gap, we do believe that web scale players want to consume technology in different ways.
Sometimes that's a fully baked system with hardware and software, sometimes it's a disaggregated approach, and I think that fits very well with Acacia's business model, where they are basically delivering technology to their customers in a way that they want to consume it, whether it's a fully baked module or a pluggable or a chipset. We think this plays very well into the way that web scale players in particular want to consume technology.
Okay. Thank you, Bill.
Thanks, Guys.
Next question. Next question comes from Aaron Rakers from Wells Fargo.
Yeah, thanks for taking the question. A lot of questions been asked, but taking it a little bit differently from the Acacia point of view, can you talk a little bit about the segmentation of Acacia's current revenue base between the various end markets? Any color there, how much is data center interconnect, how much is metro, long-haul, et cetera. I'm just trying to think about that, how that would compare again to the prior comments around Cisco's own current offerings.
Let me just make sure I understand the question, I'm going to turn it over to Raj here. You want to understand how Acacia breaks down in terms of how they think about different market segments?
Yeah. Any color on what the contributions look like across those market segments from the Acacia point of view.
Yeah. We break it down into 3 categories. One is embedded modules, which is modules that we build that are integrated into line systems. We have pluggable modules. These are in the category of CFP2, ZR modules you would have heard of. Finally, components, which would be a combination of DSPs and PICs. In general, I think if you look at the components or silicon components, those are generally somewhere between they vary quite a bit because we started out with selling DSPs and then we've added PICs to it. It's in the range of 20%-30%. It varies quarter-over-quarter. That's the component side of the business. There is, of course, between the pluggables and embedded, it varies. The remaining 70% is split. Depending on new product cycles, the ratio changes between those two.
Thank you.
One thing I would add to that, which was an important issue for Cisco is, with the most recent generation of Acacia technology, it really allows us to serve multiple market segments. We used to develop purpose-built products for metro, for long haul, for undersea. We can now support all market segments from DCI all the way through undersea with one solution that Acacia delivers, and we call that multi-haul. It really has helped simplify things for our customers, because they don't have to think about purpose-built products for each of those segments.
Very helpful. Thanks.
Great. Next question, please.
Comes from James Faucette from Morgan Stanley.
Hi, James.
James-
Hi. You have me to Marshall on instead.
Oh. Okay.
Sorry.
No problem.
From Morgan Stanley. Just a question on whether there's any plans to introduce an 800G roadmap, given competitors have one, or stick with the current 600G, 400ZR roadmap that's currently in place. Thanks.
Well, we're not announcing any roadmap plans at this point, but we're certainly expecting to continue innovation as Acacia has demonstrated over the last 10 years.
Great, thanks.
Great. Operator, next question, please.
Comes from Sami Badri from Credit Suisse.
Thank you. The one thing I really want to understand is once Acacia is actually closed at some point fiscal year 2020, maybe could you just walk us through some of the financial model implications of incorporating this business into your overall Cisco model, just so we have an idea. Is there potential cost to be reduced? Is the entity going to be largely intact? Is revenue growth going to be the objective? Just so we can get the financial priorities once this is integrated and acquired.
Hey, Sami. I think at this point in time, because of the fact that it is going to be in our second half of our fiscal year 2020, as far as the close goes, we're not providing any details there. We'll typically do that as the deal has actually, or transaction has closed for those metrics that you're looking for. Bill, I don't know if you want to maybe touch on the integration benefits that we're going to be gaining.
Yeah, no, I think I've mentioned earlier that we do anticipate some vertical integration benefits here as well as some top-line benefits, but I don't think we're going to be commenting on that until close.
Okay. Thank you.
Thanks, Sami. I believe we'll have time for one last question.
That question comes from Michael Genovese from MKM Partners.
Hi. Thanks very much. I wanted to clarify, first of all, whether Cisco plans on offering ZR to other router vendors, specifically on that product, if that would be something that Cisco does. My actual question was this at all a competitive process, or was this just Cisco directly communicating with Acacia with no other bidders involved?
Yeah, we're not going to comment on the latter question. In terms of first question, we fully intend to offer ZR to our end customers, to end customers for others that may want to buy directly and to other NEMs or OEMs that might be interested in sourcing a ZR for their end customer application.
Thank you, Bill.
We may have time maybe for one last question. Operator?
Yes. The question comes from Srini Pajjuri from Macquarie.
Thank you for squeezing me in. Good morning, guys, and congrats on the deal. Bill, most of my questions have been answered. Just want to hear your latest thoughts on the 400G optical market within the data center. I know we've been hearing of a lot of constraints there. I just want to hear your thoughts on how the ecosystem is maturing and when you expect volume shipments there.
Yeah, no, it's a good question. The vendors like Cisco are shipping 400G ports today. The optics have been, I think, slow to mature in that segment. We do expect to see optics in sample quantities by the end of this year. I don't expect a significant ramp until next year for the 400G optics. We are anticipating 400G DR4, which is the parallel optic, will probably be significantly deployed inside the data center, and that would be coupled with either a DR4 at the other end or 100G DR optic at the other end. All of those we see sort of hitting ramp in the first half of next year.
Thank you.
Great. Well, that was our last question for today. I want to thank Bill and Raj, as well as everyone who has joined us on the call today. As a reminder, a replay of this call will be available later on the Cisco and Acacia investor relations websites. If you have additional questions, please visit the website of either company or contact a member of the respective investor relations PR AR teams. Thank you very much. This concludes our conference call for today.
That concludes today's conference. You may disconnect at this time. Thank you, and have a great day.