Q1 2022 Ciena Corp Earnings Call
As well as a discussion of our financial outlook.
Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations.
A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.
Before turning the call over to Gary I'll remind you that during this call, we'll be making certain forward looking statements.
Such statements, including our quarterly and annual guidance discussion of market opportunities and strategy and commentary about the impact of COVID-19 supply chain constraints and geopolitical dynamics are based on current expectations forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that.
It could cause actual results to differ materially from the statements discussed today.
These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-Q filing which is required to be filed with the SEC by March 11th we expect to file by that date.
<unk> assumes no obligation to update the information discussed in this conference call, whether as a result of new information future events or otherwise.
As always we will allow for as much Q&A as possible today. So we ask that you limit yourself to one question and one follow up.
And as a reminder, we will be hosting investor meetings with the sell side at OFC Tomorrow on Wednesday, we look forward to seeing many of you there with that I'll turn the call over to Gary.
Thanks, Greg and good morning, everyone.
Before I speak to our results.
I would like to express our CAC concern and support for the people of the Ukraine.
Those with friends and family in the region and with all of our employees customers and partners, who are feeling the weight of this situation.
This conflict in the region is leading to tragic outcomes for the Ukrainian people and with a significant and growing humanitarian crisis underway.
We will be making a corporate donation to Ukrainian relief efforts. In addition to reinforcing with our employees at Ciena cares matching program.
Most of the company has very limited exposure in the region and we do not expect there to be a material impact on our global business.
We are complying with all U S and international sanctions on export control requirements imposed on Russia.
<unk>, having already stopped shipments upon the escalation of the conflict.
When combining those actions with a strong position to stand in solidarity with Ukraine. We have made the decision to immediately suspend business operations in Russia.
Like everyone. We will continue to monitor the situation and specifically the potential for broader geopolitical and global economic consequences.
Moving to our Q1 results today, we reported fiscal first quarter revenue of $844 4 million adjusted gross margin of 46, 2% and adjusted operating expense of $219 million in.
In line with the revised expectations, we communicated a few weeks ago.
As a reminder, these quarterly results reflect specific supply chain disruptions that happened late in our first quarter and occurred within an already challenged logistics environment that was worsened by the omicron surge.
To be clear we have subsequently manage through those specific disruptions that occurred in Q1.
Importantly, long term secular demand is very strong driven by the acceleration of cloud adoption and traffic growth and the desire to get higher capacity and more bandwidth closer to the end user.
As a result, we're seeing extraordinary demand that is generating significant momentum in our business, including unprecedented levels of order bookings for our products and services.
This is broad based across our portfolio and geographic regions.
Our order volumes are also benefiting to some extent from security of supply behaviors with customers, giving us extended visibility to their needs as well as some demand catch up type spending.
As we mentioned a few weeks ago, we are sharing additional metrics this quarter that we don't typically provide these.
These metrics illustrate the demand environment and help form the basis of our confidence in the year.
Specifically, our book to Bill ratio in Q1 was in excess of two five of quarterly revenue.
This ultimately resulted in a backlog of more than 3 billion exiting the quarter, providing exceptional visibility for the full fiscal year.
Another highlight from the first quarter as strong revenue diversification.
As we maintain our clear leadership position in web scale, we continue to benefit from prioritize spending in Dci.
In Q1. This resulted in non telco revenue now composing nearly 41% of our business up 16% year over year.
Direct web scale revenue of 20% an increase of 10% year over year.
In addition, we had a solid contribution from cable Msos in Q1.
Driven by both our long standing customers as well as many smaller customers with whom we have been gaining momentum.
Msos overall comprised 10% of total quarterly revenue in Q1 up nearly 70% from a year ago.
From a portfolio perspective.
Core optical business remains incredibly strong and we continue to win more than our fair share.
We added 16, new customers for wave logic five extreme in Q1, bringing our total to 156 customers globally.
Also in Q1 revenue for our flagship 6500 platform increased 20% year over year.
This performance reflects the monetization of some of the new deals that we secured over the past couple of years that are now beginning to deploy.
It also includes activity with existing customers, who are now building out additional capacity and new routes.
As we indicated previously we anticipated this shift in product mix for fiscal 'twenty, two and we expect it to continue throughout the year.
We expect this to result in a higher percentage of revenue from line systems and common equipment than we've seen during the last two fiscal years, particularly in our core optical business.
We also continue to win new business in the next Gen Metro and edge use cases in fact, we reached a milestone of 150, plus total adaptive IP customers during Q1.
Overall in routing and switching we had a strong first quarter with revenue up 33% year over year, including a $12 million contribution from the <unk> platform that we recently acquired from AT&T.
Our software and services business also continues to gain momentum.
Revenue for Blue Planet automation software and services was up 25% year over year.
And revenue for our platform and services software and services was up nearly 50% from Q1 of last year.
Within that business revenue for our newly introduced MCP domain controller almost doubled from this time last year.
Okay.
Now with respect to the supply chain environment and as we mentioned a few weeks ago deliberate actions, we've taken to invest in our growth will provide us greater flexibility.
Beginning in the second half of this year basically to manage current supply chain challenges.
Specifically, we made decisions roughly nine months ago to placed significant orders with our suppliers to meet our expectations for a strong second half <unk>.
Similar to last year.
On an outsized 22 revenue growth rate.
We've been accumulating components that are not as scarce today in order to be efficient and prepared to produce finished goods more quickly when supply constraints ease for semiconductors and integrated circuits.
Additionally, we have invested in manufacturing capacity that we expect to come online later this year.
Overall, we are very positive about the strong demand environment aligned with additional supply chain capacity and flexibility and increased visibility to the remainder of the year based on our order flow and backlog.
With that being said I will hand, it over to Jim to review additional financial details of Q1 as well as provide our outlook for Q2 in the context of our expectations for the full fiscal year Jim.
Thanks, Gary and good morning, everyone.
As Gary mentioned total Q1 revenue was $844 4 million.
Adjusted gross margin in the quarter was strong at 46, 2%.
This reflects a particularly strong revenue contribution from our software and services businesses that helped to offset some of the impact of the higher supply and logistics costs, we are seeing.
In Q1, adjusted operating expense was $290 million.
With respect to profitability measures in Q1, we delivered adjusted operating margin of 11, 8%.
Adjusted net income of $72 $6 million and adjusted EPS of <unk> 47.
In addition, we used cash from operations in the quarter, primarily related to significant investments in inventory something we believe will be a significant differentiator over time.
And finally, adjusted EBITDA in Q1 was $123 $7 million.
Reflecting the addition of the net proceeds of our successful bond offering in January .
We ended the quarter with approximately $1 7 billion in cash and investments.
With a strong balance sheet, we continue to return capital to stockholders.
In Q1, we entered into an ASR arrangement under our new share repurchase program repurchasing $250 million of common stock in the quarter.
The final settlement of the ASR was completed in Q2 and approximately $3 6 million shares were repurchased through the arrangement.
Keep in mind that we have an additional $750 million authorized under our current repurchase plan, which we intend to utilize by the end of fiscal 2024.
Turning now to our guidance.
As we said a few weeks ago, we continue to expect to achieve our annual revenue guidance of 11% to 13%.
For fiscal year 'twenty two.
Our confidence in this outlook is based on a very strong demand environment expected benefits from our continued investments in supply chain capacity and greater visibility provided by our order flow and backlog.
More specifically, we expect a strong second half performance. This year, primarily driven by a significant increase in supply chain capacity in the second half.
You will recall that this is similar to the revenue profile, we delivered last year with particularly strong growth in the second half over the first.
With respect to Q2.
We expect to deliver.
Revenue in a range of $930 million to $970 million.
And adjusted gross margin in the 42% to 44% range.
This reflects our expectation for a revenue mix in Q2 that includes a larger proportion of lower margin common equipment.
Taking into account our gross margin performance in Q1.
And our outlook for Q2, we continue to believe that our gross margin for fiscal year 'twenty two will be in the range of <unk>, 43% to 46%.
Finally, we expect adjusted operating expense in Q2 of approximately $300 million.
In closing we are taking advantage of our market leadership within a very strong demand environment, leveraging our differentiated balance sheet.
Leading innovation and R&D capabilities, and deep and growing customer relationships around the globe as strategic advantages.
We expect investments in our business, including in our portfolio. Our go to market resources, and importantly, our supply chain capacity will position us well to navigate challenging market conditions and deliver the outsized revenue growth in fiscal year 'twenty two.
Which we have guided.
Lastly, before we open the call to questions I want to highlight that we continue to make progress on many ESG initiatives.
We recently made available an updated presentation on the IR section of our website that provides new details on our activity in this important area. We encourage everyone to take a look.
With that Brent will now take questions from the sell side analysts.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Ken.
Please limit yourself to one question and one follow up.
Your first question comes from the line of Amit <unk> with Evercore. Your line is open.
Yes.
Thanks, a lot for taking my question is just the first question on my side can you just talked about historically what is price increases it looked like C&I in terms of what you do.
Paid customers.
And how does that look like in calendar 'twenty two.
And what's sort of embedded in your guide from a price perspective.
I'm sorry on that.
Talking about price increases.
This increase yes.
Sure.
While the dynamics of our industry have always been such that technology reduces the cost of our goods by.
So 25% of years.
A significant amount of.
Of cost reduction in our products, which competition basically causes us to pass along some of our customers that when you get a 30% increase in the underlying demand for capacity. That's how you get to an industry that grows 5%. So it's.
It's actually been common for us over many many years too.
So lower prices per unit of capacity.
Now we are talking with our customers today.
About the fact that our costs actually have gone up quite a bit, particularly with respect to semiconductors and integrated circuits and so we are talking with our customers about sharing in this cost increase we don't expect that that will have much effect. This year, if anything it will be in effect for next.
Year, but price increases are somewhat of a rarity in our business.
Fair enough and then I was hoping you could just spend a few minutes talking about the web scale business.
<unk> double digit growth in the Jan quarter.
Sort of what's enabling that organic versus share gain and how do you see that segment stacks up with the rest of the year.
Hi, Amit.
I think what we're saying is obviously, increasing dci build outs globally.
When we've got a very large market share in web scale as you know, but we actually think.
We're probably going to be taking share based on some of the commitments that were seeing.
Being placed on us already so I think it's just a very healthy mark.
That's that's really building out more and more data centers around the globe, we have multifaceted relationships with these web scale players both in terms of domestic international submarine.
And I think not just in terms of point to point, but also a very large 6500 network capacity with with a lot of these players as well. So it was a very very good quarter and we're going to have a good year with web scale.
Thank you.
Your next question comes from the line of Tim Long with Barclays. Your line is open.
Thank you.
Yes, Gary I was hoping you could talk a little bit about.
Some of the businesses you are calling out routing switching and suffering and blue planet businesses that performed very well in the quarter could you talk a little bit about kind of cross sell in that area. How are you willing how good are you at.
Colony installed base over and how much of that is winning.
New customers with those offerings and then the follow up would just be could you just talk a little bit about the.
The Europe and Asia theaters, they looked like to be a little bit under pressure year over year was that components or is there something else going on in those regions. Thank you.
Okay.
Why don't I take that one first term and then work back through and talk about the software and cross selling and then Scott will talk a little bit about the packet routing and switching.
On the Europe and Asia, we are seeing strong demand across all geographies. So I think really Q1 was more about supply constraint and then really extrapolating out too many.
The dynamics around the different geographies, particularly in Europe , we're seeing strong demand.
Really after after a period of Underinvestment frankly over the last few years, even pre COVID-19 .
So I think Europe is going to be very strong.
India I think was also down in Q1, but I think he is going to have a very good year based on the order flows. So that's probably a good example, I just think it's.
I wouldn't extrapolate too much out based on the challenges around supply.
Constraints, which is going to be with us for a little bit for a while on the software side as Jim said, we had a strong strong quarter good growth on both Blue planet, which really is focused at the service creation layer and the automation, we've seen a lot of carriers, particularly as they've gone through COVID-19 .
<unk> really now prioritize their the automation of that network. So we're seeing very healthy demand and blue planet.
<unk>, which is really the automation of the network now.
<unk>.
The numbers look.
Very good from a growth point of view, but we're coming from a newly introduced.
That form.
But we're very encouraged what we're saying there and thats into we've now got MCP into pretty much all of our major customers around the world and that gives us a platform to upsell various applications on top of that.
And then obviously into the services layer with Blue planet as well, which is part of our strategy and then obviously is where we're seeing the convergence of packet and optical we've invested heavily in our switching and routing portfolio Scott any other based on their readiness switching places I think where we're seeing strongest demand in the <unk>.
Biggest successes, where our service providers, our MSR customers have built out their fiber fiber plans closer to their end customers whether that be.
A wireless play an enterprise play around residential play.
And obviously, we've got tremendous relationships with those service providers and msos around around the world. So that helps in that conversation.
As we look forward.
We're certainly starting to see some of the.
Tier two and tier three.
<unk> is looking for end to end solution, so being able to offer both.
The core and those access and aggregation solution plays.
To our strength as well and as you think about the next generation Metro edge, we firmly believe the winning hand, there is going to be.
Optimized routing and switching optics, photonics, and multi layer control and Gary talked about the software assets there those have a strong.
Value proposition when you start to look at those networks coming together as well.
Okay. Thank you.
Thanks, Tom.
Your next question is from Rod Hall with Goldman Sachs. Your line is open.
Yeah, Hey, guys. Thanks for the question I just wanted to come back to this backlog of $3 billion.
Maybe a couple of questions on that one is.
Do you expect that to rise further in the coming quarter or two or do you think this is the peak and you start to work that backlog down and then my follow up would be regarding backlog as well.
Well.
Yes.
Always dangerous to say, what's going to happen in any given quarter with respect to orders, but we do expect a strong order flow this quarter.
And I wouldn't be surprised if the backlog grew this quarter.
And as we look out we're going to have a very good year.
Ask everybody to remember, though that a lot of this order flow as people, giving us visibility into their order flow into their demand for this year and in some cases, even into next year and so.
It's great that's wonderful we're seeing strong demand.
But shouldnt extrapolate what's going on now into any sort of revenue expectation.
Right that makes sense and then I wanted to also ask.
It's great that you guys have this visibility due to the year I think thats, the first time ever seen that on CNN.
That kind of visibility given the industry, but I was wondering where you think you might finish the year in terms of backlog.
What do you expect that to be gone can you give us any idea.
Where the backlog might end up by the end of the year.
Right.
So let me get the get the question I, just don't think that would be appropriate for us to extrapolate out.
Because we will then get into a conversation about 23.
One of the few companies, that's actually giving guidance for the full year of 2002, I think would be getting a little ahead of ourselves to that but to Jim's. So Jim's point is.
It's a very strong demand characteristics its security of supply absolutely. There is a large portion of that but we also feel that the secular demand around cloud adoption is going to give us.
Our multiyear.
Platform for.
For growth so we feel very good around the secular dynamics.
Space and our position and it just continues to get stronger in all likelihood.
To put a pin in it.
We are going to probably have orders outstrip revenue in Q2 as well.
That's our expectation, we'll see how that plays through for the for the rest of the year.
Okay, Alright, great. Thanks, a lot guys I appreciate it thanks, Rob.
Your next question is from Paul Silverstein with Cowen Your line is open.
Thanks.
Pure and should most hoping you provide some more granularity regarding revenue diversification from a customer perspective I know.
There hasn't been meaningful concentration in a long time, but as we look forward over the next four quarters and beyond I assume the strength Youre looking at is not a function of any one or two customers, but it's more broad than that but any granularity both within the web scale more broadly beyond web scale.
Hello.
We're seeing demand.
Very broadly.
Round the world.
And across verticals Paul.
We are.
<unk> numbers generally speaking haven't changed significantly except that our percentage, which our two biggest customers represent has come down.
Right a bit but our top 10 customers are around 50% and that's been that way for a long time and I think it will continue to be but beyond that.
The top 10 customers in terms of volume we have a whole long list of customers that are seeing the same kind of demand on their networks.
The bigger companies are.
And we are winning our fair share or more than our fair share frankly of all of those build outs.
Alright.
Okay.
I'm sorry.
Copel.
Within routing switching how much of the growth you are looking at that going forward as a function of new customers new projects.
New customers versus new projects reached in our projects with existing customers.
Okay.
And I'll talk to you organically.
The buyout and you are talking about winning routing and switching from customers who are not current optical customers is that what your question.
Well most of our thoughts.
Talking about routing and switching and incremental revenue from <unk>.
While I would articulate it I think your question is how much of it is sort of continue to build outs from existing footprint versus new new application footprint, not necessarily new <unk> customers, but new applications with that.
Well well.
How much is from existing routing and switching customers how much is from customers that haven't bought routing and switching.
Okay I think.
It depends on the time horizon, certainly the growth trajectory that we see in routing and switching has has an expectation independent CNS, winning new logos, but for 2022, the bulk of it is sort of existing existing applications and existing customers.
Okay. Thanks, Chris.
Thanks, Paul.
Your next question is from Simon Leopold with Raymond James Your line is open.
Great. Thank you for taking the question.
I know you've talked about your efforts to raise prices to offset costs.
<unk> told us that it doesn't really affect fiscal 'twenty, two but is effective in fiscal 'twenty three.
Given the progress to date do you have a sense of how to quantify essentially the revenue growth tailwind for fiscal 'twenty three coming from the price increases essentially I'm looking for some quantification at some sense of the progress you've made talking to customers about higher prices.
And then I've got a quick follow up.
So let me take that I think it is.
Going conversation I think that progressed very well, obviously most of our major customers understand very well the global issues that we're all facing so I would say, it's been very constructive and very positive.
But as Jim said earlier, thats not going to impact.
Any of any of our financial performance probably in this year and I think just from a 23 perspective time and its way too early to start talking about next year.
We're already providing pretty detailed guidance for this year and we one of the few companies to do that I. Just don't think it will be appropriate for us to get into those kinds of things and about 23 I would say.
We feel very positive about the strong secular demand in our position in the space and we think this is going to be clearly.
Our multiyear.
Growth platform for us, but I, just don't think it's appropriate to get so far ahead of our Skus right now.
Okay, and just as my follow up.
Pierce that your services gross margin was actually.
A bit better than than the last.
Four quarters or so im just wondering whether there was something unusual in this quarter or whether we should think about.
More sustainability of a better services gross margin if so why.
Well as you know Simon our services revenue stack is made up of a whole.
List of projects that are in various stages of their life lives and.
So I would just attribute that movement to ebbs and flows of the business that's going to move around a bit.
<unk>.
I'd say this we've been very pleased with the progress we've made on our gross margins in services over the last several years, we've done a lot of things and our services.
Supply chain and capacity set to enable that gross margin and so we're pleased with where it is and hopefully it will get better over time, but we don't think that you should take too much.
Out of any one quarter.
Thanks, Dan.
Sure.
Your next question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you I think it was a more prepared comments by Gary you mentioned kind of a little bit more in mind business. Just curious is that because you've seen a meaningful increase in demand for it will because you have the ability to secure.
Why.
Such products and therefore meet demand where other ones you've had more supply challenged so I'm just kind of.
Curious about that and the sustainability.
Something we should expect to continue to be a little more tilted that direction. Thank you.
We are seeing a higher percentage of Commons in photonics this year as compared to previous years. That's a good thing that means that the build outs that we.
The wins that we've had over the past few years are starting to build out and so you can expect that to be a good thing for our future. What we said was that the gross margin guide for Q2 is as a result of a higher proportion of lower gross margin Commons in photonics. So all are.
That is sort of a piece.
Jim the other thing I would add there is.
It's also the context of this is a number of wins that we had frankly some of these state back to pre COVID-19 .
Kind of got put on hold from an operational point of view over the last couple of years and we're now seeing them deploy so it's new accounts and new customers.
Clawing, there and as Jim said Thats, its very positive it bodes well for their commitment to the future to us.
But it's also existing customers now reinvesting and Theyre, both capacity and network modernization. So it's this classic sort of line system photonics.
Commons, which then will follow as they as they fill in with with Cogs over time.
So it's not really it is constrained by supply chain, but we're also seeing it from an order point of view as well.
Great. Thank you for the insight it's appreciated.
Thank you.
Your next question is from Tal Leone with Bank of America. Your line is open.
Hi, guys.
I went to see I went too.
Mobile World Congress last week, and I was surprised with how much discussion there was for white box routing with <unk> and also applicable in traditional routers.
And.
The question is I understand that there is great demand the current times and at the current build out is probably dealt with these kind of solutions, but thinking about the long term.
What is the implications for demand in your space and how are you positioned.
If the market migrates to these kind of solutions.
Yeah, Scott here separate out.
The white box phenomenon from their second theme, there, which is kind of I'll call. It convergence.
Personally I think for for our customer segmentation, we're not really seeing a lot of deployments of the white box is because frankly as you sort of disaggregate the stuff someone has to put it back together again and that's typically not the business of our customers.
On the convergence piece for some parts of the network, we do see that as.
And evolution and we've talked about this in.
Our.
Next generation Metro and edge capabilities, where we really firmly believe.
The winning hand, there is going to be best in class optics best in class Photonics, a lightweight routing and switching capabilities and be off box software control systems that allow you to manage and automate that network across the layers cost effectively and we have been investing in those spreads.
For a long time and part of the fruits of that investment and you're starting to see.
Calm com with that growth in our routing and switching business.
So your position is it's not going to happen for now because of certain things and I agree with you, but what happens if it happens what happens if <unk> are going to.
I'm going to be deployed by carriers are demanded by cloud companies does it mean that CN is.
Good to see.
Shrinkage or decline in demand in the market or.
Operator.
Yes.
Different parts of the network, you're going to have different evolutions in solutions, we affirmatively that the core the core infrastructure of the network is not going to sacrifice announce a performance.
And therefore, it's going to continue to be.
Separate deployments as you get closer to the edge. We think the convergence does have a play and we think thats, a great greater opportunity and our strategy than it is for us because there is other spend that we are not havent historically been addressing that is now available to us.
Memory, we talked about an expanded Tam and product.
Thanks, Tom.
Your next question comes from the line of meta Marshall with Morgan Stanley .
Your line is open.
Okay.
Great. Thanks.
Maybe just on the second half ramp.
Understanding that youre not guiding into fiscal Q3.
Gradual ramp of capacity.
Supply chain bottlenecks for leasing and then the second question.
I mean, I would assume not but.
Any impact to subsea consortium or <unk>.
Yeah, what I'd say, Matt is that.
Q3 has always been a very strong.
Sort of the annual sequence of the way our customers operate and so we will we will see a nice.
And Q3 are you ought to look at Alaska.
Drive your view of.
Of what this year is going to look like based on last because thats kind of the way we're thinking.
A matter on the second part of your question.
Question, we are not.
Early days, but we're not seeing any geopolitical fallout yet on any of the sub marine system payables during the rest of it.
Frankly quite quite the opposite we're seeing very robust.
Demand.
Around the globe for that.
Great. Thanks.
Thanks Manav.
Your next question is from hard.
Nice job with loop capital your line is open.
Good morning, Thank you for taking my question.
Gary I wanted to kind of.
Get you help understanding your comment about strategic investments and increasing supply chain capacity for the second half.
Can you elaborate a little bit more is it just you're procuring more components are you, adding more manufacturing lines.
This.
Expansion.
Our increase in supply capacity is a permanent investment versus.
Just buying more inventory.
Three swim lanes.
We're not.
Following I guess, the just in time inventory approach.
Yes three years.
On the completion.
Opponents that orange in short supply. So you can see it in our raw material inventory and we're sort of building that up waiting for the more constrained components. So that we can turn that into finished goods quickly. So that's number one number two is we made the decision.
<unk> plus months ago to bet heavily on significant growth in our business in the second half of the year and put a significant demand on.
I will just say that component industry.
Playing to the rules other new extended lead time.
So we're not expecting any change in lead times, but we've made we made that bet.
A long time ago, and then the third thing is in order to turn it into finished goods and a.
Faster manner.
We've increased our capacity on the production side largely in the test capacity.
Capacity.
Turning that around quickly. So those are the three main things.
Okay. So.
Most of the stuff that you invest in it.
Inventory and some of it is permanent.
Additional test capacity, how should we think about.
The implications on your gross margins going forward, assuming you're 6% to 8%.
Or does that also mean that you're probably better position.
Maybe the way.
As you think about it I think in terms of Youre talking to.
The capital investment on the production side.
It's a minor needle mover from a gross margin perspective, and a really.
We're talking about pulling forward investment capacity that we would have put in place in 'twenty three anyways.
Okay I appreciate the answers thank you.
Thanks Ross.
Your next question comes from the line of Alex Henderson with Needham Your line is open.
Great. Thanks.
You made the comment.
In your prepared remarks that you expect a significant improvement.
The back half of the year in terms of components, yet one I talked to virtually everybody else in the industry.
They are saying that conditions have not improved and.
In fact may have eroded.
The rate of Decommit.
On orders has gone up virtually every other manufacturer has done the same thing that you've done which is stretched out.
Their orders.
And committed to significant increases in the future.
Sure.
Third quarter fiscal year is pretty close I mean, thats the July quarter.
So.
What gives you the confidence that the supply chain conditions are going to improve and youre not going to get decommit.
Based off of what seems to be continued stretching of duration across the entire industry as well as.
Decommit showing up.
Lot of other vendor in a while ago to be pretty extreme in terms of the lead times haven't gotten worst haven't gotten better and we're not depending on them getting better we put orders in a long time ago, playing by the new rules.
And betting on our business and have others didn't make that bet and I can see theyre showing up today trying to do it they are facing those lead times and they're stretched out.
Now what we have been following very very carefully whether or not those component suppliers have been delivering to their new advertise lead times and for the most part I would say, yes. They have.
Then you talked about Decommit action.
From my perspective, the Decommit in terms of the quantity of them.
Hasnt really changed there happening absolutely.
I would actually say there are actually less severe than they were three to six months ago in the sense of the numbers are probably the same but the magnitude of the documents are different and if you go back three months to six months, what we're seeing is the decommit pushing out quarters.
At a time and sometimes not even.
Reconfirming the quantities that we're talking about those quantities of showing up at the impacts our days and weeks. So that's what we're seeing in time ago, Alex and if others are trying to make.
Today I can understand the difference.
Okay.
Second question, if I could.
You talked about your.
Our strategy around pricing and I understand it that makes sense.
Distant with CNS strategy historically, some of your competitors, though have been much more aggressive on price particular.
Cisco.
You said multiple price increases.
Have you seen a change in the pricing environment.
From the competition, whether it be Cisco Nokia or some of the other vendors.
In the field.
Creating a little bit of a benefit to you.
In terms of share as well.
I think it's too early to tell on all of that to be an estimate and I think some.
Some of these things get announced on a lot of it a lot of the sort of price increases.
But some of the people that you talked about that are really in the enterprise space, which I think <unk> seen more aggressive price increases too so.
Some of that bleeds across for sure and as Jim talked about earlier.
We're in an unprecedented.
Environment from a price dynamic.
In the carrier and infrastructure space.
That's pretty much playing through how we had anticipated we have had some very constructive conversations with most of his time with all of our major customers.
They understand that situation.
We that will start to play through over the next one to one to three years.
But we really haven't seen any.
Massive changes in the competitive environment, it's really particularly right now all of that is hidden by all of the constraints around supply.
No.
It's more about can you supply some thing, but and what the prices.
Frankly.
So it's going to take a little bit longer for that to play through I would say this though.
Given scotts comments around the scale of the commitments that we've made to our supply chain and the step up that we've taken in that long period of time ago, our guidance of 11% to 13% growth. This year on revenues. The order backlog that we have shared with you what's absolutely crystal clear is that.
We're going to be taking market share this year and beyond.
Sure.
Super Thank you very much.
Thanks, Alex.
Your final question comes from the line of semi Chatterji with Jpmorgan. Your line is open.
Hi, Thanks for squeezing me in here.
Just if I could start on gross margin and Jim.
Wanted to see if I could get some color on you know do you creating.
Creating the gross margin guide for the full year.
It is great to see but can you maybe share any quantification of what the impact from the supply chain costs are higher supply chain costs will continue to be on for the fiscal year and the second part to that quickly is how should I think about the better software.
That you had driving the better gross margin in FY <unk>.
Should we think about that going forward with the full year I know I understand it's a wide range, but.
Is software now going to be doing better in terms of revenue for the full year than you imagined earlier because of the strong start and does that flow through to the full year margins. Thank you.
Yes.
I'm going to use some numbers here and I think you ought to be really careful with these numbers because I have to in order to illustrate the point right. The last time, we've talked about our long term gross margins.
Before COVID-19 , we sent them around 45% roughly.
What we centered our view of gross margins. We then went through a COVID-19 period of time in which capacity was the most in demand quanta.
Entity and so therefore, our gross margins did go up quite nicely to the high forties, We said, though that they were going to get back to.
Once we got through the Covid period of capacity adds and get back to a more balanced mix of line systems.
And comments in photonics and capacity that we would naturally get back towards that mid <unk> range. So.
Where are we in all of that.
I think we're heading towards that period of time, where we're back in that range. However.
We guided this year to 43% to 46.
Again, just taking the midpoint of the range that's 44, 5%.
So you could see.
Sort of quantify.
The effect of the extra cost in our supply chain based on that difference now I would caution you to not make any absolute judgments about this but thats sort of in the range of where we are now the others.
The thing that always has an effect on our margin is mix.
<unk>.
It's a mix of the type of products stages of the various projects that we have with our customers.
So.
Where all of those things do.
Impact our gross margin and it's hard to call, but I would say this we have been pleased with the fact, we've been able to maintain gross margins in this sort of unprecedented period of cost increases and we expect over time that will get back to something more like <unk>.
Long range number that we had projected earlier.
Perhaps better.
I know you're thinking software how is your expectation for software changes given the strong stock.
Well, we had an unusually high quarter in Q1, but software as part of our strategy, we've invested pretty heavily in our blue planet mix. We've also added a lot of capabilities on the platform side with MCP I think we have an industry leading management.
And so yes, that's definitely going to be a higher percentage of our revenue. We think it's going to be a higher percentage of our revenue going forward and that will help with gross margin.
Thank you. Thank you training people on our hopes for peaceful future. We look forward to seeing everyone at OFC. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Okay.
[music].
Yes.
Sure.