Supply chain conditions worsened in Ciena's second fiscal quarter of 2022, overshadowing a quarter in which the company still managed to grow revenues by 14%.

Ciena and others across the telecom landscape have been grappling with global supply chain constraints for multiple quarters. For Ciena, the situation dimmed significantly through the first three months of 2022.

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Source: Pavel Kapish/Alamy Stock Photo)

"In fact, Q2 really presented the most volatile set of supply chain conditions to date, which in fact worsened as we moved through the quarter," Gary Smith, Ciena's president and CEO, said Thursday on the company's Q2 2022 earnings call.

"I want to be extremely clear. In this environment our revenue is not a function of demand or even production capacity for that matter," Smith added. "It is purely a matter of component, supply, availability."

Still, Ciena did manage to deliver more products in its fiscal Q2 than it did in the year-ago period, he said.

Ciena has been trying to mitigate the supply chain issue with large, advanced purchase commitments for critical components that are in short supply, and by seeking out alternative sources. But Smith conceded that Ciena remains "in a very constrained supply environment," particularly when it comes to semiconductors and integrated circuits.

"Specifically, we saw a significant increase in both volume and magnitude of supplier decommits, that we weren't able to fully mitigate in two areas that are critical to our business," he explained.

The problem is multifaceted, as Smith pointed out that key optical subcomponent suppliers have been unable to fulfill their commitments alongside additional supply "decommits" among suppliers of low-value commoditized parts. Pandemic-driven lockdowns in China, a prime source of those parts, are amplifying the problem.

"There simply aren't enough parts to go around and satisfy demand across a number of industries and market segments," Smith explained.

Ciena, of course, is far from alone in this plight. Earlier this week, DZS CEO Charlie Vogt also lamented that the "real challenge" in the supply chain is sourcing ancillary materials from smaller, sub-component suppliers.

Backlog 'beyond the pale'

The impact of supply chain constraints are showing up in Ciena's rapidly growing backlog. The company ended fiscal 2021 with a backlog of $2.2 billion and saw it rise to $3 billion in fiscal Q1 2022. Ciena exited fiscal Q2 2022 with a backlog of more than $4 billion.

Jim Moylan, Ciena's chief financial officer, called the surging backlog figure "almost beyond the pale," noting that a small portion (on the order of a few hundred million) of the $4 billion backlog is for 2023 demand.

"All the rest of it is asked for by the customers in this year," Moylan said. "So our revenue for this year would have been extremely high if we were able to get the components to manufacture it."

But he warned analysts not to apply that to a new, larger revenue run rate. "This is catch-up," Moylan said. "But it does speak to the strength of demand and what we think is very doable demand."

Financial snapshot

Ciena pulled down Q2 sales of $949.2 million, up 14% versus the year-ago quarter. That came in a smidge below the $951 million expected by analysts.

By vertical, telecom (56% of sales) rose 13% year-over-year. Non-telco revenue (44% of sales) rose 15%, driven by a 2% to 3% increase in sales to cable operators, 50% growth in the government/enterprise segment and 7% growth from webscalers, according to Raymond James.

Looking ahead, Ciena forecasted fiscal Q3 sales in the range of $870 million to $930 million, below expectations of $1.08 billion. That lower expectation is driven by the supply chain issues.

"We suspect management has erred on the conservative side," Simon Leopold, analyst with Raymond James, explained in a research note. The recovery will take time, "but we see Ciena as a share gainer with expanding margins," he added.

And that $4 billion-plus backlog? "Even if a fraction of the backlog comes from double ordering, the demand metrics look great," Leopold noted. "We doubt Ciena's competitors avoid the supply chain issues, so share shifts seem unlikely, and the Huawei swap opportunities remain a multi-year tailwind."

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— Jeff Baumgartner, Senior Editor, Light Reading