Earnings Call Transcript - CIEN Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ciena Fiscal Q1 2022 Financial Results Conference Call. It's now my pleasure to turn the call over to Mr. Gregg Lampf, Vice President of Investor Relations. Please go ahead, sir.

Gregg Lampf, Vice President of Investor Relations

Thank you, Brent. Good morning, and welcome to Ciena's 2022 Fiscal First Quarter Results Conference Call. Our call today is scheduled for up to 45 minutes. With me today is Gary Smith, President and CEO; Jim Moylan, CFO; and Scott McFeely, Senior Vice President of Global Product & Services. In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our views on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's 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 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 11. We expect to file by that date. Ciena 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, though 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 and Wednesday. We look forward to seeing many of you there. With that, I'll turn the call over to Gary.

Gary Smith, President and CEO

Thank you, Gregg, and good morning, everyone. Before discussing our results, I want to express our concern and support for the people of Ukraine, including those with friends and family in the region, as well as our employees, customers, and partners who are affected by this situation. The conflict is resulting in tragic consequences for the Ukrainian people, leading to a growing humanitarian crisis. We will make a corporate donation to support Ukrainian relief efforts and enhance our Ciena Cares Matching Program for our employees. Although the company has limited exposure in the region and we do not anticipate a significant impact on our global business, we are adhering to all U.S. and international sanctions and export regulations imposed on Russia, including halting shipments following the escalation of the conflict. In solidarity with Ukraine, we have decided to immediately suspend our business operations in Russia. We will continue to monitor the situation, particularly regarding potential broader geopolitical and economic consequences. Now, regarding our Q1 results, we reported fiscal first quarter revenue of $844.4 million, an adjusted gross margin of 46.2%, and adjusted operating expenses of $219 million, which align with the revised expectations we shared weeks ago. It’s important to note that these quarterly results reflect specific supply chain disruptions that occurred late in our first quarter within an already challenged logistics environment aggravated by the Omicron surge. We have managed through those disruptions that took place in Q1. On a positive note, long-term secular demand remains strong due to increased cloud adoption, traffic growth, and the need for higher capacity and bandwidth closer to end users. Consequently, we are experiencing extraordinary demand generating significant momentum in our business, which includes unprecedented levels of order bookings for our products and services across our portfolio and geographic regions. We are also seeing some benefits from customers' security of supply behaviors, which is giving us extended visibility into their needs alongside some catch-up spending. As we mentioned, we are sharing additional metrics this quarter that we don’t usually provide, which demonstrate the demand environment and bolster our confidence in the year. Notably, our book-to-bill ratio in Q1 exceeded 2.5 of quarterly revenue, resulting in a backlog of over $3 billion at the quarter's end, giving us exceptional visibility for the entire fiscal year. Another highlight from the first quarter is our strong revenue diversification. While maintaining our leadership in web-scale, we continue to benefit from prioritized spending in DCI, with non-telco revenue now accounting for nearly 41% of our business, an increase of 16% compared to last year. Direct web-scale revenue reached 20%, a 10% year-over-year increase. Additionally, we had significant contributions from cable MSOs, which comprised 10% of our total quarterly revenue in Q1, up almost 70% from last year. From a portfolio perspective, our core optical business remains robust, capturing more than our fair share of the market. We gained 16 new customers for WaveLogic 5 Extreme in Q1, bringing our total to 156 globally. Furthermore, revenue for our flagship 6500 platform grew by 20% year-over-year, reflecting the monetization of new deals and increased capacity with existing customers. We expected a shift in product mix for fiscal '22, anticipating a higher percentage of revenue from line systems and common equipment this year compared to the past two years, particularly in our core optical business. We are also securing new business for next-gen metro and edge use cases, reaching a milestone of over 150 total Adaptive IP customers in Q1. Overall, Routing and Switching had a strong first quarter, with revenue growing by 33% year-over-year, including a $12 million contribution from the Vyatta platform acquired from AT&T. Our Software & Services business is also gaining traction, with Blue Planet automation software and services revenue up 25% year-over-year, and nearly 50% growth in our Platform and Services software revenue compared to last year, with our newly introduced MCP domain controller revenue almost doubling from last year. Regarding the supply chain situation, as we noted previously, the proactive measures we’ve taken to invest in our growth will enhance our flexibility in the latter half of this year, enabling us to manage ongoing supply chain challenges. We made significant orders with our suppliers about nine months ago to meet strong second-half expectations, aiming for a robust revenue growth rate of 22%. We've been stocking components that are currently less scarce to ensure we can produce finished goods quickly when supply constraints ease for semiconductors and integrated circuits. Additionally, we are investing in manufacturing capacity expected to come online later this year. Overall, we are optimistic about the strong demand environment, coupled with additional supply chain capacity and flexibility, and increased visibility for the remainder of the year based on our order flow and backlog. With that, I will turn it over to Jim to discuss further financial details from Q1 and provide our outlook for Q2 within the context of our full fiscal year expectations.

James Moylan, CFO

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 an adjusted operating margin of 11.8%, adjusted net income of $72.6 million, and adjusted EPS of $0.47. 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% growth for fiscal year '22. 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'll 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 our 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 '22 will be in the range of 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 has 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 '22 to 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, we'll now take questions from the sell-side analysts.

Operator, Operator

Your first question comes from the line of Amit Daryanani with Evercore.

Amit Daryanani, Analyst

Just the first question on my side. Can you just talk about historically, what does price increases look like for Ciena and what you do for your customers? And how does that look like in calendar '22? And what's sort of embedded in your guide from pricing perspective?

James Moylan, CFO

I'm sorry, Amit, you're talking about price increases?

Amit Daryanani, Analyst

Yes.

James Moylan, CFO

Well, the dynamics of our industry have always been such that technology reduces the cost of our goods by just 25% a year, a significant amount of cost reduction in our products, which competition basically causes us to pass along to 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 actually been common for us, over many, many years, to show 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 will have much effect this year. If anything, it will be an effect for next year, but price increases are somewhat of a rarity in our business.

Amit Daryanani, Analyst

Fair enough. And then I was hoping you could just spend a few minutes just talking about the web-scale business. You saw a nice double-digit growth in the Jan quarter. Sort of, one, enabling that organic versus share gain, and how do you see that segment stack up for the rest of the year?

Gary Smith, President and CEO

Amit, I think what we're seeing is, obviously, increasing DCI build-outs globally, and 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 we're seeing being placed on us already. So I think it's just a very healthy market 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 6,500 network capacity with a lot of these players as well. So it's a very, very good quarter, and we're going to have a good year with web-scale.

Operator, Operator

Your next question comes from the line of Tim Long with Barclays.

Tim Long, Analyst

Gary, I was hoping you could talk a little bit about some of the businesses you’re calling out, Routing and Switching and even Software 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 kind of pulling the 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 Europe and Asia theaters. They look like to be a little bit under pressure year-over-year with that components? Or is there something else going on in those regions?

Gary Smith, President and CEO

Okay. Why don’t I take that one first, Tim, and then work back through and then 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’re seeing strong demand across all geographies. So I think really Q1 is more about supply constraint than really extrapolating out too many dynamics around the different geographies. Particularly in Europe, we’re seeing strong demand really after a period of underinvestment, frankly, over the last few years, even pre-COVID. So I think Europe is going to be very strong. India, I think, was also down in Q1, but I think it’s going to have a very good year based on the order flows. So that’s probably a good example. I just think it’s - wouldn’t extrapolate too much out based on the challenges around supply constraint, which is going to be with us for a little bit. On the software side, as Jim said, we had a strong quarter. Good growth on both Blue Planet, which really is focused at the service creation layer in the automation. We’ve seen a lot of carriers, particularly as they’ve gone through COVID, really now prioritize their automation of their network. So we’re seeing very healthy demand in Blue Planet. Similarly, MCP, which is really the automation of the network layer. Now the numbers look very good from a growth point of view, but we’re coming from – it’s a newly introduced platform, but we’re very encouraged with what we’re seeing there. And that’s 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, as we’re seeing the convergence of packet and optical, we’ve invested heavily in our Switching and Routing portfolio. Scott, any other?

Scott McFeely, Senior Vice President of Global Product & Services

Just on the Routing and Switching piece. I think where we’re seeing the strongest demand and the biggest successes where our service providers, our MSO customers have built out their fiber plants closer to their end customers, whether that be a wireless play, an enterprise play, or a residential play. And obviously, we’ve got tremendous relationships with those service providers and MSOs around the world. So that helps in that conversation. As we look forward, we’re certainly starting to see some of the Tier 2 and Tier 3 providers looking for end-to-end solutions. 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 and edge, we firmly believe the winning hand there is going to be optimized Routing and Switching, optics, photonics, and multilayer 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.

Operator, Operator

Your next question is from Rod Hall with Goldman Sachs. Your line is open.

Rod Hall, Analyst

I just wanted to come back to this backlog of $3 billion and ask 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 that this is the peak and you start to work the backlog down? And then my follow-up will be regarding backlog as well.

James Moylan, CFO

It's always risky to predict order trends in a specific quarter, but we anticipate a strong flow of orders this quarter. I wouldn't be surprised if our backlog increases during this time. Looking ahead, we are optimistic about having a very successful year. However, it's important to keep in mind that much of this order flow reflects our customers' visibility into their demand for this year, and in some cases, even into the following year. While it's encouraging to see strong demand, we shouldn't make revenue forecasts based solely on current trends.

Rod Hall, Analyst

Right. Yes, that makes sense, Jim. And then I wanted to also ask, it's great that you guys have this visibility there. I think that's the first time I've ever seen that on Ciena with 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 half of that to be gone? Can you give us any idea of kind of where the backlog might end up by the end of the year?

Gary Smith, President and CEO

Rod, I absolutely get the question. I just don't think that would be appropriate for us to extrapolate out because we'll then get into a conversation about 23. We're one of the few companies that's actually giving guidance for the full year of '22. I think we'd be getting a little ahead of ourselves to that. But I mean, to Jim's point, it's very strong demand characteristics. It's security of supply, absolutely, there's a large portion of that. But we also feel that the secular demand around cloud adoption is going to give us a multi-year platform here for growth. So we feel very good around the secular dynamics of our space and our position in 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 rest of the year.

Operator, Operator

Your next question is from Paul Silverstein with Cowen.

Paul Silverstein, Analyst

I was hoping you provide some more granular insight regarding revenue diversification from a customer perspective. I know there hasn't been meaningful concentration in a long time, but as you look forward over the next four quarters and beyond, I assume the strength you're looking at is not a function of any 1 or 2 customers, but it's far more broad than that. But any granularity both within the web-scale and more broadly, beyond web-scale. And then I've got a follow-up.

James Moylan, CFO

We're seeing demand very broadly around the world and across verticals, Paul. Our concentration numbers, generally speaking, haven't changed significantly, except that the percentage, which our two biggest customers represent has come down quite a bit. But our top 10 customers are around 50%, and that's been that way for a long time. 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 that the bigger companies are. And we are winning our fair share or more than our fair share, frankly, of all of those build-outs.

Paul Silverstein, Analyst

All right. I'm sorry, Gary.

Gary Smith, President and CEO

Go, Paul.

Paul Silverstein, Analyst

Within Routing and Switching, what are your growth expectations moving forward? Is this driven by new customers and projects, or is it mainly due to extensions of existing projects with current customers? I'm referring to organic growth.

Scott McFeely, Senior Vice President of Global Product & Services

Are you asking about winning Routing and Switching from customers who currently do not use our optical services?

Paul Silverstein, Analyst

I'm referring to the additional revenue from Routing and Switching.

Scott McFeely, Senior Vice President of Global Product & Services

Well, I would articulate it, I think your question is, how much of it is sort of continued build-outs from existing footprint versus new application footprint, not necessarily new Ciena customers but new application footprint.

Paul Silverstein, Analyst

Well, how much is from existing Routing and Switching customers? How much is from customers that haven't yet bought Routing and Switching?

Scott McFeely, Senior Vice President of Global Product & Services

Okay. I think it depends on the time horizon. Certainly, the growth trajectory that we see in Routing and Switching has an expectation and dependency on us winning new logos, but for 2022, the bulk of it is sort of existing applications and existing customers.

Operator, Operator

Your next question is from Simon Leopold with Raymond James.

Simon Leopold, Analyst

I know you've talked about your efforts to raise prices to offset costs and you've counseled us that it doesn't really affect fiscal '22, but it is effective in fiscal '23. Given the progress to date, do you have a sense of how to quantify essentially the revenue growth tailwind for fiscal '23 coming from the price increases? Essentially, I'm looking for some quantification and some sense of the progress you've made, talking to customers about higher prices? And then I've got a quick follow-up.

Gary Smith, President and CEO

Simon, let me take that. I think it's an ongoing conversation. I think they progressed very well. Obviously, most of our major customers understand very well the global issues that we're all facing. I would say it's been very constructive and very positive, but as Jim said earlier, that's not going to impact any of our financial performance probably in this year. And I think just from a '23 perspective, Simon, it's way too early to start talking about next year. I mean we're already providing pretty detailed guidance for this year, and we're one of the few companies to do that. I just don't think it would be appropriate for us to get into those kinds of things about '23. I would say, we feel very positive about the strong secular demand and our position in the space, and we think this is going to be clearly a multi-year growth platform for us, but I just don't think it's appropriate to get so far ahead of our skis right now.

Simon Leopold, Analyst

Okay. And just as my follow-up. It appears that your services gross margin was actually a bit better than the last 4 quarters or so. I'm 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?

James Moylan, CFO

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 lives. And so I'd just attribute that movement to ebbs and flows of the business that's going to move around a bit. I'd say this, we've been very pleased with the progress we've made on our gross margins and services over the last several years. We've done a lot of things in 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.

Operator, Operator

Your next question comes from the line of Jim Suva with Citigroup.

Jim Suva, Analyst

I think it was in the prepared comments by Gary. You mentioned kind of a little bit more mine business. Just curious, is that because you've seen a meaningful increase in demand for it or because you have the ability to secure the supply of such products and therefore, lead demand where other ones you've had more supply challenges? I'm just kind of curious about that and the sustainability, is that something we should expect to continue to be a little more tilted that direction?

James Moylan, CFO

We are seeing a higher percentage of commons and 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 and photonics. So all of that is sort of of a piece.

Gary Smith, President and CEO

Jim, I would like to add that we have achieved several wins, some of which date back to before COVID but were delayed operationally over the last couple of years, and we are now starting to see them implemented. This includes new accounts and customers that we are engaging with. As Jim mentioned, this is very encouraging and indicates a strong commitment to our future. Additionally, existing customers are now reinvesting in their capacity and network modernization. This involves the typical integration of systems, photonics, and commons, which will gradually be enhanced with cards over time. While there are some supply chain constraints, we are also observing positive order activity.

Operator, Operator

Your next question is from Tal Liani with Bank of America.

Tal Liani, Analyst

I attended Mobile World Congress last week and was surprised by the level of discussion surrounding white box routing with pluggables, as well as traditional routers. Given the current high demand and the ongoing build-out not focusing on these solutions, I am curious about the long-term implications for demand in your sector. How are you positioned if the market shifts toward these types of solutions?

Scott McFeely, Senior Vice President of Global Product & Services

Yes, Tal, it's Scott here. Separate out sort of the white box phenomena from your second theme there, which is kind of, I'll call it, convergence. Personally, I think for our customer segmentation. We're not really seeing a lot of deployments of the white box piece 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 an 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, lightweight Routing, and Switching capabilities and the off-box software control systems that allow you to manage and automate that network across the layers cost-effectively. And we've been investing in those threads for a long time and part of the fruits of that investment you're starting to see come with growth in our Routing and Switching business.

Operator, Operator

You next question comes from the line of Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

Great. Regarding the ramp in the second half of the year, I understand you're not providing guidance for fiscal Q3, but should we expect a significant increase as we move into the latter part of the year? Or will it be more of a gradual increase in capacity as some of the supply chain issues ease? Additionally, will the current heightened geopolitical environment have any impact on subsea consortiums or related matters?

James Moylan, CFO

Meta, Q3 has historically been a strong quarter for us due to the annual patterns of our customers' operations. We anticipate a positive shift in Q3. To gauge this year’s performance, I recommend looking at last year’s results as that shapes our perspective for this year.

Gary Smith, President and CEO

And Meta, on the second part of your question, we are not obviously early days, but we're not seeing any geopolitical fallout yet on any of the submarine system cables or the rest of it, and frankly, quite the opposite. We're seeing very robust demand around the globe for that.

Operator, Operator

Your next question is from Fahad Najam with Loop Capital.

Fahad Najam, Analyst

Gary, can you help clarify your comment about strategic investments to increase supply chain capacity for the second half? Can you provide more details? Is it simply about acquiring more components, or are you also adding more manufacturing lines? How much of this increase in supply chain capacity represents a permanent investment versus just acquiring more inventory?

Gary Smith, President and CEO

We just say, all of the above. But Scott, do you want to share your thoughts?

Scott McFeely, Senior Vice President of Global Product & Services

Yes. You can think of it in three key areas. First, we are not adopting the just-in-time inventory method from the past for components that are not in short supply. As a result, we're increasing our raw material inventory to prepare for the more constrained components, allowing us to quickly convert them into finished goods. Second, nine months ago, we made a strategic decision to heavily invest in significant growth for our business in the latter half of the year, which has increased demand on the component industry while adapting to their longer lead times. We do not anticipate any changes in these lead times, as this was a calculated decision made some time ago. Lastly, to expedite the conversion of components into finished goods, we have expanded our production capacity, particularly in testing, to ensure quick turnaround times. These are the three main points.

Fahad Najam, Analyst

Okay. Given your investments in areas like inventory and the additional test capacity, how should we assess the impact on your gross margins moving forward? Assuming your long-term guidance of 6% to 8% remains accurate, will this significantly affect the trend of your gross margin? Or does it suggest that you are likely better positioned to...

Scott McFeely, Senior Vice President of Global Product & Services

Yes. You should consider this as a minor change in gross margin related to the capital investment on the production side. Essentially, we are accelerating the investment capacity that we had planned for 2023 in the U.S.

Operator, Operator

Your next question comes from the line of Alex Henderson with Needham.

Alex Henderson, Analyst

You made the comment in your prepared remarks that you expect a significant improvement in the back half of the year in terms of components, yet when I talk to virtually everybody else in the industry, they're saying that conditions have not improved and in fact, may have eroded the rate of decommits on orders has gone up. Virtually every other manufacturer has done the same thing you've done, which has stretched out their orders and committed to significant increases in the future. Your third quarter fiscal year is pretty close. I mean that's the July quarter. So what gives you the confidence that the supply chain conditions are going to improve and you're not going to get decommits based off of what seems to be continued stretching of duration across the entire industry as well as decommits showing up at a lot of other vendors.

Scott McFeely, Senior Vice President of Global Product & Services

There are a few points to address. First, regarding lead times, we have not observed any significant changes. A while back, there was a substantial shift in lead times, and they have neither worsened nor improved since then. We are not expecting them to get better either. We placed our orders a long time ago, adapting to the new circumstances that impact our business. If others did not make similar preparations and are only now trying to adapt, they are experiencing the longer lead times and challenges. We have been closely monitoring whether our component suppliers are meeting their new lead time commitments, and generally, they have been adhering to those schedules. As for decommits, from our perspective, their quantity has not changed significantly. They certainly occur, but they seem to be less severe than they were three to six months ago. Although the number of decommits may remain constant, their impact is now more manageable, typically resulting in delays of just days or weeks rather than pushing timelines back by entire quarters without confirming quantities. This is the current state of our supply chain, and we made our decisions early on. If others are just now trying to adapt, I can see why they face different challenges.

Alex Henderson, Analyst

Okay. Second question, if I could. You talked about your strategy around pricing, and I understand it. It makes sense. It's consistent with Ciena's strategy historically. Some of your competitors though, have been much more aggressive on price, particular at Cisco. They had 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 that are in the field that creating a little bit of a benefit to you in terms of share as well?

Gary Smith, President and CEO

I believe it's still too early to assess the situation accurately. Some of the recent announcements and the price increases you've mentioned are primarily occurring in the enterprise sector, which has seen particularly aggressive hikes. However, that definitely influences other areas as well. As Jim previously emphasized, we are currently experiencing an unmatched price dynamic in the carrier and infrastructure sectors, which aligns with our expectations. We've had very positive discussions with all of our main customers, who are aware of the current situation, and we expect this to unfold over the next one to three years. Nevertheless, we haven't observed any significant shifts in the competitive landscape. At this moment, most of this is obscured by supply constraints, making the emphasis more on availability rather than pricing. It may take longer for these changes to materialize. However, considering Scott's remarks about the scale of our commitments to the supply chain and the advancements we've made, we believe our guidance of 11% to 13% revenue growth this year is solid. The order backlog we've communicated clearly indicates that we will capture market share this year and in the future.

Operator, Operator

Your final question comes from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

I would like to start by asking about gross margin. It's great to see that you're reiterating the gross margin guidance for the full year. Can you provide any details on how the higher supply chain costs might impact us for the fiscal year? Additionally, regarding the improved software that contributed to the better gross margin in the first quarter, how do you see that influencing the rest of the year? I understand it’s a broad estimate, but does the strong start suggest that software revenue will exceed your earlier expectations for the full year, and will this have an effect on the overall margins?

James Moylan, CFO

Yes. I'm going to share some numbers, but please be cautious with them as I need them to illustrate my point. Previously, we discussed our long-term gross margins, estimating them around 45%. During the COVID period, there was a high demand for capacity, which led to an increase in our gross margins to the high 40s. We indicated that once the COVID period passed and capacity additions leveled out, we would return to a more balanced mix of line systems, commons, photonics, and capacity, naturally bringing us back to the mid-40s range. So where do we stand now? I believe we are approaching that timeframe where we can return to that range. However, for this year, we project gross margins to be between 43% and 46%. The midpoint of that range is 44.5%. You can gauge the impact of the additional supply chain costs based on that figure. I advise against making any definitive judgments, but that gives you an idea of where we are. Another factor affecting our margins is the product mix, which includes the types of products, the stages of various customer projects, and software impacts. These factors make it challenging to pinpoint exact margins. Nonetheless, we've been pleased to maintain gross margins during this unique period of rising costs, and we expect that over time we will return to our previously projected long-range margins, or possibly even exceed them. Well, we had an unusually high quarter in Q1, but software is 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 system, 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.

Gregg Lampf, Vice President of Investor Relations

Thanks, Samik, and thanks, everyone. We appreciate it. Again, we expressed our care and concern for all the Ukrainian people and our hope for a peaceful future. We look forward to seeing everyone at OFC. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.