Ciena appears to be disappointed by several suppliers outside of China that make low-cost integrated circuits. Smith told analysts on a quarterly earnings call that while they represent a small fraction of the total material, the failure to meet earlier commitments has affected Ciena’s ability to make modems used in optical equipment. “If it weren’t for this particular challenge, our sales would have hit the upper end of the expected range,” he said. Ciena had expected third-quarter sales of between $870 million and $930 million.

The knock-on effect of falling sales will rattle even the most resilient investors. Ciena’s gross profit fell 28% to around $347 million, while operating income fell 61% to less than $74 million. This resulted in the company’s third-quarter gross margin of just 40%, down 8.5 percentage points from the previous quarter. In the same period, its operating margin fell to 8.5% from 19.1% in the previous quarter. Ciena’s shares were down 10% by press time.

There are several reasons why Ciena’s margins have been severely squeezed. First, the shortage affected the majority of Ciena’s profit source －its converged packet optics business (its routing and switching segment continued to perform strongly, with revenue rising 44.5% to $101 million). At the same time, the company’s efforts to ease the crisis, such as finding alternatives, including used parts, have pushed up costs.

Ciena also continued to hire staff, hiring an additional 477 during the quarter, bringing the total to 8,013. Asked about the move, Ciena Chief Financial Officer Jim Moylan insisted the move was in line with plans announced earlier this year in which the company is expanding its routing and switching portfolio. “We have to bring people into the R&D and sales force. That’s why the headcount is going up. Next year’s growth won’t be at that level.”

Even so, the company now looks likely to miss its previously released guidance for the full year of fiscal 2022, which includes a forecast that gross margins will eventually be between 43% and 46%. In the first nine months of fiscal 2022, the figure was only 42.3%. Ciena has not mentioned any changes to the outlook so far. But in addition to missing its fiscal third-quarter sales target, the company’s fourth-quarter sales forecast was only $800 million to $880 million, down sharply from $1.04 billion a year earlier.

Ciena also doesn’t see any improvement in the supply chain this year. While most suppliers appear to have had their roughest time, finding replacements for a handful of suppliers that Moylan describes as “rather unreliable” may require product redesigns. Another risk is the ongoing factory blockade in China. Scott McFeely, Ciena’s senior vice president of global products and services, acknowledged that although the component suppliers involved were not Chinese, they may have used subcomponents from China.

However, it’s not all bad news. Ciena has been highly rated by analysts for the quality of its optics, with its order backlog increasing from $3 billion in March to $4.4 billion now. As an alternative to Huawei, its market share is expanding as carriers and internet companies add capacity to cope with the surge in data services, Smith said.

The main danger may be waiting for Ciena’s customers to start looking for other suppliers to meet demand. But Smith said: “We haven’t seen customers cancel orders, and they understand the challenges the company faces. And because of our technology and relationships, we believe that based on the huge demand we’ve seen, when the smoke clears, we will gain market share.”

Analysts are not without sympathy. Dave Kang of B Riley Securities said in a research note released shortly after the company’s earnings call that he remains “constructive” on Ciena. “We believe that supply chain conditions, which are primarily affected by a small number of bad suppliers, will eventually improve as the company works to mitigate it, including redesigning hardware,” he said. Shareholders must hope for their patience pays off quickly.