Arista Networks Q4 2022 Earnings Results & Report

Arista Networks EPS Results

• Actual EPS: $0.3525
• Consensus EPS: $0.3025
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: $0.1650
• EPS Beat Rate: 8 of last 8 quarters

Arista Networks Revenue Results

• Actual Revenue: $1.28 billion
• Expected Revenue: $1.20 billion
• Beat/Miss: Beat by +$74.53 million
• YoY Revenue Growth: +54.70%

Arista Networks (NYSE:ANET) develops and sells cloud networking solutions for data centers, cloud service providers, enterprises and specialized computing environments. The company’s products are designed to support high-performance, scalable and automated networks used for cloud computing, artificial intelligence, data analytics and other demanding applications.

Arista’s portfolio includes data center and campus switches, routing platforms, wireless networking products, network operating software and network management tools. Its Extensible Operating System (EOS) provides a common software platform across much of its switching and routing portfolio, while CloudVision supports network automation, monitoring, configuration and operations. The company also offers observability and security capabilities intended to improve visibility and control across enterprise and cloud networks.

Founded in 2004, Arista serves customers globally through direct sales, channel partners and strategic relationships with technology providers. Jayshree Ullal has served as the company’s president and chief executive officer since 2008, and David Cheriton is a co-founder and chairman. Arista is headquartered in Santa Clara, California.

Arista Networks Q4 2022 Earnings Call Transcript

Key Takeaways

• Record 2022 revenue growth of 48% to $4.38 B and non-GAAP EPS up 58%, including Q4 revenue of $1.276 B and EPS of $1.41.
• Cloud titans drove 46% of 2022 revenue with triple-digit growth, led by Meta (25.5%) and Microsoft (16%), both expected to exceed 10% of revenue in 2023.
• Lingering supply chain constraints and elevated component costs pressured Q4 gross margin to 61% and are expected to weigh most heavily in Q1 before improving.
• Arista reiterated its ~25% revenue growth outlook for 2023, targeting $5.47 B in revenue with Q1 guidance of $1.275–1.325 B and ~60% gross margin.
• Ongoing product innovation includes high-density 400 G spines (7,800 R3), first 25 T 1RU switches, expanded routing/campus offerings and AI-optimized fabrics via EOS and CloudVision.

Presentation

[Operator]

Welcome to the fourth quarter 2022 Arista Networks financial results earnings conference call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press star followed by zero. As a reminder, this conference is being recorded and will be available for replay from the investor relations section at the Arista website following this call. Miss Liz Stine, Arista Director of Investor Relations, you may begin.

[Liz Stine, Director of Investor Relations at Arista Networks]

Thank you, operator. Good afternoon, everyone, thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks President and Chief Executive Officer, and Ita Brennan, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal fourth quarter ending December 31st, 2022. If you would like a copy of this release, you can access it online at our website.

[Liz Stine, Director of Investor Relations at Arista Networks]

During the course of this conference call, Arista Networks management will make forward-looking statements, including those relating to our financial outlook for the first quarter of the 2023 fiscal year, longer-term financial outlooks for 2023 and beyond, our total addressable market and strategy for addressing these market opportunities, supply chain constraints, component costs, manufacturing capacity, inventory purchases, and inflationary pressures on our business, extended lead times, product innovation, and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future.

[Liz Stine, Director of Investor Relations at Arista Networks]

We undertake no obligation to update these statements after this call. Please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to Jayshree.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, Liz. I'm glad we avoided Valentine's Day this time. Thank you everyone for joining us this afternoon on our fourth quarter 2022 earnings call. 2022 has certainly been a record year for Arista. You might recall in November 2021 Analyst Day, we had given you a guidance of 30% growth and instead have achieved well beyond that at 48% growth for the year, driving to an annual revenue of $4.38 billion with a non-GAAP earnings per share of $4.58, translating to an EPS growth of 58% for 2022. Indeed, a memorable year. Let's get back to some Q4 2022 specifics. We delivered $1.276 billion for the quarter with a non-GAAP earnings per share of $1.41.

[Jayshree Ullal, President and CEO at Arista Networks]

Services and software support renewals contributed approximately 15.8% of the revenue. Our non-GAAP gross margin was 61% influenced by our supply chain overhead and Cloud Titan concentration. International contributions registered at 23.5% with the Americas at 76.5% in 2022. This was one of our strongest performing international quarters in recent history. In terms of Q4 2022 verticals, Cloud Titans was our largest and first, followed by Enterprise and then specialty cloud providers at third place, Financials at fourth, and Service Providers at fifth place. In 2023, we will report the three segment sectors instead of the verticals. Shifting to the segment sector revenue for 2022, Cloud Titans contributed significantly at approximately 46%, resulting in a triple-digit growth annually. Enterprise and Financials together were strong at approximately 32%, while the providers were at approximately 22%.

[Jayshree Ullal, President and CEO at Arista Networks]

Both Meta and Microsoft are now far greater than 10% customers at 25.5% and 16% contribution respectively. Clearly, we continue to enjoy a strong and strategic partnership with M&M. With that, I'd like to now invite Anshul Sadana, our Chief Operating Officer, to shed more light on our Cloud Titans performance.

[Anshul Sadana, COO at Arista Networks]

Thank you, Jayshree. Our partnership with Microsoft and Meta grew even stronger last year. Both of these Titans are in the midst of deploying our next-gen 100, 200, and 400 gig products at several key tiers of their networks. The cloud is reshaping the Internet with their massive footprint, global backbone, and edge partnerships. We are proud to have our products designed into pretty much all of these use cases. Our business with the other Titans continued to grow as well. We had additional design wins in backbone, WAN, and edge roles. This past year, we ramped our 7800R3 Series high-density 400 gig near-lossless spine. We also introduced several new products based on Tomahawk 4 and our deep buffer Virtual Output Queue systems based on Jericho2 to 7280R3 and the 7800R3 modular systems.

[Anshul Sadana, COO at Arista Networks]

While we will continue to add 100 gig and 400 gig products to our portfolio, we also launched our first one rack unit 25 Tb product with 800 gig ports that can be broken out as two by 400 gig. These products have good use cases in high-speed applications such as artificial intelligence. EOS, our high-quality resilient network data lake-based operating system, has also matured and now supports cloud scale with multiple copies of the Internet routing table. We co-develop with our cloud customers who greatly appreciate Arista engineering expertise. This past year, we furthered our partnership with Microsoft with SONiC support on many of our high-volume switches. Our work with them on automation and monitoring at scale is very well received for Azure and Bing deployments.

[Anshul Sadana, COO at Arista Networks]

At Meta, we have our co-developed platforms such as the Tomahawk-based 7368 and 7388, which help them improve throughput and data center power efficiency. FBOSS and EOS are deployed with very high reliability in the cluster fabrics using these products. Our deployments in their backbone and in generative AI and recommendation engines with the 7800 Series are now smoothly deployed in production. We don't control macro. We don't control our customers' CapEx plans. When they do spend, we are there with them to make these next-generation cloud networks successful. AI is a good example where we are continuing to grow into next-generation architectures with our cloud customers. The use cases we are involved in are generally core to their business and not an optional spend. Our cloud journey has come a long way over the last decade.

[Anshul Sadana, COO at Arista Networks]

This is still a very exciting market segment given the pace of innovation and our partnerships here. Back to you, Jayshree.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, Anshul. Wow. 2022 was indeed a phenomenal year with the cloud titans, these partnerships have been nurtured for well over a decade with expanded use cases such as these AI workloads. We remain confident of our meaningful share with both Microsoft and Meta, we expect both of them to once again contribute greater than 10% of our total revenue in 2023. In the non-cloud category, we have registered solid number of million-dollar customers as a direct result of our momentum in the enterprise and campus throughout the year. We have now surpassed 9,000 cumulative customers. In terms of 2022 product lines, we have three categories. One, our core cloud and data center products built upon our highly differentiated Arista EOS stack that is successfully deployed a4cross 10, 25, 100, 200, and 400 gig speeds.

[Jayshree Ullal, President and CEO at Arista Networks]

This drove approximately 68% of our revenue with strong cloud and enterprise spending cycles. We believe that we will continue to gain market share in the high-performance switching and have already grown from the teens to the 20s. In the 100 and 400 gig port category, we have now earned the number one position according to industry analysts. We have also doubled our 400 gig customers from 300 in 2021 to over 600 in 2022. Our second market is network adjacencies comprised of routing, replacing routers, and our cognitive campus. We doubled our campus orders to exceed $400 million in 2022. We did fall short of our revenue due to extreme supply chain shortages. We maintain our campus momentum and are aiming for $750 million in revenue by 2025.

[Jayshree Ullal, President and CEO at Arista Networks]

Our investments in cognitive campus spines, lines, wired and wireless have generated significant customer interest and demand based on CloudVision and CloudVision CUE. Considering this is only our third full year of shipping versus incumbents who've been in the market for 15 to 30 years, we are very proud of our execution. Our vision for a cognitive campus with network as a service and edge as a service based on NetDL is resonating extremely well and being embraced by our campus customers. We have also successfully deployed in many routing, edge, and peering use cases such as securing data in transit with TunnelSec encryption, precision and performance for mobile networks, cloud exchanges, and metro Ethernet. Enterprise customers can now deploy EOS with a single EVPN protocol, whether it's for data center, data center interconnect, or WAN delivering multiple profiles.

[Jayshree Ullal, President and CEO at Arista Networks]

Just in 2022 alone, we introduced six EOS software releases, 600 new features across 50 new platforms. Stay tuned for more in 2023 as we will be introducing new WAN transit functionality. The campus and routing adjacencies together contribute approximately 14% of revenue. Our third category is network software and services based on subscription models such as Arista A-Care, CloudVision, DMF Observability, Advanced NDR with AVA Sensors for security. Arista subscription-based network services and software contributed approximately 18% of our total product line. We are proud to note that CloudVision exceeded 2,000 cumulative customers, up from 1,500 the prior year, and is really a compelling data-driven platform delivering network agility, continuous integration, and operational excellence. Arista's non-cloud wins continue as well.

[Jayshree Ullal, President and CEO at Arista Networks]

While Arista's 2022 headline has been the massive contribution from our cloud customers, we are pleased with the momentum of our enterprise and provider customers as well. Arista continues to diversify its business globally with multiple use cases. Helping our prospects and customers realize these operational benefits with modern software and automation has been a recurring theme. Let me share a few examples that we have earned a seat at the table at. Our first example highlights the universal cloud network win in the travel industry. Like many conversations, the customer's initial ask was to gain more visibility into their infrastructure. We presented our DMF, DANZ Monitoring Fabric solution, but it quickly transitioned to a general data center for all of Arista's platform offerings. The customer chose our layer three leaf-spine EVPN design and for their critical VDI environment.

[Jayshree Ullal, President and CEO at Arista Networks]

The customer also leveraged CloudVision for their day zero, day one, day two operations using our chassis spine, R3 Leafs, and out-of-band management to reduce their operational risk. Our second win highlights a financial customer's choice to proceed with Arista's best-in-class cognitive campus with wired and wireless solutions. As with every campus opportunity, it was competitive. CloudVision, once again, was a key differentiator for us as we quickly became their trusted advisor. Our virtual training environment, such as Arista's CloudTest, gave architects the relevant hands-on experience. Our low CVE count and commitment to single EOS with high quality was unmatched by our peers. Arista continues to make inroads on regional tier two and tier three service providers. Regional service providers are in the middle of expanding and looking for reliable, compressed routing footprint.

[Jayshree Ullal, President and CEO at Arista Networks]

This third win highlights the evolution of our Arista EOS routing stack, where customers are now deploying EVPN services on top of their MPLS segment core network. Arista's high-density 100 gig MPLS routing, together with long-range optics and a fully automated deployment using CloudVision and zero-touch pro-provisioning, delivered that cloud-like operating model. Our next win is an international one in the education sector for high-performance computing. HPC demands low latency, deep buffers, and real-time visibility. This customer chose Arista for providing a highly elastic VXLAN-based leaf-spine pod with best-in-class performance. Consistent technology between our spine and edge leaf, anchored by our flagship 7800 chassis and combined with CloudVision-based real-time telemetry, compliance, and automation really created a lasting impression.

[Jayshree Ullal, President and CEO at Arista Networks]

Our final win for this quarter's announcements is an exciting international one in the government sector, where Arista's 400 gig Ethernet was selected instead of InfiniBand for big data Hadoop cluster deployments. In this case, the customer chose us for a 100 400 gig solution with built-in encryption capability. The customer saw clear differentiation in our automated operations, hitless upgrade, and full real-time telemetry, ensuring comprehensive visibility of workloads in the fabric. As we enter 2023, Arista is well-positioned as a game changer in data-driven client-to-cloud networking. A key part of this transformation is to make our cloud-first principles and bring that to every aspect of the data network. Software functions such as routing for WAN, zero-trust security, and observability are moving into the Arista EOS stack.

[Jayshree Ullal, President and CEO at Arista Networks]

We are building upon our cloud network heritage to bring proactive platforms, predictive operations, and a complete prescriptive experience, unifying data sets from multiple sources. Our NetDL architecture and AVA, our autonomous virtual assist using AI and ML and natural language processing techniques, is a very compelling combination. Together, this architecture can gather, store, and process multiple modalities of network data. This way, network operators can reconcile all their different silos. 2023 is the start of Arista's 2.0 journey. Arista 2.0 is our migration from best-of-breed products to best-of-breed platforms as we address our expanded TAM of $50 billion ahead. We are uniquely qualified to bring modern software principles to build that world-class data center and data-driven networking. It is based on that foundational focus on quality, availability, AI-driven deployments with top-notch support.

[Jayshree Ullal, President and CEO at Arista Networks]

As we undertake this 2.0 journey, we are excited to work with a collaborative ecosystem of our partners and customers worldwide to realize this vision. In summary, I'm so proud of our team's execution across multiple dimensions despite one of the worst supply chain backdrops ever witnessed. A special thank you to our customers for their patience and support to us last year and to all the Aristans for their hard work and Herculean efforts. Our tireless mission taught us valuable lessons, and we expect to emerge stronger. We reiterate our 25% annual growth outlook that we mentioned in the November 2022 Analyst Day as we now aim for $5.47 billion in 2023 in terms of revenue. Now, I will turn it over to Ita for financial specifics.

[Ita Brennan, CFO at Arista Networks]

Thanks, Jayshree, and good afternoon. This analysis of our Q4 and full year 2022 results and our guidance for Q1 2023 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q4 were $1.276 billion, up 54.7% year-over-year and well above the upper end of our guidance of $1.175 billion-$1.2 billion. While we experienced some improvement in overall component supply in the quarter, shipments remained somewhat constrained with lingering shortages on a handful of parts. Services and subscriptions software contributed approximately 15.8% of revenue in the fourth quarter, down from 16.3% in Q3.

[Ita Brennan, CFO at Arista Networks]

This has largely reflected growth in product revenue, while services and software continued to grow on a more consistent basis. International revenues for the quarter came in at $300 million or 23.7% of total revenue, up from 17% in the third quarter. This quarter-over-quarter increase largely reflected improved contributions from our EMEA in-region customers in the quarter. However, 2022 was a year of outsized growth in the U.S., up 61% year-over-year, largely due to domestic strength from our cloud titan customers. Gross margin in Q4 was 61% at the midpoint of our guidance range of approximately 60%-62%. We continue to recognize incremental supply chain costs in the period, combined with a healthy cloud mix.

[Ita Brennan, CFO at Arista Networks]

Operating expenses for the quarter were $235.3 million, or 18.4% of revenue, up from last quarter at $227.7 million. R&D spending came in at $153.2 million or 12% of revenue, up from $150.1 million last quarter. This primarily reflected increased headcount and new product introduction costs in the period. Sales and marketing expenses were $67.4 million or 5.3% of revenue, compared to $62.8 million last quarter, with increased headcounts and higher variable compensation expenses. Our G&A costs came in at $14.6 million or 1.1% of revenue, consistent with last quarter. Our operating income for the quarter was $543.2 million or 42.6% of revenue.

[Ita Brennan, CFO at Arista Networks]

Other income and expense for the quarter was a favorable $13.6 million, and our effective tax rate was 20%. This resulted in net income for the quarter of $445.1 million or 34.9% of revenue. Our diluted share number was 315.2 million shares, resulting in a diluted earnings per share number for the quarter of $1.41, up 72% from the prior year. Now turning to the balance sheet. Cash, cash equivalents, and investments ended the quarter at approximately $3.024 billion. In the quarter, we repurchased $2.8 million of our common stock.

[Ita Brennan, CFO at Arista Networks]

As a reminder, for the year, we have repurchased $670 million or 6.5 million shares at an average price of $104 per share. This leaves us with $257 million available for repurchase under our existing billion-dollar board authorization. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price, and other factors. Now turning to operating cash performance for the fourth quarter. We generated approximately $40 million of cash from operations for the period, reflecting strong earnings performance, mostly offset by a significant increase in working capital. We experienced growth in inventory with the receipt of components for future shipments, including shipments delayed due to supplier decommits.

[Ita Brennan, CFO at Arista Networks]

We also experienced growth in accounts receivable and DSOs in the quarter, with a significant ramp in service renewals and product shipments towards the end of the quarter. DSOs came in at 67 days, up from 51 days in Q3, reflecting the linearity of billing and growth in service renewals in the period. Inventory turns were 1.6x, down from 1.7 last quarter. Inventory increased to $1.3 billion in the quarter, up from $1.1 billion in the prior period, reflecting higher key component and peripherals inventory and an increase in switch-related finished goods. Our purchase commitments at the end of the quarter are $3.7 billion, down from $4.3 billion at the end of Q3. We expect this number to continue to decline in future quarters as component lead times improve and we work to optimize our supply positions.

[Ita Brennan, CFO at Arista Networks]

As a reminder, we have focused this extended purchase commitment strategy on early lifecycle products to help mitigate the risk of excess or obsolescence. Our total deferred revenue balance was $1.041 billion, up from $941 million in Q3. The majority of the deferred revenue balance is services related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis. Approximately $125 million of this balance, down from $165 million last quarter, represents product deferred revenue, largely related to acceptance clauses for new products, most recently with our large cloud titan customers. For clarification, this represents a reduction in products related to deferred revenue for the year of approximately $40 million. Accounts payable days were 43 days, down from 56 days in Q3, reflecting the timing of inventory receipts and payments.

[Ita Brennan, CFO at Arista Networks]

Capital expenditures for the quarter were $10.5 million. Turning to our outlook for the first quarter and beyond. 2022 was a year of outstanding revenue and earnings growth, driven by an acceleration in demand from our cloud titan customers, coupled with healthy contributions across the other areas of the business. Supply remained constrained throughout the year and somewhat limited our ability to ramp product shipments in response to this demand. As we head into 2023, we look forward to resolving the final kinks on the supply side and reducing lead times for our customers. As outlined at our Analyst Day, we expect to achieve year-over-year revenue growth for 2023 of approximately 25%. This reflects continued healthy demand across all our market sectors, but recognizing that as lead times improve, we should expect to see some reduction in visibility.

[Ita Brennan, CFO at Arista Networks]

In terms of quarterly trends, you should expect accelerated year-over-year growth in Q1, moderating as the year progresses versus more difficult year-over-year comps.

[Ita Brennan, CFO at Arista Networks]

On the gross margin front, we expect to continue consuming broker parts and other inflated cost items in the first quarter. This, combined with the continuing healthy cloud contribution, will pressure gross margins. Beyond that, we should see some steady improvement as we move through the year with fewer broker parts and the opportunity to optimize the manufacturing run. Turning to spending and investments. We remain cognizant of the overall macro environment and will be prudent in making investments as we move through the year. You should, however, expect us to make targeted hires in R&D and go to market as the team sees the opportunity to secure talent.

[Ita Brennan, CFO at Arista Networks]

On the cash front, FY 2022 was a year where much of the $1.4 billion net income generated by the business was consumed by incremental working capital needs and additional cash tax payments under Section 174, which defers the deductibility of R&D spending. As we head into 2023, you should expect to focus on supply chains and working capital optimization while recognizing the need for balance in areas of higher supply risks or where lead times remain extended. Interest income should continue to increase as we move through the year, with $20 million in Q1 growing towards a quarterly contribution of $40 million exiting the year. With all of this as a backdrop, our guidance for the first quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts and other non-recurring items, is as follows.

[Ita Brennan, CFO at Arista Networks]

Revenues approximately $1.275 billion-$1.325 billion. Gross margin of approximately 60%. Operating margin at approximately 40%. Our effective tax rate is expected to be 21.5%, with diluted shares on a post-split basis of approximately 316 million shares. I will now turn the call back to Liz.

[Liz Stine, Director of Investor Relations at Arista Networks]

Thank you, Ita. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

[Operator]

We will now begin the Q&A portion of the Arista earnings call. In order to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. We ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from the line of Jason Ader with William Blair. Please go ahead, your line is open.

[Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair]

Yeah, thank you. Good afternoon, everyone. I just wanted to ask, I guess, Ita, for you on the order trend. We all know that the revenue is incredibly strong right now because of all the lead time supply chain issues, but maybe some visibility on how orders are trending versus revenue.

[Anshul Sadana, COO at Arista Networks]

Yeah, Jason, as you know, we don't really talk about orders and backlog. I think we did talk about kind of healthy demand, you know, across the various pieces of the business, obviously, you know, we're reaffirming the guidance for 2023. There is good support for that. Jayshree, I don't know if you want to add anything to that or not.

[Jayshree Ullal, President and CEO at Arista Networks]

No, I think you said it well. Order trends in 2022 were good. We'll wait, watch, and see if the macro has broader effects in 2023. Our guide and our tone reflects that we are pretty positive at the moment.

[Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair]

No impact from macro of significance thus far on orders?

[Jayshree Ullal, President and CEO at Arista Networks]

When we have something to state, we will, Jason.

[Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair]

Okay. Fair enough. Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Jason. Thank you.

[Operator]

Your next question comes from the line of Amit Daryanani with Evercore. Please go ahead, your line is open.

[Amit Daryanani, Senior Managing Director at Evercore]

Yep. Thanks for taking my question, and congrats on the quarter. You know, I guess when I think about this 25% growth in calendar 2023, how do you think it stacks up across the three verticals for you folks? That would be really helpful to understand kind of where do you see the strongest versus weaker growth. Then on the cloud titan side, as you think about growth in 2023 and maybe even beyond, do you think that's really a function of what their CapEx plans look like on the networking side? Do you think there's a bigger narrative around the share gain potential against white box solutions, especially as workloads get more complicated, that could help you as well? Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Okay. Well, I'll take the first one, and I'm sure Anshul will have a few words on the second. How does this break down? If you look at 20... Let me go back to 2021. We had a very nice even split, Cloud Titans was actually kind of on the low side. It was 30%, if I remember right. 30%, 40%. If you look at 2022, Cloud Titans was outsized, where the 30% went to 46%. If I had to guess, I would say we'd be between those two numbers. I still think we'll have a very healthy Cloud Titan mix. Enterprise momentum continues to be strong, and you'll see a contribution from that, as well as the tier two specialty cloud providers and service providers as well.

[Jayshree Ullal, President and CEO at Arista Networks]

My guess is it'll look somewhere between 2021 and 2022 in terms of split. We'll see as the quarters progress. In terms of the CapEx and the impact of that on Cloud Titans, look, we don't exactly and equivalently track to CapEx, but eventually, you know, CapEx is an indicator of our future Cloud Titan progress. I don't believe at this point that our progress is coming from white box or specific things like commodity, things like that. It's really coming from, as Anshul pointed out, a very strategic seat at the table on new use cases like AI workloads, which has a multiplicative factor on our bandwidth. I believe we'll have a real seat at the table, especially with Microsoft and Meta.

[Jayshree Ullal, President and CEO at Arista Networks]

We'll continue to see what the use cases are that emerge that we can imagine beyond 2023. We've been working on this for 10 years, and I think it'll continue to be strong.

[Liz Stine, Director of Investor Relations at Arista Networks]

Thank you. Thank you, Amit. We can take our next question, operator.

[Operator]

Your next question comes from the line of Paul Silverstein with Cowen. Please go ahead, your line is open.

[Paul Silverstein, Senior Research Analyst at Cowen]

Thanks. I hope you'll indulge a clarification. I just want to make sure you said Microsoft was 16 and Meta was 25, or do I have that backwards?

[Jayshree Ullal, President and CEO at Arista Networks]

Yes. 25.5 on Meta and Microsoft 16.

[Paul Silverstein, Senior Research Analyst at Cowen]

Okay. Now for the question. What portion of your cloud titan revenue in general and how much of the growth in Microsoft and Meta was, if you know it, what's your sense for how much of that was AI driven? Any visibility as to the growth in AI and its impact on demand for your switches in various use cases over the course of the next two years with your cloud titan customers in general, including Microsoft and Meta?

[Jayshree Ullal, President and CEO at Arista Networks]

We see AI as a very, very important use case and workload for all our cloud titan customers. Clearly it's in the first innings. We're just beginning. Very much like cloud networking 10 years ago, we see AI as an additional use case. It is a very, very small portion of our use cases so far. A lot of upside ahead.

[Paul Silverstein, Senior Research Analyst at Cowen]

Is it possible to quantify, Jayshree?

[Jayshree Ullal, President and CEO at Arista Networks]

Too early to quantify. It's not material.

[Paul Silverstein, Senior Research Analyst at Cowen]

That's what I figured. Okay. I appreciate it.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Paul.

[Operator]

Your next question will come from the line of Aaron Rakers with Wells Fargo. Please go ahead. Your line is open.

[Aaron Rakers, Managing Director and Senior Equity Analyst at Wells Fargo]

Yeah. Thanks for taking the question and congrats on the quarter as well. I guess maybe this is for Anshul building on the last two questions is that, you know, as you look at kinda adding up the Meta and Microsoft contribution, and you compare that to 46%, total cloud titan, your other cloud titan contribution is still pretty small. Anshul, when you're engaging with other cloud opportunities, maybe you can unpack that a little bit. What, what's opening up the opportunities for you? Is it AI, or is it something else that you're starting to see? How do we start to think about that as an incremental growth driver?

[Anshul Sadana, COO at Arista Networks]

Sure, Aaron. First of all, we are proud of our achievement for the first two M&M, with the contributions there. On the other Titans, we have been engaged fairly well with them. That business is also growing. It pales in comparison to Microsoft and Meta, but it is not insignificant compared to other opportunities in the market, and we continue to chase those. Those partnerships are very, very strong as well. At some point in the future, if the opportunity are materialized, many of these customers decide to go big in the market and buy switches from the industry like us, I think we'll perform very well. We just have to wait out and get to that opportunity. It's not clear, I'd say, yet, whether it's happening in a year or two or three. I don't know. When it happens, we'll be there.

[Anshul Sadana, COO at Arista Networks]

We will do well in where we are today with them, which is essentially routing use cases or DCI use cases or WAN or Edge. We touched on this other topic before too, but if they ever shift buying more from the outside, I think we'll be ready.

[Aaron Rakers, Managing Director and Senior Equity Analyst at Wells Fargo]

Good. Thank you.

[Operator]

Your next question comes from the line of Jim Suva with Citigroup. Please go ahead. Your line is open.

[Jim Suva, Managing Director at Citigroup]

Thank you, Jayshree and Ita and everyone. Congratulations on great results. My question is, I think it was Ita made it the comment of expect a deceleration in revenues as we progress throughout the year just to get to the 25% revenue growth. I wanna make sure I heard that right 'cause that would then also mean that even with very, very stiff difficult year-over-year comps for revenues, you wouldn't expect them to go negative at all. I guess when we look at that deceleration, it kinda seems like a steep decline to get to an average of 25%. Can you help me with my math there or the missing pieces, or is it some conservativism or... I'm just kinda wondering, but it definitely doesn't seem like negative growth is in the works.

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah. No, no. We didn't talk about negative growth. If you look at the trend last year, you'll see, you know, it really accelerated post Q1, right? That's why you're seeing, you know, a much stronger growth rate year-over-year with our Q1 guide than you will as you move through the year. I think after Q1, it's better to start to look at it as a quarter-by-quarter, on a quarter-by-quarter basis and kind of, you know, grow your revenues quarter by quarter. There's certainly no kind of negative growth in that, and I think you'd get a better answer if you kind of just grow kind of quarter-over-quarter from there on out. Q1 was a much lower revenue number last year, kind of back on the trend.

[Jim Suva, Managing Director at Citigroup]

Great. Thank you for the details, and congratulations, and Happy Valentine's to all of y'all.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, Jim. Thank you, Jim. It's all about comps, isn't it?

[Operator]

Your next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead. Your line is open.

[Samik Chatterjee, Managing Director and Senior Equity Research Analyst at JPMorgan]

Oh, hi. Thanks for taking my question and congrats on the results as well. I guess I have a quick one which is-

[Jayshree Ullal, President and CEO at Arista Networks]

Samik, louder.

[Samik Chatterjee, Managing Director and Senior Equity Research Analyst at JPMorgan]

Yeah. Hopefully, you can hear me now. Is this better?

[Jayshree Ullal, President and CEO at Arista Networks]

Mm-hmm.

[Samik Chatterjee, Managing Director and Senior Equity Research Analyst at JPMorgan]

Can you hear me now?

[Jayshree Ullal, President and CEO at Arista Networks]

Yes. Much better. Thank you.

[Samik Chatterjee, Managing Director and Senior Equity Research Analyst at JPMorgan]

Yep. Yep. I was just going to ask you on your large cloud customer Meta and the recent announcement around architecture changes relative to data centers and trying to run AI workloads and non-AI workloads together on the same data centers and some of those related announcements. If you've been able to dissect that and sort of have any thoughts about how that might impact their spending in relation to switching and routing equipment, particularly as it relates to your portfolio. Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah. Samik, I'll say some few words, and obviously, Anshul can get into detail. We don't foresee any major architectural changes in the build-out of the AI clusters. Clearly, we continue to work with them on the front end of the network, and on the back end, these have been based on the flagship 7800 spines, the AI spine, where you can have a distributed AI leaf, or it can be going straight into the spine. When you have, you know, the hundreds and thousands of GPUs, you need a lossless fabric that has all of the congestion control and bandwidth management required. In the short term, no major change in architecture.

[Jayshree Ullal, President and CEO at Arista Networks]

In the long term, as these customers look for efficiency, we look for these AI fabrics to get larger or more distributed, but they will naturally be an evolution as the market grows. No dramatic shift or change, just more of the same. Anshul, say a few words.

[Anshul Sadana, COO at Arista Networks]

Samik, just keep in mind, Meta slowed down spending a few years ago, right? There's some catching up to do to sort of spend that got missed out. You have to sort of go backwards and average it out to understand the trend. Second, as Jayshree mentioned, from what we know so far, we don't believe there's any change in the networking spend. The CapEx optimizations they are discussing are either tied to how the buildings are built, facilities, or letting go of nice to have projects.

[Samik Chatterjee, Managing Director and Senior Equity Research Analyst at JPMorgan]

Okay, got it. Thank you. Thanks for taking my question.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, Samik.

[Operator]

Your next question comes from the line of Tal Liani with Bank of America. Please go ahead, your line is open.

[Tal Liani, Managing Director at Bank of America]

Hi. I wanna ask about the other part that no one is asking about the non-non-cloud titans. If I back out cloud titans, non-cloud grew 14.6%. The question is, first of all, on last year, did you allocate components to cloud titans? Was this area more pressured than cloud titans when it comes to allocation? If that's the case or what is the answer about what happens this year, this coming year or this year on the non-non-cloud titan portion, what drives it to accelerate from the 14.5% growth of last year? Thanks.

[Jayshree Ullal, President and CEO at Arista Networks]

Got it, Tal. First of all, absolutely not. We don't do any allocation. It's very much a first in, first out algorithm. Many of the cloud titans clearly were the first in, so therefore they're the first out. Our enterprise customers and the momentum and the demand is very high, and we fully expect that they will get their turn in this year, in 2023. Given how you know, constrained we were in supply, this is the way it worked out in terms of revenue.

[Tal Liani, Managing Director at Bank of America]

What are the underlying driver for growth acceleration, Outside of components, better component supplies, what are the underlying growth drivers for 2023 versus 2022?

[Jayshree Ullal, President and CEO at Arista Networks]

I think they're very similar. You, you heard me talk about some of the enterprise momentum. Our customers are really looking for, consolidation of their data centers in terms of a better automation, better telemetry, better, you know, consolidation of the operational advantages in the data center. Campus is a huge use case. Routing and bringing all of the routing features that we've been working on for over five years to bear has been a third one. Observability and security is another use case. Our telemetry with CloudVision. Very similar themes to 2022 that we're seeing in 2023.

[Tal Liani, Managing Director at Bank of America]

Great. Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Tal.

[Operator]

Your next question comes from the line of Fahad Najam with Loop Capital. Please go ahead, your line is open.

[Fahad Najam, Managing Director and Senior Analyst at Loop Capital]

Thank you for taking my question. I had a couple of clarifications. The cognitive adjacencies that were, I think 14% of revenue, is it fair to assume it's fairly split evenly between campus switching and routing?

[Jayshree Ullal, President and CEO at Arista Networks]

Sorry. Fahad, can you repeat the question? I didn't get it.

[Fahad Najam, Managing Director and Senior Analyst at Loop Capital]

The cognitive adjacency revenue that you gave, I think was 14% of revenue, if I'm not mistaken.

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah.

[Fahad Najam, Managing Director and Senior Analyst at Loop Capital]

I'm just wondering, is the split even between campus and routing?

[Jayshree Ullal, President and CEO at Arista Networks]

Approximately. Then, both of them were large contributors. I don't have the exact percentages, but, we think campus over time will become larger. At the moment, I would say it's six of one and half a dozen of the other.

[Fahad Najam, Managing Director and Senior Analyst at Loop Capital]

Got it. For my question, how should we be thinking about, you know, with AI and machine learning becoming more pervasive in cloud titan architectures and this prospective displacement of InfiniBand with Ethernet, how should we be thinking about the TAM opportunity? 'Cause, you know, how big is this InfiniBand replacement opportunity, so to speak?

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah, no, I think the InfiniBand TAM to date has been a very close to HPC, you know, $1 billion-$1.5 billion TAM. It didn't address AI workloads. I think the advent of this new application is going to open up the whole AI networking and fabric TAM to much greater than InfiniBand. Not only do we have an opportunity to replace InfiniBand, but we have a greenfield opportunity for new AI fabrics and clusters. It's both, not just a legacy InfiniBand opportunity.

[Fahad Najam, Managing Director and Senior Analyst at Loop Capital]

Roughly how big do you think the opportunity is?

[Jayshree Ullal, President and CEO at Arista Networks]

I don't think. There have been some market studies on this. You know, some people say $2 billion a year, some people say $4, some say it's going to $8. I think it's still too early to call. It depends on how quickly the adoption of AI fabric happens in all of our large customers.

[Fahad Najam, Managing Director and Senior Analyst at Loop Capital]

Thank you. Appreciate the answers.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Fahad.

[Operator]

Our next question comes from the line of Pierre Ferragu with New Street Research. Please go ahead, your line is open.

[Pierre Ferragu, Managing Partner and Head of Global Technology Infrastructure Research at New Street Research]

Thank you. Good evening. I wanted to catch up on the, you know, what you said, Jayshree, about like routing, edge routing and peering. This opportunity still comes back as an interesting and intriguing area. So my question would be anything you can give us in terms of sizing or how significant it is today. Then beyond that, could you give us a sense of how you understand, like, the long-term market dynamics in there? It's a market where all, like, the legacy routing players are very strong, have, like, a very strong existing ecosystem. I'm still not exactly clear on what market dynamics create the opportunity for Arista and how we should think about it in the long run.

[Pierre Ferragu, Managing Partner and Head of Global Technology Infrastructure Research at New Street Research]

Like, is there an opportunity to replace incumbents in peering, in large peering market? If that's the case, how does that work? Is that, like, operators buying from you? Is that coming from other types of clients, like, cloud players? What, how does the opportunity shape up over time?

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah. No, Anshul, I'd love your perspective on it. Let me kick it off. We think the router market is much bigger than the routing market. The router market is the more legacy market that's been served by a number of traditional industry experts for 20 years, and mostly servicing the service provider market. That's a very traditional market that Arista has been participating some in, but we don't expect to be a major player in traditional service providers. However, you know, we've added so much routing features. Routing is not now part of our switching system. It's sometimes hard to separate it. It's the same hardware, different software.

[Jayshree Ullal, President and CEO at Arista Networks]

If you just look at the last year, we've added Ethernet OEM capability, VPLS, timing with SyncE, EVPN, MPLS gateway, multicast VPN, edge services, routing scale you heard Anshul talk about that can go over 4 million routes. Our portfolio is really transitioning to supporting 400 gig deployments, and routing in the cloud scale is something we're very successful in. On one hand, we're not super successful in the traditional service providers. On the other hand, we are hugely successful on the cloud. In between, we're finding ourselves moderately successful in a lot of the enterprise and specialty cloud providers. Anshul, you wanna add a few words?

[Anshul Sadana, COO at Arista Networks]

Sure. Pierre, another angle here, if you look at how we started to enter this market is through some of the CDN companies like Netflix and Spotify. These companies have an SDN approach to edge. It's a scale-out architecture. You can take a simple router from Arista and scale it out, and the automation and the SDK we provide allows our customers to do that, which is why we do very well in these use cases versus the legacy full feature traditional router. Our cloud customers, the Titan, the Tier 2 cloud, the providers, all like these architectures.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, Pierre.

[Pierre Ferragu, Managing Partner and Head of Global Technology Infrastructure Research at New Street Research]

Great. Thank you for your answers.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Pierre.

[Operator]

Your next question comes from the line of Michael Genovese with Rosenblatt Securities. Please go ahead. Your line is open.

[Michael Genovese, Managing Director and Senior Research Analyst at Rosenblatt Securities]

Great. Thanks so much. I guess just sort of theoretically, in an AI data center, I mean, let's just, you know, current way of doing chat versus an AI chat, can you give us some sense of the switching intensity increase in the new use case with AI? Is there a multiplier to put on the switching or the networking to think about the, you know, higher amount of content and spend for AI?

[Anshul Sadana, COO at Arista Networks]

Sure. Michael, I'll take this one. It's very hard to generalize, right? You can almost give a single number that AI equals so much more. I'll give you an example of something that Andy talked about in the last analyst day. If you look at the resource cluster on which Meta published some papers, about 1/3 of the time, the GPUs were sitting idle because they were waiting for the network traffic to come back. Networking becomes a bottleneck in these use cases. If you can add more bandwidth, you essentially become non-blocking. Your job can run faster, and you can use your GPUs in a much more efficient manner. At a rough order of magnitude, these GPU clusters need about three times more bandwidth than a traditional compute network today. Again, that's a generalization.

[Anshul Sadana, COO at Arista Networks]

Doesn't apply to every use case, but if you need a single number, that's the one I would use.

[Michael Genovese, Managing Director and Senior Research Analyst at Rosenblatt Securities]

Thank you.

[Operator]

Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead. Your line is open.

[Meta Marshall, Executive Director and Senior Equity Analyst at Morgan Stanley]

Great. Thanks. I just wanted to get a sense of on supply chain, you know, what you are seeing there in terms of did it loosen faster than you were expecting in Q4, and that was part of the upside, or just how you're looking at conditions kind of improving throughout the year, and maybe just that kind of relief to gross margins as we think about throughout the year and kind of the overhead of the inventory currently. Thanks.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Meta. I'll comment on it, and I'm sure you'll have a few words too. Look, supply chain hasn't eased up enough for us. Maybe we have more demand than others, and that's why we're feeling it more. Having said that, our Q4 numbers would have been even better if supply chain had eased. Our Q1 gross margin is a reflection that supply chain is still an overhead on our costs, right? We expect Q1 to be the absolute worst. We're gonna improve thereafter every other quarter. Supply chain is going to be easing in the back half of 2023. As you know, at the analyst day, we gave a guide of 61%-63% for the year.

[Meta Marshall, Executive Director and Senior Equity Analyst at Morgan Stanley]

Yeah. Yeah.

[Jayshree Ullal, President and CEO at Arista Networks]

We fully intend to improve our gross margins every quarter thereafter potentially hitting a low in Q1, which is an indication of supply chain improving. At the same time, remember, another huge factor in our contribution to gross margins is the healthy cloud titan mix. We'd like to keep it healthy, and ease supply chain, and that'll give us some improvements.

[Meta Marshall, Executive Director and Senior Equity Analyst at Morgan Stanley]

Great. Thanks.

[Jayshree Ullal, President and CEO at Arista Networks]

Thanks, Meta.

[Operator]

Your next question comes from the line of Alex Henderson with Needham. Please go ahead. Your line is open.

[Alex Henderson, Managing Director and Senior Research Analyst at Needham]

Great, thanks. Congrats on super quarter. I wanted to push a little bit more on the supply chain issue that you're just talking about. I get the point that the gross margins are at their worst in the first quarter. When do you think the balance between availability and your backlog starts to come into balance so that you can actually ship what orders come in and the duration on your backlog, which I know you don't talk about, but conceptually, starts to come in line, so that we're back to a fairly normal book and ship environment?

[Jayshree Ullal, President and CEO at Arista Networks]

Paul, I'll let Ita answer this. I wouldn't call our current environment approaching normality for some time. We hope it'll be second half that the supply and the demand catch up. I hope it catches up because we improve our supply, not that demand goes down. We wanted to also improve for the right reasons.

[Ita Brennan, CFO at Arista Networks]

Yeah, Alex, I think, you know, the goal obviously is to improve, have supply improve, and then improve manufacturing and improve efficiencies, and, you know, we'll be working on that as we go through the year. I don't know what the final normal will be. We'll have to see. I think just given everything that we've been through from a supply chain perspective, it's probably, you know, maybe there's a little bit more lead time visibility that'll end up in the system at the end, but we'll have to see.

[Jayshree Ullal, President and CEO at Arista Networks]

I think what we can safely say is we are getting comfortable that lead times will improve throughout the year. Will we get to normal lead times? I think that'll still take time because we've got to work through our demand.

[Alex Henderson, Managing Director and Senior Research Analyst at Needham]

If I could just one clarification. Did you say you had a decommitted in the fourth quarter? I thought I heard that in the presentation. Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

No.

[Ita Brennan, CFO at Arista Networks]

Decommit's on the supply side. I mean,

[Jayshree Ullal, President and CEO at Arista Networks]

Oh, yeah.

[Ita Brennan, CFO at Arista Networks]

... Stops and starts on the supply side for sure, if that's the question.

[Jayshree Ullal, President and CEO at Arista Networks]

No, nothing to do with it. It had to do with our supply constraints. Component vendors are constantly decommitting.

[Alex Henderson, Managing Director and Senior Research Analyst at Needham]

Okay. Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you. Thank you, Alex.

[Operator]

Your next question comes from the line of Matt Niknam with Deutsche Bank. Please go ahead. Your line is open.

[Matt Niknam, Senior Equity Research Analyst and Managing Director at Deutsche Bank]

Hey, thanks for taking the question. I just want to follow up on the question on macro that was asked earlier. Are there any regions, verticals where you've seen any maybe greater than usual slowness in ordering because of macro? Maybe if I can sneak one in for Ita. On the free cash flow trajectory, broadly speaking, just curious if there's any broad color you can provide around working capital, and primarily asking around inventory and whether that's still a drag or whether you expect to maybe convert some more of that to cash this year. Thanks.

[Ita Brennan, CFO at Arista Networks]

Yeah, maybe I'll take the cash piece of it first. Yeah, I'm not sure that we start to see it come down just yet. I think probably at least for the first half, we'll probably still be building inventory. I mean, we do have some kind of key components that are still, you know, long lead time. We're, you know, we wanted to build buffers, so we'll continue to do that. Hopefully in the second half, it probably at least kind of flattens out. Again, we'll update that as we go quarter-by-quarter. I think there's definitely a piece, but that's still gonna be long long lead time that will kind of hold inventory a little bit higher than what we might like for the time being.

[Jayshree Ullal, President and CEO at Arista Networks]

Your question on macro, like I said before, we'll call it when we see it. We're not seeing anything major and significant yet. You know, customers are watching, we're watching, and no major trend I can point to.

[Matt Niknam, Senior Equity Research Analyst and Managing Director at Deutsche Bank]

That's great. Thank you.

[Ita Brennan, CFO at Arista Networks]

Thanks, Matt.

[Operator]

Your next question comes from the line of Tim Long with Barclays. Please go ahead. Your line is open.

[Tim Long, Managing Director and Senior Equity Research Analyst at Barclays]

Thank you. Just kind of a two-parter on the campus business. First, I think you guys have talked about doing a little bit better in the wireless LAN area. Curious if you think that having a better, you know, wired and wireless portfolio kind of accelerates the share gains potential in that area? Was that something that was maybe holding back some wind that could help in the future? Secondly, I think the analyst day talked a little bit about SD-WAN. I'm just curious if you can give us an update on when you might start to see another leg to the campus strategy in what's a pretty high growth vertical? Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Sure. Tim, on the wired and wireless, we are obviously much stronger on wired, because there's a very natural affinity to the Arista EOS stack. We also have a full portfolio, 1RU, 2RU, all the way to a chassis with built-in encryption. No other company maybe except one has that. We're very competitive there. On the wireless, we're sort of the new kid on the block. We've, as I said, if you just look at our campus entry, we are a new kid on the block. This is our third year. We, I think are going from being a toddler to an adult now here very soon.

[Jayshree Ullal, President and CEO at Arista Networks]

We believe we have a strong portfolio also differentiated by CloudVision for both wired, wireless coming into the same spine, spline architecture that we articulate and design for the data center. We feel very good about our portfolio being strong. I think more of our efforts will go into go-to-market and reaching these customers because much of what we've done to date is, if you will, low-hanging fruit with our familiar customers and our existing base.

[Tim Long, Managing Director and Senior Equity Research Analyst at Barclays]

Thanks.

[Operator]

Your next question comes from the line of Ittai Kidron with Oppenheimer. Please go ahead. Your line is open.

[Ittai Kidron, Managing Director and Senior Equity Analyst at Oppenheimer]

Thanks, and nice finish for you ladies. Couple of questions for me. First of all, for you, Ita, on the cash. Just wanna piggyback on some of the previous question on

[Ittai Kidron, Managing Director and Senior Equity Analyst at Oppenheimer]

The account receivables, clearly they've ballooned here on the year. Are the cash payment terms of the cloud guys any different than a normal enterprise? What % of this account receivable do you think you can recoup in a year? For you, Jayshree, on campus, clearly supply chain is a little bit of a hurdle there. Cisco's taken action to redesign some of its solutions to products and components that are much more readily available. Is that not a path for you? If it is, what can you do on that front to alleviate the supply and more easily address demand?

[Ita Brennan, CFO at Arista Networks]

Itta, maybe I'll take the cash one first. I mean, a lot of the DSO growth is really around those service renewals that we saw at the back end of the quarter. You know, if you think about those and how they flow, they generate almost no revenue, but obviously they're in AR, they're multi-year, so it causes the AR to spike. We'll collect kind of a lot of that in Q1. Good healthy AR balance to target heading into Q1. There's no, you know, no changes in aging or anything else. It's really just the timing of those service renewals and the fact that they end up in AR at the end of the quarter.

[Ittai Kidron, Managing Director and Senior Equity Analyst at Oppenheimer]

Got it.

[Jayshree Ullal, President and CEO at Arista Networks]

Itta on the... Thank you for the wishes by the way, and Happy Valentine's Day. We listened to you and made sure the earnings call was not on Valentine's Day. To answer your question, absolutely. We have our choice of vendors and redesigns. Redesigns take time, and qualifying them with our customer takes even longer. We've chosen to adopt a multi-track approach where we do have redesigns that we can invoke, but we are also improving our relationship and partnership with our supply chain vendors. Anshul, your team has been working on that. I think your vendor list has gone from tens to hundreds, if I remember right?

[Anshul Sadana, COO at Arista Networks]

That's right, Jayshree. This is the first time we are close to, almost 100 suppliers where we talk to them directly. Even if we don't buy the components from them, we control the relationship and the technology and the roadmap much more.

[Jayshree Ullal, President and CEO at Arista Networks]

To answer your question, in the campus specifically, both with redesigns and with our supplier partnerships, we fully expect to come back and not fall short of our numbers in 2023.

[Ittai Kidron, Managing Director and Senior Equity Analyst at Oppenheimer]

Very good. Thanks. Good luck.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you.

[Operator]

Our next question will come from the line of Ben Bollin with Cleveland Research. Please go ahead. Your line is open.

[Ben Bollin, Partner and Senior Equity Research Analyst at Cleveland Research]

Thanks for taking the question. Good afternoon, everyone. I also wanted to piggyback a little bit on campus. Jayshree, could you talk a little bit about how customers are responding as they're facing the increase in lead times or the lead times overall? It's been a market share opportunity. Any risk that that share is perishable? Do they choose to opt to renew with who they have? Then you talked a little bit about go-to-market on campus. What are you doing differently or what are your thoughts on where that goes from here? Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah. No, those are very good questions, Ben. I would say currently we are gaining share because others are messing up. You know, whether it's changing to a software model or not able to supply, Arista's been the benefactor of that. They're still small numbers obviously. But it's difficult to imagine that we're at risk of losing share when we have such small share. Our goal is to grow share at the moment. What was your second question? There was a second part to that question.

[Anshul Sadana, COO at Arista Networks]

Go-to-market strategy.

[Jayshree Ullal, President and CEO at Arista Networks]

What is the go-to-market? In the near term, our go-to-market has very much been to target our 9,000 cumulative customers. We are building a mid-market strategy. We are going to work closely with channel partners. Those things take time. I would say our initial go-to-market is our enterprise customers, and over time we will have a more mid-market strategy.

[Ben Bollin, Partner and Senior Equity Research Analyst at Cleveland Research]

Thanks.

[Operator]

Your next question comes from the line of James Fish with Piper Sandler. Please go ahead. Your line is open.

[James Fish, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, happy Valentine's Day, ladies. Great quarter. Just going back to your commentary on cloud titans being kind of between 2021 and 2022 levels, just given the overall growth, it does suggest a bit of an acceleration for everybody else. I guess what's driving that confidence? Is it just mainly what's in backlog? Is it additional hyperscaler wins, including with AI or enterprise share gains or something else? Ita, just for you as a follow-up on the cash flow, is there a way to think about kind of a normalized cash flow level, or where you expect inventory turns to get to by the end of the year? Thanks.

[Ita Brennan, CFO at Arista Networks]

Yeah, maybe I'll take that one first, Jim. I'm not not quite ready yet to call kind of a turns number for the end of the year. I think, you know, inventory dollars probably grow certainly through the first half, and then hopefully we can flatten out from there. You know, we will look for optimization, but there is still, you know, a fair amount of kind of long lead time items that we need to kind of carry and buffer. I'll come back to you as we kind of go through the year, but I think certainly for the first half, you should be looking for inventory to probably continue to grow on an absolute dollar basis.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, James, for the wishes. I think in one word, I would say momentum. Our enterprise customers are really looking for an alternative to what they've got. There's a lot of fatigue in the system. What's driving our optimism, whether it's, you know, backlog from prior demand or present demand, is they're really hungry, and Arista presents that alternative.

[Ita Brennan, CFO at Arista Networks]

Next question, operator.

[Operator]

Your next question comes from the line of David Vogt with UBS. Please go ahead. Your line is open.

[David Vogt, Managing Director and Senior Equity Analyst at UBS]

Great. Thank you everyone for taking my call. I just wanna pivot back to Meta for a second. In addition to the new architecture that they've been talking about, and I think Anshul addressed it

[David Vogt, Managing Director and Senior Equity Analyst at UBS]

The company also talked about, you know, potentially using more colocation and maybe other public company assets to kind of meet its capital intensity needs going forward. We'd just love to kind of get your thoughts on how that impacts your spending their spending on Arista gear going forward? Just on going also on the Titans mix percentages. You know, if the rest of the business is growing at the rates that we think it's gonna grow in 2023 to end up somewhere between the 2021 and 2022 level, does that suggest that the Titans business in total grows kind of in the low teens in 2023 off of, you know, triple digit growth in 2022? Thanks.

[Jayshree Ullal, President and CEO at Arista Networks]

Just to answer that one, it is definitely not going to be triple digit in 2023. We can say that with certainty. That was a beautiful year and one for the history books. Anshul, you want to take the rest?

[Anshul Sadana, COO at Arista Networks]

Sure. For the Meta question, David, in the architecture and so on, I think the high level message to us is they want to run their business efficiently, as efficiently as possible and optimize. Projects are nice to have. Obviously, those are getting cut back. As you mentioned, in places like Colos and so on, you don't need a very large architecture to start with. If you only have a 3 MW site as an example, you have a smaller cluster size. Our products already fit very well in all of these use cases. We don't believe there's any significant impact to networking from what we can tell today in the near term, right? We don't have visibility that's many, many years out today.

[Anshul Sadana, COO at Arista Networks]

The message we've been given is there's basically no big impact to networking as far as we are concerned.

[David Vogt, Managing Director and Senior Equity Analyst at UBS]

Great.

[Operator]

Our next question comes from the line of Tom Blakey with KeyBanc Capital Markets. Please go ahead. Your line is open.

[Tom Blakey, Senior Equity Research Analyst at KeyBanc Capital Markets]

Thanks for squeezing me in here. I have a question back on the F&E line, financials and enterprise, the drivers there I think, maybe Tal was getting at many questions ago. I was wondering how much like rip and replace type of wins are kind of like starting to rear into here. This, you know, implied in my mind anyway, an acceleration in growth in the F&E line. Specifically, the new Cloud Test product that you launched at the end of last year, if that's kind of a more of a 2023 driver? That kind of rip and replace type of wins, which is a large opportunity in enterprise, is more of a 2023 driver or if it's more a 24?

[Tom Blakey, Senior Equity Research Analyst at KeyBanc Capital Markets]

Maybe just quick, for, Ita, as enterprise mixes up, just remind us what the gross margin and operating margin impact should be, for mixing more towards enterprise. That'd be helpful. Thank you.

[Ita Brennan, CFO at Arista Networks]

Maybe I'll take that one quickly first. I mean, I think, you know, the gross margins we've kind of talked about are improving as we go through the year and kind of the mix is obviously part of that. Operating margin, you know, it's pretty neutral actually between, you know, cloud versus the rest. I don't know that there's any big driver there.

[Ita Brennan, CFO at Arista Networks]

No, we have much lower sales and marketing on the cloud. It's more technically driven, so the it's not the same. Going back to your rip and replace for financial, I take it F&E means financials and enterprise? Just to clarify.

[Tom Blakey, Senior Equity Research Analyst at KeyBanc Capital Markets]

Yeah. Exactly. I'm just talking specifically about the new Cloud Test product where you can emulate, you know, an existing network and then just kind of plug and play the Arista product over an existing install.

[Jayshree Ullal, President and CEO at Arista Networks]

Okay. One of the common threads we're seeing in enterprise and financials is that nobody's getting more staff to do their job. They want more tools to automate and bring their SecOps, DevOps, NetOps, all of their operations together. This is where the Arista introduction of our, you know, continuous integration, continuous design, and continuous test has really been strategic. Because not only do you have to give them a tool for automation. You also have to work with them and train and teach them how to deploy it. These end up not necessarily being rip and replaced, but sort of a gradual evolution where they'll identify the first use case or first data center that they'll do this on, and then it'll expand, land and expand to more use cases.

[Jayshree Ullal, President and CEO at Arista Networks]

Most enterprises are not a rip and replace, but it's a use case that we begin with and then gradually evolve to, you know, go into a rip and replace as their depreciation gets completed on their existing legacy gear. It's a multi-year type of deployment, and it usually begins with a couple of use cases.

[Ita Brennan, CFO at Arista Networks]

Thanks, Tom.

[Tom Blakey, Senior Equity Research Analyst at KeyBanc Capital Markets]

Thank you, Jay.

[Jayshree Ullal, President and CEO at Arista Networks]

Thank you, Tom.

[Operator]

Your next question comes from the line of Erik Suppiger with JMP Securities. Please go ahead. Your line is open.

[Erik Suppiger, Managing Director at JMP Securities]

Yeah, thanks for fitting me in, and Happy Valentine's. On the Meta front, I'm just curious. They talked about adopting more of a modular, kind of scalable architecture. I'm wondering if that changes any of the buying behavior or the purchasing patterns. Does that smooth out some of the purchasing from the likes of a Meta? Secondly, Ita, on the balance sheet with your purchase commitments, do you have control over how much inventory you take on? Or as the inventory becomes available, do you take it in? In which case, might we see your inventory balloon if more of the inventory becomes available?

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah, no, I think I don't like balloon as a word. I mean, there are certain suppliers where, you know, lead times are still respond to those leads and take it. That's why, I mean, over time, that number should come down, just managing to lead time with the contract manufacturers.

[Erik Suppiger, Managing Director at JMP Securities]

Okay.

[Anshul Sadana, COO at Arista Networks]

On the Meta question, the Meta architecture already is quite modular. We talked about the design, the core development within 25 Tb, 7388. It can go up to 256-way ECMP. 250. The cluster sizes are smaller, they don't need 256, maybe they can start with 16 or 32. We already built into the model today. I don't believe it has any impact on us. Same thing on the 7800 AI spine, they can add number of line cards based on the number of GPUs or racks that they're connected to. We are very, very efficient already, I think fits very well into their models.

[Liz Stine, Director of Investor Relations at Arista Networks]

Thank you, Erik. Operator, next question.

[Operator]

Your next question comes from the line of Sami Badri with Credit Suisse. Please go ahead, your line is open.

[Sami Badri, Managing Director and Senior Analyst at Credit Suisse]

Great. Just let me in. Two quick ones. First one is for Ita. Can we just talk about the benefits of pricing from some of the price increases that you guys have put through to the portfolio and the effect it's had on gross margins? The second question is for Jayshree. Jayshree, you've given us kind of a ballpark, visibility, I guess, you know, some kind of quantification in the number of months that you see visibility with some of your biggest customers. Could you give us an update on that same type of visibility?

[Ita Brennan, CFO at Arista Networks]

Yeah. I think on the, on the pricing piece of it, I mean, for sure we're getting some benefit from the pricing, you know, as time goes on, it's a dynamic environment, it starts to be harder to track that, kind of, and it gets lost in the overall, you know, growth in the business. You know, we did check, and there's definitely some uptick for pricing there. It's just not something that we're kinda tracking on a ongoing basis.

[Jayshree Ullal, President and CEO at Arista Networks]

In terms of visibility, Sami, in the past we've seen as much as a year's visibility. If I were to guess, I think, as the lead times improved, that visibility was reduced. Maybe it's down to three quarters now. 'Cause the visibility was very much tied to planning cycles, and when the planning cycles were, you know, longer than a year because our lead times were longer than a year, then we got greater visibility.

[Liz Stine, Director of Investor Relations at Arista Networks]

Thank you, Sami.

[Sami Badri, Managing Director and Senior Analyst at Credit Suisse]

Got it.

[Operator]

Your next question comes from the line of George Notter with Jefferies. Please go ahead, your line is open.

[George Notter, Managing Director at Jefferies]

Hi there. I'm curious about why you guys think you should take share from InfiniBand going forward in AI and HPC environments? I'm just curious about what the logic is there. Thanks.

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah. No, there's two big reasons. I think, in the past, Ethernet was always trading in terms of performance and bandwidth to InfiniBand. Today, as you start talking about 400, 800, 1.2 Tb, the options on Ethernet are much greater and very cost effective, and everybody's very used to that. The other is I think, historically InfiniBand has been more for high performance compute use cases. We are very bullish on the AI workloads and its impact on Ethernet, where we don't believe InfiniBand has any particular advantage, and in fact, Ethernet does.

[Liz Stine, Director of Investor Relations at Arista Networks]

Thank you, George. We have time for one last question.

[Operator]

Your final question comes from the line of Simon Leopold with Raymond James. Please go ahead, your line is open.

[Simon Leopold, Managing Director and Senior Equity Analyst at Raymond James]

Thanks for taking it. Wanted to maybe dig a little bit into the campus business, particularly whether or not that unit has been more constrained and therefore in a recovery bounces back. ultimately wondering if really an increase in campus in the mix, I know you gave us that $750 million target by 2025. Wondering if that's considered a headwind to gross margin or whether it's more about, say, it's the market verticals that affects your margins. Thank you.

[Jayshree Ullal, President and CEO at Arista Networks]

Yeah. No, no headwind to gross margin. Our campus business has good gross margins. I just, you know, as we said, on the product side, I feel very good that the campus can execute. On the go-to-market side, we have more work. I'm giving ourselves some optionality there that, if we do the work really well, we could exceed the 750. If we can't, then that'll be the more likely number.

[Liz Stine, Director of Investor Relations at Arista Networks]

Great. Thanks, Simon. This concludes the Arista Networks fourth quarter 2022 earnings call. We have posted a presentation which provides additional information on our results, which you can access on the investors section of our website. Thank you for joining us today, thank you for your interest in Arista.

[Operator]

Thank you for joining, ladies and gentlemen. This concludes today's call. You may now disconnect.

Participants

Executives

• Anshul Sadana, COO
• Ita Brennan, CFO
• Jayshree Ullal, President and CEO
• Liz Stine, Director of Investor Relations

Analysts

• Aaron Rakers, Managing Director and Senior Equity Analyst at Wells Fargo
• Alex Henderson, Managing Director and Senior Research Analyst at Needham
• Amit Daryanani, Senior Managing Director at Evercore
• Ben Bollin, Partner and Senior Equity Research Analyst at Cleveland Research
• David Vogt, Managing Director and Senior Equity Analyst at UBS
• Erik Suppiger, Managing Director at JMP Securities
• Fahad Najam, Managing Director and Senior Analyst at Loop Capital
• George Notter, Managing Director at Jefferies
• Ittai Kidron, Managing Director and Senior Equity Analyst at Oppenheimer
• James Fish, Managing Director and Senior Research Analyst at Piper Sandler
• Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair
• Jim Suva, Managing Director at Citigroup
• Matt Niknam, Senior Equity Research Analyst and Managing Director at Deutsche Bank
• Meta Marshall, Executive Director and Senior Equity Analyst at Morgan Stanley
• Michael Genovese, Managing Director and Senior Research Analyst at Rosenblatt Securities
• Paul Silverstein, Senior Research Analyst at Cowen
• Pierre Ferragu, Managing Partner and Head of Global Technology Infrastructure Research at New Street Research
• Sami Badri, Managing Director and Senior Analyst at Credit Suisse
• Samik Chatterjee, Managing Director and Senior Equity Research Analyst at JPMorgan
• Simon Leopold, Managing Director and Senior Equity Analyst at Raymond James
• Tal Liani, Managing Director at Bank of America
• Tim Long, Managing Director and Senior Equity Research Analyst at Barclays
• Tom Blakey, Senior Equity Research Analyst at KeyBanc Capital Markets