Arista Networks Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2021

Key Takeaways

  • Arista delivered record quarterly revenues of $748.7 million, up 23.7% YoY, and non-GAAP EPS of $2.96, a 22.5% increase.
  • The company highlighted an acute supply chain crisis with lead times of 50–80 weeks and component cost hikes of 15–200%, prompting over $2 billion in purchase commitments and an average ~10% list price increase effective November 4.
  • Customer momentum remained strong with record $1 million customers and broad growth across Cloud Titans, enterprise, financials, specialty cloud, and service provider verticals, while international revenue reached 25% of the quarter.
  • For Q4 2021, Arista expects full-year growth of ~25%, guided Q4 revenue of $775 million–$795 million, gross margins of 63%–65%, operating margin of ~37%, and announced a 4-for-1 stock split.
  • The balance sheet closed Q3 with $3.4 billion in cash and investments, $134 million of share repurchases, an added $1 billion buyback authorization, and ongoing CAPEX on a new data center and engineering campus.
AI Generated. May Contain Errors.
Earnings Conference Call
Arista Networks Q3 2021
00:00 / 00:00

There are 14 speakers on the call.

Operator

Welcome to the Third Quarter 2021 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 given at that time. 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.

Operator

Ms. Liz Stein, Arista's Director of Investor Relations, you may begin. Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Yawal, Arista Networks' President and Chief Executive Officer and Ita Brennan, Arista's Chief Financial Officer.

Operator

This afternoon, Arista Networks issued a press release announcing the results for its fiscal Q3 ending September 30, 2021. If you would like a copy of the release, you can access it online at our website. During the course of this conference call, Arista Networks Management will make forward looking statements, including those relating to our financial outlook for the Q4 of the 2021 fiscal year, longer term financial outlook for 2022 and beyond, Our total addressable market and strategy for addressing these market opportunities the potential impact of COVID-nineteen on our business product innovation The impact of supply shortages and manufacturing constraints on our business, including lead times and inventory purchases 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 ks, 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. We undertake no obligation to update and have been adjusted to exclude certain charges.

Operator

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.

Speaker 1

Thank you, Liz, and welcome to your first earnings experience. Thank you, everyone, for joining us this afternoon for our Q3 2021 earnings call. Today's call will be followed by a Virtual Analyst Day at 3 p. M. Pacific Standard Time.

Speaker 1

We delivered record revenues of $748,700,000 for the quarter with record non GAAP earnings per share of $2.96 Aecare Services and Software Renewals contributed approximately 21.5%. Our non GAAP gross margins at 64.9% was influenced by enterprise and cloud titan momentum. We remain pleased with our healthy customer growth, including record $1,000,000 customers and new customer logos in our mainstream enterprise. In Q3 2021, Cloud titans was once again our top vertical with enterprise being a close second, followed by Financials and Specialty Cloud Providers tied at 3rd and Service Providers at 4th place. All verticals contributed to Arista's diversity and growth.

Speaker 1

International contribution was strong at 25% with the Americas at 75% for the quarter. No earnings call these days is complete without supply chain commentary. We are clearly in the midst of an acute supply chain crisis with increased prices and long lead times. We are changing our Arista mindset from our historical build to forecast and orders To Build TO Invest, doubling our purchase commitments in excess of $2,000,000,000 and planning for the next 1 to 2 years. Lead times of many components have extended to 50 to 80 weeks with price hikes ranging from 15% to as high as 200 percent across our entire supply chain of copper, steel, substrate, Printed circuit board, memory, silicon, ICs, connectors, freight and labor.

Speaker 1

Arista has been deliberate and thoughtful about price increases so far as we've shared with you, but we have recently announced increased list prices effective November 4, 2021, averaging about an approximately 10% to offset these very high escalating costs. Customer demand remains strong for Arista Products As we're gaining market share in 100, 200, 400 gig high performance switching according to market analysts, we truly appreciate our customers and partners for their patience and understanding as we navigate these turbulent times throughout 2022 as well. Recently, we witnessed the progress of our routing products And the acceptance of our routing edge use cases. Similar to cloud titans, carriers and large enterprise Customers are deriving immense benefit from Arista's EOS and rich routing features. We deliver simplification and Unified Service Delivery with the support of segment routing with traffic engineering and EVPN as well as rapid sale over techniques.

Speaker 1

This provides that ideal alternative to today's complex legacy router deployments with much more improved total cost of ownership and CapEx Benefits. Since its founding, Arista has pioneered the transformation from router to routing with our Leaf Spine R Series Platform. Arista's 3rd generation R3 Series based on EOS 4.26 delivers 3 new edge use cases this year. The first one is a multi cloud edge that brings provisioning and programmatic Traffic steering. The second is a Metro Edge for single protocol adoption across multiple Edge VPN services into the Metro Ethernet fabric.

Speaker 1

And the final use case is a 5 gs RAN Edge, where the 5 gs Edge is disaggregating the radio area network with scale out routing. Continuing our theme of Big Bet Wins, I would like to highlight worldwide examples of our strength with specific customer names in routing and Campus Adjacencies. The first customer was CDLAN, an international service provider in Italy that adopted Arista for their routing transformation. Arista Solutions let them take a fresh approach to routing for next generation edge and backbone, reducing the complexity of protocols. This delivered L2 and L3 services with EVPN on a segment routed backbone along with modern operations and superior services and experience.

Speaker 1

The second customer was Connecticut Education Network, who standardized on Arista's R Series with Arista EOS being instrumental in their transformation of the MPLS VPN Edge, providing 100 gig density, Internet bus scale, stability and manageability. The advantages in the relationship with CEN across service and engineering affirmed their decision to choose us at Arista. Peering between ISPs using 100 gig and MPLS PEs to replace their large legacy routers. 3rd customer is Zenler, an international customer in Asia Pacific, who is delighted to partner with Arista and build their next generation cloud edge and for the infrastructure growth. Arista's rich routing stack brought programmatic traffic engineering in the core of the segment routing without sacrificing quality performance and reliability.

Speaker 1

And finally, in the campus, we continue to make progress towards our goal of doubling to 200,000,000 in the Cognitive Campus in 2021. An example of this is an international customer win in Australia, the Australian Securities Exchange, providing Cognitive Campus for its corporate sites in Sydney, Melbourne and Perth. The new campus network is based on This is wired platforms, the 720 XP Series, and it's built on a multiyear relationship we've built between Arista and ASX utilizing EOS and CloudVision for real time insights across all devices in trading and non trading environments. In summary, Arista's customers strongly endorse our client to cloud strategy to unify silo datasets consistently. We believe we are well positioned for the next phase of growth in data driven cloud networking with proactive platforms, predictive operations and a prescriptive experience.

Speaker 1

We look forward to sharing more of this and our vision and our goals with you at our Analyst Day later this afternoon. I will pass it over now to Ida Brennan, our Chief Financial Officer for Financial Specifics. Ida?

Speaker 2

Thanks, Jayshree, and good afternoon. This analysis of our Q3 results Our guidance for Q4 of 2021 is based on non GAAP and excludes all non cash stock based compensation impacts, certain acquisition related charges and other nonrecurring items. A full reconciliation of our selected GAAP to non GAAP results is provided in our earnings release. Total revenues in Q3 were $748,700,000 up 23.7 percent year over year and above the upper end of our guidance of $725,000,000 to $745,000,000 Shipments remained constrained in the period as we continued to The shift in geographical mix on a quarter over quarter basis Reflect a continued healthy performance from our Cloud Titan and in region businesses in EMEA with some volatility in our APAC business. Overall gross margin in Q3 was 64.9 percent at the upper end of our guidance range of approximately 63% to 65%.

Speaker 2

We continue to recognize some incremental supply chain costs in the period and these were offset by a healthy mix of revenue from our enterprise customers in the quarter. Operating expenses for the quarter were $192,400,000 or 25.7 percent of revenue, up from last quarter at 189,800,000 R and D spending commenced at $125,000,000 or 16.7 percent of revenue, up from last quarter at 119,600,000 This reflected increased headcount and employee related costs and higher new product introduction spending in the period. Sales and marketing expense was $55,800,000 or 7.4 percent of revenue, down from $57,900,000 last quarter with lower demo and other variable expenses in the period. As a reminder, we continue to benefit from lower COVID related travel and marketing expenses. Our G and A costs came in at $11,600,000 or 1.5 percent of revenue, down slightly from last quarter, but in line with normal quarterly seasonality.

Speaker 2

Our operating income for the quarter was $293,700,000 or 39.2 percent of revenue. Other income and expense for the quarter was a favorable 1,300,000 Our effective tax rate was approximately 19.7%. This resulted in net income for the quarter of 230 $900,000 or 31.6 percent of revenue. Our diluted share number was 79,900,000 shares, resulting in a diluted earnings per share number for the quarter of $2.96 up approximately 22.5 percent from the prior year. Now turning to the balance sheet.

Speaker 2

Cash, cash equivalents and investments entered the quarter at approximately $3,400,000,000 We repurchased $134,000,000 of our common stock during the 3rd quarter at an average price of $3.57 per share. As a recap, at the end of Q3 2021, we had repurchased $897,000,000 for 3,900,000 shares against our Board authorization to repurchase $1,000,000,000 worth of shares over 3 years beginning in April 2019. In October 2021, Arista's Board of Directors increased the authorization by adding an additional $1,000,000,000 to the repurchase amount. The actual timing and amount of future repurchases will be dependent on market and business conditions, business requirements, stock price, acquisition opportunities and other factors. Now turning to the operating cash performance for the 3rd quarter.

Speaker 2

We generated $273,000,000 of cash from operations in the period, reflecting strong net income performance and continued investments in inventory and supply chain. DSOs came in at 49 days, up slightly from 47 in Q2, reflecting the linearity of billings in the period. Inventory turns were 1.7x, consistent with last quarter. Inventory increased to $575,700,000 in the quarter, up from $543,200,000 in the prior period as we continued to buffer certain components and products. Our purchase commitments number for the quarter increased to $2,100,000,000 up from $1,100,000,000 in Q2.

Speaker 2

This reflects a combination of increased lead times for many components and improved demand visibility. We continue to prioritize newer Early life cycle products for inclusion in this strategy to help mitigate the risk of obsolescence. Our total deferred revenue balance was 800,000,000 up from $746,000,000 in Q2. 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 $113,000,000 of the balance, up from $90,000,000 last quarter, represents product deferred revenue, largely related to acceptance clauses for new products, most recently with our larger cloud titan customers.

Speaker 2

As a reminder, we're currently in a period of These trends in conjunction with reduced levels of upfront in person testing have resulted in increased customer specific acceptance clauses and higher product deferred revenue amounts. Accounts payable days were 47 days, down from 54 days in Q2, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $45,900,000 including approximately $40,000,000 of CapEx related to the purchase of land Construct a new data center and hardware engineering building in Santa Clara. We'll provide more details on this project over coming quarters. Now turning to our guidance for the Q4 and beyond.

Speaker 2

As outlined in our guidance, we now expect to achieve year over year revenue growth for the full year 2021 of approximately 25%. This reflects continued healthy demand across all market sectors tempered by the impacts of the difficult supply environment. On the gross margin front, industry supply constraints and elevated logistics costs continue to pressure gross margins with customer price increases as a potential offset. Based on our current outlook, we continue to reiterate our overall gross margin 63% to 65%, with customer mix remaining the key driver of volatility on a quarter by quarter basis. Turning to spending and investments, we remain committed to growing our investments in R and D to support innovation across the business and sales and marketing to support our go to market expansion.

Speaker 2

Finally, we also announced today that Arista's Board of Directors has approved a 4 for 1 stock split. Each Arista shareholder of record At the close of business on November 11, 2021, we'll receive 3 additional shares for every share held and trading will begin on a split adjusted basis on November 18, 2021. With all of this as a backdrop, our guidance for the Q4, which is based on non GAAP results that excludes any non cash stock based compensation impacts and other non recurring items is as follows: revenues of approximately 7.75 $795,000,000 gross margins of 63% to 65%, operating margin of approximately 37%. Our effective tax rate is expected to be approximately 20.5 percent with diluted shares on a pre split basis of approximately 80,000,000 shares. I will now turn the call back to Liz.

Speaker 2

Liz?

Operator

Thank you, Meta. We are now going to move to the Q and A portion of the Arista earnings call. Due to time constraints, 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 and A portion of the Arista Earnings Call. Your first question comes from the line of Samik Chatterjee with JPMorgan.

Speaker 3

Hi. Thanks for taking my question and congrats on the strong results, Really impressive. So let me keep it broad based, Jayshree. I think you mentioned strong demand that you're seeing, And I think you highlighted cloud customers in the press release, but just generally if you can talk to how broad based is the demand that you're seeing across Cloud and then what are the kind of magnitude of demand that you're seeing from enterprise customers? And how do you think about sustainability of that level of demand, what you're seeing this year.

Speaker 3

How do we think about sustainability of that into next year? Thank you.

Speaker 1

Yes. Well, thank you, Samek, for the good wishes. It's a proud moment. And I really congratulate my entire leadership team and my employees for getting us here. I think demand is very strong, as I mentioned in my earlier script, across All five verticals across all three product lines and across all three sectors as well.

Speaker 1

So I would not I would tell you, we are growing in that, what Ita highlighted as that 25% annual growth, every sector is growing. And so that's in some ways I feel bad that I even have to rank and rate them. But if you ask me to highlight some of the growth vectors, I would say obviously cloud titans are back. We had a rough spell, if you remember, 2 years ago, Halloween was not a treat, it was a trick. And It's just come back.

Speaker 1

It is a volatile sector and it's positively volatile right now. So we're enjoying the growth of cloud titans. We're also enjoying many pieces of our enterprise market growing and there really some verticals there that are doing very, very well, Not just the financials, but different parts of the enterprise. I think it's fair to say Arista has arrived in the enterprise. We've been growing double digits for a couple of years, And we expect to continue to see double digit growth in the enterprise sector.

Speaker 1

And this is by far our largest momentum of all the verticals, I would say. But not as I mentioned a lot of routing use cases, these routing use cases are not only in the cloud titans, but are obviously also in service providers and enterprises as well. So we're just enjoying a very diversified momentum of our business at the moment.

Speaker 3

Sure. Congrats again. Thank you.

Speaker 1

Thank you. Your

Operator

next question comes from the line of Fahad Najam with MKM Partners.

Speaker 4

Thank you for taking my question. I wanted to ask you a question on the visibility. You mentioned that Certain components lead times have extended from 50 weeks to 80 weeks. I presume your customers in turn are giving you Forward looking guidance as well. So can you give us a sense on the visibility you're seeing and help us quantify that In any way you can.

Speaker 1

Sure. I'll say some few words and Ita, if you could add to that. I think because of these kind of long lead times on our components, First thing Ita and the team are doing, Ita, Anshul and the entire team are planning ahead. And we're no more, like we said, building to forecast our orders, but really building to a future demand. So visibility becomes very important in that case because it's no more 1 or 2 quarters.

Speaker 1

The cloud tightness visibility has improved a lot this year. Typically, it used to be 1 to 2 quarters. Right now, it's more like a year or more. So this is the best visibility we've ever had with the Cloud titans That's allowing us to build an inventory and to build a plan and to get ahead, if you will. In the enterprise as well, Nobody's lead times are very good right now and we're no different.

Speaker 1

Although we thought and we believe we have a head start by starting on this problem as early as last year, We have several hundreds of suppliers and we've had to increase our strategic interface with these suppliers to and make again bets on them long term. So visibility in the enterprise is also 6 months to a year, visibility in the cloud and specialty cloud providers is now Exceeding a year. So in general, we're now able to make a plan to buy components well ahead of the purchase orders and forecast. Peter, you want to add something more? Yes.

Speaker 2

I mean, I think the only thing I'd add for that is it's hard to be too quantitative when you think about demand and bookings just because obviously the lead times and the time frames Are very different, right? So I think from just from a business perspective, we'll continue to focus on the revenue And then the bookings numbers will kind of ebb and flow. But obviously, right now, you are getting a lot of visibility to what's happening with Just because we need that to be able to drive the types of purchase commitments, etcetera, we're driving.

Speaker 4

Appreciate the answers.

Operator

Thanks, Fana. Your next question comes from the line of Rod Hall with Goldman Sachs.

Speaker 5

Yes. Thanks for the question. And again, I'd like to echo the positive comments. These are phenomenal results in this environment. I guess my question is regarding the COGS and the cost of some of the products you're getting from Broad Other companies we've talked to during this earnings season have talked about really high expedite fees.

Speaker 5

I'm just wondering if you're seeing those and how they're factoring into the forward costs in the business. Like are you Abel, because of this visibility to set your prices at a level that compensate for it, will we see higher COGS unwind maybe the early part of next year? I'm just curious, are you seeing those expedite fees and then how they might affect margins at some point?

Speaker 2

I think everybody is seeing I don't want to talk about a particular supplier, but we are seeing expedite fees and incremental costs kind of across the supply base, right? And You haven't seen those in the gross margins in the income statement to date just because the mix has been more enterprise heavy, and that's been kind of offsetting that, right? I think we are, as Jayshree mentioned, we are in the process of instituting some price increases, etcetera, to help offset some of those costs, so that will help. I think we're comfortable thinking about that 63% to 65% range is still being reasonable, but you will see some more Quarter by quarter just as the mix of their business, the customer mix is still going to be the biggest driver. The other costs we're managing with Some of the price increases, etcetera.

Speaker 2

But when we have a heavier kind of cloud mix in a particular quarter, etcetera, we will see some lower gross margins than what we've seen over the last couple of quarters.

Speaker 1

Thank you for the good wishes, Rod.

Speaker 5

Sure, Jayshree. No problem. Just a question, our customer what about the cloud customers? Are they willing to accept A little bit of price increase knowing that things are getting more expensive. Just curious what the conversations are like there.

Speaker 1

I would say all our customers are very understanding, but nobody is willingly accepting price increases, including the rich cloud titans.

Speaker 4

Right. Okay.

Speaker 6

Thanks a lot.

Operator

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

Speaker 7

Thank you. Truly spectacular. And I got to just ask about the build to forecast versus build to order. Kind of when did you implement that and what was the reaction of some of your customers or is it more internal? And what I'm wondering is how much further you may be ahead of

Speaker 1

Right. First of all, I just want to give a big shout out to Anshul, John McCool, Susan Hayes and the entire manufacturing team. Let me just step back, Jim, and thank you for the kind wishes. The traditional model for everybody has been Lead times are based on supplier commits. There's some buffers, but most of it is just in time, right?

Speaker 1

And very rarely does anybody pay for expedites. If you look at supply chain in 2022, 1st of all, expedites our way of life, it doesn't matter which vendor it is. You have to plan not Weeks ahead, but months ahead, often you can get decommits from suppliers. There are shortages across the board. There's lots of orders.

Speaker 1

There's no buffers. Everybody is coming at them sometimes and we used to think the high-tech industry is special, but some of the components we're talking about, we compete with the automotive industry and consumer industry, which makes it tougher. And it isn't surprising at all to see expedites, involve not just CEOs, but heads of countries, literally. That's how rough it is. So it's a very oversubscribed process.

Speaker 1

We thought we got a head start by starting, when was It's either late last year, when Anshul and the team put together a plan. So we've definitely had a head start. And if things have gotten better, We would be well ahead of everyone. But these things keep getting worse. So now the head start is good, but we have to add to that head Not just 1 or 2 vendors, but 25% of our vendors.

Speaker 1

So this is a much larger relationship pool and we're committing to them Long term, they're committing to us, but both of us have to be patient and understanding of the short term troubles we have.

Speaker 7

Thank you. And again, really big congratulations to you and your entire entity. Thank you.

Speaker 1

Thank you. Big kudos to my team.

Operator

Your next question comes from the line of Paul Silverstein with Cowen.

Speaker 8

Thanks for taking the questions. Two related questions, if I may. Was there any 200 gig from Facebook and any 400 gig revenue from Microsoft in your 3rd quarter And you expect in the Q4. And Jayshree, would you care to comment on the outlook for next year? I know in supply chain, it's challenging, but

Speaker 1

Yes. I'm just checking to see, but there was 400 gig revenue overall. As I told you last time, We have increased our customer logos in the 400 gig category from 75 customers last year The first half was 150 and we're trending to about 300 customers. So they're definitely 400 gig. I need to double check on Whether there was any $200,000,000 Let me back off that question.

Operator

Ita, do

Speaker 1

you know? Yes. I was just going to

Speaker 2

say, Paul, some of the commentary on the deferred is probably relevant here too where we talked about The deferred balance becoming more cloud titan heavy this quarter, whereas before it had been more other verticals, etcetera, right? So I think that's So we may not have had revenue, but we've probably had activity. We deferred the revenue.

Speaker 1

So we have some deferred 200

Speaker 9

So that's what I thought. But just

Speaker 8

to be specific, Jaysh, the question specific to Facebook and Microsoft, I assume A lot of that revenue is being deferred or maybe it's not. That's but that's the specific question.

Speaker 2

Yes. I think we grew our deferred revenue when we mix Stepping towards cloud and that includes new products, right? So that's kind of it.

Speaker 1

About 200 gig and 400 gig.

Speaker 8

Right. And would you care to give any comment about the outlook for next year?

Speaker 1

We are going to at the Analyst Day. How about then?

Speaker 8

I could wait 30 minutes.

Speaker 1

All right. And so those of you in the East I apologize for keeping you up late, but we'll make it short and sweet. I think our Analyst Day will be 2 hours. Yes. So you won't be You won't have to stay up too long.

Speaker 8

All right. I appreciate it.

Speaker 4

Thanks, Paul.

Operator

Your next question comes from the line of Sami Badri with Credit Suisse.

Speaker 7

Thank you for the question. Jayshree, you've mentioned a couple of times talking about reference to enterprise wins and That really kind of dialing up as far as momentum. But if you were to bullet point the key reasons why you're winning and you continue to win with What it sounds like increasing momentum, can you just highlight them for us because most of the people on this call are used to hearing about Very defendable sales channels and many other vendors with very comprehensive solutions. Can you walk us through The key sales pitch and just what is resonating with the enterprise customers?

Speaker 1

Right. And again, I'll do some of this at the Analyst Day, but I'll give you the abbreviated version 7. First 1st of all, I think our relevance in the enterprise customer has increased from data center to really a much broader portfolio that's client to cloud, Going all the way from campus, Wi Fi, Wi Fi to design to the data center to routing and a very large dose now of software and Everything from Acare to CloudVision to CloudUS to Surface Cloud Software as well as our recent Acquisition of Big Switch and Awake now contributing as well to segmentation, observability and security as well. So the completeness and the innovative nature of our portfolio has helped. The second thing that's helped is our Power of 1, if you will, 1 OS, 1 Image, 1 CloudVision.

Speaker 1

Customers just love the not just the innovation, but the quality and support of not having to buy silo boxes, but having an innovative and Much better operator experience with a much lower TCO. And finally, at the enterprise customers, we have now much as we talk about products, we have invested in Customers, our investment in sales led by Krishmit and Ashwin Koli and the entire team worldwide really began in 2017. So this is our 3rd or 4th year of enterprise investment. And I think we're now seeing the results of that. The first and second year we were kind of getting in and we're just coming into the campus.

Speaker 1

And now I think we're coming on to our own in a complete holistic fashion.

Operator

Your next question comes from the line of Jason Ader with William Blair.

Speaker 7

Yes. Thanks for the question. First, I want to say horrible numbers. You guys need to do better.

Speaker 1

Thanks for standing up.

Speaker 7

But my question is, can you quantify the backlog or book to bill or anything that might help us understand Kind of how much of a gap there is between demand and supply? And is there any risk that customers are over ordering Right now, where you could see an air gap in demand maybe in sometime in 2022.

Speaker 2

Yes. Jason, I know lots of folks have been talking about Bookings and trying to put some boundaries around that. I just think it's really hard from a timing perspective. When you These lead times, of course, you're going to have accelerated bookings and larger bookings. And certainly, we have our fair share of that, right?

Speaker 2

There's no It's just difficult to talk about the business, I think, in that context. So we're more focused on what can we deploy, and that's how we're running it internally as well, right? What are the Periods where these bookings will get deployed and building out deployment plans, that's really what's going to matter. I mean, I think when you think about the business that way, Yes, the pull ins and push outs of the actual bookings numbers and how much visibility you're getting, etcetera, becomes less important, right? So Not kind of not talking your question, we have obviously lots of demand.

Speaker 2

We've talked about the demand that we have, but these are So we're just focused on making sure we understand how it's going to get deployed.

Speaker 1

Yes. And I want to echo what Ita just said. We're not going to get excited about backlog. We're very excited about deploying our customers with real revenue. And some of the backlog may materialize and remember they're cancelable orders, some of them may not.

Speaker 1

So it's best to be responsible as a company as we always have been and share with you that demand is certainly outstripping supply. No question about that. And we're going to work hard as hell on fulfilling the supply and improving the supply.

Operator

Great. Next question, please. Thanks, Seth. Your next question comes from the line of Meta Marshall with Morgan Stanley.

Speaker 1

Great. Thanks. I realize it's kind

Speaker 2

of difficult to quantify the supply chain impact currently, but if any way you can Help us with the gross margin impact. And should we see the gross margin step down in the guide as more supply chain related or more related to the mix of revenue types? Thanks. Yes. I think the best way to think about it is that we've been operating at the upper end of that range For the last couple of quarters, that's definitely a customer mix effect, right?

Speaker 2

It's offsetting some of the cost impacts as well. And we've been deferring some of the as Paul was talking about, some of the larger customer revenue as well.

Operator

So I

Speaker 2

think as you look forward kind of outside of these quarters when the mix of the business comes back to something more balanced, I think you will see us back Towards the bottom end of that range from time to time. I think we believe we'll stay in the range over a long period of time, but there will be quarters where we could be pressuring the bottom end of That range and maybe even break the bottom end of that range while for say, add it for 4 quarters, I think we can still be okay. So there is definitely a customer element to this. There's a cost increase element to this and we will benefit from some customer price increases here that will help offset some of that. But I think the days of living at The upper end of that range, I wouldn't assume that we can do that on an ongoing basis as you look forward.

Speaker 2

Got it. And not to trap you in, but like any forward guidance, but just for the price increases, obviously, you probably wouldn't see most of that Impact to Q4, you would expect the price increases to impact more Q1 in 2022.

Speaker 1

Yes. Or would you expect to

Operator

Your next question comes from the line of David Vogt with UBS.

Speaker 7

Great. Thank you guys for This is a question for both, I guess, Jayshree and Ita. I just want to follow-up on the Cloud Titan CapEx and the hyperscaler CapEx And visibility, I think it's fairly well documented that the balance of this year into 2022, there's going to be significant data center expansion and availability expansion by the hyperscalers. So that's clearly reflected in your confidence. But you noted that you have a little bit more than a year visibility.

Speaker 7

I mean, how should we think about 2023, I know we don't even have 'twenty two guidance yet, but given the strength and the expansion and the availability and the data center trajectory, How do we think about that? And then just as a follow-up on pricing, when you think about the 10% price hike that you're going to implement in a couple of weeks,

Speaker 2

In your mind, is that

Speaker 7

sort of more than offsets the supply chain? Or is it a way to quantify how we're thinking about price versus The margin impact from the higher components, does it reduce it by 50%? Is there some way to think about it that we can model out going forward? Thank you.

Speaker 1

Yes. No, I mean, we've tried to

Speaker 2

be very transparent with customers in terms of what we're seeing on the cost side and Looking for them to help us kind of offset that. So we're definitely not looking to increase margin or make margin on that. We've been very open and transparent with

Speaker 1

Yes. And to answer your question on 2023, I guess, would say stay tuned for the Analyst Day. We'll try and give you better visibility on 2022 and give you some visionary statements on 2023 and beyond.

Speaker 7

Great. Thank you, guys.

Speaker 1

Thanks, David.

Operator

Your next question comes from the line of Amit Daryanani with Evercore ISI. Perfect.

Speaker 10

Thank you. And I'll extend my congratulations as well to you. I guess when I look at your performance in 21 based on the midpoint of your guide for December, I think you would have clearly gained some sizable market share in the year. I'd love to understand, you think the share gains are coming from white box vendors or coming more from sort of the traditional competition that you have? And then maybe a second part to this, as you think about the next Couple of years, could you see customers that use white box solutions today come to Arista?

Speaker 10

And if so, what do you think would motivate them to do so? Thank you.

Speaker 1

Both very good questions and related to each other. I would say this year with all the supply chain issues, much more of our share gains Coming from enterprise and cloud titans, just getting our fair share from our peers in the industry, not necessarily white box. If you fast forward to later years, I do think Arista will have an advantage not just in product capability, but also in the ability to Rapidly supply product probably better than some of the white boxes. And Anshul has often alluded to this. So the make versus buy decision for many of our cloud titans may shift in the direction of Arista rather than strictly white boxes.

Speaker 1

We look forward to that. I'm not going to make any guesses on that, I don't preclude that and neither has Anshul when he's spoken in the past. So it certainly wasn't part of the market share gains and the growth this year, but it could be next year.

Speaker 10

Perfect. Thank you.

Speaker 2

Thanks Amit.

Operator

Your next question comes from the line of Pierre Ferragu with New Street?

Speaker 9

Hi. Thanks for that for taking my question. I am very intrigued by the 1 year visibility you have with your Cloud client. And on that front, I was wondering first, Facebook, one of your important clients, Hi. It does have CapEx for next year by like 60%, 65% or so last week.

Speaker 9

And I was wondering is that something that is, I would say aligned with the visibility you have or if it came as a surprise. And then along the same line, Within that visibility, how do you see the spending of cloud titans changing in terms of how it is split between What's happening inside the data center, which is more on the switching side and what is more happening outside the data center in the DCI and more Thanks,

Speaker 1

Peter. Both again very good questions. I'll take the second one first. I think Arista's presence for most part until recently has been intra data center. But what has been phenomenal to watch My CloudTitan team do led by Anshul, Martin and others is the use cases have proliferated, not only outside the data center with DCI, But routing, AI use cases, top of rack use cases, special customized use cases, so both within the data center and CyderVista is getting its fair share of opportunity to respond and we're doing a lot of proof of concepts and testing work with them.

Speaker 1

Regarding the Cloud Titan CapEx spend, we're always surprised when the numbers actually come out because they're in 1,000,000,000 and of course they're nowhere close to the percentage they spend with us necessarily. But our relationship with Facebook dates back now at least 4, 5 years. We have done joint Development with them in the F BOSS and we've jointly developed products with them. We have shared with you in the past that we are developing our next generation of product with them 200 gig. So we were pleasantly surprised, but we were not completely surprised.

Speaker 9

Thanks, Joseph. That's great.

Operator

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Speaker 11

Yes. Thanks for taking the question and congratulations as well for me. I think the one number that stands out the most to me is your $2,100,000,000 plus purchase commitments. And I think that's up over 4x Relative to what it was exiting last year, I think going into kind of the June quarter, the expectations were that maybe some of these Component constraints would start to ease as we move into the mid part of 2022 and certainly into the second half. I'm just Curious, your best assessment right now, where you stand on some of those lead times starting to normalize or shorten back down?

Speaker 11

And Do I think that you're going to carry kind of this higher degree of visibility well into 2023 at this point? Thank you.

Operator

And presenters, is your line muted?

Speaker 2

Sorry about that. I don't know when that happened. Where did I talk? Yes. I think the Sorry, Aaron.

Speaker 2

Can you

Speaker 10

help me with how much of that you got?

Speaker 11

Actually, I didn't hear any of it. I apologize. Okay.

Speaker 2

All right. Okay. Let me start. Yes, so I think, look, we probably have 2 dynamics happening. We've seen a push out of lead times again with the products and the vendors that we were managing directly.

Speaker 2

And that's probably I think now our view is that's probably the end of 2022 before we start to see things get better there. In addition to that, We've also seen it kind of broaden out to other components, right? And we're now managing vendors directly that would have normally Gone through the supply chain, gone through the contract manufacturers, etcetera, and we're having to engage directly with those suppliers. And then that's also driving some increase And those purchase commitments and we're looking out longer with those suppliers as well. So it's a combination, I think of both of those that's making that number Increase, we are trying to focus on new products and products that have long life cycles, so that gives us a little bit more Leeway there in terms of taking a longer view and we'll continue to do that.

Speaker 2

But, yes, I don't think we've kind of got to the point yet where things are improving.

Speaker 1

And Aaron, we see this as an important investment to the business. It is a decision that Ita, myself and Anshul So we have made very conscious decisions to say we've got to invest in the business and we've got to invest in getting product to our customers. So we think this is an important part of our decision making process Because of the prolonged situation here with supply chain.

Speaker 11

Very helpful. Thank you.

Speaker 2

Thanks, Aaron.

Operator

Your next question comes from the line of Ittai Kidron with Oppenheimer. Thanks.

Speaker 6

Hi, ladies. Congrats. Great quarter. I guess a couple of questions for me. First of all, with regards to the purchase commitments.

Speaker 6

Can you give us a little bit more color whether This is a response to competitors of yours doing the same with your suppliers. And does this lock in volume or does it also lock in Price for the components that you're buying.

Speaker 2

Yes. No, I think it's totally us working on our own strategy. And as Jayshree mentioned earlier, we started to do that Right back at the beginning of last year even. So just a continuation of that. I think the biggest driver is obviously what's happening in the supply chain and understanding what's happening In the supply chain and understanding what's happening in the supply chain and just the breadth of suppliers that we need to kind of manage directly and start to deal with directly Right now, I mean, I think that's the biggest driver of the change as opposed to anything that anybody else is doing, etcetera.

Speaker 2

Sorry, what was the second part of your question you said?

Speaker 6

Does it lock in just the volume or does it also lock in the prices for you going forward?

Speaker 2

Yes. I mean, when you make long term commitments, there is kind of a pricing element to that, that you have a set price base. As things start to get better, we'll see how some of that plays out, right? But there obviously is a pricing in the market today and that pricing is kind of what you're Making these commitments absent, but as time we've seen over time in the past, as things start to loosen up, then some of that can change as well. But right now, it is

Operator

Your next question comes from the line of Simon Leopold with Raymond James.

Speaker 7

Thanks for taking the question. As you probably remember, early in my career, I was told never to high 5 management on a public call. I'll leave it at that. I wanted to see if maybe you could expand a little bit on the campus opportunity, which sounds like it's overshadowed by what's Going on in data center, but just want to get a better sense of where you stand in that part of your business and the trajectory. Thank you.

Speaker 1

Thank you, Simon. We will take your virtual high five even if you didn't give it to us. I think the campus business has been very relevant To a seat at the table in with enterprise customers. We're now starting to see enterprise wins and logos where we win the campus before we win a data center Because many of these campuses don't have large data many of these enterprises don't have large data centers. So I think the conversations, the strategy, the ability to bring All of the silo data sets together, whether it's in your campus or data center or in the core or WAN or branch is very important and Customers are looking to us to build their modern and modernize their enterprise network.

Speaker 1

So from that standpoint, although the numbers are still small and we're talking about doubling from 100 to 200, we think it will be extremely relevant strategically with our enterprise customers and will grow obviously in the next few years. There's also a component of channels where we're still pretty nascent and most of our success and engagement to date is direct albeit fulfilled by channels. But we hope that will change over time and that will add further strength to our campus.

Speaker 7

Thank you.

Speaker 1

Thanks, Simon.

Operator

Your next question comes from the line of Tal Liani with Bank of America.

Speaker 12

Hi, guys. I have two questions. One is just if you can give us an update on campus switching, where you are Your targets, if you said it, I apologize, I just didn't hear it. And second, I just want to understand kind of about the accounting. Can you go over again the price increases?

Speaker 12

When are they kicking in? If they kicked in already? And then what happens with your cost of goods sold since it's on FIFO? I'm assuming it's on Pfeiffer like everyone else. Does it mean that right now you're still recording Cheaper components, so the margins are higher.

Speaker 12

I'm just trying or maybe I'm totally wrong. I just want to understand kind of the margin evolution as component pricing goes up and pricing Increase is kicking.

Speaker 2

Yes. I mean it's go ahead. It's some combination of all of those, Tal. There are some Expedite

Speaker 1

costs that end up

Speaker 2

being period expenses that we've been recognizing. We recognized a chunk last quarter. We had some again in Q3. There are other costs like higher price higher pricing increases, etcetera, that will end up being inventoried And we'll flow with the inventory and some of that obviously will burn through the inventory that we have in the supply chain and then we'll start to see those costs. Those will line up better hopefully with some of the price increases that we are passing on to customers as well.

Speaker 2

I mean, this is it's going to be complex. It won't necessarily be perfect, right? But as we look at the various different scenarios, there's a better Chance of those lining up with the price increases. So that will help kind of offset some of that.

Speaker 1

And finally, Tal, on the campus, We committed to double the $100,000,000 achievement we had last year, this year. And here we are sitting 2 months away from the end of the year. So We believe we will hit it and we will have to set a new goal for next year.

Speaker 12

Got it. And just going back to the margin, so I know you're probably going to discuss it tonight, but just in general, how do we think about gross margin going forward?

Speaker 2

Yes, I mean, it's definitely part of the discussion later.

Speaker 1

Right. So And I think you already mentioned What was mentioned already is we continue to believe with the price increase effective November 4, which will really be effective next year By the time customers realize it and see it that we will be able to offset the escalating costs and our gross margin will depend on mix. And as Ita has often said, if we are heavily mixed on the cloud titans, we could be on the low end of the 63% to 65% And pressured on gross margin there. If we're heavily mixed on the enterprise, we could be on the mid to high end like we have been.

Operator

Got it. Yes.

Speaker 12

Great. Thank you.

Speaker 2

Thanks,

Speaker 1

Phil.

Operator

Your next question comes from the line of Ben Bollin with Cleveland Research.

Speaker 13

Good afternoon. Thank you for taking the question. Jayshree, I was hoping you could talk a little bit about how you view The current technology build out, the new technology build out for both enterprise and cloud as they start to transition into 204100, How you see similar or different versus what you saw from 2016 to 2018 With more cloud titans building out 100, any thoughts on duration, behavior, any puts and takes would be interesting. Thanks.

Speaker 1

Sure, Ben. I think the cloud titan behavior will be different than the enterprise behavior. On the cloud titan, you're going to see a much more rapid inflection to 200 gig and 400 gig, especially in the spine layers and the uplinks of the top of rack. And they've always been a Early and fast adopter of speeds and technology, especially within a data center or even data center to data center. So we are Expecting an inflection of 204 100 gig that's basically has started this year was very challenged with ecosystem and availability of optics and even Switches the last year.

Speaker 1

The year of inflection in my view is really late this year and goes well into 2022. On the Enterprise 2, we expect to have By the end of this year, 300 customers of 204 100 gig, primarily 400 gig, I would say. And as you know, our customer base is more than 7,000. So obviously, 100 gig and 400 gig will continue to coexist and live happily ever after together. We will start to see the uptick and adoption of 400 gig in the high end and early adopters of enterprise as well like we're starting to see this year.

Speaker 1

So I think the next few years can be best characterized as inflection of new higher speeds like 204 100 And the continuation and adoption of 100 gig in the mainstream enterprise.

Speaker 2

Thanks, Jayshree.

Speaker 1

Thanks, Ben.

Operator

Your next question comes from the line of Erik Suppiger with JMP Securities.

Speaker 6

Yes, congrats. And Curious, how is the constraints affected the 400 gig market? It sounds like you've been doing well there, but Has that been a factor? And does that make a difference from a market share perspective? Do you have any advantage or disadvantage in terms of access for your 400 gig Components.

Speaker 1

I think I'd say we are as constrained on 400 gig components as we are 100 gig components. So it's been a factor for all speeds. We're just constrained. What can I tell you? So but our market share continues to be strong in both.

Speaker 1

We're doing well in both. Our flagship Platform, the 7,800, which is especially 400 gig dependent is one of the most popular products. At the same time, our 7,280s and 100 gig versions of 705,700 are very, very popular too. So supply chain is for everything. It's not necessarily picking one speed over the other.

Speaker 6

Are the optics anything different?

Speaker 1

The optics is actually better than last year in terms of the ecosystem for 400 gig coming up, not different Other than that, it's actually improved for 400 gig.

Speaker 6

Okay, very good. Thank you.

Speaker 1

Thank you.

Operator

Your next question comes from the line of George Notter with Jefferies.

Speaker 7

Hi, guys. Thanks very much. I guess I wanted to go back to a statement earlier. I'm paraphrasing, but I think you said you were running the business to demand rather than orders Something to that effect. Could you go back and kind of expand upon that?

Speaker 7

I'm just curious about what you meant on that. I assume you're trying to Look through customer order books and try to see what they really need as opposed to excess ordering.

Speaker 13

Maybe you could

Speaker 7

just expand on that. Thanks.

Speaker 1

It's actually the other way around, George. What we said is, all the just in time and build to forecast and being extremely disciplined about Buying inventory only when the customer puts in an order has gone out the window a little bit. And because of these long lead times, we're having to plan To order well ahead of the customer orders or forecast, that's what we meant. So it's build to purchase orders to our supply chain Rather than build to customer purchase orders, if that makes sense, since they're still constrained on long lead times. So we're making a bet that the supply chain constraints, which I hope will eventually improve, will favor those of us who make those kind of purchase commitments.

Speaker 1

So we're having to get in there early and fast Even before the customer orders come in.

Speaker 7

Out of curiosity, did you have any flexibility on those purchase commits? I mean, are they cancelable on your side?

Speaker 1

Most of the semiconductor components are non cancelable, but that's just the way the business is run. We've been careful to choose components that we don't need to cancel, like picking new products, which and taking common componentry across them. So we believe there's limited risk in the investment we've made.

Speaker 7

Super. Okay. Thanks very much.

Speaker 2

Thanks, George.

Operator

Operator, we have time for one more question. Your final question comes from the line of John Lopez with The Vertical Group.

Speaker 6

Thanks so much for squeezing me in. And I apologize because I'm going to stay on the same topic. But hopefully it will be the last one. We can cover the rest of the stuff on the Analyst Day. This has been alluded to a few times.

Speaker 6

If we look at your largest competitor, they've also like roughly doubled their purchase commitments fairly recently. You're now doing Same. The dollars collectively are like many multiples larger than either of you have ever carried. I guess my question here is to what extent you think inventory is actually evolving into a competitive weapon as we think about 2022 and 2023? And maybe like to what extent does it introduce Risk like if you can't get supply as fast or in the same quantities that you're envisioning now, can that influence your revenue outlook in 2022 or in 2023?

Speaker 2

Yes. No, I think there's no doubt that supply is shaping our revenue line right now, Almost more so than demand, right? I think that is a factor, right? We are constrained. So supply is definitely a factor.

Speaker 2

I think In terms of looking at the purchase commitments, we are working very carefully with these suppliers. And again, we're expanding kind of the breadth of what we're doing. And we are expanding kind of the lead times and the length of time that we're covering with those purchase commitments. And I think that's important. And again, we're doing it on new products, newer products that have significant lives ahead of them.

Speaker 2

So really, The risk we're taking somewhat is tying up some cash, etcetera. It's not because of the life cycle of the products and stuff, It's not really an obsolescence risk, right? But it could take some time to burn through that inventory if things change. But I think it's well It's a bet that's worth making. We're making it obviously in consultation and discussion with customers, etcetera.

Speaker 2

But it is kind of a longer lead time and then a broader suppliers than we normally carry. That's why you're seeing that big uptick, is we're not only doing it for the components that we used to buffer in the past Directly, but we're also now doing it for components that would have come to us through the CMs, in a normal supply environment.

Speaker 6

Understood. Okay. Thanks for the thoughts.

Speaker 2

Okay. Thank you very much.

Operator

This concludes the Arista Q3 2021 earnings call. We have posted a presentation which provides additional information on our fiscal results which you can access on the Investors section of our website. Thank you for joining us today.

Powered by Quartr