Arista Networks Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2022

There are 20 speakers on the call.

Operator

Welcome to the Second 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. 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.

Speaker 1

Thank you, operator. Good afternoon, everyone, and 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 Q2 ending June 30, 2022. If you would like a copy of the release, you can access it online at our website.

Speaker 1

During the course of this conference call, Arista Networks Management will make forward looking statements, Including those relating to our financial outlook for the Q3 of the 2022 fiscal year, longer term financial outlook for 2022 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, the potential impact of COVID-nineteen, customer mix, 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 ks, and which should 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 these statements after this call. Also, 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 and our earnings press release.

Speaker 1

With that, I will turn the call over to Jayshree.

Speaker 2

Thank you, Liz. Thank you, everyone, for joining us this for our Q2 2020 earnings call. We delivered revenues of $1,050,000,000 for the quarter With a non GAAP earnings per share of $1.08 service and support renewals contributed approximately 17.6 Our non GAAP gross margins of 51.9% was influenced by escalating costs due to supply chain as well as a higher cloud titan mix. We do expect both these trends to continue throughout 2022. In terms of Q2 2022 verticals, CloudTitans was our largest vertical, followed by the enterprise, Cloud Specialty Providers and Financials tied for 3rd position with the service providers in 4th place.

Speaker 2

International contribution was 20% with the Americas at 80% and strong performance, particularly with our large cloud customers. In the first half of twenty twenty two, we completed 2 small acquisitions to bolster our investments in security and switching fabrics. We acquired Untangle Incorporated, a security asset for edge threat management for our commercial branch offerings led by former CEO, Scott Devan. In late Q2, we closed the acquisition of Pluribus Networks led by former CEO, Kumar Srikanthin. Pluribus pioneered a new class of unified cloud fabric networking endorsed by our partners Ericsson for telco and 5 gs Cloud and NVIDIA for DPU based networking.

Speaker 2

Our Q2 2022 results reinforce Arista's customer relevance in CloudTitan, specialty cloud providers and mainstream enterprises. As I mentioned previously, Our $1,000,000 logos have doubled in the last 3 years in all categories, greater than $1,000,000 greater than $5,000,000 greater than 10,000,000 and significantly greater than 25,000,000 customers. I would like to invite Anshul Sadana, our Chief Operating Officer and Chief Cloud Expert to shed some light on the nature of our strategic partnerships with CloudTitan and that contribute at least 100 of 1,000,000 annually. Ghansham?

Speaker 3

Thank you, Jayshree. We are proud to be a pioneer and market leader in cloud networking and have provided data center solutions to many cloud providers, connecting millions of servers. The same platform, EOS software and network designs at a lower scale have also helped us win in all our other verticals, giving us an efficient model to grow our business. As we disclosed in previous calls, Microsoft and Meta Our very special customers and expected to each be over 10% of our revenue for the full year. At Microsoft, we're deployed in all layers of the network from the leaf switches at the top of frac To datacenter spines and regional spines to WAN and cloud edge layers across the globe.

Speaker 3

We have partnered together to create the DCI layer with encryption and long reach pluggable optics, which has now become a gold standard in the industry. Microsoft deploys our products both with Sonic and EOS And the engineering partnership to co develop the next gen network is stronger than ever. Our newer 400 gig products are deployed in production and we continue to receive very positive feedback about our quality and execution and continue to be the 3rd supplier for Azure. We have also had a strong partnership with Meta and have been involved with their network designs since the early days. We have co developed multiple generations of products With them including the latest 25.6 Terabit 7,388 platform with unmatched power efficiency And time to market it.

Speaker 3

We have deployed in their colorful cluster fabrics with parallel planes. We're also deployed in several use cases, including Meta's backbone layer, where there is a constant need for higher speed networks. In addition to our top 2 titans, we are continuing to do well with the other titans as well. As well as cloud specialty providers, very similar partnership to the big titans and use cases, but at a smaller scale. We continue to have a great engineering partnership with customers when it comes to next gen architectures, platforms or features.

Speaker 3

Over the last 2 years, we have also had a very strong partnership on supply chain. Customers who build their own servers Know these challenges firsthand. The relentless work by the Arista manufacturing team to find additional supply Despite so many lockdowns, looking at components in the broker market, analyzing second order risk And our forward looking investments to purchase commitments are deeply appreciated by our customers. We are now recognized not only for our best in class products, but also for our superior supply chain compared to other alternatives. While we cannot predict the future and spend patterns on behalf of these guidance, our cloud business continues to be healthy.

Speaker 3

Back to you, Jayshree.

Speaker 2

Thank you, Anshul. You can see that we are having one of our best years to date with our cloud customers. In terms of new products, Arista has introduced several this quarter. The 7,130 series is a powerful combination of low latency and a programmable EOS functionality designed for demanding high frequency trading and exchange applications. 27,130 models Integrate fully featured L2, L3 switching with high performance ultra low latency L1 connectivity.

Speaker 2

Arista also launched its 1st commercial and distributed enterprise edge portfolio, the Cognitive Unified Edge or Q for short. Q is an extension of our cloud vision to offer edge as a service for commercial and distributed enterprises. Arista earned its highest Net Promoter Score, NPS of 80 in 2022 for customer support, translating to a world class rating of 93%. Having an always available team with strong expertise, root cause analysis and fewer vulnerabilities was cited as the primary reason for customers choosing Arista in this 3rd party independent report. Let me illustrate a few enterprise customer wins in the first half of twenty twenty two to give you an idea.

Speaker 2

Firstly, a campus win for Cognitive WiFi was an integral part of an RFP decision, changing the way wired and wireless is delivered To student dormitories in one of the largest universities in the U. S, Cognitive Unified Edge or Q with rich dashboards for Quality of experience, client journey, security influenced their decision, beating us well entrenched Wi Fi players. In a large international bank, we won the overall data center architecture, including Spine with Layer 3 and EVPN. CloudVision was a key decision factor in enabling the customer to manage all their datasets and change control across cloud domains with superior automation and visibility. Our professional services and leading NPS score drove the next win, an enterprise customer providing supply chain management and manufacturing.

Speaker 2

Their heavy interest in routing on the premise and Azure for the public cloud was made possible with Arista's rich visibility and telemetry. A major messaging platform supporting over 100,000,000 users internationally was a strategic multimillion dollar win for Arista, including a combination of BGP peering and routing across the Leaf and Spine. Key reasons for this win included high port density, Deep Packet Buffers for the Edge as well as Routing and EOS Programmability to integrate with their homegrown automation. Another international win was in the IT Banking Outsourcing sector with a data center interconnect use case. It was once again possible that Arista's architectural advantages for telemetry and day 0 automation as well as Assurance capabilities.

Speaker 2

Our reseller played a key role with Arista, where we were positively viewed as a single team by the customer. Last, but by no means least, was a global specialty cloud provider headquartered here in the Bay Area, California. Arista's flagship data center With R3 Spine Platforms, delivered price performance and rich EOS quality and features such as close spec, traffic class filtering and port mirroring for analysis and mitigation. With the collapse of the perimeter, Arista also won the security and visibility forensics layer, combining DMS, DAN's Monitoring Fabric and NDR, Network Detection and Response, into a holistic platform. As you can see, a common theme across all these wins is Arista's strength and proof of concept lab, best practice network design and deployments with CloudVision and EOS being compelling differentiators.

Speaker 2

In summary, I'm so proud of the Arista team as we have evolved From Arista as a start up at 0 revenue way back in 2008 to a few $100,000,000 at IPO in 2014 To our first $1,000,000,000 a year in 2016 and now our first $1,000,000,000 quarter in Q2 2022, This has been a huge feat, a lot of hard work and much credit and kudos and gratitude goes out to all my Aristans as well as our unwavering customers who have believed in us continue to push us to build better cloud networking. Arista is not only the best of breed in cloud data centers today, but really centering multimodal data all the way from the client to the cloud Based on our network data lake and AVA architecture, our quest for proactive predictive and prescriptive data driven networking marches on. And with that, I'd like to turn it over to Ita for financial specifics. Thanks, Jayshree,

Speaker 4

and good afternoon. This analysis of our Q2 results and our guidance for Q3 'twenty two 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 Q2 were $1,052,000,000 up 48.7 percent year over year and well above the upper end of our guidance range of 950,000,000 to $1,000,000,000 Overall demand in the quarter was healthy with strength across all areas of the business. The supply environment remains challenging with ongoing supplier decommits, constraining shipments and requiring higher cost broker purchases and expedite fees.

Speaker 4

Services and subscription software contributed approximately 17.6 percent of revenue in the 2nd quarter, down from 19.2% in Q1. This largely reflected accelerated growth in product revenues, while services and software continued to grow on a more consistent basis. International revenues for the quarter came in at $206,800,000 or 20 percent of total revenue, down from 24% in the Q1. This reflected strength in U. S.

Speaker 4

Revenues in the period, particularly with our larger cloud titan customers. Overall gross margins in Q2 were 61.9%, The upper end of our guidance range of 60% to 62% with somewhat lower than expected expedite fees in the period. As previously discussed, the current lower gross margin ranges reflect a healthy cloud mix and the need for higher levels of broker component sourcing and expedite fees. Operating expenses for the period were mostly flat to last quarter at $226,100,000 or 21.5 percent of revenue. R and D spending came in at $148,000,000 or 14.1 percent of revenue, up from last quarter at 144,300,000 This primarily reflected increased headcount costs in the period.

Speaker 4

Sales and marketing expense were 63,100,000 are 6% of revenue compared to $66,200,000 last quarter with increased headcount offset by lower variable expenses. Our G and A costs came in at $15,000,000 or 1.4 percent of revenue consistent with last quarter. Our operating income for the quarter was 425 $500,000 or 40.4 percent of revenue. Other income and expense for the quarter was a favorable 4,600,000 And our effective tax rate was approximately 20.9%. This resulted in net income for the quarter of $342,700,000 of 32.6 percent of revenue.

Speaker 4

Our diluted share number was 316,580,000 shares, resulting in a diluted earnings per share number for the quarter of $1.08 up approximately 59% from the prior year. Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately 2,900,000,000 We repurchased $483,700,000 of our common stock during the Q2 at an average price of $101 per share. As a reminder, we've now repurchased approximately $693,000,000 or 6,500,000 shares against our October 2021 $1,000,000,000 Board Authorization. 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.

Speaker 4

We also completed 2 acquisitions in the first half The total consideration of $158,900,000 including $4,000,000 in common stock and the remainder in cash. The revenue and expenses associated with these acquisitions are included in our outlook provided below and are not expected to have a material impact on our financials in the near term. Now turning to operating cash performance for the Q2. We generated $101,100,000 of cash from operations in the quarter, reflecting strong earnings performance, somewhat offset by increased working capital investments. Increases in inventory and other assets are mainly driven by receipt of components for future shipments, including shipments delayed due to supplier decommits.

Speaker 4

This trend should reverse once overall supply conditions for these decommitted components improve. DSOs came in at 51 days, down from 67 days in Q1, reflecting the linearity of billings and the decline in deferred revenue in the period. Inventory turns were 1.9 times, up from 1.7 times in the prior quarter. Inventory increased $852,800,000 in the quarter, up from $694,200,000 in the prior period, reflecting higher components and peripherals inventory and a small increase in switch related finished goods. Our purchase commitment number for the quarter was $4,500,000,000 up from $4,300,000,000 in Q1.

Speaker 4

These multiyear purchase commitments reflect Overall strength in demand and the current long lead time supply environment. As a reminder, we continue to prioritize newer Early lifecycle products were included in these strategies in order to help mitigate the risk of excess or obsolescence. Our total deferred revenue balance was $1,000,000,000 down from $1,100,000,000 in Q1. The majority of the deferred revenue balance Services related and directly linked to the timing and term of service contracts, which may vary on a quarter by quarter basis. Approximately $228,000,000 of the balance, down from $327,000,000 last quarter, represents product deferred revenue, largely related to customer specific acceptance clauses for new products with our larger customers.

Speaker 4

Accounts payable days were 63 days, up from 58 days in Q1, affecting the timing of inventory receipts and payments. Capital expenditures for the quarter were 8,900,000 Now turning to our outlook for the Q3 and beyond. Our Analyst Day outlook for 2022 called for 30% year over year revenue growth, Somewhat balanced across our market sectors and heavily constrained by supply. Reflecting on the first half of the year, we achieved revenue growth of approximately 40% in the face of a very difficult supply environment. We yet again saw the resilience of the business model with higher component costs combined with a heavier cloud mix, Lowering gross margin, but allowing for increased scale, operating margin expansion and year over year earnings per share growth of approximately 48%.

Speaker 4

Looking to the Q3, while demand metrics have remained strong across the business, attempts to predictably scale shipments have been somewhat hindered by ad hoc supplier decommission. Our Q3 outlook assumes some improvement in ship volume, but reflects a balanced view of the remaining supply chain uncertainties. We expect gross margin pressure to continue with some need for broker purchases and expedite fees combined with a healthy revenue contribution from our cloud titan customers. As to spending and investments, we expect to continue to grow our investments in R and D and sales and marketing in line with our baseline investment plan. However, we are cognizant of the broader macro risks and we'll continue to monitor spending carefully.

Speaker 3

With all of this as

Speaker 4

a backdrop, our guidance 3rd 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: Revenues of approximately $1,025,000,000 to $1,075,000,000 gross margin of approximately 60% to 62 Operating margin of approximately 39%. Our effective tax rate is expected to be approximately 21% and diluted shares on a post split basis of approximately 316,000,000 shares. I will now turn the call back to Liz. Liz?

Speaker 1

Thank you, Ita. We will now move to the Q and A portion of the Arista earnings call.

Operator

We will now begin the Q and A portion of the Arista earnings call. 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 Aaron Rakers with Wells Fargo. Your line is now open.

Speaker 5

Yes. Thanks for taking the question and congratulations on the quarter. I just Ita, I'd like to go through the outlook commentary that you provided. Appreciating that you gave the 3Q guide. I guess I was a little bit confused or maybe I just missed it.

Speaker 5

Are you what is the updated kind of expectation For the full year because as we look at it, obviously 30% growth would imply some form of pretty sharp deceleration in the fiscal or in the calendar Q4. So just curious if you could update us how you're thinking about that 30% that you laid out at the Analyst Day, obviously for the implied 4Q guide? Thank you.

Speaker 4

Yes. I mean, obviously, we're pretty happy that we've done very well against that original metric for the year. I mean, we're pretty That's 40% for the 1st three quarters. We're not guiding the 4th quarter specifically, just given some of the uncertainty around supply, etcetera. But I think we feel pretty good about where we sit now versus that original growth rate.

Speaker 2

Erin, this is Jayshree. The philosophy we have taken as a team on Sholita and myself is 1 quarter at a time when we get so many surprises on It's 1 quarter at a time when we get so many surprises on supply chain. There's no point getting ahead of ourselves, But we certainly feel good that the demand and our commitment and execution has gone well, well, well north of the 30% we guided in 30% in November last year, but 1 quarter at a time is still our philosophy.

Speaker 6

Okay. Thank you very much.

Speaker 2

Thank you.

Operator

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

Speaker 7

Great. Thanks guys for taking my question. So maybe just want to follow-up on supply chain and vendor decommits. I know There were some headwinds last quarter and it sounds like you have more this quarter. But one of your competitors really struggled, I think, securing components.

Speaker 7

Obviously, they higher expedited fees and revenue growth was strong, but it sounds like that they took a bigger hit. Just want to kind of get a sense for what you're seeing In that market, whether it's in the broker market for the components or the expedited freight fees, just a little bit more color. And how do

Speaker 8

you think that plays out

Speaker 7

the balance of the year? I know you talked about Having some limited visibility, but is there an expectation that as we maybe move into next year, we could see some relief in that gross margins Could get a little bit healthier as we move into 2023. Thanks.

Speaker 2

Yes. So David, I think as you know from our strategy, we have left no stone unturned And supply purchase commitments, they just keep going higher and higher. This quarter, we reported $4,500,000,000 So there's no lack of desire, Arista's part to fulfill the demand we have. We are clearly going in with strong demand, strong backlog, etcetera. However, we need all the components to come together and the component It has been bad in Q1.

Speaker 2

It's no better in Q2, and we're not foreseeing it much with much improvement in Q3. So perhaps in 2023, we'll get some relief. But again, to get relief, we have to have all the components come. If we're missing one component, we can't build a system. So our guide reflects that and our behavior in how we acquire components is reflecting that we're still not getting the components.

Speaker 2

Many of Components have 70 week lead times and therefore we have to plan multiple quarters and years for that.

Speaker 7

Just a quick follow-up, Jayshree. So the $4,500,000,000 of purchase order commitments, I know it's multiple years, but how do Maybe can you help us think about how that sort of falls through the balance of this year into 2023 and beyond from a product revenue perspective, if you can help us kind of frame that?

Speaker 2

Yes. If we could do that, we probably wouldn't buy so much. We don't know. We know it's a multiyear commitment and it comes when our suppliers deliver it to us. So in most We're just not getting enough supply and we're getting very small percentages of what we ask.

Speaker 9

Great. Thank you.

Speaker 10

Thank you.

Operator

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

Speaker 11

Thank you very much and congratulations to your entire team for such great work in a very challenging supply chain environment. I wanted to focus my question on the demand side. It sounds like Ida and Jayshree both mentioned that the demand has gone well north of 30%, You're not updating the full year and taking it 1 quarter at a time. That makes sense. But the question I have is more about kind of the backlog and visibility that you're getting.

Speaker 11

I only assume backlog continued to increase, but we recently saw some news of some of the cloud titans changing their depreciation schedules for the Switch and network components. So I'm wondering how you think about that. And are you getting more visibility than say even 6 months ago given the supply chain issues. Thank you.

Speaker 2

Sure, Jim. Thank you for the good wishes and I couldn't agree with you more. I'm very proud The Arista team for this major milestone this quarter and beyond. So I remember a time when we talked about call titans and, gee, would it be flat or single digits? It's a very proud moment to say Anshul and the team have been consistently growing the entire 5 verticals, but especially the cloud titans significantly.

Speaker 2

So all the growth and upside you're seeing north of 30% is a direct contribution to the healthiness of our cloud customers, especially the cloud titans. So first, I want to say that. Secondly, we don't report orders. We don't report backlog. We are very disciplined about that.

Speaker 2

It kind of are meaningless numbers unless we can execute. Our visibility has improved with the client tracking. So I'm going to turn it over to you. They've gone from 6 months onshore to about a year. How are you feeling about that?

Speaker 3

That's right. Well, The cloud customers are as anxious as everyone else to get through these supply constraints so that they can come back to normal planning. But for the time being, they understand the issues. And as I highlighted, they not only partner with Sunpro, they actually go deeper in understanding what So the visibility is roughly a year, 52 weeks is our current free time with them. But in the near term that demand is healthy.

Speaker 3

We can't really predict what happens beyond that. A lot of people are trying to guess Asking us on their behalf, I think it's best to ask these big companies directly. But we feel good about their business and the build outs. They're in a healthy cycle. As you all know, they're doing the 400 gig upgrade or investment in the DCI layers and several other refreshes inside the data center as well.

Speaker 3

So all that is coming along well.

Speaker 10

And then just back

Speaker 4

to the depreciation question, Jim. I mean, I think when you think about accounting and how that works, I mean, that usually follows what's already been I don't think there's anything new there from an operations perspective. It's just the accounting kind of catching up to What's happening in the field? And we saw something similar a couple of years ago where they it also kind of elongated the depreciation cycle, but we didn't see anything different in the operations of the business.

Speaker 11

Thank you and congratulations to you and your teams.

Speaker 10

Thank you.

Operator

Your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open.

Speaker 12

Great. Thank you. Thanks for taking my question. I guess, Jayshree, as we've Gone through this earnings season, last week or so, we've seen some mixed feedback on how the enterprise vertical is responding to the current macro. Just wondering if you can sort of not asking for orders or backlog from the enterprise vertical, but how are your conversations with enterprise customers progressing?

Speaker 12

Do you see the same intent in terms of spending from them going into the next year? And the response to I know you on the last earnings call, you talked about price increases. So How has the response been to those price increases in the enterprise vertical? Thank you.

Speaker 2

Thank you, Samik. Well, nobody likes price increases for sure, but I have to tell you the customer credibility and connection we have has never been higher with both enterprise and cloud customers. I mean, when you step back and look at this, in less than 5 years, we're now larger than many legacy standalone enterprise customers, right? The enterprise business has been growing faster than many of our competitors and peers. I feel good that we have a strong relationship And despite all the talk of recessions, while Arista is not a bellwether for a macro recession, I would certainly Classify our quarter and much of this year as micro momentum and we're a little oasis both for enterprise and cloud in our execution.

Speaker 4

Thank you.

Speaker 2

Thanks, Sami. Thank you, Sami.

Operator

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

Speaker 6

Hey, guys. Thanks for the question.

Speaker 3

Did want to go

Speaker 6

back on the supply chain because It does seem based on your product deferred coming down by about $100,000,000 in EBITDA, we talked about roughly $50,000,000 drawdowns a quarter. It seemed like you were able to ship a little bit more and the expedited fees came down. Are you expecting this reversal of product deferred to Continue somewhat at this rate, because I think it was last quarter, we were talking about $50,000,000 drawdowns. And is there any way to help us bridge how backlog can Feed into product deferred revenue, understanding it does still come down to execution, Jayshree?

Speaker 4

Yes. Jim, I don't think we're going to kind of discuss kind of the backlog Bookings, just because this is kind of the worst possible time to do that with lead times where they are and etcetera. It's just not a helpful metric. Coming back to the deferred revenue, I mean, we did draw down $100,000,000 in Q2. And the guide that we just gave you for Q3 assumes no drawdown, So just to be clear, there's no assumption of deferred revenue drawdown.

Speaker 4

So we are improving on the shipment side in Q3. So I think that's good news. We're pleased to see that. I think that's probably the best way to think about it.

Speaker 13

Thanks, Yita.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Alex Henderson with Needham and Company. Your line is now open.

Speaker 14

Great. Thanks. First off, the founding quarter of 48% revenue growth. I looked at our model back to 2014, 2015 timeframe, and I think you've only generated 3 quarters that are in that vicinity of 50%, Which is pretty amazing since one of the last times you were up there was back when you were $600,000,000 annual company, much less The revenues you're producing now. So I guess my question is, as we look at that comp and think about The out year and we listened to you say that you've got a year's worth of lead time.

Speaker 14

Is there any reason to believe that we should be tailoring down our expectations for 2023 Given your commentary at your Analyst Day would imply around the 15% growth rate in that timeframe Or should we be taking these extremely tough comps that you're generating this year against a supply constrained environment And look at those as too daunting to grow that at that rate again. And I know you don't like to go out, but we're kind of forced to think

Speaker 2

about it. You know us well, Alex. You know us well. Well, first of all, thank you for The discussion down history lane, it's always good to know when how we grew at $600,000,000 and how we're growing now off a base that's almost $3,900,000,000 or whatever will be by the end of the year. I think the way to think of this is the following.

Speaker 2

We committed to double digit growth And we see no reason off our large base that we still couldn't grow double digits next year. We do think that the lead will improve maybe in the back half of twenty twenty three. And as lead times improve, there will be some challenges, Right. The challenges will come in terms of losing some of our visibility and as well as our demand. And then if there really is a recession, we'll probably feel it too.

Speaker 2

But all said and done, we're still feeling good about 'twenty two and we're feeling good about the first half of 'twenty three and we'll tell you more at the next Analyst Day.

Operator

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

Speaker 10

Jason?

Speaker 1

Operator, we can go to the next question.

Speaker 2

Oh, please never mind. There you are.

Speaker 15

Hello. Can you hear me?

Speaker 4

We can hear you now.

Speaker 15

Okay. Sorry. When we think about your enterprise 7 and 8 figure accounts, is there any way to tell how penetrated you are in those accounts? Because I know in some cases, they may have another primary supplier and they're using you for Maybe part of their network or a new data center or something, but just it'd be helpful to know how much headroom you have in some of those large enterprises where you've already Penetrated to some extent, but just curious about how you think about that?

Speaker 2

Jason, that's an excellent question. I don't have a precise answer for you, but I think one of the We have good penetration is the financials. We started out in the high frequency trading. But even there, I'd say we have a long way to go because we've got the data center We've got the campus. And then if you look at the other verticals, we're only starting, right?

Speaker 2

Less than 5 years in our journey here. And as you know, enterprises have a long tail and take time. So I don't feel very penetrated in the enterprise. There's huge TAM and huge upside. And we're probably a little more penetrated in the financials of the data center, but still nothing close to 50%.

Speaker 15

And are you seeing those orders grow every year? I mean those accounts grow every year at a nice pace just to give us a sense That's kind of the follow on opportunity after you get that initial land?

Speaker 2

Yes. No, we definitely see land and expand. It doesn't always happen exactly every year. It depends on their spend, But it certainly happens over several quarters or sometimes it skips a year and goes to the next year.

Speaker 6

Great. Thank you.

Speaker 10

Thanks, Jason.

Operator

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

Speaker 9

Good afternoon, everyone. Thanks for taking my question. Anshul, I had a question for you about your thoughts on How equipment availability is influencing the network redundancy in these large cloud titans? How is that evolving? And how are they playing catch up to address some of the shortages they're seeing?

Speaker 3

Okay. That's a good question. Generally, these customers have very resilient architectures with the leaf spine designs. So they could do short term trade offs if they Absolutely, absolutely had to. They try to avoid these because it's very hard to go back and retrofit a site.

Speaker 3

But if you are just completely out, then you'd go with a Lighter network initially and then you add more over time. But I don't think that's happening broadly. I saw some comments and sorting out as well, but that's A rare exception. Most customers are deploying the site at the scale they want to upfront. Thank you.

Speaker 2

Thanks, Ben.

Operator

Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open.

Speaker 16

Yes. Thanks for the question. I guess I'll use the Oasis analogy again, Jayshree. So You have this nice oasis. Are you taking water from somebody else's oasis?

Speaker 16

I'm just curious whether you are using able to do supply In this environment, even though I know it's tough for you, it seems like you've done better than others. And I'm wondering, do you feel like that's something you've been able to use to gain a little bit of share Maybe from some other competitors, particularly in enterprise. And then I have

Speaker 6

a quick follow-up for you.

Speaker 2

Thanks, Rod. I now feel like a camel. But to continue your analogy, I think it is it's multiple efforts. As Anshul alluded to, the manufacturing And the supply chain has just done an outstanding job. The leadership of Ansho, John McCool, Susan Hayes, they have left no stone unturned.

Speaker 2

I can't speak to my peers in the industry, But I can just tell you that my team pushes themselves to keep doing better and they are an A team already. So thank you for that. But coming back to also the relationship we have with our enterprise, when I look at what Krishmit, Ashwin and the team are doing, We now have a far bigger relevance and seat at the table. It's an investment they only started a few years ago, 3 to 4 years ago. And we feel like the enterprises are inviting us as much as we are going to them.

Speaker 2

And our product, our quality, our differentiation, Our software defined capabilities with CloudVision and EOS speak for themselves. So it's a combination of becoming the gold standard even for Not only cloud titans, but the enterprise, our manufacturing execution and then also the relationships we've built, albeit young, It's less than 5 years old. We've got a long ways to go.

Speaker 16

Okay. Thanks for that, Jisuri. And then I also wanted to ask, There's been a lot of speculation about the delay in Sapphire Rapids and maybe what effect that would have on major project builds, whether it might Create some volatility in those builds or something like that. I'm just curious if you could give us any color on that, what you think about? Does it affect things at all?

Speaker 2

Yes. No, the last time we experienced this with Facebook, many of you may remember, it was a little more nightmarish scenario for us. They not only Because of delays, they skipped an entire server cycle and Arista certainly felt it. That sneeze turned into pneumonia for us. But this time around, I think there are many more competitive options.

Speaker 2

And what we see, especially due to supply chain, is either the customer will sweat the assets I'll look for an alternative. Anshul, you're seeing some of this. You can shed some light. Sure.

Speaker 3

Most of these cloud companies want to add capacity as quickly as possible. You're not seeing them wait or have any odd point effect. They will deploy either current technology or alternate technology, whatever they can get their hands on immediately. There's really no slowdown because of the tough weather uncertainty.

Speaker 16

Great. Yes, that's very helpful. Thank you for

Speaker 14

that. Thanks, Rob.

Operator

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

Speaker 17

Great. Thanks. A couple of questions for me. One, just Ita, would you imagine kind of any of kind of I understand for Q3, you're not expecting a major deferred revenue drawdown, but just how you're thinking about it throughout the year? And then second question, just maybe on supply chain.

Speaker 17

I think some Tiers kind of within the space have maybe said within the last couple of weeks or maybe even the last month of the quarter, conditions maybe improved slightly. Your guidance would imply that there is kind of some improvement happening. So just wanted to see kind of during the quarter, is there any volatility that We should be mindful of or any kind of signs as you exited the quarter that conditions are just improving slightly? Thanks.

Speaker 4

Yes. I think on the deferred, it's tough to kind of forecast it out into Q4, especially when we're not kind of being very specific on the overall quarter. I think it's a quarter at a time. We have seen some improvement in Q3. You can see that in the kind of underlying ship numbers.

Speaker 4

So hopefully that continues. But I don't think there's anything particular around deferred for Q4 at this point.

Speaker 2

And then in terms of the supply chain itself, We're seeing marginal improvements, but nothing to get terribly excited about. We need a whole lot more components than we're getting. So not yet, Meta.

Speaker 17

Okay, great.

Speaker 10

Thank you. Thank you.

Operator

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

Speaker 11

Thanks for taking the question. I wanted to see if you had some thoughts as to the potential implications for Arista, Given a number of the cloud titans have talked about slowed hiring, I imagine it wouldn't have an immediate effect on you. But just wondering, How you're thinking about the public comments as well as the speculation given those comments that they're hiring fewer engineers, slowing up their expenses, Given the stresses they're facing, what if anything does that mean to Arista?

Speaker 2

Well, Simon, I think Every company needs to exercise some amount of discipline on expense management, and it's probably one of the first times that the cloud titan and the cloud customers in general have had to. But however, We feel good about their CapEx. We feel Arista is a small, small percentage of their CapEx, and the slow hiring has no impact on the CapEx

Operator

Your next question comes from the line of Eric Suppiger with JMP Securities. Your line is now open.

Speaker 18

Yes. Thanks for taking the question. Just one point of clarification. I think last quarter you had said that your demand and visibility was The highest ever. It sounds as though that's certainly still the case.

Speaker 18

Can you confirm if that is? And then secondly, The cloud titans and the specialty providers are clearly just posting some very robust demand. Can you talk to any broad trends That are driving, is there maybe focus video or is it are there any particular broad trends that you think are driving a

Speaker 2

So Eric, just to quickly answer your question, I think the visibility and demand has Is that strong as we expressed in Q3? The same symptoms, same experience. And in terms of plans,

Speaker 6

take it

Speaker 2

away, Ashish.

Speaker 3

Eric, our customers are still very strong at their normal use cases when it comes to standard compute or storage applications.

Speaker 13

Okay, very good. Thank you.

Speaker 10

Thanks, Eric.

Operator

Your next question comes from the line of Amit Darianni with Evercore. Your line is now open.

Speaker 10

Hi, this is Lauren on for Amit. Thanks for taking the question. So just going back to the purchase commitments and thinking about them in terms of the sequential uptick being much at a much slower pace than the March quarter. So how should we think about it in terms of lead times that you guys saw over the last 90 days? Would this be kind of an improvement or lead times holding steady?

Speaker 4

No, I think Lauren, what we saw last quarter was just kind of the beginning of the year and Setting up some purchase orders for 2023. So it was just more of a step function than you'd expect to see normally. So I wouldn't read anything else into that.

Speaker 2

Got it. Thank you.

Operator

Your next question comes from the line of Paul Silverstein with Cowen and Company, your line is now open.

Speaker 19

I have multiple questions, but the good news is my first one is asking Anshul if he'd be kind enough to sit closer to the mic.

Speaker 4

Okay. That's easy. I appreciate that.

Speaker 3

One question at a time.

Speaker 19

I actually care what you have to say, Anshul. But the question, if I recall, you exited 2021 with Enterprise at $200,000,000 and you're targeting $400,000,000 for 2022, if I remember the numbers. I assume you're tracking ahead of that I know you don't want to guide, but I assume you're tracking ahead of that $400,000,000 annualized run rate for the year from the first half of the year. That's One question. The other question is, everyone's obviously concerned with macro environment translating to weakness for you and everybody else.

Speaker 19

Are there any it doesn't sound like it, but are there any signs that you've seen any communications from enterprise or cloud customers wherever of Impending macro weakness and related to that, where is the greatest opportunity from our side from here? Is it more of the same? Is it the new product Areas that you're edging out into? Any thoughts would be appreciated. Thank you.

Speaker 2

Okay. Anshulian, you have the mic. You want to answer?

Speaker 3

Paul, in terms of you had multiple questions.

Speaker 2

On macro, look, there are no signs right now. Not that we're a bellwether, but at the moment, we're being prudent About expenses, we're prioritizing our projects, but no customer has come to us and said specifically that we got a macro issue or recession issue and they want to cancel That may change. When recessions come, I've been through a few of them. They happen fiercely and suddenly. But as of now, so far so good.

Speaker 3

And Paul, on the go ahead.

Speaker 2

Go ahead on the enterprise.

Speaker 3

The enterprise customers are all telling us that things are steady. They all are cautious, so worried and asking what are others doing, but we are not seeing any slowdown from customers yet.

Speaker 19

And relative to that $400,000,000 number, how you're tracking?

Speaker 2

Yes. So that's not on the this is where we were a little You mean on the campus, right? That's not Yes.

Speaker 19

I apologize. Campus Enterprise, exactly. My

Speaker 2

apologies. Yes. Okay. So we're still on track to close the year at 400,000,000 We feel good about the demand. We need to feel better about the shipment.

Speaker 19

But Jayshree, I trust demand. So if you have the shipments, You'd be able to deliver greater than the $400,000,000 The only issue is having the capacity?

Speaker 2

Yes. Like I said, we feel good about the demand. I don't feel as good

Operator

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

Speaker 15

Hi. Thank you for

Speaker 9

the question. My question is on visibility. So we've had this conversation a couple of times, Hi, Jayshree and Anshul about just the visibility that you're getting from your customers. And I think what created the most amount of turbulence In the tech sector in this last quarter was what all these hyperscalers were saying, what the TaiwaneseChinese supply chains We're saying and reporting regarding cancellations, slowdowns, accelerations, etcetera. But if I just ask you guys to eliminate all that.

Speaker 9

At the end of the day, Has your visibility been extended and improved with your key customers? Or has it essentially remained the same? Or has it worsened? Just to kind of get an idea on Where we are on the spectrum?

Speaker 2

I like multiple choice questions. It's remained the same. And I think the day We see lead times decline. We expect visibility to decline as well, but we don't see that for a while.

Speaker 9

Got it. Thank you.

Operator

Your next question comes from the line of Pierre Ferragu with New Street. Your line is now open.

Speaker 13

Hi, thanks for taking my question. I'm dying to ask you about How much your clients are going to buy in 2023 or how much components are going to get in the next few quarters? Maybe I'd like to remove to something different. You've announced this quarter the acquisition of 2 rather small operations, And I was wondering what you could tell us about How significant these acquisitions are in terms of like the maybe like an idea of the number of people or developers or the 100 of thousands of lines of software that these teams have developed. And if you could tell us about what's like The product vision behind these acquisitions, what kind of features are you adding and which markets, which of your segments You want to address with these technologies?

Speaker 13

And most importantly, what's your integration strategy? Is that like additional products you're going to add to Your line, Michael, is that deep technology you're going to integrate into your core EOS software or any other platform?

Speaker 2

Yes. Well, Pierre, first of all, thank you for the refreshing new question. I appreciate it. We did make 2 small acquisitions. I think ETA in total about 150 employees.

Speaker 2

So an aggregate of we will increase our headcount in addition to our normal organic investments by another 150. And as you probably know, it's not uncommon for Arista to make small acquisitions starting back in 2018 with and Mojo and then VicSwitch Networks and Awake, we have tended to make acquisitions for technology and talent. But most of all, integration results of that. So Untangle and Pluribus are no different. Untangle will be tackling The commercial and distributed enterprise market bringing us very low end security and edge threat management that we can bring in with our and secure our wired and wireless For the mid market and the channel market, Pluribus is a great acquisition of talent and technology to bring this Concept of a unified cloud fabric.

Speaker 2

As you know, Arista has been building lots and lots of forms of cloud networking. But in two instances, it would be really exciting to see a fabric Integrating them, one is in the telco cloud and 5 gs case. So we're really excited to forge a new relationship with Ericsson through our Pluribus acquisition. And also in the DPU case, the data processing unit, there are a lot of DPU companies, NVIDIA is the market leader and I'm really looking forward to working with Jensen and the team on that and bringing more capability rich capabilities and overlays into the DPU fabric. So they're both talent and technology Thank you, Bir.

Operator

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

Speaker 11

Hi, guys. Thanks a lot. Any I know a quarter ago, there was some talk about raising pricing. Just wondering what you guys decided to do in that area. Any sense for magnitude?

Speaker 11

Any sense for timing in terms of when that might show up in the model? Thanks a lot.

Speaker 2

Thank you, George. Yes, we did make 2 pricing adjustments, one last November that probably the earliest we'll see effect of is in late Q4. And we have made a second pricing adjustment in late Q2 in June That again will probably only affect us in 2023. So we expect most of this pricing to help our gross margins And neutralize some of the high costs we've had in 2023.

Speaker 11

Got it. Any sense for magnitude on the June price adjustment?

Speaker 2

They were different in different products. We did not do the magnitude range from 5% to 10% depending on product. I should say 0% to 10%, shouldn't I?

Speaker 3

Yes, Josh, the second raise was only on selected products, not across the portfolio.

Speaker 4

Okay. Thank you.

Speaker 6

Just where

Speaker 2

we had the high costs, we took some price decisions.

Speaker 1

Thanks, George. Operator, we have time for one more question.

Operator

Your final question today comes from the line of Tal Liani with Bank of America. Your line is now open.

Speaker 8

Hey, guys. Anshao, 400 gig, we didn't talk about it for a long time. Can you talk about the significance of it to potential significance of it to your revenues going forward? You used to say at the beginning that it's a small business case, then the message changed. How do you see 400 gig deployed?

Speaker 8

How significant it is? And Where is it being deployed? What kind of market verticals?

Speaker 2

Absolutely. 400 gig is very strategic to us along 100 gig and in some cases 200 gig as well. Just to give you a quick review backwards, we grew from about 70 customers in 204 100 gig in 2020 to 300 in 2021, and you can expect us to grow to more in 2022. The cloud customers are obviously the fastest adopters of 204 100 gig, as Anshul would attest, but we're starting to see a lot of 100, 400 gig combinations in the enterprise as well.

Speaker 8

Revenue wise, how significant it is, given its smaller numbers but higher price?

Speaker 2

Yes. It's still early stages for that. It's stronger this year. This is the 3rd year of 400 gig. I think they were mostly in trials in 2021.

Speaker 2

We We started seeing production in 2022 in a significant way. We'll give you more year end as the market share Numbers come out at the end of 2022.

Speaker 1

Thanks, Hal.

Speaker 9

Thank you.

Speaker 1

This concludes the Arista Networks' Q2 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 and thank you for your interest in Arista.

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Earnings Conference Call
Arista Networks Q2 2022
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