Arista Networks Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2023

There are 24 speakers on the call.

Operator

To the Q4 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. Ms.

Operator

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 Q4 ending December 31, 2022. If you would like a copy of this 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 Q1 of the 2023 fiscal year, Longer term financial outlook for 2023 and beyond, our total addressable market and strategy for addressing these market opportunities, Supply chain constraints, component costs, manufacturing capacity, inventory purchases and inflationary pressures on our business, Extended lead times, product innovation and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10 Q and Form 10 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 these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non GAAP And have been adjusted to exclude certain charges. We have provided reconciliations of these non GAAP financial measures to GAAP financial measures in our earnings press release.

Speaker 1

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

Speaker 2

Thank you, Liz, And I'm glad we avoided Valentine's Day this time. Thank you, everyone, for joining us this afternoon on our Q4 2022 earnings call. 2022 has certainly been a record year for Arista. You might recall in November 2021 Analyst Day, We had given you a guidance of 30% growth and instead have achieved well beyond that at 48% growth for the year, Driving to an annual revenue of $4,380,000,000 with a non GAAP earnings per share of $4.58 translating to an EPS growth of 58% for 2022, indeed a memorable year. Let's get back to some Q4 2022 specifics.

Speaker 2

We delivered $1,276,000,000 for the quarter with a non GAAP earnings per share of $1.41 Services and software support renewals contributed approximately 15.8% of the revenue. Our non GAAP gross margin was 61% influenced by our supply chain overhead and cloud tightening concentration. International contribution registered at 23.5 percent with the Americas at 76.5% in 2022. This was one of our strongest performing international quarters in recent history. In terms of Q4 2022 verticals, Cloud titans was our largest and first, followed by enterprise and then specialty cloud providers at 3rd place, Financials at 4th and service providers at 5th place.

Speaker 2

In 2023, we will report the 3 segment sectors instead of the verticals. Shifting to the segment sector revenue for 2022, CloudTitans contributed significantly at approximately 46%, resulting in a triple digit growth annually. Enterprise and Financials together were strong at approximately 32%, While the providers were at approximately 22%. Both Meta and Microsoft are now far greater than 10% customers At 25.5 percent 16 percent contribution, respectively. Clearly, we continue to enjoy a strong and strategic partnership with M&M.

Speaker 2

With that, I'd like to now invite Anshul Sadhana, our Chief Operating Officer, To shed more light on our cloud tightly performance.

Speaker 3

Thank you, Jayshree. Our partnership with Microsoft and Meta Grew even stronger last year. Both of these titans are in the midst of deploying our next gen 100, 200 And 400 gig products at several key tiers of their networks. The cloud is reshaping the Internet With their massive footprint, global backbone and edge partnerships, we are proud to have our products designed into pretty much all of these use cases. In addition, our business with the other titles continue to grow as well.

Speaker 3

We had additional design wins In backbone, WAN and Edge roles. This past year, we ramped our 7,800R3 Series high density 400 gig near lossless spine. We also introduced several new products based on Tomahawk 4 And our deep buffer virtual output queue systems based on Jericho 2, the 7,280 and the 7,800 R3 modular systems. While we will continue to add 104 100 gig products to our portfolio, we also launched our first One rack unit 25 terabit product with 800 TIC ports that can be broken out as 2 by 400 TIC. These products have good use cases in high speed applications such as artificial intelligence.

Speaker 3

EOS, our high quality resilient network data lake based operating system has also matured and now supports Cloud scale with multiple copies of the Internet routing table. We co developed with our cloud customers We greatly appreciate Varista engineering expertise. This past year, we further our partnership with Microsoft with Sonic support On many of our high volume switches, our work with them on automation and monitoring at scale is very well received for Azure and Bing deployments. At Meta, we have our core developed platforms such as the ThermoD Phase 7,368 and 7,388, which helps them improve throughput and data center power efficiency. EPOS and EOS Are deployed with very high reliability in the cluster fabrics using these products.

Speaker 3

Our deployments in the backbone and in generative AI And recommendation engines with the 7,800 series are now smoothly deployed in production. We don't control macro. We don't control our customers' CapEx plans. But when they do spend, we are there with them to make these next generation cloud networks successful. AI is a good example where we are continuing to grow into next generation architectures with our cloud customers.

Speaker 3

The use cases we are involved in are generally core to their business and not an optional spend. Our cloud journey has come a long way over the last decade. This is still a very exciting market segment Given the pace of innovation and our partnerships here. Back to you, Jayshree.

Speaker 2

Thank you, Anshul. Wow, 20 was indeed a phenomenal year with the cloud titan. And these partnerships have been nurtured for well over a decade with expanded use cases such as these AI workloads. We remain confident of our meaningful share with both Microsoft and Meta, and we expect both of them to once again contribute greater than 10 percent of our total revenue in 2023. In the non cloud category, we have registered solid number of $1,000,000 customers As a direct result of our momentum in the enterprise and campus throughout the year, we have now surpassed 9,000 cumulative customers.

Speaker 2

In terms of 2022 product lines, we have 3 categories. 1, our core cloud and data center products built upon our highly differentiated Arista EOS stack that is successfully deployed across 10, 25, 100, 200, 400 gig speeds. This drove approximately 68% of our revenue with strong cloud and enterprise spending cycles. We believe that we will continue to gain market share in the high performance switching and have already grown from the teens to the 20. In the 104 100 gig port category, we have now earned the number one position according to industry analysts.

Speaker 2

We have also doubled our 400 gig customers from 300 in 2021 to over 600 in 2022. Our second market is network adjacencies comprised of routing, replacing routers and our cognitive campus. We doubled our campus orders to exceed $400,000,000 in 2022, but we did fall short of our revenue due to extreme supply chain shortages. We maintain our campus momentum and are aiming for $750,000,000 in revenue by 2025. Our investments in Cognitive Campus, Spine, Wired and Wireless have generated significant customer interest and demand based on CloudVision and CloudVision Q.

Speaker 2

Considering this is only our 3rd full year of shipping Versus incumbents who've been in the market for 15 to 30 years, we are very proud of our execution. Our vision for a cognitive campus with network as a service And Edge as a service based on NetDL is resonating extremely well and being embraced by our campus customers. We have also successfully deployed in many routing edge and peering use cases, such as securing data in transit with tunnel SEC encryption, Precision and performance for mobile networks, cloud exchanges and metro Ethernet. Enterprise customers can now deploy EOS With a single eVPN protocol, whether it's for data center, data center interconnect or WAN delivering multiple profiles. Just in 2022 alone, we introduced 6 EOS software releases, 600 new features across 50 new platforms.

Speaker 2

Stay tuned for more in 2023 as we will be introducing new WAN transit functionality. The campus and routing adjacencies together contribute approximately 14% of revenue. Our 3rd category is network software and services Based on subscription models such as Arista ACare, CloudVision, DMF observability, advanced NDR with EVA sensors for security. Arista's subscription based network services and software contributed approximately 18% of our total product line. We are proud to note that CloudVision exceeded 2,000 cumulative customers, up from 1500 the prior year.

Speaker 2

And it's really a compelling data driven platform delivering network agility, continuous integration and operational excellence. Arista's non cloud wins continue as well. While Arista's 2022 headline has been the massive contribution from our cloud customers, We are pleased with the momentum of our enterprise and provider customers as well. Arista continues to diversify its business globally with multiple use cases. Helping our prospects and customers realize these operational benefits with modern software and automation has been a recurring theme.

Speaker 2

And so let me shed a few examples that we have earned a seat at the table at. Our first example highlights the universal cloud network wins In the travel industry, like many conversations, the customer's initial ask was to gain more visibility into their infrastructure. We presented our DMS, DAS Monitoring Fabric Solution, but it quickly transitioned to a general data center for all of Arista's platform offerings. The customer chose our Layer 3 leaf spine EVPN design is for their critical VDI environment. The customer also leveraged CloudVision for their day 0, day 1, day 2 operations using our chassis spine, R3 leaf and out of band management to reduce their operational risk.

Speaker 2

Our second win highlights the financial customers' choice to proceed with Arista's best in class Cognitive Campus with wired and wireless solutions. As with every campus opportunity, it was competitive. CloudVision once again was a key differentiator for us As we quickly became their trusted advisor, our virtual training environment such as Arista's cloud test gave architects the relevant hands on experience. Our low CBE count and commitment to single EOS with high quality was unmatched by our peers. Arista continues to make inroads on regional Tier 2 and Tier 3 service providers.

Speaker 2

Regional service providers are in the middle of expanding and looking for reliable compressed routing footprint. The 3rd win highlights the evolution of our EOS routing stack, The customers are now deploying EVPN services on top of their MPLS segment core network. Arista's high density 100 gig MPLS routing, Together with long range optics and a fully automated deployment using CloudVision and Zero Touch provisioning delivered that cloud like operating model. Our next win is an international one in the education sector for high performance computing. HPC demands low latency, deep buffers And real time visibility.

Speaker 2

This customer chose Avista for providing a highly elastic BXLAN based leaf spine pod with best in class performance. Consistent technology between our spine and edge leaf anchored by our flagship 7,800 chassis and combined with cloud vision based real time telemetry, Compliance and automation really created a lasting impression. Our final win for this quarter's announcements It's an exciting international one in the government sector, where Avista's 400 gig Ethernet was selected instead of Inciniband for big data Hadoop cluster deployments. In this case, the customer chose us for a 100, 400 gig solution with built in encryption capability. The customer saw clear differentiation in our automated operations, headless upgrade and full real time telemetry, ensuring comprehensive visibility of workloads in the fabric.

Speaker 2

As we enter 2023, Arista is well positioned as a game changer In data driven client to cloud networking, a key part of this transformation is to make our cloud first principles and bring that to every aspect of the data network. Software functions such as routing for WAN, 0 Trust Security And observability are moving into the Arista U. S. Stack. We are building upon our cloud network heritage to bring proactive platform, Predictive operations and a complete prescriptive experience, unifying datasets from multiple sources.

Speaker 2

Our NetDL architecture and AVA, our autonomous virtual assist using AI and ML and natural Language processing techniques is a very compelling combination. Together, this architecture can gather, store and process multiple modalities of network data. And this way, network operators can reconcile all their different silos. 2023 is the start of Arista's 2.0 journey. Arista 2.0 is our migration from best of breed products to best of breed platforms as we address our expanded TAM Of $50,000,000,000 ahead, we are uniquely qualified to bring modern software principles to build that world class Data center and data driven networking.

Speaker 2

It is based on that foundational focus on quality, availability, AI driven deployments with top notch support. And as we undertake this 2.0 journey, we are excited to work with a collaborative ecosystem of our partners And customers worldwide to realize this vision. In summary, I'm so proud of our team's execution across multiple dimensions, Despite one of the worst supply chain backdrops ever witnessed, a special thank you to our customers for their patience and support to us last year And to all the Aristins for their hard work and peculiar efforts. Our tireless mission taught us valuable lessons and we expect to emerge stronger. We reiterate our 25% annual growth outlook that we mentioned in the November 2022 Analyst Day as we now aim for $5,470,000,000 in 2023 in terms of revenue.

Speaker 2

Now I will turn it over to Ita for financial specifics.

Speaker 4

Thanks, Jayshree, and good afternoon. This analysis of our Q4 and full year 2022 results and our guidance for Q1 2023 is based on non GAAP and excludes all non cash stock based compensation impacts, certain acquisition related charges and other non recurring items. A full reconciliation of our selected GAAP to non GAAP results is provided in our earnings release. Total revenues in Q4 were 1,276,000,000 of 54.7 percent year over year and well above the upper end of our guidance of $1,175,000,000 to 1,200,000,000 While we experienced some improvement in overall component supply in the quarter, shipments remain somewhat constrained with lingering shortages on a handful of parts. Services and subscription software contributed approximately 15.8 percent of revenue in the 4th quarter, down from 16.3% in Q3.

Speaker 4

This is largely reflective growth in product revenues, while services and software continue to grow on a more consistent basis. International revenues for the quarter came in at $300,000,000 or 23.7 percent of total revenue, up from 17% in the 3rd quarter. This quarter over quarter increase largely reflected improved contributions from our EMEA and region customers in the quarter. Overall, however, 2022 was a year of outsized growth in the U. S, up 61% year over year, largely due to domestic strength from our cloud titan customers.

Speaker 4

Overall gross margin in Q4 was 61%, At the midpoint of our guidance range of approximately 60% to 62%. We continue to recognize incremental supply chain costs in the period combined with a healthy cloud mix. Operating expenses for the quarter were $235,300,000 or 18.4 percent of revenue, Up from last quarter at $227,700,000 R and D spending came in at $153,200,000 Our 12% of revenue, up from $150,100,000 last quarter, which primarily reflected increased headcount and new product introduction costs for the period. Sales and marketing expenses were $67,400,000 or 5.3 percent of revenue Compared to $62,800,000 last quarter with increased headcounts and higher variable compensation expenses. Our G and A costs came in at $14,600,000 or 1.1 percent of revenue consistent with last quarter.

Speaker 4

Our operating income for the quarter was $543,200,000 or 42.6 percent of revenue. Other income and expense for the quarter was a favorable 13 point $6,000,000 and our effective tax rate was 20%. This resulted in net income for the quarter of 445,100,000 Our diluted share number was 315,200,000 shares, Resulting in a diluted earnings per share number for the quarter of $1.41 up 72% from the prior year. Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately 3,024,000,000 In the quarter, we repurchased $2,800,000 of our common stock.

Speaker 4

As a reminder for the year, we have repurchased $670,000,000 Our 6,500,000 shares at an average price of $104 per share. This leaves us with $257,000,000 Available for repurchase under our existing $1,000,000,000 board authorization. The actual timing and amount of future repurchases We'll be dependent on market and business conditions, stock price and other factors. Now turning to operating cash performance for the 4th quarter. We generated approximately $40,000,000 of cash from operations in the period, reflecting strong earnings performance, mostly offset by a significant increase in working capital.

Speaker 4

We experienced growth in inventory with the receipt of components for future shipments, including shipments delayed due to supplier decommit. We also experienced growth in accounts receivable and DSOs in the quarter with a significant ramp in service renewals and product shipments towards the end of the quarter. DSOs came in at 67 days, up from 51 days in Q3, projecting the linearity of billing and growth and service renewal in the period. Inventory turns were 1.6 times, down from 1.7 times last quarter. Inventory increased to $1,300,000,000 in the quarter, Up from $1,100,000,000 in the prior period, reflecting higher key components of Grifols inventory and an increase in switch related finished goods.

Speaker 4

Our purchase commitments at the end of the quarter were $3,700,000,000 down from $4,300,000,000 at the end of Q3. We expect this number to continue to decline in future quarters as component lead times improve and we work to optimize our supply positions. As a reminder, we have focused this extended purchase commitment strategy on early life cycle products to help mitigate the risk of excess pharoptilist. Our total deferred revenue balance was $1,041,000,000 up from $941,000,000 in Q3. The majority of the deferred revenue balance is services related and directly linked to the timing and term of service contracts, which can vary on a quarter by quarter basis.

Speaker 4

Approximately $125,000,000 of this balance, down from $165,000,000 last quarter represents product deferred revenue, Largely related to acceptance clauses for new products, most recently with our large cloud titan customers. For clarification, this represents a reduction in products Related deferred revenue for the year of approximately $40,000,000 pounds payable days were 43 days, down from 56 days in Q3, Reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were 10,500,000 Now turning to our outlook for the Q1 and beyond. 2022 was a year of outstanding revenue and earnings growth, Driven by an acceleration in demand from our cloud titan customers coupled with healthy contributions across the other areas of the business. Supply remained constrained throughout the year and somewhat limited our ability to ramp product shipments in response to this demand.

Speaker 4

As we head into 2023, we look forward to resolving the final kinks on the supply side and reducing lead times for our customers. As outlined at our Analyst Day, we expect to achieve year over year revenue growth for 2023 of approximately 25%. This reflects continued healthy demand across all our market sectors, but recognizing that as lead times improve, we should expect to see some reduction in visibility. In terms of quarterly trends, you should expect accelerated year over year growth in Q1 moderating as the year progresses versus more difficult year over year comps. On the gross margin front, we expect to continue consuming broker parts and other inflated cost items in the Q1.

Speaker 4

And this combined with the continuing healthy cloud contribution will pressure gross margins. Beyond that, we should see some steady improvement as we move through the year With fewer broker parts and the opportunity to optimize the manufacturing run. Now turning to spending and investments. We remain cognizant of the overall macro environment and will be prudent in making investments as we move through the year. You should, however, expect us to make targeted hires In R and D and go to market as the team sees the opportunity to secure talent.

Speaker 4

On the cash front, FY 2022 was a year where much of The $1,400,000,000 net income generated by the business was consumed by incremental working capital needs and additional cash tax payments under Section 174, which defers the deductibility of R and D spending. As we head into 2023, we should expect to focus on supply chain and working capital optimization, While recognizing the need for balance in areas of higher supply risk are where our lead times remain extended. Interest income should continue to increase as we move through the year with $20,000,000 in Q1, growing towards a quarterly contribution of $40,000,000 exiting the year. With all of this as a backdrop, our guidance for the Q1, which is based on non GAAP results and excludes any non cash stock based compensation impacts and other non recurring items, It's as follows. Revenues of approximately $1,275,000,000 to $1,325,000,000 gross margin of approximately 60%, Operating margin at approximately 40%.

Speaker 4

Our effective tax rate is expected to be 21.5% and diluted shares on a postpaid basis approximately 316,000,000 shares. I will now turn the call back to Liz. Liz?

Operator

Thank you, Ita. We will

Speaker 1

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

Operator

We will now begin the Q and A portion of the Arista earnings call. Your first question comes from the line of Jason Ader with William Blair. Please go ahead. Your line is open.

Speaker 5

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

Speaker 4

Yes. Jason, as you know, we don't really talk about orders and backlog. I think we did talk about kind of healthy demand across the various pieces of the business. And obviously, we're reaffirming the guidance for 2023. So there is good support for that.

Speaker 4

Tisha, I don't know if you want to add anything to that or not?

Speaker 2

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

Speaker 5

So no impact from macro of significance thus far on orders?

Speaker 2

When we have something to state, we will, Jason. So far, we are

Speaker 5

Okay. Fair enough. Thank you.

Speaker 4

Thank you.

Speaker 2

Thank you. Your

Operator

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

Speaker 6

Yes. Thanks for taking my question and congrats on the quarter. I guess when I think about this 25% growth in calendar 2023, how do you think it stacks up across the 3 verticals for you folks. That will be really helpful to understand kind of where do you see the strongest versus weaker growth. And then on the cloud Sunita.

Speaker 6

As you think about growth in 2023 and maybe even beyond, do you think that's really a function of what that CapEx plans look like on the networking side? Or do you think There's a bigger narrative around the share gain potential against white box solutions, especially as workloads get more complicated that could help you as well. Thank you.

Speaker 2

Okay. Well, I'll take the first one and I'm sure Anshul will have a few words on the second. How does this break If you look at 2020 let me go back to 2021. We had a very nice even split and cloud titan is actually kind of on the low side. It was 30%, if I remember right, 30%, 30%, 40%.

Speaker 2

And if you look at 2022, cloud titans was outsized, The 30 went to 46. If I had to guess, I would say we'd be between those two numbers. I still think we'll have a very healthy cloud titan mix. But enterprise momentum continues to be strong and you'll see a contribution from that as well as the Tier 2 specialty cloud providers and service providers as well. So I think it'll My guess is it will look somewhere between 2021 2022 in terms of split.

Speaker 2

We'll see as the quarters progress. In terms of the CapEx and the impact of that Look, we don't exactly and equivalently track to CapEx, but eventually CapEx is an indicator of future Of our future cloud titan progress. I don't believe at this point that our progress is coming from white box or Specific things like commodity, things like that, it's really coming from, as Anshul pointed out, a very strategic seat at the table Our new use cases like AI workloads, which has a multiplicative factor on our bandwidth. So I I believe we'll have a real At the table, especially with Microsoft and Meta. And we'll continue to see what the use cases are that emerge that we can imagine beyond 20 But we've been working on this for 10 years and I think it will continue to be strong.

Speaker 1

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

Operator

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

Speaker 7

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

Speaker 2

Yes. 25.5 on Meta and Microsoft 16.

Speaker 7

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

Speaker 2

Yes. We see AI as a very, very important use case and workload for all our cloud titan customers. Clearly, it's in the first innings. We're just beginning. So very much like cloud networking, 10 years ago, we see AI as an additional use case.

Speaker 2

It is a very, very small portion of our use So far, so a lot of upside ahead.

Speaker 7

Is it possible to quantify, Tushar?

Speaker 2

Too early to quantify. It's not material.

Speaker 7

That's what I figured. Okay.

Speaker 4

I appreciate it. Thanks, Pavel.

Operator

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

Speaker 8

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

Speaker 3

Sure. Aaron, first of all, we are proud of our achievements for the first two M and M, with the contributions there. On the other titans, we have been engaged fairly well with them. That business is also growing, but it pays in comparison to Microsoft and Meta, but that is not insignificant compared to other opportunities in the market. And we continue to chase those.

Speaker 3

Those partnerships are very, very strong as well. At some point in the future, if the opportunity is materialized, any of these customers decide to go big in the market and buy switches from the industry like us, I think we'll perform very well. We just have to wait out and get to that opportunity. It's not clear yet, whether it's happening in a year or 2 or 3, I don't know. When it happens, we'll be there.

Speaker 3

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

Speaker 9

Yes. Thank you.

Operator

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

Speaker 10

Thank you, Jayshree and Ida and everyone. Congratulations on great results. My question is, I think it was Ita made the comment of expect a deceleration in revenues as we progress throughout the same throughout the year just to get to the 25% revenue growth. Want to make sure I heard that right because that would then also mean that even with very, very stiff difficult year over year comps for revenues, You wouldn't expect them to go negative at all. And I guess when we look at that deceleration, it kind of seems like a steep decline to get to an average of 25%.

Speaker 10

So can you help me With my math there or the missing pieces or is it some conservatism or I'm just kind of wondering, but it definitely doesn't seem like negative growth is in the works.

Speaker 4

Yes. No, we didn't talk about negative growth. If you look at the trend last year, you'll see it really accelerated post Q1. So that's why you're seeing a much stronger growth rate year over year with our Q1 guide than you will as you move through the year. So I think after Q1, it's better to Start to look at it as a quarter by quarter on a quarter by quarter basis and kind of grow your revenues quarter by quarter.

Speaker 4

There's certainly no kind of negative Growth in that. I think you'll get a better answer if you kind of just grow kind of quarter over quarter from there on out. Q1 was a much lower revenue number last year Back on the

Speaker 10

trend. Great. Thank you for the details and congratulations and happy Valentine's to all of you.

Speaker 2

Thank you, Jim. It's all about comps,

Operator

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

Speaker 11

Hi. Thanks for taking my question and congrats on the results as well. I guess I have a quick one. Hi, Jay.

Speaker 12

Can you hear

Speaker 2

me louder?

Speaker 11

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

Speaker 4

Can you

Speaker 11

hear me now?

Speaker 2

Yes. Much better. Thank you.

Speaker 11

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

Speaker 2

Yes. So, Samek, I'll say some few words and obviously Anshul can get into detail. We don't foresee any major changes in the build out of the AI clusters. Clearly, we continue to work with them on the front end of the network and on the back end. These have been based on the flagship 7,800 spines, the AI spine, where you can have a distributed AI lead, so it can be going straight into the spine.

Speaker 2

And when you have the 100 and 1000 of GPUs, you need a lossless fabric that has all of the congestion control And bandwidth management required. So in the short term, no major change in architecture. In the long term, As these customers look for efficiency, we look for these AI fabrics to get larger or more distributed, but they will naturally be an evolution as the market

Speaker 3

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

Speaker 2

Thank you, Sameet.

Operator

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

Speaker 13

Hi. I want to ask about the other part that no one is asking about the non cloud titans. So if I back out cloud titans, Non cloud grew 14.6%. And the question is, first of all, on last year, did you allocate components To Cloud titans and was this area more pressured than Cloud titans when it comes to allocation. So if that's the case or what is the answer about what happens this year, this coming year or this year on the Non cloud titan portion, what drives it to accelerate from the 14.5% growth of last year?

Speaker 13

Thanks.

Speaker 2

Got it, Tal. So first of all, absolutely not. We don't do any allocation. It's very much a first in, first out algorithm. And many of the cloud titans Clearly, we're the first in, so therefore, they're the first out.

Speaker 2

Our enterprise customers and the momentum and the demand is very high, And we fully expect that they will get their turn in this year in 2023. But given how constrained we were in supply, This is the way it worked out in terms of revenue.

Speaker 13

Is there what are the underlying driver For growth acceleration, the driver outside of components, better component supplies, what are the underlying growth drivers for 2023 versus

Speaker 2

I think they're very similar. You heard me talk about some of the enterprise momentum. Our customers are really looking for Consolidation of their data centers in terms of a better automation, better telemetry, better consolidation of their operational advantages in the data center. Campus is a huge use case. Routing and bringing all of the routing features that we've been working on for over 5 years to bear has been a third one.

Speaker 2

Observability and security is another use case. Our telemetry with CloudVision, so very similar themes to 2022 that we're seeing in 2023.

Speaker 5

Great. Thank you.

Speaker 4

Thanks, Paul.

Operator

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

Speaker 14

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

Speaker 2

Sorry, Fahad, can you repeat the question? I wouldn't

Speaker 4

understand.

Speaker 14

The cognitive Existence to revenue that you gave, I think it was 14% of revenue, if I'm not mistaken. And I'm just wondering, is the split even between campus and routing?

Speaker 2

Approximately, both of them were large contributors. So I don't have the exact percentages. We think campus over time will become larger. But at the moment, I would say it's 601 and half a dozen of the other.

Speaker 14

Got it. For my question, how should we be thinking about with AI and machine learning Becoming more pervasive in cloud titan architectures and this perspective displacement of InfiniBand with Ethernet. How should we be thinking about the TAM opportunity? Because how big is this InfiniBand replacement opportunity, so to speak?

Speaker 2

Yes. No, I think the incident band TAM to date has a very close to HPC $1,000,000,000 to $1,500,000,000 TAM. And it didn't address AI workloads. I think the advent of this new application is going to open up the whole AI And Fabric TAM to much greater than InfiniBand. So not only do we have an opportunity to replace InfiniBand, but we have a greenfield opportunity for new AI fabrics and clusters.

Speaker 4

So it's

Speaker 2

both, not just the legacy InfiniBand opportunity.

Speaker 14

So roughly how big you can the opportunity is?

Speaker 2

I don't think, there have been some market studies on this. Some people say $2,000,000,000 a year, some people say $4,000,000,000 some say it's going to $8,000,000 So I It's still too early to call. It depends on how quickly the adoption of AI fabric happens in all of our large customers.

Speaker 14

Thank you. Appreciate the answers.

Speaker 4

Thanks, Fahad.

Operator

Our next question comes from the line of Pierre Ferragu with New Street Research.

Speaker 15

Thank you. Good evening. I wanted to catch up You know what you say, Jayshree, about like routing, edge routing and gearing, And this opportunity still comes back as an interesting and intriguing area. And so my question would be anything you can give us in terms of sizing how significant it is today? And then beyond that, could you give us a sense of how you understand like the long term market dynamics in there?

Speaker 15

So It's a market where all legacy routing players are very strong, have like a very strong Existing ecosystem and I'm still not exactly clear on what market dynamics create the opportunity for Arista and how we should Think about it in the long run, like is there an opportunity to replace incumbents in peering, in large peering markets? And if that's the case, how does that work? Is that like Operator's buying from you, is that coming from other types of clients like cloud payers? So how does the opportunity shape up over time?

Speaker 2

Yes. Anshul, I love your perspective on it. Let me kick it off. We think the router market is much Bigger than the routing market. The router market is the more legacy market that's been served by a number of traditional Industry experts for 20 years and mostly servicing the service provider market.

Speaker 2

And that's a very traditional market That Arista has been participating some in, but we don't expect to be a major player in traditional service providers. However, we've added so much routing features. Routing is not now part of our switching system. It's sometimes hard to separate it. It's the same hardware, different software.

Speaker 2

If you just look at the last year, we've added Ethernet OEM capability, VPLS, timing with Syncy, EVPN, MPLS gateway, multicast VPN, Edge services, routing scale, you heard Anshul talk about that can go over 4,000,000 routes. So our portfolio is really transitioning to Supporting 400 gig deployments and routing in the cloud scale is something we are very successful in. So on one hand, We're not super successful in the traditional service providers. On the other hand, we are hugely successful on the cloud. And then in between, we are finding ourselves Moderately successful in a lot of the enterprise and specialty cloud providers.

Speaker 2

Anshul, you want

Speaker 3

to add a few words? Sure. Pierre, another Angle here, if you look at how we started to enter this market is through some of the CDN companies like Netflix and Spotify. These companies have an SDN approach to edge. It's a scale out architecture.

Speaker 3

You can take a simple router from Arista and scale it out The automation and the SDK we provide allows the customers to do that, which is why we do very well in these use cases versus the legacy full feature traditional router. And our cloud customers, the Titan, the Tier 2 cloud, the providers, all like these architectures.

Operator

Your next question comes from the line of

Speaker 12

I guess just sort of theoretically,

Speaker 16

In an AI data center, I mean,

Speaker 12

let's just your current way

Speaker 16

of doing chat versus an AI chat. Can you give us some sense of the switching intensity increase in the new use case with AI? Is there a multiplier to put on the switching or the networking to think about the higher amount of content and spend for AI?

Speaker 3

Sure. Michael, I'll take this one. It's very hard to generalize. So I can give you a single number that AI equals I'll give you an example of something that Andy talked about in the last Analyst Day. And if you look at the resource cluster on which Meta published some papers, About some of the time, the GPUs were sitting idle because they were waiting for the network traffic to come back.

Speaker 3

So networking becomes the bottleneck in these cases. And if you can add more bandwidth, then you essentially become non blocking, your jog can run faster and you can Use your GPUs in a much more efficient manner. So at a rough order of magnitude, the GPU cluster need about 3 times more bandwidth Than a traditional compute network today. But again, that's a generalization, doesn't imply every use case, but if you need a single number, that's the one I would use.

Speaker 5

Thank you.

Operator

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

Speaker 17

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

Speaker 2

Thanks, Meta. I'll comment on it and I'm sure you guys have a few words too. Look, supply chain hasn't eased up enough for us. Maybe we have more demand than others and that's why we're feeling it more. But having said that, our Q4 numbers would have been even better if supply chain had eased.

Speaker 2

And our Q1 gross margin is a reflection that supply chain is still an overhead On our costs, right? We expect Q1 to be the absolute worst. We're going to improve thereafter every other quarter. So supply chain is going to Using in the back half of twenty twenty three. And as you know, at the Analyst Day, we gave a guide of, it has been said 61% to 63% for the year.

Speaker 2

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

Speaker 17

Great. Thanks.

Speaker 2

Thanks, Vida.

Operator

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

Speaker 12

Great. Thanks and congrats on super quarter. I wanted to push a little bit more on the supply chain issue that Just talking about, I get the point that gross margins are at their worst in the Q1, but when do you think the Balance between availability and your backlog starts to come into balance so that you can actually Shipwood orders come in and the duration on your backlog, which I know you don't talk about, but conceptually starts to come in line So that we're back to a fairly normal book and ship environment.

Speaker 2

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

Speaker 4

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

Speaker 2

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

Speaker 12

If I could just one clarification, did you say you had a decommitted in the Q4? I thought I heard that in the presentation.

Speaker 4

Thank you. No. Decommission the supply side, I mean, we've had thousands of stars on the supply side for sure, if that's the question.

Speaker 2

Nothing to do with our supply constraints. Component vendors are constantly decommitting.

Speaker 3

Okay. Thank you.

Speaker 2

Thank you, Alex.

Operator

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

Speaker 18

Hey, thanks for taking the question. I just

Speaker 8

I just want to follow-up on

Speaker 18

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

Speaker 4

Yes. Maybe I'll take the cash piece of it first. Yes. I'm not sure that we start to see it kind of come down just yet. I think probably at least for the first half, we'll probably still be building Inventory, I mean, we do have some kind of key components that are still long lead time.

Speaker 4

And we wanted to build buffers, so we'll continue to do that. And then hopefully in the second half, it probably at least kind of flattens out. But again, we'll update that as we go quarter by quarter. But I think there's definitely a piece that's still going to be Long lead time that will kind of hold inventory a little bit higher than what we might like for the time being.

Speaker 2

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

Speaker 18

That's great. Thank you.

Speaker 4

Thanks, Matt.

Operator

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

Speaker 5

Thank you. Just kind of a 2 parter on the campus business. First, I think you guys have Talked about doing a little bit better in the wireless LAN area. So curious if you think that Having a better wired and wireless portfolio kind of accelerates the share gains potential in that So was that something that was maybe holding back some wind that could help in the future? And then secondly, I think at the Analyst Day, you talked a little bit about SD WAN.

Speaker 5

I'm just Curious if you can give us an update on when you might start to see another leg to the campus strategy in what's a pretty High growth vertical. Thank you.

Speaker 2

Sure. So Tim, on the wired and wireless, We are obviously much stronger on wired, because there's a very natural affinity to the Arista EOS stack. So And we also have a full portfolio, what are you to, are you all the way to a chassis with built in encryption. No other company maybe except one has that. So we're very competitive there.

Speaker 2

On the wireless, we're sort of the new kid on the block. We've, as I said, if you just look at our campus entry, we are a new kid on the block. This is our 3rd year. So we, I think, are Going from being a toddler to an adult now here very soon. So we believe we have a strong portfolio also Differentiated by CloudVision for both wired wireless coming into the same spine architecture that we articulate and design for the data center.

Speaker 2

So we feel very, very good about our portfolio being strong. I think more of our efforts will go into go to market and reaching these Because much of what we've done to date is, if you will, low hanging fruit with our familiar customers and our existing base.

Operator

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

Speaker 19

A couple of questions for me. First of all, for you, Ida, on the cash, Just want to piggyback on some of the previous question on the account receivables. Clearly, they've ballooned here on the year. Are the cash Payment terms of the cloud guys, any different than a normal enterprise? And what percent of this account receivable do you think you can recoup in the year?

Speaker 19

And then For you, Jayshree, on campus, clearly supply chain is a little bit of a hurdle there. Cisco is taking action to redesign some of its solutions to products and components that are much more readily available. Is that not a path for you? And if it is, what can you do on that front to alleviate the supply and more easily address demand?

Speaker 4

Itad, maybe I'll take the cash one first. I mean, a lot of the DSO growth is really around those service renewals that we saw at the back end of that quarter. You think about those and how they flow, they generate almost no revenue, but obviously they're in AR, they're multi year. So it causes the AR to spike. We'll collect kind of a lot of that in Q1, good healthy AMR balanced target heading into Q1.

Speaker 4

So there's No changes in aging or anything else. It's really just the timing of setting up those service renewals and the fact that they end up in AR at the end of the quarter.

Speaker 2

Yes. So Itay, thank you for the wishes, by the way, and Happy Valentine's Day. We listened to you and made sure the earnings call was Not on Valentine's Day.

Speaker 1

To answer your

Speaker 2

question, absolutely, we have our choice of vendors and redesigns. Designs take time and qualifying them with our customer takes even longer. So we've chosen a soft multi approach where We do have redesigns that we can invoke, but we are also improving our relationship and partnership with our supply chain vendors. Ashul, your team has been working on that. I think your vendor list has gone from tens to hundreds, if I remember right, right?

Speaker 3

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

Speaker 2

So to answer your question in the campus specifically, both with redesigns and with our supplier partnerships, we fully

Operator

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

Speaker 20

Thanks for taking the question. Good afternoon, everyone. I also wanted to piggyback a little bit on Campus. Jayshree, could you talk a little bit about how customers are responding as they're facing the increase in lead times or the lead times overall? It's been a market share opportunity.

Speaker 20

Any risk that that share is perishable? Do they choose to opt to renew with who they have? And then you talked a little bit about go to market on campus. What are you doing differently or what are your thoughts on where that goes from here? Thank you.

Speaker 2

Yes. Those are very good questions, Ben. I would say currently we are gaining share because others are messing up. Whether it's changing to a software model or not able to supply, Arris has been the benefactor of that. There's still small numbers obviously.

Speaker 2

But it's difficult to imagine that we're at risk of losing share when we have such small share. Our goal is to grow share at the moment. What was your second question? The second part to that question?

Speaker 3

Go to market strategy.

Speaker 2

What is the go to market? Well, in the near term, our go to market has very much been to target our 9,000 cumulative customers. But we are building mid market strategy. We are going to work closely with channel partners. Those things take time.

Speaker 2

I would say our initial go to market is our enterprise customers and over time we will have a more mid market strategy.

Speaker 3

Thanks.

Operator

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

Speaker 8

Terry, on Cloud titans being kind of between 'twenty one and 'twenty two levels, just given the overall growth, it does suggest a bit of an acceleration for everybody else. Everybody else. I guess what's driving that confidence? Is it just mainly what's in backlog? Is it additional hyperscaler wins, including with AI or share gains or something else.

Speaker 8

And then Ita, just for you as a follow-up on the cash flow. Is there a way to think about kind of a normalized cash flow level Or where you expect inventory turns to get to by the end of the year? Thanks.

Speaker 2

Yes, maybe I'll take that one

Speaker 4

first, Jim. I'm not quite ready yet to call kind of a turns number for the end of the year. I think Inventory dollars probably grow certainly through the first half and then hopefully we can flatten out from there. We will look for Optimization, but there is still a fair amount of kind of long lead time items that we need to kind of carry and buffer. So I'll come back to you as we kind of go through the year.

Speaker 4

But I think certainly for the first half, you should be looking for inventory to probably continue to grow on an absolute dollar basis.

Speaker 2

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

Operator

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

Speaker 21

Great. Thank you everyone for taking my call. I just want to pivot back to Meta for a second. And so in addition to the new architecture that they've been talking about and I think Anshul addressed it. The company also talked about potentially using more co location and maybe other public company assets To kind of meet its capital intensity needs going forward, we just love to kind of get your thoughts on how that impacts your spending, going your spending on Arista gear going forward.

Speaker 13

And then just on going also on

Speaker 21

the Titan's mix percentages, if the rest of the business is growing at the rates that we think it's going to grow in 2023 To end up somewhere between the 2021 and 2022 level, does that suggest that the Titan's business in total grows kind of in the low teens in 2023 off Triple digit growth in 2022. Thanks.

Speaker 2

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

Speaker 3

Sure. For the meta question, David, in the architecture and so on, I think the high level message to us is They want to run the business efficiently as efficiently as possible and optimize. So projects are nice to have obviously those are getting cut back. And as you mentioned in phase like colos and so on, you don't need a very large architecture to start with. If you only have a 3 megawatt site as an example, you have a smaller cluster size.

Speaker 3

But our products already fit very well in all of these use cases. So we don't believe there's any significant impact to networking from what we can tell today In the near term, right? We don't have visibility that's many, many years out today. But the message we've been given is

Speaker 4

Great.

Operator

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

Speaker 22

Thanks for squeezing me in here. I have a question back on the F and E line, Financials and Enterprise. The drivers there, I think, Maybe Tal was getting at many questions ago, but I was wondering how much like rip and replace type of wins are kind of like starting to We're into here this implied in my mind anyway acceleration in growth in the F and E line. And specifically, the new cloud test product that you launched at the end of last year, if that's kind of a more of a 2023 Driver and again that kind of rip and replace type of wins, which is a large opportunity in enterprise is more of a 23 driver or if it's more 24. And then maybe just quick for EDA, as enterprise mixes up, just remind us what the gross margin and operating margin impact should be For mixing more towards Enterprise, that would be helpful.

Speaker 22

Thank you.

Speaker 4

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

Speaker 2

No, we have much

Speaker 4

lower sales and marketing

Speaker 2

on the cloud, more technically driven. So it's not the same. Going back to your rip and replace for financial, I take it F and E means financials and enterprise, just to clarify?

Speaker 22

Yes. Exactly. And just talking specifically about the new Cloud Test product where you can emulate an existing network and then just kind of plug and play the risk to product Over an existing install.

Speaker 2

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

Speaker 2

So most enterprises are not a rip and replace, but it's a Use case that we begin with and then gradually evolve to go into a rip and replace as their depreciation Gets completed on the existing legacy PR. So it's a multiyear type of deployment and it usually begins with a couple of use cases.

Speaker 22

Thanks, Tom. Thank you, Jayshree.

Speaker 2

Thank you, Tom.

Operator

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

Speaker 23

Yes. Thanks for fitting me in and happy Valentine's. On the Meta front, I'm just Curious, they talked about adopting more of a modular kind of scalable architecture. Wondering if that changes any of the Buying behavior or the purchasing patterns, does that smooth out some of the purchasing from the likes of Ameda? And then secondly, Ida, on the balance sheet with your purchase commitments, do you have control over how much inventory you take on?

Speaker 23

Or as the inventory becomes available, do you get do you take it in, in which case might we see your inventory balloon If more of the inventory becomes available?

Speaker 4

Yes. No, I think I don't like boom as a word. I mean, There are certain suppliers where lead times are still want to grow that inventory. So we'll continue To do that, I think on the purchase commitment, we talked about this a little bit at the Analyst Day as well. I mean, as lead time start to move around, obviously, we'll work with the contract That's why I mean over time that number should come down as managing to lead time with the contract manufacturers.

Speaker 7

Okay.

Speaker 3

Like on the META question, the META architecture already is quite modular with We talked about the design for the 4 development, 35 terabits 7,388. It can go up to 256 way eCMP, the 2.50 6 plus. The cluster size is smaller, they don't need 2 Maybe they can start with 16 or 32. So we already built into the model today. I don't believe it has any impact on us.

Speaker 3

Same thing on the 7,800 AI spine, they can add number of line cards based on the number of GPUs or racks that they're connected to. So we are very, very efficient already, I think, that's very well in the quarter.

Speaker 1

Thank you, Eric. Operator, next question.

Operator

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

Speaker 5

Great. Just fit me in. Two quick ones. First one is for Ita. Can we just talk about the benefits of pricing Some of the price increases that you guys have put through to the portfolio and the effect it had on gross margins.

Speaker 5

And then the second question is for Jayshree. Jayshree, you've given us kind of a ballpark visibility, I guess, some kind of quantification in the number of months that you See visibility with some of your biggest customers. Could you give us an update on that same type of visibility?

Speaker 4

Yes. I think on the pricing piece of it, I mean, for sure, we're getting some benefit from the pricing. But as time goes on, it starts with the dynamic environment, it starts to be harder To track that kind of when it gets lost in the overall growth in the business. But we did check and there's definitely some uptick Pricing there, it's just not something that we're kind of tracking on an ongoing basis.

Speaker 2

And in terms of visibility, Sami, in the past, we've seen As much as a year's visibility, if I were to guess, I think as the lead times improve, that visibility will reduce. Maybe it's down to 3 quarters now. And because the visibility was very much tied to planning cycles and when the planning cycles were Longer than a year because our lead times were longer than a year and that then we got greater visibility.

Operator

Thank you, Sami.

Speaker 5

Got it.

Operator

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

Speaker 9

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

Speaker 2

Yes. No, there's 2 big reasons. I think in the past, Ethernet was always trading in terms of performance and bandwidth to InfiniBand. Today, as we start talking about 400, 800, 1.2 terabit, The options on Ethernet are much greater and very cost effective and everybody is very clear with that. The other is, I think, Historically, InfiniBand has been more for high performance compute use cases.

Speaker 4

We are very bullish on

Speaker 2

the AI workloads And its impact on Ethernet, where we don't believe InfiniBand has any particular advantage and in fact Ethernet does.

Speaker 1

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

Operator

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

Speaker 9

Thanks for taking it. I wanted to maybe dig a little bit into the campus business, particularly Whether or not that unit has been more constrained and therefore recovery bounces back and ultimately Wondering if really an increase in campus in the mix, I know you gave us that $750,000,000 target by 25, Wondering if that's considered a headwind to gross margin or whether it's more about the market verticals that affects your margins. Thank you.

Speaker 2

Yeah. No headwind to gross margin. Our campus business has good gross margins. I just as we said, on the product side, I feel very good that the Catalyst can execute. On the go to market side, we have more work.

Speaker 2

So I'm giving ourselves some optionality there that if we

Speaker 4

do the work really well, we

Speaker 2

could exceed the $750,000,000 And if we can't, then that will be the more likely

Speaker 1

Great. Thanks, Simon. This concludes the Arista Networks' 4th quarter 2022 earnings call. We have posted a presentation which provides additional information on our results, which you can access on the Investors section of our website. Thank you for joining us today and thank you for your interest in Arista.

Operator

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

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Earnings Conference Call
Arista Networks Q4 2022
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