Q1 2020 Earnings Call
Welcome to the first quarter 2020, Airbrushed to networks financial results earnings Conference call. During the come all participants will be you know listen only mode. After the presentation and we will conduct t. question and answer session instructions will be provided at that time, if at any time during the conference.
Need to reach an operator, please press star followed by is zero.
Reminder, this conference is being recorded and will be available for replayed from Investor Relations section be arrested website. Following this call Oh now trying to call over to Mr. Critics, Mickey tractor of corporate an investor developments or you may be can.
Thank you operator, good afternoon every one in thank you for joining US with me on today's <unk> well the rest of networks, President and Chief Executive Officer, and either Brennan Aristas Chief Financial Officer.
Afternoon arrest the networks issued a press release announcing the results for fiscal first quarter ending March 31st 2020, if you'd like a copy of the release you can access it online at our website.
During the course of this conference call. The rest of networks management will make forward looking statements, including those relating to our financial outlook for the second quarter of the 2020 fiscal year longer term financial outlooks.
Potential impact of covert 19 on our business industry innovation, our market opportunity the benefits of recent acquisitions and the impact of litigation, which are subject to the risks and uncertainties that we discussed in detail in our documents filed with the L.C.C. specifically in our most recent form 10, Q. and form 10, K. and which.
Could cause actual results to defer 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 where to take no obligation to update. These statements. After this call also please note that certain financial measures. We use on this call our expressed <unk>.
It has been adjusted to exclude certain charges.
We have provided reconciliation of these nongaap financial measures to gap financial measures in our earnings press release with that.
<unk>.
Thank you Curtis. Thank you everyone for joining us this afternoon for our first quarter Twentytwenty earnings call.
First I would like to address the Corona virus global pandemic.
World's largest in hundred years.
Clearly this is I'm like recessionary events, including the Dot com crash of 2001, Oh, the financial recession of 2008, both of which was sector specific.
I never so we have focused on the welfare of our employees supporting our customers and helping the local community.
Recognize our role and responsibility and supporting global Communications and cloudy infrastructure. During these mission critical time.
Let me just thing to the new normal real time audio and video communication.
I support case load has doubled during the initial weeks, but is now stabilize that'd be help our customers in that time of neat.
Getting back to kill one specifics, we delivered revenues of 523 million for the quarter with the non gap earnings per share of $2 to say.
Contributed approximately 21% of revenue up from 19% last quarter.
Are non gap gross margin, that's what 65.6% influenced by a healthy software and services next.
We registered solid number of million dollar customized as a direct result of our enterprise traction.
In Q1, Twentytwenty cloud prices was our largest vertical.
The enterprise is now consistently the second largest followed by the T.R. two specialty cloud providers and financial tied for third place and the service provider I'd fourth place.
Due to pop up you know request from our analysts friends, we're not providing more kinda into our annual trends across three main sector.
<unk> approximately 40% of on mix enterprise, including financial services, approximately 35% of our mix and providers, which includes both service provider and clouds specialty provider approximately 25% of on mix.
Intensive geography is Q1, Twentytwenty mix had international contribution at 23% with the Americas at 77%.
In terms of mergers and acquisitions, we close the acquisition of big such networks in February 2020.
We are experiencing already traction and complimentarity with viscous data analyze again offering an entry into the necklace packet broke his face.
We are extending into campus of cloud networking principles, introducing exciting cognitive wife's life to me to features with the support of Google Hangouts, Microsoft teams as soon as well as Openconfig base automation model.
He says cognitive campus portfolio was launched last summer to address the explosion of clients users and I.O.T. devices with software driven automation.
Yeah, well no no way to meeting our first years hundred million target ending cute to 2020.
We are pleased with distraction me must all exercise patients that'd be cultivate this part of our business. It took us more than seven yes to build a cloud doesn't have to 500 million and be believed that are enterprise prospects will take time, especially in the schools in 19 era.
We are only just beginning our first year of a five to seven your journey to disrupt 30 years of legacy and status quo.
19 has required us to respond rapidly to changing events.
In accordance with the country specific shelters and ordered.
Have closed all our offices to a show employee healthy health and safety.
Yeah, Consequently experiencing supply chain constraints.
Global capacity without contract manufacturers in San Jose, Mexico, Malaysia, and coping with some inventory and component shortages.
<unk> very and have doubled recently put some of our popular products.
Vista is working in lock step with our customers in supporting that business continuity and planning throughout Twentytwenty.
I've visibility, especially into second half Twentytwenty, it's pretty no.
The number of confirmed calls with 19 cases has increased sharply in April until the economic environment can access to resume more normal routine we have limited visibility to demand.
It is clear that'd be living on second time, and that's cool with what we know at this time, it's prudent to assume our annual 2020 revenue may decline versus at 2019.
Expect to manage our overall business this year at Aristas 2018 levels.
I'm here to monitor this closely.
Together with the entire business sector and global supply chain is coping with multiple unknown in the midst of a global pandemic.
We expect to see some short term stress and cloud Titan offset by prolong sales cycles, with new prospects and the campus and enterprise sector.
Remain confident that the combination of our product superiority commitment to quality with the lowest critical vulnerabilities and the highest net promoter score of 76.
Compelling and the networking industry I have great value to our customers.
I'd be should market share gains customer intended.
Operating leverage well navigate us to these unforeseen circumstances.
We expect a much stronger than many of our industry P.S. as the migrate to modern networking.
Before I turn it over to eat for financial specifics on behalf of the Vista I truly wish all of our listener employees and their families customers and well the should be safe and healthy.
Yeah.
Exchange rate and good afternoon.
This analysis of R.P., one results and our guidance for Q2 20 is based on non gap and excludes on non cash stock based compensation impacts certain acquisition related charges and other nonrecurring item.
Pull reconciliation of our select the gap to non-GAAP results provided in earnings release.
Total revenues in Q1 were 523 million down 12% year over year I just above the lower end of our guidance a 522 to 532 million.
As discussed previously.
Fine on a year over year basis wasn't part relation to the recognition of approximately 83 million of deferred revenue.
Quarter of 2019.
In addition, while demand into 120 20 was reasonably healthy we did experience some cope with 19 related component supply of manufacturing challenges, which results in an extended lead times and somewhat constrained shipment for the quarter.
Service revenue represented approximately 21% of total revenue up from 19 per cent last quarter affecting strong service renewed activity in the period.
Filled with the lower product revenue number.
International revenues for the quarter came in at 122.4 million or 23.5% of total revenue down from 25% income for.
Shifting geographical mix on a quarter over a quarter and year over year basis.
Largely driven by the level of revenue and the location of deployments by our cloud tightened customers.
Overall gross margin and Q1, 65.6%.
Of our guidance for approximately 63% and up from 65.2% last quarter.
As expected we saw strengthen our club business in the period with the related nor gross margin impact more than offset by some one time constrained supply related sales of previously reserved inventory.
In a healthy mix of software and services mix.
Operating expenses for the quarter or 149.3 million or 28.5% of revenue.
Down from last quarter to 154.3 million.
Orange you spending came in at 91 million or 17.4% of revenue.
I'm from 96.2 million last quarter. This decline larger protected lower engineering and prototype cough in the period.
Sales and marketing expenses was consistent last quarter at approximately 46 million.
0.8% of revenue with increased headcount <unk> someone else set by lower marketing I've traveled related spending.
Oh G.N.A. costs were flat to last quarter at approximately 12 million or 2.3% of revenue.
Operating income for the quarter was 194 million or 37.1% of revenue.
Other than kinda expense for the quarter was a favorable 12.2 million no effective tax rates approximately 21.6%.
This was on that income for the quarter of 161.7 million are 30.9% of revenue.
I didn't share number 179.94 million shares.
It's also manage diluted earnings per share number for the quarter of $2.02 sound, 12.6% from the problem here.
We completed the purchase accounting for Big switch acquisition in the period with immaterial amounts of revenue an expense included and our Nongaap results in the first quarter.
For those you focus on our gap results were recorded 11.9 million of acquisition related expenses as a period, which he considered to be one time in nature, and which together with 4.9.
<unk> have acquired intangibles have been excluded from our Nongaap result.
Full reconciliation of our gap to Nongaap results have been provided in earnings.
No time to the balance sheet cast cataclysms in investments enter the quarter at approximately 2.6 billion.
We we purchased $228 million of our common stock during the quarter.
Ended average price of $189 per share.
Brings our total repurchases to date to $494 million, a 2.4 million shares over for quite a period.
Reminder, I board of directors has authorized a three year $1 billion talking purchase program, commenting on Q2 19.
Allows us to Repurchasers were common stock Opportunistically and a spongy from operating cash both.
Generated 195 million of cash from operations in the first quarter second solid net income performance and a slight increase in working capital requirements.
The S. always come in at 61 day down from 65 days and Q. for.
And the timing feelings in the period.
Inventory turns with 2.5 times down from 2.9 last quarter.
Inventory increase to 262 million in the corridor up from 244 million and the prior period.
Total deferred revenue bonds with 597 million up from 575 million. Thank you for.
As a reminder, hard if I'd read deferred revenue balances now almost exclusively services related.
Pounds tables days were 43 days down from 44 days and Q. for affecting the timing of inventory receipts payments.
Capital expenditure of the quarter, a 3.1 million.
No turning for outlook for the second quarter and beyond.
As you mentioned, we continue to closely monitor the impact of covert 19 around the world.
We are customers in our supply chain partners continue to operate under various locally restrictions and it does I don't care when and how these restrictions will be lifted.
While we're not in a position to predict these outcomes and provide longer term guidance, we didn't want to provide some color and how we are managing framing the business in the internet.
Why we expect man from our cloud businesses to remain stable. We believe a number of other verticals could see some called are slowing of I.T. spending.
Panting clarity on the economic outlook.
Given this uncertainty and believe it prudent to manage.
Carefully.
Range closer to 2018 level.
Are prioritizing see projects and customer engagements, well venison benefiting from a natural real.
Travel marketing another variable expenses.
On the gross margin front, we would reiterate our overall gross margin outlook of 63% to 65%.
Customer makes things a key driver.
Now for a couple of additional housekeeping items, we have continued to see some upward pressure on the effect of tax rate and increase the full casket rate to 21.8%.
Addition, we expect the current lower interest rates environment to negative impact or other income amounts in the future.
Finally or guidance for T. two reflects our current understanding of covert 19 and its impact on our businesses <unk>. This is I'll ever and inherently on certain situation and we will need to continue to monitor and attempt to mitigate new challenges as a situation on poles.
With all of this as a backdrop our guidance for the second quarter, which is based on <unk> excuse any noncash stock based compensation impacts and other non recurring items isn't spouse.
Use of approximately 520 540 million gross margin of 63% to 65% operating margin of approximately 35%.
Are effective tax rate is expected to be approximately 21.8%, which alluded shares of approximately 79.7 million shares Oh now trying to call back to Curtis.
Thank you eat up.
We're now going to move to the Q. and a portion of the Arista earnings call due to time constraints I like to request that everyone. Please limit themselves to a single question as possible.
Q for your understanding operator, please take it away.
<unk> earnings call in order to ask a question. During this time simply press star and the number one on your telephone keypad, if you'd like to try your question press. The pound key 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.
Chatterji with G.P. marketing your line is open.
Thanks for taking the question.
<unk>.
Expecting.
Oh.
So.
Oh.
Oh.
<unk>.
Oh why isn't.
Site.
<unk>.
Thanks to make well I've you know.
Cloud tightened performance, it's consistent with the cloud Catholics reporting in other words, some experiencing strong spend some are declining and others are cautious given all the pluses and minuses I think it's safe to say that for the young we accept expect a flat dish cloud Titans friend and.
This is actually an improvement because we've been saying collect the down so of course you monitor this closely as you know we never have a long time visibility on a cloud Titans, it's quarterback quarter, So will inspect more closely especially for the second huh.
Now in terms of the clouds specialty providers they were actually strong a trend for us and Q1, it's pretty cyclical nature. It depends on different T.R. two clock providers. Each one has a unique architecture, we had a somewhat weak.
Specialty cod providers and 2090, but they've started off well for us in Q1, and Q. too and all the time it'll be a matter of economics and what makes most sense for them I believe some of them will succeed in specialize use cases, but once again, we're going to keep a watching monitor this closely in the second huh.
Huh.
Your next suggestion.
Comes from Chamlong with Barclays Your mind, it's open.
You could talk a little bit about the the enterprise vertical and maybe on on two different doctors or could you. Just kinda you know give us a little color and what you're seeing on on large large enterprises and then as it relates to you talk about.
A little longer process for you know the campus move who could you just talk a little bit about the the moving parts near term given that obviously.
A lotta people working from home so it's difficult to show a on from equipments or you could just give us a little more color there. Thank you.
Yeah sure can go to actually a broad question on enterprise sector. I think our it's does brand is very well recognized for data center.
And you know with our 6000 plus customers. We've got very good recognition there from a differentiated products and they've already been very engaged with them. So how's must be been engaged in in fact, we had most recently in February you know just a little bit for all the doors got shut down on US we were engaged with over 100 hundred and.
50 enterprise customers and we had a global advisory and a Vista innovative so art intimacy with enterprise customers is very high and and it could.
Do well with them at both existing and new project I.
I think wherever it will be challenged in the enterprise and also the campus is new prospects.
We're not going to get enough space time with them, we're doing a lot of a virtual virtual events will actually be fees. It's a virtual world was suddenly living in but the level of contacts for both product capability conversation relationship partnership and in fact, even testing.
For both new prospects and enterprise and campus will be challenging and nobody's in the building to upgrade their campus either so it's called the 19 was definitely delay our enterprise cycles for new prospects.
Should be okay for new projects with familiar customer.
Okay. Thank you.
Yeah.
Your next question comes from Alex Kurtz with keeping capital market Your mind, it's open.
Yeah, Thanks, and I'm glad every one is.
Even healthy over it.
I just wanted to follow up to three and your commentary from the beginning of the Cold you said you're.
You're planning to to run the business versus 28, T. level I assume that's an all decks comment or objects comment that also maybe relates to where you think revenue could kinda pencil louder.
Yeah, No I I like first of all I think we have we understand the first half better than the second half. So please take this would you know a grain of unknown and uncertainty and everything and you know I know feels that's supposed to know everything but I can honestly tell you. We don't know much about the second half. So what we're doing is controlling what.
Can control.
And what you done I can control is the business and expense more than the top line for the yeah and eat or you want to add more to that yeah. I mean, I think Alex. It's you know it's a focus on just the objects and investment levels until we understand better kind of what the rest of the year, how the rest of the airplane ride on so you you should expect to see.
I was kind of cut back on some of the variable expenses et cetera, and you know come back to spending that looks similar to where we work for for 2018, and then as things unfold weekend.
We can we can change that's right, but for now that's the focus and I and you don't I wanted me to make something me, but absolutely continue pedal to the metal investing T.R. and D.N. customer support.
Reduce marketing travel obviously since we can't travel and perhaps M.I.T.A. spending and still be work on what they can control and that that is a business and it could improve you'll suddenly recalibrating invest more.
I preached appreciate doesn't eat just on the 40% comment on cloud tightened next year to date, obviously it would be helpful that I'll be.
You get that.
Yes, I think in the in the Investor definitely put some trends around want them you know what what the split has been and and how it slumped and we put a range in there for a kind of Howard played I've during the during during the yeah right. During the past year right. So that there's an investor deck of looking at a trend over the prior year and then <unk>.
<unk> more short term so I think that gives you arrange to to work with.
And.
Special side for you guys like 15, I think it is right right right. That's in your honor.
Appreciate that thank you.
Right.
Question comes from Jason Adder, with William Blaring airline is open.
[noise] hi.
Just really too quick ones I promised it'd be very quick number one is it correct a cloud outperformed Q1 versus expectations and enterprise onto performed on second week G. Sri can you comment on your campus timeline as 100 million as I pushed out now.
Okay, Jason I think both cloud and enterprise performed as we expected in Q. why we I. If there was a theme in Q1, which becomes a stronger theme and Q2, I would say supply country constraint in supply chain I'll verticals were pretty pretty normal.
Expected.
In terms of campus I love. The are on target. We are committed to 100 million revenue into festival quarters at S. Q2 2020.
There, but we do expect that the acceleration I would've personally like to see beyond that in the second and third year, we now have to wait and see due to call. It.
Thank you.
<unk> comes from my Kids were with Oppenheimer. Your mind is open.
I think solo ladies.
<unk> and I must say, you're very brave to offer a second quarter guidance. So like I I hope it works out.
Let me see a couple of course is for me Oh first of all under supply chain can you tell us how much revenue spilled over from the warm from one q. into two q. because of that so we can understand it true run rate of your business.
In two Q. and again going back to Alex's question on the 22018 investment levels.
Just to fine tune disk, there's I mean total optics 2020 equals total opic's, an 18 or is this a runway call man I just want to make sure I I appropriately captured modeling watch.
Yeah, I mean, I think as we sit here today, we would say.
We're managing it to a an overall you know plus or minus 2000 eating total number and again, obviously as we know more you tie as we go through the year, we'll we'll continue to to address that farther but for now that we're seeing it.
Yeah.
<unk>.
Yeah, So do I asked that question.
We did our best and Q1 would be got supply constrained in March I think we must be really 'cause supply constrained in q. too. So I do think cute too is a case of.
Demand and more about supply constraints.
<unk>.
Your next question comes from Simon Leopold with Raymond James Your line is open.
Thank you to appreciate the opportunity I wanted to sort of this it's a question or comment you made regarding the the Kobe crisis.
Make it more challenging to sell new products I guess, what I'm looking for is a better understanding of how much of your business comes from new customers Slash new products <unk> and I. Certainly appreciate you get 400 gig products in the pipeline campus in the pipeline, but I guess, what I'm struggling with is the sense that a lot of the campus.
Was targeting existing customers are just trying to understand that comment had a quantify how that fits into the overall guidance. Thank you yeah well.
I'm in first of all it's important to understand that 100 million dollar campus target is hundred million, it's small compared to our overall business. We do believe that we can actually go into I, just think customizable already know U.S. and clod vision, but as I said last tells me what pleasantly surprised by the new prospects an interest in campus.
So in a non profit environment I would have expected, 60% existing customers and 40% <unk> new prospects in the current environment I think they're going to go back to a comfort level.
Customers are more likely to spend the dust and I knew prospects will take time, so it'll probably be 70%, maybe even higher on familiar an existing customers in 2020, which was not the trend to be wrong.
Yeah.
And the implications for 400 gig 'cause that slid out as well Oh no I okay. So.
And you'll campus question what was your question on 400 gig again.
Well gets broadly speaking I I think it's new including campus and 400 gig. So I I just wanted to get a sense of how you see that 400 gig market if that has slid out versus your prior expectation and if so when.
Okay. So first of all 400 gig, we believe is truly or a high end enterprises.
Service providers cloud and very high and enterprise quite the opposite of campus.
And as you said this whole we expect early 400 gig trials will be in the late 2020 timeframe and actually material production general availability due to you know low cost.
Cost effective water gigoptixs and even some of the colvin issues will be in 2021, nothing's really changed their but we continue to see that.
Well, we didn't did have some exciting product announcements.
400 gig, we introduce theorist, though it was F.B. line car, which is really a little.
No power high highly compact.
Plug the lowest F.B. four factor.
Simplifying D.W.D.M. four distances up 220 kilometers. We also into is demonstrated interoperability, but see I now.
How would that most dancing spectrally efficient 400 gig and nervous to switch softball hundred gig trial definitely I can tuning with existing customers in cloud Tyson.
But as we've always said we expect you know just to put this in context for you in in Q. for the number of 400 gig ports. According to market research as a 5000 ports.
However.
Get get course was you know several million.
So there's a thousand x. magnitude difference between the two.
I don't think that's going to change them in Utah.
Thank you for taking the question for.
Absolutely.
The next question comes from <unk> more interesting that your line is open.
Yeah. Thank you I was wondering if you could help us understand the.
The nature of the man's change over the course of the quarter and into April just so that we get a little better sense of how you were thinking about the second quarter developing is going to end strongly or is it.
Into the quarter that that type thing.
Okay, let's sell.
We have yet to experience the full impact of Kobe 19 I.
I think we'll see much more of that in the second huh.
So if I like a cue wanting to be we experienced it up at 10, then mostly that mostly in terms of our supply chains.
And if I look a cute too will still be very supply chain constrained.
So I think we understand Q1 and cute to better and both of them.
You know as seasonably slow quarter for us it really picks up steam in March and we couldn't pick up and I've seen because he couldn't ship enough and the theme is going to continue into cute too.
Two two is all about shipman, we do see as you said good strength.
In the clock Titan.
And V.C., you know reasonable demand and cute too, but I think a real worry is second huh.
Okay are you able to share with us loose dollar range for how much. This the blind constraints, you think or or a affecting you in either the first or second quarter.
Well I think the first court has done but you can tell me we projected no and then consensus you can count all of that on more I supply chain related yeah. I mean, I think that have you look at where we came out for the for the first quarter on revenue versus our guide and stuff. It gives you some idea of what of the magnitude of that right I I'm not going to try to do that for Q. too.
Yeah.
Okay. Thank you both remote.
Thank you.
Question comes from Aaron Rakers with Wells Fargo, only Caroline is open.
Okay. So the question I I I.
I don't have a different way maybe ask about the same question again, but you know I'm curious of how you think about the demand profile for your cloud guys. We're seeing you know industry reports talking about pretty healthy serve would be bad several of these public cloud beggars, we've seen the numbers for Microsoft and others.
And what kind of go wag effect, you see between sober footprint get 20 minutes or expansion.
She's actually pulling more network bandwidth beads, and obviously a benefit for <unk>.
But first of all we we do see cloud typing you escape demanded basically three area.
Our customers are adding additional core assigned capability or they're expanding racks to increase the seven density or in some cases, we're also seeing some Jewish fashion for the international needs. Although some of them have been ordered from the United States, increasing our U.S. Tyson contribution.
So I think they use cases for us is very very clear.
What we also see is that because we have long lead times that on show on the team working very closely on really understanding and sharpening their forecast and timing and working with us on scenarios and contingencies.
So I think when they're starting to look at that 2020 deployments did not just looking at Q. why q. too they try to give us visibility for the second half as well.
And so you know why we have not affected any of that into I.Q. why not beautiful. Okay. We are seeing them doing some very prudent planning and for business continuity in that 2020 timeframe.
Yeah.
<unk>.
I'm sorry go ahead actually what you like to add some more to that Hmm no not really I know there's been a lot of commentary about other components that go into the cloud we're the computer <unk> on.
And it's hard to correlate one for one, especially in this time frame because some of the spike indoors Oh, no components is coming because of shortages in previous gorgeous if you remember that.
They might be from one little Indian you'll see some spike up on computer on Nick booking has been <unk>.
I was just you mentioned with some constraints towards the end up but prior to nothing supposed to be so they would not shorten networking.
<unk>.
I do want to on one last comment on the traffic needs. Some there's a lot of common trained on on the street on Oh dropped because growing and spicing up in blood from home and so on.
To keep those <unk>.
Relative to the overall cloud capacity.
Just working from home means may need.
Conferencing or phone calls or it's connectivity.
But that's a really small fraction of people would all cloud spent in in in the.
So, yes, sometimes topic quadrupled or.
Some sort of regions, but that's lifted off one plus an impact spend.
Hyper home that rather than material impact.
But I I was there have been mentioned things Macleod <unk>.
No refocus ones to come home for them.
Yeah.
That's a great aunts and that's a great answers stable meeting you're expected.
It'd be stable for cloud versus previously Sega would be meaningfully down.
<unk>.
Yeah exactly.
Oh, we said we expect the clouds of you slap yearly blackish you are young and then just to clarify before we get all wrapped on the revenue deferred thing again.
Yeah, we're talking about the boundaries around the business and the and the trends of the business and then obviously, we set out to deal with the differed after that right now, but if it is an improvement from we've talked about the business being flat the down and everything we think unstable in that context, and then the differences as additive to that afterward.
Thank you very much.
I think you're.
Your next question comes from Ryan <unk> Securities. Your line is open.
[noise] great. Thanks.
But the service provider segments been somewhat of a other laagered and.
Are there any kind of new strategies are products that you guys Rolling out reserve different sales motion. Thanks, good integrate that segment.
<unk>.
Yeah no. Thank you for that we we have been marching towards more and more product capability. In fact, we just introduced U.S. also released for about 20 vote for very targeted towards cloud read routing and service provider up hearing use cases, it a single U.P.N. control plane and second routing in M.P.L.
That's on the data plane, just chock full of features.
You flew away across what label at the N.S. segment routing traffic engineering, what I can tell you that they're getting richer and richer enough I capability, but but I can also tell you a service providers take time to operationalized. These things and then it's we are doing okay. In the are already existing service provider customers and we have.
<unk> too I can't see one <unk>, but do I need to call into wanting to say much more about it.
Great.
Hey.
Your next question comes from Eric Supper with G.M.P. Your line is open.
Yeah. Thanks for taking the question.
He was discussed how the the large enterprise accounts are getting impacted by covert 19 as it is it a sales execution issue, we're calling on the customer is the challenge or is it actually personnel issue, where they've got people staying at home and and not in the data centres deploying a servers and switches or where where is the disrupt.
And most impacting.
Classified in two ways I think the knowledge enterprises that are already intimate with the Vista and need to make incremental enhancements there okay, they're familiar with us.
But that was supporting then there there are our systems engineering teams.
Sales team led by Christmas.
Tremendous amount of engagement with our existing customers right. So I I don't see a dramatic change, yes in sales engagement or product differentiation.
Where I do see difficulty is prospects. So we're having a tremendous amount was that you have been having a tremendous amount of new customer logo and I knew how some of those little continue to be healthy and we gathered steam, especially internationally baby <unk>, 60% of on your custom a little those come in however to convert them, especially into.
<unk> in large enterprises require large proof of concept number of natural design clinics, and obviously was slow down due to the lack of face to face. So we're spending more time with them training educating than we are able to do and deployment, whereas without all existing familiar and the price up to us we can march forward with more progress.
Okay. That's terrible thank you.
Thanks, everyone. Next question comes from me to Marshall with Morgan Stanley Your mind is open.
Great. Thanks, maybe just one for me you know you noted kind of strong behavior out of some of the tier two clouds, but you know has there been any change a daughter or is it just too early you know as the tour to go forward, whether they will continue to kind of build their own data centers or or leverage the public have more ideas.
<unk> kind of <unk>.
To have any <unk> changed so that behavior. Thanks.
That's a good question you know and I said before it depends on the care too you know some of the logic here to have pause and it's not that they're going to.
They just pausing to spending others like finding that data centres and some of the smaller ones are continuing a four day specialized application. So it's my belief that they will continue to succeed into especially use cases and compliment the public cloud, but it'll be typical they didn't do much of it last year and I think some of them.
Back this year and that that what we're seeing his discussion.
Realizing that some of the workload, they can control better and something long into public, though so I don't I I think they'll continue to have a place and in fact, a good example of that was content delivery guy.
Traction to the C.D. on customs customers and it's Unreal, you know real time streaming content delivery, particularly would work from home.
With the millions of users and the aggregate to four K.N.A. came close but you can see why they would make some important investment there.
Got it thank you.
Expects me to your next question comes from appear Fair do with New Street. Your line is open.
Hey.
My question.
So on.
<unk>.
Revenues between.
That's true I was wondering how you'll make.
Mix it holding it.
Things I have in mind is.
That's the lower end up to.
<unk>.
So.
<unk>.
Hi.
From spine an awful.
<unk>.
<unk>.
Based products.
Based product.
Between you and last year. Thank you.
Thank you up here I would say in a short answer is no. We've always had a very nice mix of value products with the Tomahawk and tried his family connecting to server sorry, the volume product and then the value products with the Jericho family with the 70 to 80 and 7500 flagship so depending on the use cases.
<unk> <unk>, they both very very popular products and both that currently challenges and lead times as well, it's not so much that we're seeing a change in product mix I would say the biggest change missing is people are doubling down on hundred gig.
Getting pushed out next year in the class.
<unk>.
Thank you. Thank you.
Question comes from John Machete, Steepling line is open.
Thanks, very much just your I'm curious <unk> with the supply constraints that are going on right now if it impacts any one of the the vertical was a a little bit more than any of the others orange broaden out that it's kind of having a and even in pack a across the group and then either just sort of as a follow up to that you you sold a bit out of inventory.
You know I'm guessing because you couldn't you know bring some other stuff then is that something that likely occurs again here in in in the second quarter.
Yeah, maybe let me take that first I mean, that's the kinda that the one time.
Thing, where you know when when things are constrained you know it's a good opportunity to to go look at what you have an inventory in in south and stuff that maybe we hadn't thought we would go to think what through most of that now. So that's why I think the guide for gross margin comes back to the typical you know 63 to 65, and then it'll just be driven more by customer mixed than anything else right.
Yeah, and John to ask your question.
Anytime.
I'm actually saw it turned on verticals. What we did see is that I keep customers worked very closely but I'm sure will and Chris and ashman to really sharpen their forecasts and timing and worked closely with that I found that knuckle desires and what products available what's not when can be shipped what to them and you know this.
I I hope I hope these are famous last words, but I hope weekend, John Makhoul I missed out on the team I really working hard to overcome this.
And it shouldn't be improved this and <unk> three I think we will have a chance to fulfill a lot of aki customers neat and factor that into that 2020 deployment consideration, but I didn't see anything by vertical I saw them all by top customers.
<unk>.
Thank you <unk>.
Question comes from Sammy Battery with Credit Suisse. Your line is open.
Hi, Thank you I was a little bit true if you could give us a little bit more maybe an idea on dynamics or just it'd be some observations you've had one q. 2020, what's going on in Europe and are you competing against different companies or are they offering different types of products at least in a year.
In region person <unk> has to offer and I know you've made comments that a lot of your customers in the U.S. wants to teach you want also in Europe, but have you seen dynamics change our their pre or post cold dead or at least anything going on at 2020 that you could shed light on as an observation.
No I think for a risk out because our presence internationally is what you we are feelings stronger in terms of I investment in sales and different countries. So cocky by country, we feel better about Europe now than we did say, even a year or two ago. What I think is the difference between Europe and.
United States is they don't have the equivalent of cloud Titans and we haven't one major service provider type and so we tend to have.
Smaller wins, but many customers.
I think that's on but country by country the level of engagement in fact, my our entire executive team was that Europe customer session.
November we were all that seems for like forever, but wasn't that long ago and the level of intimacy that the team has developed with our customers and especially in the developed country.
Germany, U.K. friends Hmm Middle East, even Israel has been very strong so I think the European customer bases in racing or Vista for its differentiation evaluated.
We just don't have the size of customers.
On it and then just may be competitors are competitors, a little bit different in Europe, or you're seeing similar competitors and both regions.
I don't see a huge difference.
He's not in Europe, and Asia, we tend to see some but not in your.
Thank you.
Question.
Huh.
Meat dairy Emmy with <unk>, it's open.
<unk>.
Thanks stigma question, guys, I guess <unk> elaborate on what specifics.
I I may pick on here you your choppy.
<unk>.
I'll be in Thailand.
Right.
Oh boy.
Oh.
<unk>.
Bottlenecks that you would dealing with and if you did not have you supply chain issues and <unk> what would the June quite a guy that looked like would it'd be too, it's a high and or something different.
Well, it's difficult to speculate since we have supply chain issues.
But.
You know and the reality is different than the theory.
Yeah.
They obviously there are other constraints right, but I don't know that we can size those at this point right. There's lots of movies that are if I doesn't matter because you have to string.
Yeah, I guess I was more trying to think could this help you and maybe size how much does it help in the back half of the U.R. Wendy's supplied shouldn't bottom legs.
Times normalized but maybe in another way.
Oh, well, it's a gross margin impacted dealing with because you supply seem constraints is the way to quantify down in the Philadelphia. Thank you I mean, we saw a little bit of incremental spending too on but it was very small we will see <unk> into two but again I think it's manageable at this stage right.
You know again I'd go back to the 63 to 65 and you know we'll be yeah. The midpoint of that range is a good place to start and then we'll see how we go because there is some incremental.
<unk> because you are you are prioritizing fly.
Over some other things, but at least in the first half a we don't see something that's that's really significant.
Thank you.
Thanks.
Your next question comes from Alex and there's 10 with need them in your mind is open.
Thank you very much.
I was hoping you could give us.
Enterprise executives are thinking about conditions, what they're thinking about in terms of.
How old are approaching spending you made a comment that I think is probably accurate.
More concerned about.
But I assume that's not supply chain.
Demand related yeah.
I would assume that you've done.
Calls with top executives.
What are they saying to you about.
The.
<unk>.
Already in place.
Getting completed but.
Maybe the pipeline falling off.
Yeah.
Expectations for spending.
Maybe.
It's hard to put it any other way sharply constrained.
Right. So I like that that that's a good question I think our enterprise decision makers and key executives.
Struggling with his once in 100 years phenomena, just the way we are right.
They all do have 2020 plans and deadline and they would very much like to work with a vista and overcome the supply constraints to meet them.
And I believe they will I believe they'll also takes many of them will also take a not just in 2020 horizon, but it must be a horizon and start thinking about how to plan for projects in this world.
So we we do see some systematic prudent planning and why we don't have visibility to that demand. We don't think demands it'll be challenged significantly if they planned prudently.
That'd be think demand will be challenged like I said before his new project.
You know people I'm familiar with the rest people who have to do a lot more testing with the rest people who loved her stuff I haven't had a chance you have to get their hands on.
So that class of enterprise customers, you know, maybe more comfortable doing nothing or being as it.
Suddenly the 10000 plus customers, we engage with really really want to work with us.
New to plan that projects this year on next year.
Right.
Okay. Thank you. Your next question comes from Paul Silverstein with Cohen. Your line is open.
But can you hear it.
Yes, yes, I can call.
So what's good luck.
<unk>.
Mmm.
Mm.
<unk>.
Maybe not surprised.
<unk>.
<unk>.
<unk>.
<unk>.
<unk>.
<unk>.
<unk> <unk> <unk> <unk>.
When your position.
True.
<unk>.
Okay I can't answer the question, you're sounding very muscles, Paul maybe a wearing a mask.
But if if I understood the question.
What is a competitive landscape looked like with cloud Titans.
And I would just sort of genetically say that I'll fundamental thesis is unchanged been not seeing major competitive issues or architectural shift.
In fact, if you look at the recently released a market data from both <unk>. It validation number one spot and 100 gig and for the third consecutive year. We are doing that we all the number one market share and hundred gig and we continue to increase market share into the high teens for high performance data center switching. So we are pleased with that problem with year after year, including two.
Any 19, I shall I like to call you to see if there's any specific plug price and as soon as you want to highlight.
<unk>.
We said before about the level of sort of joint development, we can't do with these customers.
So.
<unk> so we're not.
Oh, well, what do you want it.
Competitive environment stuff.
Need to be so.
No matter.
<unk>.
<unk>.
This is a good time for me to highlight the work entree has been doing as you normally have a rich long history and open networking and today or if they're just introduced especially abstraction interface.
Working so that'd be can work with our best to be platforms, and an abstraction layer four <unk>, who can now use sonic on <unk> on top of hours to F.T.I. and this is another example of the close collaboration on she was mentioning.
<unk> follow up I appreciate the mortgage.
Exactly.
<unk> forward looking in the risk of displacement <unk> <unk> food anything from those clouds fighting.
The middle concern relative to where you've been to store.
Yeah on one hand to be are always paranoid on <unk>, that's on nature, and we shouldn't be that way and we want to continue to deliver the best the best on the other hand, we have no particular concern on no change and concern or no radical shift into competitive plants.
Oh, I don't think coupon.
That's all.
My next question comes from Ben Bowling with Cleveland researcher line is open.
Good evening, Thank you for taking the question.
I'm I'm. So can you could step back a little bit <unk>.
Bigger picture about <unk> I'm not looking for guidance I'm, just interested hearts went for about the customers.
Longer term the framing for that.
Near term or can we kind of materials demand drivers <unk> clouds.
Neat for you know last the capacity a good fun.
And in in the interim not from a between <unk> <unk> <unk> drivers themselves. So I'm interested hard to think about it longer term whatever the material driver that kind of accelerate grow crazy.
And.
Factors that you think could be meaningful current acceleration in the broader investment banker.
Thank you been.
No I think that the greatest six innovation for Vista came when the Titans made a huge migration to at least fine architecture, and especially standardized on Aristas U.S. 400, gigabytes universals fine so and and then on top of that acceleration a number of I tightened.
Called developed with us.
I joined development focus that allowed them to scale. This to distributed data centres, all all over the region and all over the club.
So I think the next acceleration comes from more use cases.
With 400 gig on hundred gig in tandem.
With the possibility of expanding the data centres and that's ever density and their storage capability.
And I don't think <unk> necessarily this year, but it could be in the next three years. So it would have to be a repeat of how we succeeded in hundred gig at 400 gig levels.
I'm sure do you want to add something more to that.
Yes.
The way to look at the cloud.
<unk> they started with data centres with computer in storage.
Then moved on two different types of and I know continuing <unk>.
And the next phase up investment in the space.
No view there would be more.
The edge.
By age I don't mean directly just it's computing, but think overnight equinix type of meet me. Please.
Nothing with continuing <unk>.
And then connect that into the 10 in space and there are lots of data centers do notebooks.
Different kinds of being paid contribute based on the next.
Different types of overlaps in encryption on on mapping from one to them speaks to the other and so on.
Significant because in a longer picture. If you look at 510 years from now we will look back and say well. This is how the company's <unk> the internet.
And nothing do those were the most of the strategic project from an experience.
Thanks, actually that's great the D.C.I.N. routing.
Yes cases cannot be underestimated and they truly truly redefined the internet.
Thank you done.
Next question comes from Oh, What's Bloomberg Caroline is open.
Oh, great. Thanks, excuse me and.
From question as it relates to the enterprise has the nature of your conversations.
You are close enterprise customers change that all this maybe a little bit premature and the reason why ask is a given that we're at a stay at home zero touch environment.
One would have to think that the network automation thesis should start playing out a little bit faster given that no could get to the networks anymore, how does that fit into customer conversations today do you think that a little balls.
And especially given that you do have big switch that provides that enterprise.
Club like environment.
Through the enterprise.
That might be a positive to you guys in the long term.
Yeah, No I wasn't really bring up a good point yeah. We we tend to talk about data center on campus and all these all these different use cases, but our customers that thinking more and more operationally.
It's great to have a box, but how to ignite that box at the right operational capabilities is very very important.
And so when you look at it you're absolutely right Daisy Road day, one day to zero touch automation, one click for the campus data center huge topic. The other one and this is why the bug fix which is not only I'll be igniting real time real real times training to them it seems cloudvision.
Really extending that into the availability a nickel packet broke his face and they're very pleased with the sort of some of data analyze that's audition and now <unk>.
Fixed fish to extend our data monitoring fabric. So that try all combinations going to be very important for deeper telemetry. So I enterprise conversations that going beyond that the <unk> too much more operational automation analytics availability and in the future security in segmentation is though.
Oh, just a follow up on that or these conversations that you've been having that that's an ongoing for quite some time now or does the I I guess, the pandemic crisis, a summary that potentially.
Forced customers to make a less turn and their purchasing.
Decisions are the architectural decisions, causing purchasing does it delays.
Yeah, No you know.
Think it's too early to say, it's because of the pandemic they were going on anyway, but I think the importance of them becomes greater is a pandemic continues longer.
Right now I think like I know hammered on supply chain, yeah, but it'd be overcome that I think we'll get much more on automation on <unk>.
That's understood that question.
Thank you. Thank you from E. tie kitchen with Oppenheimer line is open.
True.
Yes.
Yeah.
I'd rather than me [laughter], yes of course.
Again I just started a couple one for you just stream I figured out <unk> did you get a sense of if if there was any business activity in the corner dad was just a pool in from second half plants into the first task given the effects of work from home and some customers. So pressure started <unk>.
Bunch of quick claim did it like pulling it budgets and for you eat on on the 2018 I'll fix comments.
I understand T. any you you clearly saving a lot of money, there, but <unk> head count reductions clamped as well. This is just less marketing less travel.
You're you're not flying business anymore, or how do I think about that.
Yeah, I mean, I I'll take that one person maybe too.
Yeah, No I think we're preserving kind of you know employee talent that probably our.
Most important resource and we're definitely focused on doing that and reading we're looking at other areas other more variable.
Expenses one time.
We can manage you know hopefully in the near term a window and preserve kind of employees and sat in the town base.
And the shorthand.
Your question is we did not experienced plans and Q1.
Very good good luck later.
Alright, I see vacuum.
Okay.
Conclude theorist or 212020 earnings call.
We have posted a presentation, which provides additional information on our fiscal results, which you can access on the investor section of our website.
He for joining us today and please be safe everybody.
Using gentlemen, this concludes today's call me now disconnect.
[noise] Hi, William.
Mmm.
[noise].