Q2 2020 Arista Networks Inc Earnings Call
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I will now turn the call over to Mr. Curtis Mckee director of corporate and Investor development, Sir you may begin.
Thank you operator, good afternoon, everyone and thank you for joining up with.
With me on todays call RJ, Israel, Arista networks, President and Chief Executive Officer.
Brian Aristas Chief Financial Officer. This afternoon, Arista networks issued a press release announcing the results for fiscal second quarter ending June Thirtyth 2020.
If he would like a copy of the release you can access it online on our website.
During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the third quarter of 2020 fiscal year longer term financial outlooks, but potential impact of Copel 19 on her business.
Industry innovation, our market opportunity the benefit the recent acquisitions and the impact of litigation, which are subject to the risks and uncertainties that will discuss in detail <unk> documents filed with the FCC specifically in our most recent form 10-Q, and form 10-K, and which could cause actual results to differ materially from those anticipated by these days.
These forward looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements. After this call.
Also please note that certain financial measures. We use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charters. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.
With that I will turn the call over the Jayshree.
Thank you Cartus. Thank you everyone for joining us this afternoon for a second quarter Twentytwenty earnings call.
To start where that we'd like to address the once in 100 Ya Corona virus global pandemic and reiterate our commitment to employee safety I'm customer response.
I'd Arista, we recognize our role and responsibility in supporting Global Communications and cloud infrastructure. During these mission critical sometimes.
Our adjusting to the new work from home norm and expect this will continue its about 2020 onto vaccines all therapeutics in March.
We are working closely with us supply chain and contract manufacturing to improve lead times and support our customers in that business continuity initiative.
Back to Q2 specifics.
We delivered revenue of 540 point Sixmillion for the corridor with a non-GAAP earnings per share off $2.11. It care services and software support renewals contributed approximately 22% of revenue.
Our non-GAAP gross gross margins was 64.7% influenced by software and services mix.
Registered a record number of million dollar customized as a direct result of our enterprise vertical traction I continue to March towards our goal of one to two new customers a day in the second quarter.
In Q2, 2020 cloud Titans was the largest vertical the enterprise is once again, our second largest the former followed by tier two cloud service providers and financials types of third place and service providers in fourth place.
Vertical mix in the second quarter was consistent with the prior trends that we shared with you and me cloud Titans, approximately 40% of the mix enterprises, including financial services, approximately 35% of the mix I providers approximately 25% of the mix.
In terms of geography International question was 19% would the Americas at 81 person.
Regional EMEA attraction must know than normal due to push out of big customer decisions and reduced international cloud Titans spend in the quarter.
As we predicted Aristas cognitive campus portfolio met its first your 100 million objective ending June Thirtyth 2020.
Well, we are pleased with the traction we've been we believed that our new enterprise prospects will take time is in this cobot Eva.
We remain hopeful and optimistic did double in the next five to six quarters to 200 million of course, depending on market conditions.
King of multi club through Hershey, Cokes telephone and the dashboard based on the rest is clod vision for centralized visibility of enterprise and cloud resources.
As we review 2020 at the media point, there are clearly macro issues outside our control.
The number of confirmed covered 19 cases has increased sharply in July the economic recession is looming and trade was our escalating.
Despite this arista experienced a cloud tightened recovery and enterprise strength in cue to offset by extended sales cycles in the campus sector.
We're also pleased with the recent leaders recognition in both forest is wave four open programmable switches in business wide SDN with the top score and strategy category and with Darkness Magic quadrant for data center and cloud networking.
Gardner designated US a magic quadrant leader for the sixth consecutive year.
This placements truly validate arrest as premier status and networking.
I believe we are well positioned in club networking for datacenter routing campus and new multi cloud monitoring capabilities, enabling network migration from legacy to modern.
And these unprecedented times customer seek a compelling advantages and we expect to emerge even stronger than many of our industry peers.
We hope you all being safe and well I will now turn the call to our CFO either Brennan for financial details EDA, Thanks surgery and good afternoon.
A R Q to resolve and or guidance for Q3 2020 is based on non gap and excludes all non-cash stock-based compensation impacts certain acquisition related charges another nonrecurring items.
For reconciliation are are selected gap to non gap results is provided in our earnings release.
Total revenues, and Q2 or $541 million down 11% year over year, but at the upper end of our guidance of 520 $540 million.
Approximately 6% of this decline really interested in recognition of $38 million a product deferred revenue and the second quarter of 2019.
In addition, while overall demanded Q2 was reasonably healthy we continue to experienced some corporate 19 related supply challenges.
Resulting in extended lead time somewhat constrained shipments for the quarter.
Service revenues represented approximately 22% of total revenue up slightly from 21% last quarter.
International revenues for the quarter came in at 104 $7 million 19, 4% of total revenue.
Down from 23% and the first quarter.
While the shifts and geographical mix on a quarter over quarter and year over year basis minority due to the location of deployments by a cloud tightened customers.
Did see some push out of larger opportunities in our in region business is also.
Overall gross margin in Q too was 64, 7% above the midpoint of our guidance of approximately 63% to 65%.
But the last quarter at 65, 6%.
Operating expenses for the quarter, where $144 $1 million or 26 seven per cent of revenue down from last quarter at 149 $3 million.
R&D spending came in at 91 $6 million are 17% of revenue consistent with last quarter.
Sales and marketing expense was 41 $9 million or seven 8% of revenue down from 46 million last quarter with lower marketing untraveled related spending.
Our G&A costs come in at 10, $6 million or 2% of revenue down from last quarter approximately $12 million.
A operating income for the quarter was 205 $7 million 38, 1% of revenue.
Other income an expense for the corner with a favorable eight $3 million and our effect effective tax rate with approximately 21, 9%.
This resulted in net income for the quarter of $167 million are 39% of revenue.
Ah diluted sure number was 79 3 million chairs, resulting in a diluted earnings per share number for the quarter of $2 and 11.
Down 13, 5% from the prior year.
Now turning to the balance sheet.
Gosh equipment and investments entered the quarter and approximately two 8 billion.
We did not repurchase shares of our common stock during the second quarter.
As a reminder, we have previously repurchased $494 million or 2.4 million chairs against our board authorization to repurchase $1 billion worth of shares over three years commencing in Q2 19.
We expect to continue to execute opportunistically against the remaining authorization.
We generate $138 million of cash from operations in the second quarter.
And solid net income performance somewhat offset by incremental working capital investments.
Expect to continue to strategically increase inventory levels through the end of the year as we look to improve lead times and help buffer against any future cold weather related supply chain disruptions.
She came in at 65 days off from 61 days in Q1, reflecting the linearity of feelings as a period.
<unk> turns were two three times down from two five last quarter.
[noise] Tori increase the $327 million of the quarter up from $262 million and the prior period.
Our total deferred revenue balance was 578 million times from $597 million and Q1.
As a reminder are deferred revenue bounces now almost exclusively services related.
The level of services deferred revenues directly linked to the timing in term of service renewals, which can very on a quarter by quarter basis.
Accounts payable days were 59 days up from 43 days and coupon protecting the timing of inventory receipts and payments.
Capital expenditures for the quarter $421 million.
Now turning to outlook for the third quarter and beyond.
Continued to closely monitored the impact of Cove at 19 around the world.
Local operating instructions remain in flux and it is unclear when and how these restrictions will finally be resolved.
While we make good progress on supply chain of manufacturing during the quarter. We still have some work to do to fully returned to normal lead times.
On the gross margin front, we would reiterate our overall gross margin outlook of 60, 365% with customer mixed being the key driver.
We expect to recognize some incremental colby related freight and supply chain costs and Q3 Q for.
With all other things being equal with bound gross margins closer to the mid point of our range.
Spending side will continue to manage spending and investments carefully prioritizing key projects and customer engagements wild benefiting from a natural colby related reduction in travel marketing unrelated expenses.
However, expect to see us add investments back into the model as incremental revenue solidifies.
Finally, our guidance for Q3 reflects our current understanding of Cove at 19, and its impact on our business and supply chain.
However, an inherently on certain situations and we will need to continue to monitor and attempt to mitigate new challenges is the situation unfold.
With all of this was a backdrop are guidance for the third quarter, which is based on non gap results and excludes any non-cash stock based compensation impacts another nonrecurring items is as follows.
Revenues of approximately 570 $590 million gross margin of 63, 65%.
Rating margin of approximately 37 per cent.
Effective tax rate is expected to be approximately 21, 9% with diluted chairs of approximately 79 6 million chairs.
I will now turn the call back to Curtis Curtis.
Thank you Eater, we are now going to move to the Q&A portion of the Arista earnings call due to time constraints I'd like to request that everyone. Please limit themselves to a single question. Thank you for your understanding.
Operator, please take it away.
We will now begin the Q&A portion of the Arista earnings call in order to ask a question. During this time simply for a star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key we ask that you pick up your himself before.
Asking questions to insure optimal shown quality.
Your order first question comes from the line of Rod Hull from Goldman Sachs. Your line is open.
Hi, Thanks for the question I wanted to start off with their revenue trends.
On the verdict goals, whether you're seeing since we didn't see the seasonality on the quarters last year.
With or what you're seeing here is normal or.
Similar to what you observed last year in terms of the <unk>.
Cloud another verticals moved that from you wanted to cute too.
And then secondly, I wondered if you guys could comment on the supply in park. So I know that you said there was or we calculated about $14 million of impact last quarter.
Alright.
Is that all come back to you here and is there any further ongoing impactful revenues and.
And the guidance from supply chain issues are those mostly salt no.
Hi, Rod <unk>. So in terms of seasonality I think things got better and cute too then we feared from covered in general.
We obviously experienced a very strong come back from the cloud Titans.
But we also had strong traction on all the other four verticals as well and they pretty much continued in a fairly linear fashion throughout the quarter.
And in terms of.
Manufacturing, we are still experiencing.
Inventory issues, we have very long lead times.
We have improved we are improving them, we looked improve them, but we don't expect it to be back to normal until probably Q4.
Okay. Thank you Ron still.
Getting a little bit a drag on brothers days, three because of the budget, but maybe it sounds like maybe not as much as lost quarter.
Yeah, I live in improving from Q onto cute too will improve again from Q Q3, but we won't get back to normal to Q4.
Great. Okay. Thank you.
Thanks Rockford.
Your next question comes from Milan of herbs Super Girl from J P. M Securities. Your line is open.
Yeah. Thanks for taking the question.
Back on the on those supply chain.
Did did it prevents you from from shipping from from upside further upside and the quarter or were you able to because I think you'd indicated last quarter that you've had inventory sufficient inventory for the June quarter did did you supply chain prevent you from being able to make the shipments that you anticipated to make.
Well given the guide we gave Eric we were able to make quarter, but if you're asking.
Could we have made more we could've made more if we had more inventory.
Okay.
Very good thank you.
Eric.
Your next question comes.
From the line of Jason.
William Blair Your line is open.
Yeah. Thank you good afternoon guys.
Can you talk about the demand environment for the enterprise data center I'm not talking specifically about campus, but about data center. It seems like you had another good quarter there.
Just a little bit of.
While you're winning there what are some of the learnings J Street that you've had over the last several years sewing into that market because I know.
It's a pretty competitive market with a.
With a major incumbent so just talk about your success there the environment and why you're winning.
Yeah, No I think we're winning because of really three reasons quality and support.
Customers are seeing us as being superior to our peers and every which way in that department are innovation is getting stronger and stronger and then our market recognition votes from industry analysts and our customers and <unk>.
Customers stand other customers. So many of these enterprises were aware of us and I know starting to make real decisions on us.
Both existing ones with greater London.
Expand opportunities as well as new ones.
Sales cycle, then the enterprises can be long and so this is really work in progress that's been going on for several quarters at we're seeing materializing cute too.
This may sound obvious, but also another aspect of I enterprises success is.
That.
Familiar customers are deepening their expansion with us for many more use cases.
So not only have the winning new prospects, but but also getting moorland and expand opportunities. So I think we've always pointed to the enterprise being our shiny Steiner brightest opportunity and now we're seeing that across the board and all the region.
Alright, thank thank you Jason.
Your next question comes from the line of meat a martial from Morgan Stanley. Your line is open.
Great. Thanks.
I just wanted to kind of.
And update on how you thought covid.
It was changing how tier two's, we're thinking about build versus leveraging public cloud just given the acceleration some of them might've seen due to kind of cold winter work from home.
Yeah, No I think.
There's two ways to really look at.
Pier to cloud meter sometimes.
They make investments and from a cost perspective, they can very much justify their investments as much more cost effective in the long run then going to the public cloud, but other times.
They have a hybrid combination of also going to the public cloud.
To manage their cost structure, so you'll see a bit of both it's very cyclical nature and it really depends on which to your to cloud you're talking about.
So so I'll start on their own cloud and continue to grow the workloads and we experienced some of that and cute too and others slow down a little let me experienced some of that too throughout the we did have some delay decisions that'd be hope you can pick up in the second half of the year.
I think a piece of the cloud that's doing well for us is especially CDN.
With the work from home as you rightly mentioned.
The aggregate all that video bandwidth is starting to create investment not that the video itself is large but all of all of the <unk> clothes add up to an aggregate bandwidth.
Great. Thank you.
Thank you me, though.
Your next question comes from the line of Amish Dirty on only from Evercore. Your line is open.
Yep, Thanks for taking my question.
Yes request for you in the last couple of quarters <unk> Senior revenue decline you know 10 to 12 personally over your wild Hyperscale Capex has continued to go higher and totally realized hyperscale hyperscale capex with a lot more things I'd, just order suspend but as we get into the back of this year the expectations Hyperscale topics will slow down some.
And if not context should we feel comfortable that original revenue decline starts to diminish and shrink because we exit the year or how do we think about that.
Well I'm at first of all you're absolutely right to say there is no one to one correlation between network Capex and the massive cloud tightened capex, but if you look at the cloud tightened cat Kappus Capex that was reported somewhere very some restaurants Gladys somewhere down.
So I think the Titans did experienced a stronger spend.
Overall and that that did affect are cute too.
But as we said and the last call and I want to reiterate originally thought we'd be flat to down because of the strong capex. We know feel good about flattish, which is an improvement from down. So of course will monitor this is the second half but.
We believe that the overall for the year.
Will be a flat for a closet.
Alright, thank you.
Thanks, Thanks, a lot.
Your next question comes from a line of Paul Silverstein from telling your line is open.
Good evening does.
<unk> too long student concern among investors, you're getting kicked off to what extent or another weather.
Only develops lashway Fox solutions for it to voters links this is going to restore specifically, obviously referring to clubs.
So you can sure with us regarding your competitor position any changes for federal worse.
Thanks, Paul no change for better or worse in the corner as you know Arista introduced the switch abstraction interface. So we continue to have a long history of commitment on Linux COF SDK containerized eof's virtually U S. <unk> Sonic support F pass support.
Now support so.
We embraced by boxes, and our customers embraced services blue boxes too.
Just read just to be clear I'm, not just referring to decisions that impact quarter revenue both decisions. It might've been made that could impact.
The latter half of this year or next year for that matter.
Yeah.
We don't we don't and maybe on show as you. There we can get you to get you a color, but we don't <unk>.
Change in second half.
Go ahead.
There's a lot of noise around this topic and obviously created by parties that.
A month to lose.
Look.
Engage does instruments and multiple projects, including.
A lot of the roadmap for our customers trying to it's not just a box to Tuesday of to build a network.
For their business and we are really heavily involved in 2021 and 2022 architectures.
The Hollywood message I would give us don't worry.
<unk>.
Onshore apologize does that don't worry notwithstanding sure Los you'll be fine because there's so many projects you'll grow notwithstanding others, gaining some ground or are you, saying that there will be incremental projects and you will not lose sure.
Alright.
Yeah Yeah.
We can continue in detail, but I think the message of getting is a fundamental thesis is unchanged. We're not seeing architectural shift so competitive losses. In fact recent data validates a a number one spots on the third consecutive year on 100 gig, so and our shares increasing every quarter.
Thanks, Paul Okay.
Your next question comes from the line of Gyms Sumo from Citigroup. Your line is open.
Thank you so much maybe if we just look even longer term with 400 gig coming up yeah. We have corona virus pandemic that we're working through too and it's harder to meet and half teas and coffees with people in person and such.
Visibility you have on 400 gig coming whether it be discussions with a more fruitful taken longer testing labs, how should I think about that.
Alright, Thanks, Jim well I think as they always told you 400 gig trials began at the end of last year, but we as we said last quarter, we will be delayed from 2020 to some of them may go into 2021 due to all the things you mentioned covered related slowdown you just.
Can't deployed 400 gag over over a virtual.
Aberration conference you have to do from New protocol vacation you have to get the optics.
That said, we're very pleased we adopt progress and 400 gig.
And we're winning tens of customers in fact, the date me one over 50 customers and 400 gigs. So we're pleased with the progress but many of them are in trials in early deployment cycles.
Thank you so much.
Thank you Tim.
Our next question comes from the line of Erin Rakers from Wells Fargo. Your line is open.
Yeah. Thanks for taking the question I just wanted to go into the number is a little bit.
Can you can you help us understand or appreciate the variables to gross margin.
At 50, 945% product gross margin it looks like it's the lowest level <unk> seed and I think if my Memory's correct. Your mixed between the verticals really didn't change sequentially. So can you just unpack the impacts that you're seeing a gross margin and how we think about product. This merger going forward. Thank you.
Yeah, I mean, I think there is.
Biggest driver is still the customer makes right, but you're right. It wasn't that dislocated between Q1 in Q too I think if you look at your last quarter, we had talked a lot about being able to sell some inventory that previously we thought we couldn't salary wouldn't salad that'd given us and pick up on the gross margin side all of that type of stuff will flow through Prada.
Margin not obviously not to the services. So now as you think about this quarter and honestly into Q3 Q for we have some incrementally colbath costs that we're also covering around for a freight logistics just supply chain costs of kind of prioritizing surprise supply over.
Over cost structure right. So we are going to carry some some burden of cost.
Around those activities through the end of the year and that long show up on that product line alright, So I think that's.
Move around a bit even outside of the just the normal kind of customer mix that that we've been seeing historically.
I guess just could be clear they said no change in pricing dynamics comparatively and work with you Sir.
I mean, there's always puts and take some pricing that's.
The market works, but nothing out of the ordinary alright, and nothing any anything newer different alright, yeah, and just to clarify what are you. Just said we are experiencing covered related greater cost structures, no change and competitive pricing dynamics.
Perfect. Thank you.
Thank you Sir.
Your next question comes from the line of Simon Leopold affirmed Raymond James Your line is open.
Thank you very much for taking the question.
Kate U.
Giving the guidance comment on the cloud Titans I was hoping you could clarify what baseline you're using when you talk about flat given that you had the significant revenue recognition.
Last year I guess, the number we had been thinking you meant.
Was a base of about 840 million in 2019, but I want to make sure I understand what you mean by flatwoods, you're comparing it to thank you yeah. That's that's actually a great question. Simon I was just simply computing year over year relative to.
The revenue we've given but.
I didn't get into the color of deferred either you want to help me with that yeah that commentary assignments very much around demand right. So it's not adjusting as the differ so if you think about the cloud business year over year and you say okay. It was the demand was flat you still need to adjust out the 118 million of differed on top of that right. So you will still see a decline on a revenue basis.
For cloud year over year, even with the demand as JC describing being flat.
Could you tell us what dollar value you're using just to keep our lives simple.
Off the top of my head no, but if you take the presented to US that we gave you roughly for the.
For the.
Mix of the billing us and then adjust the deferred you'll get there right. I mean, you know how much the deferred was $180 million and you know what the split at the business was on the demand basis. So you can get there and we can take it up after it see if you want but it's.
It's.
It's pretty straightforward.
Okay. Thank you very much.
Thanks.
Your next question comes from the line of Widgeon hold from Bloomberg. Your line is open.
Great. Thank you for taking my question. So it seems as you may have a new competitive switching market Nokia and it's not a competition question bore Soho market demand question I'm. Just curious is the telco providers of.
Change their purchasing or or just thoughts.
On switches because I know that's been a sore software you guys for quite some time, though I'm wondering if I, just finally coming into fruition pull for switching business for Ya.
Well.
Think there's very few details on exactly what the product is but Nokia suddenly a good service provider company.
And I believe Wilder entry into the data center as the fifth player will be difficult and it'll be tough to compete and I don't really see any 400 gig products available despite the marketing.
We do think though and we have respect for them as a service provider and especially combined with optical company they might find some use cases there.
So I don't see we will see like you rightly pointed out I don't think we'll see a direct competition with them, but they may find some use cases combining with optical.
Well is there an opportunity for that telco datacenter to finally emerge when five you said you're rolling out for you guys.
We are already seeing opportunity with a telco datacenter independent <unk> rolling out, but we certainly see that as an independent of Nokia. That's a very real use case that arista today participate strongly in the service provider segment alright.
Thank you thanks.
Your next question comes from the line of Jeff call from Wolf Research, you're lying is open.
Thank you very much everyone.
I was hoping to ask about the <unk>.
Trajectory and cloud Titans traditionally of course, who are we still you all have been very soon with Grove Mccloud vertical and the last couple of years has been a little less so.
I think many of honestly been hoping that 2021 would be back to the smooth trajectory and I'm wondering if the push.
400 gig.
<unk> got a little bit or we should be just a little careful about how we look at 121, giving me that 400 gigs might comes.
And the first half or even in the middle of the year rather than at the top of the year. Thank you.
Thank you, Jeff I'll I'm going out.
If you work from pass it too I'm sure. When you look at 400 gig as I said, that's not one you can buy over a cup of coffee so.
Intense level of testing and.
Proof of concept labs that go on and while a cloud visibility and demand as much better understood for 2020.
I think.
It was still still take time to make this migration from hundred to 400 gig and different cloud Titans are in different stages of that migration. There suddenly all in varying forms of trials, but I think you right to say some of them will will get off to a good start in 2020, 2021, and some of them will take longer.
I think what I can confidently tell you is the combination of 100 gig and 400 gig is going to be the mainstream deployment for most of our customers actually want to add to that on the phone again.
Absolutely.
Just for you mentioned, there's no real stall effect for 400 in the cloud because the cloud needs to deploy capacity they'll buy what it was available in the market and qualified to do.
The market is doing it bifurcate going from 100 gig into 200 gig 400 gig and two by 400 gig in the next one to two years.
And I think we will participate very well and all of these phone practice.
Hello does not reading, they just compared with what they didn't have to do.
Okay. Thank you very much.
Thanks, Jeff.
Your next question comes from the line of semi Chatterji from J P. Morgan that you're alone is open.
Hi, Thanks for taking my question just for you mentioned, you're seeing a strong coming back from the Claude O'neill and I'm, just wondering how're you feeling related visibility in terms of getting back to one of them with beans.
Spending from without customers that you had come to get it at the 2019, and let's see and how does that does.
21, where I think consensus systems seem to be large street.
Putting in a double treated with the cloud.
Okay.
Thanks.
Don't think I'm ready to say, we're going to grow double digits of mid teens on the cloud a numbers are so large will be happy to grow in the cloud period right. I think are faster growth in traction is clearly coming from the enterprise.
And.
But the large numbers are clearly being contributed from the cloud.
So time hotel, but there's too many variables to to make a direct correlation for that and.
2021.
It's a little early to start trying to to call at 2021 view, just yet with everything all the uncertainty there is alright yep.
Thank you.
Alright, Thanks for me.
Your next question comes from the line of it totally from Bank of America. You line is open.
Hi, guys hopefully you can hear me okay.
Uh-huh require hideout, Hello, I'm going back to a lot of the questions that kind of danced around it lost years. If I look at Q1 Q2 in Q3, you grew year over year, 26, 17, and 16% pretty nice growth.
And this this quarter.
Yes, you beat the numbers, but year over year grosses is double digit decline.
So.
I'm trying to understand the color of the numbers beneath the surface meaning.
Last quarter, you provided us with the numbers for the.
Loud vertical and I was able to see what was the growth X cloud vertical I'm trying to do the same thing to see whereas the strength, whereas the weakness.
And get some color around it.
So can you help us with two things first is.
What what's the growth within without cloud just so we understand the growth and the other verticals and second can you give us color on the profile of the cloud growth, meaning is this an existing customer that started to deploy new new architecture as you mentioned in the past and because of that.
The demand is going up or is it just demand just after a decline you see kind of snap back in demand et cetera, I'm trying to see if there is any.
Big trend behind the recovery and cloud.
Yeah, I don't think we're going to go.
Down to that level of detail I think if you if you take kind of.
The year over year growth.
[noise] about 6% of that that relates to the deferred revenue being recognized last year.
You have a step down on Facebook, which I think we've talked about before right. They were very active in the first half through Q3 actually of last year and then we saw that step down in the fourth quarter, Alright, and we know they're running at a lower level. We've shared that previously through this year. So those are kind of your big driver's on the cloud without I was trying to get into different youth.
As in products and stuff because we're not gonna do that but those are the key kind of drivers around the cloud and then we've seen strength and some of the other vertical and JC gave the mix. The verticals again. This corner there was nothing that unusual in the mix versus the breakdown that we gave you on the last call.
Just gone and Q too alright, so enterprise continued to do to do well.
To grow and cloud.
[noise] was better than we had expected, but still when you're looking at it over the year it's not.
It's not a breakout it's it solidly kind of flattish on demand basis now versus being down when we thought coming into the year.
Okay.
Any any color maybe my second question any color about the the growth in the cloud vertical.
I think you can get there on the math or if you take out the differed look at the growth of the certainly on that on the revenue basis, you can get there right.
We're saying for the year, we thank the demand it'll be will be flattish for the year alright, So I'm not sure if there's not much else that we can give me at this point.
What I was referring to was in the past you'll notice that some of the declines where because customers were looking to deploy new types of servers and as a result, they reduce spending.
I'm trying to understand whether there is any correlation between.
That part in between the growth and cloud is it is it just reversion to demean or is there any big trend beneath it.
And new architectures are deployed et cetera, and that's why I demand is going up.
So solid.
We have a number of use case expansion in 2020 and.
Usually they come in multiple flavors, either it's adding an additional finally or where they're building super spine original fine it could be expanding rack to increase the seven density on the network I O and.
These these two especially or it could be but they are building out new datacenters. So these are the three most popular use cases, we see.
And.
We definitely saw that this quarter and we expect to see more of that this year.
Thank you well thanks, so much.
Your next question comes from the line of Alex Kurtz from Keybank. Your line is open.
Hi, This is Michael on for Alex Thanks for taking the question.
Second half of the year and we can start to opex perfectly or 21, I guess I would you start to think about the timing of hopefully one leverage and then returned some more normalized grill.
Yeah, I mean, I don't know that you should expect us to drive a ton of leverage.
I think we talked about kind of reinvesting and bringing back some of the investments.
That we talked about taking out last quarter as we see revenue.
Solidify in revenue growth solidifies, so I think.
The operating margin targets that we've out there.
Model is roughly the 35% plus or minus we guidance 37%.
Four Q3.
So I don't know that we're looking to drive operating margins that are much higher than that so it will continue to invest.
<unk> kind of topline growth.
Alright.
Great. Thank you Michael.
Your next question comes from the line of James Fish from paper Sandler you're alone is open.
Hey, ladies.
When the quarter, but I just want to understand where you mainly solve attraction on the campus sides.
Definitely on the Go's.
Given what's going on lately and in this environment, because most of us raising aren't sitting at a campus anymore and if I can just sneak in one related to this.
We are there any push outs related to cloud Titans I just want to understand correctly. If the pushout were primarily just related to cloud Titans internationally is that the right way to think about it or was it something else.
Okay, Let me understand.
I got confused when there's more than one question. So let's start with the campus first.
So your question wise, how did we achieve our goals when nobody's in the office.
Quite simply when nobody is in the office is everybody's making planning to decisions is easier to to to install them in the office because no one's there to interrupt with it. So what we found is that engagements we've had with both existing customers a new prospects in 2019 really help us achieve offers to your goal through through the first and.
It was very strong demand and.
I can't even point to a theme on verticals at range all the way from mid market enterprise to some of our large customers who are familiar with us.
Who really influenced our decision to be in the campus and one of the main reasons. They want us in the campus a single U S High quality one club vision, So and then one ability to manage both your wired and Wi Fi.
What was your question James on the cloud titles.
I just wanted to make sure I was thinking about it correctly with the pushout related it sounded like you guys said it was related to cloud Titans internationally.
Is that correct on me no no no what they tried to say it was our EMEA business was week because the closet tightened did not order in that country. So the European piece of a cloud tightened Lisby with me and there were some push out of European customers that pushed out of cute too, which made that number weaker than.
Normal.
Got it thanks have a teller treasury sure. Thanks James.
Your next question comes from the line of Ryan <unk> Rosenblatt Securities Zero, one is open.
Great. Thanks for the question.
Circumstantial your campus opportunity there can you maybe walkers through some of your your channel strategy and how much is direct versus.
Looking for third party.
Graders and stuff to work with Ya. Thanks.
No. That's a good question Ryan R channels strategy is still in very early stages and evolving in fact, if we do do channel checks I think most of you don't hear enough provider Mister.
So I would say a lot of our first year success was definitely do to our direct customer focus.
Maybe as north is 80%, however, we fulfill through the channels and so I'll fulfillment of the channels is also 80%, but the impact of channels I think we'll kick in more and the second and third year than it did the first.
Couple of and I got to give a shout out to.
Christmas Ned Chapman and a number of folks who are working on.
Ah sweet of channels.
Extremely competitive all over the world.
Okay.
Thank you Brian.
Operator next caller.
Your next question comes from the line I've been Bolan from Cleveland researcher line is open.
Good evening, everyone. Thank you for taking the question.
<unk> I was hoping you could talk a little bit about.
How you feel increased mix of work from home employees across brought her enterprise.
Is likely to impact.
Longer term investments in in the campus from the enterprise customer and then also.
You mentioned, a little bit about video with service provider, but I'm interested if you think there's any corresponding impact.
Is more people or at home and that might be influencing service provider investments. Thanks, Yes, Ben both are very good questions.
I think it really depends on how long you think work from home is going to go on if it's going to go on indefinitely.
I think the campus investments will take longer they will still happen.
We're expecting to double every year and maybe we won't double every year, but we will we will attempt to double every 18 months to two years. So they will this very much of campus requirement.
Whether you call it the headquarters campus or the regional offices or the branches and Roosters technology, we weren't able to unify wired and wireless in a single payment glasses powerful.
But I think.
We will see the decision, making take longer so I still see the opportunity as vibrant, but the time being longer.
In terms of video on service providers I think it's a really good question. When you look at our tier to both cloud providers and service providers.
The ramp and video traffic by itself, because it's compressed walk clothes aren't that great, but the aggregate bandwidth is definitely causing more investment in bulk tier two caught providers.
It's a kono are appearing point or.
Content providers. So we are seeing that the work from home.
Creating an aggregate demand.
For bandwidth. Thank you okay. Thanks Benjamin Your next question comes from the line of George number from Jeffries. Your line is open.
Alright, thanks, very much I guess I with.
Going to ask about I guess some of the bigger picture drivers you're talking about 400 gig earlier, but.
Until recently delayed there seven nanometer program around Cpus, including servers, Cpus and I guess I'm wondering if that impacts the server refresh model that.
Many big Internet content providers, we're kind of following how do you think about the bigger picture.
Thanks, George I think when it comes to building a network.
Philosophy, many of the top enterprise and cloud client steak an actual.
Alluded to this is build with what behalf. So we haven't seen any delays in putting the network together because of silver depreciation cycles are.
Price acquisition cycles. So we don't think the Intel slipped will have an immediate impact it could factor end in 2020, 120, 22, but right now I think we don't see any impact of the seven nanometer because they need I O and they need Iowa independent over CPU. It is.
So we feel pretty good in the near term.
Thank you.
Thanks.
Your next question comes from the line of semi boundary from Credit Suisse. Your line is open.
Hi, Sammy.
Hey, sorry about that.
Thank you for the question I, just wanted to ask a little bit about the international opportunity. There. We've seen a couple of quarters of year on year decline and you talked about some push outs. However European region. Some of the other reaches are probably going through something very similar as the United States with more cloud application consumption.
And people working from home et cetera, and I'm trying to understand what is it about the other regions that are not seeing the same magnitude of demand for the same dynamics as the U S from an architecture perspectives product perspective, how Arista and search into it could you just give us any color on what explains the.
The decline versus some of the other.
Under reaches that are holding up relatively well.
Yeah. So I would say three things Sammy I think first we just got a late start on international investments.
And we're still see we're still looking to see that pay off country by country in each country has its dynamics, it's hard to lump Europe as one.
Second is both quarters that you're referring to was influenced by the cloud tightened and how they purchased so they just send it to purchase more in the United States than they did.
Country in the region and that effected at.
And then the first thing I would say as in general Krishna and Ashwin call, you ancho and the whole team, where humming more and we're having greater enterprise traction in the U S and bigger bed and the U S and we want to see the same and we have every beliefs and hope that we will see the same but it's taking a bit longer.
And the international the patients.
Got it thank you.
Okay.
Your next question comes from a line of the note <unk> from Oppenheimer. Your line is open.
Hi, Thanks for taking my question I, just wanted to talk about your outlook.
Did you extend that you're embedding supply and demand headwinds would you say that the headwinds are mostly like 70, 580% supply chain related or are you see you're expecting some demand weakness sir slow down I mean any vertical thanks.
Thanks for not that's that's a loaded question that I may not be able to answer to your satisfaction, but I would say at least as it pertains to cute too.
Demand with straw and I wish you could've ship Moore.
And I think we'll run into a little bit of that in Q3 as well that'll be it that's a slow summer cycle.
So we don't yet know about next year or we don't know enough about Q4, but separately Q2, Q1, Q too what pressured by supply chain.
And the second half, we hope to respond to that supply chain and create more demand.
Great.
Okay. Thank you and is there what would you say can you just give us a sense of your your back a lot like how much of that as kind of game held up.
Yeah, No we don't talk about backlog, but it's safe to say, we have some [laughter] [laughter].
[laughter].
Thanks.
So this concludes the Arista Q2, 2020 earnings call. We have posted a presentation, which provides additional information on our fiscal results, which you can access the investors section of our website.
For joining us today and everyone be soon.
Thank you.
Thank you for joining ladies and gentlemen. This concludes today's call you may know disconnect.
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