Q3 2020 Arista Networks Inc Earnings Call
After the presentation, we will conduct a question and answer session instructions will be provided at that time, if at any time during the conference you need to reach an operator. Please press the star followed by zero as a reminder, this conference is being recorded and will be available for replay for me Investor Relations section at the Arista website.
Following this call 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 US with me on today's call are Jewish real all Arista Networks', President and Chief Executive Officer, and either brand interest as Chief Financial Officer. This afternoon, Arista networks issued a press release announcing the results for its fiscal third quarter ending September Thirtyth 2020.
If you would like a copy of the release you can access it online at our website.
During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the fourth quarter of the 2020 fiscal year longer term financial outlooks for 2021 and beyond our total addressable market strategy for addressing these market opportunities the potential impact of Covance.
19 on our business, our product innovation and the benefits of recent acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC specifically in our most recent form 10-Q, and form 10-K, and which could cause actual results to differ materially from those anticipate.
Guided by these statements. These forward looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements. After this call also please note that certain financial measures. We use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our press earnings press release.
With that I will turn the call over to Jayshree.
Thank you Curtis. Thank you everyone for joining us this afternoon for our third quarter Twentytwenty earnings call.
The stock when we all hope that you and your families are safe during the global pandemic.
At Arista, we recognize our role and responsibility and supporting global Communications and cloud infrastructure. During these challenging times.
We are working closely with our employees supply chain contract manufacturing customers and Arista Foundation to assist in business continuity initiatives and People's lives.
Back to Q3, 2020, we delivered 605.4 million for the quarter with a non-GAAP earnings per share of $2.42 eight.
AK services and software and support renewals contributed approximately 21% of revenue.
Our non-GAAP gross margins were 64.6% influenced by software and services mix and a higher Asia Pacific contribution.
We registered a record number of new customer logos this quarter and million dollar customers. A direct result of our momentum in the enterprise vertical on campus traction this quarter.
In Q3, 2020 cloud Titans was our largest vertical the enterprise is once again consistently our second largest pro forma followed by tier two cloud service providers and financials tied for third place and service providers in fourth place but.
With respect to sector trends cloud Titans are now approximately 37% enterprise in financials also are approximately 37% and provided us with Kingsoft cloud service providers combination is approximately 26%.
What is clear is aristas cloud principles now apply to all sector.
Got diversifying well across customers and verticals.
In terms of geography mix International contribution was 25% with the Americas at 75%.
The European business recovered from Q2, and the Asia business has had a particularly strong quarter.
In the absence of a physical analyst day. This yeah, we would like to shed some light on our strategy for addressing our 30 plus billion dollar Tam.
The past decade can be best characterize my recent momentum in cloud networking, but.
But in the past four quarters, we have experienced Detroit storm of cloud Titan volatility cobiz pandemic and deferred revenue related comp.
Despite this tough reset we.
We believe Arista will emerge stronger not only returning to double digit growth in 2020, one, but also aiming for consistent growth in the years beyond.
We expect a multiyear growth cycle. Some three major product line contributors, one our core cloud and data center products, our largest business building upon our flagship Arista U.S. with the hallmarks of leaf spine topology across our five major vertical to a second market is the net book.
Jason piece with routing, replacing routers and our recent entry into the cap cognitive campus what spaces.
The routing market consists of course fine edge and peering use cases for tier one two or three service cloud and enterprises.
The Capex brings a cognitive unified edge for wired and wife, I endpoints as well as new I O T devices in a two tier leaf spine or supply network.
We do expect to disrupt the campus and router incumbency off the last few decades in the next few years.
A third category is network software and services based on software subscription models, such as Arista It care cloud vision cloud U.S. rider for multi cloud big switch monitoring and our latest entry into advanced nickel detection and response with the acquisition of a weak security.
Elaborating on I'll focus on subscription based software this product line, it's typically multiyear contracts.
Customers are driving mandates for network automation monitoring visibility across that dataset. We believe the recent acquisition of a big security is a strategic contributor that transforms the silo aspects of security into a sits at the seamless secure network.
Moving to cloud blurs, the parameter and the increased use of I O T. On satellite T. means that I see I always and Csos need a netbook round of truth.
Simply storing the broad data or other isn't comprehensible data, a new AI driven data driven state driven software stack like Arista provide it's foundational.
In our opinion the security in the industry is going through and that offices from point security.
The proactive predicted secure networking.
Cloud vision combined with the rest of 2020 acquisitions of Big switch Netbooks clubs of ability and a weak security for autonomous SEC hunting, a very natural software additions to this category.
The content of campus is a priority for vistas adjacent product line, we are witnessing a massive transition in the cold weather era to work from home where the boundary between the office the home they tend to work on my side is it on the user is blurring into elastic and flexible work spaces a.
Aristas recent introduction of the cognitive campus is a state and data driven model, coupled with a unified dashboard for wired and wireless edge for next generation zero touch campus deployments.
This combined with the awake nipple detection and response security feeds into our comp campus visibility flow tracker for both Aiotv and OTI application.
We do expect a campus portfolio to double by the end of 2021 as we invest in both engineering and go to market model.
Getting example is today's announcement of our flagship 750, Cvs campus chassis delivering a combination of industry, leading chassis density performance for high definition video Failover resilient for rolling upgrades cognitive P.O. easy and secure encryption I.
I would like to invite Andy back to sign a founder and Chief development Officer to highlight our launch today Andy.
We like markets that are right for real innovation indeed.
And the campus networking market is a prime example of that well.
With the launch of our 750 serious modular chassis. The are introducing an exceptional platform to deliver more performance more security more disability and more power capabilities than any other product in its class.
The 750 has 400 gigabits per second uplink throughput just five times the performance of our nearest competitor. This level of performance is key to support by six where each access point has up to five gigabit throughput.
The single 70 chassis, we can support the full complement of 384 Lifesize six axis point in.
In addition, the 750 office Mexico encryption on every report, which supports secure communication from the viceroy through the entire campus network.
Some 50 also bricks of ground in density being three you more compact than our closest competitor.
Combined with the legendary credibility of harvest this U.S. refining system.
The 750 office unmatched performance security availability visibility and power handling.
Thanks, Andy that was great I'm excited I could use one at home next.
Next generation Dotting is another key adjacent market for us whereby that bringing the union of two box level approaches. They are two switches and literally routers together for rich protocol support resiliency scale and program ability.
Then a four to five year endeavor for us to bring disruptive economics via Addbacks merchant Silicon I noticed as modern software stack you as well.
We're starting to see the fruits of this labor Arista customers now see us as a compelling and cloud and carrier grade routing alternative to expensive legacy routers right.
Extending beyond classical leaf spine intra DC use cases to multi terabit routing offering low power and higher density interconnect accelerating when an entire DC routing use cases.
Investments in the simplification of Everest as routing stack, which standards based E V. P. N BGP. It segment routing are yielding early traction. We have won a few important tier two tier three service provider customers for many of these use cases, including spine interconnect multi access edge. They are to let three bps and peering use case.
Yes.
Our core Universal Cloud network design. So data center continues to expand that they're just as the pioneer we have been the market leader driving to the number one position in 100 gigabit Ethernet switching market and early leadership and 400 gig with flexible software partnerships with Sonic Openconfig I'd ask boss without cloud Titan customers.
We haven't pushing beyond going up a storage computing <unk> clusters at cloud scale. This quarter, we deliver cloud vision managed in a type C. We state driven database as a netbook whites of its hosted in the cloud cloud.
Clearly very enabling clock principles across the entire enterprise with five days of agility.
Stability automation analytics and any <unk> that the network.
Actual for Donna our Chief operating officer will add some more color on a cloud customer traction actually.
Thank you Jayshree.
Arista has been a leader in cloud networking piece, a nimble execution product quality and ability to well developed with our customers.
Both companies are highly impressed with the work we've done for the last decade.
In getting us more than ever to.
To discuss the architecture for the future.
God went off to Thirtys unrelated silicon is driving a product transition.
We are winning new artist piece for next Gen products bought 100 gig on 400 gig.
We have expanded our footprint from data center leaf spine on PCR to now encompass vine and end use cases traditionally supported by legacy Rialto.
Why is that there was a lot of talk about white boxes on 401 hour.
Our customers have maintained statistical.
We are not seeing a change in position from the start of school customers, who use white boxes are continuing to use like boxes were.
We're not customer who users to switch to.
Our continent use our products study on for the future design.
If anything some use cases currently covered by internally developed light boxes may transition to our feature rich products you know few here.
Gold companies operate on a massive scale and they're continuing to grow.
The skill mix them lean more on us what technology I'm sport.
Our total cost most the immense value and working with us and we have high customer satisfaction here.
Our portfolio is highly competitive and we'll be doing but we are ahead of competition.
Hence it is unlikely that we will see significant share shift.
So I'll be cloud Titans are not influenced by pretty marketing flight.
Our our pre Cds products have now been qualified by all major cloud customer, but several hundred gig on 400, good use cases.
We will keep marching on Dr. Usually banks aren't too and we will be marching on wells said on the cloud Titans success.
So in summary, I rest of vision now track sense, Nan Wang cloud networking with clear diversification across customer products and vertical it.
It's really going into more software data driven network built across customer datasets and managed by cloud vision.
We have built a transformative architecture harnessing the new trends in I O T computing unified edge archiving data across the network our customers resonate with his vision and I couldn't be more upbeat on our strategy our innovation our quality, our support and our customer migration from legacy side All places in the next one.
Cognitive client to cloud networking, which we call places in the cloud we.
We have now deployed a cumulative 40 million ports over the past 12 years.
With that I will turn it over to either our chief financial officer for more financial specifics Yep. Thanks, Terry and good afternoon. Its analysis of our Q3 results and our guidance for Q4 2020 is based on non-GAAP and excludes all non cash stock based compensation impacts certain acquisition related charges and other.
Nonrecurring items [noise] pull.
For a reconciliation of our select GAAP to non-GAAP results is provided in our earnings release.
Total revenues in Q3 were 605.4 million down 7.5% year over year, well above the upper end of our guidance of $570 million to $590 million and up 12% from the prior quarter.
While we saw some improvements on the supply chain front shipments remain somewhat constrained with some expected continuation of extended lead times into Q4.
Service and software support revenues represented approximately 21% of total revenue down slightly from 22% last quarter.
International revenue for the quarter came in at 152.7 million or 25.2% of total revenue up from 19.4% in the second quarter.
Well, the shifts and geographical mix on a quarter over quarter and year over year basis, largely due to the location of deployments by our cloud Titan customers.
We did see some incremental improvement in our in reagent business is also.
Overall gross margin in Q3 was 64.6%.
Above the midpoint of our guidance of approximately 63% to 65% and consistent with last quarter. We.
We continue to recognize incremental cold and related costs in the period, including.
Including elevated freight component costs.
Operating expenses for the quarter were 159.4 million or 26.3% of revenue.
Up from last quarter at 144.1 million.
[noise] began to increase operating expense investments during the third quarter as our top line performance for the year continue to improve.
R&D spending came in at 106.1 million or 17.5% of revenue.
Up from 91.6 million last quarter.
This reflected increased employee costs and increased new product introduction related spending in the period.
Sales and marketing expenses for the 3.1 million a 7.1% of revenue.
Up from 41.9 million last quarter with increased variable compensation and other personnel costs.
As a reminder, we continue to benefit from lower cobot related travel and marketing expenses.
Our g. any costs came in at 10.2 million or 1.7% of revenue down slightly from last quarter at approximately 10.6 million.
Operating income for the quarter was 231.5 million or 38.2%.
Other income and expense for the quarter was a favorable $13.2 million.
Our effective tax rate was approximately 21.6%.
This resulted in net income for the quarter of 192 million or 31.7% of revenue.
Our diluted share number seven to 9.3 million shares resulting in diluted earnings per share for the quarter of $2 to 42 cents down 10% from the prior year.
Please note that included in other income and expense for the quarter was a onetime gain on the sale of investments of 9.4 million.
In addition, given current low interest rate environment, all other things being equal we would expect other income of approximately 3 million per quarter throughout the coming year.
The acquisition of a weak securities pills in October seven and we are now focused on integration of purchase accounting.
Acquisition will not have a material impact on the financials for the profit.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately 2.85 billion.
We repurchased $167.3 million of our common stock during the third quarter at an average price of two to $208 per share.
As a reminder, we have now repurchased $661 million or 3.2 million shares against our board authorization to repurchase $1 billion worth of shares over three years.
Commencing in Q2 90.
Turning to capital allocation, you should expect us to continue to execute opportunistically against the remaining authorization.
We generated 215.1 million of cash from operations in the third quarter second solid net income performance and a consistent level of overall working capital investment mix.
We expect to continue to strategically increase inventory levels through the end of the year as we improve lead times and attempt to buffer against any future cobot related supply chain disruptions.
Dsos came in at 46 days down from 65 days in Q2 affecting many hours of billings in the period.
Inventory turns were two times down from 2.3 last quarter inventory increased to $438 million in the quarter up from 327 million in the prior period as we continued to buffer a certain components and products.
Our total deferred revenue balance was 562 million down from 577 million in Q2.
As a reminder, our deferred revenue balance is now almost exclusively services related to the level of service revenue is directly linked to the timing and term service renewal, which can vary on a quarter by quarter basis.
Accounts payable days were 70 days up from 59 days in Q2, reflecting the timing of inventory receipts and payments capital expenditures for the quarter were 2.5 million.
Now turning to our outlook for the fourth quarter and beyond.
While we remain cautious about the impact of COVID-19 on the economy and our business.
We have seen some incremental improvement in underlying business trends.
Activity in our enterprise <unk> provider sectors has remained healthy with increased win rates across what is for us a radically under penetrated as part of the market.
In addition, we continue to solidly and consistently execute against the needs of our cloud Titan customers.
We believe a combination of these trends combined with favorable year over year comparisons supports the current consensus growth rate of 13% to 14% for fiscal 2021.
On the gross margin front, we would continue to reiterate our overall gross margin outlook of 63% to 65% with customer mix remains the key driver.
Turning to spending and investments I will continue to carefully manage spending we are committed to making go forward results based investment business.
This includes continued go to market expansion to support enterprise and campus growth and investments in R&D to support innovation across the business.
Well it won't happen overnight.
Especially in an environment of resumed to topline growth. We would take this opportunity to remind you of our long term operating margin target of plus or minus 35%.
Finally, our outlook discussion about our guidance for Q4 reflects our current understanding of COVID-19, and its impact to our business and supply chain.
This is however, inherently uncertain and we will need to continue to monitor and attempt to mitigate new challenges as the situation unfolds, but.
With all of this as a backdrop our guidance for the fourth quarter, which is based on non-GAAP results and excludes any non cash stock based compensation impacts and other nonrecurring items is as follows.
Revenue was approximately 615 to 635 million gross.
Gross margin of approximately 63, 65%.
Operating margin of approximately 37% our effective tax rate is expected to be approximately 21.9%.
Diluted shares of approximately 79 million shares I will now turn the call back to Cartus Cartus. Thank you either.
We are now going to move to the Q and a portion of the Arista earnings call due to time constraints I'd like to request that everyone. Please limit themselves to a single question.
Thank you for your understanding operator, you May go ahead.
Thank you we will now begin the Q and a portion of the Arista earnings call in order to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to address your question first the pound key we ask that you pick up your.
I'm sure before asking questions in order to ensure optimal sound quality.
Your first question comes from Milan of Samik Chatterjee from Jpmorgan. Your line is open.
Hi, Thanks for taking my.
Question I guess.
Keep it simple.
Yes, I think.
Right.
You sound a lot.
<unk> <unk>.
90 days ago, So I'm wondering what's driving that is it.
The 400 gig wins coming in and you expected or is that the underlying.
Finding starting.
Thank you.
Yeah no. Thank you. So I mean, I I think when you look at the font foundation and fundamentals of Arista. They didn't change right. We've always had superior products and very strong customer traction.
And but I think we got our customers and Arista got used to the uncertainty of coated and cold It became a new norm and people have to start planning that spend so we saw a very balanced and customer traction across all our verticals and all our sectors in Q3.
Yes, I wouldn't say the same for Q2 and Q1, when we were still figuring things out. So I think the combination off an unchanged strategy a highly differentiated product and were just winning in every sector and there's no silver bullet, but all humming on all cylinders gives us a new found confidence.
Thank you thank.
Thank you for me thank you.
Your next question comes from a line of David Firmed you'd be US your line is open.
Great, Thanks, guys and good quarter great guidance.
Maybe just a big picture industry question, if you guys could entertain me.
Can you share your thoughts on the proposed Marvell inside transaction that was announced last week and may be what it might mean for the industry Holistically as we kind of move forward into 2021 that'd be great.
I try I'm you know I came from the semiconductor world two decades ago, but as you know there's been a lot of semi consolidation and video arm.
Maxim analog digital.
And now Marvell and five.
I think the way to look at this is a semiconductor companies are all the large ones are trying to get larger and the smaller ones are producing some real innovative technology, but need scale. We're very impressed within five they've been an important partner for us and they have both very best of breed technology in the Thirtys and.
The optic side.
And it's something that Marvell lax, so hopefully some of the strike they bring especially to the cloud will help marvell.
Thank you.
Hi, David.
Your next question comes from the line of.
Sammy Baldry from credit Suisse. Your line is open.
Thank you very much I just wanted to just check on a comment made by onshore earlier in the transcript regarding white boxes, and you made the comment that some customers may deploy white boxes today, and then eventually swap that out for feature rich Mr product in the future now is there may be a rationale behind why they would want.
To deploy you know data centers filled with white box infrastructure or white box equipment, and then eventually swap it out can you just explain to us the.
The transition that will take place and design or just in the thought process for why they would do that after they've gone down the white box route.
Sure Tony.
The would have talked about blue boxes by just from one dimension for many many years, but remember our customer through that analysis inboard direction not just one.
And I just can't grows on their needs grow.
The net book is getting more complicated and in certain situations. When do you reach a point, where they need even more functionality and is easy to build internally.
They want to stay competitive in the market and not Miss on timing there.
They do start looking out as well.
But as I mentioned these are future crime or take a couple of deals at least to happen.
But these are currently drilling our discussion on issues going on in our space today.
Great.
Got it thank you.
Your next question comes from along no Alex Kurtz from Keybanc capital markets. Your line is open.
Thanks, Linda glad to hear everyone's doing doing well spaced at Arista.
And secrets on the quarter Jayshree, just on your comments about software and maintenance, becoming right roughly 20% of the business.
Can can this.
Can this growth in your portfolio of software products, whether design internally or acquired.
To maybe accelerate that that software renewal base to where maybe in a couple of years. We're looking at 30, 40% of the business that you can.
Go back to these big cloud Titans and kinds of debt.
Demonstrate the value of these bigger.
Software portfolios. He didn't have a couple of years ago, and really expand that piece of software.
Oh, Thanks, Alex Good question I think I I, it's very observant of you to note that when we say its 20% of our business, it's not just services and software renewals and subscriptions. So it's already starting to have a contribution.
I'd be greater greater than 2025, yes, it would be hard to be 30, and 40, especially with the cloud Titans because cloud Titans tend to think they can and they have the resources to build many of these tools themselves. So I would say all the other four verticals are more likely to embrace our software subscription while the cloud Titans me.
Let me take it in bits and pieces that they would take it and components, but not an entirety, but.
But I certainly think this this segment.
Where we can have subscription multiyear contracts is an important part of our triad stool of core networking adjacent networking and network as a service capabilities.
Thank you.
Thank you Alex.
Your next question comes from a line of Tal Liani from Bank of America. Your line is open.
Hello, Hi, Jayshree I count.
I have a question on the trends in the quarter profit growth. So overall revenues are down 7.5%, but it's not even between products and services product growth is down.
About 13, and a half year over year and services are up 26, so I'm trying to understand both sides.
The strong growth in services, yes.
Yeah. This is the steeper decline in product.
So first remember again services includes many of our software subscriptions and multi year contracts. So it's not just services.
So, but where's product is very clearly perpetual product right.
So I look I think the comps were deferred revenue never helped us from last year to this year.
But I wouldn't read too much into the trend, except to say, but getting stickier with services and software.
And how we should all we can only do better with product yeah. I mean, I think called it the services should continue to grow and continue to be a more meaningful piece of the business and they are the software on top of that.
And then you know product is recovering but it is recovering you can see that in the Q4 guide and dealing into our common treatment for next year as well. So I think you know they're just the different drivers at this particular point in time, but they should will start to grow as we go forward.
Got it.
Thanks.
Thanks Scott.
Your next question comes from the line up for hard news on the from MKM Partners. Your line is open.
Thank you for taking my question a couple of things all too well I look at your working capital. It seems like your inventory that's gone up significantly well your kills people also awful, but can you just help us understand what's happening what you.
Pretty good up so much are you expecting a significant.
Forthcoming demand lab in the next couple of quarters.
Yeah, No I think that what we're what we're really doing is we're buffering you know again some of the uncertainties around cold, but I mean, if you look at the Q when we file as you'll see that a good portion of that increase is still a raw materials and component. There was some uptick in the finished goods right at the end of the quarter for particular products, but we still have more work to do around.
Expanding that to other products, but our goal is to you know to have sufficient buffer is that if we do get some more shocks from coal, but that we were able to react and that we're in a better position to react and we were maybe on the first wave. So it really is just a focus around making sure we've got more optionality and flexibility.
Appreciate it thank you.
As for Hot.
Your next question comes from the line of Paul Silverstein from Cowen and company. Your line is open.
Thanks, just true. Thank you try to sort of turn the call, but I'm going to ask.
Sure I would for next year with double digit growth through the doors to move through two fortune personal consumptions number.
She gets there are things that would you say you expect your campus portfolio doubled but im just wondering what are you, saying you expect.
Campus revenue to double digit.
Go through what your institutions or the cloud.
Orient pausing financials and for service providers to go to that double digit growth.
Hi, Paul. Thank you, yes. So as you know we said last quarter that we have achieved this is our first year at campus is still young kids here.
And we've achieved our first 100 million and you may recall, we said it would take us four to six quarters to double.
I don't yet know for them before six but we are feeling pretty good, particularly with that product announcement today and the campus traction were getting that we didnt feel last quarter. So yeah. The goal is to definitely double that hundred million to 200 billion by the end of 2021 and revenue and let's hope we can do better.
In terms of segments I think it's too early to call it but breakdown, but they're very comfortable with the annual consensus for.
For 2020, why did you not you went after that and I think Bob we're not going to try to do it by vertical at this point right. We feel like there is between the campus stuff that you talked about between the growth in services.
Cloud has resumed growth and then the rest of the business has also been performing well I think between all of those drivers you have you have multiple different ways to get there won't be exactly how it plays out but I think we're not going to try to pick which verticals are going to do want [laughter] just curious Google search process to get their cloud has to be healthy.
Okay.
No I think I hope you noticed on our I'll be talking especially on shows.
You know we started the yard saying it will be flat to down and then we said it'll be flattish trend at this point I think we're feeling like a cloud can be a gross profit.
Patents can also grow next year.
I appreciate it thanks guys.
Thanks, Paul Thank you Paul Thanks, Paul.
Your next question comes from the line of Jeff Cole from Wolfe Research. Your line is open.
Oh, yes, thanks, very much I was wondering if you two wouldn't mind, giving us a little bit of some of the thought process behind the guidance I guess.
One part is you.
You.
Hi, there was not a partner in the supply chain at one of your customers that the cast a pall over 2020, and I'm wondering if that particular issue and sami's is resolved and.
And then the other question is could you help us a little bit with the assumption of 400 and when that starts to layer in to the 20 2021 21 up thanks.
<unk>.
Hi.
Yeah, I know I think so that again the rationale for the for the guidance I think if you look at the various pieces pretty much what we talked about with Paul a few minutes ago right. I mean, there are multiple different pieces of the business than we've seen.
Positive trends across those sectors right not all of us know reflected in revenue today, but.
The enterprise vertical being with good solid wins that will drive some revenue traction into 2021, and then for cloud I think we feel like we've got you know we're in the window of starting to understand their plans for next year.
And feeling more confident around those drivers.
Drivers as well and then obviously the rest the business continues to that continues to grow looking at service software.
After the more ratable piece of the business I think those are the building blocks and you know we like to put those building blocks together multiple different ways and feel good about the guidance and that's kind of where we cannot for next for next year, Yeah, Jeff I think I've said this best we expect cloud Titan trends are to improve in 2021 based on both the Capex projections.
But for us isn't a huge indicator because we're a small number but bulk of these deployments will be 25 gig 100 gig and even some 400 gig I think the white box and the overall competitive landscape much as everyone fears. It is unchanged and were seeing a status quo and look forward to share gains and new roles in.
Campus data center routing and club.
Okay.
We will follow up thank you both very much. Thanks.
Thanks, Thanks, Jeff.
Your next question comes from a lot of George Notter from Jefferies. Your line is open.
Hi, guys. Thanks, very much I'm very interested to hear the commentary about routing and all the different use cases, you're pursuing in that space. So maybe you could kind of talk about your definition of success in routing and also could you give us a sense for where you are now in routing applications, a percentage of sales or the amount of revenue.
To your driving there and.
And then they'd be looking forward do you know what use cases are you in today and what use cases will you be in going forward. Thanks.
Yeah sure George it's difficult to break it down as I've always told you because routing and switching often go together, but what they saw as a trend is you know we've always sort of aimed for the big elephant. So the tier one service providers and those take time, but we started winning particularly this year, we turned the corner on winning a lot of tier two and tier three providers.
Not only in the U.S., but internationally and these use cases tended to be telco cloud. Some of them are just very happy with the Multivendor combination off you know VXLAN any VPN BGP stack from us some of them are peering use cases. So these are all classical router use cases that better disruptive economics program.
I believe zillions and and routing features that they have come to know enough from others, but that they could get better from us. So were signed and that and then also be doing very very well in the cloud customer base as well we have been for some time. So the combination of all this to say that routing is not.
Just with the service providers. It is now permeating all five verticals.
Got it and then is there anything is there one.
Product delivery or for future delivery that has allowed you to turn to quarter in service provider space or anything you can choose to.
If you know the service providers as well as you do it's never one feature it's a long list of them. So I mean, we've been working at for four to five years and I think the combination of it has led to more success, but there's always one more feature to do George as you know.
Well. Thank you George Thank you.
Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Yeah. Thanks for the question I wanted to just ask kind of a housekeeping question and then maybe one last housekeeping is do you guys think deferred revenue will become an issue in two.
21, because the 400 gig rollout do you think we'll see product deferred revenue building up again.
And then I also wanted to go back to enterprise. It seems like a time when enterprises, if anything would be a slow spending that you guys have really accelerated at least sequential growth there and there's a lot of absolute additional revenue in Q3. So just curious do you think you are pulling any revenue for an enterprise or.
How does that look like it continues for the next few quarters for you. Thanks.
Yeah, I think on the deferred it's you know it's always difficult to forecast when we'll have no customer requirements et cetera for acceptance of it tends to be you know last.
I have to be for some very differentiated or different products that particularly you know under the current accounting. So we'll see it's hard to predict that there would be some of that or not at this point, but it's.
It's definitely.
It's more difficult to get to a deferred bar would have to be a very differentiated products.
And going forward.
Well Roger I, just see it feels good to be back after a tough few quarters, the enterprises love our product and they want to buy more and if anything I would say the opposite of pull then we were still slightly supply constrained constrained versus demand and are experiencing some shortages that will hopefully improve by the end of the year.
No Portland for sure.
Right. Okay. Thank you Sri.
Thanks Rod.
Your next question comes from a line of Jim Suva from Citigroup. Your line is open.
Thank you very much and really a heartfelt congratulations to you and your team for a very strong results and outlook during cold.
Hi, My question is regarding the outlook for 2021, when you mentioned consensus up 13% to 14% you're comfortable what dot com does that bake into the most recent capex outlook said, we were provided last week. It's notable that like Facebook gave an outlook.
Well, you know materially up that percentage and I know that you are wrapping up and getting ready for earnings and things, but I believe there are capex is supposed to be up 30% to 40% or would that be added them. Thank you.
Yeah, No I mean this is our current view as I'm today of what we think we feel comfortable with for 2021, and then we'll see there's always going to be puts and takes on the capex tennis networking correlation has has its challenges right. So we'll see where it goes from there that's what we see as of today.
Jim. Thank you for the wishes as you know as you know the Capex includes building leases capital. So the networking component is very very small either and I were talking earlier I was I was with actual to its generally less than on around 5%. So it's hard to make any specific decisions based on capex, but as an overall trend we're pleased.
The Capex is going up next year, but then we'll keep watching this quarter by quarter, because it tends to be lumpy and volatile.
And congratulations again to you and your team.
Thank you Jim Thanks, Jim.
Your next question comes from the line of James Fish from Piper Sim or your line is open.
Congrats on the quarter ladies.
You know you went over the negatives of the higher freight costs, but also the positive as well.
Of lower travel.
To your best understanding what was the net impact of a COVID-19 on capex the.
The last this last quarter, and then Dsos would imply more frontend loaded quarterback that either insinuates a slow down in September or was it just lack of needing to push more business that we have a strong backlog heading into Q4.
No I mean that the Dsos actually the biggest driver. This quarter was just we exited with a high balance at the end of last quarter right. We were very back end loaded last quarter and then you can collect.
Against that and that drives.
Try some good traction through the quarter. So I think we were you know Jayshree mentioned, we still have some supply.
Or a you know still receiving in inventory and you saw that in the accounts payable as well right. So we were still a little bit backend loaded through the quarter, but we had a good balance to collect against Ah coming into the quarter. You know I don't know that I'm going to try to size exactly what the coal that impact is there was a little bit and in gross margin.
You've seen that in the product margins and you know there's.
Theres a travel try.
Travel some marketing expenses that you're probably couple of million ourselves comes out of the sales and marketing line.
Because of it as well.
Understood Thanks and.
Congrats again thanks.
Thanks, Thank you James Thanks Chip.
Your next question comes from the line of Jason Ader from William Blair. Your line is open.
Thank you.
You can't decide.
Wondering what types of customers are actually find stuff in the midst of working from home.
Just [laughter].
I think to me that you're winning a lot of new logos. There. So that's kind of the firm.
Further question second part of the question is.
The 750 series product. This is a big hole in your portfolio and you think that it could actually accelerate some of your traction.
The campus market.
Well first of all you'd be pleasantly surprised as I am that <unk>, even though people are not coming back to smart buildings. All their headquarters, it's really vertical dependent as you know some of the logistics and healthcare and some of the business critical ones do need to go back and do need connectivity and performance and I'm a far more distributed.
Plastic fashion. So I think cactus is back just not the way we thought it would be the emphasis on unified wired or wireless.
Rather than specific smart buildings is the change we are seeing.
And it also gives them what we noticed is it's also giving them a chance to plan better because everybody's in the building you can't plan, but now you can do a lot more proof of concept testing I I'm very excited with the 750, there's a whole billions of installed base of some of my old products called the catalyst that you know are ripe.
An old and H. and I'm sure you want to comment on the beauty of that absolutely.
Different they're very excited with what they're doing but north a lot of this is driven by feedback from customers. This immense interest and B 750 cities are not broadening our portfolio.
When you look at the Fortune 1000 type of enterprises, they absolutely need high density and high performance even in campus and yes. There's some companies are thinking about the imposing on the office the talent upgrade on repurchase but they also put in companies thinking about there aren't enough inflows in the office. So let's go ahead I'd be fresh.
And that's really what's driving the change in the enterprise as well, but the feature set consistent deal with cloud vision automation a lot of the visibility on the benefits would give to people is important to them. If your retail conference. How gentle you don't want to be a debugging in the middle of the day, you need to meet sort it all by itself and one of those are the capabilities.
Deliver without profit.
Great. Thank you Jason.
Which is the catalyst.
Comparable from Cisco.
I think there's a couple of them that are 4000 series and the 6500 series and the cats 9400 and their current the pregnancy shipping one is the 9400.
But the older ones that are for Kansas 6500. Thank you.
Great. Thank you.
Your next question comes from the line of Ryan goods from Rosenblatt Securities. Your line is open.
Hi, Thanks, a question I Wonder if we could circle back to the campus opportunity again and look at the competitive front there.
That's a great technology, and how you feel you're progressing towards building out your channels and displacing the big incumbent there.
Like how they influence over these larger enterprise.
Global 2000 customers. Thanks.
Thanks, Ryan I I I.
I think we have to understand that we are in our second year of campus and if you look at our competitors, they're not they're 10 to 15, though 20th year, they're very mature. So definitely we got work to do on go to market model. So our first first area of focus there is our existing customers. When we have over 6500 of them some percentage of them love.
The U.S. and cloud vision and when he was asked on the second is we are making more progress on the channel.
Side or were not signing up everybody, but we certainly see a strong international focus on channel.
And I think that would be something we will continue to invest in and the third is for the last two or three years, we have been investing in the enterprise go to market led by Krish met and Ashwin coli under Ashwin. So we're starting to see the fruits of our labor and just enterprise traction whether it's in the datacenter our campus and it's taken us the better.
Part of two to three years to achieve that.
That's great thanks, very much and congrats on the quarter.
Thank you Ryan.
Your next question comes from the line of you try to Kidron from Oppenheimer. Your line is open thanks, ladies and gentlemen, a.
A couple for me and maybe just kind of to drill down some of the questions were asked first Sundar a cloud.
Clearly you're more bullish here. So it's great to hear can you clarify whether the this includes no principal cool server refresh is finally back on track and.
And you got a piece of that and then.
I'll pick him back on the question that Jason had done on the campus and your 750. Congrats on that just got just to refresh your 9400 I guess when I look at your solution right now in line. It looks like you have couple of cool features they're always on PEO, you better supervisor data plan separation.
Well it was my impression that this whole traffic count.
Campus category is on a massive decline customers moving into fixed architectures not modular at all so help me understand how much really is the opportunity here and when you talk about your confidence in doubling.
Campus business through next year.
Is this going to be a material contributor to the outdoor this is really towards thereafter.
Oh boy, how many questions why not [laughter] three.
Three within one you're having a lovely could tie we'll keep our eye with a shorter than your question [laughter] record that.
You want to take the cloud one on obsolete, it's I wouldn't say about this misspoke silver refreshes in our guide.
Guidance on a model, but on a phospholipid metwox plans for the next show our in our model lets decouple down another button on behalf. The data we have today from our customers for using thus we are confident that there is growth coming back make sure on that thanks.
Right and Onvia 750, you know, having both actually and I have been involved a lot and chassis is in my prior life I think if there's anything that will be under constraint. It's the stack of those customers are moving to more and more distributed why are you and what are the things that probably got a little I noticed in our announcement today is our two are you now.
Yes, export, which obviates the need for any stackable and then for the really high density distributed buildings, which have large employees large headquarters you do need a 750, you need the investment protection off 100 gig couplings you unique the density and you know footprint and power you need there.
Operational power management, you need the security you need the always on fail over time for rolling upgrades, So and I think what's happened at least non minds is the chassis has gone from being a physical cable plant discussion to much more of an automation visibility security discussion you need all the properties that you had in the data center.
So that market is coming to us so we.
We feel good that this oh yeah.
Yeah, it's a new product it will take time to qualify but it is a contributor to our number in 2021.
Good.
Thanks, you talked your net.
Your next question comes from the line of meta Marshall from Morgan Stanley. Your line is open.
Great. Thanks, maybe wanted to touch on just kind of what sort of traction you're seeing with existing customers from your big switch and awake, a security acquisitions, and just whether that could be I understand it's not material to Q4, but a more material contributor to 2021. Thanks yeah.
Yeah. Thanks, Hieko I definitely think it's a strategic contributor to 2021 and bookings as you know the revenue may follow as multi your contracts are in software network software and subscription models. So how material will it be in 2021, probably small but it both those are very strategic.
Gig to influencing our customers decisions on the data center on campus and in general, helping with that operational the architectural experience on their operational experience, it's a huge differentiator so.
Observe ability monitoring inline data analysis capability and then the economists that hunting you know, it's so important now because the firewall on the perimeter for the firewall is just collapsed so the ability to do that as we as you know we just closed the begs the awake acquisition in October two early to tell but the one thing we can tell.
As everyone is interested in it actually went after that.
Yes, you're absolutely right, but I odeon sensors and campuses and work environment. The monitoring is going to be very very different on this.
This on an unmet need in this space today, and I think a wafer did very well with the ice technology.
Big switch and the anymore. Thanks.
Great. Thanks.
Thanks Peter.
Your next question comes from Milan Oh.
Aaron Rakers from Wells Fargo. Your line is open.
Yes. Thank you all for taking the question I want to go back to one of your size a question and I can appreciate that you're not factoring in kind of Facebook and server refresh cycle, you know in the context of your guidance, but.
If you go back in time, how do you think about the context of server cycles, and how that pulls through.
Your business just to get a historical backdrop, because if you look into 21, you've got obviously, a big refresh for Intel you've got and the push into service. If you cycle I'm just curious how you think about that.
A pull through effect on Aristas business. Thank you.
Hi, Aaron I don't think it's changed much for US what happens is you got to get the buildings and the power and the cooling and then you've got to get the service and that's typically a one to two quarter lag on the network.
And so clearly the service cycle comes ahead of US, which is why we felt the pain. We did last year hopefully, we'll see we'll feel the gain of it next year.
Yeah. Thank you.
Thank you Aaron.
Your next question comes from a line of appear.
Pure <unk> from New Street Research your line is open.
Hi, Thanks for taking my question.
Generally you mentioned in your opening remarks, Chad outside it's your coal switching markets you had gross.
Routing campus and subtract and services and I was wondering you know like three maybe to five year time horizon, how much actual gross do you think is going to government and trends is that you should know.
Segments versus how much is going to come from switching.
Switching your call switching markets.
Well you just telling me not to answer this question [laughter].
[laughter].
[laughter] from a vision perspective, we think those two segments the new markets that we're underpenetrated anywhere in the early innings.
Both network adjacent fees and you know software and services will grow faster than our core market how about EBITDA that is that a good enough answer I couldn't have answered all right.
[laughter].
Your next question comes from the line of Tim Long from Barclays. Your line is open.
Thank you.
Could you just hit on the telco vertical it seems like it's still towards the bottom of the pecking order at least in your results. So.
What's going on there what what do you think you get that going is it just increasing the routing use cases and further penetrating on that regard or or maybe the addition of of more security features which which often do well in the telco networks. Thank you.
Thank you Tim look I think <unk>, unlike the cloud where they will adopt riding features even if were missing why not to handle operationalize. It you know very well service providers want every bell beland vessel and as I said in my opening remarks, it's taken us a better part of four or five years, we're making very good traction in tiers, two and three.
Tier one is still taking time, but in this year. We have won some early design wins and tier one as well, but the numbers are small so I think in order to make them back they need to spend more from us.
Great. Thanks, Tim.
Your next question comes from a line.
Amit Daryanani from Evercore Your line is open.
Perfect. Thank you for taking my question.
You asked me if I just go back to the double digit sales growth expectation because of 21 I'm trying understand is that organic statement is that a total revenue growth statement. How do we think about that and then broadly when I hear you talk about 21, it sounds like the growth what doors are getting much more diversified than they historically have been.
I'm wondering how does that play out into the operating expenses and perhaps a need to expand the infrastructure for the income to 21.
So just I mean, just to take the question upfront. It is absolutely based on products as we have now organically, but not factoring in any in any future products or M&A in that discussion and maybe you know you want to talk about the.
Yeah, I mean, that's my model I think on the investment side, you know with the topline returning to growth that gives us a lot of room to make those investments and maybe a little bit more than that we'll see right, but we certainly have the growth on the top line to do that my scripted remind everybody that our target model of 35% operating margin.
We are reserving the right to you know to do that should we find the right the right investments to make and we'll be very metric driven around that as we go forward, but that's kind of the target model longer term you know in the meantime, we'll have the benefit of topline growth at the health of the investment in the near term.
Great. Thanks on it.
Your next question comes from Milan.
I'm in Leopold from Raymond James Your line is open.
Thanks for taking the question I wanted to.
Get your sense on a scenario.
We assume an existing arista customer want to upgrade a datacenter two hundredg not 400 for two hundredg.
What does that mean for Arista is this a line card change or.
Swap with Cherokee's and if it is a swap of chat. These you risk losing share and that kind of upgrade scenario.
One of your customers. Thank you.
Huh.
Simon.
Why don't you haven't talked about 200 gig broadly there are certain customers looking at these types of technologies and defense to staying with the falling out to stick to that for by 50.
The good news is.
All of the products, we mentioned the three cities some and be 70 60 series some into 7300 cities all of them support not just 400 gig, but also 200 gig.
We are a better off the need in certain cases up 200 gig of anybody rose poised to actually grew our benefit from that as well.
Great. Thank you Simon.
[noise] cool.
Your next question comes from Milan, and Oh, We would you know from a group.
Berger intelligence your line is open.
Oh, great. Thank you for squeezing me and also an intermediate term a technology question here.
Hi. This is chip question has been asked so so in video and well they'll be talking a lot about a DP use in the data center sounds as if the gifts and starting to get a little bit more complex or the architectures I need.
Doesn't gpus present, a port growth opportunity for you in the club we may not have considered in the past.
No I would say.
Well, Jim this is a bit too early to see it with a diffuse would've come disrupt or is that a lot of marketing in terms of offload engines remember off road engines, especially on fluids have been around for many many years and this might have special instruction sets for the new types of offshore towards looking at.
So so far we don't see any major impact to Nick looking like or maybe even a benefit because that drives changes in architectural and actually helps us compared from the incumbency.
Yeah, I think they generally have been coprocessors, they don't take away the need for a CPQ.
Great. Thank you.
Thanks again.
Your final question comes from the line of John Lopez from vertical group. Your line is open.
Oh, Thanks, so much guys hear me okay.
Yeah, Hi, John Yeah, John Mccain Hey.
Thanks, Sorry, I just had one clarification for you on the deferred side.
The deferred is gone marginally lower sequentially each of the last few quarters and I just want to make sure I understand.
Are there.
Puts and takes in that is that now more say dependent on larger renewals that happen periodically through the course of the year.
If you can just talk a second about that and also is there anything in that trending that we should think about as we think about services revenue in 2021.
Yeah, I know that that's exactly what it is right I mean, it's almost all services now and it's really going to move around more by the you know the term and the timing of just those renewals right. When the revenue one year or three years. It doesn't really make any difference to the business, but it will show up in that deferred.
Revenue line item right the revenue will still be pretty consistent right because you're recognizing it overtime.
Deferred line will move around so if we have a big renewal on a multiyear contract that number is going to go up if we renewed just one year and come back to do the next later and won't increase or it might decline site, because we're recognizing some of that revenue. So it's going to move around a bit but it's not a business driver right. It's just more how are we negotiating and closing out.
Yeah perfect. Okay. Thanks for the help.
Thanks, John This concludes the Arista Q3, 2020 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. Thank you for joining us today and everybody please be safe.
Thank you for joining ladies and gentlemen that concludes today's call you may now disconnect.
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