Q4 2020 Arista Networks Inc Earnings Call
[music].
Okay.
Welcome to the fourth quarter 'twenty 'twenty of Arista networks financial results earnings Conference call. During the call all participants will be in a listen only mode. After the presentation. We will conduct a question and answer session and instructions will be provided at that time, Inc.
At any time during the conference from new to reach an operator, Please press star followed by zero as the.
This conference is being recorded and will be available for replay from the Investor Relations section of the rest of the website. Following this call I will now turn the call over to Mr. Charles Yager director of product and Investor advocacy, Sir you may begin.
Thank you operator, good afternoon, everyone and thank you for joining US with me on today's call of Jason Real all Arista networks, President and Chief Executive Officer, and heater Brennan Arista as Chief Financial Officer. This afternoon, Arista networks issued a press release announcing the results for its fiscal fourth quarter ending December 31 2020.
If you'd like a copy of the release you can access it on line at our web site. During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the first quarter of the 'twenty 'twenty, one fiscal year longer term financial outlooks, our total addressable market and strategy for <unk>.
Dressing these market opportunities the potential impact of COVID-19, other business, our product innovation and the benefits of recent acquisitions, which are subject to the risks and uncertainties that we discussed 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 anticipated by these statements. These forward looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements. After this call also please note that certain financial measures. We use on this call are expressed on a.
Non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release with that I will turn the call over to Jay Shri.
Charles Thank you everyone for joining us this afternoon for our fourth quarter of 2020 earnings call.
If there's one thing dependent Nick has taught us if the importance of adapting in real time.
In 2020 of our world changed quickly and rapidly.
As a cohesive leadership team, we have to prepare for a lot of unknowns and uncertainties.
The offices were closed a contract manufacturers were shutting down and supply chain constraints resulted in longer lead times.
20 create a new loans that he found many virtual ways of communicating with our customers, including access to our products for their business continuity.
But the vaccines the emerging we certainly hope that all of you and your families are safe and healthy during these unprecedented times.
I am so proud of our employees and how we handle this and think of partners and customers as well for placing their trust in us.
Back to some Q4 2020 specifics, we delivered revenues of $648 5 million for the quarter with the non-GAAP earnings per share of $2.49.
So this is in software and support renewals contributed approximately 20 percentage of our revenue.
Our non-GAAP gross margins at 65% was influenced by software and services mix and the higher enterprise contribution for the quarter and the year.
We've registered a record number of new customer logos and millions of customers direct result of our momentum in the enterprise vertical and campus this quarter.
We now have surpassed 7200 cumulative customers over the past decade.
In Q4, 2020 cloud Titans was our largest vertical enterprise was second followed by financials and debt. Please and the providers both service provider and cloud specialty providers tied for fourth place in.
In terms of effect the trends, we see cloud Titans, and approximately 36% enterprises, including financials at approximately 36% and providers at approximately 28% consistent with the effect of ranges we have provided.
Microsoft was the only greater than 10% customer concentration of 21, 5% for the year 2020.
In terms of geography geographical mix International contribution was slightly higher at 26% with the Americas at 74% for Q4 2020.
Despite the turbulent 2020, especially the cloud Titans, we believe of Arista is going to emerge stronger with more diversified products and customers.
We reiterate our multiyear growth path based on three major product line. The evolution, one I'll call cloud and data center products built on our highly differentiated Arista Eos leaf spine architecture, and our cloud first principle based on the five as we.
We expect this to contribute approximately 60 to 65 per cent range in the future.
Our second market is the net book Adjacencies with routing, replacing routers and our entry into the cognitive campus Workspaces. We expect these two adjacencies together to contribute approximately in the range of 10% to 15% as a compelling alternative to incumbent legacy networks.
For the category its networks software and services based on subscription models, such as the Arista AK of cloud vision multi cloud U S router, VIX, which DANZ monitoring fabric of our Dms and advanced the neck of detection and response with the recent awake security acquisition.
We predict that the subscription based networks services and software will contribute approximately in the 25 per cent range. Please note. The perpetual software licenses are not included here and now generally counted in our core or adjacent product lines.
As we look ahead I noticed the research has shown the customers believe that COVID-19 has actually increased the value and relevance of the network in the post pandemic era and in our opinion, we concur the.
Networking industry is undergoing a metamorphosis from point silos or places in the networks to a seamless cognitive cloud networks that is state of driven Arista is helping customers with their digital transformation to the data centric cloud first paradigm.
As the experience the explosion of users devices Iot Ot more video more of the ability of workloads and workflows the boundary between all of the locations whether it's your office cloud home caliber could of transit and user is really blurring into elastic workspaces.
We believe of Arista is well positioned to address the data driven networks for this client to cloud workspaces. The powering some of the world's largest data centers and cloud providers as a trusted partner and this expertise that we have gained has helped us modernize networking to a software driven cognitive experience.
A good example of this is the rest of Q4 2020 introduction of DMF, our DANZ monitoring fabric for contextual observe the ability based on our big switch of acquisition that we did earlier in 2020.
Zero Trust vision that we launched the smart also cements the relevance of the differentiated network protection and security.
Our holistic zero Trust network requires the union of network segmentation, situational awareness and visibility and net of detection and response security.
A key part of our strategy is to bring this cloud first principles to every aspect of our cloud networks.
So we bring it to routing observer ability and security functions and it must be inherently designed as a part of the rest of the state and AI driven network architecture and foundation.
So with this I'd like to invite Ken Duda, our founder and Chief Technology Officer, and senior Vice President of software engineering to share some of our latest innovations on security Ken.
Thanks Chase III.
Zero Trust framework for security is top of mind at Arista for <unk>.
So many years networking vendors have focused first and foremost on providing connectivity that is making sure everything can talk to everything else.
This was fine in the 19 eighties, but it makes no sense today, where security is of greater concern than ever for many of our customers more important than connectivity itself.
Arista is addressing the needs of security conscious operators integrating security directly into our network devices. So.
So that the network is secure from day, one without bolt on the security products.
You've already heard about the awake acquisition and progress in AI, driven network detection and response I'd like to go a little deeper on this call into another innovative risk of the security feature called micro segmentation service groups or M. SSG.
With MSG, the operator of signs endpoints to segment based on the type of device that's connected to user of that device or the application they're using.
The operator, then the specifies the segmentation policy.
Your line, which pairs of the segments are permitted to communicate for example, the policy might permit corporate engineering laptops of connector manufacturing applications.
Not for the finance applications and not even to one another.
M SSG enforces that policy uniformly whether wired or wireless whether on the campus for in the data center on premises or working remotely. The operator can change the policy, including we are finding an endpoint to a different segment without requiring any other changes to the networks in particular the policy is completely independent.
Of network address of assignment, which can be quite important for example, it for you.
User device behave suspiciously it can be reassigned to an untrusted the segment without triggering any network change at the endpoint of the device. So that the compromise device can be quarantined and investigated without tipping off the adversaries that they have been detected.
Arista is M. S. S. G works with 100% of standard space packets without adding any proprietary headers trailers encapsulation of et cetera, and is thus easy to deploy incrementally into the existing networks.
Finally enforcement has implemented entirely in hardware for high performance without relying on the extensive switch T camps for classification, which has led to scale of problems than competing solutions.
Our view is that M. SSG is an example of the larger trend of networking, where Moore's law is enabling a larger and larger feature set to be integrated into the mainstream mainstream switching and routing devices.
The integration is essential to move beyond security as an afterthought and provide solutions that are of secure off the shelf and I'm delighted in the role of Arista is able to play in helping customers address the challenges of building and operating of modern network not just from a performance from scale perspective, but including so many other aspects such as disability manageability of monitoring.
The commissioning process automation and of course security.
Back to you Jay.
Thank you Ken clearly customers are fatigued with the proprietary <unk> silo networking you just mentioned and just as we all modernize the cloud network security must turn from a non to an adjective to build secure networks.
When your World Class Engineering team has mastered the art of quality and software architecture with best in class agility, and Programmability credit to you for founding and building this innovation and greatness and interest and I can't wait to see more of it.
In addition to our campus workspace. This progress that I spoke about last time next generation routing is another key adjacent market.
Our investments in simplification of Arista is routing stack has been going on for many years with standards based EVP and VX Lan BGP and segment routing and these are yielding good traction in cloud service provider and enterprise customer win.
To give you context on this just in 2020 alone we introduced six AOS software releases across 40 platforms and delivered over 800 features in routing.
The result of these investments we have made in our routing innovation in footprint have been brought us over 200 customers in 2020.
In summary of Arista demonstrates the Stark contrast to the current fatigue of silos and different operating systems for Wan campus cloud datacenter, each one generating its own disparate data silos.
We are building upon our cloud networking heritage to unify datasets consistently and harnessing and archiving data across one software stack Eos and one cloud vision.
The net working industry is truly the rights for this transition and change the data driven networking.
Simply put a good enough mediocre networks is no longer good enough and acceptable and this is why we believe that we're poised for a multiyear inflection ahead.
With that I'd like to turn it over to EDA for the financial specifics ETA.
Thanks, Jerry and good afternoon.
The assets of our Q4 and full year of 2020 results and our guidance for Q1 'twenty 'twenty. One is based on non-GAAP and excludes all noncash stock based compensation impacts certain acquisition related charges and other nonrecurring items for <unk>.
Reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Total revenues in Q4 was $648 5 million up 17, 4% year over year and well above the upper end of our guidance of $615 million to $635 million.
While we continue to strive for improvements on the supply chain from shipments remained somewhat constrained in the quarter, but some COVID-19 second and third wave related disruptions.
Service and software support renewals represented approximately 20% of total revenue down slightly from 21% last quarter.
International revenue for the quarter came in at $165 7 million or 26% of total revenue up from 25% in the third quarter.
While the shift in geographical mix on a quarter over quarter and year over year basis is largely due to the location of deployments by our third supplier of cloud Titan customers. We did see some incremental improvement in our in region businesses this quarter.
Overall gross margins in Q4 were a healthy 65% at the upper end of our guidance of approximately 63% to 65%, reflecting a heavier mix of shipments to our enterprise and financials customers in the period.
Operating expenses for the quarter for $178 1 million or 27 five per cent of revenue up from last quarter at $159 4 million. We continue to increase operating expense investments during the quarter as our top line performance for the year continue to improve.
R&D spending came in at $110 2 million of 17% of revenue up from one hundreds of $6 1 million last quarter.
<unk> increased employee costs.
The offset by lower new product introduction spending in the period.
Sales and marketing expense was $54 9 million of eight.
Five per cent of revenue up from $43 1 million last quarter with increased variable compensation and other head count related charges.
As a reminder, we continue to benefit from lower Covid related travel and marketing expenses.
Our G&A costs came in at $13 million or two per cent of revenue up from last quarter at approximately $10 2 million, reflecting normal fourth quarter of compliance related activities.
Our operating income for the quarter was $243 5 million of thought.
37, 6% of revenue.
Other income and expense for the quarter was the favorable $1 4 million and our effective tax rate was approximately $19 three per cent other.
Other income and expense included $2 5 million of interest income offset by some unfavorable FX of Mt.
The favorable tax rate included the release of from tax reserves for which the statute of limitations expired in the period.
This was the one time effect and the rate will likely return to a more structural rate of 21, 9% in future periods.
Overall this result of net income for the quarter of $197 7 million or 35% of revenue.
You know the share number was $79 3 million shares resulting in the diluted earnings per share of number for the quarter of two daughters of 49 of approximately.
The 9% from the prior here.
Now turning to the balance sheet cash cash equivalents and investments ended the year at approximately $2 87 billion.
To recap of our uses of cash for the year, we generated $735 million of cash from operations.
Returned approximately $395 million of 54 per cent of this to shareholders in the form of share repurchases.
In addition, we used approximately 227 million of 31% to fund cash consideration of two acquisitions, which closed during the year retaining the balance of approximately $113 million in the business.
To date, we have 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 19.
We will continue to execute opportunistically against the remaining mandate.
Turning to the operational cash performance for the fourth quarter of generated $186 9 million of cash from operations in the period, reflecting solid net income performance and continued investments in working capital.
Dsos came in at 55 days up from 46 days in Q3, reflecting the linearity of billings in the period.
Inventory turns of one eight times down from two times last quarter inventory increased $480 million in the quarter up from $438 million from the prior period.
As we continue to buffer of certain components and products.
Our total deferred revenue balance of $651 million up from $562 million from Q3.
This increase largely the effect of typical fourth quarter service renewal activity and a small amount of deferred product revenue related to new product deployment the law.
Level of services deferred revenue is directly linked to the timing and terms of service renewals, which can vary on a quarter over quarter basis.
Accounts payable days were 54 days down from 70 days in Q3 was that from the timing of inventory receipts and payments cash.
The expenditures for the quarter of $3 2 million.
Now turning to our outlook for the first quarter and beyond.
The good diversification of the business in fiscal 2020.
For the expected declines in cloud Titan revenue somewhat offset by growth in our other of market sectors.
Looking into 'twenty 'twenty, one ex that continued growth with our enterprise and provider customers combined with the solid cloud type of contribution.
From a product perspective, we expect strength in Adjacencies in software and services.
For you to make these areas the more meaningful contributor to the business overtime.
We believe the combination of these trends combined with favorable year over year comparative allow for top line growth rate for the year, which is in line with annual consensus growth rate of 14% 15%.
You should also note that our second half of 2020 top line recovery will likely result in some deceleration in quarterly year over year of growth rates as we move through 2021.
On the gross margin front, we've continued to reiterate our overall gross margin outlook.
63% to 65% the customer mix remained the key driver.
Turning to spending and investments we remain committed to making go forward results of these investments of the business is.
This includes continued low to market expansion to support enterprise and campus growth and investments in R&D to support innovation across the business.
Finally, our outlook discussion of all of in our guidance for Q1 reflects our current understanding of COVID-19, and its impact on our business the supply chain.
However, an inherently uncertain situation and we will need to continue to monitor and attempt to mitigate new challenges as the situation unfolds.
With all of this as the backdrop our guidance for the first quarter, which is based on non-GAAP results and excludes any noncash stock based compensation impacts.
Other nonrecurring items.
Problems.
Revenues of approximately 630 to 650 million gross margin, 63% to 65% operating margin of approximately 37 per cent.
Effective tax rate is expected to be approximately 21, 9% the diluted shares approximately 80 million shares.
I will now turn the call back to Charles Charles Thank you either we're 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 take it away.
We will now begin the Q&A portion of the Arista earnings call in order to ask the question during the time simply press the star.
Then the number one on your telephone keypad, if you'd like to withdraw your question press. The pound key we ask that you pick up your handset me for asking questions in order to ensure optimal sound quality nor for.
First question comes from meta Marshall with Morgan Stanley. Your line is open.
Yeah.
Great. Thank you maybe just a comment around you just announced the kind of macro segmentation kind of security portfolio just as your.
Broadening out of the campus portfolio just other security features and functionalities that you think you will need or other partnerships that you think you'll need to expand upon to just kind of address of that customer base.
Maybe the needs of different than the data center needs. Thanks.
Thanks for that.
As you know we've had a very robust set of partnerships. So we will be working on securing the network, but protecting the network is the only one aspect of the datacenter of campus you have to make sure you work with different types of firewall vendors you have to protect the cloud and the multi cloud the zones you have to protect the devices in the identity.
So our macro segmentation has multiple fronts, we enforced a lot of rules so partnerships with firewall vendors in particular of Palo Alto networks as well as others. We enforce the rules on the host with our partnership with Vmware, especially and then more recently, we have also done with a macro segmentation that Ken talked about.
More and more identity mapping and enforcement with our partner for like for Scout.
As well as Aruba clear path. After so the first thing I want to say of security is too important for just the Arista to do will be securing and protecting the network and working with these partners.
Looking ahead, we see other forms of security too and I'd love for Ken or onshore to comment because you know whether it is security the networks in the segmentation and the many forms we talked about but also more and more in the data center encryption capabilities and privacy, but it's the network wide IHOP to pop pop and in the campus.
Bringing security all the way down to a wireless.
So kind of rationale do you want to say something more about that sort of the discrete taking an enterprise customer connect to.
To the cloud is extremely important.
You know.
There's no one simple way to connect.
Enterprise apps to the slowdown.
<unk> thousand different fees, but the direct connect.
Tops meet me in the middle of the different service providers and we are quite focused on enabling more and more functionality the differing.
Cost of the tunneling.
Of the excellent EVP and approach for enterprises, and I didn't get to what happens from the cloud side different types of encryption channel and so on.
Ken anything you want to add.
Yeah, I just wanted to add debt we are.
Our segmentation is simply the newest announcement that we've made in this area, but we have a robust portfolio of security features already including the hardware support for Mac second ipsec to secure of individual links.
Including multi stage alcohol for advanced the packet classification.
And several other features for wireless intrusion prevention.
I think that.
Customers are already able to build a of.
Fully secured networks all of Universal solutions.
Third we will of course be looking to partner in the future with <unk>.
And one who can help us build a more secure solution.
Oh, great. Thanks.
Thanks meta.
Your next question comes from Ryan Koontz with Rosenblatt Securities. Your line is open.
Alright, Thanks for the question of what to ask you about the the semi supply chain you talked about building inventory in the quarter on key parts can you give us some more color on what's going on there we do hear about.
Production capacity issues and obviously the lead times are starting to stretch out you feel you can give us some comfort.
Comfort you feel comfortable with your other commitments from your suppliers and what you're seeing out there I appreciate it. Thank you.
Sure, but Brian as we said we have been constrained much of from two.
2020, starting with March. So this has been a real issue for the entire supply chain, we have products with extremely large lead times that we plan ahead for and I would be remiss, if I didn't say that while we have some great partners that the semiconductor supply chain is still constrained.
M either and her team as well as onshore and the team have taken some very important steps to build out of our inventory for some of these long lead time components, but because we use a lot more parts then we still have.
Couple of thanks, very much thanks.
Thanks, Brian.
Your next question comes from Jason Patter with William Blair. Your line is open.
Yes. Thank you.
Jason could you talk about what's driving your momentum in the enterprise.
Would you say, it's more of the product portfolio, that's expanded or is it just the build out of your sales and distribution infrastructure of maybe its both.
Yeah, I think the simple answer Jason is it is both you know you've been making a multiyear investments on both the product side.
First of all of both in the data center, but also going beyond the data center to a different roles and use cases.
And onshore and Chris Schmidt and Ashwin and the team have been building out our capacity both in the U S. Non internationally.
But I would say the third thing that's also clicking is.
Our best of breed product capability of its one thing to invest in it the customers are really resonating with the single O S cloud vision being a huge differentiator. We just crossed over 1000 cloud vision customers. Since we started shipping this product a few years ago. So I think the ability to not just build a great networks, but to operate it.
And for them to experience the quality of experience.
Has made it much more complete.
So I would say great products, a great go to market and then of high quality operation and experience.
Great. Thank you.
Thanks, Jason.
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yes, thanks for the question.
Just wanted to ask you about the verticals.
With regards to providers you guys beat that pretty solidly against our expectation so maybe a little bit more color. There and then cloud was a little bit weak.
And I'm just curious if you guys are still thinking you can grow cloud this year end.
Is it the single digit growth rate et cetera, and maybe you don't want to talk about that but just curious what your thoughts are on cloud growth. This year. Thanks.
Oh right right well as you know cloud has been tough for us in pretty volatile the.
Visibility on cloud Titans is very difficult last year on the other hand as we've been telling you we're starting to make good penetration in both tier two tier three service providers as well as our tier two cloud providers. So that has come up nicely to make up for some of the volatility not tightened.
I in terms of answering your question one of the things we felt in Q4. We did achieve was we were firing on all five verticals and on all three sectors, but because we had so much volatility and tightened.
Overall in the year, we were down and.
I'm told me you may want to add to that as debt in our view of it has no reflection on the strength and an intimacy of for preferred partnership with our cloud Titans.
But we did have some delays in the qualification of 400 gig and in spite of all of the new product. We had decisions took longer to happen I'm sure you want to comment on that sure.
Jason our work with the cloud Titan collaboration co development partnership is coming along fairly well.
Both for 400 gig as one of 200 gig. We believe we will start to see the is ramping second half of the year.
<unk>.
We believe we will do with the cloud for the cloud type of numbers for us are already loves. So obviously when I look at the same growth rate, but we believe our business will remain solid for them.
Okay.
Thank you for Nexgen.
Thank you for your go ahead I was going to say in the providers I don't know if you had any comment on that.
You know on the other providers.
Providers are doing well for us they tend to be seasonal it depends on when the providers investing so I think our specialty provider of some of them are coming back very strong and they had less investments of the prior year and some of them are also recognizing that they need to be of specialty cloud just of the name suggests.
And not just rely on the public cloud. So it's a segment we are feeling more optimistic about.
Great. Okay. Thanks for your story.
Thanks for your next question comes from Amit journey of any with Evercore. Your line is open.
You will see a fall off congrats on the really good quarter of given all of the craziness of yours had.
I used my question really is is there.
Think about the calendar 'twenty one guide of March I think we'll be up 20% to 23% of year over year and I think the full year guide is implied to be on 14 per cent.
Beyond the compares.
The dollar what why do you think the growth will decelerate as we go through the year, especially given the comments on the onshore made about 40 gig ramping up in the back half. Thank you.
Yeah, I think it's really all about kind of if you can look at the the trend from last year. I mean, it was really a year of two halves right you had some very constrained lower numbers in the first half and then obviously, we started to recover and exit the year with a very respectful.
M revenue top line numbers. So a lot of it has to do with the comps I think you have to think about it more this year just in terms of progress as we move through the year of the necessarily trying to target a particular year over year growth rate just because of how the the.
The volatility that we saw in 2020.
And just to add to that yes, we.
We are confident of our position the cloud Titans, but as you know of near term visibility is always better than our long term.
So we'll know better as we go quarter by quarter.
And I'm looking forward actually raising the forecast.
I'm going to ask those questions again.
I like I should just kind of mind. Thank you very much.
Your next question comes from the Jeff Quality Research your line is open.
Yes.
Yes.
Good afternoon. Thank you for taking the question I guess first for sure.
The judiciary or onshore could you help us understand she is.
Where you stand in the value proposition with Wi Fi and SD Wan and I bring that up because of lot of your peers in the market will make much of what they are up to in both of those particular categories.
And then I guess secondarily.
Either for you could you perhaps frame for us a bit about the magnitude of the.
Revenue left on the table in the in the fourth quarter and to what extent, that's a factor in your first quarter guidance as well.
Well sure Jeff we will try to address your two part question, we'll do our best so specific to Wi Fi. We view this as a very important component of our overall cognitive workspace. This portfolio, but we are not competing directly with you know of Cisco or Aruba or anybody else on the control of based traditional Wi Fi.
Architecture. So our approach Wi Fi has been very much like our approach to optics were not an optical vendor, but we view Wi Fi and optics as an accessory to provide that cognitive.
The inference AI driven architecture. So that you can seamlessly connect across wired and Wi Fi the cloud vision supports wired and Wi Fi, we have a unified edge that supports wired and Wi Fi Wi Fi will lead to migration net customers may need into LTE or <unk> of <unk>. So to us Wifi is almost a technology in the feature.
Not a market segment, but it's critical to bringing our wired wireless unified leaf spine architecture that the extended from the data center into the campus. So I think our competitors aren't looking at it more traditionally and we're looking at modern Workspaces for.
SD Wan.
Been very clear that we are not in that market space.
We look at some of the SD Wan attributes of feature and an extension of our Wan routing so but other than that we're not in that low low end market, where we're supplying branch offices to smbs like are the.
Hello cloud arm of Rocky Mount.
Thank you. Your next question comes from Sami Badri with Credit Suisse. Your line is open.
Alright. Thank you very much my question has more to do with the quantification of the campus switching for enterprise opportunity would you be able to give us kind of.
Quantified number or revenue run rate that you guys came in up as of.
For 2020 and a.
Sri I think for you have guided us to where you want to be at some point for.
From a run rate basis has that has that timeline accelerated whereas the contracted thank you.
So I mean, I think we told you we wanted to achieve at least the $100 million in 2020, and we certainly achieved that in fact, we exceeded it.
And our goal is to double that and the fear and I will give you more quantification as the year progresses.
We're on track for executing well.
I won't say, it's changed dramatically, obviously COVID-19 has slowed down some of the large campus decision, making but I think it's it's going to get better.
Got it thank you.
Your next question comes from Paul Silverstein with Cowen Your line is open.
Just a clarification of your question the clarification.
Tickets basic math fiscal for the.
The full year was less than 230 million, maybe meaningfully less but it certainly wasn't more because of the math rocky that'd be down over 40% I'm. Just wondering hoping you could confirm that if not false where it was and then the question would be for the rest of the team.
Can you talk about.
Your Australia.
And Florida markets.
Robert monitoring.
M automation et cetera.
Give us the breakdown what you appreciate the terms of the contribution of revenue, but any thoughts on what type of growth.
I suspect some of those average monitor.
So we're coming off of a century for ground zero adjusted.
The big switch acquisition, albeit the presence with monitoring for a while now but any sense you can give us for what type of growth you are looking at outside of the data sort of switching with as much granularity as to the stomach.
Yeah, Paul just to close up on the Facebook I mean, they were 16, 6% of revenue last year and other start down below 10% this year.
So I think that that gives you something to work with the right.
And part of it.
Well as you know the the two types of software that's the perpetual licenses, where we do do some monitoring with what they call dance data analyzer, that's built in with our switches and routers and then there's the subscription so unlike many of the peers, where not just converting perpetual into subscription of subscription based.
Software is really new markets, new markets like a big switch DANZ monitoring fabric cloud vision.
Obviously, you had for multi cloud of U S. Router and then we're very very excited about the recent acquisition of a weak security. So the revenue will trail of the the.
Subscription, but under obviously starting off a small number so it would be remiss, if we didn't grow double digits on those small numbers.
We expect to grow much faster than our 14% to 15% annual growth of that.
You described.
And we live in the third of course, I will leave it at that when we show our execution.
Any thoughts of what that could be of dollar contribution.
But what I did say is between eight care services software renewals and all of the software as we expect it to be in the 25% range looking ahead.
And again I think it's important to think of that as trends not exact revenue because revenue lags. The bookings. Thank you Paul the question.
And your next question comes from James Fish with Piper Sandler Your line is open.
Hey, guys. Congrats on the quarter, just actually wanted to go off of.
The question before I appreciate the year end disclosure, but I'm curious if you could actually talk about what did happen with your second largest historical customer on on why it was cut by somewhere around 50% even backing out the deferred haircut, it's still a pretty massive cut.
And related to this it would imply that given the cloud vertical exposure that you had an uptick of which I'm guessing was for Q4, not just the entire year, but that another large hyperscale or actually had had some strengthening of the knee. So just kind of curious if you can walk us through the cloud Titans vertical more specifically thank you.
Sure James first of all our cloud Titans Verde.
Verticals consists of only the major cloud scale customers right, we list them, but their usual suspects that you know so we do have other cloud Titan customers, Besides Microsoft and Facebook just to clarify your question.
Facebook we've discussed a lot in the past as you know they had a change in the product line, where the skipped the service cycle and we saw the loss of that especially in second late 2019 and also much of 2020. So we're looking forward to its coming back I'm sure do you want to add anything more to that.
Did you see that we.
<unk> been plenty of transplant with what happened there on the city of cycle changes the.
Plans for the financing so on and I think actually everything worked out of that stood at almost four quarters ago.
Yes.
Got it thanks.
Your next question will come from David <unk> with UBS. Your line is open.
Thanks, guys and.
Great quarter. So just maybe a quick follow up on the supply disruptions can you provide more detail around sort of the nature of the disruption you experienced what I mean by that is you know can you comment on sort of the magnitude of the impact in the quarter, what it might look like in the first quarter, maybe the sector, where youre seeing more of an exposure and maybe timing around your ability to recover those.
Last house thanks.
Yeah, I mean, I think look it's more of an extended lead time environment than it is anything else right and we're working very closely with customers to.
To make sure that we're not losing business right that we're actually planning.
Carefully with them and prioritizing what's most important to them. So I think we had hoped.
At the top of this time last quarter, we had hoped to see more of a recovery in the fourth quarter than we did just because we saw more COVID-19 related disruptions around the loss of manufacturing capacity on and off because of the COVID-19 activities are in different locations.
The slight change some of the suppliers into the supply chain saw that as well right thought of it just I don't know the that different to where we have been and as we head into Q1 I think we're in the similar position. So there's no way of disruption to the numbers I think coming out of them.
Changes in that environment we.
We just didn't make maybe as much progress as we would've liked right. We said, we're continuing to just stay close to customers and prioritize but we're also trying to make sure we don't lose business as part of that.
And I just wanted to acknowledge that the manufacturing team led by John Mccool is doing a really good job with line shows leadership for doing the best we can but we haven't recovered.
Yeah.
Your next question comes from SME Chatterji with J P. Morgan Your line is open.
Oh great.
Thanks for taking the question I guess Jeffrey.
You guys have strong revenue.
And that's the.
But you did mentioned camp of sales cycles of the property is still of a long, but let me focus on the.
The data center part of the enterprise I just wanted to check like how are you. What are you seeing in terms of drivers of growth there.
Is it from one of our land and expand with the existing customers that are you. If momentum are you seeing the in relation of the new logos on the core data center part of the enterprise customer.
Yeah actually that's a really good question many.
None of the enterprise customers are looking at us as the thought leader on how they should proceed with the workloads in the cloud. So I think by virtue of being consultative with them. What we're finding is some workloads move to the cloud, but many of them end up creating more data center capability that they need for some of their premise.
Workloads. So this enterprise number that we are sharing absolutely includes more than campus. It includes existing customers land and expand as well as new logos. We had one of our best ever of quarters on not only new customer logos that million dollar customers. So you can imagine that wasn't just campus and so there was a lot of data center in there.
Thank you.
And from some of your next question comes from lots of hard match them with M. K M Partners. Your line is open.
Thank you for taking my question I had a big picture question on the architectures of the often hear from the cloud Hyperscale operators.
Talking about 800 gig of using silicon photonics to expand the switch.
In order to reduce the number of layers in the.
Data centers networks, how should we think about debt impacting your revenue outlook from new hyperscale customer should be achieved extending the range of architecture that they are talking about today.
Yeah, just before I hand, it to onshore is perfect to answer. This we believe the Arista is number one today in both hundred gig and 400 gig, including 200 right on the 100 gig market is easily 40 times bigger than the 400 gig and anybody planning 800 gig is typically the doing so in a much longer term, especially for <unk>.
Optics right. So in general if you just step back and look at 400 gig the clause have shifted out by a year and we expect production mainly in the second half. So we're still in the world of 100 204 hundred gig I believe this year, but actually do you have some more color absolutely.
Bob Cushing is low.
On the point, but it is the part of a futuristic discussion because this is not something that sort of hop into the next one or two years.
Customers always likes to collapse lift from the network because of that a significant saving on cost and power.
For the same time their business needs would like larger clusters, which of the adding blue.
And as a result of that the other balance button.
They know our largest switch.
Can support 230 ton of bits of pulpwood in a simple switch for.
Some of these large block items, that's still not big enough.
Like bigger to stay one more line of the network for.
The constantly engaged into the discussion.
As we move from 50 gig <unk>, which as of yet to be 400 gig close to 100 gig facilities.
Of these architecture of points will come up but I think by the end of this really it may be even 224 gig cities the amount that's at least six years out.
Hi.
The predict that and that's been I think you'll see some of these changes.
That's very visionary.
Thank you our next.
Your next question comes from Simon Leopold with Raymond James Your line is open.
Thanks for taking the question I wanted to see if you could touch on the routing use cases, you mentioned in the prepared remarks.
The expansion of feature sets and I appreciate that there's a bit of of spectrum between switching and routing, but if you could give us a little bit more color in terms of.
The revenue that this is contributing as well as your outlook for the growth in these maybe wide area network and routing functional cases within.
Your data center deployments.
Sure.
And I think as you know this is a very important part of the adjacency and I would sort of describe our success in routing in three areas. They're very specific use cases and service providers, we have been doing very well exactly, especially with routing and residential edge and bringing bringing that edge capability for mobile edge or.
<unk> edge et cetera.
Then there's the second which is an extension of our data center, where we go into peering points.
And this could be cloud providers, but they could also be enterprises in conjunction with service providers and then there's a third which is building the telco cloud itself, where many people are looking many customers are looking to build.
The same cloud like principles inside their service provider network and shouldn't you want to add something north of that.
It pretty much started for everything out of the data center of the cloud connecting to the backbone impactful to the internet speeds of the connection points and then to the service providers on day of customers I think the actually doing fairly well marching along that journey.
A lot of that has been done the stood a lot more to be done, but I think the debate will keep bringing up the pool.
Any quantification you can offer.
As we said in the opening remarks I'll go list together with campus for this adjacent sector to be 10% to 15% of our business looking forward.
And also remember, where we struggled a little bit with how the count routing.
So we try to be very disciplined about counting routing only when does routing. So if it's combined with switching it still goes into core.
Thanks for that.
Thank you. Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Yeah. Thanks for taking the question and also congratulations on the quarter.
Apologize to go back to this but in the context of kind of your guidance and the discussion around your second largest customer I'm just curious of how you thought about you know the.
The move to the next generation server cycle with ice Lake in AMD at the Milan.
And also in the context of of the second largest customer given the Capex guide it looks like it's up about 40% year over year.
How did you factor that into your outlook commentary for the full year or is that something that you consider hey, let's see if this just capex guide comes to fruition of that.
Rather take a conservative view on how that filters into the rest of the business just curious of how you thought about the R&R.
I think that's an excellent question given we got burnt the last time.
On some of the forecasts and.
We do think that.
We are going to take a much more pragmatic view and our view is really that it's a multiyear of spend not just in 2021.
So right.
Clearly going to be some good capex improvement from 2020 to 2021, specifically, but we're not counting it all for this year.
And just to be clear remind me again of how you how your business trails kind of server cycle again.
That's a good question answer line just describe that other than what I would see him to not try to coordinate the short term to any cloud Titan spend because they can spend the capex in many different ways and the Tony correlates to our business from the long term nature of the shutdown.
And typically there's a lag of a few quarters right. So the capex can be building cooling air conditioning server storage before we think of the networks.
That's helpful. Thank you very much.
I'm sorry, Thank you are.
Your next question comes from Tim Long with Barclays. Your line is open.
Thank you.
Hey, guys just wanted if I could could you talk a little bit about when we're starting to think about these adjacencies and in the service and software of lines.
How are you thinking about getting to those growth out of those areas and those the splits of the business that you talked about.
As far as the kind of <unk>.
Cross selling the core portfolio and the existing customers I would I would assume switched the routing is pretty synergistic, but could you talk a little bit about how much youre expecting to cross sell into into the new campus customers, new new software of customers or what might just might be some new growth areas outside of <unk>.
For the core products are really strong thank you.
Yeah, No. That's a really good question I think we will rely very much on our sales force and our strength with the existing customers to achieve adjacency in campus and the same is true for routing as well, it's a very natural way to go because it's the directed sales for large big bets in segments of customers.
However, we will complement that so while on Adjacencies will rely on our 7000 or more customers in.
In the case of campus the spending a lot of time and energy on how the augment that with channels and partner distribution.
And in the case of software and subscription services, it's not always connected so onshore and the team of putting a fair amount of effort on not really just hiring sales people, but creating systems engineering expertise. So building debt expertise for Dms building that for a week is an import.
Aspect because often they maybe the same customer, but they may be of different decision maker.
So that go to market is a little more nuance for the software and subscription but somewhat similar for the adjacency.
Okay, great. Thank you.
Thanks, Tim.
Your next question comes from Alex Henderson with Needham Your line is open.
Thank you very much.
Was hoping you could talk a little bit about the emergence of <unk>.
<unk> infrastructure.
The.
The ICD pipelining of micro services edge compute.
How that's going to change the traffic patterns and purchasing of of your products over time.
Particularly around the implications for them.
The the service mesh at the edge.
I would think that the.
You're you've been talking about points from the cloud.
The places in the cloud true for a really long time in the architectural change.
Effectively makes individuals' end application simply points from the cloud if you play out that the strategy and therefore data line.
Protection becomes critical so how are you thinking about.
Those aspects of the.
The you know the the emergence and the adoption of the Kubernetes Michael.
The micro services, CIC pipelining and the like impacting your business.
I don't know if can still on the line to address this in more detail, but I think in general we believe of data driven network coming to the edge, whether the sources of multi cloud wireless.
<unk> ran kubernetes et cetera is very relevant to the way we develop of software can you want to add a little more.
Yeah sure no I think we're very well aware of those directions, and we're maximizing our relevance there and of course.
All of ways. The first is.
What's required for the.
The whole computing model.
The scale out of your application horizontally across kubernetes is a uniformed physical networking fabric judy's low latency from physical alleged the physical edge, regardless of where the kubernetes clusters are deployed.
And you need to be able to deploy them in a lot of different places like you mentioned with edge compute also some enterprises need to be on premises for various reasons to want the same type of application architecture because of using the cloud as well.
So there is a need to have the same sort of repeatable.
For all out process of the underlying infrastructure for the kubernetes based environments, whether it's on from edge compute or in the cloud and that's what we've achieved was called vision studios. So I don't know if we've talked about this much in the context of the earnings call.
The collision studios enables us to the.
Both of our customers to create automation frameworks. So they can easily spin up new new.
New fabric deployments new pods.
Absolutely the supporting communities in mind.
And this is probably a great topic for analyst day, Alex, but the stay tuned for more here.
I appreciate the answer thank you.
Thank God.
Your next question comes from Jon Lopez with vertical group. Your line is open.
Okay.
Hey, Thanks, so much Peter I was wondering if you could just.
Talk a second about deferred.
The short term of deferred was like really really strong best in multiple years.
I'm wondering what was in that whether of wake had any influence on that and then I think within that you talked about perhaps some product deferred in there and I'm. Just wondering if you could talk to us about maybe when that layers in so we don't get tripped up which happened a couple of years back so sorry for that but can you just maybe discuss all of those things quickly.
I mean, the driver in the uptick.
In Q4 was really around services and services renewals for item in Q4 of the Big <unk>.
Typically a fairly large renewal quarter and we had some we had some larger customers.
Customers renew.
The our period of renewals of service that's by far of the biggest driver there is a little bit of product, but it is small.
Just pure new new customer new product stuff, but that's much much smaller part of it right. It's really more of the services and the services and awake is too small and too early to call that number.
Yeah.
Got you okay. Thanks for the help thanks, Tom Thanks for your.
Our next question comes from George Notter with Jefferies. Your line is open.
Hi.
For George Thanks, a lot for the question just wanted to get your thoughts on how you see customers deploying 400 gig and do you think there's the opportunity to upgrade some of the 100 gig installed base to 400 gig in the early stages, where much of the initial for them to big ramp be coming from net new for growth.
Well I think.
George I've always said this is a strong correlation, especially with our cloud customers on.
104 hundred gig being tied as we move through our 400 gig sign you still need a lot of 100 gig tributary and in the past that's.
Besides COVID-19 we've had we.
We haven't had effective available optics I think all of that is shifting.
<unk> shifted 400 gig by year, but this is this is the year, we really see the 400 gig will be deployed especially in the second half just to give this in context for a while we have over 7000 customers. We have about 75 customers already deploying 400 gig in some fashion. So it's about 1% of less than a percentage of our <unk>.
The good faith and is still 100 gig will continue to be relevant as the augment with 400 gig both in our high end cloud and enterprise and service provider.
Okay.
Your next question comes from Ben Bolan with Cleveland Research. Your line is open.
Uh huh.
Yeah. Good afternoon. Thank you for taking the question.
Could you address a little bit more about the recurring software and service revenue opportunity.
Specifically I'd be interested in what types of customers and verticals do you see is really driving that that transition do you have opportunities to take.
The gain traction there with your Hyperscale accounts.
And then <unk>.
Any high level thoughts on it.
Contract terms average length or invoice methodology it would be helpful. Thanks.
Sure Ben I think the biggest and most attractive verticals for the software subscription would be enterprise and financials.
Love to get it into others as well, but these would be the two big areas of target and there's clearly a lot of verticals in the sub verticals.
And we're already seeing a lot of interest in.
The financial markets for the software and subscription and I expect we'll see them anymore.
And a lot of this is bill upfront.
The two to three year type kind of <unk>.
M contract term it could I can usually we're collecting kind of for billing and collecting cash upfront. So far I mean that may change over time, depending on the size of the customer, but so far that's kind of been the model.
Thank you.
Thanks.
Your last question comes from Jim Suva with Citigroup Research Your line is open.
Thank you and my sincere congratulations on good results and outlook in your prepared remarks, I think I think I heard some number of store out like 36, 36, 28% and I think that was for the vertical mix is without more for the year out for a long long long term.
And the reason I'm asking the question is with the guidance of I think you said up 12% for next year and it's off easy comp I'm, just trying to figure out which of those three markets are seeing the most strength because if I look at those percentage of it almost seems like it's a lot coming from service providers that may be on bridging that incorrectly. Thank you.
Yeah, Jim Thank you for the good wishes.
So the the trends are not exact revenue for Q4, but it is our best indicator of how we think the year ahead will rollout. So we will keep updating it every every quarter to give you an idea of how it's rolling out, but how it's actually turning out so the three sectors in that right. The.
For our sector as cloud Titans, because it's big enough for you just have to look at that number and the individual of others. The second is enterprise and financials together, which is the other 36 and the third of specialty cloud and service providers together.
If you look at Q4, we believe all of the three sectors contributed strongly to the number.
And.
If you look ahead, obviously is the answer is pointed out of the cloud Titans are vital to our growth, but they are operating off of large base. So we should be able to grow faster than the other sectors and still carry a large number of cloud Titan.
Thank you for the details and congratulations thank.
Thank you so much. Thanks, Jim This concludes the Arista Q for 2020 earnings call. We have posted a presentation, which provides additional information, which you can access on the investors section of our website. Thank you for joining us today.
Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.
Okay.
[music].
Sure.
[music].