Q1 2021 Arista Networks Inc Earnings Call
Welcome to the the first quarter of 2021, a redskin networks financial results earnings conference call. During the call all participants won't be in the listen only mode. After the presentation for conduct a question and answer session instructions will be provided at that time if of any time for the conference you need to reach the operator, Please press star followed.
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For a reminder of this conference is being reported and will be available for replay from the Investor Relations section of the rest of the website called on this call I will not from the call over to Mister Curtis the T. A b P corporate Investor development, Sir you need again.
Thank you operator, good afternoon, everyone and thank you for joining US with me on today's college, Israel, well most of the networks, President and Chief Executive Officer, and eat of Brennan Arista Chief Financial Officer. This afternoon arrest of the networks issued a press release announcing the results of the physical first quarter ending March 31st 2000.
21.
He would like a copy of the release you can access it online on our website.
During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the second quarter of the 2021 fiscal year longer term financial outlooks for 2021 of them beyond our total addressable market and strategy for addressing these market opportunities the potential impact of COVID-19 nine.
Teen on our business and product innovation.
And the benefits of recent acquisitions, which are subject to the risks and uncertainties that we will discuss in detail on our documents filed with the SEC specifically in our most recent for them 10-Q, and form 10-K, and which could cause actual results to differ of materially from those anticipated by the statements. These forward looking statements as of today.
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<unk> <unk>. These are 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 the statements that for this call also please note that certain financial measures. We use on this call are expressed in a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations for.
For the non-GAAP financial measures to get financial measures and our earnings press release with that I will turn the call over to J Shrek.
Thank you Curtis. Thank you everyone for joining us this afternoon for our first quarter of 2021 earnings call. I Hope you are all being safe and vaccinated in these pandemic time.
And it was strawberry, especially deeply concerned by the heightened COVID-19 crisis in India, we're taking steps to assist our local teams as best we can and no Dr.
That the Q1 21 step the specifics we deliver of revenue as of 667 6 million for the quarter with of non-GAAP earnings per share of $2.50.
<unk> services E O S renewals and subscription software contributed approximately 21.4% of the revenue on non-GAAP gross margin at $64 seven per cent was influenced by software and services mix as well as higher enterprise and cloud tightened contributions for the quarter. We continued.
The experienced good customer traction and growth with new customer logos and increasing million dollar customers in the end of prices.
In the corner cloud Titans was the largest vertical enterprise was of close second followed by financial and specialty cloud providers tight at the place and service providers at fourth place and.
International contribution of 25% and the America, we're at 75% of the quarter.
In terms of the sector and product line to be will report the specifics of annually. They are consistent with the range as we have already provided in our investor relations deck.
No need of eight a cloud Titans on in the 35% to 39% range. The enterprises are on the 35% to 39% of range also and the providers in the 25% to 30% range.
The product line forecast annually expect it to be 60% to 65% for core data center, 10% to 15% for adjacent to campus on voting and 20% to 25% of the software and services.
In light of the industry, why it's chip chip and supply chain shortages I'd like to shed more light on this topic, especially as it pertains to the risk of.
First and foremost we are pleased with the healthy demand to be experiencing and Arista is resonating well with customers and prospects.
They are driving unlucky of growth projections.
We share of preferred status with many of our top hundred and more customized and work intimately with them.
However, the supply chain has never been so constrained in the rest of history.
To put this in prospect of we now have to plan for many components that 52 weekly Titans.
COVID-19 has resulted in subsequent and wait for shortages and reduce the assembly capacity a contract manufacturers of experienced significant volatility due to country the country specific COVID-19 order.
Naturally, but working more closely the Doc strategic suppliers to improve planning on delivery.
From a demand on visibility Bill has improved in the past few months, we are working with our customers to understand the timing of the deployment neat we do not believe at this time that our customers of preordering. However, we do thank the of exercising prudent planning for the second half of 2021 and even into 2022 with the.
This is a backdrop, we believe supply chain will remain of pain point for the balance of this year as of as the of all of these shortages. Therefore of risk is taking decisive steps to invest and increase the inventory and manufacturing capacity.
I am not for not for my cost of why customers, especially the risk averse enterprises choose the risk.
The rest is recent the enterprise momentum spends many vertical markets and includes the sweet of data center campus routing and software products.
Customize the aligned with our software driven data centric approach to building that cloud architecture, the cloud operations and the cloud experience.
Okay part of oriented price traction is addressing the C. I O pinpoints to build the cloud first and of data driven network spanning client to cloud networking.
Historically, despite functions and datasets into the routers security switches on network management functions can now the integrated by Arista into a seamless network architecture with program the ability state on AI driven characteristics let.
Let me try to illustrate a few enterprise examples to highlight this.
A recent data side of customer when was it the hospitality sector.
They chose us because of a single E O of software image across multiple leaves and spine platforms using cloud vision for automation for zero touch position at the provisioning easy upgrades telemetry in compliance was the only feasible because of Arista of.
The risk of deep off of Spice, which is also enhance the availability.
A second example isn't the international of retail customer for data center in routing application.
A million dollar cost of my this is based on EVP on VX land modern the spine designs and once again leveraged cloud vision and he asks for improved automation Programmability and change control.
Net ops on Dev ops automation with ansible integration with another key deliverable for the distribution center.
A third for enterprise when was on campus in Europe. The 720 X piece of differentiated as of Poa platform with multi get capability across campus Workspaces for both the chassis and one of our you form factors.
The 70 50 C X finance line brought low apart.
Low footprint and high density as an alternative to the chassis.
The campus customer also implemented unified wired and Wifi called the cognitive capabilities on display the key role.
Migrating from manual the operations once again cloud vision with streaming telemetry was a key factor.
And all of the three examples of it with some common themes.
The customer was very fatigued with the legacy issues and embraced are you a software and a cloud vision esky differentiate isn't advantages.
They also have much confidence in the risk of support quality and continued innovation.
Okay and based on strategy and built upon a differentiate at the state driven and programmable software foundation. The deliver all cognate of five eighth of agility availability analytics automation and AI and API driven architectures.
Switching to a copy of the cloud tightened we of please do also state that we now see increased visibility across the 10 gig sorry hundred gig 200 gig and 400 gig demand from a cloud of typing customers.
Well all of this business can be volatile we have enjoyed the preferred partnership status with many of them deploying us and diverse use cases and deployment consistent with the overall Capex reported recently.
I'd like to invite Arsenal, our chief operating officer to elaborate more on this awesome. Thank you just for Ya.
We are driving Mixtion recent cloud networking architectures for compute storage.
The data center interconnect on.
Line.
These designs continue to improve resiliency scale of.
Efficiencies for our customers.
The much talked about.
For 100 gig upgrade cycle.
We have been seeing the Nixon hundred 204 hundred gig upgrade cycle is expected to start the second half of the shoe.
The bill the ability of the <unk> optics Mexican Crimson on software features to monitor. These optical links is also well aligned in this timeframe.
While our customers have always wanted multi window environments.
We remain the preferred partner on continue to get off for sure.
The amount for our products and the flow tightened Sigma is healthier than what we expected of quarterly go for.
Talk to you just for Ya.
Thank you on show well said and so for all of the reason for Oxford, just mentioned beyond more constructive on the cloud tightened demand and the second half of 2021, although shipments made trail do are increasingly times.
So in summary, Ah client to cloud networking strategy unified silo datasets consistently we are at the cusp of of network transformation, resulting in growth and diversification across both market sector and product lines in the future.
Will now pass it over to our CFO, either Brendan for more financial specifics yeah. Thanks for sharing and good afternoon. This analysis of our queue on resolved on our guidance for Q2 2021 based on non-GAAP and excludes on non-cash stock based compensation impacts certain acquisition related charges another non-recurring items.
For the reconciliation of are selected GAAP to non-GAAP results as provided in our earnings release.
Total revenues in Q1, with the $667.6 million up 27.6% year over year, and well above the upper end of our guidance of $630 million to $650 million shipped.
<unk> remained somewhat constrained in the period as we continued to carefully navigated industrialized supply chain constraints and COVID-19 related disruptions.
Services and subscription software contributed approximately 21.4% of revenue in the first quarter.
International revenue for the quarter came in at 165 7 million or 25 per cent of total revenue down slightly from 26% of the fourth quarter.
The shift and geographical mix was largely due to the location of deployment of larger kind of tightened and specialty cloud customers.
Overall gross margin in Q1 was $64 seven per cent above the mid point of our guidance of approximately 63% to 65% reflecting of balanced cuffed customer of mix for the corner.
Bob waiting expenses for the corner, where of $180 9 million of $27 one per cent of revenue up from last quarter at of $178 $1 million.
R&D spending came in as 110 million are of 12 or $16 five per cent of revenue consistent with the last quarter at $110 $2 million. This for.
Reflected increased employee of are they the cough offset by law of new product introduction spending in the period.
Sales and marketing expense of $59.5 million or $8 nine per cent of revenue up.
From $54 9 million last quarter with the increased variable compensation and other head calculated charges.
As a reminder, we continue the benefits of lower coven for the age of travel and marketing expenses.
Our G&A costs come in at 11.4 million of 1.7 per cent of revenue down for the last quarter of approximately 13 million acting normal for the corner compliance related activities.
Are operating income for the quarter was $251.3 million or 37, 6% of revenue.
Other income of an expense for the corner of with a favorable of 1.6 million and are effective tax rate was approximately 21.4% of.
Ah the income and expense include the 2 million of of interest income offset by some unfavorable FX amount of.
This result of net income for the quarter of of $198 8 million of 29.8 per cent of revenue.
I do the the show number was $79 6 million shares resulting in of diluted the earnings per share number for the quarter of $2.50 off of approximately 23, 8% from the prior year.
Now trying to the balance sheet cash cash equivalent of investments end of the year at approximately $3 billion.
We repurchased of $101 million from a commie stuff during the first quarter at an average price of $276 per share.
As a reminder, we've now repurchase $763 million or three 6 million chairs against our board of authorization to repurchase $1 billion worth of shares of over three years commencing in Q2 19, we will continue to execute opportunistically against the romantic mandate.
Turning to operational cash performance for the first quarter, we generate of $254.7 million of cash from operations of the period and for.
Checking solid net income performance of continues investments in inventory and supply chain.
Dsos come in at 51 day is down from 55 days on queue for effect on the linearity of billing the period infant.
<unk> turns of one eight times consistent with the last quarter.
Inventory increased of $483 to midnight on the quarter up from $480 million of the prior period as we continue to buffer of certain components of products.
Our total deferred revenue balance for $720 million up from 651 million in queue for.
Approximately 40 million of this increase related to product deferred revenue with acceptance causes for new product across various customers in the sectors.
The remainder of of the increase in deferred revenue related to the service renewal of activity and is directly linked to the timing I'm term of service renewals, which can vary on a quarter by quarter of basis.
Looking forward, we expect Twenty-twenty wanted to be a year of significant new product introductions.
Combined with the healthy new customer acquisition race and extended use cases with existing customers the.
These trends in conjunction with reduced levels of upfront and person testing may result in increased customer specific acceptance clauses and increased volatility and our product deferred revenue amount of.
Sounds payable days for 52 days down from 54 days in queue for reflect on the timing of inventory of seats in payments capital expenditures for the quarter for $5 for 1 million.
Now turning to our outlook for the second quarter and beyond we saw healthy demand across all of our market segments of the first quarter. These.
These demand trends combined with favorable hero for your comparative continue to support and improving top line growth made for the year.
That said, we still expect some deceleration and quarterly year over year of growth rates as we move through the year given the top line recovery experienced in the second half of 2020.
On the gross margin from we will continue to be interested are all for all of gross margin outlook of 63% to 65% the customer makes remaining the key driver.
Turning to spending and investment will remain committed to growing on investments in R&D to support innovation across the business.
And sales and marketing to support or go to market expansion.
Finally, our outlook discussed above and our guidance for queue to the effects are current understanding of the COVID-19, and its impact on our business of supply chain.
This is however, an inherently uncertain of situations and we will need to continue to monitor and attempt to mitigate any challenges at the situation on full.
With all of this is the backdrop our guidance for the second quarter, which is based on non-GAAP results and excludes any non-cash stock based compensation impact another non-recurring items is as follows.
The revenues of approximately 675 to 695 million gross margin of 60, 365% and operating margin for approximately 37 per cent.
Are effective tax rate is expected to be approximately 21.9 per cent, but to do the chairs of approximately $79.7 million I will now turn the call over to Curtis first. Thank you Eater, we are now going to move to the Q&A portion of the Arista earnings call due to time constraints I'd like to request that everyone. Please limit themselves to a simple question. Thank you.
For your understanding and the operator, please take it away.
We will not be getting the 20 portion of of the rest of the earnings call in order to ask the question. During this time can be pressed stars and the number one on your telephone keypad, if you'd like to watch on your question press. The pound key we ask that you pick up the handset the for asking questions in order to ensure optimal sound quality. Your first question comes from San the bedroom with credit.
Sweet your line is open.
Hi, Thank you so much for the question of congratulations on such a solid quarter and got the list.
So I wanted to just go back for something conscious.
The guarding the expectations.
All for Hyperscale like Coltrane better today than it was just three months ago on children and maybe J C. Could you guys just walk us through kind of what you saw from your customers as far as planning and and filled out plans for what helped you reached that conclusion and was it broad based on the cross all major customers or for maybe two or three.
Scandalous for is how.
How much the wants to bring all the time.
Sure the semi.
For quite some time this from this talk about the phone on the big upgrade cycle on we've been saying for the most to you started to take some time.
The what is the always knew it would be coming now we can see customers doing the pilot ronson. So on on getting ready for for the can talk so that's really what gives us the confidence.
It's not much more than that.
Two of she mentioned, there's plenty of issues on the supply chain for it and so on that all of the customers have to work through as well. So it's really more of the planning stages right no.
We told me of getting better than before.
And I just wanted to add Sammy that of.
You know I'm sure the and his team make sure that our status of the cloud Titans is not just the regular vendor. So the emphasis on the preferred partnership and the intimacy on their deployments there needs the priority the products. The use cases, the different permutations and combinations has allowed us to go from you know.
The strength of if you will.
Alright, Thanks for me.
Your next question comes from Jason either with William Blurry. Your line is open.
Yeah. Thank you first of all I wanted to.
The <unk> the supply chain team deserves a raise.
[laughter] I I'll take that under advisement, and then I get the lead times down on and thank you.
But my question I guess it was on the enterprise started the business and.
Two of ramped up your enterprise efforts over the last few years.
You know what are some learnings the that you've you've come away with where do you feel like you can do better maybe.
And the particular vertical customer segment of Orange or geography.
I think the learnings are a total of three items. The first thing I would say is.
It just takes longer it's not instant gratification likely of often had with dark cloud providers or even early enterprise decisionmaker. So investments we made two years ago I the fruits of the neighbors, what we're seeing now so that's one point. The second thing is our product line is more diverse before we were only selling data center.
And the expansion from client to cloud, including the our software products are big switch D. M. S are awake security Ah routing on campus <unk>.
Most importantly, clouds vision, which is the epicentre of all of their on manual to automation migration.
I think it has been a huge advantage because the really modernise. The network until then they will measure really the migration was impossible because it was all inside of the different operating system. So another big learning is the product line diversity combined with the relationship for you have formed over the last couple of years I think has been key I know.
And and also the way it my third point would be COVID-19.
COVID-19 itself COVID-19 has been an equalizer for Arista with dominant and a price competitors.
It has given our customers a chance to plan and think about alternatives and I think we've had some advantage I'm disadvantage with that the advantages.
More willing to work with the the rest of the disadvantages they can't physically come and see us and do physical talk so we've had to move the virtually.
Alright.
Thank you thank.
Your next question comes from Paul Silverstein was counting company on your line is open.
That's true true I want to congratulate you personally on your new grandchild.
Thank you. Thank you so much he's he's an amount of him.
[laughter].
<unk> wishing you on my Shopping's.
Yeah, we're just supposed to the business can you give some more insight on the two of from customer markets going back to your telecom it's.
Was that the most of.
Sue Microsoft interest for softball, I'm gonna.
Any of them. So that you can sure in terms of how much of of the strength of you're looking at for how much of an improvement the specific to those two in the house.
Most of them from what you've been called times. There's also some of the other folks and also with the structure of the customer seconds. What are you Sir.
Right. Okay on should help me out here for the country hold on I have tightened customer base is a very small sample size of five to seven customers right. So.
The two of you mentioned, Microsoft on Facebook continue to be very relevant very important if we don't do well with them the others can't quite make up the difference. So you need to know that the intimacy with them the strategic nature of our joint partnership is very important and they definitely contributed in Q1.
You said that the onshore of of the team have been working with other cloud guidance they are getting healthier.
And in Q1 on throughout 2021 people feel debt contributions and design wins.
Specifically, one or two of them on show you want to say anything more than half of it that's true.
So we mentioned this call is that of previous ones were willing of multiple list of of the metal.
And for the the the center as well as outside the data centre, especially run on the related areas for these customers. So that's giving us an opportunity to expand on broke beyond very book.
But having said that didn't show specific numbers I think everyone should note, but they're always on so to any of these with multiple talked us of related with the upgrade cycles from putting some we don't control it on like the availability of optics and all of you remember what happened in the Hunter gig cycle. So the comments of really about the of feeling better the all of the elements of adding up of my sleep to stop the.
Great cycle in Silicon hub.
Thank you aren't Ya.
For the next question comes from Jim to go with sitting on your line is open.
Thank you and also a big congratulations to you and everyone. There <unk>.
You beat purely I mean, very very materially on your sales and a lot of other companies or you know, citing component shortages. So you got the components, which is great for on the end market perspective, or your vehicles, which one of the biggest it was at cloud service right of enterprise It really drove even above your expect.
Patients the stronger sales as well as the outlook. Thank you.
Jim Thank you and I really Wanna give kudos to onshore quick Schmidt ashwin in the entire sales team for beating materially.
We can only beat materially if we if we drive sales materially and then of course, we have to ship.
One of the things you might of hard for me to the statements is all of five vertical perform very very well in Q1.
So they were all up if.
If I had to highlight which ones were up more I would go by the ratings I would say both cloud Titans and the enterprise definitely made the contribution and made the mark and especially combined with the new logo acquisitions and increase in multi.
Million dollar customers I think those two stood out but all five of very good.
Alright.
Thanks, Jim.
Okay. Your next question comes from the Hackneyed him within Cam Partners. Your line is open.
Oh, Thank you for <unk> for taking my question in.
In terms of any impact on the quarter of from component of shortages or were you able to 200 per cent of your day ma'am.
The.
The question what can help of bold.
Yeah, I think that there's there's no doubt that we're facing extended lead times right.
Clearly customers would like to have the sooner than we would like to give it to them sooner, but we are facing extensively. So I think it's hard to quantify that which I know everybody would like us to do but I mean, we are definitely the operating under the constrained kind of supply environment with with long anytime.
Alright. So my question on your book visibility and clock Titans.
If I if I'm not mistaken your largest cloud tightened customer of Microsoft is talking about building 50 to 100 do the senators each year for the foreseeable future for the entry 10, new countries. This you have a low.
So why is just kind of like it's like you know positive for why not a significantly book look from from New club type of customer the segment of low given the substantial.
You know it for such a build out the day or talking about.
That would be.
Expecting he likes to be too those orders of those trends since you've given the long the times I'll be sure to do so is it improved visit Bill you can quantify the how much open the true visibility you'll see.
Yeah. So for I'll take the question normally we get one to two quarter visibility. This time you are absolutely right. We now have visibility throughout 2021, and perhaps some of that believe an extended to 2022 right on channel So and it's exactly for the reasons you say that we now have a longer term visibility that they are.
Sure the desk on the future plans now having said that as you know we're not gonna take that to the bank. There's still an awful lot of execution on that part and the up hard to turn that visibility into actual results they've got to build the data centers. They go to acquire the compute the storage the power of the cooling you name it and we got to also execute so why don't you of depth.
Currently detecting an optimistic tone on a more upbeat view you never know thanks for that change, but definitely we feel like we have a better I into more than the typical want the two quarters.
Thanks for the Hutch.
Your next question comes from David Both would you be at your line is open.
Thank you and the one for taking the question and I just had a question about the the supply chain of inventory. If maybe you can get a little bit deeper. So you know obviously she I'd look at your inventory of positioned it's basically flat sequentially.
Hopefully interpret that in terms of your commentary of what you're spending capital.
For your manufacturing increase inventory, when we should be expecting a fairly meaningful way and check out of the year from some of the Titans and does your inventory piece of.
At least not getting the guidance give us the central where you think three cute might be at this point.
Yeah. So I think if you look at the inventory balance kind of let's say scars of the beginning of the year and look at look at it kind of the beginning of of last year. All the way through for you. One of this year I mean, it has been growing each quarter and if you look at the mix of that as you'd expect the growth has been more on the components on the raw materials side and then we've been using the finished good pretty much as fast.
As we can right the other place that you'll see when we filed the queue, you'll see purchase of commitments are up to like $750 million at the end of Q1, which is as high as it has been significantly higher than what it's been historically and that was putting putting commitments on the table with various suppliers across the supply chain to make sure that supply comes in.
So we are kind of pushing on all on all fronts and being a grasp the the new products. So they have a lower risk profile whenever you're saying no risk, but they have an enormous profile. So we are being of grasp of in terms of.
The funding inventory and supply chain.
And can you eat I don't have the cute in front of me can you tell us what the purchase of commitment <unk> would be sort of on a year over year basis for the Cuba's file of what was it last year at this point Oh I do have to say the Andy significantly lower yeah. So I think of you take a look at and then we're gonna find of later today, so you'll see it.
But where I'm at significantly higher we haven't been of that round historically.
The understood specialist will find the queue.
Thanks for your next question comes from Simon Leopold with Raymond change the line is open.
Great. Thanks for for taking the question last quarter, you were kind enough to indicate that you are comfortable with the consensus view that 2021 could grow 15% that seems like a pretty low bar and I I'm not ignoring the the comment you you offered about the celebration on the back half of the year, but I I would like.
To get an update cause you certainly sound more upbeat we've had no two quarters <unk>.
In terms of March in the June guide of high 20 growth what are you thinking for the full year at this point. Thank you.
So Simon I Love you to answer the question, but the definitely thinking it'll be higher than 15% right right. I mean, I think Simon without trying to guide the ear every corner, which is not kind of you know our normal practice.
I mean, obviously, we've given the use some upside in Q1, there's upside on the guide.
I think we can.
We continue to see some growth there, but don't forget the comparative from and if you look on the year over year basis. So I think you need to think about it more of a quarterly and sequentially from the quarters than trying to do it kind of year over year from here on out because there was a significant step up and revenue between Q2 20 on two 320. So just keep that in mind kind of think obviously, where we've show on your some improvement.
I think we're feeling better, but it's still out of incremental quantity growth rate and so I think is the right way to to kind of.
Just to clarify other than the supply chain are there other obstacles, we should be considering when we think about the seasonal patterns sequential patterns.
No I mean, I think the supply chain is probably the biggest the biggest constraint alright, yeah. I think we've indicated that demand was healthy.
So great. Thank you of good fulfill of more of it will be feeling a lot better.
Alright, thank you.
<unk>.
Your next question comes from Rod Hall with Goldman Sachs. The line is open.
Yeah. Thanks for the question I wanted to go back to the cloud Titans and just kind of of the trajectory there of the quarter.
Tempted.
Significantly improved kind of of orders that did the project. What's your revenue so you're going to look like in March So January and February where it's sort of okay, but the march hooked up quite a bit so I'm curious what your.
Which are linearity was in terms of the borders for cloud Titans and is that one of the things that it gives you so much more confidence as you look into the back end of the year.
Oh right so.
Normally we would of experienced seasonality of Q1 right, but this Q1, we didn't have the seasonality nodded. We have this linearity issues, we were pretty consistent and cloud of tightened so for that matter of our entire customer base all of articles where linear of January February and March so it felt pretty good.
This as opposed to the COVID-19 situation, but because they would know whether storms or impact of Chinese new year on any of the normal things. We have we didn't have the normal seasonal issues in January and February.
And then the rug for all.
The.
Rather than go for all of the vertical.
Yes.
Okay.
Please initial force.
The rug as you know the.
The cloud Titans are lumpy by the nature of trying to win trying to measure of them on a month I'm on base of just one book.
It's really comes from the timing of when they want the ploy on so on at this point I've just for you mentioned, it's much more tied to supply of products.
But we of your ship them.
So I don't know, what you're measuring but that's for me not hobby for it.
Okay, great. Thank you for you.
You're from the your next question comes from the swimming Cherokee with J P. Morgan Your line is open.
Thank you uhm.
Just wanted to.
For Ya.
But then price customers.
For you.
The address.
Et cetera.
God provision into that market.
The order of impression instead of the means that some of the other companies on positioning themselves for the next generation.
Private companies.
So I just wanted to get your thoughts on.
So I'm thinking about the rest of the bread.
For for you.
Expansion day <unk>, how much of that is on again.
Almost juice of you need to kind of continue to expand right.
That's a good question simic on obviously from the rest of suspected we've gone from best of breed data center to a more complete the enterprise portfolio, but that doesn't mean, we play in every market segment of every space. Our focus has largely been on SB Latin more than SD ran for campus on data center to or I would say.
More of of the medium to high end at the price right. So we're we're not building products today is more for the SMB I would say that's the first of all of an area of we haven't focused on so if you think of a focus we have D. C. I, we have multi cloud and I would even say, we have ran routing which could be a form of regional.
Steven and will continue to build on that but in terms of S. D. When for the branch and sassy on SMP market will continue the partner with the best of breed whether to be aware of Palo Alto a new name of it. So we feel good that we have a very good rich portfolio for the high end of the enterprise and will complement that with the SMB portfolios of other companies.
Thank you for sure.
How much. Your next question comes from Penn The theory any with ever calling the line is open.
The thanks for taking my question and congratulations on the really good quarter Uhm, you'll it gives the question will be going to look at the you know your recent performance of it looks like it's the feeling really good top line grilled What'd you do the better divorced for the worst is just being cloud tied to know switching driven as it wasn't the password I guess my questions for you and two dynamics a.
Inherently is selling software insecurity in routing of more complicated operation been throbbing switching and do you need to all through anything in totally go to market of something to keep the statement was proud of diversity and then for it can be of you start sending more to enterprises and service providers. What do you think of the biggest challenge you'd have to or come to get success on that please. Thank you.
Alright, you got your two questions and thank you I Miss So yes, I would say once you what switching was hard too when he first got started because of the of new vendor, but now that we have entered switching with good market share our approach to selling software and routing is to enhance the switching platforms. So it's not inherent.
The harder, but it does take of different systems engineering and technical expertise. So what we find ourselves doing an usher in the non shows organization is augmenting switching expertise with more software in routing and we have specialists for the big switch dance monitoring fabric with a specialist for.
On the way connect of detection in response to the specialist for the routing so naturally we need to build upon that switching foundation and add these layers of cake or I think if you will.
In terms of enterprise and service provider challenges no doubt as many you know where the new Kid on the block and we're still best of breed day, and we're dealing with the incumbency of vendors who've been the easily 10 to 20 to 30 years longer. So I would say our biggest challenges breaking old habits and the I don't think we have any challenge.
Showing on technical prowess, but being offered the opportunity to get that in overcoming the incumbency continues to be an important challenge.
But.
On it.
Okay.
Your next question comes from the top of call with the for free search your line is open.
Yes on the perhaps more prosaic.
Nature you just for you it seems as though there are a couple of cross currents going on in in the margin structure of that.
You don't get the enterprise mixed with the call techniques, maybe change of them a little bit of components are tight and Opex are all good for me to come back a little bit with the the struggle. So I'm wondering if you could sort of the parser for US have you are balance who knows of what we might expect them to the so that you can share of over the course of of the year.
Yeah, No I mean, I think we're executing pretty well to kind of the the midpoint of that 6200 65, a little bit better right. There are lots of moving pieces. Obviously, there's no doubt we're still carrying some burden from whether it's COVID-19 or supply constraints and in the inventory numbers and then in the P&L on.
We sell those inventories right. So there is some burden there for sure it's somewhat offset by the fact that we have the benefit on the Opex side of lore travel lore payments marketing expenses et cetera. So I think we'll see both of those play out over time, and hopefully they're kind of they're somewhat offsetting alright. So I think that's how.
To think about it from the short term I think the the 63 to 65 is still a good range for gross margins and we'll we'll operate somewhere in the middle of that okay. As we go for it.
And and operating margins evening.
We've talked about the the plus or minus 30.
37%. So I think that's still good right, where some of that and I think again, those moving pieces, but I think we feel good about the state in that range yep. Thanks.
Thanks, Jess Thank you.
Your next question comes from each of my kitchen with Oppenheimer on your line is open.
Thanks, and very nice sort of ladies congrats kind.
Thank you for sure I want a good yeah. Thanks, I have a couple of course, the first of all of the <unk> want you to make sure you can clarify the appropriate the bill to you on the cloud fine and and what I mean by that is with a decent for visit built is just the reflection of the new projects. The design was that you've talked about the required a little bit more for planning or a reflection of the supply.
Can you choose.
Meaning once the those are resolved you should expect visit both of you to shorten back down again, and then on the on the deeper side of it going back to the question on is the one before.
Day three.
You know the it seems like the you you know you talk a lot about automation in a in monitoring of things like that but security and networking are slowly blending on at the age as well and you haven't talked really much if at all how about your plans on how you are going to attack the security landscape and as you.
<unk>, which is a clear networking site you seem to be leaving that the security of vendors, which is a little bit of I don't understand why you do that what would you do that so maybe you can kind of give us a little bit of your thoughts on the security of market how relevant do think that would be for the future of of the company longer term, perhaps not short term and.
He's partnership the best way to play there is there no place that you can have the just market.
It Die, which question do you want me to answer all of them.
All of them [laughter].
Well, you'll need will need an hour for that one will do more on the call backs, but the anti of specific question on cloud Titans definitely actually on the team are very involved with the projects and yes, those tend to be one to two quarters, but because of their long term planning and our supply chain constraints. The both go hand in hand, they're making some.
Capex decisions and we have some supply constraints, we are getting beyond that two quarter of visibility to actually figures visibility. So I think you're absolutely right in saying, it's going beyond the project one to two quarters to one year because of the supply constraints and because of the long term decision on security.
I'll give you the short and soon as of longer discussion. We will continue the partner with the best of breed security vendors number one are approached of zero trust networking will really be holistic on network centric and there's really three parts to it one is how do we provide the right networks segmentation, we introduced the Macrosegment Asian, how do we provide the.
The right Incorruption capabilities at the D. C. I layer. This is a bit of huge differentiator for us on a day to send a product. So how do we do the wireless intrusion protection all of those on network related security. The secondary I would largely called visibility of situation of analysis of the combination of both the awake products as well as the.
Real time, telemetry and streaming and a big switch dance monitoring fabric really allows us to attack security from of visibility perspective, and the third is the proactive acquisition of of wake itself. We didn't acquire awake just to be of point security product, we really acquired it of natural in Roswell of working on this.
To make it a more seamless network and proactive network detection and response capability. That's the AI driven so stay tuned you'll hear more from us on that but all of this basically is zero trust networking strategy different from our partnerships with firewall vendors on cloud security vendors right.
Very good.
Okay. Thanks for your your your next question comes from none of martial with Morgan Stanley. Your line is open.
Acquisitions for us and like all of strategic acquisitions, they take time.
Our goal and let me start with big switch for US we were already building data analyzer of dance as we call it into our switching fabric and with the big switch.
Acquisition, we are now able to integrate more monitoring fabric capabilities correlation visit visualization et cetera on our switches. We just introduced that recently and you'll be seeing variance of that on different platforms, including the $7 50, and 70 to 80 towards the end of this year. So the big switch integration of various strategic.
<unk> not only because of the monitoring capabilities the because of the switch integration.
On the of Wix site I'm Gonna have onshore talk more about it but the team has done a fantastic job first of all of really focusing and not just on the CSO, but on the CIO you really have to target. Both decision makers essentially you want to say more about that here, absolutely well with all acquisitions.
Have to figure out the hardware integrate them based on.
From the team the product go to market and then the integration.
We have.
Done fairly quick integration with the week of theirs.
More to do but at least on the sales go to market clearance on the just you mentioned the rest of.
It seems unable to take them to the customer on tickets to the net working team to give them more visibility and sometimes on collaboration with the security. So the product so it's coming along well.
Obviously, we acquired a week of the way small companies for this more investments for growth to come.
It's coming along well on faster than what we typically would have done in other situations.
Great.
And your next question comes from Pierre If you agree with New Street. Your line is open.
Hi, guys. Thank you for taking my question.
The for maybe a need to agree with your question.
Here you talked about your supply constraints for the same time you beat.
And you guys go.
The expectation. So if you have supply concerns of gets you to beat the expectations of your question on.
On really love to have you being constrained.
Yeah, especially David.
Joseph.
You mean, it's a nice problem to have if we have done on.
Exactly yeah.
It goes out like the supply constraints.
The demon problem, you can have too much given maybe the range.
Great.
My question is actually the.
How much visibility do you have to kind of keep operating.
The way of Europe anything of this quarter on Youre planning to agree it makes the water it's fine.
When do you really get into trouble if more capacity is not coming on line at your of suppliers you. Congrats that's probably what I'm trying to figure out.
Yeah. It's a good question on and I I would have to give you of more thoughtful answer over time I guess, if we were the only vendor with supply constraint issues, we would be in more trouble quickly because they'd have alternatives, but because this is an industry wide shortage I think we're all in deep trouble, including the our customers who are trying to do the <unk>.
Planning so I would tell you we're on an equal footing and we're all in bad shape.
On the on the supply constraints side, but not every one of US is in good shape on the demand side. So we feel good about that.
And your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Yes, thanks for taking the questions and congratulations on the quarter as well.
I want to go back to yes, I want to go back to the deferred revenue discussion.
You mentioned in your prepared remarks, you've got $40 million of product deferred debt. That's now built I think it's been quite some time since we've seen any kind of product deferred kind of build into the.
Net deferred revenue bucket. So how do you think about that in the context of guidance are you expecting that to come into the revenue number this.
The next quarter over the next couple of quarters, and then any comments on on performance obligations that are outside of the for what does that how does that kind of expand thank you.
Yeah, So I think on the deferred.
It's always hard to forecast that kind of multiple quarters out, but I will say that we don't expect to kind of that to come down in the second quarter, that's not an assumption for the for the Q2 guide right.
But I'm not necessarily on a position to start kind of guy that has multiple quarters out yet, but I think we do not expect it to come down.
It's the mix of customers across various sectors.
I think it's likely that one of at least <unk> at least that level of deferred going forward.
On the <unk> I mean, we did some work in the queue, which you'll see later around the our appeal of disclosure on kind of consolidated of little bit. So that you can see the pieces.
A lot of the movement is in deferred revenue between the product on the.
And the services.
The other items didn't move that much kind of quarter over quarter.
But again, you'll see that in the kind of consolidated some of those disclosures into the single footnotes of it you can see it altogether, the hopefully that's easier to kind of debt to process, but the the non balance sheet. If you like our Po amounts of really all around the services.
Services kind of Unbilled amounts right.
As opposed to kind of build product or anything like that which is in the deferred revenue.
Great. Okay. Thank you for sure.
Your next question comes from the calling any of the Bank of America on your line is open.
Hi, guys I wanted to congratulate the about the quarter, but I'm not going to be unique and I wanted to congratulate you about your grandchild I'm not going to the unique either so.
For the second one way more important thank you. Thank you.
I wanted to ask about.
[noise] data set of enterprise data centers are one of the companies said that.
Enterprises sweat the assets they're assets during the 2020 and now they see the renewed momentum because there is kind of snapback in spending and data centers.
And I'm wondering if you had the same kind of experience where corporates are under spent last year and now they just have to spend they just have to modernize and at the capacity et cetera et cetera.
Or that the other drivers drive data center enterprise data centers.
As you know enterprise data centers on much more of a long term decision. So I'm not sure. There was so tied to last year of COVID-19.
But the generally sweat the assets for three to five years and then they are looking for a consolidation and theyre looking for upgrades 200 gig on 400 gig and if anything I would say it was less tied to one year. It was more tied to.
No.
Meeting of cloud first strategy and figuring out which of the workloads go to the cloud and which ones. They invest in their premise and so I would say, it's more tied to that than anything specific to last here.
So bringing cloud principles into their data centers is probably the number one motivator.
Got it. Thank you for it it's tough to you. Your next question comes from Ben Bolan with Cleveland Research. Your line is open.
Good afternoon. Thank you for taking the question I think on what I wanted to piggyback. The prior question a little bit gesture you talked about.
COVID-19, resulting in more planning from customers.
Could you talk for sure.
Any thoughts about how that planning and return to work may be influencing that the trajectory of new customer wins.
And then interested in how you feel you're executing on the overall campus initiatives. Thanks.
No. That's a good question and I was surprise campus hadn't come up so far.
So so I think what happened last year on COVID-19 is everybody just froze and there was a period of time, nobody even knew how to deal with making decisions right towards the second half of the year, we started seeing them engage and make the decision, making and this year many of them, especially from the campus perspective are looking at it much more of as hybrid workspaces.
<unk> is doing the same we don't see of full return to work of all our employees until it's safe to do so but running the safe to do so we don't see of 100% return either some of them of work here, especially on shows on John Nicols team, that's very hardware intensive but for example can do the of software team is very happy working in the different geographical locations remotely and may or may not come.
In to work every day of the week, so we see the campus changing.
For a variety of reasons, it's moving from very distinct headquarters in regions and branches to a more fluid elastic set of Workspaces, where you have to provide wired Wi Fi on equal access to multiple geographies, whether you're at home on whether you're at work or whether Youre in transit you still have to do work and that is influencing on.
Campus decisions are enterprises are clearly very constructive on coming back to headquarters, but theyre also very constructive on offering ubiquitous campus could connectivity to the remote employees as well.
As an example in the retail space, even though we're not an SD Wan we are seeing a lot of activity on distribution centers, which are more regional and connected to these retail spaces.
So arista is doing well in the campus, we're obviously operating of small numbers.
And most of all well is in the high end enterprises. So that's where I think we're having success and we're marching to our targets.
Where we are not doing well on maybe not have been focused.
Is as I said, the SMB, which is more of a distributed enterprise of more channel driven enterprise. We've got a lot of work to do there and that hasn't been our area of focus frankly, so doing well in our target campus and not doing much at all in on non targets of what I'd say.
Okay.
Thanks for asking.
Your next question comes from Tim Long with Barclays. Your line is open.
Thank you.
Maybe Jamie can you just update of what a little bit on what you're seeing from the white box community, maybe a two part or are you seeing.
Any.
Move with new customers, where the tier two cloud or SaaS companies are trying to do a little bit more white boxing on the switching side and then second are you seeing any of the opposite trends where the traditional.
The white box.
Type of customers, maybe are going a little bit more branded for certain portions of their networks. Thank you.
I know on should have some pretty strong views on white box do you want to take that question sure.
Yeah.
Tim the two parts of one in terms of tier two cloud of SaaS company the on.
We haven't really seen any change in the white box.
Scenarios in that part of the markets of trip.
That's true.
The white box of the largely limited to the very large cloud Titan in the United States or some in Asia, and it really hasnt changed beyond that.
You may want to go back to all of the supply chain discussions we had on just as in FY. It applies equally to the white boxes as well and in fact, many of the cloud companies are struggling through that because.
Not every ODM and so on is going to carry so much inventory and have large commitments. So.
The fact is on shifting there, but the meta side.
On our previous discussion on some of the larger cloud companies looking at growing branded.
We're doing well in our engineering projects and those opportunities, but as I've mentioned before.
Thanks.
Couple of years to materialize.
Please be patient, we feel really good about our execution on about the opportunity, but you have to give it give it time, let it back of the labs, let it go to success in pilots and when it's ready.
Im getting deployed we will happily share the news with you as well.
So no change in my pocket no change just out of scope okay.
Thank you.
Thanks, Jeff.
Your next question comes from George of Crystal on with Keybanc. Your line is open.
Hi, Thanks for taking my question on dialing in for Steve.
Touch on the 400 key opportunity.
What are your expectations in line.
Many differences on how you talked about second half of the spread of 2022 of do you expect that timing of differ between your major verticals. Thank you.
Yeah, No. It's I think the early adoption of 400 gig will definitely be in a cloud Titans and our specialty cloud providers and some of the high end enterprises, but I would say the first place you would see them as the cloud Titans.
Yeah.
Thanks George.
Just a quick follow up the expectations on maybe like a lag for the adoption of enterprise.
Do you think it'll be on some of them twice of the hydro.
Yeah I think.
The enterprises will take longer many of the enterprises are still adopting 100 gig. So I think youll see a combination of 104 hundred gig starting 2022, but it could go well into 2023, 24 and 25 as well.
Alright, Thanks George.
Your next question comes from Erik <unk> with JMP Securities. Your line is open.
Yeah. Thanks for taking the question.
First of January you said you are on target for your you're on track to hit targets for campus.
Can you remind us does that does that mean that you're on track for $200 million in 2021.
Secondly on that is okay. So the answer is yes.
Very good. Thank you and then on the the 400 gig.
Can you remind us.
Are you still anticipating that you'll be the market share leader in 400 gig.
As that starts to ramp up or can you talk a little bit about some of the competitive dynamics if anything has changed on that front.
Sure Eric.
So from a competitive standpoint, not much has changed on our execution of still very very good customers are very happy and the feedback for our parts of products of good.
The market share of the result of customers buying our product not our forecast. So let the results speak for themselves. So we feel good about our position.
Alright, Eric Thanks.
Your next question comes from Jon Lopez with vertical group. Your line is open.
Okay.
Thanks, So much excuse me I had to sort of.
Not particularly interesting follow up on some of these topics the first one.
Your service revenue is like very very rarely decline.
For the quarter. It did so very marginally of this quarter like why is that and is there anything.
On to extrapolate from that activity.
Yeah, no I wouldn't try to draw any conclusions from that it's really just timing of when you close the renewal contracts and whether you bill in the quarter and then theres, some catch up or not it doesn't change the fundamentals at all right. So I wouldn't.
And typically Q4 of strong Q1 can be a little lighter and I wouldn't try to read anything more than that into that it's not it's not of funds. Okay.
Perfect I got you and sorry, just the second real quick one just coming back to the.
Uh huh.
I guess the thing I want to explore is this concept of seasonality so.
We're getting the year on year for a second and in meeting its like kind of of wild.
Data series, but Youre generally between Q3, and Q4 up let's call it high single digits low double digits sequentially.
What are you, saying either of that perhaps some of that activity has been pushed earlier into the year.
Or are you not suggesting that and youre just more focused on the year on year trend given the comps.
Yeah, No I think I said that we did not experience the Q1 seasonality that's all I said.
Given the pandemic, but other than that I think.
The rest of the year.
Based on demand and we're feeling good about the demand I think my only comment John was around Youre growing off of $5 23 in Q1, and then you.
True.
Q2 to Q3, you added like $60 million last year in revenue quarter over quarter. So obviously the comps get much harder in Q3 and Q4, that's the only reference of the year over year growth rate is going on is going to come down just naturally because of that I think if you look at the quarter over quarter growth rate, that's an easier thing to kind of map out knocking on it from a model <unk>.
Victor.
That's it thanks, thanks, so much for the help.
Thanks, John.
Your last question comes from George Notter with Jefferies. Your line is open.
Hi, This is Kyle on for George Thanks for the question and fitting me in here. My main questions were on campus in 400 gig so to avoid beating those of Dessau I ask a simple one.
Do you have any expectation currently on win T.
Travel expenses would pick back up again I know you said that they are currently out of the model, but are you do you of any plan on when they may turn back again or is it kind of a wait and see you still and how should we contemplate that in the Florida Opex expectations.
Huge I mean, our kind of.
Sales and marketing expenses around that or are not huge to begin with but I think it doesn't start to come back to later in the year and we'll update as we go.
Because of lot of moving pieces around that range.
Okay. Thanks very much.
Hey.
So this concludes the Arista Q1, 2021 earnings call. We have posted a presentation, which provides additional information on our fiscal results, which you can access on the investors section of our website. Thank you for joining us today and everyone. Please continue to be safe.
Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.
Okay.
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