Q1 2022 Arista Networks Inc Earnings Call
Yeah.
Welcome to the first quarter 2022 Arista networks financial results earnings Conference call.
During the call all participants will be in a listen only mode. After.
After the presentation, we will conduct a question and answer session and instructions will be provided at that time.
At any time during the conference you need to reach an operator. Please press the star followed by zero.
As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website. Following this call.
Ms Lipstein Arista as director of Investor Relations you may begin.
Thank you operator, good afternoon, everyone and thank you for joining us with.
With me on todays call are Jay for you all Arista Networks', President and Chief Executive Officer, and eat at Brennan <unk> Chief Financial Officer.
This afternoon Arista networks issued a press release announcing the results for its fiscal first quarter ending March 31st 2022.
A copy of the release you can access it online at our website.
During the course of this conference call Arista networks management will make forward looking statements.
Putting those relating to our financial outlook for the second quarter of the 2022 fiscal year longer term financial outlook for 2022, and beyond I total addressable market and strategy for addressing these market opportunities the potential impact of COVID-19 supply chain constraint component cost manufacturing capacity.
Inventory purchases and inflationary pressures on our business product innovation and the benefits of acquisition.
Which are subject to the risks and uncertainties that we discuss in detail in our documentation 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 Street.
Listen Thank you everyone for joining us this afternoon for our first quarter 2022 earnings call.
In addition to the pandemic, we're now facing the global uncertainty with the war in Ukraine, and increasing inflation trend.
Behalf of Arista, We express our deep concern over the tragedies in Ukraine, and thank the Arista employees for their thoughtful donations to the Ukraine humanitarian causes matched by the Arista Foundation.
Dr Q1, 2022 we delivered record revenues of $877 1 million for the quarter with a non-GAAP earnings per share of <unk> 84.
Services software support renewals contributed approximately 19, 2% of the revenue.
Our non-GAAP gross margins of 63, 9% with influenced by continuing supply chain constraints and elevated costs.
When did they commit for certain components increased sharply in March 2022, with no clear relief insight in the near term.
In terms of Q1, 2022 verticals cloud Titans was our strongest and largest political followed by enterprise cloud specialty providers and financials tied the third place and service providers export.
Our geographical mix included strong performance in the Americas at 76% with the international contribution at 24%.
According to market analysts in calendar 2021, Arista gained market share and overall data center high performance switching growing to approximately 19% market share.
We are proud to maintain our number one position in Hungary, 204 hundred gig switching and achieved this growth. Despite all the challenges of the supply chain.
Arista has also been a pioneer and leader in client to cloud networking.
Customer relevance is increasing with new logos in tech enterprises, healthcare education, and retail as well as to provide the sector.
A million dollar logos have doubled in the last three years in all categories. These categories include greater than 1 million greater than $5 million greater than $10 million and greater than 25 million customers.
What's clear is that personally engage across our worldwide base of CIO and <unk> is that the planning horizon for networking has really changed our.
Visibility and demand has never been stronger.
The nature of our discussions with our customers. It's also most strategic in nature let.
Let me try to illustrate with a few examples.
For example on AI spines, we're building upon our cloud heritage to expand scale for AI workloads that are both data and compute intensive, thereby requiring hundreds 408 hundred gig performance in the future with rich Eos software feature.
And the cognitive campus threat hunting is now becoming integral to the network instead of being an afterthought and is changing the way cyber security and very Olin threat scan be detected and managed holistically.
Network Security is clearly migrating to secure the zero trust networking based on AI and Eva sensors.
Larger enterprises network as a service based on cloud vision is enabling our customers to manage their datasets across client to cloud domains with superior unmatched automation and analytics.
Our decade long preferred partnership with cloud Titans, especially Microsoft in meta.
Our courts joint engineering products for hyper cloud scale, all the way now to edge use cases.
Clearly a risk doesn't the midst of an exciting and growing total available market or Tam expansion to fulfill our customers' requests for proactive predictive and prescriptive networking.
This with the right data driven foundation and architecture.
This network data Lake use tax that we launched last November is resonating well and it's validating our customer network design.
In conclusion, I'm, so proud of a risk this progress and traction and look forward to multiple years of double digit growth and with that I'd like to turn it over to either for Q1 2022 financial specifics.
Thanks, Jerry and good afternoon.
This analysis of our Q1 results and our guidance for Q2 'twenty. Two is based on non-GAAP and excludes all noncash stock based compensation impacts certain acquisition related charges and other nonrecurring items a full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Total revenues in Q1 were $877 1 million up 31, 4% year over year and well above the upper end of our guidance of $840 million to $860 million.
Our enterprise business continued to contribute healthily to our overall revenue growth in the first quarter combined with accelerated shipments to our cloud Titan customers some of which were deferred.
Apply remained constrained in the quarter with supplier decommit, resulting in higher broker purchases and expedite fees in the period.
Services and subscription software contributed approximately 19, 2% of revenue in the first quarter down from 21% in Q4 International.
Revenues for the quarter came in at $212 7 million or 24% of total revenue down from an unusually high 29% in the fourth quarter of 2021.
This decline in international mix, primarily reflect some volatility with our global customers, including the deferral of some international cloud shipments in the period.
Overall gross margin in Q1 was 63, 9% above the midpoint of our guidance range of approximately 63, 64%.
Operating expenses for the quarter with $225 3 million or 25, 7% of revenue up from last quarter at $206 2 million.
R&D spending came in at $144 3 million or 16, 5% of revenue up from last quarter at $133 million.
This primarily reflected increased head count and higher new product introduction costs in the period.
Sales and marketing expense was $66 2 million or seven 5% of revenue.
Third to $61 2 million last quarter with increased head count and strong shipments driving higher variable compensation expenses for the period.
As a reminder, we continued to benefit from lower Covid related travel and marketing expenses.
Our G&A costs came in at $14 8 million or one 7% of revenue consistent with last quarter.
Our operating income for the quarter was $335 6 million or 38, 3% of revenue.
Other income and expense for the quarter was a favorable $3 million and our effective tax rate was approximately 27%.
This resulted in net income for the quarter up $268 7 million or 36% of revenue.
Our diluted share number was $319 7 million shares resulting in a diluted earnings per share number for the quarter of 84 cents off approximately 35% from the prior year.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately $3 4 billion.
We repurchased $136 $2 million of our common stock during the first quarter at an average price of $116 per share.
As a reminder, we've now repurchased approximately $209 million or one 8 million shares against our October 2000, $21 billion Board authorization.
The actual timing and amount of future repurchases is dependent on market and business conditions business requirements stock priced acquisition opportunities and other factors.
Now turning to operating cash performance for the first quarter.
We generated $217 1 million of cash from operations in the quarter.
Protecting strong earnings performance combined with continued working capital investments.
Dsos came in at 67 days up from 58 days in Q4, reflecting the linearity of billings and growth in deferred revenue in the period.
Inventory turns were consistent with last quarter, one seven times inventory increased to $694 2 million in the quarter.
From $650 1 million in the prior period, primarily reflecting higher component inventory.
Our purchase commitment number for the quarter was $4 3 billion up from $2 8 billion in Q4.
This significant increase in commitments largely represents orders for 2023 and beyond reflecting overall strength and demand for those periods and our expectation that this long lead times supply environment continues.
As a reminder, we continue to prioritize newer early lifecycle products for inclusion in these strategies in order to help mitigate the risk of excess or obsolescence.
Our total deferred revenue balance was $1 1 billion up from $929 million in Q4.
The majority of the deferred revenue balance and services related and directly linked to the timing in term of service contracts, which can vary on a quarter by quarter basis.
Approximately 327 million of this balance up from $160 million last quarter represents.
It represents product deferred revenue largely related to acceptance clauses for new products. Most recently with our large cloud Titan customers.
As a reminder, we remain in a period of significant new product introductions combined with the healthy new customer acquisition rate and expanded use cases with existing customers.
These trends have resulted in increased customer specific acceptance clauses and higher product deferred revenue amounts.
Accounts payable days were 58 days down from 63 days in Q4, reflecting the timing of inventory receipts and payments.
Capital expenditures for the quarter were $14 9 million.
Now turning to our outlet for the second quarter and beyond.
Our analyst day outlook for 2022 calls for 30% year over year revenue growth somewhat balanced across our market sectors and heavily constrained by the supply environment.
As we progress through 2022 demand metrics remains strong across the business, but particular strength from our cloud Titan other cloud and enterprise customers.
We've added manufacturing capacity and component supply in response to this demand supplier decommit make forecasting accelerated shipment momentum difficult. These.
These decommit also have a negative impact on gross margin as well was turned to other sources to try to backfill decommit of components in the quarter.
From a business model perspective, this means that in this supply constrained environment and the accelerated growth quite accretive to the bottom line may come with a lower gross margin percentage due to increased cloud mix and additional expedite fees.
Turning specifically to Q2, we expect revenues of approximately 950 to a $1 billion, including approximately $50 million of cloud related deferred revenue recognition from the balance sheet on.
On the gross margin front.
And expected healthy cloud mix in the quarter combined with 200 to 300 basis points of assumed expedite costs would result in gross margins of approximately 60% to 62%.
That's the spending and investments we expect to continue to grow our investments in R&D and sales and marketing in line with our baseline investment plan.
With all of this as a backdrop our guidance for the second quarter, which is based on non-GAAP results and excludes any noncash stock based compensation impacts and other nonrecurring items is as follows.
Revenues of approximately $950 billion to $1 billion gross margin of approximately 60% to 62% and operating margin of approximately 37% 38%.
Our effective tax rate is expected to be approximately 21% with diluted shares on a post split basis of approximately 320 million shares I will now turn the call back to Liz Smith.
Thank you Peter we will now move to the Q&A portion of the Arista earnings call to allow for greater participation I'd like to request that everyone. Please limit themselves to a single question.
For your understanding operator take it away.
Yeah.
We will now begin the Q&A portion of the Arista earnings call in order to ask a question. During this time simply press Star then the number one on your telephone keypad.
I would like to withdraw your question again press the star one we ask that you pick up your handset before asking questions in order to ensure optimal sound quality.
Your first question comes from the line of Sami Badri with Credit Suisse. Your line is now open.
Thank you I have one clarification and then one question.
First thing is.
You talked about customer acceptance clauses can you just expand a little bit on that just because you do have some deferred revenue and it sounds like Theres a lot moving around could you just.
Define or maybe just elaborate a little bit more on that for specifically midyear 2022, and then my actual question is when you talk to your actual suppliers what do they actually tell you is the reason for that E commence and when they do decommit, how many days before the actual plan delivery date are they decommit goodbye.
Okay.
Maybe I'll take the deferred revenue question first right I mean, obviously in time periods, where you have lots of.
New products are bringing new products to these larger customers in particular are two completely new customers. They don't have the opportunity to test everything about the product in their environments and we can't mimic those large scale environment. So we have customer acceptances, where we give them the time period to accept the products.
So we can ship bill.
And collect cash on those but its deferred from a revenue perspective, because there are some criteria that we need to prove that we satisfy.
So that they can give us the acceptance.
And for me to answer your question no. The become it's come literally the week, we are expecting the components. So they surprise us right. When we're looking to build them, which is why.
We struggled frankly in the back half of the quarter.
I'm not getting the components, we needed and just having a lot of our.
Contract manufacturing capacity waiting on key component and the only way to resolve that was to pay extra expedited by orders of magnitude to get them, sometimes we could get them and sometimes we couldn't see what we believe this very constrained environment of components combined with <unk> is going to continue in Q2.
And who knows about Q3, yet John Mccool as our head of manufacturing and platforms do you have more to add to that sure just nature of the <unk> I think that we see very.
Part specific reasons for each of those decommit.
Some can be tester capacity yield logistics issues.
As the suppliers worked through that so I wouldn't say, there's any generic.
Being store those decommit, it really depends on what part what supplier.
Got it and congratulations thank you.
Thank you Sammy.
Your next question comes from the line of Fahad <unk> with loop capital. Your line is now open.
Well. Thank you for taking my question, usually last time, you said that you had.
The best visibility that you've ever seen pretty much said that you had.
Visibility for the entire calendar 'twenty two.
So I'm, assuming you're already have your conversations with your customers about their demand picture, maybe starting to come in the quarter. It seems so can you parse that a little bit of a color on that.
Dynamics Youre seeing with your customers regarding that.
Kevin According to you maybe if you could quantify what do you mean by that.
The best visibility that you have.
Yeah.
Thank you for her last quarter, our visibility was very strong for 2022.
This quarter, our visibility continues to be very strong for 2023, but I would also add that in particular, the cloud Titans and some enterprises are starting to plan for 2023, they have to start thinking about it now that we're in Q2 here.
So all of this does suggest that you know there the demand is strong for this year, we expect demand to be strong at least for the first half of next year from our planning purposes things can always change orders could always be moved around but in all my career across Cisco and perhaps even others I've never seen demand be so.
So clearly purpose and strong I'm sure do you want to add more to that so just regarding customer.
No longer are struggling to understand the supply chain is constrained they very well understand that many of these cloud companies build their own computer and storage as well so they're planning along with their own teams.
For 2023 right now.
Their businesses are good which means the underlying demand is strong.
If I could follow up one on the deferred revenue from cloud.
Okay.
Just one cloud Titan customer can you help us understand is that a functional.
Hello.
Okay.
Good.
Your supply into them anything you can help us understand on the dynamics and so we can model appropriately.
Titan revenue comes going forward.
Yeah, No I think it's across multiple customers and again, it's very standard for us if you look back historically to have peer.
<unk> that the beginnings of product life cycles, where we're shipping the product, they're deploying the product, but where we're at we're just waiting for that kind of acceptance. So that we can actually take the revenue from a Rev. Rec perspective, right. So it's not unusual for us to see that it's good I've seen that over time.
What we said was we built deferred in Q1.
And then we will draw down about $50 million in Q2, but were still up roughly $110 million for the first half.
From a product deferred revenue perspective.
I appreciate it thank you thanks.
Thanks, Dave.
Your next question comes from the line of David Voight with UBS. Your line is now open.
Great. Thanks, guys for the question just a quick question and then a follow up so maybe just on the vendor commits and what Youre seeing from your CMS relative to 90 days ago can you just kind of share with us a little bit more color in terms of what's been the impact is at the recent lockdowns that we've seen from supply chain partners in Asia or in other parts of.
The world or is it just simply a reduction in availability had mismatched components that would make a complete set effectively and then just quickly on a follow up you mentioned you don't think you had mentioned 200 to 300 basis points of expedited costs and the gross margin.
Does that include sort of the mix shift to a more hyperscale or mix as well in the guidance for Q2 or does that or is that just.
Separate cost in terms of how your gross margins are going to play out for the rest of the year. Thanks.
Yes, I think the 200 to 300 basis points is really looking at kind of a.
An estimate if you like of what we think those decommit could cost us.
That is separate to the to the customer mix etcetera, it's really being driven more by kind of looking at kind of the day commits that we saw end of last quarter beginning of this quarter and then what's the impact for that.
So it's separate to the customer mix.
Yes.
On the supply chain piece, I think we've kind of seen a more.
Our focus issue really around semiconductors in general that's still led by the supply demand balance.
In terms of particulars on <unk>.
I think again each part each device has a separate story we've seen some suppliers that are trying to increase test capacity don't have test equipment, they're waiting for orders that are also constrained by semiconductors, some perturbation with the lockdowns in China for raw material and equipment. So it's across the board and very specific.
As ive to each device.
And I think it's fair to assume that the follow up.
Just just to clarify also that it's safe to also say it changed a lot since our last call. So we have a couple of vendors that are causing a lot of gaps for our decommit. We don't want to name them, because I know, they're working hard to improve their commitment to us but.
Three vendors that contributed.
Chase rate was there any competitive issue and the documents or that wasn't the issue, meaning that you know maybe there was some allocation issues between yourself and some of your competitors know to another into the cycle.
No none that we're aware of it.
Great. Thank you. Thank you very much.
Thank you David.
Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open.
Yeah, Hi, Thanks for the question I guess I wanted to come back first of all thank you Peter for clarifying the deferred revenue release and the Guy. That's a helpful number I'm just trying to come back I was looking at your deferred revenue and aggregate over time and obviously, it's very inflated here curious what you think the timeline for reducing that kind of back to some sort of a <unk>.
Normal level is I know, it's very hard to predict but just based on what you know today is that likely to happen. This year or does it take 24 months just if you could gauge that for US and then also we don't really we don't really know what the backlog the order backlog looks like I don't know if you could quantify that at all for us So kind of two different areas of question there I guess thanks.
Yeah, I think on the deferred revenue.
I said I don't really like to forecast, but we will call out when we think were drawing it down in the guidance so that the reference to the $50 million.
I think at this point.
Don't think we would draw down two to achieve the 30% growth rate.
Obviously this is churning and turning all the time right, but we think that balance.
It doesn't come down year over year in our assumptions for the 30% growth rate I think on the order backlog I'll, let Jason comment as well, but for me at this point, what the impact of time et cetera on the backlog, it's not a meaningful.
Number for us to share its not a meaningful metric to shadow okay.
Rod we've stayed away from auto strength in backlog. Please don't mean anything unless we can ship. It. So we'll continue to keep telling you about our visibility on demand and a qualitative fashion, but in a quantitative fashion the only number that matters is shipment.
Okay, great. Thanks, a lot appreciate it.
Okay.
Your next question comes from the line of Amit <unk> with Evercore. Your line is now open.
Perfect. Thank you.
I guess my question is really around if I heard the purchase commitment number correctly I think was $4 3 billion was up a fair bit sequentially.
And I'm sure. The math is not linear on purchase commitments, but could you maybe just help me connect the dots between the $4 3 billion purchase commitment versus what I think Gil TTM cost of goods sold is on $1 2 billion are you locking in supply on a multiyear basis or do you really see a sustainably to this current 30% growth to be a lot more durable versus perhaps what you.
<unk> talked about at the Analyst day, just help me put in context, what it seems like a sizable number versus the growth rates.
Yeah, Yeah, Yeah, I mean, good observation I think we jumped up from $2 8 billion to four plus billion and you're absolutely right. This is a multiyear commitment now this is not just for 'twenty. Two it's also 23 and perhaps it leads into 24 as well given the extended lead times that are only getting worse and we wanted to make sure we secure.
Our commitments, so where we're placing a bet on long term demand, our multiyear double digit growth and accordingly planning for it and so you don't need to read anymore or any less into it except we're bullish about demand and we're planning for multiple years.
Perfect. Thank you.
Thank you.
Your next question comes from the line of Simon Leopold with Raymond James Your line is now open.
Thanks for taking the question I wanted to see if you could maybe describe what the timeline is like for your sales into a hyperscale data center basically what I'm, what I'm trying to get a sense of this from the day they begin construction.
How long does it take for them to make purchases from you.
In terms of initial deployment and then upgrade so if you reflect back.
On your experience how would you spread out the spending for given Hyperscale data center over a period of <unk>.
Number of years hopefully yeah.
Yeah. It actually does make sense, because I think there is a period of planning and build out and what they want to do then is actually putting a design on what theyre going to do and then there's the deployment answer or you are still smack in the middle of this this is yours to answer sure absolutely.
When we work with our cloud Titans.
Pink of regions and the build out in different regions different geos.
Sometimes different you cannot actually just tackle regional build out and say this will always be the same.
And many of the major regions, which are.
Hundreds of megawatts, sometimes gigawatt.
<unk> network needs to rebuild first before rocks can be added.
Some of the smaller or mid sized regions. They can actually start with <unk> and Dci can grow over time as well.
Yes.
These are generally about two to three year planning cycles for our customers.
As equipment suppliers, showing up last minute, they decide where they would deploy the network. So that we don't really control. The last part of the planning is really two to three years.
Okay.
Okay.
Next question operator.
Your next question comes from the line of Jason Ader with William Blair. Your line is now open.
Yes, Thank you and.
And I'm not going to ask a question about deferred revenue.
Hi.
We'll be happy to hear that.
Mike My question is on the enterprise side, you guys continue to do well there.
I'm wondering if your ability to deliver supply faster than some of your competitors has made a difference maybe I don't know, even though that's true, but if you can comment on that and also whether subscription software mandates from some of your competitors is helping you win business and any examples of that would be great. Thank you.
Yeah, no. Thank you Jason for sparing us a repeat question.
If you step back and look at our enterprise momentum I'd say, it's really picked up steam in the last three years.
In some cases I think we are now larger than standalone companies with our enterprise business who've been around 25 years I think the reason I enterprise business is growing so well is really three reasons and probably very little to do with the fact that we can supply product sooner. They all look wish we could do it earlier.
It has to do with an architectural approach that is different now, especially post COVID-19 for a campus and data centers, where they want to build off one U S. One cloud vision and one leaf spine architecture, so they really coming to us for a different design approach, whereas historically it was.
Rinse and repeat so that makes a huge difference the second is their experience with us in the case of existing customers, where they've had such good quality lower critical vulnerabilities and experience with us.
I really want to take that across the network clients to cloud and many more use cases.
And the third I think is what you alluded to there is a lot of fatigue and frustration from our industry peers who've been going one way and only one way and seeing a better alternative both from a technology and consumption point of view, we're not forcing them down to subscription and we're giving them options. They can have it as a service so they could buy perpetually its the customer's choice.
All of this has helped.
It really cement our.
Enterprise momentum at least with the high end enterprise adopters, we got a long way to go in the mid market, but certainly I would say that's the case for the enterprise high end customers.
Thank you.
Thanks Dennis.
Your next question comes from the line of attack had drawn with Oppenheimer. Your line is now open.
Thanks.
The numbers I guess, a couple of two related questions, what's the value of purchase commitments in an age of the comments.
And I guess I'm trying to think about pricing and the impact on the gross margin you talked going to your guidance on gross margin.
Why not move to a model just an operating model for the foreseeable future until things change whereby.
Certain parts will be our pricing are just variable in.
Your price thanks to the customer as you get price yourself why not roll this over and I know you can do increases every quarter, but just have like an empty box on an invoice that gets filled in.
Purchase components.
I think clients will be overly surprised that something like this happens.
Yeah, we need GDP with you into our procurement Department I think my my billings team might be a little confusing.
[laughter] good question Peter.
You want to start yet so I think on the pricing side of things <unk> will start to benefit from the last price increase really kind of in Q4 really December maybe a little bit before that but that's that price increases rolling is rolling through.
Price increases are hard right I mean, we will we will look and consider when we see sustained cost.
Where we need to pass them on and we will do that but.
Price increases are tough to do that.
They do kind of impact the customer.
So we'll look and see if we need to do another one in what the house how sustained some of these cost increases are then we'll decide based on that but we should start to see some benefit from the prior one.
Burnt through the backlog et cetera in Q4.
Very good.
Thanks <unk>.
Your next question comes from the line of meta Marshall with Morgan Stanley . Your line is now open.
Great. Thanks.
Sorry to bring it back to deferred revenue, but just a point of clarification ETA.
You had noted last quarter that 30% kind of outlook for the year and include kind of recognition of any of that deferred revenue balance, but obviously the deferred revenue balance grew by by quite a bit and so I just wanted to clarify that the 30%.
Is without kind of where we were at the beginning of the year on deferred revenue or even where we are now.
Or will be at the end of Q2 yeah.
I think many of them the commentary around not drawing it down is really an annual statement year over year right, but what you saw US do for Q1 was obviously grow at 167.
Million will drawdown 50 of that so I think the best way to think about it as the first half right, we will be up $110 million from our product deferred revenue at the end of Q2 based on based on our guidance right. So we're building. It I don't think we draw it down versus the beginning of the year at least we will see what happens the second half, it's very hard to forecast it precisely.
But again I think that 30% did not contemplate taking anything out of the opening year deferred revenue bonds.
Okay got it and then maybe just a small follow up I mean, obviously the inventory balance has grown by a fair amount just wanted to get a sense of you know are there any concerns around obsolescence of any of that inventory or are you know just as it takes longer to get all of the parts or is that.
The only concern we should be mindful of.
Yes, I mean, I guess, the inventory balance itself isn't up that much right, it's up a little bit on the raw materials, but not a ton because obviously we're shipping everything we have is that we can I mean, the purchase commitment balances up a chunk, but I think again that is time bound more than anything else right. I mean, we're really looking through 2023 now.
And making commitments for that and again, we're trying to pick the right products.
That started to be perfect.
We're definitely taking a risk approach there and we're doing it in conjunction with customers.
Thats I think thats, what we have to do right now.
Great. Thanks.
Your next question comes from the line of Paul Silverstein with Cowen. Your line is now open.
Thanks, Josh at the risk of asking questions that you are either cannot or will not answer.
First off I'm, hoping just through that.
As for somebody to.
Provide any incremental insight regarding the Microsoft Nokia announcement.
Secondly, what are the numbers your first quarter results and second quarter guidance, that's almost 35% year over year growth to 30%.
<unk> guidance for 2000, and so that translates to about 26% growth for the second half of the year and Youre talking about the best demand environment, you've ever seen I. Appreciate we're only one quarter into the year.
I get it.
But it sure sounds like.
Supply permitting that you could do well north of 30% and hopefully provide some insight on that.
Gross.
Sure.
So to help you answer the Microsoft.
Partnership you may have seen the quoted in our earnings release, we consider Microsoft a very strategic and preferred partner and so do they have us. The use cases are expanding and of course, that's like I've always said doesn't mean, we get 100% of the use cases or the business they've always patches.
Multi vendor and open and from time to time, they've chosen other partners.
You know for other use cases, so it doesn't change at all our status with them, but obviously means they're going to always be multi vendor and open not sure you want to add to that triple our relationship with Microsoft is so long and so deep we work with them not just for our current products, but for several generations to come.
Tom.
And the discussions on people spend all the way up to 2025 2027 architect chosen what can be possible once they're built for them. So.
So the leadership position we've had will continue.
You mentioned, becoming multi source, but we believe we'll stay in a healthy position and we're.
We're not going to get distracted by this announcement.
Okay, Yeah, and then Paul I guess coming back to the growth I mean, youre right. It was close to 35% for the first half I think we would have an outlook of 30% for the second half so I'm not necessarily saying were going to decelerate off of 30%.
But it's all about supply right. If we could solve for these handful of <unk>.
Components that are kind of causing these decommit.
Yes, we could do some more but for now I think we just have to respect that from the uncertainty of that and be cautious.
Josh just ask a quick clarification.
Sure.
A lot of folks on the call. It sounds like people think you're just pulling out about pulling out of deferred to make these numbers right.
How much of this is just satisfying backlog.
How much of it is also sure Dan.
What's going on in terms of driving the demand.
I don't think I don't think that algorithm in the deferred is actually up $110 million in our guidance.
For the first half right. So I don't think anybody thinks were.
Using deferred to drive the numbers.
Organic demand absolutely we.
We have backlog, we don't talk about that and we have an increase in deferred altria to we just have to ship.
Yes.
Got it thanks, guys. Thank you Paul.
Your next question comes from the line of Snake Chatterji with J P. Morgan. Your line is now open.
Yes, hi, Thanks for taking my question I guess, if I can just ask you two quick ones on the enterprise.
You mentioned the strong momentum you have with enterprise customers.
One of the concerns we've been hearing from investors is about the current macro and how enterprises at this point to that in terms of any weakness in the auto trends, maybe if you can clarify if you had any seeing any of that in your discussions with these customers and also if you can give us an update on the revenue, which we were looking to dump it sounds from the momentum that you should be.
Sort of on track.
Your expectations, but if you can just give us an update thank you.
SME, we are seeing no change in the enterprise momentum, it's strong or we haven't seen any slowdown maybe it will later on the.
The impact of inflation trends, who knows but at the moment things are looking very strong Chris Schmitt Ashwin and the whole team are just.
Knocking at the door always for products.
There are certainly creating the demand with their customers and thats, where the campus.
Very similar story you know our goal is to double this year and we've only had one quarter, but one quarter doesn't make a trend but this one quarter alone has is showing a trend in that direction and as I think you asked me in analyst day.
I shared with you that we will grow at least to 750 million by 2025, I think we can achieve that perhaps if we are in a less constrained environment, we could beat it too.
Great. Thank you thank.
Thank you.
Your next question comes from the line of Pierre Fair do with New <unk> New Street Research. Your line is now open.
Hi, Thanks for taking our question Pierre isn't a noisy environment. So this is antoine asking one on behalf of them.
Thank you.
So could you please share your thoughts and then we give the spectrum for how you see this chip fitting into the competitive landscape and how your CMV job seem to be becoming a competitor.
And maybe when do you expect to have 51, two terabits per second chips in your products.
Well, we've always viewed nvidia as a partner, especially for the Gpus are next.
When they were mellow Nox and we continue to view that.
There are times when companies choose a vertical stack and I think Nvidia is focused on spectrum for us more as a vertical stack for their captive customer opportunities.
As a horizontal the best of breed.
We don't see them as a competitor a dull and Arista is poised to be best of breed and continues to be the preferred choice with customer essentially you want to add to the 51 terabyte roadmap.
Let me just remind you that the $25 60 is just now ramping so.
I'll leave at that.
The co development projects, we take on with our customers are well along as well.
The one thing is really nextgen.
So at least two years, maybe more for many of the high volume customers.
And the announcement game doesn't really matter right, just because someone announced doesn't mean others are not working on that either we will be ready in time.
Okay.
Okay.
And our next question comes from the line of Aaron Rakers with Wells Fargo. Your line is now open.
Yes, thanks for taking the question a lot of my questions have been asked and answered, but I wanted to go back to kind of some of the architectural stuff that you've talked about your history in the past.
Fabric you continue to bring this up on conference calls. These last couple of quarters, we're seeing obviously some big large deployments at one of your large cloud Titan customers I'm. Just curious if you can offer up any other thoughts around the size of this incremental opportunity of the trajectory of what youre seeing if youre seeing it become more broader base just any context.
Around that opportunity for Arista.
Yeah, Erinn I bring it up more because I think it is a strategic innovation much like Arista pioneered cloud networking with a leaf spine architecture and when it came to the forefront with our front end network that was.
Based on that architecture, what we see here is that the backend network is changing and this is to primarily be you know interconnect bus base Infiniband based and you know and a high performance clusters HBC is it's often called but the new AI workloads really our data and compute intensive and they can't.
B R. I O based alone I'll just focus on latency.
We're pushing we're pushing the envelope of Ethernet to really deal with the predictable latency the ability to scale, a whole network et cetera, very much in the first innings. So youre right to say, it's starting with the you know early.
Early deployment of cloud customers much like cloud itself started five years ago, but I think it's going to penetrate some of the specialty clouds and workloads in.
Large enterprises as well, but this will emerge and take place over the next three to five years, it's not going to happen overnight.
Your next question comes from the line of Tal Leoni.
With Bank of America. Your line is now open.
Guys I'm going to follow the tradition of one clarification and one question.
Hum.
The clarification you on one hand, you say supply chain is getting worse.
On the other hand, youre getting youre, giving a very strong guidance for next quarter. So how do you reconcile the fact that he is getting worse and in the guidance is so strong.
And the second question is one of the top questions I'm getting from investors is that we know that Microsoft and Facebook are strong we know that they are investing a lot in their data centers right now.
And the question is how much exposure how much dependency you have on this.
Yes.
Perhaps concentration customer concentration vertical concentration any any any data you can give on that front. Thanks right. So.
My chain is getting worse, because not because of the extended lead times not just because of that because we were planning for that but because of the sudden surprising decommit. So when they're trying to build a product and ship it on and certainly we don't have these last two components you know it.
Just freezes the whole supply chain and our ability to commit to revenue so.
Zito said, what did you do at that point, John and the team had to go scouring the face of a year to get parts that would normally cost ex that are now hundred X in many cases, and that's a very stressful thing because sometimes you get them and sometimes you don't so our ability in Q1 to shift more was very much there, but a constraint in Q1 to shift more of us all.
So.
Magic, because we couldn't get the parts.
And that is the story for Q2, and perhaps will go into Q3 as well now what how does that affect us maybe executing better than others, but it's affecting us in that because of the elevated cost of these components and expedite its showing up as gross margin. So we have a gross margin pressure for the next couple of quarters, both due to the cloud.
Which was your second question, Andy you know the.
Commitments from Microsoft and <unk> and other cloud Titans as well as these expedite that adding double pressure on our gross margins. So that's why we wanted to take away, but then execute as best as we can customers come first we're going to do our best there even if it means buying these components had very very elevated costs.
Do you want to answer the cloud question, and especially with Microsoft <unk> sure well. These are great customers to have and we wouldn't have it any other way.
We don't control the market.
Some of the largest cloud companies in the world.
And we are the leader in cloud networking.
So yes, we are exposed to them.
These investments are highly leveraged whether it's product development, whether it's developing the roadmap with the getting economies of scale on our product line and manufacturing there are several benefits we get on the customers get those benefits as well.
As a result of that we are happy that this cut.
Most are doing well and growing and you're increasing the Capex then we benefit from that as well just be you mentioned this.
The last earnings call.
On the audio.
Of them I expect it to be 10% customer this year and beyond.
Happy with that outcome.
Got it thank you.
Thank you Tara.
Your next question comes from the line of Jim Suva with Citigroup. Your line is now open.
Yeah.
Thank you and congratulations J stream either to your teams and agile while I have one question and that is about the lag time between your pricing actions and the orders. So <unk> mentioned, a few times about the December price increases.
But I just wanted to see wouldn't it be logical that all customers are putting in a lot more orders now to give you more visibility.
Selfishly are rightfully and smart Felipe economically it would get better pricing knowing that prices are going to go up in the future or either in <unk> or you're saying that you've adjusted prices since December price increase I just wanted to get some color on the lab league of pricing of the orders. Thank you.
Yeah, Jim Jim. Thank you for the congratulations and wishes. So we've made a pricing increase that we spoke to you about in November the effectiveness of the pricing is very difficult to control right away. So first of all we give them. Some notice so historically we have.
So orders in flight don't get affected by that pricing orders in backlog also don't get affected by the pricing. So all of a sudden done even though we're getting new orders with the new pricing everything that's shipping in Q1, Q2, Q3 and a good chunk of Q4, we'll have the old pricing, that's what they're trying to say or is it are getting now will reflect the new pricing.
And that'll come in late Q4 or 2023.
We are contemplating a second price increase given the tremendous pressure we have on costs.
But again once again, if we make it now its effect is not going to be until the second half of 2023.
Does that help you answer the question.
It does so my point is compared to November things have really changed it's been six seven months now.
It sounds like you're kind of contemplating but I just was wondering if there was more dynamic since last November with your pricing.
Yeah, no we've been very thoughtful about not shaking up pricing over and over again some of our competitors have done it five times, we're pretty much only done it once but we are.
Contemplating a second one.
Got you thanks for the clarification.
Thank you Tim.
Your next question comes from the line of Ben Bolan with Cleveland Research. Your line is now open.
Thank you good afternoon, everyone. I appreciate you taking the question.
Jay Sherry and eat I was hoping you could touch on your thoughts.
Around the durability of the orders that you are seeing right now Jay sure you commented a little bit on Hyperscale, but.
Any thoughts around how far in advance you're seeing orders.
From cloud Titan and enterprise customers.
And then also.
I'd be interested in your thoughts on the type of financial commitments Youre seeing from the different verticals.
How you are monitoring and managing.
You know the risk or perceived risk of excessive bookings or pull forward. That's it. Thank you.
Okay. So you were asking about durability of our orders and authenticity of our orders if I understood. It correctly right. So first of all that.
Because we don't we fulfill through channels, but so much of our orders are very intimate relationships with our customers to answer your second question first.
We really believe the orders are not double booked a double or there may be some but the majority of our cloud orders enterprise cloud provider service providers. These are relationships dialogues conversations we have regularly. So we have no reason to believe at this point that that's double booking going on of any kind there could be a minor percentage, but nothing new.
Sure.
In terms of durability and again, our customers are planning for a one to two year horizon. So I believe the durability of our orders in this one to two year horizon is strong.
Of course, there's always a risk the risk that the orders are canceled and they may make changes, but for most part they've stayed committed to us and we have seen them be.
Consistent and wanting to get our product and willing to wait for it so <unk>.
Your ability and authenticity is good.
Okay.
Okay.
Let's take our next question comes from the line of Eric <unk> with JMP Securities. Your line is now open.
Yeah. Thanks for taking the question.
One just what are you telling your customers in terms of lead times for your longer lead time products and how does what are your customers telling you in terms of how that compares to some of your competitors in terms of their lead times and then either.
Could you just comment the two to 300 basis point impact.
Presumably that's Q2 and Q3 do you think that starts to dissipate after Q3.
Yeah, I mean look it's tough right I think we're probably with that at least Q2 Q3, and then we should start getting some relief from the pricing and other things in Q4, but I think I'd I'd hold that through Q2 and Q3.
Yeah and on lead times, it really varied by product and it varies by Decommit right now.
We thought we were doing Super well and you know we were.
We're talking of examples on top of the line. If you asked US This last November .
But I think things have degraded for all our peers and for US. So lead times are definitely measured in many weeks and many months.
Do do you strive to have shorter lead times and your competitors.
We strive to execute better and I think we have.
Done better than our competitors and we hope we continue to do so.
What we don't do as promise one lead time, and then come up with another at least not intentionally.
Yeah.
Let me ask US do your competitor do you have customers, leaving your competitors.
For you, noting that your lead times are shorter.
They don't drive I have had a number of enterprise customers come to us and say I got all of this I can give it to you if you can ship now.
But again, we're not able to ship now either so much as they try the best we can do is faced some kind of use cases for them and different and different products.
But it isn't a case of direct substitution. It's a case of switching from one vendor to another and still having a plan across the period of time.
Thanks, Eric Let's go to the next question. Please. Your next question comes from the line of George Notter with Jefferies. Your line is now open.
Hi, Thanks, a lot guys I guess I had another question on purchase commitments the $4 $3 billion is a big number an impressive number and certainly in this environment, it's very understandable.
If I play the other side of this.
How do you see the risk of getting caught with lots of high cost componentry, and the case, where the supply chain ultimately correct and prices normalize is that something you guys think about is it.
Is it a risk in your mind or or just simply worth it in terms of.
Having more opportunity to gain share right now.
I think it's simply worth it George.
I've seen a few of these in my career.
The first thing you do here is you're really procure your newest products. Your components that are least likely to get obsolete and I think we've been very smart and sensible about it second thing is don't confuse purchase commitments with purchase arrivals they have not arrived yet.
Going to take multiple quarters or years to arrive. So think of this as a multiyear purchase commitment that could arrive in 'twenty two 'twenty three or in some cases 24.
And the third thing is we look at this as a wise investment for.
A lot of common components that will be in our new products as well.
So all in all no regret so there may be some part of basin on sub components that arrive and don't arrive, but well we feel good about this being one of our best investments for the short and long term.
Got it and is there any safety valve in that for you guys in terms of the ability to push out those deliveries or cancel orders. How are you thinking about that regarding pushout, we'd rather they don't we don't want that safety valve at the moment.
So most of the orders in the semiconductor industry. If you have been working around them are generally noncancelable, but they can they can be managed from a time basis point of view.
Thanks, George Thank you.
Sure. Thank you.
Your next question comes from the line of James Fish with Piper Sandler Your line is now open.
Hey, Thanks for squeezing me in here given most of my questions have been answered. Most of mine are just follow ups I wanted to actually circle back to <unk> question on pricing not so much.
On the magnitude of the price side, but what are you seeing with customers across your verticals of what youre implementing that can give confidence that youre not giving a pull on our borders.
Essentially more pass through being needed as these are smart buyers can see the supply chain is likely getting worse, if youre seeing it too and then additionally, why not implement noncancelable terms like others in our space.
Thanks.
Yeah, No I think they are both good questions James I'll take the first one noncancelable orders.
Easier said than done because they're based on contractual terms, so where we can do it we will look at that but generally speaking we have long term contracts.
And in terms of what was the other question.
Pricing.
Pricing in wine the impact of pricing or what was the question again.
Yes.
Not necessarily the actual pricing itself, we all kind of I've heard it and know it but it's more about what gives you confidence that we're not getting a Poland our borders.
Taking the second step off.
Okay.
You have smartphones.
Yeah, James I think the keyword does not pull in but better planning. So they are obviously looking at their purchases when the lead times of six weeks. They could look at this year this year and not worry about next year.
So, but now theyre, having to consider their budgets and their plans for not only this year, but next year.
So I am so.
So definitely I think you're seeing the demand of not just this year, but as onshore often likes to say this year has an extra quarter maybe two.
So from that point of view I think there are planning longer term.
Thanks James.
Question. Please your next question comes from the line of Tom Blakey with Keybanc capital markets. Your line is now open.
Hi, Jason how are you.
Thank you for squeezing down here at the end here.
My question is about software so everybody can hang up I'll just ask you guys just a question.
[laughter] commitments this business line.
<unk> saw a slowing of growth to 15% growth from 30 plus percent last quarter strong quarter could just be timing, but I'd love to just take the opportunity here to dive a little bit deeper in terms of what percentage of this line. It's important line in my mind is subscription.
Ratable software what percent what presented services, maybe just take the opportunity to dive a little bit deeper in terms of what the largest.
Software solution.
A large percentage of software system.
Tom It's definitely work in progress we could do better here, if I would classify our software and sort of three buckets.
The perpetual licenses that are very important that go with our products and we continue to be strong. There. These could be routing licenses automation licenses analytics et cetera, then as you call them the subscription revenue and as I've often alluded to we don't just take our business and make it subscription. These are generally new businesses like DANZ monitoring fabric.
Visibility the Ava sensors for threat hunting cloud vision for network as a service and Theyre doing well, but the revenue trails. The bookings as you as you know they're multiyear subscriptions and this is still small for us.
And so these two buckets together.
It can be viewed as something that's in the 10% range that we would like to double in the next few years right and then there's the services bucket when you do really well on products or service percentages that you saw this year.
This quarter can get smaller Q4 tends to be our strongest.
Services and renewals bucket and that tends to be typically in the <unk>.
Mid teens to sometimes high teens. So these three are really are recurring and software components and they are very important but they can tend to dwarf when your product is terribly strong like it is this year.
That's very helpful and just one last quick one the squeeze on the deferred revenue delays that you referred to you commented about new products, causing delays. This has happened in the past.
Hey, good uptick was there I thought I heard you, saying it was a new cloud customer there's not many of the cloud Titans is that accurate did I hear that right.
And the cloud it's really it's the it's pretty much the existing customers new use cases, new products and then on the enterprise side because there is some enterprise stuff in there too it's new customers, where we're deploying for the first time.
Yes. Thanks, Thank you.
We have time for one last question.
Your last question today comes from the line of Woo Jin Ho with Bloomberg Intelligence. Your line is.
Oh, great. Thanks for squeezing me in guys just a clarification on the on the second half outlook is that dependent on the supply chain getting a little bit better from where it is right now or does that assume that there's no changes to the.
Decommit environment.
Yeah, I mean, I think look we're going to take this quarter by quarter here.
I think.
All references to the full year et cetera is assuming.
Continued constrained environment I don't think we think the world changes that much but we'll take it quarter by quarter.
Great. Thank you thank.
Thank you. Thank you again this concludes the Arista Networks' first quarter 2022 earnings call. We have posted a presentation, which provides additional information on our results, which you can access on the investors section of our website. Thank you for joining us today and thank you for your interest.
Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.
Please wait the conference will begin shortly.
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