Q2 2022 Arista Networks Inc Earnings Call
Welcome to the second quarter 2022 Arista networks financial results earnings conference call during.
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After the presentation, we will conduct a question and answer session instruction.
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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 Lis Stein, our risks as director of Investor Relations you may begin.
Thank you operator, good afternoon, everyone and thank you for joining us.
With me on todays call are Jay for you all Arista Networks', President and Chief Executive Officer, and eat up Brennan <unk> Chief Financial Officer.
This afternoon Arista networks issued a press release announcing the results for its fiscal second quarter ending June 30th 2022.
If you would like a copy of the release you can access it online at our website.
During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the third 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 supply chain constraints component.
Manufacturing capacity inventory purchases and inflationary pressures on our business the potential impact of COVID-19 customer MIT product innovation and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC specifically in our most recent form.
10-Q, and Form 10-K, and which could cause actual results to differ materially from those 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 Jeffrey <unk>.
Liz.
Thank you everyone for joining us this afternoon for our second quarter 2020 earnings call we.
We delivered revenues of one point to one 5 billion for the quarter with a non-GAAP earnings per share of $1 and <unk> <unk>.
Service and support renewals contributed approximately 17, 6% of the revenue.
Our non-GAAP gross margins of 61, 9% was influenced by escalating costs due to supply chain as well as a higher cloud Titan mix.
We do expect both these trends to continue throughout 2022.
In terms of Q2 2022 verticals cloud Titans was our largest vertical.
All of those by the enterprise cloud specialty providers and financials tied for third position with the service providers in fourth place.
International contribution was 20% with the Americas at 80% and strong performance, particularly with our large cloud customer.
In the first half of 2022, we completed two small acquisitions to bolster our investments in security and switching fabrics.
We acquired Untangle incorporated a security asset for edge threat management for our commercial branch offerings led by former CEO Scott Devin.
In late Q2, we closed the acquisition of Florida box networks led by former CEO Kumar Shri content.
Pluribus has pioneered a new class of unified cloud fabric networking endorsed by our partners Erickson for telco and five G cloud and Nvidia for GPU based networking.
Our Q2 2022 results reinforced our risk is customer relevance and cloud Titan specialty cloud providers and mainstream enterprises.
As I mentioned previously our million dollar logos have doubled in the last three years and all categories greater than $1 million greater than 5 million greater than $10 million and significantly greater than 25 million customers I would like to invite onshore so Donna <unk>, our chief operating officer, and Chief cloud expert to shifts.
Some light on the nature of our strategic partnerships with cloud Titan and contribute that contribute at least hundreds of millions annually onshore. Thank.
Thank you Jesse.
We are proud to be a pioneer and market leader in cloud networking.
And then provided data center solutions to many cloud providers connecting millions of servers.
Same platform U S soccer.
It broke designs at a lower SKU have also helped us Brendan all our other verticals, giving us an efficient model to grow our business.
As we disclosed in previous calls Michael.
Microsoft unmet.
Very special customers unexpected to each be over 10% of our revenue for the full year.
Microsoft we have deployed in all layers of the network from the leaf switches at the top of rack to data center spine and regional spine to run on cloud players across the globe.
We have partnered together to create the Dci layer with encryption and long reach optics.
Which has now become a gold standard in the industry.
Microsoft deploy as I've got it.
With Sonic.
Yes.
And then using a partnership to co develop <unk>.
Nextgen network is stronger than ever.
Our New York 400 gig products.
<unk> production and we continue to receive very positive feedback about our quality and execution and continue to be the fifth towards suppliers put onshore.
We have also had a strong partnership with <unk> and have been involved with their network design since the early days.
We have co developed multiple generations of products with them and fueling believers 25 six.
70, 388 platform with unmatched power efficiency and time.
Two marketed wanted to.
We have deployed and the colorful cluster topics with part of those claims.
Also deployed in several use cases, including <unk> corn list, where there is a constant need for higher speed networks.
In addition to our top two titles were continuing to do well with the other tightens as well.
As well as cloud specialty providers very similar partnership to the big items and use cases.
Smaller SKU.
We continue to have a creep in generic partnership with customers when it comes to Nextgen architectures platform. So feature.
Over the last two years, we have also had a very strong partnership on supply chain.
Customers, who build their own silhouette, nor these challenges posed tenant.
So relentless.
The manufacturing team to find additional supply.
Despite so many lockdown.
Looking at component in the broker market analyzing second order risks.
And our forward looking investment to purchase commitments are deeply appreciated by our customers.
We are now recognized.
Not only for our best in class got it but also for a superior supply chain compared to other alternatives.
While we cannot predict the future and spend patterns on behalf of these Titans.
Our cloud business continues to be healthy.
Back to your industry. Thank.
Thank you and Joe you can see that we are having one of our best year to date with our cloud customers.
In terms of new products Arista has introduced several this quarter.
The 730 series is a powerful combination of low latency and a programmable Eos functionality designed for demanding high frequency trading and exchange application too.
70, <unk> hundred 30 models integrate fully featured <unk> switching with high performance Ultra low latency at one connectivity.
<unk> also launched its first commercial and distributed enterprise edge portfolio, the cognitive unified edge op you for sure.
<unk> is an extension of our cloud vision to offer edge as a service the commercial and distributed enterprises.
Arista earned its highest net promoter score NPS of 80 in 2022 for customer support translating to a world class rating of 93%, having an always available team with strong expertise root cause analysis and fewer vulnerabilities was cited as the primary reason for customers choosing Arista in there.
Third party independent report.
Let me illustrate a few enterprise customer wins in the first half of 2022 to give you an idea.
Firstly, a campus win for cognitive Wifi was an integral part of an RFP decision changing the way wired and wireless is delivered to student dormitories and one of the largest universities in the U S.
Cognitive unified agile Q with rich dashboards for quality of experience client journey security influenced that decision, beating out well entrenched Wi Fi players.
In a large international bank, we won the overall data center architecture, including spine with layer, three and EVP and cloud vision was a key decision factor in enabling the customer to manage all of their datasets and change control across cloud domains with superior automation and visibility.
Our professional services and leading NPS score drove the next win an enterprise customer providing supply chain management and manufacturing.
They're heavy interest in routing on the premise and Azure for the public cloud was made possible with Arista as rich visibility and telemetry.
A major messaging platform supporting over 100 million users internationally was a strategic multimillion dollar win for Arista, including a combination of BGP peering and routing across the leaf and spine key reasons for this win included high Port density deep packet buffers for the edge as well as routing in the U S.
Graham ability to integrate with their homegrown automation.
Another international win wasn't the banking outsourcing sector with a data center interconnect use case.
Was once again possible with Arista is architectural advantages for telemetry and daily mirror automation as well as assurance capabilities. Our reseller played a key role with Arista wherever you were positively viewed as a single team by the customer.
Last but by no means least was a global specialty cloud provider headquartered here in the Bay area of California.
<unk> flagship data center with our three spine plat platforms delivered price performance and rich <unk> quality and features such as close back traffic class filtering and partnering for analysis and mitigation.
With the collapse of the perimeter ERISA also won the security and visibility forensics layer, combining DMF DANZ monitoring fabric and endear network detection and response into a holistic platform.
As you can see a common theme across all of these wins is the risk of strength in proof of concept lab best practice network design and deployments with cloud vision and U S being compelling differentiators.
In summary, I am so proud of the Arista team as we've evolved from a risk as a startup at zero revenue way back in 2008 to a few hundred million dollars.
The IPO in 2014 to our first $1 billion a year in 2016 and now our first $1 billion a quarter in Q2 2022.
This has been a huge feat a lot of hard work and much credit and kudos and gratitude goes out to all my Arista as well as our unwavering customers who have believed in us continue to push us to build better cloud networking our.
Arista is not only the best of breed in cloud Datacenters today, but really centering multimodal data all the way from the client to the cloud based on our network data Lake and Eva architecture.
Our quest for proactive predictive and prescriptive data driven networking marches on and with that I'd like to turn it over to either for financial specifics. Thanks, Joshua and good afternoon. This analysis of our Q2 results and our guidance for Q3 'twenty. Two is based on non-GAAP and excludes all noncash stock based compensation impacts certain.
<unk> 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 Q2 were 1.052 billion up 48, 7% year over year and well above the upper end of our guidance range of $950 million to $1 billion.
Overall demand in the quarter was healthy with strength across all areas of the business to supply environment remains challenging with ongoing supplier decommit constraining shipments and requiring higher cost broker purchases and expedite fees.
Service as a subscription software contributed approximately 17, 6% as a percent of revenue in the second quarter down from 19, 2% in Q1. This largely reflects the accelerated growth in product revenues, while services and software continue to grow on a more consistent basis.
International revenues for the quarter came in at $206 8 million or 20% of total revenue down from 24% in the first quarter.
Reflected strength in the U S revenues in the period, particularly with our larger cloud Titan customers.
Overall gross margins in Q2 were 61, 9% at the upper end of our guidance range of 60% to 62% with somewhat lower than expected expedite fees in the period.
As previously discussed the current lower gross margin ranges reflect a healthy cloud mix and the need for higher levels of broker component sourcing and expedite fees.
Operating expenses for the period were mostly flat last quarter, $226 1 million or 21, 5% of revenues.
R&D spending came in at $148 million or 14, 1% of revenue up from last quarter at $144 3 million.
This primarily reflected increased head count costs in the period.
Sales and marketing expense was $63 1 million or 6% of revenue compared to $66 2 million last quarter with increased head count offset by lower variable expenses.
Our G&A costs came in at $15 million or one 4% of revenue consistent with last quarter.
Our operating income for the quarter was $425 5 million or 44% of revenue.
Other income and expense for the quarter was a favorable $4 $6 million and our effective tax rate was approximately 29%. This result of net income for the quarter of $342 7 million or 32, 6% of revenue.
Our diluted share number was $316 five 8 million shares resulting in a diluted earnings per share number for the quarter of <unk>.
$1 eight up approximately 59% from the prior year.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately $2 9 billion.
We repurchased $483 $7 million of our common stock during the second quarter at an average price of $101 per share.
As a reminder, we've now repurchased approximately $693 million or $6 5 million shares against our October 20, $21 billion Board authorization.
The actual timing and amount of future repurchases.
Will be dependent on market and business conditions.
Ms requirements stock priced acquisition opportunities and other factors.
We also completed two acquisitions in the first half with a total consideration of $158 9 million, including $4 million in common stock and the remainder in cash.
The revenue and expenses associated with these acquisitions are included in our outlook provided below and are not expected to have material impact on our financials in the near term.
Now turning to operating cash performance for the second quarter, we generated $101 $1 billion of cash from operations in the quarter, reflecting strong earnings performance somewhat offset by increased working capital investments increases.
Increases in inventory and other assets.
Mainly driven by receipt of components for future shipments, including shipments delayed due to supplier Decommit. This trend should reverse once overall supplier supply conditions for these decommit components to permits.
Dsos came in at 51 days down from 67 days in Q1, reflecting the linearity of billings and a decline in the deferred revenue in the period.
Inventory turns were one nine times up from one seven in the prior quarter.
Inventory increased to $852 8 million in the quarter up from $694 2 million in the prior period, reflecting higher component and peripherals inventory and a small increase in Switzerland with finished goods.
Our purchase commitment number for the quarter was $4 5 billion up from $4 3 billion in Q1. These multiyear purchase commitments reflect overall strength in demand and the current long lead time supply environment.
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.
Total deferred revenue balance was $1 billion down from $1 1 billion in Q1.
The majority of the deferred revenue balances services related and directly linked to the timing in term of service contracts, which may vary on a quarter by quarter basis.
Approximately 228 million up the balance down from 327 million last quarter represents product deferred revenue largely related to customer specific acceptance clauses for new products with our larger customers.
Accounts payable days were 63 days up from 58 days in Q1, reflecting the timing of inventory receipts and payments capital expenditures for the quarter were $8 9 million.
Now turning to our outlook for the third quarter and beyond.
Analyst day outlook for 2022 call for 30% year over year revenue growth somewhat balanced across our market sectors and heavily constrained by supply.
Reflecting on the first half of the year, we achieved revenue growth of approximately 40% in the face of a very difficult supply environment.
We yet again saw the resilience of the business model with higher component costs combined with a heavier cloud mix lowering gross margin, but allowing for increased scale operating margin expansion and year over year earnings per share growth of approximately 48%.
Looking to the third quarter was a man metrics have remained strong across the business attempts to predictably scale shipments have been somewhat hindered by AD hoc supplier decommit.
Our Q3 outlook assumes some improvement in ship volume, but reflects a balanced view of the remaining supply chain uncertainties.
We expect gross margin pressure to continue with some need for broker purchases and expedite fees combined with a healthy revenue contribution from our cloud Titan customers.
As to 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. However, we are cognizant of the broader macro risks and we'll continue to monitor spending carefully.
So all of this as a backdrop our guidance for the third 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 1.025 billion to 1.075 billion gross margin of approximately 60 to 62 operating margin of approximately 39%.
Our effective tax rate is expected to be approximately 21% and diluted shares on a post split basis of approximately 316 million shares I will now turn the call back to this list.
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. Thank you for your understanding operator take it away.
We will now begin the Q&A portion of the Arista earnings call.
To ask a question during this time simply press Star then the number one on your telephone keypad.
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Your first question comes from the line of Aaron Rakers with Wells Fargo.
Your line is now open.
Yes, thanks for taking the question and congratulations on the quarter.
I'd like to go through the outlook commentary that you provided you know appreciating that you gave the <unk> guide I guess I was a little bit confused or maybe I. Just missed it are you what what is the updated kind of expectation for the full year because as we look at it obviously, 30% growth would imply some some form of pretty sharp.
Celebration.
Physical <unk> are in the calendar fourth quarter. So just curious if you can update us how youre thinking about that 30% that you laid out at the analyst day, obviously for the implied for Q guide. Thank you.
Yeah, I mean, obviously, we're pretty happy that we have.
We've done very well against that original.
Our metrics for the year I mean, we're pretty much at 40% for the first three quarters.
Guiding the fourth quarter, specifically, just given some of the uncertainty around supply et cetera, but I think we feel pretty good about where we sit now versus that original growth rate.
This is Jason the philosophy, we have taken as a team onshore leader myself is one quarter at a time when we get so many surprises on supply chain. There's no point getting ahead of ourselves, but we certainly feel good that the demand and our commitment and execution has gone well well well north of the 30%, we guided and 30% in.
November November last year.
But one quarter at a time is still our philosophy.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of David Ross with UBS. Your line is now open.
Great. Thanks, guys for taking my question. So maybe just wanted to follow up on supply chain and vendor Decommit I know there was some headwinds last quarter and it sounds like you have more this quarter, but one of your one of your competitors really struggled I think securing.
Karen components, obviously, they pay to hire expedited fees and revenue growth was strong but it sounds like that they took a bigger hit just what kind of get a central what youre seeing in that market, whether it's in the broker market for the components or the expedited freight expedited freight fees, there's a little bit more color and how do you think that plays out the balance of the year I know you talked about having some limited visibility.
But is there an expectation that as we move into next year, we could see some relief in that gross margins could get a little bit healthier as we move into 'twenty three.
Yeah, So David I think as you know from our strategy. We have left no stone unturned and supply purchase commitments. They just keep going higher and higher this quarter. We reported $4 5 billion. So there is no lack of desire or was this part to fulfill the demand. We have we are clearly going in with strong demand strong backlog et cetera.
However, we need all the components to come together and and component problem continues it has been bad in Q1, it's no better than Q2, and we're not foreseeing it much but much improvement in Q3, so perhaps in 2023, we'll get some relief.
But again to get relief, we have to have all the components come if were missing one component we can build a system.
So our guide reflects that and our behavior in how we acquire components is reflecting that we're still not getting the components. Many of the components of 70 week lead times and therefore, we have planned multiple quarters and years for that.
Okay.
Quick follow up Jason or each of the $4 5 billion of purchase order commitments I know, it's multiple years, but how do you.
Maybe can you help us think about how that sort of falls through the balance of this year into 'twenty three and beyond from a product revenue perspective, if you can help us kind of frame that yeah. If we could do that we probably wouldn't buy so much. We don't know we know it's a multiyear commitment and it comes when our suppliers deliver it to us so in most cases, but just not getting enough supply and.
We're getting very small percentages of what we ask.
Great. Thank you.
Do you.
Okay.
Your next question comes from the line of Jim Suva with Citigroup. Your line is now open.
Thank you very much and congratulations to your entire team for such a great work in a very challenging supply chain environment.
I wanted to focus my question on the demand side.
L J.
<unk> both mentioned.
It's gone well north of 30%, but youre not updating the full year and taking it one quarter out that makes sense, but the question I have is more about kind of the backlog and visibility that you're getting I only assume backlog continued to increase but we recently saw some news of some of the cloud Titans changing their depreciation schedules.
For the switch and network components. So I'm wondering how you think about that and are you getting more visibility than say, even six months ago, given the supply chain issues. Thank you.
Sure Jim. Thank you for the good wishes and I Couldnt agree with you more I'm very proud of the Arista team for this major milestone this quarter and beyond.
So you know I remember a time, when we talked about cloud Titans and G would it be flat or single digits. It's a very proud moment to say anshul and the team had been consistently growing the entire five verticals, but especially the cloud Titans.
<unk> so all the growth in upside you're seeing north of 30% as a direct contribution to the healthiness of our cloud customers, especially the cloud Titans. So first I want to say that.
Secondly, we don't report orders, we don't report backlog he was very disciplined about that it kind of a meaningless numbers unless we can execute.
Visibility has improved with the <unk>, so I'm going to turn it over to you they've gone from six months onshore to about a year how are you feeling about that.
Well the cloud customer as anxious as everyone has to get through the supply constraints. So that they can come back to normal planning, but for the time being they understand the issue.
As I highlighted not only partner with different product. They actually go deeper in understanding what the constraints of its component is short and so on.
So the visibility is roughly a year after two weeks as our current lead time with them.
But in.
In the near term that demand is healthy.
Can't really predict what happens beyond that a lot of people are trying to guess are asking us on their behalf I think it's clear to US is the companies directly but we feel good about their business and the build out there in a healthy cycle.
As you all know they are doing the 400 gig upgrade our investment in the <unk> and several other refreshes inside the data center as well so all of that is coming along well.
And then just back to the depreciation question, Jim and then I think when you think about accounting and how that works I mean is that usually follows what's already been happening kind of in the business. So I don't think there's anything new there from an operations perspective, it's just the accounting kind of check of catching up to what's happening in the field and we saw something similar a couple of years ago, where they.
It also kind of elongated the depreciation cycle, but we didn't see anything different in the operations of the business.
Thank you and congratulations to you and your teams okay. Thank you.
Your next question comes from the line of <unk> <unk> with J P. Morgan. Your line is now open.
Oh, great. Thank you. Thanks for taking my question I guess Jeffrey as we've gone through this earnings season.
Last week or so we've seen some mixed feedback on how the enterprise vertical is responding to the current macro.
Just wondering if you can sort of I'm not asking for autos or backlog from the enterprise vertical but how are your conversations.
With enterprise customers progressing do you see the same intent in terms of spending from them going into the next June .
A response to I know you're on the last earnings call you talked about price increases.
How has the response been to those price increases in the enterprise.
Thank you.
Thank you Sammy well nobody likes price increases for sure, but I have to tell you the customer credibility and connection we have has never been higher with both enterprise and cloud customers.
When you step back and look at this.
In less than five years, we are now larger than many legacy Standalone enterprise customers right. So enterprise business has been growing faster.
Then it than many of our competitors and peers.
I feel good that we have a strong relationship with them and despite all the talk of a recession, while Arista is not a bellwether for a macro recession I would certainly clarify classify a quarter and much of this year as micro momentum and we're a little oasis both for enterprise and cloud.
In our execution.
Thank you.
Thanks, Dan Thank you Sammy.
Your next question comes from the line of James Fish with Piper Sandler Your line is now open.
Hey, guys. Thanks for the question do you want to go back on the supply chain because it does seem based on your product deferred coming down by about $100 million and we talked about roughly 50 million drawdowns of quarter.
It seemed like you were able to ship a little bit more in the expedited fees kicking down are you expecting this reversal of product deferred.
And you somewhat answered this right because I think it was last quarter, we were talking about $50 million drawdown.
Any way to help US bridge, how backlog can feed into product deferred revenue understanding it does still come down to execution Treasury.
Yeah, Dan I don't think we're going to kind of discuss kind of the backlog and the bookings just because this is kind of the worst possible time to do that would lead times, where they are and et cetera. It's just not a helpful.
<unk> coming.
Coming back to the deferred revenue I mean, we did draw down $100 million in Q2.
And the guide that we just gave you for Q3 assumes no drawdown right. So just to be clear, there's no assumption of deferred revenue drawdown. So we are improving.
The shipment side in Q3, so I think that's good news.
We're pleased to see that.
That's probably the best way to think about it.
Thank you Peter.
Thank you.
Your next question comes from the line of Alex Henderson with Needham <unk> Company. Your line is now open.
Great. Thanks.
First of all cause is found in quarter or 48% revenue growth.
But our model back too.
$2014 15 timeframe and I think you've always generated three quarters.
Or in the ER.
Sydney at 50%.
Which is pretty amazing.
When was the last time you were up there was back when you were a $600 million annual company much less so.
The revenues you are producing now so I guess my question is.
As we look at that.
Think about the out year.
And we listened to you say you've got a year's worth of lead time.
Is there any reason to believe that we should be.
Tailoring down or expectations for 'twenty three.
Given your commentary are at your analyst day would imply around a 15% growth rate in that timeframe or should we be taking these extremely tough comps that you're generating this year.
Against a supply constrained environment.
And look at those as two daunting.
To grow that at that rate against.
And I know you don't like to go out.
I want to thank everybody well, Alex you know us well, but first of all thank you for the time, you know that the discussion down history Lane. It's always good to know when you know how we grew at $600 million in how we're growing now off of a base. That's almost a $3 9 billion or whatever will be by the end of the year I think the way to think of this is the following.
We committed to double digit growth and we see no reason of a large group base that we still can grow double digits next year.
We do think that the lead times will improve maybe in the back half of 2023 and as lead times improve there will be some challenges right. The challenges will come in terms of losing some of our visibility.
And as well as our demand and then if there really is a recession, we'll probably feel it too, but all said and done we're still feeling good about 'twenty two and were feeling good about the first half of 'twenty three and we'll tell you more at the next analyst day.
But all I could ask for thank you so much.
Got it.
Yeah.
Your next question comes from the line of Jason Ader with William Blair. Your line is now open.
Oh.
Okay.
Jason.
Yeah.
Operator, we can go to the next question Oh, Please never mind.
Hello can you hear me.
Here you know okay alright.
When we think about your.
Enterprise seven and eight figure accounts is there any way to tell how penetrated you are in those accounts because I know in some cases. They may have another primary supplier and they are using you for maybe part of their network or a new data center or something but just be it would be helpful to know how much headroom you have in some of those large enterprises, where you've already penetrate.
To some extent, but I'm just curious about how you think about that.
Okay. So that's an excellent question I don't have a precise answer for you, but I think one of the verticals. We have good penetration is the financials. We started out in the high frequency trading, but even there I would say we have a long way to go because we've got the data center opportunity we've got the campus.
And then if you look at the other verticals, we are only starting right.
Less than five years in our journey here, so and as you know enterprises have a long tail and take time. So I don't feel very penetrated in the enterprise is huge Tam and huge upside.
And we're probably it's probably a little more penetrated in the financials of the data center, but still nothing close to 50% and are you seeing those orders grow every year I mean, those are those accounts grow every year at a nice pace just to get it to give that to give us a sense of kind of a follow on opportunity. After you get that initial land.
No, we definitely see land and expand it doesn't always happen exactly every year it depends on their spend but is suddenly happened over several quarters.
Sometimes it skips the ear and goes through the next year.
Great. Thank you.
Thanks, Jason.
Your next question comes from the line of Ben Bolan with Cleveland Research. Your line is now open.
Good afternoon, everyone. Thanks for taking my question.
Onshore I had a question for you about your thoughts on how equipment availability is.
Influencing the network redundancy in these large cloud Titans, how is that evolving.
How are they playing catch up to address some of the shortages there Shannon.
That's a good question Julien these customers have really resilient architectures with the leaf spine design.
They could do a short term trade offs, if they absolutely absolutely hard to try to avoid these because it's very hard to go back and retrofit on site.
Just completely out then you'd go with them later, thanks, Luke initially and then you add more over time, but.
I don't think thats happening broadly I saw some comments and sorting out as well, but thats real exception most customers are deploying the site at the scale they want to implement.
Thank you.
Thanks Ben.
Your next question comes from the line of Rod Hall with Goldman Sachs.
Your line is now open.
Yeah.
Yes, thanks for the question.
I guess I'll use the Oasis analogy again, Jeffrey so you.
You have this in isolation.
Taking water from somebody else's Oasis.
I'm, just curious where.
Are you able to do supply in this environment, even though I know it's tough for you. It seems like you've done better than others and I'm wondering do you feel like that's something you've been able to use to gain a little bit of share maybe from some other competitors, particularly in enterprise.
A quick follow up for you.
I now feel like a camel.
But you know to continue your analogy I think it is it's it's multiple efforts as Angela alluded to this the manufacturing team and the supply chain is just doing an outstanding job the leadership of onshore John Mccool, Susan Hey, They have left no stone unturned I can't speak to my peers in the industry, but I can just tell you that my team pushes themselves to keep.
Better and they are in a team already so thank you for that.
But coming back to also the relationship we have with our enterprise when I look at what Chris Schmitt Ashman and the team are doing.
We now have a far bigger relevance in seat at the table isn't it isn't investment the only started a few years ago three to four years ago, and we feel like the enterprises are inviting us as much as we are going to them and our product our quality, our differentiation or our software defined capabilities, the cloud vision and speak for themselves.
So it's a combination of becoming the gold standard even for not only cloud Titans, but the enterprise manufacturing execution and then also the relationship we've built albeit young.
It's less than five years old we got a long ways to go.
Okay. Thanks, Thanks for that jewelry, and then I also wanted to ask him theres been a lot of speculation about the delay in Sapphire Rapids, and maybe what effect that would have one major project builds whether it Mike.
Create some volatility in those builds or something like that I'm. Just curious if you could give us any color on that what you would you think about this is it affecting growth.
Yeah, I know the last time, we experienced this with Facebook. Many of you may remember it was a little little more nightmarish scenario for us they not only.
Because of delays the skipton entire service cycle in Arista suddenly felt at that sneeze turned into pneumonia for us.
But this time around I think there are many more competitive options and what we see especially due to supply chain is either the customer will sweat the assets or look for an alternative onshore youre seeing some of this you can shed some light.
Both of these telecom.
Yes, yes.
Okay got it.
Youre not seeing them or have any osborne effect.
As long as their current technology alternate technology wherever they can get their hands on immediately so really no slowdown because of the tough hurdles.
Great. That's very helpful. Thank you for that.
Thanks, Jeff.
Your next question comes from the line of meta Marshall with Morgan Stanley . Your line is now open.
Great. Thanks.
Couple of questions for me.
One just would you imagine kind of any of kind of.
Understand for Q3, you're not expecting a major deferred revenue drawdown, but just how youre thinking about it throughout the year.
And then second question, just maybe on supply chain.
I think some peers kind of within the space of maybe you said within the last couple of weeks or maybe even the last month of the quarter conditions, maybe improved slightly.
Your guidance would imply.
Fly that there is some improvement happening and so just wanted to see kind of during the quarter.
Any volatility that we should be mindful of or any kind of signs as you exited the quarter that conditions are just improving slightly.
Yeah, I think on the deferred it's tough to kind of.
Forecasted out into Q4, especially when we're not kind of being very specific on the on the overall quarter.
I think it's a quarter at a time, we have seen some improvement in Q3, you can see that in the kind of underlying ship numbers. So hopefully that continues.
But I don't think there's anything particularly around deferred for the for Q4 at this point.
And then in terms of the supply chain itself, we're seeing marginal improvements, but nothing to get terribly excited about it we need a whole lot more components than we're getting so not yet meter.
Okay, great. 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 had some thoughts as to the potential implications for Arista given a number of the cloud Titans have talked about slowed hiring I imagine it wouldnt have an immediate effect on on you, but just wondering.
How youre thinking about the public comments as well as the speculation.
Given those comments that they're hiring fewer engineer slowing up their expenses given the stress they're facing what if anything does that mean to arista.
Well Simon I think every company needs to exercise some amount of discipline on expense management and that its probably one of the first times that the cloud Titans and the core customers in general I've had two but however, we.
We feel good about the Capex, we feel our risk is a small small re percentages that capex.
The slow hiring has no impact on the Capex spend at this time in the near term for Arista.
Thank you.
Thank you.
Your next question comes from the line of Erik <unk> with JMP Securities. Your line is now open.
Yeah. Thanks, Thanks for taking the question.
Just one point of clarification I think last quarter, you had said that your demand and visibility was the highest ever.
Well, that's certainly still the case can you confirm if that is right.
Secondly.
The cloud Titans in the specialty providers are clearly just posting some very robust demand can you talk to any broad trends that are driving us there maybe focused video or is it are there any particular <unk>.
Broad trends.
Or you think are driving demand across the group.
So Eric just to quickly answer your question I think the visibility and demand has is as strong as we expressed in Q3. The same same symptoms claim experience.
And in terms of long okay.
Okay.
Eric the cloud customers are still going strong.
Normal use cases, whether it comes to a standard compute storage obligations.
Yes.
Please.
Sure.
Alright, great.
As a result of the green.
Thank you.
Okay.
Okay.
Okay very good thank you.
Your next question comes from the line of Amit <unk> with Evercore.
Your line is now open.
Hi, This is Lauren on for Amit Thanks for taking the question.
So just going back to the purchase commitments and thinking about them in terms of the sequential uptick.
Being much at a much slower pace in the March quarter.
How should we think about it in terms of lead times that you guys saw over the last 90 days would this be kind of an improvement or lead times holding steady.
No I think Laura and one what we saw last quarter was just kind of you're at the beginning of the year and in setting up some purchase orders for 2023. So it was just more of a step function then you'd expect to see normally so I wouldn't read anything else into that.
Yes.
Got it thank you.
Your next question comes from the line of Paul Silverstein with Cowen <unk> Company. Your line is now open.
Multiple questions, but the good news is my first one is upstream onshore if you'd be kind enough to sit closer to the mic.
Okay, that's easy.
I appreciate it.
Only one question at a time right I actually Joe or Jeff just financial.
Okay.
The question if I recall, you exited 2021 with enterprise.
<unk> hundred million and you were targeting $400 million for 2022, if I remember the numbers.
I assume you're tracking ahead of that through the first I know you don't want to guide, but I assume you're tracking ahead of that 400 million annualized run rate for the year from the first half of the year less one question. The other question is.
Everyone's obviously concerned with macro environment translate into weakness for you and everybody else are there any it doesn't sound like it.
Any signs that you have seen any communications from enterprise or cloud customers.
Ever of impending macro weakness and related to that where is the greatest opportunity for most folks from here is it more of the same as with the new product areas that youre edging out into any thoughts will be appreciated. Thank you.
Okay answered here any other Mike you want to answer [laughter].
Paul in terms of.
Multiple questions.
Macro.
On macro look there are no signs right now.
Not that we're a bellwether, but at the moment, we're being prudent about expenses, we're prioritizing our projects.
No customers come to us and said specifically that we got a macro issue a recession issue and they want to cancel projects that may change when recessions come I've been through a few of them they happened fiercely and suddenly but as of now so far so good.
But Paul and Tom.
Go ahead go ahead on the enterprise and at the end.
Enterprise customers are.
All telling us that things are steady they're all all cost here. So what are you asking what how are those doing but we're not seeing any slowdown from customers yet.
And relative to the $400 million number how youre tracking.
So that's what this.
This is why they were a little you mean on the campus right. That's not really I'm, sorry, I apologize you campus center for Us exactly.
So we're still on track to close the year at $400 million.
We feel good about the demand we need to feel better about the shipment.
Just really trust demand. So if you have the shipments.
You'd be able to deliver greater than $400 million only issues, having the capacity.
Yeah like I said, we feel good about the demand I don't feel as good right now about the shipments.
I need more component, yes got it.
Thank you. Thank you.
Okay.
Your next question comes from the line of Sami Badri with Credit Suisse. Your line is now open.
Hi, Thank you for the question.
My question is on visibility. So we've had this conversation a couple of times G. Sri and onshore all about just the visibility that you're getting from your customers and I think what created the most amount of turbulence in the tech sector. In this last quarter was what all these hyperscale as we're saying what the Taiwanese slash Chinese.
Supply chains are staying in reporting regarding cancellations slowdowns acceleration et cetera, but if I just ask you guys to eliminate all of that at the end of the day has your visibility been extended and improved with your key customers or has it essentially remain the same or has it worsened just to kind of get an idea on where.
We are on the spectrum.
I like multiple choice questions remain the same.
And you know I think the day.
We see lead times decline, we expect visibility to decline as well, but we don't see that for a while.
Got it thank you.
Your next.
Question comes from the line of Pierre <unk> with New Street. Your line is now open.
Yes.
Hi, Thanks for taking my question.
I'm going to ask you about how.
Sure. Thanks, I'll get into in 2023, how much component.
In the next few quarters, maybe I'll actually moves to something different you announced this quarter.
Acquisition of two small operations in Angola and variables.
And I was wondering.
What you could tell us about how significant.
These acquisitions hobby gallons offline.
Maybe like an idea of the number of people hundreds of thousands of lines of software.
These teams have developed and if you could tell us about.
What's like the.
The product vision behind you.
What kind of features.
Are you, adding in which markets which of your segments.
You want to address resist technology and.
And most importantly, whats your integration strategy is that additional.
Although it's still going to add to.
Your line is now poised and deep technology Yogi invigorating through Yoko.
And yogurt platform.
Yeah, well first of all thank you for the refreshing new question I appreciate it.
We did make two small acquisitions I think EDA in total about 150 employees aggregate, we will increase our head count in addition to our normal organic investments by another 150 and as you probably know it's not uncommon for Arista to make small acquisitions starting back in the 2018 with meta Mako and Mojo and then big switch.
Networks and awake, we have tended to make acquisitions for technology and talent, but most of all they got to fit our culture. So that we can make them successful and we're very proud of the fact that all the four we've done to date, we can see the business and cultural and product integration results of that.
Untangle and turn a bus or no different untangle will be tackling the commercial and distributed enterprise market, bringing us very low end security and edge threat management that we can bring in with our secured unsecure wired and wireless for the mid market and.
And the channel market.
All of us as a great acquisition of talent and technology to bring this concept of a unified cloud fabric. As you know Arista has been building lots and lots of forms of cloud networking.
In two instances it would be really exciting to see a fabric integrating them. One is in the telco cloud and <unk>. So we're really excited to forge a new relationship with Ericsson through our <unk> acquisition and also in the GPU case. The data processing unit. There are a lot of GPU companies Nvidia as a market leader and I'm really looking forward to working with Janssen in the.
Jim on that and bringing more capability rich capabilities and overlays into the GPU fabric.
So, they're both talent and technology acquisitions to further our larger system wide goal on our products.
Thanks, Jason.
Thank you Pierre.
Your next question comes from the line of George Notter with Jefferies. Your line is now open.
Hi, guys. Thanks, a lot.
I know a quarter ago, there was some talk about raising pricing.
Just wondering what you guys decided to do in that area any sense for magnitude any sense for timing in terms of when that might show up in the model. Thanks a lot.
Thank you George Yes, we did make two pricing adjustments one last November that probably the earliest we'll see affect US is in late Q4, and we have made a second pricing.
Adjustment in Q2 in June .
That again will probably only affect us in 2023. So we expect most of this pricing too to help our gross margins and neutralize some of the high cost we've had in 2023.
Got it any sense of magnitude on the June price adjustment.
They were different in different products, we did not do.
The magnitude range from 5% to 10% depending on product.
Say zero to 10% shouldn't judge the secondary as well as the only on selective products not across the portfolio.
No.
Okay. Thank you then add the high cost.
We took some <unk>.
Decision.
Thanks, George Operator, we have time for one more question.
Your final question today comes from the line of Paul Leone with Bank of America. Your line is now open.
Hey, guys on shell.
400 gig, we didn't talk about it for a long time.
Can you talk about the significance of it to potential significance of it to your revenues going forward.
You used to say at the beginning that it's a small business case than the message changed how do you see 400 gig deployed how significant it is and where is it being deployed what kind of market verticals.
Absolutely.
400 gig is very strategic to us along with 100 gig and in some cases 200 gig as well just to give you a quick.
Review backwards, we grew from about 70 customers and 400 204 hundred gig and.
2020 to 302021, and you can expect us to grow to more than 2022.
Customers are obviously, the fastest adopters of two and 400 gig is onshore, but a test, but we're starting to see a lot of 100 400 gig combinations in the enterprise as well.
This concludes their revenue.
Go ahead Tom.
Okay.
Revenue wise, how significant it is given its smaller numbers, but higher price.
Yeah, it's still early stages for that its stronger. This year. This is the third year of 400 gig I think they were mostly in trials in 2021, we've started seeing production in 2000.
22 in a significant way.
We'll give you more year end stats is the market share leader.
Numbers come out at the end of 'twenty two.
Thank you.
Okay. This concludes the Arista Networks' second 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 in Arista.
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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