Q4 2022 Arista Networks Inc Earnings Call
Speaker 2: Please wait, the conference will begin shortly.
Speaker 3: Welcome to the fourth quarter, 2022, a RISTA Network's financial results earnings conference call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press star-followed by zero.
Speaker 3: As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Euristor website following this call. Miss Liz Stein, a RISTA Director of Investor Relations, you may begin.
Speaker 4: Thank you, operator. Good afternoon, everyone, and thank you for joining us.
Speaker 4: With me on today's call, our J. Shrew L. A RISSA Network's President and Chief Executive Officer and Eda Brennan, a RISSA's Chief Financial Officer.
Speaker 4: This afternoon, a RISSA Network issued a press release announcing the results for its fiscal fourth quarter ending December 31, 2022. If you would like a copy of this release, you can access it online at our website.
Speaker 4: During the course of this conference call, a RISC Network's management will make forward looking statements, including those relating to our financial outlook for the first quarter of the 2023 fiscal year. Longer term financial outlook for 2023 and beyond our total addressable market and strategy for addressing these market opportunities.
Speaker 4: supply chain constraints, component costs, manufacturing capacity, inventory purchases, and inflationary pressures on our business, extended lead times, product innovation, and the benefits of acquisitions which are subject to the risks and uncertainties that we discuss in detail and are documents filed with the SEC.
Speaker 4: Specifically, in our most recent form 10Q and form 10K, in which could cause actual results to differ materially from those anticipated by these statements.
Speaker 4: 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-gab basis and have been adjusted to exclude certain charges.
Speaker 4: We have provided reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to J.Sri.
Speaker 5: Thank you, Liz.
Speaker 5: And I'm glad we avoided Valentine's Day this time. Thank you everyone for joining us this afternoon on our Flood Quarter 2022 Running Call.
Speaker 5: 2022 has certainly been a record year for a RISTA. You might recall in November 2021 analyst day, we had given you a guidance of 30% growth and instead have achieved well beyond that at 48% growth severe, driving to an annual revenue of 4.38 billion.
Speaker 5: with a non-gap learning spasher of $4.58, translating to an EPS growth of 58% for 2022. Indeed, a memorable year.
Speaker 5: Let's get back to some Q4 2022 specifics. We delivered 1.276 billion for the quarter with a non-gap earnings share of a $1.41. Services and software support renewals contributed approximately 15.8% of the revenue.
Speaker 5: Our non-GAP gross margin was 61% influenced by our supply chain overhead and cloud-tiking concentration.
Speaker 5: International contribution registered at 23.5% with the Americas at 76.5% in 2022.
Speaker 5: This was one of our strongest performing international quarters in recent history.
Speaker 5: In terms of Q4 2022 verticals, cloud titans was our largest and first followed by enterprise and then specialty cloud providers at third place, financials at fourth and service providers at fifth place.
Speaker 5: In 2023, we will report the three segment sectors instead of the verticals.
Speaker 5: Shifting to the segment sector revenue for 2022, cloud tightness contributed significantly at approximately 46% resulting in a triple-digit growth annually.
Speaker 5: Enterprise and financials together was strong at approximately 32%. While the providers were at approximately 22%.
Speaker 5: Both meta and Microsoft are now far greater than 10% customers at 25.5% and 16% contribution respectively.
Speaker 5: Clearly, we continue to enjoy its strong and strategic partnership with M&M.
Speaker 5: With that, I'd like to now invite Anshul Sedana, our Chief Operating Officer, to shed more light on our Cloud-type uniform.
Speaker 6: Thank you, Judge Flee.
Speaker 6: Our partnership with Microsoft and Meadow.
Speaker 6: Guru, even stronger last year.
Speaker 6: Both of these titans are in the midst of deploying our next Shen 100, 200 and 400 products at several details of their networks.
Speaker 6: The cloud is reshaping the internet with their massive footprint, global backbone and edge partnerships.
Speaker 6: We are proud to have our products designed into pretty much all of these use cases.
Speaker 6: In addition, our business with the other titans continue to grow as well.
Speaker 6: We had additional design wins in fact on ran and edge rolls
Speaker 6: This past year we ran our 7800R3 series high density 400 gig near lossless spine.
Speaker 6: We also introduced several new products based on Tomahawk 4 and our DeepBarford Virtual Output Keyed Systems based on Jericho 2, the 7280 and the 7880 or 3 modular systems.
Speaker 6: While we will continue to add 100 and 400-dick products to our portfolio, we also launched our first one-raction at 25 terapet product with 800-dick ports.
Speaker 6: that can be broken out as 2x400 take.
Speaker 6: These products have good use cases and high speed applications such as artificial intelligence.
Speaker 6: The OS, our high quality resilient network data lake based operating system has also matured and now supports cloud scale with multiple copies of the Internet routing table. The OS, our high quality resilient network data lake based operating system has also matured and now supports cloud scale with multiple copies of the Internet.
Speaker 6: We co-developed our customers who greatly appreciate our RISTA Engineering expertise.
Speaker 6: This past year, we furthered our partnership with Microsoft with Sonic Support on many of our high volume switches.
Speaker 6: A work with them on automation and monitoring our skills is very well received for Azure and Bing deployments.
Speaker 6: At meta we have our core developed platform such as the Tomhawk base 7368 and 7388.
Speaker 6: which helps them improve throughput and data set up our efficiency.
Speaker 6: F-Post and EOS are deployed with very high reliability in the cluster fabrics using these products.
Speaker 6: A deployment in the backbone and in generative AI and recommendation engines with the 7800 series are now smoothly deployed in production.
Speaker 6: We don't control macro.
Speaker 6: We don't control our customer's cap expense.
Speaker 6: But when they do spend, we are there with them to make these next generation cloud networks successful.
Speaker 6: AI is a good example where we are continuing to grow into next-generation architectures without cloud customers.
Speaker 6: The use cases we are involved in are generally core to their business and not an optional spent.
Speaker 6: Our cloud journey has come a long way with the last last decade.
Speaker 6: This is still a very exciting market segment, given the peace of innovation and our partnerships here. Back to you, Jesui.
Speaker 5: Thank you, on-shows. Wow, 2022 was indeed a phenomenal year with the CloudSighties. And these partnerships have been nurtured for well over a decade with expanded use cases such as these AI workloads.
Speaker 5: We remain considerate of our meaningful share with both Microsoft and Meta, and we expect both of them to once again contribute greater than 10% of our total revenue in 2023.
Speaker 5: In the non-cloud category, we have registered solid number of million dollar customers.
Speaker 5: as a direct result of our momentum in the enterprise and campus throughout the year. We have now surpassed 9,000 cumulative customers.
Speaker 5: In terms of 2022 product lines, we have three categories. One, our core cloud and data center products built upon a highly differentiated, a RISTA EOS stack that is successfully deployed across 10, 25, 200, 200 and 400 did speed.
Speaker 5: This drove approximately 68% of our revenue with strong cloud and enterprise spending cycles.
Speaker 5: We believe that we will continue to gain market share in the high performance switching and have already grown from the teams to the 20s.
Speaker 5: In the 100 and 400 gig port category, we have now earned the number one position according to industry analysts.
Speaker 5: We have also doubled our 400-git customers from 300 in 2021 to over 600 in 2022.
Speaker 5: Our second market is Nefokajasensees comprised of routing, replacing routers and our cognitive campus.
Speaker 5: We doubled our campus orders to exceed 400 million in 2022, too. But we did fall short of our revenue due to extreme supply change shortages.
Speaker 5: We maintain our campus momentum and our aiming for 750 million in revenue by 2025.
Speaker 5: Our investments in cooperative campus, finds, lines, wired and wireless have generated significant customer interest and demand based on cloud vision and cloud vision queue.
Speaker 5: Considering this is only our third full year of shipping versus incumbents who've been in the market for 15 to 30 years, we are very proud of our execution.
Speaker 5: Our vision for a cognitive campus with network as a service and edges of service based on that deal is resonating extremely well and being embraced by our campus customers.
Speaker 5: We have also successfully deployed in many routing edge and peer-in-use cases such as securing data in transit with tunnel set encryption, precision and performance for mobile networks, cloud exchanges and Metro Ethernet.
Speaker 5: Enterprise customers can now deploy U.S. with a single EVP and protocol, whether it's for data center, data center interconnect, or when delivering multiple profiles.
Speaker 5: Just in 2022 alone, we introduce 6 EOS software releases, 600 new features across 50 new platforms.
Speaker 5: Stay tuned for more in 2023 as we will be introducing new WAN transit functionality.
Speaker 5: The campus and routing adjacent cities together contribute approximately 14% of revenue.
Speaker 5: Our third category is NeppokSoftware and Slevesus, based on subscription models such as RISTA, A-Care, Cloud Vision, DMF observability, advanced NDR with AvaSensor Security.
Speaker 5: A risk-disk subscription-based network services and software contributed approximately 18% of our total product line.
Speaker 5: We are proud to note that Cloud Vision exceeded 2,000 cumulative customers up from 1,500 the prior year. And it's really a compelling data-driven platform, delivering network agility, continuous integration, and operational excellence.
Speaker 5: A risk of non-cloudwinds continue as well. While a risk of 2022 headline has been the massive contribution from our cloud customers, we are pleased with the momentum of our enterprise and provider customers as well. A risk to continue to diversify its business globally in multiple use cases.
Speaker 5: Helping our prospects and customers realize these operational benefits with modern software and automation has been a recurring theme. And so let me share a few examples that we have learned to see to the table at.
Speaker 5: Our first example highlights the Universal Cloud Network lens in the travel industry.
Speaker 5: Like many conversations, the customers initial asked was to gain more visibility into their infrastructure.
Speaker 5: We presented our DMS, Dance Monitoring Fabric Solutions, but it quickly transitioned to a general data center for all of our VISTAs platform offerings.
Speaker 5: The customer chose our Layer 3 Leaf Spine EVPN design for their critical VDI environment. The customer also leveraged cloud vision for their day zero day one day two operation using our chassis spine, R3 Leafs, and out of band management to reduce their operational risk.
Speaker 5: Our second win highlights a financial customer's choice to proceed with a RISTA's best-in-class cognitive campus with wired and wireless solutions.
Speaker 5: As with every campus opportunity, it was competitive.
Speaker 5: Cloud Vision once again was a key differentiator for us, as we typically became their trusted advisor. Our virtual training environment, such as the RISC Cloud Test, gave architects a relevant hands-on experience.
Speaker 5: Our low-CVE account and commitment to single EOS with high quality was unmatched by our peers.
Speaker 5: A RISTA continues to make in roads on regional tier 2 and tier 3 service providers. Regional service providers are in the middle of expanding and looking for reliable, compressed, routing footprint.
Speaker 5: The third one highlights the evolution of our US Riding Stack, where customers are now deploying EVP and services on top of their MPLS segment core network.
Speaker 5: a VISTA's high density 100 gig MPLS routing, together with long range optics, and a fully automated deployment using Cloud Vision and Zero Touch Provisioning, delivered that Cloud-like operating model.
Speaker 5: Our next win is an international one in the education sector for high performance computing.
Speaker 5: HPC demands low latency, deep buffers and real-time visibility.
Speaker 5: This customer chose the Vista for providing a highly elastic VX land-based leaf fine pod with best in class performance.
Speaker 5: Consistent technology between our fine and edge leaves anchored by our flagship 7800 chassis and combined with cloud vision-based real-time telemetry compliance and automation really created a lasting impression.
Speaker 5: Our final win for this quarter's announcements is an exciting international one in the government sector.
Speaker 5: where a RISTA 400-gith ethernet was selected instead of instant of an for big data, her Duke cluster deployment.
Speaker 5: In this case, the customer chose us for a 100, 400-deep solution with built-in encryption capability.
Speaker 5: The customers are clear, differentiation in our automated operations, Hitler subgrade, and full real-time telemetry, ensuring comprehensive visibility of workloads in the fabric.
Speaker 5: As we enter 2023, a risk is well positioned as a game changer in data-driven client-to-cloud networking.
Speaker 5: A key part of this transformation is to make our cloud first principles and bring that to every aspect of the data network.
Speaker 5: Trust-refunctions such as routing for when, zero trust security and observability are moving into the every step.
Speaker 5: We are building upon our cloud network heritage to bring proactive platforms, predictive operations, and a complete prescriptive experience, unifying data sets from multiple sources.
Speaker 5: Our NetDial, Lafittexia and ABA, our autonomous virtual assist using AI and ML and Natural Language Processing techniques is a very compelling combination.
Speaker 5: Together this architecture can gather, store, and process multiple modalities of network data. And this way network operators can reconcile all their different silos.
Speaker 5: 2023 is the start of a Vistus 2.0 journey.
Speaker 5: Arista 2.0 is our migration from Vesta breed products to Vesta breed platforms as the the address I expanded 10 or 50 billion ahead.
Speaker 5: We are uniquely qualified to bring modern software principles to build that world class data center and data driven networking.
Speaker 5: It is based on that foundational focus on quality, availability, AI-driven deployments with top-notch support.
Speaker 5: And as we undertake this 2.0 journey, we are excited to work with a collaborative ecosystem of our partners and customers worldwide to realize this vision.
Speaker 5: In summary, I'm so proud of our team's execution across multiple dimensions, despite one of the worst supply chain backdrops ever witnessed.
Speaker 5: A special thank you to our customers for their patience and support to us last year and to all the effective responses.
Speaker 5: Our tireless mission taught us valuable lessons and we expect to emerge stronger. We reiterate our 25% annual growth outlook that we mentioned in the November 2022 and the state as we now aim for 5.47 billion in 2023 in terms of revenue.
Speaker 5: Now, I will turn it over to ETA for financial specifics.
Speaker 5: Thanks, J. Shreys, and good afternoon. This analysis of our Q-POWER and 12-year 2022 results and our guidance for Q-1-20-23 is based on non-GAP. It excludes all non-CASH stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items.
Speaker 7: A full reconciliation of our selected GAP to non-GAP results is provided in our earnings
Speaker 7: Total RAM is in Q4 or 1.276 billion of 54.7% year-over-year and well above the upper end of our guidance of 1.175 to 1.2 billion.
Speaker 7: While we experience some improvement in overall components fly in the quarter, shipments remain somewhat constrained with lingering shortages on a handful of parts.
Speaker 7: Services and subscriptions offer contributed approximately to 15.8% of revenue in the port border, down to 16.3% in Q3. This is largely reflected growth in product revenues. While services and software continue to grow on a more efficient basis.
Speaker 7: International revenues for the quarter came in at 300 million, our 23.7% of total revenue.
Speaker 7: up from 17% in the third quarter.
Speaker 7: This quarter of a quarter increase largely reflected improved contributions from our AMIA and region customers in the quarter.
Speaker 7: Overall, however, 2022 was the year of outside growth in the US, up 61% year-over-year, largely due to domestic strength from our cloud-tightened customers.
Speaker 7: Overall, growth margin in Q4 was 61 percent at the midpoint of our guidance range for approximately 60 to 62 percent.
Speaker 7: We continue to recognize incremental supply chain costs in the period combined with a healthy cloud mix.
Speaker 7: Operating expenses for the quarter were 235.3 million, or 18.4% of revenue, up from last quarter at 227.7 million.
Speaker 7: R&D spending came in at 153.2 million or 12% of revenue up from 150.1 million last quarter.
Speaker 7: This is my very reflected increased headcount and new product introduction costs in the period.
Speaker 7: Sales and marketing expenses were 67.4 minutes or 5.3% of revenues compared to 62.8 million last-quarters with increased head counts and higher variable compensation expenses.
Speaker 7: Our DNA cost 10 minutes 14.6 million, our 1.1% of revenue consists of the last quarter.
Speaker 7: Our operating income to the quarter was $543.2 million or 42.6% of revenue.
Speaker 7: Other income and expense of the quarter was a favorable 13.6 million and our effective tax rate was 20%.
Speaker 7: This results in net income to the quarter of $445.1 million or 34.9% of revenue.
Speaker 7: Our diluted share number was 350.2 million shares, resulting in a diluted earnings per share number to the quarter of $1.41, up 72% from the prior year.
Speaker 7: Now, go into the balance sheet. Cash cash and quibblance and investments enter the quarter to approximately 3.024 billion.
Speaker 7: In the quarter, we repurchase $2.8 million from our common stock.
Speaker 7: As a reminder, for the year, we have repurchased $670 million or $6.5 million shares at an average price of $104 per share.
Speaker 7: This leaves us with $257 million available for repurchase under our existing $1 billion gold authorization.
Speaker 7: The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price and other factors.
Speaker 7: Now, I'm trying to operate in cash performance for the fourth quarter. We generated approximately 40 million of cash from operations in the period.
Speaker 7: with that in strong earnings performance, mostly offset by a significant increase in working capital.
Speaker 7: We experience growth in inventory with the receipt of components for future shipments, including shipments delayed to display a decommission.
Speaker 7: We also experienced roles in accounts receivable and DSOs in the quarter, with a significant ramp in service renewals and product shipments towards the end of the quarter.
Speaker 7: DSO is committed 67 days, held from 51 days in Q3, projections in linearity of billing and growth and service renewal from the period.
Speaker 7: Invented turn to 1.6 times down to 1.7 last quarter.
Speaker 7: Inventory increased to 1.3 billion in the quarter, up from 1.1 billion in the prior period, reflecting hierarchy component of peripherals inventory and an increase in switch-related finish goods.
Speaker 7: Our purchase commitments at the end of the quarter are $3.7 billion, down from $4.3 billion at the end of Q3.
Speaker 7: We expect this number to continue to decline in future quarters as component lead times improve and we work to optimize our supply positions.
Speaker 7: As a reminder, we have both this extended purchase commitment strategy on early life cycle products to help mitigate the risk of excess or optimists.
Speaker 7: Our total deferred revenue balance was 1.041 billion, up from 941 million in Q3.
Speaker 7: The majority of the deferred revenue allows the services related and directly linked to the timing and term service contracts, which can vary on a quarter by quarter basis.
Speaker 7: Approximately 125 million of those pounds, down from 165 last quarter, represents product deferred revenue, largely related to acceptance policies for new products, most recently with a large prototype in customers.
Speaker 7: For clarification, this represents a reduction in products related to peridropney for the year of approximately 40 million.
Speaker 7: Counts payable days, before the three days, down from 56 days in Q3, protects the timing of inventory of the payment.
Speaker 7: Cabin extenders to the quarter for 10.5 million.
Speaker 7: Now try and draw out of the first quarter and beyond.
Speaker 7: 2022 with a year of outstanding revenue and earnings growth driven by an acceleration of demand from our pilot tighten customers coupled with healthy contributions across the other areas of the business.
Speaker 7: Supplier being constrained throughout the year and somewhat limited our ability to ramp product shipment and response to this demand.
Speaker 7: As we head into 2023, we look forward to resolving the final kinks on the supply side and reducing lead times for our customers.
Speaker 7: As outlined at our analyst date, we expect to achieve year-over-year revenue growth for 2023, up across 25%.
Speaker 7: This reflects continued healthy demand across all our market sectors, but recognizing that as lead times improve, we should expect to see some reduction in disability.
Speaker 7: In terms of quarterly trends, you should expect accelerated year-over-year growth in Q1, moderating as year progresses, versus more difficult year-over-year accounts.
Speaker 7: On the Gross Margin Front, expect to continue consuming broker parts and other inflagia cost items in the first quarter.
Speaker 7: And this combined with the continuing healthy cloud contribution will pressure for those margins.
Speaker 7: Beyond that, we should see some steady improvement as we look through the year with fewer broker parts and the opportunity to optimize the manufacturing ramp.
Speaker 7: Now try and spending an investment. We remain cognizant of the overall macro environment and will be prudent in making investments as we move through the year.
Speaker 7: You should however expect us to make targeted higher in R&D and go to market at the team see if the opportunity to secure a talent.
Speaker 7: On the cash front, FY 2022 was a year where much of the 1.4 billion net income generated by the business was consumed by incremental working capital needs and additional cash tax payments under Section 174, which refers to the deductibility of RMD spending.
Speaker 7: As we head into 2023, we should expect to focus on supply chains and working capital optimization, while recognizing the need for balance in areas of higher supply risk or where lead times remain extended.
Speaker 7: And just in comes to continue to increase as we move through the year, the 20 million Q1 growing toward a quarterly contribution of 40 million in the year.
Speaker 7: With all of this as a backdrop, our guidance, the first order to say it's a non-gap results and include any non-cash stock based compensation impacts and other non-recurring items is as follows.
Speaker 7: Revenue is approximately 1.275 to 1.325 billion. Gross margin of approximately 60 percent. Operating margin at approximately 40 percent.
Speaker 7: Our effective tax rate is expected to be 21.5% in diluted shares on a post-beth basis of a approximately 316 million shares.
Speaker 4: I will now turn the call back to this. Liz. Thank you, Edas. You will now move to the Q&A portion of the Arrissa Erning 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.
Speaker 3: We will now begin the Q&A portion of the Arrister earnings call. In order to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. We ask that you pick up your hand set before asking questions in order to ensure optimal sound quality.
Speaker 3: Your first question comes from a line up Jason Aitor with William Blair. Please go ahead, your line is open.
Speaker 8: Yeah, thank you. Good afternoon, everyone. I just wanted to ask, I guess, either for you on the order trend. We all know that the revenue is incredibly strong right now because of all the lead time supply chain issues, but maybe some visibility on how orders are trending versus revenue.
Speaker 7: Yeah, Jason, we don't really talk about orders and backlog. I think we did talk about kind of healthy demand across the various pieces of the business and obviously, you know, where we're affirming the guidance for 2023. So there is good support for that. I'm just going to add it if you want to add anything to that. No, I think you said it well. Order trends in 2020.
Speaker 5: orders. When we have something to state we will just end so far. Okay.
Speaker 6: Thank you.
Speaker 3: Your next question comes from the line of Amit Daryanani with Evercore. Please go ahead your line is open.
Speaker 9: If thanks for taking my question and congrats on the quarter. I guess when I think about this 25% growth in calendar 23, how do you think it stacks up across the three verticals for you folks? That'll be really helpful to them to send kind of where do you see the strongest versus weaker growth? And then on the cloud side, if you think about growth in 23 and maybe even beyond, do you think that's really a function of what they're...
Speaker 5: How does this break down? If you look at 20, let me go back to 2021. We had a very nice even split and Cloud Titan was actually kind of on the low side. It was 30% if I remember right? 30, 30, 40. And if you look at 2022, it will Cloud Titan's without size, whether 30 went to 46.
Speaker 5: If I had to guess, I would say we'd be between those two numbers. I still think we'll have a very healthy cloud-tightened mix, but enterprise momentum continues to be strong, and you'll see a contribution from that. I've spent as the TR2 specialty cloud providers and service providers as well. So I think it'll...
Speaker 5: My guess is it'll look somewhere between 21 and 22 in terms of, we'll see as the quarters progress. In terms of the cat-x and the impact of that on cloud type, we don't exactly and equivalently track to cat-x, but eventually cat-x is an indicator of future.
Speaker 5: of our future cloud-tiping progress. I don't believe at this point that our progress is coming from white box or specific things like commodity things like that. It's really coming from, as I'm just pointed out, a very strategic seat at the table on new use cases like AI workloads, which has a...
Speaker 5: multiplicative factor on our bandwidth. So I believe we'll have a real seed at the table, especially with Microsoft and NetApp.
Speaker 5: And we'll continue to see what the use cases are that we can imagine beyond 23, but we've been working on this for 10 years and I think it'll continue to be strong.
Speaker 3: Thank you. Thank you, Emmett. We can take our next question, operator. Our next question comes from the line of Paul Silverstein with Cowland. Please go ahead. Your line is open. Thank you.
Speaker 10: Thanks, I hope you'll enjoy the clarification. I just want to make sure you said Microsoft was 16 and Meadow was 25 or do I have that backwards.
Speaker 5: Yes, 25.51 meter and right to soft 16.
Speaker 10: Okay, now for the question. What portion of your cloud type revenue in general and how much of growth in Microsoft and Meta was, if you know it, what's your sense for how much of that was AI driven? Any visibility as to growth in AI and its impact on demand for your switches and various encounters analysis and offices andrajers representative fund??'
Speaker 10: over the course of the next few years with your cloud-time customers in general, including Microsoft and Madam.
Speaker 5: Yeah, we see AI as a very, very important use case and workload for all our cloud-earned customers. Clearly, it's in the first tenings we're just beginning. So, very much like cloud networking ten years ago, we see AI as an additional use case.
Speaker 5: It is a very very small portion of our use cases so far so a lot of upside ahead.
Speaker 5: very very small portion of our use cases so far so a lot of upside ahead. Is it possible to quantify? Too short.
Speaker 5: Too early to quantify it, not material.
Speaker 9: to quantify it's not material. That's when I say, okay, I appreciate it.
Speaker 11: Right.
Speaker 3: Your next question will come from the line of Aaron Rakers with Wells Fargo. Please go ahead, your line is open.
Speaker 8: Yeah, thanks for taking the question and congrats on the quarter as well. I guess maybe this is for onshore building on the last two questions. Is that, you know, as you look at kind of adding up the meta and Microsoft contribution and you compare that to 46% total cloud titan, your other cloud titan contributions so pretty small.
Speaker 8: So, also, when you're engaging with other cloud opportunities, maybe you can unpack that a little bit. What's opening up the opportunities for you is an AI, or is it something else that you're starting to see, and how do we start to think about that as an incremental growth driver?
Speaker 6: Sure, Aaron, first of all, we are proud of our achievement for the first two M&M with the contributions there.
Speaker 6: On the other titans we have been engaged fairly well with them. That does us also growing, whether it pays in comparison to Microsoft and Mirab.
Speaker 6: But it is not insignificant compared to other opportunities in the market and we continue to achieve those, those partnerships are very, very strong as well.
Speaker 6: At some point in the future, if the opportunity is materialized, many of these customers.
Speaker 6: decide to go big in the market and buy switches from the industry like us. I think we'll perform sure. We start to wait out and get to that opportunity. It's not clear as they yet whether it's happening in a year or two or three. I don't know when it happens to be there and we will do well in where we are today with them, which is essentially routing you.
Speaker 3: comes from the line of Jim Suba with City Group. Please go ahead your line is open.
Speaker 12: Thank you, Dr. Shree and Eda and everyone. Congratulations on great results. My question is, I think it was Eda made the comment of expect a deceleration in revenues as we progress throughout the same year, just to get to the 25% revenue growth. I want to make sure I heard that right because that would then also mean that
Speaker 12: Even with very, very stiff, difficult year-over-year comps for revenues, you wouldn't expect them to go negative at all. And I guess when we look at that deceleration, it kind of seems like a steep decline to get to an average of 25%. So can you help me with my math there, or the missing pieces, or is it some conservativism, or...
Speaker 7: I'm just kind of wondering, but it definitely doesn't seem like negative growth is in the works. No, we didn't talk about negative growth. If you look at the trend last year, you'll see, you know, it really accelerated post-Q1, right? So that's why you're seeing, you know, a much stronger growth rate year over year with our Q1 guide.
Speaker 7: then you will as you move through the year. So I think after Q1 it's better to start to look at it as a quarter by quarter, on a quarter by quarter basis and kind of grow your revenues quarter by quarter. There's certainly no kind of negative growth in that. I think you'd get a better answer if you kind of just grow kind of quarter over quarter from there on out. Q1 was a much lower revenue number last year because I'm back on the trend.
Speaker 12: Great, thank you for the details and congratulations and happy Valentine's to all of y'all. Thank you Jim, it's all about comps, isn't it?
Speaker 3: Your next question comes from the line of Sonic Chat or G with JP Morgan. Please go ahead, your line is open.
Speaker 13: Oh, hi, thanks so take my question and congrats on the results as well. I guess I have a quick one. Thank you.
Speaker 13: Yeah, hopefully you can hear me now. Can you please better?
Speaker 11: Oh.
Speaker 13: Can you hear me now? Yes, much better. Thank you. Yep. So I was just going to ask you on your large cloud customer meta and their recent announcement around architecture changes relative to data centers and trying to run AI workloads and non-AI workloads together on the same data centers. And some of those related announcements, if you've been able to dissect that and sort of.
Speaker 13: have any thoughts about how that might impact their spending in relation to switching and routing equipment, particularly as a relates to your portfolio. Thank you.
Speaker 5: Yeah, so Suleika, I'll say some few words and obviously, I'll show you again in detail. We don't foresee any major architectural changes in the build out of the AI clusters.
Speaker 5: Clearly, we continue to work with them on the front end of the network, and on the back end, these have been based on the flagship 7800 spines, the AI spine, where you can have a distributed AI lead for it, can be going straight into the spine. And when you have the hundreds and thousands of GPUs, you need a lossless fabric that has all of the congestion.
Speaker 5: there will naturally be an evolution as the market grows.
Speaker 5: but no dramatic shift or change, just more of the same.
Speaker 6: I should just keep in mind, made a slow down spending a few years ago. So there's some catching up to do sort of the spin that got missed out. So you have to sort of go back with an average it out to understand the trend. And second, just mention from what we know so far.
Speaker 6: We don't believe that's any change in the networking spend, the capex optimizations they are discussing are either tied to how the buildings are built facilities, or letting go of nights to have projects.
Speaker 13: Thank you.
Speaker 13: Thank you. Thanks for taking my question. Thank you, Samay.
Speaker 3: Your next question comes from the line of Tauliani with Bank of America. Please go ahead your line is open.
Speaker 14: I want to ask about the other part that's not when he's asking about the non-cloud cloud titans. So if I back out cloud titans.
Speaker 14: NUN Cloud grew 14.6%.
Speaker 14: And the question is, first of all, on last year, did you allocate components to Cloud Titans and was this area more pressure than Cloud Titans when it comes to allocation?
Speaker 14: So if that's the case or what is the answer about what happens this year, this coming year or this year on the Non-cloud Titan portion what drives it to accelerate from the 14.5 percent growth of last year? Thanks
Speaker 5: So first of all, absolutely not. We don't do any allocation. It's very much a first-end, first-out algorithm. And many of the cloud titans clearly were the first-end, so therefore they're the first-out. Our enterprise customers and the momentum and the demand is very high. And we fully expect that they will get their turn in this year in 2023.
Speaker 5: But given how constrained we weren't supplied, this is the way it worked out in terms of revenue.
Speaker 14: What are the underlying drivers for growth acceleration, the outside of components, better components supplies? What are the underlying growth drivers for 2023 versus 2022?
Speaker 5: I think they're very similar. You heard me talk about some of the enterprise momentum. Customers are really looking for consolidation of their data centers in terms of a better automation, better telemetry, better consolidation of the operational advantages in the data center.
Speaker 5: Campus is a huge use case, routing and bringing all of the routing features that we've been working on for over five years to bear has been a third one. Observability and securities and other use cases are telemetry with closeness and so very similar themes to 2022 that we're seeing in 23.
Speaker 5: use case, routing and bringing all of the routing features that we've been working on for over five years to bear has been a third one. Observability and securities and other use cases are telemetry with cloud vision. So very similar themes to 2022 that we're seeing in 23.
Speaker 15: Thanks, Phil. Your next question comes from the line of Bahad Nijam with Loop Capital. Please go ahead. Your line is open. Thank you for taking my question. I had a couple of clarification. The cognitive adjacency that worked, I think 14% of revenue is that better so? No, no.
Speaker 15: I can't really see clearly, even between campus switching and routing. Sorry, Fahad, can you repeat the questions? The cognitive agency, the agency revenue that you gave, I think was 14% of revenue, that's how I'm on this right hand.
Speaker 5: And now we're wondering is this split even between campus and routing? Approximately, then both of them are large contributors. So I don't have the exact same percentages. So we think campus over time will become larger.
Speaker 5: But at the moment I would say it's 6.1 and half a dozen of the other.
Speaker 9: Got it for my question.
Speaker 15: How should we be thinking about, you know, with AI and machine learning becoming more pervasive and cloud-tyred and architectures in this prospective displacement of in Phoenix band with Econnet? How should we be thinking about the CAM opportunity? Econnet?
Speaker 5: In how big is this infinity band good placement opportunity for the speed? No, I think the incentive and time to date has a very good HPC, you know, one to one and a half billion dollar term. And it didn't address AI workloads. I think the advent of this new application is going to open up.
Speaker 5: the whole AI networking and fabric time to much greater than incentive bands. So not only do we have an opportunity to replace incentive bands, but we have a green field opportunity for new AI fabrics and clusters.
Speaker 5: So it's both not just a legacy and a band opportunity.
Speaker 16: So roughly how big you can be opportunity is.
Speaker 5: I don't think there have been some market studies on this. Some people say two billion years, some people say four, some say it's going to age. I think it's still too early to call. It depends on how quickly the adoption of AI fabric capital is in all of our large customers.
Speaker 3: Thank you. Our next question comes from the line of Pierre Faragou with New Street Research. Please go ahead. Your line is open.
Speaker 17: Thank you, good evening. I wanted to catch up on what you say, Jeffrey, about routing, edge routing and gearing.
Speaker 17: And this opportunity still comes back as an interesting and intriguing area. And so my question would be anything you can give us in terms of sizing how significant it is today. And then beyond that.
Speaker 17: Could you give us a sense of how you understand like the long-term market dynamics in there so?
Speaker 17: It's a market where all legacy routing players are very strong, have a very strong existing ecosystem. And I'm still not exactly on what market dynamics create the opportunity for our design, how we should think about it in the longer run.
Speaker 17: Is there an opportunity to replace in components in a, in appearing, in large appearing markets? And is that the case? How does that work? Is that like operators buying from you? Is that coming from other types of clients like cloud players? So how does your percentage shape up over time?
Speaker 5: Yeah, now I'm sure I love your perspective on it. Let me kick it off.
Speaker 5: We think the router market is much bigger than the routing market. The router market is the more legacy market that's been served by a number of traditional industry experts for 20 years.
Speaker 5: bigger than the routing market. The router market is the more legacy market that's been served by a number of traditional industry experts for 20 years. And...
Speaker 5: mostly servicing the service provider market and that's a very traditional market that RISTA has been participating some in but we don't expect to be a major player in traditional service providers.
Speaker 5: However, we've added so much routing features. Routing is not now part of our switching system. It's sometimes hard to separate it. It's the same hardware, different software. If you just look at the last year, we've added ethernet, OEM, capability, VPLS, timing with stinky EVPN, MPLS, gateway, multi-cast VPN.
Speaker 5: Edge services, routing scale you heard Anshul talk about that can go over 4 million routes. So our portfolio is really transitioning to supporting 400 gig deployments. And routing in the cloud scale is something they are very successful in. So on one hand, we're not super successful in the traditional service providers. On the other hand, we're hugely successful on the cloud.
Speaker 5: And then in between, we're finding ourselves moderately successful in a lot of the enterprise and specialty cloud providers.
Speaker 6: I'm sure you want to add a few words? Sure. A pair of another angle here, if you look at how we started doing to this market.
Speaker 6: It's through some of the CDN companies like Netflix and Spotify.
Speaker 6: And this company is having a STN approach to edge.
Speaker 6: It's a scale-out architecture. You can take a simple router from a RISTA and scale it out. And the automation and the SDK we provide allows a customer to do that, which is why we do very well in these use cases versus the legacy full feature traditional router. And our cloud customers, the titan, the Tiotuk cloud, the providers, all like these architectures.
Speaker 17: Thank you. Thank you.
Speaker 17: Thank you very much. That's all your answers.
Speaker 3: Your next question comes from the line of Michael Genoves with the Rosenblatt Securities. Please go ahead, your line is open.
Speaker 18: Great, thanks so much. I guess just sort of theoretically in an AI.
Speaker 18: data center.
Speaker 18: You know, current way of doing chat versus an AI chat. Can you give us some sense of the switching intensity increase in the new use case with AI? Is there a multiplier to put on the switching or the networking to think about the...
Speaker 18: higher amount of content and spend for AI. I'm sure Michael, I think that's when...
Speaker 6: It's very hard to generalize. I can move us to a single number that AI equals so much more. But I'll give you an example of something that Andy talked about in the last analyst state. And if you look at the research cluster on which met up published some papers about the time, the GPUs were sitting idle because they were waiting for the support traffic to come back.
Speaker 6: So networking becomes a bottleneck in these cases, and if you can add more bandwidth, then you essentially become non-blocking. You can do your job in run faster, and you can use your GPUs in a much more efficient manner. So at a rough order of magnitude, these GPU clusters need about three times more bandwidth than a traditional compute network today. But again, that's a generalization, doesn't it, but every year.
Speaker 12: And what you were seeing there in terms of, did it loosen faster than you were expecting in Q4 and that was part of the upside or just how you're looking at conditions kind of improving throughout the year and maybe just that kind of release to gross margins as we think about throughout the year and kind of the...
Speaker 5: And having said that, our Q4 numbers would have been even better if supply chain had used. And our Q1 growth margin is a reflection that supply chain is still in overhead on our costs, right? We expect Q1 to be the absolute worst. We're going to improve thereafter every other quarter. So supply chain is going to be using in the back half of 23.
Speaker 5: And as you know, at the end of the day, we gave a guide of, we said 61 to 63 for the year. So we fully intend to improve our growth margins every quarter thereafter, after potentially hitting a low in Q1.
Speaker 5: which is an indication of supply chain approving, but at the same time, remember, another huge factor in our contribution to growth margins is the healthy cloud-tiking mix. We'd like to keep it healthy and ease supply chain, and that'll give us some improvement.
Speaker 5: indication of supply chain approving, but at the same time, remember, another huge factor in our contribution to growth margins is the healthy cloud-tiking mix. We'd like to keep it healthy and ease supply chain, and that'll give us some improvements.
Speaker 8: Thanks, Vida. Your next question comes from the line of Alexanderson with Needham. Please go ahead. Your line is open. Great. Thanks. Congrats on Super Quarter. I wanted to push a little bit more on the supply chain issue that you're just talking about.
Speaker 8: I get the point that the gross margins are the worst in the first quarter, but one do you think the balance between availability and your backlog starts to come into balance so that you can actually ship what orders come in in the duration.
Speaker 8: on your backlog, which I know you don't talk about, but conceptually starts to come in line so that we're back to fairly normal book and ship environment.
Speaker 5: Paul, I'll let you answer this, but I wouldn't call our current environment approaching normalities for some time. So we hope it will be second half that the supply and the demand catch up. But I hope it catches up because we improve our supply, not that demand goes down. So we wanted to also improve for the right reasons.
Speaker 7: Yeah, it looks like, you know, the goal, obviously, is to improve, have supply improve and then improve manufacturing and improve efficiencies and, you know, we'll be working on that as we go through the year. I don't know what the final normal will be. We'll have to see. I think just giving everything that we've been through from the supply chain perspective, it's probably...
Speaker 7: Maybe there's a little bit more lead time visibility that will end up in the system at the end, but we'll have to see. I think what we can safely say is we are getting comfortable that lead times will improve throughout the year.
Speaker 5: What will we get to normal lead times? I think that will still take time because we've got to work through our demand.
Speaker 8: If I could just one clarification, did you say you had a decommitted in the fourth quarter? I thought I heard that in the presentation.
Speaker 7: No, the comments on the splice side when we've had all the starts on the splice side for sure that if that's the question
Speaker 5: Nothing to do with our supply constraints. A component vendors are constantly decommitting.
Speaker 5: I think it had to do with our supply constraints. As a component vendors are constantly decommitting. Okay. Thank you.
Speaker 9: Thank you, Ellen. Your next question comes from the line of Matt Nicknam. What's Deutsche Bank? Please go ahead. Your line is open. Hey, thanks for taking the question. I just want to follow up on the question on macro that was asked earlier. Are there any regions, verticals where you've seen any maybe greater than usual slowness in ordering the cause of macro and then maybe?
Speaker 9: I can sneak one in for you on the free cash load trajectory, broadly speaking. Just curious if there's any broad color you can provide around working capital and primarily asking around inventory and whether that's still a drag or whether you expect to maybe convert some more of that to cash this year. Thanks.
Speaker 7: Yeah, maybe I'll take the cash piece of it first. Yeah, I'm not sure that we start to see it. So kind of come down just yet. I think probably at least for the first half we'll probably still be building inventory. And we do have some kind of key components that are still.
Speaker 7: you know, long lead time. And we wanted to build buffers, so we'll continue to do that. And then hopefully in the second half, it's probably at least kind of flattened out. But again, we'll update that as we go quarter by quarter. But I think there's definitely a piece that's still going to be long, long lead time that will kind of hold inventory a little bit higher than what we might like for the time being.
Speaker 5: Any impression on macro? Like I said before, we'll call it when we see it. We're not seeing anything major and significant yet. And customers are watching, we are watching, and no major trend I can point to.
Speaker 3: That's great. Thank you. Your next question comes from a line of Tim Long with Barclays. Please go ahead. Your line is open.
Speaker 19: Thank you. Just kind of a two-plotter on the campus business.
Speaker 19: First, I think you guys have talked about doing a little bit better in the wireless LAN areas. So, Turyus, if you think that having a better wired and wireless portfolio kind of accelerates the share gains potential in that area, so was that something that was maybe holding back?
Speaker 19: some wind that could help in the future. And then secondly, I think the analyst, they talk a little bit about SD-WAN. I'm just curious if you can give us an update on when you might start to see another leg to the campus strategy in what's a pretty high growth vertical. Thank you.
Speaker 5: Sure, Tim, on the wired and wireless, we are obviously much stronger and wired because there's a very natural affinity to the ERISTA EOS stack. And we also have a full portfolio. What are you two? Are you all the way to a chassis with built-in encryption? No other company, maybe except one has that. So we're very competitive there.
Speaker 5: On the wireless, this is sort of the new kid on the block. As I said, if you just look at our campus entry, we are a new kid on the block. This is our third year. So I think our going from being a toddler to an adult now here very soon. So we believe we have a strong portfolio, also differentiated by cloud vision.
Speaker 5: for both wireless coming into the same spine spline architecture that we articulate and designs for the data center. So we feel very very good about our portfolio being strong. I think more of our efforts will go into go-to market and reaching these customers because much of what we've done to the data is..
Speaker 9: If you will, no hanging fruit with our familiar customers and I existing base. Your next question comes from the line of the Thai Kidron with Auburn Heimer. Please go ahead. Your line is open. Thanks and nice finish to what do you have ladies. A couple of questions for me. First of all, for you, Iida on the cash. Just want to pick it back up.
Speaker 9: on campus clearly supply chain is a little bit of a hurdle there.
Speaker 9: Cisco, second action to redesign some solutions to...
Speaker 9: to products and components that are much more readily available. He's got not a path for you and if it is, what can you do on that front to alleviate the supply and more easily address demand?
Speaker 7: I mean, a lot of the DSO roles is really around those service renewals that we saw at the back end of the quarter. You know, if you think about those and how they flow, they generate almost no revenue. They're in AR, they're whole to year. So it causes the AR to be spiked.
Speaker 7: We'll collect kind of a lot of that in Q1. Good, good healthy AMR balance target heading into Q1. So there's no, no changes in aging or anything else. It's really just the timing of those service renewals. In the fact that they end up in AR at the end of the corner.
Speaker 7: that in Q1, good healthy AMR balance target heading into Q1. So there's no change in aging or anything else. It's really just the timing of those service renewals the fact that they end up in AR at the end of the corner.
Speaker 5: Yeah, so each eye on this. Thank you for the wishes by the way and happy Valentine's Day. We listen to you and make sure their learning's cold is not a melanchine thing.
Thank you. A question. Absolutely. We have choice of vendors and redesigns. We design, take time and qualifying them with our customer takes even longer. So we've chosen a multi-trot approach where we do have redesigns that we can invoke. But we are also improving our relationship and partnership with our supply chain vendors.
Archie, your team has been working on that. I think your vendor list has gone from 10 to 100. So if I remember right, right? That's right, Ashley. The first time we're close to almost 100 suppliers where we talk to them directly, even if we don't buy the components from them, we control the relationship and the technology in the roadmap. Much helpful. So do I have a question in the campus specifically?
Both with re-designs and with our supplier partnerships, we fully expect to come back and not so short of our numbers in 23. Thank you. Good luck. Thank you.
Our next question will come from the line of Ben Bowling with Cleveland Research. Please go ahead, your line is open.
Thanks for taking the question. Good afternoon, everyone. I also wanted to piggyback a little bit on campus.
Jay Shriek, could you talk a little bit about how customers are responding and they're facing the increase in lead times or the lead times overall? It's been a market share opportunity. Any risk that shares perishable, do they choose to opt to renew with who they have?
And then you talk a little bit about go to market on campus. What are you doing differently or what are your thoughts on where that goes from here? Thank you. Yeah, both are very good questions Ben. I would say currently we are gaining shape because others are messing up.
you know, whether it's changing to a software model or not able to supply, Eris has been the benefactor of that. There's still small numbers, obviously. But it's difficult to imagine that we're at risk of losing share when we have small share. Our goal is to grow share at the moment.
changing to a software model or not able to supply. Ores has been the benefactor of that. There's still small numbers obviously. But it's difficult to imagine that we're at risk of losing share when we have small share. Our goal is to grow share at the moment. And what is your second question?
So second part to that question. Go to market strategy. Oh, what is the go to market? Well, in the near term, our go to market has very much been to target our 9,000 cumulative customers. But we are building mid-market strategy. We are going to work closely with channel partners. Those things take time.
So I would say our initial go-to market is our enterprise customers and over time we will have a more mid-market strategy.
market is our enterprise customers and over time we will have a more mid-market strategy.
Your next question comes from the line of James Fish with Piper Sandler. Please go ahead. Your line is open. A happy Valentine's Day, ladies. Great quarter. Just going back to your commentary on Cloud Titans being kind of between 21 and 22 levels. The
just given the overall growth. It does suggest a bit of an acceleration for everybody else. I guess what's driving that confidence is it just mainly what's in backlog, is it additional hyper-scaler wins, including with AI or enterprise share games or something else. And then Eda just for you as a follow-up on the cash flow, is there a way to think about kind of a normalized cash flow level?
inventory dollars probably grow certainly through the first half and then hopefully we can flatten out from there. We will look for optimization but there is still a fair amount of kind of longer time items that we need to kind of carry and buffer.
So I'll come back to you as we can go through the year, but I think 30 for the first tap, you should be looking for inventory to probably continue to grow on an absolute dollar basis.
Thank you James for the wishes. I think in one word I would say momentum. Enterprise customers are really looking for an alternative to what they've got. There's a lot of fatigue in the system. And what's driving my optimism, whether it's, you know, backlog from prior demand or present demand, is they're really hungry. And a risk of presents that alternative.
Next question, operator. Your next question comes from the line updated vote with UBS. Please go ahead. Your line is open.
That's great. Thank you everyone for taking my call. I just want to pivot back to Meta for a second. So in addition to the new architecture that they've been talking about, and I think I'm sure you'll adjust it, the company also talked about potentially using more co-location and maybe other public company assets to kind of meet its capital intensity needs going forward. We just love to kind of get your thoughts on how that impacts your spending.
So they're spending on a risk of gear going forward. And then just going also on the Titans mix percentages. If the rest of the business is growing at the rates that we think it's going to grow in 2023, to end up somewhere between the 21 and 22 level, just that suggests that the Titans business in total grows kind of in the low teens and 23 also, you know, triple digit growth in 22. Thanks.
So just to answer that one, it is definitely not going to be triple digit in 23. We can say that with certainty. That was a beautiful year and one for the history books. Actually, you want to take them out? Sure, no.
Or the metal question they would in the archival and so on. I think the high level methods to ask them around the business efficiently are as efficient as possible and optimize the projects are nice to have obviously those are getting cut back. And as you mentioned in space like cold and so on, you don't need a very large.
Architecture to start where the Pionli Avalcine may work side as an example, you have a smaller cluster size But our products already fit very well in all of these use cases. So we don't believe there's any significant impact to networking from what we can tell today.
in the near term, but we don't have visibility that many, many years out today. But the message we've been given is that it's really no big impact on networking as far as we are concerned.
near term, but we don't have visibility that many, many years out today. But the message we've been given is that it's really no big impact on networking as far as we are concerned.
many many years out today but then message we've been given is that basically no big impact on networking as far as we are concerned.
Our next question comes from the line of Tom Blakey with Keybank Capital Markets. Please go ahead, your line is open.
Thanks for squeezing me in here. I have a question back on the F&E line financials and enterprise. The drivers there, I think maybe Tau was getting at many questions ago. I was wondering how much like rip and replace type of wins are kind of like starting to rear into here. This implied in my mind anyway, acceleration and growth.
in the F&E line. And specifically, the new cloud test product that you launched at the end of last year, if that's kind of more of a 2023 driver. And again, that kind of rippin' replaced type of winds, which is a large opportunity, and Enterprise is more of a 23 driver, or if it's more a 24. And then maybe just quick for Eda, as Enterprise mickers up, just remind us what the gross margin and operating margin impact should be.
for mixing more towards enterprise. That'd be helpful. Thank you. Maybe I'll take that one quick days for us. The Grants margins is kind of talked about it improving as we go through the year and kind of the mixes is obviously part of that. Operating margins, it's pretty neutral actually between cloud versus the rest. So I don't know if there's any big drivers there. No, we have much lower sales and marketing on the cloud, more technically driven. So it's not the same.
financials is that nobody is getting more staff to do their job. So they want more tools to automate and bring their second DevOps, NetOps, all of their operations together. And this is where the original introduction of our, you know, continuous integration, continuous design and continuous test.
has really been strategic because not only do you have to give them a tool for automation, but you also have to work with them and train and teach them how to deploy it. So these end up not necessarily being rip and replace, but sort of a gradual evolution where they'll identify the first use case or first data center that they'll do this on, and then it'll expand, land and expand to more use.
and it usually begins with a couple of use cases.
couple of use cases. Thanks, Tom. Thank you, Dr. J.
Thank you, Tom. Your next question comes from the line of Eric Superdure with JMP Securities. Please go ahead. Your line is open. Yeah, thanks for fitting me in and happy Valentine's. On the meta front, I'm just curious. They talked about adopting more of a modular kind of scalable architecture.
I'm wondering if that changes any of the buying behavior or the purchasing patterns. Does that smooth out some of the purchasing from the likes of a meta? And then secondly, Eda, on the balance sheet with your purchase commitments, do you have control over how much inventory you take on?
Or as the inventory becomes available, do you take it in? In which case might we see your inventory balloon if more of the inventory becomes available? I don't like balloon as a word. There are certain suppliers where lead times are still.
I want to keep growing that story, so we'll continue to do that. I think on the purchase commitment, we talked about this a little bit at the end of the day as well. I mean, as lead time starts to move around, obviously we'll work with the contract.
That's why I mean, over time that number should come down as it is in to lead time with the contract manufacturers.
Ok, I at the medical center.
Middle architecture already is quite modular with, we talked about the design, the portable 253.388 that can go up to 256 way ECMP, the 250 net path, the cluster size is smaller, they don't need to be 2006 maybe they can start with 16 or 32.
So, I've already built into the model today. I don't believe it has any impact on us. Same thing on the 7800 AI spine, they can add number of line cards based on the number of GPUs or racks of the connected tubes.
So we are very efficient already and it's very well-entered model.
Your next question comes from the line of semi-badgery with credit suites. Please go ahead. Your line is open.
Great. Just hit me in two quick ones. First one is for Eda. Can we just talk about the benefits of pricing from some of the pricing increases that you guys have put through to the portfolio and the effect of TAD on gross margins? And then the second question is for J-Street. J-Street, you've given us kind of a ballpark.
I guess, some kind of quantification in the number of months that you see visibility with some of your biggest customers. Could you give us an update on that same type of visibility?
I think on the pricing piece of it, I mean for sure we're getting some benefit from the pricing, but as time goes on it starts in the dynamic environment, it starts to be harder to track that kind of it gets lost in the overall growth in the business. But we did check and there's definitely some uptick for pricing there. It's just something that we're kind of tracking on an ongoing basis.
And in terms of visibility, in the past we've seen as much as a year's visibility. If I were to guess, I think as the VTAN has improved that visibility was reduced, maybe it's down to three quarters now. And because the visibility was very much tied to planning cycles and then the planning cycles were...
about why you guys think you should take share from in Finneban going forward in AI and HPC environments.
just curious about what the logic is there. Thanks. There's two big reasons. I think the past, even I was always training in terms of performance and bandwidth to incentive and today as we start talking about 400, 800, 1.2 the options I need to have are much greater and very cost effective and everybody's very interested.
The other is, I think, historically in Symban has been more for high performance compute use cases. We are very bullish on the AI workloads, and it's impact on Ethernet, where we don't believe in Symban has any particular advantage, and in fact, Ethernet does. Thank you, George.
We have time for one last question. Your final question comes from the line of Simon Leopold with Raymond James. Please go ahead. Your line is open. Thanks for taking it. Wanted to maybe dig a little bit into the campus business, particularly whether or not that unit has been more concerned.
strain and therefore in a recovery bounces back. And ultimately, wondering if really an increase in campus in the mix, I know you gave us at 750 million target by 25, wondering if that's considered a headwind to gross margin or whether it's more about the market verticals that affects your margins. Thank you.
Yeah, no, no advent to gross margin, our campus business has good gross margins. I just, as we said, on the product side, I feel very good that the campus can execute. On the go-to-market side, we have more work. So I'm giving ourselves some optionality that if we do the work really well, we could succeed the 750.
And if you can, then that'll be the more likely number. Great. Thanks, Simon. This concludes the Arista Network's fourth quarter of 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 ERISA. Thank you for joining ladies and gentlemen. This concludes today's call. You may now disconnect.
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