Q1 2023 Arista Networks Inc Earnings Call

May 1, 2023

All participants will be in a listen only mode. After the presentation. We will conduct a question and answer session and instructions will be provided at that time.

Welcome to the first quarter 2023, Arista networks financial Health earnings Conference call.

Is that any time during the conference you need to reach an operator. Please press the star followed by zero.

During the call all participants will be in a listen only mode. After the presentation. We will conduct a question and answer session and instructions will be provided at that time.

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Ms. Liz Stein, our risks as director of Investor Relations you may begin.

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.

Thank you operator, good afternoon, everyone and thank you for joining us.

With me on today's call are <unk>, Arista networks, President and Chief Executive Officer.

And at this time I referenced director of Investor Relations you may begin.

And EDA Brennan <unk> Chief Financial Officer.

Thank you operator, good afternoon, everyone and thank you for joining us.

This afternoon Arista networks issued a press release announcing the results for its fiscal first quarter ending March 31 2023.

With me on todays call are Jay for you, all Arista Networks', President and Chief Executive Officer.

And either Brennan <unk> Chief Financial Officer.

If you would like a copy of the release you can access it online at our website.

This afternoon Arista networks issued a press release announcing the results for its fiscal first quarter ending March 31st 2023.

During the course of this conference call Arista networks management will make forward looking statements.

Including those relating to our financial outlook for the second quarter of the 2023 fiscal year.

If you would like a copy of the release you can access it online at our website.

Longer term financial outlook for 2023 and beyond.

During the course of this conference call Arista networks management will make forward looking statements.

Our total addressable market and strategy for addressing these market opportunity, including AI customer demand trends and supply chain constraints component costs Manny.

Including those relating to our financial outlook for the second quarter of the 2023 fiscal year.

Longer term financial outlook for 2023 and beyond.

Manufacturing output inventory management and inflationary pressures on our business.

Our total addressable market and strategy for addressing these market opportunities, including AI customer demand trends and supply chain constraints component costs Manny.

Lead time product innovation, working capital optimization, 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.

Manufacturing output inventory management and inflationary pressures on our business.

Lead time product innovation, working capital optimization, and the benefits of acquisitions, which are subject to the risks and uncertainties that we discussed in detail in our documents filed with the SEC.

Specifically in our most recent Form 10-Q, and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements.

These forward looking statements apply as of today and you should not rely on them as representing our views in the future.

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.

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.

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.

We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.

Also please note that certain financial measures we use on this call are.

On a non-GAAP basis and have been adjusted to exclude certain charges.

With that I will turn the call over to Jay Shri.

This I'm happy Monday, everyone and there have been months of Mi.

We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.

We delivered revenues of $1 35 billion for the quarter with a non-GAAP earnings per share of $1 43.

With that I will turn the call over to Jay Shri.

Services and software support renewals contributed approximately 13, 5% off the revenue.

Thank you Liz I'm happy Monday, everyone I know have been bumped off me.

We delivered revenues of $1 35 billion for the quarter with a non-GAAP earnings per share of $1.43.

Our non-GAAP gross margins of 63% was influenced by supply chain overhead and cloud Titans concentration.

License and software support renewals contributed approximately 13, 5% off the revenue.

We expect our gross margins to improve every quarter throughout this year.

Our non-GAAP gross margins of 63% was influenced by supply chain overhead and cloud Titan concentration.

International contribution registered at 17, 5% with the Americas strong at 82, 5% for the quarter.

We expect our gross margins to improve every quarter throughout this year.

While we will shift to reporting our vertical segments on an annual basis I would like to share some overall trends you're seeing.

International contribution registered at 17, 5% with the Americas strong at 82, 5% for the quarter.

We do expect cloud Titans will moderate compared to our 2022 and triple digit growth what enterprise is likely to be more steady state.

While we will shift to reporting all vertical segments on an annual basis I would like to share some overall trends you're seeing.

It is evident that our lead times are improving our visibility customer forecast. Therefore are now beyond six months are now below six months I should say and they're shrinking.

We do expect cloud Titans will moderate compared to our 2022 and triple digit growth what enterprise is likely to be more steady state.

Despite macro uncertainty we endorsed consensus of 26% annual growth to approximately $5 5 billion revenues in 2023.

It is evident that our lead times are improving our visibility to customer forecasts. Therefore are now beyond six months are now below six months I should say and they're shrinking.

On the product side, we made many exciting Q1 announcements.

Despite macro uncertainty we endorsed consensus of 26% annual growth to approximately $5 5 billion revenue in 2023.

OFC 2023, we introduced our vision for linear drive optics for intra and inter data center connectivity at 800 gig and beyond.

On the product side, we made many exciting Q1 announcements.

This was a highlight for both Arista and the optical industry at large delivering the promise of low power and improved price performance for demanding AI workloads.

OFC 'twenty to 'twenty three we introduced our vision for linear drive optics for intra and inter data center connectivity at 800 gig and beyond.

Speaking of AI, the mandate to avoid island states and expensive and large AI processor clusters requires that specialized AI networks.

This was a highlight for both Arista and the optical industry at large delivering the promise of low power and improved price performance for demanding AI workloads.

Key characteristics include wire, right and lossless delivery of large and synchronize bursts of data at 400 to 800 gig speeds.

Speaking of AI, the mandate to avoid idle states and expensive and large AI processor clustered requires that specialized AI network.

Today, the combination of our DNA mix rdna stance for remote direct memory access and Rocky which is our DNA over converged Ethernet along with the switches allows ethernet to become that predictable transport network.

Key characteristics include wire rage, and lossless delivery of large and synchronized burst of data at 400 to 800 gig speeds.

Today, the combination of Rdna next rdna stands for remote direct memory access and rocky, which as rdna over converged Ethernet along with the switches allows ethernet to become that predictable transport networks.

Ethernet of course brings familiarity great economics massive install base standards with industry wide interoperability and many merchant silicon options.

This is supporting compute and data intensive workloads based on generative AI inference, and large language model training application.

Ethernet of course brings some linearity great economics massive install base standards with industry wide interoperability and many merchant silicon options.

I was just cloud customers are resonating with our AI and switching strategy for platforms. Presently we are in the midst of trials leading to production deployments. This year in 2023.

This is supporting compute and data intensive workloads based on generative AI inference, and large language model training applications.

I was just cloud customers are resonating with our AI and switching strategy for platforms. Presently we are in the midst of trials leading to production deployments. This year in 2023.

We expect AI networking to become meaningful throughout the years and through the decade ahead.

In Q1, 2020 see Arista also formalized our new entry into the wide area network with our Wan routing system.

We expect <unk> to become meaningful throughout the years and through the decade ahead.

Our enterprise class routing platform is based on carrier and cloud neutral transit with cloud vision Pathfinder.

In Q1, 2020 see Arista also formalized our new entry into the wide area networks with our Wan routing system.

Not surprisingly you support Arista Eos operating systems back delivering that operational model for network as a service and white area episodes.

Our enterprise class routing platform is based on carrier and cloud neutral transit with cloud vision pad find this service now.

We are targeting mission critical enterprise is where high volume and encrypted traffic matter and a modern when Arista.

Not surprisingly, we support Arista Eos operating systems back delivering that operational model for network as a service and white area.

Arista has partnered with Equinix to develop and deploy the Wan routing systems.

When running will be included as part of a Netflix adjacency category.

We are targeting mission critical enterprises, where high volume and encrypted traffic matter in a modern win.

And the non cloud category, we have registered a solid number of million dollar customers.

There has partnered with Equinix to develop and deploy the Wan routing system.

As a direct result of our momentum in the enterprise and campus throughout the past year.

When running will be included as part of a netbook adjacency category.

Let me illustrate with a few customer wins.

And the non cloud category, we have registered a solid number of million dollar customers.

The first use case is an international government grant.

The customers' objective was to detect illegal activities such as money laundering terrorism scans and other criminal behavior in real time by collecting and analyzing data a.

Which is a direct result of our momentum in the enterprise and campus throughout the past year.

Let me illustrate with a few customer wins.

The first use case is an international government grant.

Arista data driven AI clusters, Optimizes network assurance for mission critical AI and ml workloads you.

Our customers objective was to detect illegal activities such as money laundering terrorism scans and other criminal behavior in real time by collecting and analyzing data.

Using advanced features like micro bursts and fan in congestion management ultra deep packet buffer memories with latency analyzer provides real time telemetry visibility automation and dynamic controls for their AI and ml Datacenters all based on open standards Ethernet.

Arista data driven AI clusters, Optimizes network assurance for mission critical AI and ml workloads using advanced features like micro bursts and fan in congestion management Ultra deep packet buffer memory with latency analyzer provides real time telemetry visibility automation.

Okay.

Our second win continues on the international theme and highlights our ever growing strength in the education vertical where Arista is proposal four edge campus platforms, ranging from Colorado Ethernet switches.

Dynamic controls for their AI and ml Datacenters all based on open standards Ethernet.

This access points and automation was a decision factor.

We leveraged cloud vision Q cognitive unified edge, coupled with Arista validated designs as an automation framework across multiple distributed locations, bringing unmatched flow visibility.

The next one is in the U S financial sector.

This customer had grown organically and inorganically through acquisition and is looking to modernize their entire infrastructure moving their data closer to the cloud to enable the hybrid cloud architecture.

The next one is in the U S financial sector. This.

This design included multiple Greenfield data centers hosted an equinix requiring active active 400 gigabit Ethernet fine securely encrypted data center interconnect and Internet connectivity at each site.

This customer had grown organically and inorganically through acquisition and was looking to modernize their entire infrastructure moving their data closer to the cloud to enable the hybrid cloud architecture.

This design included multiple Greenfield data centers hosted an equinix requiring active active 400 gigabit Ethernet spine securely encrypted data center interconnect and internet connectivity at each site.

For a smooth upgrade in their campus environments without disruption to their end users Arista FSU or smart systems upgrade feature played a prominent role.

We also help them build a digital twin of the environment modeling their designs for automation.

For a smooth upgrade in their campus environments without disruption to their end users are risked as ssu or smart systems upgrade feature played a prominent role.

The next customer highlights health care as a critical win for network monitoring and security analysis tools at their remote datacenter facilities.

We also help them build their digital twin of the environment modeling their designs for automation.

This holistic view of port mirroring sessions for traffic analysis from all of the remote data centers with a superior approach.

The next customer highlights healthcare as a critical win for network monitoring and security analysis tools at their remote datacenter facilities.

Bristow centralized dms DANZ monitoring fabric, what's better than disparate and expensive tools at each remote location.

This holistic view of port mirroring sessions for traffic analysis from all of the remote data centers with a superior approach.

Our final customer when he was looking for real time in house video streaming and editing capabilities.

Arista centralized Dms DANZ monitoring fabric was better than disparate and expensive tools at each remote location.

Video would be stored on their storage arrays, which which could be connected at 100 gigabit Ethernet and then access and rendered by the clients be they P. C's of Max with 25 gigabit Ethernet.

Our final customer win was looking for real time in house video streaming and editing capabilities.

Video would be stored on their storage arrays, which which could be connected at 100 gigabit Ethernet and then accessed and rendered by the clients be the Pcs and Macs with 25 gigabit Ethernet.

Arista is core strengths in the media vertical comes from its deep buffer virtual output queuing architecture with our our three platforms.

The simplicity scalability and flexibility our lines. This shows this elegant design and highlights our strength in the media and entertainment vertical.

Arista core strengths in the media vertical comes from its deep buffer virtual output queuing architecture with our our three platforms.

So as you can see this is a recurring theme in all of our customer wins, where Arista is deploying innovative solutions based on our consistent architecture, allowing each and every customer to modernize their network with the power of our platform and with that I'd like to hand to EDA, our CFO for financial metric. Thanks.

Simplicity scalability and flexibility our lines.

Shows this elegant design and highlights our strength in the media and entertainment vertical.

So as you can see this is a recurring theme in all of our customer wins, where Arista is deploying innovative solutions based on our consistent architecture, allowing each and every customer to modernize the networks with the power of our platform and with that I'd like to hand to EDA, our CFO for financial metrics, Thanks, Tricia and good.

Thanks, Tricia and good afternoon.

Now since our Q1 results and our guidance for Q2 'twenty three based on non-GAAP excuse on noncash stock based compensation impacts certain acquisition related charges and other nonrecurring items.

Afternoon.

A reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.

Since our Q1 results and our guidance for Q2 'twenty three is based on non-GAAP excludes all non cash stock based compensation impacts certain acquisition related charges and other nonrecurring items.

Total revenues in Q1, 1.351 billion up 54% year over year and well above the upper end of our guidance of 275 to 132 5 billion.

A reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.

We continue to experience improvements in component supply in the quarter supporting more consistent levels of manufacturing output and some improvement in lead time.

Total revenues in Q1, a 135 1 billion up 54% year over year and well above the upper end of our guidance of 275 to 132 5 billion.

Services and subscription software contributed approximately 13, 5% of revenue in the first quarter down from 15, 8% in Q4.

We continue to experience improvements in component supply in the quarter supporting more consistent levels of manufacturing output and some improvement in lead time.

These effects are accelerating.

Revenues from services and software continued to grow on a more consistent basis.

Services and subscription software contributed approximately 13, 5% of revenue in the first quarter down from 15, 8% in Q4.

International revenues in the corner came in at 236 million or 17, 5% of total revenue.

In Florida, we are perfect and accelerated growth in product revenues, while services and software continued to grow on a more consistent basis.

Down from 23, 5% last quarter.

Is corner to corner reduction largely reflected an unusually high contribution of our EMEA region customers in the fourth quarter.

International revenues for the quarter came in at $236 million or 71, 5% of total revenue.

Overall, we continue to see outsized growth in the U S largely due to ongoing domestic trends from our cloud Titan customers.

From 23, 5% last quarter.

Is corner to corner reduction largely reflected an unusually high contribution of our EMEA region customers in the fourth quarter.

Overall gross margin in Q1 was 63% in line with our guidance of approximately 60%.

Overall, we continue to see outsized growth in the U S largely due to ongoing domestic strength of our cloud Titan customers.

We continue to recognize income on supply chain costs in the period combined with a healthy classics.

Operating expenses for the quarter were $257 5 million or 19, 1% of revenue up from last quarter at $235 3 million.

Overall gross margin in Q1 was 63% in line with our guidance of approximately 60%.

We continue.

R&D spending came in at $164 8 million or 12, 2% of revenue up from $153 2 million in last quarter is primarily reflected increased head count and new product introduction costs in the period.

Sales and marketing expense was $75 9 million or five 6% of revenue compared to $67 4 million last quarter with increased headcount costs and higher variable compensation expense.

Our G&A costs came in at $16 8 million or one 2% of revenue consistent with last quarter.

Our operating income for the quarter was $556 8 million or 41, 2% of revenue.

Other income and expense in the quarter with a favorable $17 7 million.

Our effective tax rate was 21, 2%.

This resulted in net income from the corner Orange to $52 5 million or 33, 5% of revenue.

Our diluted share number was $315 6 million shares.

Diluted earnings per share number for the corner of $1.43 up 70% from the prior year.

Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately $3 three 3 billion.

In the quarter, we repurchased $82 $3 million of our common stock at an average price of $111 $9 per share.

Now repurchased $825 $5 million or $7 8 million shares at an average price of $106 per share under our current spend and daughter Board authorization.

This leaves $174 $5 million available to repurchase in future quarters.

The actual timing and amount of future repurchases will be dependent on market and business conditions stock price and other factors.

Now turning to operating cash flow for the first quarter generating approximately $275 million of cash from operations in the period.

Second strong earnings performance, partially offset by ongoing investments in working capital.

Dsos came in at 57 days down from 67 days in Q4, reflecting a strong collections quarter with good linearity of billings.

Inventory turns were one three times down from $1 six last quarter inventory increased $1 7 million in the corner up from $1 3 billion in the prior period effect on receipt of components from our purchase commitments and a slight increase in switch related to finished goods.

Our purchase commitments at the end of the quarter and $2 9 billion down from $3 7 billion at the end of Q4.

We expect this number to continue to decline in future quarters as component lead times improve and we work to optimize our supply position.

Our total deferred revenue balance was 1.092 billion up from 1.04 billion in Q4.

The majority of the deferred revenue balance services tornadoes and directly linked to timing terms of service contracts, which can vary quarter by quarter base.

Our product deferred revenue balance was flat to last quarter.

Payable days were 55 days up from 43 days in Q4, protecting the timing of inventory receipts and payments.

Expenditures for the quarter to $5 6 million.

Now turning to our outlook for the second quarter and beyond.

As we move through 2023, we expect to resolve the final Kingston with supply chain.

I was more consistent manufacturing I'm, quoting and improving lead times to our customers.

We do however expect these reduce lead times to also results in reduced reduced visibility with customers our customers no longer needing to make purchase decisions, so far and at that point.

Should we expect some moderation in customer spending, especially with our cloud Titan customers. Following a year of accelerated demand in 2022.

All of that being said these customer engagements with current deployments across the business.

The current consensus revenue growth rates for 2023 approximately 26%.

In terms of quarterly trends, you should expect moderating year over year growth as the year progresses, that's more difficult prior year comps.

On the gross margin structure beginning in Q2, we expect to see some steady improvement as we consume fewer broker parts.

Have the opportunity to optimize manufacturing unquote.

Maintaining a healthy contribution from our cloud customers.

I'm not trying to spending and investing we continue to monitor the overall macro environment carefully prioritize.

Prioritize our investments as we move through the year. This will include a focus on targeted hires in R&D and go to market team sees the opportunity to courthouse on.

On the cash balance, while continuing to focus on supply chain and working capital optimization.

Some continued growth in inventory on a quarter by quarter basis, as we receive components from a purchase commitment.

With all of this as a backdrop our guidance for the second quarter based on non-GAAP results and excludes any noncash stock based compensation impacts and other nonrecurring items is as follows.

Revenues of approximately 135 to $1 4 billion gross margin of approximately 61% operating margin at approximately 40%.

Active tax rate is expected to be approximately 21, 5% with diluted shares of approximately 317 million shares I will now turn the call back to Lynn.

Thank you, yes, 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.

In order to ask a question. During this time simply press Star then the number one on your telephone keypad.

I would like to withdraw your question.

Again star one.

We ask that you pick up your handset before asking questions in order to ensure optimal sound quality.

Your first question comes from the line of Aaron Rakers with Wells Fargo. Your line is now open.

Yeah. Thanks for taking the question.

I'm, just curious kind of the commentary around the Hyperscale cloud.

<unk> lead time shrink how would you characterize if at all the visibility in that vertical and specifically, how maybe that's evolved or changed relative to let's say the commentary or the thoughts you know a quarter ago. Thank you.

Yeah, Hi, here and I'll kick it off and maybe actually can help me.

As you know historically visibility with the cloud Titans issue. If you take out if you subtract the last two years, which were largely supply chain related was typically two quarters right and for a period of time last year and the year before we were starting to get a full quarters of visibility as our lead times are improving our visibility.

So shrinking, especially with that segment because they can make decisions.

Decisions closer to our lead times, so I would say our visibility has reduced from last year to just feel by two quarters and is roughly six months.

Thank you Darren you can go ahead and take the next question.

Your next question comes from the line of Anton Chigurh pain with New Street Research your.

Your line is open.

Alright, Thank you very much for taking my question.

So the <unk> I think you provided.

Intensive networks Tam of about two or three billions in the next few years.

During last earnings Broadcom said that their Ethernet switch chips deployed it was well over $200 million in 'twenty, two and the forecast that this could grow to over 800 million in 'twenty three.

I imagine that that would correspond to four 5 billion revenues.

This is therefore already well above the time that you estimated I might be missing anything or did that.

Consider that considerably more than you were anticipating at the of the symptoms.

Sure.

The hydro's onshore.

There's a lot of talk about AI and it's a very exciting topic in many ways.

<unk>, you too and the forecast that this could grow to well over $800 million in 2003.

Hum.

Plus you have to separate those numbers by Broadcom for the year versus.

So I imagine that that would correspond to four 5 billion in revenues.

Customers will deploy systems, but there's an offset or when the chips was has been weakened ship systems and often by a quarter, sometimes it could be as long as a year right given the lead times and so on that are going on in the bucket.

This is therefore already well above the time that you estimated.

Missing anything or did the time extend consider it considerably more than you were anticipating at the at the 70.

Second I think here soon in its infancy.

Sure.

One thing that we know really how big it will be clearly on a very good trajectory to keep on growing.

Hydro's onshore.

A lot of talk about AI, and it's a very exciting topic in many ways.

It is a great opportunity for us for sure.

Plus you have to separate out numbers at Broadcom CPO versus where our customers will deploy systems, there's an offset of when they ship chips. Once it's been they can ship systems and often by a quarter, sometimes it could be as long as a year right given the lead times and so on that are going on in the market.

They're doing very well with some of our top customers just talked about and the premise Cryptos Road.

Yeah, and just to add to what <unk> said, all our forecast is two to 3 billion was more in the 2025 arena market analysts are already showing larger numbers than that 2025, 2027 arena I think market analysts already projecting it's double that.

Second.

Tune in its infancy.

I don't think we know really how big it will be it's clearly on a very good trajectory it will keep on growing.

And 70, Broadcom is and enthusiastically looking at that chip deployment, but again as our onshore diluted by the time Broadcom has a chip the trip gets spoken to our system by US and then the system gets deployed by our cloud customers. It can be one to two years.

It is a great opportunity for us for sure.

We're doing very well with some of our top customers as <unk> talked about in the primary script as well.

Yeah, and just to add to what I'm, saying.

Our forecast is $2 billion to $3 billion is more in that 2025.

Yeah.

Let me now market analysts are already showing larger numbers than that 27, 5% to 27 arena I think market analysts already projecting it's double that.

Thank you. Your next your next question comes from the line of Cemig Chatterji with J P. Morgan Your line is open.

Hi, Thanks for taking my question.

And secondly, Broadcom is.

If you don't mind can we just dig a bit deeper into the inventory number I think getting a few questions on that.

Enthusiastically looking at that chip deployment, but again as I.

I Shouldnt alluded by the time Broadcom has a chip the chip gets built into our system by US and then the system gets deployed by our cloud customers. It can be one to three years.

<unk> will step up in the inventory in the quarter.

Particularly as you mentioned the lead times for your products in those six months do we sort of conclude that your lead times would be the step function down. If you have this much inventory at this point.

Thank you your next your next.

<unk> comes from the line of sneak chatterji with J P. Morgan Your line is open.

At fleet, if you had visibility into demand is starting to come in a bit.

Yes, hi, thanks for taking my question.

Why you sort of maybe help me think about why the inventory.

Can we just dive and dig a bit deeper into the inventory.

Just to sort of pile.

Pilot from Hewlett rather than sort of start to come down in line with your visibility into demand. Thank you.

I think getting a few questions on that obviously a material step up in the inventory in the quarter or particularly as you mentioned lead times for your products in those six months do we sort of conclude that your lead times will take a step function down if you have this much inventory at this point.

And finally this is Peter.

When you think about the purchase commitments that we have and that we made some time ago right. We're going to have to continue to work through those as we go through the rest of this year.

Particularly on some key components of our long lead times.

If fleet at field visibility into demand is starting to come in a bit.

We have to pay its commitment for kind of this year well earlier last year in order to secure the supply those components will continue to come into inventory and obviously well go out of inventory as well as we are.

Why you sort of maybe help me think about why the inventory continues to sort of move up higher from here rather than sort of start to come down in line with the visibility into demand. Thank you.

Thank you Christina.

Build products et cetera. So you know we have a healthy deployment pipeline in front of both on the system side, but we are still going to gather components based on windows purchase commitments were made on the timing of those purchase commitment. So if you look at the total of inventory purchase commitments that came down in excess of $400 million this quarter.

When you think about the purchase commitments that we have and that we need some time ago right. We're going to have to continue to work through those.

As we go through the rest of this year.

Particularly on some key components of our long lead times.

Got to pace commitment for kind of this year.

Earlier last year.

And we'll continue to kind of work that down over time, but you will see the shift from purchase commitments into inventory parts and then people will sell that inventory and somebody just to add to.

To secure the supply of those components will continue to come into inventory and obviously well go out of inventory as well as we are.

Build products et cetera, So we have a healthy deployments pipeline in front of us on the systems side, but we are still going to gather components based on windows aren't just commitments were made on the timing of the purchase commitment. So if you look at the total of inventory purchase commitments. It came down in excess of $400 million this quarter.

We're not managing the business I was just in time inventory as you. Just said you know we have 72 reviews on still on many of our components, even even with the supply chain improvements. So we have to plan ahead, and if we want to get product to our customers in six to 12 months I assume are positioned on the inventory and especially goes.

And we'll continue to kind of work that down over time, but you will see the shift from purchase commitments into inventory parts and then off the signal well found that inventory and so maybe just to add that we're.

<unk> common components, maybe feel confident that there is demand and we will continue to fulfill that demand this year and next year.

Okay. Thank you thanks for taking my question.

We're not managing the business as just in time inventory.

Excellent.

Your next question comes from the line of David <unk> with UBS. Your line is open.

As <unk> said, we have 72 week lead times still on many of our components, even even with the supply chain improvements. So we have to plan ahead, and if we want to get products to our customers in six to 12 months.

Great. Thank you guys for taking my question I just wanted to follow up.

Basically on the question on AI inventories and sort of revenue growth expectations for the second half. So if I'm hearing you correctly. It sounds like you think given tough comps and sort of spending patterns from the tightened group is going to come down bring revenue growth down to about 15% in the second half on a year over year basis.

Similar position on the inventory and especially do so uncommon components, maybe feel constantly then that there is demand and we will continue to fulfill that demand this year and next year.

Okay.

Thanks for taking my question.

Excellent.

Yet as you just mentioned inventories still need to come down to how do we square that with sort of the optimism in the marketplace that it looks like you took your Tam up from about $40 billion to about $50 billion for data center and campus in the deck and I'm just trying to square the deceleration that you're talking about.

Your next question comes from the line of David <unk> with UBS. Your line is open.

Great. Thank you guys for taking my question I, just wanted to follow up a bit.

On the question on AI inventories and sort of revenue growth expectations for the second half.

If I'm hearing you correctly. It sounds like you think given tough comps and sort of spending patterns from the tightened group is going to come down bringing revenue growth down to about 15% in the second half on a year over year basis, and yet you know as you just mentioned inventories still need to come down so how do we square that with sort of the optimism in the marketplace that.

Versus sort of the expanded Tam that you're also kind of highlighting the deck. Thanks.

Hey, David I think first of all the time, we took up with between 27 not not Q3 Q4 of 2023 just to be clear.

And I think we continue to feel very optimistic about our long term demand in enterprise cloud and AI.

Looks like you took your Tam up from about $40 billion to about $50 billion for data center and campus in the deck and I'm just trying to square the deceleration that you are talking about <unk>.

So we shouldn't confuse the comps and difficult he of comparing Q3 2022 with Q3s range, maybe three with a long term demand and Tim both are valid statements. So.

Versus sort of the expanded Tam that you're also kind of highlighting in the deck.

But as you know the cloud is a very volatile market and the tightness will spend a lot one year and then spend a little less the other ear out there.

David I think first of all the time, we took a pause for 2020 send that not not Q3 Q4 of 2023 just to be clear.

Resting it and deploying it so.

And I think we continue to feel very optimistic about our long term demand and enterprise cloud and AI.

If you look across multiple years, and they're gonna have the strong demand and do well.

David This is very consistent what we talked about last quarter right. I mean, we're because of the comps in the pattern of the comps were going to grow quarter by quarter growing each corner consecutively, but you will see that deceleration just because of how last year's kind of.

So we shouldn't confuse the comps and difficult D of comparing Q3, 2022, and with Q3s range mainstream with a long term demand and Tim both are valid statements.

But as you know the cloud is a very volatile market and the tightness will spend a lot of one year and then spend a little less the other area is theyre digesting it and deploying it so.

Revenue trended as well is there anything new there in fact, we probably took up the overall numbers are little bit forget for 26% right. You said 25 in November and I always think 'twenty six.

Right. Thank you thanks guys.

If you look across multiple years, and they're going to have the strong demand and do well and David. This is very consistent what we talked about last quarter right. I mean, we're because of the comps and the pattern and the comps were going to grow quarter by quarter growing each quarter consecutively, but you will see that deceleration just because of how last year, it's kind of rare.

Thank you.

Your next question comes from the line of meta Marshall with Morgan Stanley . Your line is open.

Great. Thanks.

Maybe just kind of on the cloud Titan vertical you know you mentioned kind of reduced visibility, but just wanted to clarify have you seen any changes in orders or any push outs kind of within the quarter of orders right.

Anything new here in fact, we probably took up the overall numbers a little bit against the 26% right. You said 25 in November and now we're saying 26.

Right. Thank you thanks guys.

And within kind of your near term guidance of orders that you thought were going to take place that are maybe getting pushed out.

Thank you.

Your next question comes from the line of meta Marshall with Morgan Stanley . Your line is open.

I'll, let Angela answer the question, but I would say, it's sort of a given it takes.

Great. Thanks.

Maybe just.

Some things are getting pushed out and some are getting pulled in the silver lining is a clearly AI.

Iranian kind of on the cloud Titan vertical you know you mentioned kind of reduced visibility, but just wanted to clarify have you seen any changes in orders or any push outs kind of within the quarter of orders right.

That's not getting pushed out but some of that deployment of our cloud region.

Are getting pushed out.

So you went after that and then if I can add some more color two key areas that they've been tracking.

And within kind of your near term guidance of orders that you thought were going to take place that are maybe getting pushed out.

We only want to talk about AI.

<unk>.

Dci market and backboard, which is what started the 400 gig cycle as opposed to please.

I'll, let Angela answer the question, but I would say, it's sort of a given or take.

Those deployments are progressing as expected as well.

Some things are getting pushed out and some are getting pulled in the silver lining is clearly AI.

Part of the steady state of Nova Sea.

It is growing.

Compared to what we knew before.

Yeah.

Great. Thank you.

Are getting pushed out.

Your next question comes from the line of Sebastian Nausea, with William Blair. Your line is now open.

So you want to add to that and then if I can add some more color two key areas that <unk> been tracking.

I know, we only want to talk about it.

Great. Thanks for taking the question.

This dci market and backbone, which is what started the 400 gig cycle in the first place.

Just given this discussion around generative AI, maybe can you frame for us the advantages of Ethernet for building out. These AI network fabrics and any metrics you might have that highlight these advantages versus something like infiniband.

Those deployments are progressing as expected as well with.

So that part is steady state and obviously.

<unk>.

Compared to what opinion before.

Sure.

Okay.

I think I've said this before but I think the the number one advantage of Ethernet is the fact that.

Great. Thank you.

Your next.

Question comes from the line of Sebastian <unk> with William Blair. Your line is now open.

You're building a standards based multi vendor highly interoperable network, where everything from triple troubleshooting to familiarity when you're connecting to the GPU cluster is very well known so from a best of breed horizontal approach Ethernet can win every time, an Ethernet technologies generally struggle.

Hi, Thanks for taking the question.

Having said that the vertical approach that infiniband adopted for high performance computing can be applied to GPU costco's as well. So I think it all depends on the customer's clusters and how large they are on the larger they become the more it favors Ethernet.

Sure.

I think I've said this before but I think the the number one advantage of Ethernet.

Is the fact that.

You are building a standard space multi vendor highly interoperable network, where everything from simple troubleshooting to familiarity when you're connecting to the GPU clusters. This is very well known so from a best of breed horizontal approach Ethernet can win every time, an Ethernet technologies generally struggle.

Great. Thank you.

Your next question comes from the line of Tommy Honey with Bank of America Your.

Your line is now open.

Hi, guys, thanks very much.

Having said that the vertical approach that infiniband adopted for high performance computing can be applied to GPU clusters as well. So I think it all depends on the customer's clusters and how large they are in the large and they become the more it favors Ethernet.

I wanted to ask about non cloud Titans the other part.

Last year. It grew about 14, 5% and it was supposed to grow.

But your guidance kind of supposed to grow much faster this year.

What happened this quarter and again, if you don't provide exact numbers, even qualitatively what happens this quarter with non cloud Titan how is demand shaping up.

Great. Thank you.

Your next question comes from the line of Tolley Honey with Bank of America. Your line is now open.

Hi, guys.

When it comes to orders.

Thanks very much.

Im trying to neutralize the supply chain issue. Thanks.

I wanted to ask about non cloud Titans the other part.

No. It's a good question.

Last year. It grew about 14, 5% and it was supposed to grow by your guidance kind of supposed to grow much faster this year.

Enterprise demand is pretty strong and steady and in fact I would go as far saying the customer activity has been just as strong as last year.

What happened this quarter and again, if you don't provide the exact numbers even qualitatively what happens this quarter with non cloud Titan how is demand shaping up.

And some of these macro things we hear about are you know.

We are experiencing less of it perhaps because there are a small fish in a big ocean right. So.

When it comes to orders.

That said, obviously, our revenue has a high component of subtyping concentration in Q1.

Trying to neutralize the supply chain issue. Thanks.

Yeah no good question.

So the demand doesn't translate into direct revenue contribution in a specific quarter, but I think you will see a number far greater than the 15% through the year.

Enterprise demand is pretty strong and steady.

In fact, I would go as far saying the customer activity has been just as strong as last year and some of these macro things we hear about.

Got it.

Your next question comes from the line of Michael <unk> with Goldman Sachs. Your line is open.

We are experiencing less of it perhaps because there are a small fish in a big Ocean alright.

Hey, good afternoon, and thank you for the question. It was encouraging to hear about the endorsement of consensus of 26% year over year growth.

That said, obviously, our revenue has a high component of subtyping concentration in Q1.

I was just wondering if you could talk about what youre, assuming as it relates to AI production deployments because you did talk about that.

So the demand doesn't translate into direct revenue contribution in a specific quarter, but I think you will see a number far greater than the 15% through the year.

Trial that was underway.

Any other.

Got it.

Areas of the Optionality that you would call out perhaps the DIY to branded switches within web scale cloud Titans any updates there would be helpful. Thank you.

Your next question comes from the line of Michael <unk> with Goldman Sachs. Your line is open.

Hey, good afternoon, and thank you for the question. It was encouraging to hear about the endorsement of consensus of 26% year over year growth.

Sure Michael Yeah, as we said the 7800 is Arista flagship AI platform.

I was just wondering if you could talk about what youre, assuming as it relates to AI production deployments because you did talk about that.

And we have spent the better part of last year or maybe even the year before I'm sure. You can correct me doing a tremendous amount of stimulation on how we work with GPU clusters and different types of Netflix.

Trial that was underway.

Any other.

Areas that Optionality that you would call out perhaps the DIY to branded switches within web scale cloud Titans any updates there would be helpful. Thank you.

Network interface cards the performance the loss with the you know due to the bursty traffic the latency the transaction.

And we believe that this will be a critical year and seeing those trials come into production.

Sure Michael.

As we said the 7800 is Arista flagship AI platform and we have spent the better part of last year, maybe even the year before actual and you can correct me doing a tremendous amount of stimulation on how we work with GPU customers in different types of Netflix.

So we do expect <unk> to be.

For this year as opposed to not material. The last couple of years and we believe the 7800 would be the flagship product for that.

And if I can.

So your other indirect question. Your question was overdue despite boxes [laughter] recent blue box [laughter].

Network interface card performance the lossless.

Dealing with bursty traffic the latency in the transaction.

We said this before I think we're maybe getting started school, they're doing very well with all goes smoothly.

And we believe that this will be a critical year and seeing those trials come into production.

Fred.

And we don't believe the motive stripping back the white box as it does in fact, the co development effort.

So we do expect to AI to be meaningful this year as opposed to not material. The last couple of years and we believe the 7800 would be the flagship products for that.

Even more intense than before but I think largely speaking base achieved startup school I think that's where the market is for now.

And if I can just answer your other indirect question. Your question goes over to not just buy boxes.

Thanks, Victoria, Thanks, Joe.

Yeah.

Your question <unk>.

We simply.

[laughter].

Question comes from the line of Alex Henderson with Needham. Your line is now open great.

Hmm.

We said this before I think we are maintaining status quo, they're doing very well with our customers.

Alright. Thanks.

Got a question I want to split it into two pieces the first one.

Fred.

And we don't believe the motive shifting back to white box as it does in fact, the core development efforts are.

As you know as Youre looking at.

Our market share.

Even more intense than before but I think largely speaking we've achieved status quo I think thats, where the market stands for now.

In the AI arena.

Does the networking piece gained share within the AI wallet.

Thanks, <unk> Thanks, Joe.

Yeah.

Budgets and then second.

Your next question.

Now that you've had a very significant share.

Next question comes from the line of Alex Henderson with Needham. Your line is now open great.

Advantage and high speed.

Gained significant share from your competitors for every year that I can remember.

Great. Thanks.

Got a question I wanted to split it into two pieces the first one.

And I guess the question is will drive.

As you know as Youre looking at.

Drive an acceleration in your share given your dominant experience so far.

Market share.

In the AI arena.

Does the networking piece gained share within the AI wallet.

And delivering it.

Sure within the.

Capex wallet share within the AI market.

Now that you've had a very significant share.

To answer your questions.

And it's let me go back to your high speed.

Advantage and high speed.

Gained significant share from your competitors for every year that I can remember.

Acceleration question first and then we'll talk about the market share in AI, because they're still trying to rapidly with what is the marketplace right.

And I guess the question is will drive.

Right now in terms of high speed I think we've now got some killer use cases for 408 hundred gig really I did you will see us trend is going from strength to strength.

Drive an acceleration in your share given your dominant experience so far.

And delivering it.

Sure within the.

Capex wallet share within the AI market.

200, and some cases and now 408 hundred with AI being that Kim applications driving our high speed acceleration, we feel more confident now otherwise you could argue you know what is the use case for 408 hundred gig so that makes us very positive specific to E wallet share.

And let me go back to your high speed.

Acceleration question first and then you can talk about the market share in AI and there's still.

Spine rapidly with what is the market play out right.

Now in terms of high speed I think we've now got some killer use cases for 400 800 gig with AI.

Quite honestly the greatest component of AI today is the processors that is 80, maybe 90% of the spin and the applications. Obviously that go with that so if they're vertically integrated you may not see as much of it but if customers choose the horizontal investor we will absolutely get our share of wallet there.

You will see us trend.

<unk> 200, and some cases and now 408 hundred with AI being that killer application driving our high speed acceleration, we feel more confident now otherwise you could argue you know what is the use case for 408 hundred gig so that makes us very cognizant specific to AI wallet share.

Yeah.

Great. Thank you so much.

Alan.

Your next question comes from the line of Amit <unk> with Evercore. Your line is now open.

Quite honestly the greatest component of AI today is the processors that is 80% maybe 90% of the spend and the applications. Obviously that go with that so if they are vertically integrated we may not see as much of it but if customers choose the horizontal best of breed, we'll absolutely get our share of wallet there.

Hey, good afternoon, thanks for taking my questions.

I just want to go back to this reduced visibility that you're seeing with the cloud Titans.

I guess is it your sense that you're just not extra long visibility at four quarters of nice Green button going back two quarters of just normal or do you think that the risk that it actually ends up in outright pause at some point given these companies did have a really big spending cycle with you in the last four or five quarters already. So I'm. Just wondering is this a return to normalcy or do you think there's risk that we end up in a pause would want.

Great. Thank you so much.

Alan.

Your next question comes from the line as Amit <unk> with Evercore. Your line is now open.

Both of them the way we did in 2019. Thanks.

Yes. Good afternoon, thanks for taking my question.

It goes onto a customer.

I just wanted to go back to this reduced visibility that you're seeing with the cloud Titans.

Customers have been waiting for throwing up here for the moment, because they're going back to normal.

I guess is it your sense that you're just not extra along with Liberty at four quarters of not going back and going back to two quarters, which is normal or do you think that the risk that it actually ends up in outright pause at some point given these companies did have a really big spending cycle with you in the last four or five quarters already. So I'm. Just wondering is this a return to normalcy or you think there's risk that we ended up in a pause would want.

Supply chain is recovering the subs most volatile component based on retail sales growth.

Okay. Thanks, and then coming back to wherever your speed CECO nothing different nothing more than that.

And summit next question please.

Your next question comes from the line of Hot in the job as an independent analyst. Your line is open.

Both of them the way we did in 2019.

Hi, Matt those onto our customers have been waiting for this moment they can return back to normalcy.

Okay. Thank you for taking my question.

Usually I wanted to.

Ask your question on.

Supply chain is recovering these customers followed component based on Springfield sales growth.

Broadcom is recent introduction of the delicately AI chip it kind of reminds me of the time when they first introduced the Jericho two.

To critics and they are coming back to where it used to be pre COVID-19 levels nothing different nothing more than that.

And to see you.

The earliest.

Adopters of that technology and that led to a significant.

Next question please.

Your next question comes from the line of Houghton, John as an independent analyst Your line is open.

These are the leaf spine.

Architecture so.

Is the.

Vertical three a similar upgrade cycle and should we think about the same.

Hey, Thank you for taking my question.

This is you guys are enjoying in this forthcoming cycle as you did in the previous cycle or anything that you can.

So I wanted to ask your question on.

Broadcom is recent introduction of the identical to the AI chip and it kind of reminds me of the time when they first introduced the Jericho two.

Hello.

Elizabeth.

Further a good way to look at this.

And to see you at the earliest.

Good day.

The introduction of <unk>.

400 gig.

There is not room and quickly and suddenly get replace vertical three 400 gig will go on for some time customers will take time to make changes on board, especially when they don't need more bandwidth just yet at.

At the same time, you see a quicker dog 800 gig technology.

The complementary chip that is also announced.

No.

Further a good way to look at this market.

This is Thomas <unk>.

Between five and Jacob AI AI team's philosophy consumed with us quickly.

The introduction of <unk>.

If you can get them out there.

400 gig.

You may have read some white papers that were also published along with the announcements that showed that.

There's not going to end quickly and suddenly get replace vertical three 400 gig will go on for some time customers will take time to make changes and so, especially when they don't need more bandwidth just yet.

Jacobs is two very large, but just trying to compare to 4000 Gpus.

Quickly Dave.

At the same time, you see a quick adopt 800 gig technology.

<unk> hundred gig.

The cluster performed 10% better throughput time infiniband.

So complimentary trip that was also announced this is Tom I'll quote, but between <unk> five and Jacob III AI AI team's philosophy consumed about as quickly as the market can get them out there.

So that is why there's such a need.

For this technology out there everyone is anxious to get it but.

He is a member of the chimps have just been announced.

Takes time to get those systems typically most what sort of trials and then go to high volume production. It's a very exciting multiyear journey and we really value our partnership with Broadcom, but what you're seeing here is a.

<unk> is a very large clusters against peer to 4000 Gpus.

100 gig for mainstream enterprises, 400 gig for the cloud and 800 gig and beyond for AI use cases.

Quickly on <unk> and the cluster performed 10% better throughput on Infiniband.

Yeah.

That is why there's such a need for the.

I appreciate the answers thank you.

This technology out there and everyone is anxious to get it but.

Your next question comes from the line of Matt Mcnulty with Deutsche Bank.

It takes time to get them both systems typically customers towards sort of trials and then go to high volume production. It's a very exciting multiyear journey really value our partnership with Broadcom, but what you're seeing here is.

Your line is open.

Hey, Thanks for taking the question just.

Just to go back to the macro discussion I'm. Just wondering were there any regions customer verticals, where you maybe saw some greater than usual slowness or lengthening sales cycles, particularly later in the quarter.

100 gig for mainstream enterprises, 400 gig for the cloud and 800 gig and beyond for AI use cases.

Yeah, Matt I'd say back.

Yeah.

Usually we see a very strong activity in the month of March but in Q1, we did see some seasonality in certain regions, especially internationally.

I appreciate the answers thank you.

Your next question comes from the line of Matt <unk> with Deutsche Bank.

Your line is open.

Hey, Thanks for taking the question.

And I don't know how to at one one quarter doesn't a trend make but we're definitely watching this.

Okay and has that changed at all in early April .

Too early to say no you mean has it changed in that in a sense. It's improved in April is that your question.

Yeah, Matt I'd say back.

Actually we see very strong activity in the month of March but in Q1, we did see some seasonality in certain regions, especially internationally.

That's right yeah.

Yeah.

It was good so far.

Okay. Thank you.

Your next question comes from the line of Michael Genovese with Rosenblatt.

I don't know how to at one one quarter doesn't a trend make but we're definitely watching this.

Your line is now open.

Hi, Thanks for taking the question just one one question for me.

Okay and has that changed at all in early April .

But.

Too early to say no you mean hasnt changed in that sense. It's improved in April is that your question.

So basically when it's.

It's about timing on AI and when when do we think switching will inflect and I guess, maybe the actual question is what's your outlook on 2020 for cloud spending I mean, we've talked a lot about the next six months, but I wonder.

That's right yeah.

Yeah.

Okay. Thank you.

Your next question comes from the line of Michael Genovese with Rosenblatt.

About 2024.

Thinking about that right now thank you.

And the next months.

Your line is now open.

Any forward spending because we don't know we don't have the visibility.

One one question for me.

It's a little early for that yet Mike.

But.

But what about on the timing of switches I mean, as we go through all of this.

So basically when it's about timing on AI and when.

Gpus.

Processing units now training all of these things.

When do we think switching will inflect and I guess, maybe the actual question is what's your outlook on 2020 for cloud spending I mean, we've talked a lot about the next six months, but what about 2024.

Or do you think the timing for switching deployments will inflect positively.

You're asking specific to me I have the cloud Titan spending.

Yeah.

Thinking about that right now thank you.

Specific.

And the next months.

I mean, it's clearly happening now, but but 80% 90% of the spending is in is it been stuff that you don't do.

Spending because we don't know we don't have that visibility.

Early for that yet Mike.

But what about on the timing of switches I mean as you go through all of this.

When do you think that there'll be a significant.

Gpus.

Uptick in that percentage of switching deployments and AI cluster data centers, okay, well I as I said I think last year was the RF trials. This year, we will see some production and it will certainly accelerate in 'twenty four 'twenty five specific to ear.

Processing units now training all of these things.

When do you think the timing for switching deployments will inflect positively.

You're asking specific to me I cloud Titan spending.

Well specific.

But again, that's a small spend relative to our largest cloud spend maybe we'd like to see more visibility on how the cloud regions are getting built out et cetera.

I mean, it's clearly happening now but.

But 80% to 90% of the spending is in is this been.

And stuff that you don't do.

Yeah, that's perfect. Thanks for clarifying that.

When do you think that there'll be a significant.

Thank you yeah.

Taking that percentage of switching deployments and AI cluster data centers, okay, well as I said I think last year was the RF trials. This year, we will see some production and then suddenly accelerate in 'twenty four 'twenty five specific to <unk>.

Thank you.

Your next question comes from the line of James Fish with Piper Sandler Your line is open.

Hey, ladies nice quarter.

Nacho as well of course.

The purchase commitment.

And to circle back there as well, it's moving down as you guys anticipated, but obviously you guys are a much larger business than you were pre pandemic. So I guess, how are you guys thinking about both the level of normalcy purchase commitments as we kind of work through this.

But again, that's a small spend relative to our largest cloud spend maybe we'd like to see more visibility on how the cloud regions are getting built out et cetera.

Yeah, that's perfect.

Your next question comes from the line of James Fish with Piper Sandler Your line is open.

Obviously, you talked about.

That we will see sequential impacts to cash flow still on the inventory as we kind of convert that purchase commitment to inventory.

Hey, ladies nice quarter.

Onshore as well of course.

Is that something that should reverse then in early 2024.

Purchase commitment alright, I wanted to circle back there as well, it's moving down as you guys anticipated, but obviously you guys are a much larger business than you were pre pandemic. So I guess are you guys thinking about the level of normalcy purchase commitments as we kind of work through this and obviously you talked about.

And how should we kind of think about free cash flow conversions.

This year, though.

Yeah look I think if I had my I have my way the purchase commitment number will come down significantly over the next 12 to 18 months, because we don't need it once we start to see somebody's component lead times come in so we need to see to manage that some have some have long lead times that we do want to receive and you will see that growing inventory some.

That we'll see sequential impacts to cash flow spill on the inventory as we kind of convert that purchase commitment to inventory.

Is that something that should reverse then in early 2024.

We will look to reposition if we can but obviously there is a keen focus on kind of managing that number now, but the net of it is I think you've grow inventory through.

Yeah look I think if I had my I have my way that purchase commitment number will come down significantly over the next 12 to 18 months because we don't need is once we start to see some of these component lead times come in so we need to manage that some have some have long lead times that we do want to receive and you will see that growing inventory.

Through the year it will consume some cash and then it will flip in 2024, when we'll actually start to kind of generate more cash.

As we start to bring that inventory number down do we ever go back to kind of where we were before I think probably not I mean, we probably will carry on.

A little bit more inventory and more buffers, having just gone through what we went through the last couple of years, but it should certainly.

We will look to reposition if we can but obviously that there is a keen focus on kind of managing that number now.

Come down from where it is today.

Net of it is I think <unk> grow inventory through through the year. It will consume some cash and then it will flip in 2020, former will actually start to kind of generate more cash as we start to burn that inventory number down do we ever go back to kind of where we were before I think probably not I mean, we'll probably will carry.

And kind of any thoughts on the free cash flow conversion for the year.

Yeah, I think for.

For this year, our inventory is in the consumer.

Cash so it's probably it's hard to know exactly what that looks like but I think every quarter, we'll increment that inventory balance as we go through the year that will consume some cash, but I mean, the P&L, it's highly cash.

A little bit more inventory and more buffers, having just gone through what we went through the.

Last couple of years, but it should certainly come down.

Positive yes.

But the guidance that we put out so I think we'll still be generating a healthy amount of cash that we built the turnouts.

From where it is today.

And any thoughts on the free cash flow conversion for the year.

Okay understood. Thank you thank.

Yeah, I think for.

Thank you.

For this year at inventory as a consumer.

Your next question comes from the line of Thai Kedron with Oppenheimer. Your line is open hi, Thanks, Hi, ladies nice quarter.

Cash so it's probably it's hard to know exactly what that looks like but I think every quarter, we'll increment that inventory balance.

Just kind of wanted to dig into your comments on gross margin, where you expect them to improve through the year.

As we go through the year that will consume some cash, but I mean, the P&L, it's highly cash.

Two things there number one.

What is the supply chain is getting better or what is it in the supply chain does still expensive. That's hurting you on the gross margin side and how does that get mitigated and second the improvement that you anticipate is that just a reflection of the mix meaning.

But the guidance that we put out so I think we'll still be generating a healthy amount of cash that we built the turnouts.

Yeah understood. Thanks, Peter.

Thank you.

Your next question comes from the line of <unk> Kidron Oppenheimer. Your line is open.

Meaning cloud, perhaps moderating to your point.

Thanks, Hi, ladies nice quarter.

Or is most of the improvement is driven again by supply chain.

Can you kind of wanted to dig into your comments on gross margin, where you expect them to improve through the year.

Better pricing on the supply side.

Yeah, I mean, I think in <unk>.

Two things there number one.

In Q1, we were still consuming broker price in other parts that we had purchased prior right because I mean, obviously you have to prepare.

What is the supply chain is getting better or what is it in the supply chain is still expensive. That's hurting you on the gross margin side and then how does that get mitigated and second the improvement that you anticipate is that just a reflection of the mix.

For the.

The quarter that should get back in Q2, and then even more so as we go through the rest of the year, where we will stop consuming Apple legacy if you like broker parts of you have in the pipeline. So that will definitely help the other thing Thats important is.

Meaning cloud, perhaps moderating to your point.

Or is most of the improvement is driven again by supply chain.

Now that we don't have a stop start as the beachhead and stuff. We can focus on manufacturing, we can focus on driving manufacturing and driving efficiencies there et cetera. So we should see some improvements come out of that as we go through the year I am not assuming.

Better pricing on the supply side.

Yes, I mean I think in.

In Q1, we were still consuming broker parts and other parts that we had purchased prior right because I mean, obviously you have to prepare for.

The corner that should get back in Q2, and then even more so as we go through the rest of the year, where we will stop consuming apples legacy if you like broker parts that we have in the pipeline. So that will definitely help the other thing thats important is.

Whole lot of change in the mix of the business, maybe a little bit more but not a lot just because we havent deployment pipeline for cloud.

Discussion that we're having about cloud is more.

When do they need to place the orders for the next deployment, but there isn't.

Now that we don't have a stop start at the beach medicine and stuff. We can focus on manufacturing, we can focus on driving manufacturing and driving efficiencies there et cetera. So we should see some improvements come out of that as we go through the year I am not assuming.

Payments in front of US right now so I don't think I think that's an important distinction right. So I think we are we're pretty happy with how the cloud business is kind of split.

Is plotted out through through the rest of the year. The question becomes when do they placed new orders with these shorter lead times and when can we see what that the warrants would look like.

A whole lot of change in the mix of business, maybe a little bit more but not a lot just because we havent deployment pipeline for cloud.

Thank you.

Yes.

Your next question comes from the line of Ben Bolan with Cleveland Research. Your line is open.

Discussion that we're having about cloud and more.

When do they need to place the orders for the next deployment now that there isn't deployments in front of US right now so I don't think I.

Good afternoon, everyone. Thanks for taking the question.

Peter I guess more specific for you could you share any thoughts around opex with respect to R&D and sales and marketing and how those have evolved through the year, given the visibility and supply and what youre seeing out there. Thank you.

I think that's an important distinction right. So I think we are we're pretty happy with how the cloud businesses.

Is plotted out through.

Through the rest of the year. The question becomes when do they placed new orders with these shorter lead times and when can we see that the warrants will look like.

Yeah, I think we when we talked about a little bit in the script, but when we are continuing to hire and we are continuing to.

Okay. Thank you.

Your next question comes from the line of Ben Boland with Cleveland Research. Your line is open.

To make some investments.

Good afternoon, everyone. Thanks for taking the question.

We will continue to do that.

Certainly within the envelope as we think about the business for the year to date and we will continue to do that it probably doesn't grow quite as fast as the top line, we will see.

Peter I guess more specific for you could you share any thoughts around opex with respect to R&D and sales and marketing and how those.

But we are continuing to increment that quarter over quarter and Youll see us continue to grow.

Revolver through the year, given the visibility and supply and what Youre seeing out there. Thank you.

Those investments then again, yes.

Its head count around our B and go.

Yeah, I think we when we talk about a little bit in the script.

Go to market and really.

We are continuing to hire and we are continuing.

Looking for good talent in places, where we know where there's opportunity right, but we will continue to invest given the envelope business.

To make some investments.

We will continue to do that.

Certainly within the envelope as we think about the business for the year to date and we will continue to do that it probably doesn't grow quite as fast as the top line, we will see.

Thank you.

Your next question comes from the line of Tim Long with Barclays. Your line is open.

But we are continuing to increment that quarter over quarter and Youll see us continue to grow.

Thank you.

A two parter on the Adjacencies.

Those investments then again, yes, it's head count around our go to market and really.

First just curious on the campus side, obviously, you guys have been growing nicely. There how do you. How do you think that tends to be more macro sensitive. So how do you view.

Looking for good talent in places, where we can win an opportunity but.

But we will continue to invest given the envelope business.

Being able to grow the same level.

Yeah.

Thank you.

In that sector.

Your next question comes from the line of Tim Long with Barclays. Your line is open.

When there becomes more macro headwinds like we're starting to see and then on the routing side I'm curious now that you're out with a full platform J.

Thank you.

J C F.

Can I ask a two parter on the Adjacencies.

Or onshore if you could just give us.

A little view of kind of what what feedback has been and what you think the kind of the revenue path would look like for for increased routing business. Thank you.

Tim I think on the campus side, the Tam is somewhere between 10 and $15 billion. So I don't want to make macro an excuse because I think we have fantastic demand because those are fantastic products.

Being able to grow the same level.

In that sector.

When there becomes more macro headwinds like we're starting to see and then on the routing side I'm curious now that you're out with the full platform.

That said, obviously the way we will see the campus demand manifest as we may see longer decision cycles with the macro continues but the actual interest in our products is very solid very good because it's still operating and still aiming for our first million here in the next few years. So so I think it's looking good.

J C. You are onshore if you can just give us.

A little view of kind of what feedback has been and what you think the kind of the revenue path would look like for for increased routing business. Thank you.

Tim I think on the campus side, the Tam in somewhere between 10 and $15 billion. So I don't want to make macro an excuse because I think we have fantastic demand because it's a fantastic product.

On the wine routing actually you want to add some comments, it's been a very exciting launch nothing demand stemming money right.

There's a lot of disruptions happening in the market even at the edge and you talk about campuses.

That said, obviously the way we will see the campus demand manifest as we may see longer decision cycles with the macro continues that.

Can you talk about what's inside the building, but there's the merits that connects the downside to that.

Figure of interest from our customers in this area.

The actual interest in our products consists very solid very good because it's still operating and still aiming for our first million here in the next few years. So.

Too early we just announced this offering so.

Taught it to jump up and down in the states.

Good.

Boston as it goes but having the integrated solution is important to go after the pro to enterprise.

So I think it's looking good on the wind routing actually want to add some comments, it's been a very exciting launch another demand stimulus right, but theres lots of disruption happening in the market even at the edge right. When you talk about campuses.

Our existing customers.

Do you see the national affinity to our cloud vision and U S tax so that would be the national spot.

Ill talk about what's inside the building, but there's the merits that connects to the outside too.

We have plenty of interest from our customers in this area. It is a bit too early we just announced this offering so.

Okay. Thank you.

And your next question.

Your next question comes from the line of Erik <unk> with JMP Securities. Your line is open.

Too early to jump up and down and save.

Lots of membership.

Once it as it goes but having the integrated solution is important to go after the pro to enterprise clients.

Yeah. Thanks for taking the question.

Can you speak.

At least qualitatively about.

How how much backlog you were you were using up at this point and how long do you expect to continue working down backlog orders.

Do you see the national affinity.

Affinity to our cloud vision and Eos stack, so that would be the national spot.

Okay.

On a quarterly basis.

Thank you.

Yeah, you know I love to talk about backlog.

And your next question.

We're gonna do fast.

No I think it all comes back to the tax rate. It's lead times is the driver of all that's right.

Thanks for taking the question.

And to the extent that customers.

Can you speak.

Customers had to place orders to those lead times and lead times improve customer doors to shorter lead times that will slowly kind of navigate our way back to a more normal visibility window and lead time, it's alright.

At least qualitatively about.

How how much backlog you are youre using up at this point and how long do you expect to continue working down backlog orders.

On a quarterly basis.

We're taking the first steps of that now right.

Yeah, you know I love to talk about backlog and I don't think.

But that's going to take time and to get there, but that's what will happen is lead times will naturally bring visibility back to something more normal, but that's going to take some time I think we're very beginning of that.

We're going to do that.

No I think it all comes back to Deepak right lead times is the driver of all S. K.

Okay that makes sense that customers have to place orders.

Is that a multi year process.

Those lead times and lead times improve customer service and shorter lead times, it will slowly kind of navigate our way back to a more normal visibility window and lead time window right.

I don't know when we're back to normal it will take it will take time to have even though we've pretty much said it'll take us the back half of 'twenty train speed. So I think normal is really next year.

We're I think we're taking the first steps of that now.

Okay. Thank you.

And that's going to take time to get there, but that's what will happen is lead times will naturally bring visibility back to something more normal, but that's going to take some time I think we're already beginning.

Okay. Thanks, Dan.

Your next question comes from the line of Simon Leopold with Raymond James Your line is now open.

Thanks for taking the question.

Is that a multi year process.

A quick one if we could get a metric the RP O value.

I don't know when we're back to normal it will take it will take time to be.

And in terms of my question. It does seem as if you've had a number of announcements around some software capabilities around your campus.

We've pretty much said it'll take us the back half of 2026, and I think normal Israeli next year.

And enterprise focused products.

Okay. Thank you.

And it feels like you've sort of built up a critical mass of I'm wondering how you look at that strategy in terms of its maturity and its readiness.

Okay. Thanks, Eric.

Your next question comes from the line of Simon Leopold with Raymond James Your line is now open.

In terms of the software behind the campus portfolio, if there's anything still missing. Thank you.

Thanks for taking the question just a quick one if we could get a metric the RP O value and in terms of my question. It does seem as if you've had a number of announcements around some software capabilities around your campus.

Yeah. Thanks, Simon I think you know we.

Most of our software is not Standalone software, it's bundled either in cloud vision or U S is very few standalone pieces of course, there's the endear and the DANZ monitoring fabric specific to the campus are I would say they tend to look at it more as a solution where they bring in wired wireless there.

And enterprise focused products.

And it feels like you've sort of built up a critical mass I'm wondering how you look at that strategy in terms of its maturity and its readiness.

In terms of the software behind the campus portfolio, if there's anything still missing. Thank you.

One in automation framework with cloud vision, they want some security capabilities.

In order to save the announced some of the missing gap to be filled historically, we've partnered with other vendors for a network access control and Arista introduced its first one I'll talk about it more next quarter, but I think some of the gaps we are now starting to sell ourselves, but in the campus. It always tends to be a combination of.

Yeah, Thanks, Simon I think.

Most of our software is not Standalone software, it's bundled either in cloud vision or U S is very few standalone pieces of course, there's the endear and.

Das monitoring fabric specific to the campus are I would say they tend to look at it more as a solution where they bring in wired wireless they want an automation framework with cloud vision, they want some security capabilities.

[noise] platforms and software it never stand alone software alone.

Yes, we are seeing announcement was actually sort of where my question was coming from it felt like that was.

In RSA the announced some of the missing gaps. These sales are historically, we've partnered with other vendors for a network access control and Arista introduced its first one I'll talk about it more next quarter, but I think some of the gaps we are now starting to sell ourselves, but in the campus. It always tends to be a combination of.

In my mind, maybe one of the final gaps and that's what I'm really trying to understand here.

I was going to save it for next quarter, but I'll just give you. The condensed version at the Arista Guardian for network identity Aadmi means fire in India in Indian language sounds great. So who describes some of the ice without fire.

Platforms and software and never stand alone software alone.

Sounds good and just the Ark deal value is do you have that handy.

Yes, we are seeing announcement was actually sort of where my question was coming from it felt like that was.

Yeah, I think it's up it's.

It's up about between $50 million to $60 million a quarter over quarter and it did tick up a little bit on the on the software and services side.

In my mind, maybe one of the final gaps and that's what I'm really trying to understand here.

And that range still small numbers long way to go yet.

I was going to save it for next quarter, but I'll just give you the condensed version at the Arista Guardian for network identity Aadmi means fire in India in the Indian language subsequent Soho square some of the ice without fire.

Thank you thanks.

Thanks, Tom.

Your next question comes from the line of Sami Badri with credit Suisse.

Your line is open.

Sounds good and just the IPO value is do you have that handy.

Hi.

Two number questions. One is could you just give us an idea on campus revenues and <unk> 23, and that's going to trend in 2023, and then for cloud Titans is that expected to grow grow double digits any kind of you know.

Yeah, I think it's up to them.

It's up about between $50 million to $60 million.

I know in the corner and it did tick up a little bit on the on the software and services side.

And that range still small numbers long way to go yet.

Reference that you could make for cloud Titans is going to do for the balance try 23.

Thanks.

Thanks, Tom.

Yeah, I don't think we're going to try to predict the vertical split I think what we said we think our two biggest customers will be at least 10% customers for the year, but that's about all we've really said on that front and we feel good about that they're good partners and despite all the volatility will have a good year with them.

Your next question comes from the line of Sami Badri with credit Suisse.

Your line is open.

Hi.

Two number questions. One is could you just give us an idea on campus revenues and <unk> 23 of that is going to trend in 2023, and then for cloud Titans is that expected to grow grow double digits any kind of.

And on campus I think I gave you a number for $750 million by 2025, I'll stick with that.

Reference that you could make for what cloud Titans is going to do for the balance.

Let me give that to you towards the end of the year.

When we really achieved something.

Yes, I don't think were going to try to predict the vertical split I think what we've said is we think our two biggest customers will be at least 10% customers for the year, but it's not always good on that front and they feel good about that Eric and good partners and despite all the volatility will have a good year with them.

Great. Thank you.

Operator, we have time for one last question. Please.

Your final question today comes from the line of George Notter with Jefferies. Your line is now open.

Hi, guys. Thanks, a lot I guess just following on some of the questions about visibility and customers.

And on campus I think I gave you a number for $750 million by 2025, I'll stick with that.

Any evidence of customers building inventory of your products.

Well I can give that to you towards the end of the year.

Whether it's you know it was a standalone inventory or whether it's inventory that may.

When we really achieved something.

Great. Thank you.

Operator, we have time for one last question. Please.

May be installed in the network, but not being fully utilized I guess, what I'm really asking is you know in any thoughts about excess inventory rather than just kind of a normal buffers that are out there. Thanks.

Your final question today comes from the line of George Notter with Jefferies. Your line is now open.

Well I think you asked the question well you almost answered it it's just normal buffers, there's nothing excess inventory, we're seeing nothing abnormal and supply has been so constrained George I mean.

Hi, guys. Thanks, a lot I guess just following on some of the questions about visibility and customers.

Any evidence of customers building inventory of your products.

Oh my gosh, if they have some we'd like to know how they got it.

Whether it's standalone inventory or whether it's inventory that.

Thanks, so much.

Super Thank you.

May be installed in the network, but not being fully utilized I guess, what I'm really asking is you know any thoughts about excess inventory rather than just kind of a normal buffers that are out there. Thanks.

Yeah.

This concludes the Arista Networks' first quarter 2023 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.

Well I think you asked the question well and you almost answered it. It's just normal buffers, there's nothing excess inventory, we're seeing nothing abnormal and supply has been so constrained George I mean.

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.

Gosh, if they have some we'd like to know how they got it.

Thanks, so much.

Super Thank you.

Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.

Thank you.

Okay.

Yeah.

Okay.

Q1 2023 Arista Networks Inc Earnings Call

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