Arista Networks, Inc.

Welcome to the fourth quarter 2021 Arista 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 the start button followed by the number zero. As a reminder, this conference call is being recorded and will be available for replay from the investor relations section of the Arista website following this call. Mr. Venk Nathamuni, Arista's head of corporate and finance and investor relations, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Network's president and chief executive officer, and Ida Brennan, Arista's chief financial officer. This afternoon, Arista Networks issued a press release announcing the results of its fiscal fourth quarter ending December 30, 2021. If you would like a copy of the press release, you can access it online at our website. During the course of this conference call, Arista Networks management will make forward-looking statements, including those relating to our financial outlook for the first quarter of fiscal year 2022, the longer-term financial outlook for 2022 and beyond, our total addressable market and strategy for addressing these market opportunities, the potential impact of COVID-19, supply chain constraints, manufacturing capacity, and inventory purchases on our business, product innovation, and finally, the benefits of acquisitions. These statements are subject to risks and uncertainties that we discuss in detail in our SEC filings, specifically in our most recent Form 10Q and Form 10K which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today and should not be relied on as representing our views in the future, and we undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, let me now turn the call over to Jayshree.

Thank you, Venk, and welcome to your first earnings call at Arista. We're excited to have you on board as our executive head of corporate development, IR, and finance. Thank you, everyone, for joining us this afternoon for our fourth quarter 2021 earnings call. If there's one thing the pandemic has taught us, it is that it comes with variant surprises. With vaccines and booster choices, we certainly hope that all of you and your families are safe during the latest spread of the Omicron variant. I am proud of our employees for adapting and thank our partners and customers for placing their trust in us during these ever-changing times. Back to Q4 2021, we delivered revenues of $824.5 million for the quarter with a non-GAAP earnings per share of 82 cents. Services and software support renewals contributed approximately 21% of the revenue. Our non-GAAP gross margins of 64.3% was influenced by increasing supply chain costs. We registered a record number of million-dollar customers as a direct result of our momentum in the enterprise and campus fraction that we have experienced throughout the year. We have now surpassed in excess of 8,000 cumulative customers. In terms of Q4 2021 verticals, Cloud Titans was our largest vertical, followed by the enterprise, followed by the specialty cloud providers at third place, financials at fourth place, and service providers at fifth place. All the verticals grew well at double digit percentages in 2021. In terms of Q4 geographical mix, international contributions was strong at 29% with the Americas at 71% for the quarter. Shifting to annual sector revenue for the year in 2021, Cloud Titans registered approximately 30% of the revenue. Enterprise and financials came in at approximately 40%, and the providers at approximately 30%. Microsoft was the only greater than 10% customer at a 15% contribution. We do expect Meta, formerly Facebook, to become our second 10% revenue customer in 2022 as we improve lead times. I would now like to invite Anshul Sadana, our Chief Operating Officer, to shed more light on our cloud tightening execution.

Thank you, Jayashree. Our cloud business continues to be strong. In 2021, we successfully transitioned from prototype to trials to production on our latest products for 100, 200, and 400 gig. The Arista 7800 is now deployed at scale for data center spine, DCI and regional spines, and AI spine clusters. The Arista 7388, which we co-developed with Meta and announced at OCP November last year, is also now running successfully in production data centers. We not only continue to do well in existing use cases, but are also winning in new areas like WAN and Cloud Edge. Feedback from our largest customers is consistent. Vista products are easier to work with and have far fewer issues than competition. While there is often speculation about share shifts in some of our use cases, demand for our products from these cloud titans remains healthy. To quote one of our largest customers directly, Vista continues to maintain and even grow its leadership position in these high-volume leaf-spine deployments. Back to you, Jayashree.

Thank you, Anshul. We look forward to our continued partnership with the Cloud Titan, something you and the entire engineering team has been nurturing for over a decade. In terms of annual 2021 product lines, our core cloud and data center products, built upon our highly differentiated Arista EOS stack, is successfully deployed across 10, 25, 40, 100, 200, and 400 gig speeds. This drove approximately 64% of our revenue with strong cloud and enterprise spending cycles. We believe we will continue to be the number one in market share for both 100 gig and 400 gig ports, according to industry analysts. Our second market is network adjacencies, comprised of routing, replacing routers, and the cognitive campus workspaces. We doubled our campus revenue at approximately $200 million in 2021 and aiming to double again to $400 million in 2022. Our investments in the cognitive campus switching spines and wireless generated significant customer wins versus incumbents. We successfully deployed in many routing edge and peering use cases, winning Tier 1 and Tier 2, Tier 3 service provider projects for routing. Our investments in the simplification of the routing stack and the edge is yielding traction. Just in 2021 alone, we introduced six EOS software releases across 37 platforms. We delivered over 1,500 features in routing over the past two years. The total campus and routing adjacencies together contribute approximately 14% of revenue as a compelling alternative to legacy networks. Our third category is network software and services, based on subscription models such as Arista Acare, Cloud Vision, Dance Monitoring Fabric or DMS observability, and the Advanced Network Detection and Response, NDR, with AVA sensors for security. Arista's subscription-based network services and software contributed approximately 22% of total product revenue. We are proud that Cloud Vision has now exceeded over 1,300 cumulative customers as a highly differentiated integral element for our customers' network agility and operations. To recap our discussion at November 2021 Analyst Day, the networking industry is ripe for this digital transformation to data-driven networking. Arista is well positioned as a leader in this client to cloud networking. A key part of the strategy is to bring these cloud-first principles to every aspect of the data network. Software functions such as routing, security, and observability are inherently embedded into the Arista EOS. Our EOS has evolved to a third-generation software stack with both state and store-driven NetDL functions. NetDL, our network data lake architecture that we launched in November 2021, is resonating well with customers. We're building upon our cloud network heritage to bring proactive platforms, predictive operations, and a prescriptive experience to unify data sets from multiple sources. We are consistently harnessing the powerful combination of NetDL and AVA, our autonomous virtual assist, to gather, store, and process multiple modalities of network-generated data and network-related data. AVA uses a supervised AI ML algorithm and natural language processing to help network operators with root cause analysis and threat hunting. Looking ahead into 2022, as I engage with worldwide customers, I'm observing fatigue and frustration with our peers' discontinuity in products and low support and quality. In contrast, Arista's pursuit of world-class data-driven networking is unwavering. It cannot be achieved by us alone. We're joining forces with industry leaders to collaborate with Microsoft, VMware, Red Hat, Equinix, Palo Alto Networks, ServiceNow, Slack, Splunk, Zscaler, and Zoom, to name a few, that together build our collaborative ecosystem. In summary, I'm so proud of our team's execution across multiple dimensions in 2021. With a record-setting year at $2.94 billion, 27% annual growth, and a cash flow for the first time exceeding $1 billion, This was indeed an exciting and memorable year for Arista. It marked the return of the Cloud Titan's growth, coupled with diversified momentum across our product lines and customer sectors. Arista's profile and affinity with customers has heightened to earn a strategic seat at their table. And so despite the supply chain obstacles that we now expect to continue into 2023, we have emerged stronger. We reiterate our 30% annual growth outlook mentioned at November's analyst day, as we now aim for 3.85 billion in 2022 and multiple years of growth ahead. Now, I'll turn it over to Ida, our CFO, for financial specifics.

Thanks, Jayshree, and good afternoon. This analysis of our Q2 and full year 2021 results and our guidance for Q1 2022 is based on non-GAAP. and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. In addition, all share-related numbers are provided on a post-split basis to reflect the four-for-one stock split completed in November 2021. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q4 were $824.5 million, up 27.1% year-over-year, and well above the upper end of our guidance of $775 to $795 million. We continue to see strong demand across all our market sectors, with particular strength from our Cloud Titan customers as we ramp our new products. Shipments remain constrained in the quarter as we continue to carefully navigate industry-wide supply shortages and COVID-related disruptions. Services and subscription software contributed approximately 21.2% of revenue in the fourth quarter, roughly in line with Q3. International revenues for the quarter came in at $242.1 million, or 29% of total revenue, up from 25% in the third quarter. This completes a year of strong international performance, with international revenues for the year growing 46% on a year-over-year basis. This reflects healthy performance with our in-region customers, combined with solid contributions from our larger CloudTitan customers. Overall gross margin in Q4 was 64.3%, just above the midpoint of our guidance range of approximately 63 to 65%. We continue to recognize incremental supply chain costs in the period and began to see an increase in cloud-tightened revenue mix in the quarter. Operating expenses for the quarter were $206.2 million, or 25% of revenue, up from last quarter at $192.4 million. R&D spending came in at $130.3 million, or 15.8% of revenue up from last quarter at 125 million. This primarily reflected increased headcount and employee related costs in the period. Sales and marketing expense was 61.2 million or 7.4% of revenue compared to 55.8 million last quarter with increased headcount and a higher variable compensation expenses. As a reminder, we continue to benefit from lower COVID related travel and marketing expenses. Our G&A cost came in at $14.7 million, or 1.8% of revenue. Our operating income for the quarter was $324.2 million, or 39.3% of revenue. Other income and expense for the quarter was a favorable $1.5 million, and our effective tax rate was approximately 19.4%. This resulted in net income for the quarter of $262.4 million, or 31.8% of revenue. Our diluted share number was 319.75 million shares, resulting in a diluted earnings per share number for the quarter of 82 cents, up approximately 32.3% from the prior year. Now turning to the balance sheet. Cash, cash equivalents and investments entered the quarter at approximately 3.4 billion. We repurchased $176 million of our common stock during the fourth quarter at an average price of $113 per share. As a recap, this completes the April 2019 billion-dollar repurchase authorization, having repurchased a total of 16.7 million shares at approximately $60 per share. In addition, we initiated repurchases against the October 2021 billion-dollar Board authorization, purchasing $72.9 million, or 590,000 shares in the quarter, at an average price of $124 per share. The actual timing and amount of future repurchases will be dependent on market and business conditions, business requirements, stock price, acquisition opportunities, and other factors. Now turning to operating cash performance for the fourth quarter. We generated $225 million of cash from operations in the period, completing our first year with cash generation in excess of $1 billion. This reflects the strong earnings and cash flow potential of our business model, even in a period of increasing investments in inventory and supply chain. DSOs came in at 58 days, up from 49 days in Q3, reflecting the linearity of billings and deferred revenue growth in the period. Inventory returns were consistent with last quarter at 1.7 times. Inventory increased to $650.1 million in the quarter, up from $575.7 million in the prior period, reflecting increased component buffers and some added inventory costs. Our purchase commitments for the quarter were 2.8 billion, up from 2.1 in Q3. This is in response to increased lead times, now extending into 2023, and continued strength in demand. As a reminder, we continue to prioritize newer early life cycle products for inclusion in these strategies in order to help mitigate the risk of excess or obsolescence. Our total deferred revenue balance was 929 million, up from 800 million in Q3. The majority of the deferred revenue balance is services-related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis. Approximately 160 million of the balance, up from 113 million last quarter, represents product deferred revenue, largely related to acceptance clauses for new products, most recently with our larger Cloud Titan customers. As a reminder, we remain in a period of significant new product introductions, combined with healthy new customer acquisition rate and expanded use cases with existing customers. These trends, in conjunction with reduced levels of upfront in-person testing, have resulted in increased customer-specific acceptance clauses and higher product deferred revenue amounts. Accounts payable days were 63 days, up from 47 days in Q3, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $8.5 million. Now turning to our outlook for the first quarter and beyond. As outlined at our analyst day, we expect to achieve year-over-year revenue growth for 2022 of approximately 30%. This reflects continued healthy demand across all our market sectors, tempered by the impact of a difficult supply environment. On the gross margin front, we see continued industry-wide supply constraints and elevated logistics costs, with some offset from customer price increases. While we expect gross margins for the first quarter to be in the range of 63% to 64%, we would highlight the potential negative impact of customer mix in future quarters. If we are successful in improving supply, enabling our Cloud Titan contribution to accelerate, it would likely result in gross margins below the typical guidance range. Now turning to spending and investments. We remain committed to growing our investments in R&D to support innovation across the business, and sales and marketing to support our go-to-market expansion. With all of this as a backdrop, our guidance for the first quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts and other non-recurring items, is as follows. Revenues of approximately $840 to $860 million, gross margin of 63% to 64%, and operating margin at approximately 38%. Our effective tax rate is expected to be 21%, which eluded shares on a post-bit basis of approximately 320 million shares. I will now turn the call back to Venk. Venk?

Thank you, Ida. We're now going to 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, please take it away.

We will now begin the Q&A portion of the Arista earnings call. 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 handset before asking questions in order to ensure optimal sound quality and in the interest of time please do limit yourself to one question your first question comes from the line of rod hall with goldman sachs your line is open please go ahead

Yeah, hey guys, thanks for the question. So my one question would be regarding the enterprise momentum, given the disclosure on the split, the enterprise growth in 21 is over 40%. And I wonder if you could dig a little bit into the verticals where you're succeeding there and talk a little bit about sustainability of that momentum. It's extremely strong momentum. By the way, congratulations, over a billion dollars of revenue there, well over a billion. So just wondering if you can give us more color on what's going on in enterprise, how that looks for 22. Thanks.

Thank you, Rod. So yeah, the contribution has definitely been a pleasure to watch. And the traction, by the way, the enterprise also includes the financials. So we've had some very good traction with financials, which has been a longtime customer for us, but we very much landed and expanded in the financials. So that would be a moment of pride for us. But we are going across many cylinders on the enterprise. We're seeing a lot of activity in the healthcare, in the media and entertainment. across international geographies, and of course, the campus traction is also included in the enterprise. So, a lot of diversity in our enterprise momentum, and it's one we're proud of and expect to have continuing this year as well.

And Jitri, could you just maybe give us anything on campus, like how's that going? I know there's been a lot of demand generally, you know, for campus Wi-Fi, but I don't know how you're, you know, you're feeling there at the moment.

Yeah, so I think in general, as we have shared with you, we are doing extremely well with our own Arista EOS customer base, who is very familiar with us. And therefore, we are seeing a lot of million-dollar customers just embracing Arista EOS on the campus. So that would be a point of real success. The second thing I'd say we're seeing is we're not just seeing Wi-Fi, but we're really seeing the unification of wired and wireless across the edge, and that's been a very interesting thing. momentum as well in the campus. So a lot more work ahead of us as you'll all often point out these numbers are still small, but we're looking to make them larger.

Great. Okay.

Thank you. Thanks, Ron. Your next question comes from the line of Sameek Jatterjee with JPMorgan. Your line is now open.

Great. Thank you for taking my question and congrats on the results as well. Jashree, you mentioned in your prepared remarks about improving lead times with, I think, Meta in particular, but maybe if you can just dig into that a bit more. How is visibility today in terms of improving lead times as we go through the year? Where do you see the supply chain standing today? Is it better or worse than maybe a quarter ago? And any sort of details on where you're seeing the most shortages? Thank you.

Thank you, Samit. Well, first of all, I want to say thank you, customers, for giving us more visibility on your forecast. That has helped a lot. And usually with our cloud titans, we only got one or two quarters. Now we're literally getting a year, which helps. It helps us plan. It helps us project. It helps us do a whole lot of things. And Anshul and the team have done a phenomenal job there. That being said, I do want to say that supply chain we felt improved in November when we met with you all at the analyst day. but declined in January when we started seeing some decommits from some of our component vendors. So I would describe our supply chain shortages as two steps forward and one step backward. We don't like the one step backward, but between the Omicron virus, the labor shortages, the logistics, and the component shortages, we're suddenly experiencing another wave of uncertainty in Q1 over here. So we do have elevated lead times, so some of our components, as I've shared with you, they're anywhere from 50 to 70 weeks. It's no fun, but therefore I think our commitment for the year will be back and loaded. We'll keep improving every quarter, but Q1 isn't the great indicator of our supply chain improving.

Thank you. Thanks for taking my question. Thank you.

Your next question comes from the line of Jason Ader with William Blair. Your line is now open.

Yeah, thanks. And thanks for the disclosure on the breakdown of campus and routing and the software. I guess my question is, what was the growth in 2021 for those two particular product segments, campus and routing, which was 14% of revenue, I think you said, and then the software, which was 22%. What was your rear growth rates for those two?

Oh, gosh. Maybe, Ida, you can help me. I know the campus was excellent. It was double, right? It was 100%. I don't have the numbers for me on software and routing offhand.

The software piece is probably going pretty much in line with the business, right? Because the percentage of revenue is pretty constant, right? The routing piece itself, I don't have that to hand.

Okay. All right. So, yeah, if you can locate the kind of campus and routing for 2020 at some point, that would be helpful. I can follow up offline. But, yeah, thanks.

That has doubled, so we know that's 100%.

Right, but routing I was curious about. You combined those two, right, as 14%?

Yeah, as a contributor we did, yes.

We'll get back to you.

Very good. Thank you.

Thanks, Susan.

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

Thanks for taking the question. I want to see if maybe you could discuss a little bit of the moving parts in your Cost of goods sold, and what I'm thinking about specifically is whether your component suppliers, particularly semiconductors, have retroactively raised prices on you, or if we're going to see higher input costs maybe six months from now as goods you've ordered last year start coming in at higher prices. If you could help us unpack how to think about those drivers. Thank you.

Yeah, I mean, we've definitely seen, you know, increases in prices, and we've talked about that, right? You know, we had some orders that were repriced, so there has been some repricing of backlog, right, given the extended lead times. That's just the reality as people try to fulfill against that open price. backlog to those suppliers, we're seeing that they need to make increases there. So we've definitely seen some of that. So I think it's a combination of both. You're seeing ongoing kind of disruptions and increases as you go forward, but also some repricing of our backlogs to these suppliers, right? Do we know kind of where this is going to go next? I think we're watching that very carefully to see if there are further increases. We've obviously passed on Some of those increases to our customers with the price increases that we've made. We've been transparent about what we're seeing on the cost side, and we'll continue to do that. We'll continue to monitor with the buyers and with customers and take what actions we need to take as we go forward.

But just to be more specific, do you expect gross margin would be weaker in the second half of your calendar year or similar to the first half?

Yeah, I mean, I think what I go back to kind of our normal commentary around gross margin, I think what we've said is, as we fulfill backlog, that was kind of at older pricing, we'll see some pressure there, then we'll start to benefit from some customer price increases that we put into place. But that's not going to happen for some time, because we had quite a large backlog and long lead time. At the same time, we will see some mixed shifts between the different pieces of the business. So I think we can you know, we can maintain some similar gross margins across the various pieces of the business, but then as the customer mix shifts, that will have a bigger impact. That's why, you know, we would caution, you know, as we're able to improve supply and grow that cloud-tightened piece of the business again, it will have a negative impact in gross margin in outer quarters potentially, right? So I think it's a like-for-like kind of sector-to-sector. I think we can do a good job of kind of managing that, but then as we mix between the different pieces again, that's going to have an impact. Thank you.

Your next question comes from the line of Amit Daryanani with Evercore. Your line is now open.

Thanks for taking my question and congratulations on the good print here. You know, I was hoping you could just talk about the recent 7800R3 offering. I think that's what it was called, the AI Spine offering. It was sort of around the same time that Facebook launched the Super AI cluster. So I'd love to understand what is this solution all about? Is this just a next-gen product, something you already have in place? Or is it for new workloads, new applications that's potentially expanding your time? And if it is, I'd love to understand what are these workloads and how much would your time expand by with these offerings? Thank you.

Always a good question, Amit. Thank you. I'll kick it off, and then Anshu will go into more detail. Uh, 1st of all, we have been very strong in the cloud network, which we largely call the front end network, the least fine architecture and, you know, we've been pioneers and thought leaders there. The back end network, which is largely based on a lot of compute intensive and now intensive workloads also require the same focus on building a very purposeful network. Especially when you have a lot of small packets and large elephant flows, and you're dealing with a tremendous amount of metaverse applications and traffic. So this is a new area that's historically, as Facebook indicated, been implemented with InfiniBand. But the 7800 R3 has a unique opportunity to place its mark as the Ethernet fabric for these AI workloads. with the right dynamic load balancing, with the efficient packet spring, with the congestion control and QoS. I'll turn it over to the master of the 7800. Anshul, you want to say more?

So just a little bit more. You did a great job describing the answer.

Thank you.

Ethernet classically has had hot spots when you try to saturate it with all these types of flows and heavyweight traffic. But the 7800 can provide lossless networking across all of these nodes, GPUs, CPUs, data sets being sliced around and shuffled around, which is what creates the opportunity for us, especially with the 7800, and the product is doing fairly well in the new AI ML Spine use cases.

And I would say to answer your question, we are in the beginning of a new, brand new cycle and a new TAM, because historically Arista is new to this, and historically it's traditionally been InfiniBand.

Perfect. I'll wait for the next announcement when you expand your time now. Thank you. Thank you.

Your next question comes from the line of Tal Yanni with Bank of America. Your line is now open.

Hi, guys. Hopefully you can hear me okay. I spoke with Juniper about their solution for data centers and campus and they're seeing great growth in orders and you are having, of course, great results. The question I have here is between the underlying growth of the market and share gains from Cisco, where is the answer to why suddenly this market is growing so much, meaning are we seeing finally Cisco is starting to lose share more substantially than before and this is why you're growing so much or is it is it the answer is more about acceleration of growth in the market itself and if that's the case how do you look at it higher level meaning what's the driver oh wow Cal you're making us really think about the answer I tend to think of it as Arista's execution and

and our relevance to our customers has gotten higher and higher. Maybe that means the competition is getting weaker, but more than that, in the past, if you just look back three years ago, we were a data center company. If you look today, I think we have many, many more relevant components for the enterprise customer, whether it's campus, routing, data center interconnect, the data center itself, observability, monitoring, threat hunting, cloud vision and the entire operation analytics and agility. So we have a better seat to the table for these modern set of workloads where some of them are in the cloud and some of them are on the premise and Arista is being sought out as not only the thought leader but the advisor on how do they make this happen. So I think that has really changed because of our product portfolio and because of the customer needing an alternative. As I said in my opening remarks, due to COVID, I think they've also had a better planning horizon. they're increasingly more fatigued and frustrated with the existing players, and they want an alternative. So I think the timing and our relevance has both now improved in the last couple of years.

Got it. And Jayshree, do you think that market share shifts are explaining more now than before? Or no? Or it's the same? It's more about the growth in the underlying market and your ability to deliver the right products to the right customers, but less about share shifts?

Well, I think we're definitely gaining in our market share in the 100 gig and 400 gig and data center switching. The other market share shifts are still small because we're still a small player. Now we have to work to get bigger. So I wouldn't call them shifts. I'd say increased relevance on our side, but still small numbers.

I mean, I think, Tal, we're certainly seeing, I would say, good new logo closure rates, et cetera, in that part of the business. I think that's It's hard to comment on share, but I think that there's definitely traction there. You see it in our numbers, obviously.

Got it. Thank you.

Thank you, Josh.

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

Great. Maybe building on that question from Tal, I guess just from your enterprise customers, just curious as to whether – know organizations being basically forced into giving more visibility has made them more likely to be comfortable with architecture changes or really take a higher level kind of look at what they really want to be doing with their data center architectures that maybe they weren't comfortable with in kind of a normal course supply chain environment where you know they were just able to get product within a quarter. Just wondering if this is triggering kind of higher level discussions with customers. Thanks.

Mita, I think you're exactly right. I think that planning horizon is a lot better. In the past, they were firefighting in the office. And today, you know, when you have lead times that are so extended, they've got a chance to think about alternatives. Also, the CIO is extremely pressured to think about the cloud and what workloads they put on the cloud and what they put on the premise. So I think the overall enterprise architecture and redesign is well underway, and Arista is a benefactor of that.

Great, thanks. Thank you.

Your next question comes from the line of Paul Silverstein with Cohen. Your line is now open.

Thanks. Just really, if we could look further out, one concern that quite a number of investors have is the runway for both Microsoft and Facebook on the respective point of getting 200-dig builds. And I recognize The world is probably not nearly as binary as many of us in the investment community think, but any insight you could share on the runway for those bills and on what's next, assuming that at some point they hit peak levels, flatten out, and eventually roll over?

Well, look, we're used to volatility from our CloudTitan customers. We experienced the highs of 2018 and then the lows of 2019 and 20. So we're in a period where the cloud titans are clearly investing from a capex, and increasingly we are more directly correlated to their network capex. Anshul, you want to shed more light on that?

Absolutely. I think the cloud titans have a very strong business model, which is resulting in the investments they are making. So there's real strength there. Number two, all of these customers are planning fairly well, so we appreciate the visibility. And it's very clear they're not trying to stop these products in the warehouse. They absolutely need them to go live into their network. So the build-ups are very real. Paul, if we had visibility for two or three years, we would be delighted, but we should be happy of visibility for one year. So let's not go beyond that. But for the near term, we believe the demand is strong. All right.

Paul, do you have something?

Go ahead.

What's interesting to me, Paul, is what we're seeing consistently across all our Cloud Titan customers, and in fact, some of the specialty cloud customers, is all their upgrades are in full swing. They're all investing. Additionally, they're putting more megawatt data center capacity annually every year. And so we think this is a multi-year upgrade, but we obviously can't see much beyond 2022 right now, but we'll let you know as we do.

Patricia, I know you've made the point in the past about AI build-outs involving far greater infrastructure, consuming far greater bandwidth. And I assume Meta, while it gets all the focus understandably from all of us, it's not the only and it won't be the last such build-out. But if I could get a clarification from Ida on something she said earlier. Ida, when cloud dominated your revenue earlier after you went public back in 2014, You were doing 64% to 65% plus gross margin back then. I understand things change over time, but with cloud likely to increase the percentage of revenue over the course of the next year, and you're cautioning about the impact, that customer mix impact and gross margin, why would it be different than what we saw back when? What's changed?

Yeah. Yeah, so I think there's a couple of things in there, right? I think, you know, if you go back to what we said at Analyst Day, which was, look, we could grow 30% with reasonable growth rates across the business and, you know, be in that kind of 63% to 65% range, right? And I think that's still the case. I think that the script guidance is more a thing. If we're able to accelerate beyond that and we really accelerate on the cloud piece of the business, that's when we'll see it kind of threaten the bottom end of that range and maybe, you know, and go below that, right? It's a different environment in terms of just the cost structure and some of the cost inputs that we're dealing with, et cetera. I think you have to think about the different cost increases, logistics costs, et cetera, that we're dealing with now. And the flexibility just isn't there in the same way as it was back then. I mean, we've done a really good job, I think, and the team has done a really good job of optimizing gross margin over time. But now your degrees of freedom are less, right? So I think it's a tighter cost structure to deal with, and then it's a growing cloud presence. And again, we're just saying, okay, in that scenario, you could see some pressure on the bottom end of that range.

I'm going to take the next question.

Your next question comes from the line of Sammy Badry with Credit Suisse. Your line is now open.

Hi, thank you. First question is maybe you could just frame for us how many, you know, how many uncaptured revenue opportunities have been created in 2022 as a function of some of the supply chain disruptions and disconnects. And just a quick follow-up after that is we kind of see the Microsoft and Meta build up as 10% plus customers, but are there any third or fourth potential customers that are ramping up their network in a way that they could become 10% plus over the next two to three years that you guys are seeing. And we don't need to know who, we just need to know if it's in the cards.

Yeah, the second question is a little easier to answer. At the moment, there's a lot of activity with all the Cloud Titans, but no one's substantially big like Microsoft is today and Meta will be. Maybe we can find another M Cloud Titan customer, find that. You know, ask me a question on how many opportunities. I mean, it's almost a theoretical question, Sammy, because, you know, we go into this engaging with all our customers and some happen right away. In fact, I heard today of a customer that we engaged with five years ago that we just won. So some happen in five weeks and some happen in five years. So we really don't have an exact precise answer on that ratio. But we just hope it keeps increasing because we've got plenty of time and time to serve it.

Got it. Thank you.

Thank you, Sammy.

Your next question comes from the line of Jim Suva with Citigroup. Your line is now open.

Thank you. And Jayshree and Ida, if you take a step back, say, three months ago when we had our last call compared to now, can you let us know what end markets or verticals really impressed you, both not only in the results, but maybe the bookings you mentioned earlier? You're getting a lot more visibility now. I'm just kind of wondering about your end markets. What's really impressed you and surprised to the upside the most versus three months ago? Thank you.

Thanks, Jim. I would say I'm pleasantly surprised with the entire year, not necessarily Q3 to Q4. I think the level of activity on enterprise has been something they're very proud of. At the same time, our preferred partnership status with both Cloud Titans and some of the specialty cloud providers is The team is just executing very, very well. And if anything, you know, while Arista doesn't tend to boast about backlog and orders and order strength, I am most proud of the execution that despite all of those happy capabilities, executing that and translating into revenue is a pleasant surprise from Q3 to Q4.

Operator, we'll take the next question.

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Your line is now open. Mr. Rakers?

Yeah, thank you for taking the questions and congrats on the quarter. I'm going to build off that last comment, Jayshree, on kind of the backlog. And, you know, as you guys contemplated the 30% growth guidance for the full year, You know, you've got both backlog buildup and you've got also, you know, Ida, you've got some deferred revenue bill that you've seen over the last couple quarters. That 30% revenue growth guidance that you've laid out, do you assume that you carry a similar amount of backlog coming out of the calendar year as well as deferred revenue and product? Or do you expect that 30% to be somewhat driven by, you know, fulfilling against that backlog that you've seen?

Yeah, I don't know that we're going to get into the whole backlog bookings conversation. I mean, it's just so hard for it to be meaningful right now, given the lead times and what's been happening with lead times, et cetera. I think on the deferred revenue, I would say, look, it's not our intention right now that that deferred balance would feed the 30%. We'll see how that goes as we go to the quarter, but we're not assuming right now that that's coming off the balance sheet. Yeah, I think it's fair, Aaron.

I think the broader thing to take away is demand is strong. Execution could be stronger if we had supply chain resolution.

Right, right. Thank you, operator. Thank you very much.

Thanks, Aaron.

Next question, please.

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

Great. Thank you very much. It's a pleasure to get one in. I'm hoping you could talk to us about the broad problem that I think confronts all of the analysts who follow this category, which is that if you look at the orders at extreme Cisco, Juniper, and your 25% plus growth in 21 and 30% growth in 22 forecasted, it's clearly a substantially higher rate of growth than at any time that this industry has produced since even probably the tech bubble. And so there's got to be a resolution to this environment, which is a return towards normalized growth, which I think if you exclude the titans is probably in the 0% to 5% vicinity. and if you include the Titans, it's probably no more than 5% to 10% vicinity, which is what gave you rise to guidance of 10% to 15% with some share gains. How do we resolve this environment that we're in now with backlogs 30% to 50% at a number of companies? Does it all roll over into down orders at some point? Obviously, you don't have that backlog problem, but could you – Help us understand how to resolve 30 to 50% type quarter growth in an industry that's 0 to 5%.

Yeah, I'll try to answer. I think it's a very thoughtful question, Alex, that will this period of extreme growth continue forever? And the answer is no. Nothing continues forever. Every party has a beginning and an end. However, for Arista, there's tremendous opportunity. I just want to clarify. that independent of the Cloud Titan CapExpend, I believe we can enjoy a double-digit growth for quite some time to come in the non-Cloud Titan space. So I just want to make sure you understand that independent of this, you know, extreme enthusiasm and excitement era we're in, Arista has a foundation to keep growing double digits for multiple years to come. Now, I do think we're in a, you know, because of lead times, there's a frenzy and people are booking and planning and, visibility is greater for us. And I think this will continue not only in 2021 and 2022, but it'll continue into 2023. We'll probably, and this is just a pure speculation on my part, settle in to a more normal growth thereafter. But even so, we don't wish for that growth to be in single digits. We'll be working hard for that to be much faster.

If I could just follow up on it. So do you think that as this occurs, that the orders that some of the other companies that have run these large backlogs start to roll over to reconcile? I mean, this is way above normal.

But Alex, it's a compression of time as well, right? Instead of having visibility to a quarter, you've got visibility to a period that's much, much longer, right? That's why you have to stay focused on deployments and how is Yeah, how is all of this going to get deployed? It's not all going to get deployed at the same rate that it's booking, that's for sure, right? So I think you have to think about it. That's why we keep trying to focus on deployments with customers and when will stuff actually get deployed because the booking number is more a factor of time and the planning horizon than it is anything else, right? Yeah, it's a really good point.

Thank you, Alex. Operator, we'll take the next question, please.

Thanks, Alex. Thank you. Your next question comes from the line of Eric Superger with JMP Securities. Your line is now open.

Yeah, thanks for taking the question. Two questions. One, in the campus business, can you comment a little bit about how much new logo business you're seeing? Is that doing what you want, or how do you feel that's progressing? And then secondly... I think the Microsoft business was 21% in 21, and then I think you said it came down to 15. The question is, is the overall Titan business holding up? Is that the incremental downshift there being spread out across other Titans, or is that being carried more by the enterprise business that you're making up for that?

Eric, Anshu's going to answer the Titan question while I look over the campus data.

Okay. Sure. As I mentioned right at the start of the year, we expected many of these new products, new technologies to be deployed second half of the year. And especially the 7800, the 7388 was launched November of last year. So they were somewhat back-end loaded. Other than that, demand has been healthy and strong. So there's a little bit of timing gaps, there's more related to supply of new products and technology, but there's nothing else to worry about within the cloud business. We believe they will be a strong contributor going forward.

And to answer your campus questions, to answer the campus question, I don't have exact numbers, but a good rule of thumb for you to think of is about half our customers came from existing and half came from new prospects. And we're getting many, many new logos, obviously, that we're just starting with. So some of them start small and they'll get even bigger this year.

Thanks, Alfred. Very good. Thank you.

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

Thanks, and happy Valentine's Day to the entire team here.

Thank you, James. Thank you.

I'm convinced you guys like spending spending Q4 earnings with us on Valentine's Day to avoid your spouses a bit. Anyway, you know, going back to Alex's question, you know, given your comments around increased visibility for 22 and actually J3, you pointed out 2023 possibly. Can you guys help us kind of quantify how much of the business you actually have visibility into today is Is it really just the Titans? And how are you thinking about that kind of potential net pull in effect of demand and orders in the second half of the year, 2023, into what we're seeing to today?

Well, let me just separate the question you're asking, James. The Titans, we historically had one or two quarters, and now we're saying we have at least a year. That's a huge factor in our planning. It's also the volume of purchase we have to make, the projects, etc. On the enterprise, we've always enjoyed longer-term visibility. It's always been six to 12 months. So I would say in general, one year is our visibility right now on projects. Not too much longer than that and not too much less than that. It's just enjoying the benefit of greater visibility on the Titans is what's really changed.

And on the potential for net pulling of demand here from 2023 into 2022?

It kind of comes back to the deployments, James, where they're not telling us they're going to deploy it all tomorrow. They're laying out kind of project plans and deployment plans over time, right? So it's not so much that these orders are pull-ins. It's more we're working with them to figure out when stuff needs and can.

be deployed right and that's going to be a solution of their orders obviously but also the supply and when and when stuff can be deployed right let's take a campus example invariably it's a new building they're putting in or a new project they have the project is most likely to be second half 2022 or early 2023 but they're planning now so that happens all the time that's that's not new that's not pull-ins per se from a revenue and business perspective right they're just giving visibility But one thing I would want to reiterate is the planning horizon and the planning time and the think time on this has gotten a lot larger because of the lead time mission. They never used to worry about it. They were doing just-in-time planning, and now they have to do one-year planning.

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

Good afternoon, everyone. Thank you for taking the question. Ed, I had a question for you. I was hoping you could talk a little bit more about the $2.8 billion in your non-cancellable purchase commitments. Could you share any details on how you see that, how the timing of that comes in over time from a component perspective, how you think it might influence the risk of decommits? And could you comment at all about what you think despite the decommits in January? Thanks.

Yeah, I mean, the $2.8 billion, there's a big piece of that that's kind of, you know, some of our key components that we've, you know, we've always buffered and we've extended kind of the period of time that we're buffering for. So the, you know, some of the chips and other things that, you know, just are new chips for new products, relatively low, you know, excess obsolete risk and, you know, difficult to secure. And we are making kind of investments there to do that. So there's a, At least 50% or more is tied up in that right and you know that those will come in and we'll hold them and we'll use them when we when we need to use them. You know the rest of the class other components, because what we've seen is. You know it's not just about the key components anymore right, we have to get ourselves involved in you know other components broader set of components across the supply chain. Because you need 100% of the bomb, in order to be able to ship right and that's kind of you know you see decommits the decommits or not, we would have considered key components before there. They're just smaller components embedded in the BOM. So we're taking a broader view of that, and that's why you've seen that step up happen again this quarter. In terms of when it gets received, I mean, the chips and stuff will come in. I mean, they will come in and we'll hold them. So you'll see a fair amount of that turn in 2022 because of that, just because it's the components and we're going to hold them.

I just want to add, Ben, that what Anshul, John McCool, Susan Hayes, the entire team has done is they've historically had to focus on 5 or 10 strategic vendors. I think that number has gone up 10x to 50 to 70. So the relationships we now have to maintain, keep, and understand and appropriately design our products and wait for their timing has gone up by 7 to 10x. And therefore, we have to make more purchase commitments and plan for them for a longer duration of time.

Thanks, ladies. Have a great night. Thank you. Thanks, Ben.

Your next question comes from the line of George Noter with Jefferies. Your line is now open.

Hi. Thanks, guys, very much. I appreciate it. I just want to keep going on the question of purchase commitments. Yeah, we ran a little exercise where we looked at the combo of your inventory and your purchase commitments, and we tried to compare those to our estimate for your next 12-month hardware cost of goods sold. And granted, this is from Q3 ending and the numbers are much higher at Q4 end, but we came up with like 281% of your next 12-month hardware cost of goods sold estimated. And so I guess the question in this is, you guys seem to be so far out in terms of magnitude relative to all the other companies in the space in terms of how far ahead you're getting on inventory and purchase commits. Are we just grossly underestimating how much business you guys are looking at in the next 12 months, or are you anticipating some real adverse changes in the supply chain? What's your perspective on that?

Yeah, George, I think it comes back to thinking about the components again and where the value of the BOM is and the commitments we're willing to make around some of those key components. So they're not necessarily going to be consumed in this coming year, but we are willing to kind of take control of those components by making those commitments. And again, it's early life products and early life silicon, and we believe that that's a relatively safe bet, and it's the cost of capital, really, that we're tying up. So I think that's what you're seeing. It's not that everything that we've got purchase commitments out for now will be consumed, shipped, and revenueed in 2022.

We have time for one last question. Yeah.

Your final question today comes from the line of David Vogt with UBS. Your line is now open.

Great. Thanks for squeezing me in, guys. Notwithstanding some recent operational issues at Meta, I just want to kind of get your thoughts on how sort of double-digit data center expansion, both at Microsoft and Facebook this year, plays into your sort of revenue visibility, the balance of this year, and then how that plays into 2023. You know, obviously there's some delays in terms of qualification and when revenue would be in the books in 2022 from last year, but just trying to get a sense for how we should think about that in 22 and 23, given their aggressive pace of investment. Thanks.

Sure. David, as Jasonita mentioned, we took a lot of time at the analyst day and today to go over our 30% growth plans. And both of these customers are very significant parts of our business. One is already greater than a 10% customer. The other one will likely get there soon. So we have taken their strength into our models and into our guidance already. We believe the demand is healthy. As you mentioned, they are investing very well across the entire world in new build-outs and data centers with new technology. And we are clearly the preferred partner they've had and they continue to have in networking. So we'll benefit with that as well. To some extent, this makes up for the lack of growth in 2019 or 2020 now with this new cycle, and we'll enjoy the growth with them.

Andres, just as a quick follow-up, what percentage of that do you think spills into 2023 if, let's say, Microsoft is delayed in terms of or back-end weighted in terms of building out 400 gig in their data centers this year?

Right. It's only hard to model all the volatility we have with supply. I think right now demand is strong. So it's really tied to supply of products. And these customers have enough other ways they can figure out how to deploy technology if we give them enough heads up. So that's less of a concern right now.

Great. Thanks, Anshul. And thanks, David. This concludes Adipa Network's fourth quarter 2021 earnings call. We have posted a supplemental presentation which provides additional information on our results. and you can access that on the investor section of our website. Again, thank you all 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.