Arista Networks, Inc.

Welcome to the second quarter 2022 Arista Networks 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 star followed by zero. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stein, Arista's Director of Investor Relations, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jay Sriyulal, Arista Network's President and Chief Executive Officer, and Ida Brennan, Arista's Chief Financial Officer. This afternoon, ERISA Networks issued a press release announcing the results for its fiscal second quarter, ending June 30, 2022. If you would like a copy of the release, you can access it online at our website. During the course of this conference call, ERISA Networks management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2022 fiscal year, longer-term financial outlooks for 2022 and beyond, our total addressable market and strategy for addressing these market opportunities, supply chain constraints, component costs, manufacturing capacity, inventory purchases, and inflationary pressures on our business, the potential impact of COVID-19, customer mix, product innovation, and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10Q and Form 10K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to Jayshree.

Thank you, Liz. Thank you, everyone, for joining us this afternoon for our second quarter 2020 earnings call. We delivered revenues of $1.05 billion for the quarter with a non-GAAP earnings per share of $1.08. Service and support renewals contributed approximately 17.6% of the revenue. Our non-GAAP gross margins of 61.9% was influenced by escalating costs due to supply chain, as well as a higher Cloud Titan mix. We do expect both these trends to continue throughout 2022. In terms of Q2 2022 verticals, Cloud Titans was our largest vertical, followed by the enterprise, Cloud specialty providers and financials tied for third position with the service providers in fourth place. International contribution was 20% with the Americas at 80% and strong performance, particularly with our large cloud customers. In the first half of 2022, we completed two small acquisitions to bolster our investments in security and switching fabrics. We acquired Untangle Incorporated, a security asset for edge threat management for our commercial branch offerings, led by former CEO Scott Devon. In late Q2, we closed the acquisition of Pluribus Networks, led by former CEO Kumar Srikantan. Pluribus pioneered a new class of unified cloud fabric networking, endorsed by our partners Ericsson for telco and 5G cloud, and NVIDIA for DPU-based networking. Our Q2 2022 results reinforced Arista's customer relevance in Cloud Titan, specialty cloud providers, and mainstream enterprises. As I mentioned previously, our million dollar logos have doubled in the last three years in all categories. Greater than a million, greater than five million, greater than 10 million, and significantly greater than 25 million customers. I would like to invite Anshul Sadana, our Chief Operating Officer and Chief Cloud Expert to shed some light on the nature of our strategic partnerships with CloudTitan that contribute at least hundreds of millions annually. Anshul?

Thank you, Jayashree. We are proud to be a pioneer and market leader in cloud networking and have provided data center solutions to many cloud providers connecting millions of servers. The same platforms U.S. software and network designs at a lower scale have also helped us run in all our other verticals, giving us an efficient model to grow our business. As we disclosed in previous calls, Microsoft and Meta are very special customers and expected to each be over 10% of our revenue for the full year. At Microsoft, we're deployed in all layers of their network, from the leaf switches at the top of racks to data center spines and regional spines to WAN and cloud edge layers across the globe. We have partnered together to create the DCI layer with encryption and long-reach pluggable optics, which has now become a gold standard in the industry. Microsoft deploys our products both with Sonic and EOS, and the engineering partnership to co-develop the next-gen network is stronger than ever. Our newer 400-gig products are deployed in production and we continue to receive very positive feedback about our quality and execution and continue to be the preferred supplier for Azure. We have also had a strong partnership with Meta and have been involved with their network design since the early days. We have co-developed multiple generations of products with them including the latest 25.6 terabit 7388 platform with unmatched power efficiency and time-to-market advantages. They're deployed in their colorful cluster fabrics with parallel planes. They're also deployed in several use cases, including Meta's backbone layers, where there is a constant need for higher-speed networks. In addition to our top two titans, We are continuing to do well with the other titans as well. As well as cloud specialty providers, very similar partnership to the big titans and use cases, but at a smaller scale. We continue to have a great engineering partnership with customers when it comes to next-gen architectures, platforms, or features. Over the last two years, we have also had a very strong partnership on supply chain. Customers who build their own servers know these challenges firsthand. The relentless work by the Oyster manufacturing team to find additional supply, despite so many lockdowns, looking at components in the broker market, analyzing second order risk, and our forward-looking investment through purchase commitment are deeply appreciated by our customers. We are now recognized not only for our best-in-class products, but also for a superior supply chain compared to other alternatives. While we cannot predict the future and spend patterns on behalf of these titans, our cloud business continues to be healthy. Back to you, Jayashree.

Thank you, Anshul. You can see that we are having one of our best years to date with our cloud customers. In terms of new products, Arista has introduced several this quarter. The 7130 series is a powerful combination of low latency and a programmable EOS functionality designed for demanding high-frequency trading and exchange applications. Two 7130 models integrate fully-featured L2-L3 switching with high-performance, ultra-low-latency L1 connectivity. Arista also launched its first commercial and distributed enterprise edge portfolio, the Cognitive Unified Edge, or Q for short. Q is an extension of our cloud vision to offer edge as a service for commercial and distributed enterprises. Arista earned its highest Net Promoter Score, NPS, of 80 in 2022 for customer support, translating to a world-class rating of 93%. Having an always available team with strong expertise, root cause analysis, and fewer vulnerabilities were cited as the primary reasons for customers choosing Arista in this third-party independent report. Let me illustrate a few enterprise customer wins in the first half of 2022 to give you an idea. Firstly, a campus win for cognitive Wi-Fi was an integral part of an RFP decision, changing the way wired and wireless is delivered to student dormitories in one of the largest universities in the U.S. Cognitive Unified Edge, or Q, with rich dashboards for quality of experience, client journey, security, influenced that decision, beating out well-entrenched Wi-Fi players. In a large international bank, we won the overall data center architecture, including spying with Layer 3 and eBPM. Cloud vision was a key decision factor in enabling the customer to manage all their data sets and change control across cloud domains with superior automation and visibility. Our professional services and leading NPS core drove the next event, an enterprise customer providing supply chain management and manufacturing. Their heavy interest in routing on the premise and Azure for the public cloud was made possible with Arista's rich visibility and telemetry. A major messaging platform supporting over 100 million users internationally was a strategic multi-million dollar win for RISTA, including a combination of BGP peering and routing across the leaf and spine. Key reasons for this win included high port density, deep packet buffers for the edge, as well as routing and EOS programmability to integrate with their homegrown automation. Another international win was in the IT banking outsourcing sector with a data center interconnect use case. It was once again possible with Arista's architectural advantages for telemetry and day zero automation as well as assurance capabilities. Our reseller played a key role with Arista where we were positively viewed as a single team by the customer. Last but by no means least was a global specialty cloud provider headquartered here in the Bay Area, California. Arisa's flagship data center with R3's fine platforms delivered price performance and rich EOS quality and features such as flow specs, traffic class filtering, and port mirroring for analysis and mitigation. With the collapse of the perimeter, Arisa also won the security and visibility forensics layer, combining DMF, DAN's monitoring fabric, and NDR, network detection and response, into a holistic platform. As you can see, a common theme across all these wins is Arista's strength and proof of concept lab, best practice network design, and deployments with Cloud Vision and EOS being compelling differentiators. In summary, I'm so proud of the Arista team as we have evolved from Arista as a startup at zero revenue way back in 2008, to a few hundred million dollars at IPO in 2014, to our first billion a year in 2016, and now our first billion-dollar quarter in Q2 2022. This has been a huge feat, a lot of hard work, and much credit and kudos and gratitude goes out to all my Aristas, as well as our unwavering customers who have believed in us, continue to push us to build better cloud networking. Arista is not only the best of breed in cloud data centers today, but really centering multimodal data all the way from the client to the cloud based on our network data lake and AVA architecture. Our quest for proactive, predictive, and prescriptive data-driven networking marches on. And with that, I'd like to turn it over to Ida for financial specifics.

Thanks, Jayshree, and good afternoon. This analysis of our Q2 results and our guidance for Q3 22 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q2 were $1.052 billion, up 48.7% year-over-year and well above the upper end of our guidance range of $950 million to $1 billion. Overall, demand in the quarter was healthy with strength across all areas of the business. The supply environment remained challenging with ongoing supplier decommits constraining shipments and requiring higher-cost broker purchases and expedite fees. Services and subscription software contributed approximately 17.6% of revenue in the second quarter, down from 19.2% in Q1. This largely reflected accelerated growth in product revenues, while services and software continued to grow on a more consistent basis. International revenues for the quarter came in at $206.8 million, or 20% of total revenue, down from 24% in the first quarter. This reflected strength in U.S. revenues in the period, particularly with our larger cloud-type customers. Overall gross margins in Q2 were 61.9%, at the upper end of our guidance range of 60% to 62%, with somewhat lower than expected expedite fees in the period. As previously discussed, the current lower gross margin ranges reflect a healthy cloud mix and the need for higher levels of broker component sourcing and expedite fees. Operating expenses for the period were mostly flat last quarter at $226.1 million, or 21.5% of revenue. R&D spending came in at $148 million, or 14.1% of revenue, up from last quarter at $144.3 million. This primarily reflected increased headcount costs in the period. Sales and marketing expense were $63.1 million, or 6% of revenue, compared to $66.2 million last quarter. with increased headcount offset by lower variable expenses. Our G&A costs came in at $15 million, or 1.4% of revenue, consistent with last quarter. Our operating income for the quarter was $425.5 million, or 40.4% of revenue. Other income and expense for the quarter was a favorable $4.6 million, and our effective tax rate was approximately 20.9%. This resulted in net income for the quarter of $342.7 million, of 32.6 percent of revenue. Our diluted share number was 316.58 million shares, resulting in a diluted earnings per share number for the quarter of $1.08, up approximately 59 percent from the prior year. Now turn to the balance sheet. Cash, cash equivalents, and investments entered the quarter at approximately $2.9 billion. We repurchased $483.7 million of our common stock during the second quarter, at an average price of $101 per share. As a reminder, we've now repurchased approximately $693 million, or 6.5 million shares, against our October 2021 Billion Dollar Board authorization. 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. We also completed two acquisitions in the first half, with a total consideration of $158.9 million, including $4 million in common stock and the remainder in cash. The revenue and expenses associated with these acquisitions are included in our outlook provided below and are not expected to have a material impact on our financials in the near term. Now turning to operating cash performance for the second quarter. We generated $101.1 million of cash from operations in the quarter, reflecting strong earnings performance, somewhat offset by increased working capital and investments. Increases in inventory and other assets are mainly driven by a receipt of components for future shipments, including shipments delayed due to supplier decommits. This trend should reverse once overall supply conditions for these decommitted components improve. DSOs came in at 51 days, down from 67 days in Q1, reflecting the linearity of billings and the decline in deferred revenue in the period. Inventory returns were 1.9 times up from 1.7 in the prior quarter. Inventory increased 852.8 million in the quarter, up from 694.2 million in the prior period, reflecting higher component and peripherals inventory and a small increase in switch-related finished goods. Our purchase commitment number for the quarter was 4.5 billion, up from 4.3 billion in Q1. These multi-year purchase commitments reflect overall strength in demand and the current long lead time supply environment. As a reminder, we continue to prioritize newer, early lifecycle products for inclusion in these strategies in order to help mitigate the risk of excess or obsolescence. Our total deferred revenue balance was $1 billion, down from $1.1 billion in Q1. The majority of the deferred revenue balance is services related and directly linked to the timing and term of service contracts, which may vary on a quarter-by-quarter basis. Approximately $228 million of the balance, down from $327 million last quarter, represents product deferred revenue largely related to customer-specific acceptance clauses for new products with our larger customers. Accounts payable days were 63 days, up from 58 days in Q1, affecting the timing of inventory, receipts, and payments. Capital expenditures for the quarter were $8.9 million. Now turning to our outlook for the third quarter and beyond. Our analyst day outlook for 2022 called for 30% year-over-year revenue growth, somewhat balanced across our market sectors, and heavily constrained by supply. Reflecting on the first half of the year, we achieved revenue growth of approximately 40% in the face of a very difficult supply environment. We yet again saw the resilience of the business model, with higher component costs combined with a heavier cloud mix, lowering gross margin but allowing for increased scale, operating margin expansion, and year-over-year earnings per share growth of approximately 48%. Looking to the third quarter, While demand metrics have remained strong across the business, attempts to predictably scale shipments have been somewhat hindered by ad hoc supplier decommits. Our Q3 outlook assumes some improvement in ship volume, but reflects a balanced view of the remaining supply chain uncertainties. We expect gross margin pressure to continue with some need for broker purchases and expedite fees, combined with a healthy revenue contribution from our cloud-tightened customers. As to spending and investments, we expect to continue to grow our investments in R&D and self-marketing in line with our baseline investment plan. However, we are cognizant of the broader macro risks and will continue to monitor spending carefully. All of this is a backdrop. Our guidance for the third 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 $1.025 billion to $1.075 billion gross margin of approximately 60 to 62, operating margin of approximately 39%. Our effective tax rate is expected to be approximately 21% and diluted shares on a post-bid basis of approximately 360 million shares. I will now turn the call back to Liz. Liz?

Thank you, Ida. We will now move to the Q&A portion of the ERISA 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 ERISA 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, again, press the star one. We ask that you pick up your handset before asking questions in order to assure 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, and congratulations on the quarter. I just, Ida, I'd like to go through the outlook commentary that you provided, appreciating that you gave the 3Q guide. I guess I was a little bit confused, or maybe I just missed it. What is the updated kind of expectation for the full year? Because as we look at it, obviously 30% growth would imply some form of pretty sharp deceleration there. in the fiscal or in the calendar fourth quarter. So just curious if you could update us, you know, how you're thinking about that 30% that you laid out at the analyst day, you know, obviously for the implied 4Q guide. Thank you.

Yeah, I mean, obviously we're pretty happy that we've, you know, we've done very well against that original metric for the year. I mean, we're pretty much at 40% for the first three quarters. We're not guiding the fourth quarter specifically, just given some of the uncertainty around supply, et cetera, but... I think we feel pretty good about where we sit now versus that original growth rate.

Erin, and this is Jayshree. The philosophy we have taken as a team, Anshulita and myself, is one quarter at a time when we get so many surprises on supply chain. There's no point getting ahead of ourselves, but we certainly feel good that the demand and our commitment and execution has gone well, well, well north of the 30% we guided in November last year. But one quarter at a time is still our philosophy.

Okay.

Thank you very much.

Thank you. Your next question comes from the line of David Vaught with UBS. Your line is now open.

Great. Thanks, guys, for taking my question. So maybe I just want to follow up on supply chain and vendor decommits. I know there was some headwinds last quarter, and it sounds like you have more this quarter. But one of your competitors really struggled, I think, securing components. Obviously, they paid higher expedited fees and revenue growth was strong, but it sounds like that they took a bigger hit. Just kind of get a sense for what you're seeing in that market, whether it's in the broker market for the components or the expedited freight, expedited freight fees, just a little bit more color. And how do you think that plays out the balance of the year? I know you talked about having some limited visibility, but is there an expectation that as we maybe move into next year, we could see some relief and that gross margins could get a little bit healthier as we move into 23? Thanks.

Yeah, so David, I think as you know from our strategy, we have left no stone unturned in supply purchase commitments. They just keep going higher and higher. This quarter we reported $4.5 billion. So there's no lack of desire on ERISA's part to fulfill the demand we have. We are clearly going in with strong demand, strong backlog, et cetera. However, we need all the components to come together, and the component problem continues. It has been bad in Q1. It's no better in Q2, and we're not foreseeing it with much improvement in Q3. So perhaps in 2023, we'll get some relief. But again, to get relief, we have to have all the components come. If we're missing one component, we can't build a system. So our guide reflects that, and our behavior in how we acquire components is reflecting that we're still not getting the components. Many of the components have 70-week lead times, and therefore, we have to plan multiple orders and years for that.

Just a quick follow up, Jayshree. So the 4.5 billion of purchase order commitments, I know it's multiple years, but how do you, you know, maybe can you help us think about how that sort of falls through, you know, the balance of this year into 23 and beyond from a product revenue perspective, if you can help us kind of frame that.

Yeah, if we could do that, we probably wouldn't buy so much. We don't know. We know it's a multi-year commitment, and it comes when our suppliers deliver it to us. So in most cases, we're just not getting enough supply, and we're getting very small percentages of what we ask.

Great. Thank you.

Thank you.

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

Thank you very much, and congratulations to your entire team for such great work in a very challenging supply chain environment. I wanted to focus my question on the demand side. It sounds like Eda and Jayshree both mentioned, you know, that the demand has gone well north of 30%, but you're not updating the full year and taking it one quarter at a time. That makes sense. But the question I have is more about kind of the backlog and visibility that you're getting. I only assume backlog continue to increase, but we recently saw some news of some of the cloud titans changing their depreciation schedules for the switch and network components. So I'm wondering how you think about that, and are you getting more visibility than say even six months ago given the supply chain issues? Thank you. Sure, Jim.

Thank you for the good wishes, and I couldn't agree with you more. I'm very proud of the Arista team for this major milestone this quarter and beyond. So, you know, I remember a time when we talked about cloud titans and, gee, would it be flat or single digits? It's a very proud moment to say Anshul and the team have been consistently growing the entire five verticals, but especially the cloud titans significantly. So all the growth and upside you're seeing north of 30% is a direct contribution to the healthiness of our cloud customers, especially the cloud titans. So first I want to say that. Secondly, we don't report orders. We don't report backlog. You're very disciplined about that. It kind of are meaningless numbers unless we can execute. Our visibility has improved with the cloud titans. I'm going to turn it over to you. They've gone from six months on show to about a year. How are you feeling about that?

Well, the cloud customers are as anxious as everyone else to get through these supply constraints so that they can come back to normal planning. But for the time being, they understand the issues. And as I highlighted, they not only partner with us on product, they actually go deeper in understanding what the constraints are, which component is short, and so on. So the visibility is roughly a year. 52 weeks is our current lead time with them. But in the near term, that demand is heavy. We can't really predict what happens beyond that. A lot of people are asking us on their behalf. I think it's best to ask these big companies directly. But we feel good about their business and the build-outs. They're in a healthy cycle. As you all know, they're doing the 400 gig upgrade or investment in the DCI layers and several other refreshes inside the data center as well. So all that is coming along well.

And then just back to the depreciation question, Jim, and I think, you know, when you think about accounting and how that works, I mean, that usually follows what's already been happening kind of in the business. So I don't think there's anything new there from an operations perspective. It's just the accounting kind of catching up to what's happening in the field. And we saw something similar a couple of years ago where they had also kind of elongated the depreciation cycle, but we didn't see anything different in the operations of the business.

Thank you, and congratulations to you and your teams.

Thank you. Your next question comes from the line of Sameek Jatterjee with J.P. Morgan. Your line is now open.

Great. Thank you. Thanks for taking my questions. I guess, Jayashree, as we've gone through this earnings season last week or so, we've seen some mixed feedback on how the enterprise vertical is responding to the current macro. Just wondering if you can sort of, I'm not asking for orders or backlog from the enterprise vertical, but how are your conversations with enterprise customers progressing? Do you see the same intent in terms of spending from them going into the next year and The response to, I know on the last earnings call you talked about price increases, so how has the response been to those price increases in the enterprise vertical? Thank you.

Thank you, Sami. Well, nobody likes price increases for sure, but I have to tell you the customer credibility and connection we have has never been higher with both enterprise and cloud customers. I mean, when you step back and look at this, In less than five years, we're now larger than many legacy standalone enterprise customers, right? So enterprise business has been growing faster than many of our competitors and peers. I feel good that we have a strong relationship with them, and despite all the talk of a recession, while Arista is not a bellwether for a macro recession, I would certainly classify our quarter and much of this year as micro momentum, and we're a little oasis, both for enterprise and cloud. in our execution. Thank you.

Thank you, Sandy.

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

Hey, guys. Thanks for the question. I did want to go back on the supply chain because it does seem, based on your product deferred coming down by about $100 million, and we talked about roughly 50 million drawdowns a quarter, It seemed like you were able to ship a little bit more and the expedited fees came down. Are you expecting this reversal of product deferred to continue somewhat at this rate? Because I think it was last quarter we were talking about 50 million drawdowns. And is there any way to help us bridge how backlog can feed into product deferred revenue, understanding it does still come down to execution, Jayshree?

Yeah, I don't think we're going to discuss the backlog of the bookings just because this is kind of the worst possible time to do that with lead times where they are, etc. It's just not a helpful metric. Coming back to the deferred revenue, we did draw down $100 million in Q2, and the guide that we just gave you for Q3 assumes no drawdown. So just to be clear, there's no assumption of deferred revenue drawdown. So we are improving on the shipment side in Q3. So I think that's good news. We're pleased to see that. I think that's probably the best way to think about it.

Thanks, Edith. Thank you.

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

Great, thanks. First off, this down in quarter, 48% revenue growth, I looked at our model back to – 2014-15 timeframe, and I think you've only generated three quarters that are in that vicinity of 50%, which is pretty amazing since one of the last times you were up there was back when you were a $600 million annual company, much less the revenues you're producing now. So I guess my question is, as we look at that comp and think about the out year, and we listened to you say that you've got a year's worth of lead time. Is there any reason to believe that we should be tailoring down our expectations for 23, given your commentary at your analyst day would imply around a 15% growth rate in that timeframe, or should we be taking these extremely tough comps that you're generating this year against a supply constrained environment. And look at those as too daunting to grow at that rate against. And I know you don't like to go out, but you're kind of forced to think about it.

You know us well, Alex. You know us well. But first of all, thank you for the discussion down history lane. It's always good to know how we grew at $600 million and how we're growing now off a base that's almost... 3.9 billion or whatever we'll be by the end of the year. I think the way to think of this is the following. We committed to double digit growth and we see no reason off our large base that we still couldn't grow double digits next year. We do think that the lead times will improve maybe in the back half of 2023. And as lead times improve, there will be some challenges, right? The challenges will come in terms of losing some of our visibility, and as well as our demand. And then if there really is a recession, we'll probably feel it too. But all said and done, we're still feeling good about 22, and we're feeling good about the first half of 23, and we'll tell you more at the next Analyst Day.

That's all I could ask for. Thank you so much.

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

Jason?

Operator, we can go to the next question.

Oh, never mind. There you are. Hello?

Can you hear me?

We can hear you now.

Okay. Sorry. When we think about your enterprise seven and eight figure accounts, is there any way to tell how penetrated you are in those accounts? Because I know in some cases they may have another primary supplier and they're using you for maybe part of their network or a new data center or something. But just it would be helpful to know how much headroom you have in some of those large enterprises where you've already penetrated to some extent. But I'm just curious about how you think about that.

That's an excellent question. I don't have a precise answer for you, but I think one of the verticals we have good penetration is the financials. We started out in the high-frequency trading. But even there, I'd say we have a long way to go because we've got the data center opportunity, we've got the campus. And then if you look at the other verticals, we're only starting, right, a week. Less than five years in our journey here. And as you know, enterprises have a long tail and take time. So I don't feel very penetrated in the enterprise. There's huge TAM and huge upside. And we're probably a little more penetrated in the financials with the data center, but still nothing close to 50%.

And are you seeing those orders grow every year? I mean, those accounts grow every year at a nice pace, just to give us a sense of kind of the follow-on opportunity after you get that initial land?

Yeah, no, we definitely see land and expand. It doesn't always happen exactly every year. It depends on their spend, but it certainly happens over several quarters. Or sometimes it skips a year and goes to the next year. Great, thank you.

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

Good afternoon, everyone. Thanks for taking my question. Anshul, I had a question for you about your thoughts on how equipment availability is influencing the network redundancy in these large cloud titans. How is that evolving and how are they playing catch up to address some of the shortages they're seeing?

That's a good question. Generally, these customers have very resilient architectures with the leaf spine designs. So they could do short-term trade-offs if they absolutely, absolutely had to. They try to avoid these because it's very hard to go back and retrofit a site. But if you are just completely out, then you go with a lighter network initially, and then you add more over time. But I don't think that's happening broadly. I saw some comments floating around as well, but that's a rare exception. Most customers are deploying the site at the scale they want to up front. Thank you.

Thanks, Ben. Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open.

Yeah, thanks for the question. I guess I'll use the oasis analogy again, Jayshree. So you have this nice oasis. Are you taking water from somebody else's oasis? I'm just curious whether you are able to supply in this environment. Even though I know it's tough for you, it seems like you've done better than others. And I'm wondering... Do you feel like that's something you've been able to use to gain a little bit of share, maybe from some other competitors, particularly in enterprise? And I have a quick follow-up for you.

Thanks, Rod. I now feel like a camel. But, you know, to continue your analogy, I think it's multiple efforts. As Anshul alluded to, the manufacturing team and the supply chain has just done an outstanding job. The leadership of Anshul, John McCool, Susan Hayes, they have left no stone unturned. I can't speak to my peers in the industry, but I can just tell you that my team pushes themselves to keep doing better, and they are an A team already. So thank you for that. But coming back to also the relationship we have with our enterprise, when I look at what Krishmit, Ashwin, and the team are doing, we now have a far bigger relevance and seat at the table. It's an investment we only started a few years ago, three to four years ago. And we feel like the enterprises are inviting us as much as we are going to them. And our product, our quality, our differentiation, are our software defined capabilities that cloud vision and eos speak for themselves so it's a combination of becoming the gold standard even for not only cloud titans but the enterprise our manufacturing execution and then also the relationship we've built albeit young which if it's less than five years old we've got a long ways to go okay uh thanks thanks for that jushri and then i also wanted to ask um there's been a lot of speculation about the delay in sapphire rapids and maybe what effect that would have on

major project builds, whether it might, you know, create some volatility in those builds or something like that. I'm just curious if you could give us any color on that, you know, what you think of that. Does it affect things at all?

Yeah, no, the last time we experienced this with Facebook, many of you may remember, it was a little more nightmarish scenario for us. They not only, because of delays, they skipped an entire server cycle, and Arista certainly felt it, that sneeze turned into pneumonia for us. But this time around, I think there are many more competitive options. And what we see, especially due to supply chain, is either the customer will sweat the asset or look for an alternative. Anshul, you're seeing some of this. You can shed some light.

Sure. Most of these cloud companies want to actually have the asset as possible as they can. You're not seeing them wait or have any odd-porn effect. They will deploy either current technology or alternate technology, whatever they can get their hands on immediately. So there's really no slowdown because of the software assets.

Great. Yeah, that's very helpful. Thank you for that.

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

Great. Thanks. A couple of questions for me. One, just, Ida, would you imagine kind of any of kind of I understand for Q3 you're not expecting a major deferred revenue drawdown, but just how you're thinking about it throughout the year. And then second question, just maybe on supply chain, you know, I think some peers kind of within this space have maybe said within the last couple of weeks or, you know, maybe even the last month of the quarter conditions maybe improved slightly. Your guidance would imply that there is some improvement happening. I just wanted to see during the quarter, is there any volatility that we should be mindful of or any signs as you exited the quarter that conditions are just improving slightly? Thanks.

I think on the deferred, it's tough to forecast it out into Q4, especially when we're not being very specific on the overall quarter. You know, I think it's a quarter of the time we have seen some improvement in Q3. You can see that in the kind of underlying ship numbers. So hopefully that continues. But I don't think there's anything particular around deferred for Q4 at this point.

And then in terms of the supply chain itself, we're seeing marginal improvements, but nothing to get terribly excited about. We need a whole lot more components than we're getting. So not yet, Mehta. Okay, great.

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

Thanks for taking the question. I wanted to see if you had some thoughts as to the potential implications for Arista given a number of the cloud titans have talked about slowed hiring. I imagine it wouldn't have an immediate effect on you, but just wondering how you're thinking about the public comments as well as the speculation. given those comments that they're hiring fewer engineers, slowing up their expenses, given the stresses they're facing, what, if anything, does that mean to Arista?

Well, Simon, I think every company needs to exercise some amount of discipline on expense management, and it's probably one of the first times that the Cloud Titans and the Cloud customers in general have had to. But, however, we feel good about their capex. We feel Arista is a small, small, wee percentage of their capex, And the slow hiring has no impact on the capex spend at this time in the near term for Vista.

Thank you. Thank you.

Your next question comes from the line of Eric Superger with JMP Securities. Your line is now open.

Yeah, thanks. Thanks for taking the question. Just one point of clarification. I think last quarter you had said that your demand and visibility was the highest ever. It sounds as though that's certainly still the case. Can you confirm if that is? And then secondly, the cloud titans and especially providers are clearly just posting some very robust demand. Can you talk to any broad trends that are driving this? Is there maybe focused video, or are there any particular broad trends that they think are driving a demand across the group?

Eric, just to quickly answer your question, I think the visibility and demand is as strong as we expressed in Q3. Same symptoms, same experience. And in terms of cloud, take it away, Ash.

Eric, the cloud customers are still going very strong at their normal use cases, whether it comes to standard compute or storage applications. Those are still very strong. CI and ML are still very strong, too. And the cloud edge is also doing very well.

Okay, very good. Thank you.

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

Hi, this is Laura Amant from AMIT. Thanks for taking the question. So just going back to the purchase commitments and thinking about them in terms of the sequential uptick, you know, being at a much slower pace in the March quarter. So how should we think about it in terms of lead times that you guys saw over the last 90 days? Would this be kind of an improvement or lead times holding steady?

No, I think, Lauren, what we saw last quarter was just kind of the beginning of the year and setting up some purchase orders for 2023. So it was just more of a step function than you'd expect to see normally. So I wouldn't read anything else into that.

Got it. Thank you. Your next question comes from the line of Paul Silverstein with Cowan & Company. Your line is now open.

I have multiple questions, but the good news is my first one is asking Anshul if he'd be kind enough to sit closer to the mic. Okay, that's easy. I appreciate that. One quick another time.

I actually care what you have to say, Anshul.

The question, if I recall, you exited 2021 with Enterprise at 200 million and you were targeting 400 million for 2022, if I remember the numbers. I assume you're tracking ahead of that through the first. I know you don't want to guide, but I assume you're tracking ahead of that 400 million annualized run rate for the year from the first half of the year. That's one question. The other question is, everyone's obviously concerned with macro environment translating to weakness for you and everybody else. It doesn't sound like it, but are there any signs that you've seen, any communications from enterprise or cloud customers, wherever, of impending macro weakness, and related to that, where's the greatest opportunity from outside from here? Is it more of the same? Is it the new product areas that you're edging out into? Any thoughts would be appreciated. Thank you.

Okay, I'm sure you're near the mic. You want to answer?

Paul, in terms of, you had multiple questions.

On macro, look, there are no signs right now Not that we're a bellwether, but at the moment we're being prudent about expenses. We're prioritizing our projects, but no customer has come to us and said specifically that we've got a macro issue or recession issue and they want to cancel projects. That may change. When recessions come, I've been through a few of them. They happen fiercely and suddenly, but as of now, so far, so good.

Go ahead on the enterprise. The enterprise customers are all telling us that things are steady. They all are cautious or worried and asking what are they doing, but we are not seeing any slowdown from customers yet.

And relative to that $400 million number, how you're tracking?

Yeah, so that's not on the – this is where they were a little – you mean on the campus, right?

That's not – Yeah, I apologize. Campus enterprise, exactly. My apologies. Yeah, okay.

So we're still on track to close the year at $400 million. We feel good about the demand. We need to feel better about the shipment.

Jayshree, I trust demand. So if you have the shipments, you'd be able to deliver greater than $400 million. The only issue is having the capacity?

Yeah. Like I said, we feel good about the demand. I don't feel as good right now about the shipment.

I need more components.

Got it.

I appreciate the responses. Thank you. Thank you.

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

Hi. Thank you for the question. My question is on visibility. So we've had this conversation a couple of times, Jayshree and Anshul, about just the visibility that you're getting from your customers. And I think what created the most amount of turbulence in the tech sector in this last quarter was what all these hyperscalers were saying, what the Taiwanese slash Chinese supply chains are saying and reporting regarding cancellations, slowdowns, accelerations, et cetera. But if I just ask you guys to eliminate all that, at the end of the day, has your visibility been extended and improved with your key customers or has it essentially remained the same or has it worsened? Just to kind of get an idea on where we are on the spectrum.

I like multiple choice questions. It's remained the same. And, you know, I think the day we see lead times decline, we expect visibility to decline as well. But we don't see that for a while.

Got it. Thank you.

Your next question comes from the line of Pierre Faragu with New Street. Your line is now open.

Hi. Thanks for taking my question. I'm dying to ask you about, you know, how much your clients are going to buy in 2023 or how much components are going to get in the next few quarters. Maybe I'd like to move to something different. You've announced this quarter the acquisition of two rather small operations, Entangle and Pluribus. And I was wondering, you know, what you could tell us about how significant these acquisitions are in terms of like the maybe like an idea of the number of people or developers or the hundreds of thousands of lines of software um that these teams have developed and if you could tell us about you know what's like the the product vision behind uh these acquisitions what kind of features are you adding and which markets which of your segments uh you want to address with these technologies and most importantly you know what's your integration strategy is that like additional products you're going to add to uh your lineup or is that deep technology you're going to integrate into your core uh eos um software or any other platform yeah well pierre first of all thank you for the refreshing new question i appreciate it um

We did make two small acquisitions. I think either in total about 150 employees, an aggregate of, we will increase our head count in addition to our normal organic investments by another 150. And as you probably know, it's not uncommon for Arista to make small acquisitions, you know, starting back in the 2018 with MetaMarco and Mojo and then Big Switch Networks and Awake. We have tended to make acquisitions for technology and talent. But most of all, they've got to fit our culture so that we can make them successful. And we're very proud of the fact that all the four we've done to date, we can see the business and cultural and product integration results of that. So Untangle and Pluribus are no different. Untangle will be tackling the commercial and distributed enterprise market, bringing us very low-end security and edge threat management that we can bring in and secure our wired and wireless. for the mid-market and the channel market. Pluribus is a great acquisition of talent and technology to bring this concept of a unified cloud fabric. As you know, Arista has been building lots and lots of forms of cloud networking. But in two instances, it would be really exciting to see a fabric integrating them. One is in the Telco Cloud and 5G case. So we're really excited to forge a new relationship with Ericsson through our Pluribus acquisition. And also in the DPU case, the Data Processing Unit, There are a lot of DPU companies. NVIDIA is the market leader, and I'm really looking forward to working with Jensen and the team on that and bringing more capability, rich capabilities, and overlays into the DPU fabric. So they're both talent and technology acquisitions to further a larger system-wide goal on our products.

Thanks, Jessie.

Thank you, Pierre. Your next question comes from the line of George Nodder with Jefferies. Your line is now open.

Hi, guys. Thanks a lot. I know a quarter ago there was some talk about raising pricing. Just wondering what you guys decided to do in that area. Any sense for magnitude? Any sense for timing in terms of when that might show up in the model? Thanks a lot.

Thank you, George. Yes, we did make two pricing adjustments. One last November that probably the earliest we'll see effect of is in late Q4. And we have made a second pricing adjustment in late Q2 in June that, again, will probably only affect us in 2023. So we expect most of this pricing to help our gross margins and neutralize some of the high costs we've had in 2023. Got it.

Any sense or magnitude on the June price adjustment?

They were different in different products. We did not do the magnitude range from 5% to 10%, depending on product. I should say 0% to 10%, shouldn't I?

Yeah, George, the second raise was only on selective products, not across the portfolio. Thank you.

We had the high cost. We took some price decisions.

Thanks, George. Operator, we have time for one more question.

Your final question today comes from the line of Tal Liani with Bank of America. Your line is now open.

Hey, guys. Anshal, 400 gig, we didn't talk about it for a long time. Can you talk about the potential significance of it to your revenues going forward? You used to say at the beginning that it's a small business case. then the message changed. How do you see 400GB deployed? How significant it is and where is it being deployed? What kind of market verticals?

Absolutely. 400GB is very strategic to us along with 100GB and in some cases 200GB as well. Just to give you a quick review backwards, we grew from about 70 customers in 200GB and 400GB in 2020 to 300GB in 2021 and you can expect us to grow to more in 2022. The cloud customers are obviously the fastest adopters of 200 and 400 gig, as Anshul would attest, but we're starting to see a lot of 100, 400 gig combinations in the enterprise as well.

Go ahead, Tal.

Revenue-wise, how significant it is, given its smaller numbers but higher price?

Yeah, it's still early stages for that. It's stronger this year. This is the third year of 400 gig. I think they were mostly in trials in 2021. We started seeing production in 2022 in a significant way. We'll give you more year-end stats as the market share numbers come out at the end of 2022. Thanks, Hal.

Thank you.

This concludes Nearesta Network's second quarter 2022 earnings call. We have posted a presentation which provides additional information on our results, which you can access on the investor section of our website. Thank you for joining us today, and thank you for your interest in ERISA.

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