Welcome to the Second Quarter 2021 Arista Networks Financial Results Earnings Conference Call. As a reminder, this conference is being recorded and will be available for replay will be in the Investor Relations section at the Arista website following this call. I will now turn the call over to Mr. Charles Yeager, Director of Product and Investor Advocacy. Listeners may begin.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Alal, Arista Networks' are in the line with the operator, and Ita Brennan, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its will be available for the Q2 ending June 30, 2021. If you'd like a copy of the release, you can access it online at our website.
During the course of this conference call, Arista Networks' management will make forward looking statements, including those relating to our financial outlook and strategy for addressing these market opportunities, the potential impact of COVID-nineteen on our business, product innovation and the benefits of acquisition, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10 Q and Form 10 ks and which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements
are not subject to the financial results 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. Will be 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.
Will be in the line. Thank you, Charles.
Thank you, everyone, for joining us this
afternoon for our Q2 2021 earnings call. I hope you're all being safe and vaccinated in these post pandemic times, especially with the resurgence of the Delta variant. Will be available. I would also like to take this opportunity to warmly welcome, this time, our new Director of Investor Relations Advocacy, are working closely with Charles. Liz is a long time Arista with deep networking expertise and most recently ran our South Central region were $7,300,000 for the quarter with a record non GAAP earnings per share of $2.72 AKI Services and Software Renewals contributed approximately will be recognized by the company's performance and software and services contribution.
We are pleased with the healthy customer traction, including new customer logos And record $1,000,000 customers in the mainstream enterprise. In Q2 2021, cloud titans were our largest vertical. The enterprise was a close second, followed by financials and specialty club providers tied at 3rd place and service provider at 4th place. International contribution was strong at 27% with the Americas at 73% for the quarter. We surpassed the cumulative of 50,000,000 cloud networking port shipments this quarter and we consider this to be a key golden milestone.
Will be available. In light of the industry wide supply chain shortages and escalating cost of components, freight and expedite logistics, will be available. I would like to invite John McCool, our Senior Vice President and Chief Platform Officer to shed some more light on our manufacturing execution. Welcome, John.
Thanks, Jayshree. The continued industry wide impact of COVID on global supply chain output, combined with increase in demand for electronics across all segments, is expected to remain for the foreseeable future. Component lead times are the highest we've seen and have roughly doubled from pre pandemic warms. Most notable are semiconductor lead times, which have extended in the range of 40 to 60 weeks. Factories are operating near full capacity, limiting flexibility will be for changes in demand.
Therefore, we expect extended lead times and escalating product costs due to expedites and elevated component increases will be in 2020 1 2022. To mitigate these headwinds, we've taken a number of steps in Arista manufacturing. Firstly, improve manufacturing procedures to maximize capacity and material utilization. We are increasing our purchase commitments for 2022 forecast to adjust for increased component lead times. We placed additional emphasis on inventory for our new products to offset supply constraints.
Will be available. Finally, we are working closely with our strategic suppliers to plan for capacity expansion programs. Clearly, we are redoubling our efforts and execution in this Challenging macro environment and look forward to supply chain improvements in the second half of twenty twenty two and beyond. Back to you, Jayshree.
Thanks, John. We really appreciate the diligent and disciplined work that you and the entire manufacturing team have stepped up to. Will be available. We welcome Susan Hayes, your newest Vice President of Manufacturing as a strong addition. We also thank our customers for their patience and understanding during our lead time constraints and we'll strive to keep doing better as we recover in second half
will be in the
range of 2022. Our enterprise customer momentum has never been stronger. Continuing on our theme of enterprise wins, I would like to share with you three examples of strength
will be happy to take your questions
and answers. The first win was in the retail sector for both data center and campus. We began with the data center win that Arista's hallmark EOS for will be in the range of 10% or data analysis switching and routing. We expanded in 2021 with CognitiveCensus for both power over Ethernet wired switches and our wireless providing a natural expansion into these use cases. Retail markets cannot tolerate downtimes With the magnitude of IoT proliferation they have, Arista was able to perform real time upgrades without downtime will
be in the range of 100 plus stores
and warehouses. In the absence of retail remote staff and hands, we drove automation across all these stores with open APIs And CloudVision. Our second win was a major U. S. Financial for both data center and routing.
Arista continues to expand its will be recognized by routing use cases, not just supporting with data center with Arista EOS features, but also a more software led simplified automated deployment Of core routing in the spine using standard space routing protocols with VXLAN, EVPN and multicast. Our customer was able to rapidly migrate from legacy to Arista within a few months, enabling billions of transactions. Will be available. An international media and entertainment campus win included a customer who wanted an extension of their data center in the campus with simple operating systems, with easy to scale, common spine deployment using CloudVision. This customer took a build as we go approach for flexibility and visibility.
Will also include a device access for back to work applications with our cognitive WiFi. In all of these three examples, Enterprise customers are hungry for an alternative and Arista was chosen as the disruptor with superior product capability and a cohesive client to cloud strategy to unify silo datasets consistently. Arista's innovation combined with high quality and support is becoming the gold standard for customers to build cognitive cloud networking. According to industry experts, with Arista continues to gain switching market share across large enterprises and providers. We are proud to be the number one market leader in 100 gigabit Ethernet ports for the 5th consecutive year.
We see 2021 as the 1st year of inflection for higher speeds ranging from 100 to 200 to 400 Gigabit after 18 months of trials. We have now shipped more than 2,500,000 ports of high performance port will be in the first half of twenty twenty one according to analysts, placing us also at number one leadership in the combined will be conducting a few minutes to discuss our financial results. In summary, Arista is well positioned for the next phase of our growth in cloud and data driven networking. We do this with proactive platforms, predictive operations will be on a prescriptive experience, and we believe we are poised to achieve increasing market share with greater business diversification. And while the path forward is paid with supply chain obstacles, volatile customer demand and your normal typical competitive tactics.
I believe Arista, which means to be great will live up to its name and with our A game, our A customers and our A team. With this, I'll pass it over to Ita, our Chief Financial Officer, for financial specifics.
Thanks, Jayshree, and good afternoon. This analysis of our Q2 results and our guidance for Q3 will be conducting a question
and answer session. Please note that the call is based on non GAAP and excludes our non cash stock
based compensation impacts, certain acquisition related charges and other nonrecurring items. A full reconciliation of our selected GAAP to non GAAP results is provided in our earnings release. Total revenues in Q2 were 707,300,000 will be up 30.8% year over year and well above the upper end of our guidance of $675,000,000 to 695,000,000 shipments remain somewhat constrained in the period as we continue to carefully navigate industry wide supply chain shortages and COVID related disruptions. Will
be available on the call. Services and
subscription software contributed approximately 22.3 percent of revenues in the 2nd quarter, up from 21.4% in Q1. Will be available. International revenues for the quarter came in at $193,200,000 or 27% of revenue, up from 25% in the Q1. Will discuss the shift in geographical mix on a quarter over quarter basis reflected strong international deployments by our Cloud Titan and Specialty Cloud customers, combined with healthy performance from our in region businesses. Overall gross margin in Q2 was 65.2%, are above the upper end of our guidance range of approximately 63% to 65%.
While we recognized some incremental supply chain costs in the period, These were more than offset by a healthy mix of enterprise and software revenues for the quarter. Operating expenses for the quarter were 189,800,000 are 26.8 percent of revenue, up from last quarter at $180,900,000 R and D spending came in at $119,600,000 are 16.9 percent of revenue, up from last quarter at $110,000,000 This reflected increased employee related costs and higher new product introduction spending in the period. Sales and marketing expense was $57,900,000 or 8.2 percent of revenue, will lower COVID related travel and marketing expenses. Our G and A costs came in at $12,300,000 or 1.7 percent of revenue, are consistent with the Q4. Our operating income for the quarter was $271,700,000 or 38.4 percent of revenue.
Other income and expense for the quarter was a favorable $1,700,000 and our effective tax rate was approximately 20.7%, reflect an improved geographical mix. Other income and expenses for the quarter included approximately $2,000,000 of interest income, offset by some unfavorable FX This resulted in net income for the quarter of $216,800,000 or 30.6 percent of revenue. Our diluted share number was 79,710,000 shares resulted in a diluted earnings per share number for the quarter of $2.72 are up approximately 29% from the prior year. Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $3,300,000,000 We did not repurchase shares of our common stock during the Q2.
As a recap, We have now repurchased $763,000,000 or 3,600,000 shares against our Board authorization to repurchase $1,000,000,000 worth of shares will be over 3 years commencing in Q2 'nineteen. We will continue to execute opportunistically against the remaining mandate. Will be available. Turning to operational cash performance for the 2nd quarter. We generated $263,000,000 of cash from operations in the period, Reflecting solid net income performance and continued investments in inventory and supply chain.
DSOs came in at 47 days, down from 51 days in Q1, will be discussing the linearity of billings in the period. Inventory turns were 1.7x, down slightly from last quarter at 1.8x. Inventory increased to $543,200,000 in the quarter, up from $483,200,000 in the prior period, will continue to buffer certain components and products. Our total deferred revenue balance was 746,000,000 are up from $720,000,000 in Q1. The majority of the deferred revenue balance is services related and is directly linked to the timing and term service renewals, which can vary on a quarter by quarter basis.
Approximately $90,000,000 of the balance, up from $70,000,000 last quarter, represents product deferred revenue, will be in line with the call. As a reminder, we expect 2021 to be a year of significant new product with introductions, combined with a healthy new customer acquisition rate and expanded use cases with existing customers. Will discuss these trends in conjunction with reduced levels of upfront in pricing testing may result in increased customer specific acceptance clauses and increased volatility in our product deferred revenue amounts. Accounts payable days were 53.7 days, will be up from 52.3 days in Q1, reflecting the timing of inventory receipt payments. Capital expenditures for the quarter were 4,500,000 will now begin.
Now turning to the outlook for the Q3 and beyond. We reported strong year over year revenue growth of approximately 29% for the first half will be conducting a healthy demand across all our market sectors combined with favorable comparisons from the first half of twenty twenty. Will be in the range of $1,000,000,000. While we expect continued strength and demand as we move through the second half, we will likely see some deceleration in year over year revenue growth will be given the top line recovery experienced in the back half of twenty twenty. Turning to gross margin.
Industry supply constraints continue to pressure component costs. Some of these incremental costs will initially be recorded as inventory and only be recognized in the income statement when the products are sold in future periods.
Will be available. With this
as context, we will continue to reiterate our gross margin outlook of 63% to 65%, with customer mix remaining the key driver of volatility on a quarter by quarter basis. Turning to spending and investments, we remain committed to growing our investments in R and D to support innovation across the business and sales and marketing to support our go to market expansion. With regard to cash flow, we expect to fund approximately $40,000,000 of CapEx in the 3rd quarter for the purchase of land to build a data center and engineering location in Santa Clara. We'll provide more details on this project over the coming quarters. Will be available.
Finally, our outlook discussion discussed above and our guidance for Q3 reflects our current understanding of COVID-nineteen and its impact to our business and supply chain. This remains an inherently uncertain situation, and we will need to continue to monitor and attempt to mitigate new challenges as the situation unfolds. Will be recorded. With all of this as a backdrop, our guidance for the Q3, which is based on non GAAP results and excludes any non cash stock based compensation impact and other non recurring items is as follows: revenues of approximately $725,000,000 to $745,000,000 gross margin of 63% to 65 represent operating margin of approximately 37%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 80,000,000 shares.
I will now turn the call back to Charles. Charles?
Thank
you, Ita. We are now going to move to the will be conducting a question and answer session. Thank you for your understanding. Operator,
will take it away.
We will now begin the Q and A portion of the Arista earnings call. Your first question comes from the line of Meta are Scholl with Morgan Stanley.
Great. Thanks. I've got another couple of questions on this today. But just If you could give a sense of if the supply chain constraints are worse than any portion of the portfolio And then maybe as it relates to that, where the inventory is, I guess, just trying to get a sense of is it on kind of the high speed Products or either more of the campus service provider portfolio. Thanks.
Thanks, Neda. I think just about every component is affected in our supply chain. I'll let John or Ita comment that we're affected on chips, memory, copper, passive components, freight, logistics, expedite fees. I don't know if I can pinpoint. So it affects all our products.
And the lead times vary, as you heard, they've all doubled. So We've been experiencing anywhere from 20 weeks to 60 weeks or 40 weeks to 60 weeks like you said, John, right? Yes. So depending on the part, We are experiencing component levels of increase across the board, campus, routing, switching, data center, you name it. Will be in the next quarter.
They're at the component level. Now we're going to try and absorb as much of it and offset as much of it as we can and not pass it on to our customers if we can help will accept in modest levels, but I don't think it's anything more than across the board.
Okay, great. Thank you.
Thanks, Meta.
Your next question comes from the line of David Voigt with UBS.
Will be Great. Thank you for taking my question. A competitor just recently noted, as you guys are talking about that they're seeing some orders placed a little bit earlier, Adjusting that there's been a little bit of a pull forward given sort of the industry constraints.
Can you guys just kind
of explain a little bit how you're thinking about visibility Relative to your order book and backlog, given the strength this quarter and sort of supply constraints, does this lead Better visibility, obviously, over the next, let's call it, 2 to 3 months. And what does it mean for the Q4 without getting into specific guidance? Thank you.
Will be answered.
Sure, David. Well, as you know, we've always had limited visibility, but the last few quarters, I've noted that our visibility has are on mute. So I think there's a direct proportion to long lead times, long slightly longer visibility. So particularly with the cloud titans that Anshul closely with we have been able to get visibility beyond the 1 to 2 quarters that we normally get, and we do have visibility into 2022. And I think it's directly tied to them planning better and realizing that the longer lead times, they need to know what they're going to do in 2022 for us to supply product.
Actually want to add some more to that?
So Jayshree, I would say we're not seeing order pull ins or if customers are doing it, they won't tell us. It's much more the non binding demand signals we get is where the discussions happen with customers. That's how we get off of the brief comments.
It's just prudent planning, David, from
Good afternoon. Thanks for taking my question. I guess my question is really around the 400 gig opportunity. And I think in the last couple of years, you spent a lot of time explaining to folks how your software stack is really differentiated against white box risk. I would love to get your perspective as the underlying technology gets more complicated with 400 gig and 800 gig.
What's the potential for will cloud titan that have historically relied more on White Fox to start talking to Arista. And I'd love to know if you're seeing a shift in customers that have
Sure. Amit, the companies that build their own white boxes are fairly sophisticated. So they're not short on talent. If they are committed to our mission, they'll go ahead with it. So I don't believe will be If any changes happen in the industry, it will be simply because the addiction is harder to build.
But it's much more about the collaboration we have with them and the co development partnerships we have here. Will be available. And we've talked about this in the past. Nothing has changed on that front. We are moving along on our mission in the few situations where customers consider from buying from the will That will take a few years to actually materialize.
No big change here expected.
Amit, I think the way to think of this is if you want commodity 100 gig Without our software stack and you just want to buy basic vanilla stuff, it will continue. But if you really appreciate
will Perfect. Thank you.
Thanks, Amit.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Yes. Thanks for taking the question and congratulations on the quarter. I wanted to actually ask about the progression of the subscription of business within the model. As we look at the services line, is there any way or how we investors should start to think that as being an increasingly visible growth driver
for the company. Thank you.
Thanks, Erin. Thank you for the wishes. Wish we could shift more. I think the real issue is to think of subscription as a long term indicator of not necessarily just revenue, But the stickiness of our business, right? When you look at CloudVision, Cloud EOS, what we're doing with network detection and response with AI driven security or Vixit acquisition with Dans Monitoring Fabric.
These are all, if you will, layered icing on the cake. And the icing contributes good margin And obviously has a long term 1 year, 2 year or 3 year subscription. So the revenue shows up a little bit later, but the bookings are very strong as you can imagine from that. So, we will continue to see strong software service renewals as well from our ACARE. And so the 2 together, we believe we've always said will be a 20% to
with your next question comes from the line of Samik Chatterjee with JPMorgan.
Hi, good afternoon. Thanks for taking my question. Jayshree, you did comment Starting off that you're seeing strong demand from enterprise customers. Wondering if you can just talk about what you're seeing from the other customer like is demand accelerating similarly, for example, the cloud titans as well as some of the telcos and Keeping that backdrop in mind, it does look like the 3rd quarter guidance is for like a 4% increase when traditionally we've seen like a high single digit. So should I just infer that's all supply kind of driven In terms of the moderation relative to historical trends.
Well, first of all, thank you. Historically Historicals aside, I think all of our 5 verticals are doing well. In that, I would highlight cloud titans and enterprise is stronger, But that doesn't take away from the contribution and success we're having with Specialty Cloud Financials or the service providers. I guess it's a case of rising tides raise everything, so all of them are contributing well. Relative to our Q3, demand is strong.
I wish we could shift more, but I wouldn't compare it necessarily to our last Q3 in the post pandemic era. I would just say on the basis of large numbers, we're doing well. Yes, I think if you look at last
year, I mean, given the year that it was, we saw a very significant uptick in Q3, was up 12% or something quarter over quarter. That was just more of a semblance of what was happening with COVID at the time. Right.
And previous years went like that.
Yes, I
think the Q3 guide, 21% at the midpoint year over year. That's a good place to start, Ray. Yes.
Thank you.
Thanks, Your next question comes from the line of Fahad Najam with MKM Partners.
Thank you for taking my question. In terms of the pricing environment, can you comment on are you planning on passing on any of the incremental costs that you're experiencing? Can you also talk about the dynamic You're seeing in the market in terms of pricing, are your competitors increasing their pricing as well or are they using this as an opportunity to kind of absorb the cost and maybe kind of aggressively price. So maybe a comment there, we appreciate it.
Fahad, I'm not in a position to talk about competitors. Maybe they'll share that with you. They certainly don't with us. But I will say that we're going to try our best to absorb the costs. On selective models, we will have to where the increases are significant, increased prices slightly, but we don't expect the impact on that on our backlog or existing inventory.
So the real impact of Any changes we make will impact our gross margin or our price changes next year.
Appreciate the response.
Will be
Thank you.
Your next question comes from the line of Jeff Kvaal with Wolfe Research.
Yes. Thanks very much. I am wondering, you started to talk a little bit about deceleration in the back half of the year, which makes complete sense. I'm wondering if there are any one time tailwinds that you are expecting This year that we should be considering when we start to think about the shape of 2022. Obviously, you all don't want to talk too much about it, but anything that we should be considering as we have to think about
it. Yes. I mean, I think it is a little early to start getting too specific about 2022. This year did have an unusual slope to it just because of the pandemic and how 2020 played out, Right. We're putting up some very good numbers now this year.
That's obviously setting a good base for us to grow up next year. So I'd bear that in mind. But The business is solid. There's strong demand. I think we're executing well and it's broader, right?
It's across the verticals. So we'll probably take a shot at giving Some book ins in next quarter for 2022, but it's a little too early.
Okay. Thank you, Ethan.
With your
next question comes
from Thanks, Jeff.
Nice job, Anshul, Chris and the whole team for creating demand.
Thanks, Jesse.
Will follow-up.
Your next question comes from the line of Paul Silverstein with Cowen.
Thanks. A clarification
of question, Jisrit, did I hear you were you to say that you're expecting 20% growth now for top line for the year?
No. We would never say those things, Paul. But Ita, what did you say?
We talked about the
midpoint of The guidance
for Q3 year over year growth.
Let me ask a question. Last I think you responded in response to a question, you said for this year, you're definitely expecting 15% growth for the year, that was in the Q and A. Any thoughts for what you're expecting now for the year? And can you also comment on how much the Supply chain is costing you in revenue and in margin structure?
Yes. I mean, I think for the year now when you layer in Q3 and you Think about Q4, you can probably get to a reasonable view of the year, right? I don't know that we want to put a specific number, but you can get there, right? Once we give you the Q3 number, It becomes a lot easier. In terms of how much clearly lead times are very extended, right?
It's always hard to kind of compare that to some kind of normal world. We could obviously do more revenue if lead times weren't that extended. How much? It's really hard to put a number on. I don't think we're going to try to put a number on that.
All right. Given that response, can I ask you within cloud titan since historically you've been highly concentrated in Microsoft and Facebook, but Of more recent vintage, you could be having some more success with some of the other folks that can Google in particular? Any insight you could share with us?
I think, Paul, you summarized it very well. Anshul and the team are doing a great job in both diversification across all our sectors. And while Microsoft and Facebook are very strategic, very important customers, we have other contacting customers also.
Next question please.
Your next question comes from the line of Sami Badri with Credit Suisse. Will
Hi, thank you. A little just a clarification on just Ita's commentary regarding the second half deceleration now. I was hoping you could give us some sequential guidance. Is there any potential that sequential growth could be negative in 3Q and 4Q? And If I just extrapolate out and I forecast
a little bit out from
where we are today, even though it's above, we're getting into the low 20% range. I just want That clarify if there would be any sequential decline in 2021.
Yes. I mean, we've given you Q3, right, at the midpoint and there's clearly Growth there quarter over quarter. Again, we're not trying to guide Q4, but Q4 is usually a good strong quarter. I'll leave you to draw your own conclusions from that, but I think we've pretty much laid
it out for the year.
Sami, I think the message we'd really like to convey is demand is strong. We're doing well. We need to execute on our shipments. And we can only approach this our shipments 1 quarter at a time because our supply chain is so
will stream.
Got it. Thank you.
Thank you.
Your next question comes from the line of Rod Hall with Goldman Sachs.
Yes. Hi. Thanks for the question. I guess I wanted to ask you about the gross margin with guidance. We when we were talking to Cisco on a similar note, they had said that the supplies impact on their gross margins was bottoming or on their margins was bottoming in will guide and I'm curious whether this guide for September from your point of view is kind of the bottom.
In other words, Gross margins at least go sideways from there or do you think it's sort of an unknown at this point and things Could continue to worsen. So that's my first question and then I have a follow-up.
Yes. I think, Rod, on the supply chain stuff, I mean, we did have Some significant supply chain impact even in Q2, right? It just was more than offset by the customer mix, right? So I think as we look forward, I mean, we are paying more for certain components, etcetera, than normal and that cost will get recognized whenever we ship those components and the products that are in Those components are incorporated into. So we will see some drag on gross margin probably for some time just given the inventory and purchase commitment levels that we We are that mix is healthier, the enterprise mix is helping to offset that, but Customer mix is still by far the biggest driver.
So if we have a quarter where there's a heavy cloud mix, you are going to see pressure on that gross margin will be able to take a look
at the number for the quarter, but
I think over time, we feel like we can stay in that 63% to 65% range. I think that's a good safe kind of place to be.
I guess what I'm thinking it is
you're already kind of signaling some pressure in 64% in the next quarter because that's down over 1% from this quarter. And I'm wondering, do you so when you say that, do you think it's probable that you have a materially lower margin than 64% or do you think When you say drive, do you mean 64% just is a possibility for longer?
Yes. No, again, I think the biggest will be the customer mix. So in a quarter where there's heavy customer mix, yes, you could be back at 64, you could even be below that, right? But again, it will be Because of a particular mix in a particular quarter, right? So I think the range is still very valid.
The 52 plus the 65 plus that we saw quarter is, it's a really good solid enterprise mix, that's helping to offset some stuff. So you will see, I mean, gross margin is going to move around will be a bit over time, but I think we're still very comfortable in that range.
As Ida said, Rod, as Ida said, a lot of our inventory costs will be realized later this year and next year. So the gross margin will actually be more pressured when those higher costs are realized. And so then if we have a really good enterprise mix, we could be on the better side of 53% to 65%. If we have a high cloud mix, Then I don't rule out the possibility of being on the lower side of 63% to 65%, right? Recognizing that the costs are We're going to enter in.
Nobody is predicting the semiconductor supply cost of shortages are going away in 2022.
No, definitely not. And then that leads me to the enterprise trajectory, but we see enterprise spending indicators are very strong here As we look into the second half, just curious what your thoughts on the enterprise pipeline are? I mean, does that look equally strong in your pipeline? Or how does that How that look to you?
Yes. Rod, I think you've run out of questions, but the short answer is yes.
Will Okay. Thanks. Appreciate it.
Thanks, Travis. Thank you, Russ.
Your next question comes from the line of Jason Ader with William Blair.
Yes. Hi, guys. My question is for Jayshree. How does this supply chain situation compare To prior periods in your career where you've seen supply constraints?
Well, I'm glad you're asking The oldest person here, close to the oldest. In my career of several decades, I've never seen it be this bad, never. This is the worst I've seen it. And there's been some pretty big ups and downs. So and more than the worst that I've ever seen it, I think it's also going to be I guess we were all hopeful we will all recover from the COVID pandemic, but everything from copper shortages to wafer starts, assembly to manpower, people, logistics, freight, just about every aspect of it is challenged too.
So Anshul, do you want to add anything more to that, Asiya? Well,
As you said, things are very, very constrained. But I think what's happened is the world supply chain never planned for this big a mismatch And as a result, when you run into a crunch, people try to book ahead and plan to rebuild profits and so on. But this is not an industry where you can react in 1 quarter. This will last a long time. The semiconductor industry is projecting maybe recovery in 2023, but who knows what So we are in it and prepared for a longer run here.
And is it inevitable that at some point we're going See like demand air pocket at Jayshree just because everyone will have ordered what they needed ahead of time and will hit some type of air pocket.
I don't know the answer to that, Jason. But I think Given the business diversification we have, the planning of one type of customer will not affect the planning of others. So I'm are hoping that some of them are planning for 2022 and some are planning for ahead in 2023 and so that air pockets will balance off, if you will. And the visibility, Jason,
I think, to what the demand is for and when it will
get deployed, at least for
the larger customers, is pretty good. So that helps, right? It's not You're deploying over time still, right?
That's right. It's very much as it is a land and expand situation. You don't just land and then buy nothing for a long time.
Very good. Thank you.
Thank you. Your next question comes from the line of Jim Suva with
with Citigroup Investments. Thank you. And I only have one question and that's related to your Strength in revenues that you've just seen and kind of the outlook that strength, is it being driven across all your end markets? Or are there kind 1 or 2 that you really want to call out to us is, if you were to look back, say, 6 or 9 months ago, you would not have guessed it would have been are so strong because you really have posted really impressive results and a great outlook. Thank you.
Thank you, Jim. And again, a lot of credit goes to Anshul and his team. So, Anshul, I would love for you to answer this question, but let me just preface it by saying all with the 5 verticals are very strong. They're all growing double digits. And in fact, I feel bad rating any of them as 2nd or 3rd or 4th or are placed.
But if you ask me what I'm most positively surprised by, you might remember a year ago, Jim, we were less bullish on the cloud titans. We thought they would even be flatted down. So Anshul, do you want to add to that?
Sure. Well, what a difference the year makes over here Despite the COVID impact, the cloud items are in a strong upgrade cycle at 400 gig And planning their transitions, and not just 400, but a mix of 100, 200, 400. And the customers themselves are surprised The end demand is so strong for their businesses. So that's been a good upside for us. And same as Supa Enterprise.
We've talked about Enterprise for quite some time, But we're quite happy with the adoption by our customers, both in our primary data center market, but also expanding into campus, into monitoring, into security. And we have a long way to go. It's a very large time, and we're just getting started there. So that keeps us very positive on both of their initiatives.
Will Thank you and congratulations.
Thank you, Jim. Your
next question comes from the line of Simon Leopold with Raymond James.
Will Thanks for taking
the question. At the beginning of July, the U. S. Government announced the cancellation of the JEDI project with a plan to put it out for rebid. I'm just wondering how you would factor that into your own forecasting and modeling given that you sell into 1 of the will essentially participate in that project.
Does this change your thoughts on this year and longer term? What do you do in terms of will be a project when it comes to forecasting your overall business. Thanks.
Thanks, Simon. I don't think we really factored it in very much except making sure we had all the certifications. You want to add to that, Morant? Simon, this
is a contract award 10 years. So it's not We saw any significant change in the last year related to that. In addition, the contract the data program might be gone, but there's So many other programs the government is doing with various cloud companies. So it just gets mixed into the noise. We don't really see.
We've noticed that the big upside, so I don't think there's any big downside either.
How big is government typically for you?
No, but in this case, this wasn't going to us, right? This is going to one of our customers, This is why we don't see it, Greg.
It's not really government. It's class titan.
Yes. No, but I guess in general, because government sounds like a good vertical. I don't know that you've talked about it in the past.
No, we haven't. We could do a lot better. Government is not big for us, but it's mixed into our enterprise momentum. It has improved year over year, but in terms of any kind of contribution or large concentration, we have a long ways to go.
Great question. Thanks, Simon.
Will answer your
question. I'm trying to ask a question without asking it directly. So Nafik is looking for a big win with 1 of the cloud titans. And this question I have is, what's your outlook for cloud titans? Are there big Kind of wins or big announcements in the pipelines that you're looking for.
Is there anything you can share with us About the puts and takes, what could happen with cloud titans over the next few quarters? Thanks.
Sure. I thought you'd say you're very happy with the results so far, and there's no more upside expected. Look, we're doing well with our Customer execution has been good. You know it is a competitive market, and despite that, we continue to do very well with both our hardware design, Our supplier products and especially our EOS software, there's no big change. I mentioned this last year as well.
Will be in the range
of the 2nd quarters. We are maintaining status quo in
terms of customers. If the customers grew, we grow with them. We obviously don't control that aspect and can't forecast on their behalf. But otherwise, it's more of moving on the next gen architecture with these entities. And while you think of them as outside and internally, we think of each one as a market, right, that's big and there's so much complexity.
But now there's no big announcement they're making or about to make over here. There are so many key milestones that need to be achieved before that can be done on anything that's dramatic or a big shift.
Will Can you if I can squeeze in another one, if not, it's okay. Can you talk about the contribution of Cloud titans to this quarter and also last quarter results, I'm trying to understand how important is it in relative terms, how important is it to the overall growth?
Oh, it's So we decided to go annually rather than quarterly, Tal, but it's staying within the annual targets we gave. I believe we said it was 34% to 39%, we bracketed it. So that's the contribution from Cloud Titan, 34% to 39%.
What about the growth? Maybe how much of the growth is it? Is it proportionately much higher than the 35% to 39% of the growth?
We don't comment on 3, hard to look
at it on a quarter by quarter basis. The cloud contribution to growth is always going to be important. Enterprise is becoming more important, right? But I don't think we want to try and do it on a quarter by quarter. Yes.
I think it will make more sense annually, Todd, because we're so constrained by shipments.
Right.
So it would be a false signal, if we said it was high, low or medium. So I think on an annual basis, it's a much better number and the growth will be good. It will definitely be double digits.
Still the number one vertical and it's important for sure. Anybody think that it's not an important part of the mix. Thank you, Tal.
I think
we're ready for the next question.
Thank you.
Your next question comes from the line of John Marchetti with Stifel.
I was wondering if you could just spend a minute or 2 just talking about what you're seeing specifically in that 400 gig market. Obviously, we go back to the early part of the year, and it seemed like We were pumping the brakes a little bit on expectations that seemed to change a little bit last quarter and you seemed a little bit more bullish there. Just curious if you
could spend a little bit of
time and I'm assuming that
is still primarily a cloud titan market, but just anything you're seeing there would be helpful.
Well, it's actually more than cloud titans. I think Arista has been trialing 204 100 gig since Q4 2019, if I remember when Andy was here and we talked about the whole portfolio of products. So this combination of 10, 200 not 10, 100, 200, 400, we expect to see a significant increase. So just to give you some context here, We had about 75 customers last year, and we expect that to triple to quadruple this year in customers. That's way more than the cloud titan.
Will be available. And your
next question comes from the line of Ben Bolen with Cleveland Research Company.
Good afternoon. Thank you for taking the question. Jayshree, you talked a little bit about getting some additional visibility from HyperScale Partners versus history even into next year. With that perspective, could you talk About how you see the evolution of 204100 as they roll that out, how that develops and maybe how you think it compares with what you saw 100 in terms of, I don't know, pace or speed of adoption?
Yes. No, that's a really good question. I think 100 gig Pace and adoption was remarkably fast. It was probably over an 18 month period, Anshul, correct me if I'm wrong, 2016 to 2018, something like that, Right. The 200 gig, 400 gig has been more gradual.
And in very many use cases, it's coupled with 100 gigs. That's why it's so hard for us to separate out. And we, I think, are finally at this inflection point or pivot point where we expect to see more 200 gig and 400 gig shipments in our Cartagena customer base in the second half of this year. And I think this will continue and will be vibrant for at least will be in 3 years to come, maybe longer. You want to is there a long tail to that, Anshul?
You want to answer?
Ben, I think it's important to note that When the world went to 100 gig in 2016, 2017, 100 gig was very much compatible backwards compatible with FortiGate. The companies that are going there, the ones that absolutely need it. And there were other technologies involved like the ZR optics needed for data center data connection will be in the range of $1,000,000 which were constrained last year and earlier this year as well. So which is why this adoption curve is very different and it's not at every layer of the network. I would not model that on the 2016, 2017 cycle.
These are different upgrade cycles, which is why To come back to what Jeshua was saying, the combined 100, 200, 400, we're winning a lot in 100 gig using new mix and products as well, and that is very much material and matter.
One other addition I'd like to make on the non cloud titan side, Ben, I know you're more focused on that is many times they make sure they buy a product that's 200, 400 or even 800 gig capable, but they'll deploy only 100 gig, right? So what's clearly happening now is customers are getting ready for the
will your next question comes from the line of John Lopez with Vertical Group.
Hey, thanks very much. Ita, I believe you said in calendar Q1, you grew product deferred by about $40,000,000 or so Actually, and I thought I heard you say it's another $20,000,000 or so this quarter. I guess the 2 questions I had there. 1, do you ascribe any of that to component constraints?
Or is that all product
feature sets? And then secondly, Trains or is that all product feature sets? And then secondly, do you expect that to flow into the income statement in the second half of this year? Or is that Stuff you'll carry with you into 2022.
Yes. So it's not really related to the supply side stuff. It's more about new customers, new use cases, new products, That's what drives that number. I mean, it is kind of a even in Q2, if you look at it, some of that was recognized and then we added other new stuff. So there is kind of some churn underneath as that of that balance, right?
But I don't expect us to take Any revenue, net revenue, if you like, out of that bucket in Q3. We'll see what happens in Q4 that's a bit further out. But I think Given the comments in the script around how that balance builds, I think we've got lots of new stuff happening. So I think it's
will.
Your next question comes from the line of Alex Henderson with Needham.
Great, thanks. I was hoping you could talk a little bit about the environment In terms of pricing, we've heard from some players in the market that Cisco is talking about 5% to 10% price Increases on a variety of products, including switching and routing related products and passing are going through more price increases than what you alluded to. You obviously suggested that you are going to be relatively Careful with that, not push through a lot of pricing on your customers. So is there a delta developing there? And within that context, could you talk a little bit about the strategic approach of Cisco to bundle together the Acacia products, and whether that architectural change to a Switch routed optical platform is something that you concur with or which you think is a fool's errand?
Will be answered.
Thanks. Wow, that was a loaded question. So I'm going to break it into 2, Anshul, think about the Acacia one while I discuss the delta on pricing. It's difficult for us to parse our competitors' pricing. But I can tell you philosophically, we got backlog, we got products in flight and we got customers who are making their budget plans.
So we're going to try as much as we can in the short term to absorb the cost. That said, we will have some slight price increases, are probably in the range of 5% on selective models that will affect our customer base in the tail end of this year and next year. And it will still affect our gross margins if the mix changes dramatically to cloud titans as It is alluded to. So all this to say, Alex, we're going to be very thoughtful because it's pain for us and we're going to try and mitigate are paying for customers and only apply it where there's a real shortage and a real significant cost increase. And Akshay, you want to take the Acacia question?
Will be available. Alex, the way our customers buy VR optics, and as you know, we've been involving these architectures since the 20 sixteen-twenty 17 time frame for 100 gigs, 100 kilometer optics. The cloud companies especially launched this in the '90s and early 2000s, they do not like bundled solutions. They like to disaggregate. Will disaggregate every layer, not just by boxes.
And the optics and the switches are not allowed to be built in a bundled manner. They will run a separate RFP for each one. We have to be independently competitive at each player to win. So which is why this is not a concern. And as we mentioned, the optics are large, Stan, And other companies can participate.
We don't have to. We have our work cut out.
And we try to qualify as many optics vendors. So at any given time, you have a team, I'm sure, that's will find a number of vendors, right?
If there's a VR optic out there, we'll qualify it.
Yes, I've noticed. There's a lead time on your qualification too, I understand.
Will come.
Thank you, Alex. Next question?
Your next question comes from the line are James Fish with Piper Sandler.
Hey, thanks for squeezing me in here. And Jayshree, I was going to comment before that Age is just a sign of wisdom, so I wouldn't say old, but just wise. And with that being
said, let's do the control. Thank you, Jamie.
I'll just let you and I will have that debate who's wise So you guys are starting to see some 5 gs core spending or at least the industry is pick up and we even saw AT and T and Microsoft kind of announce Something at the core. Carrier grew pretty nicely, it looks like, if you use the midpoint of those ranges you gave. Does your relationship with Microsoft will help extend your regions to your carrier environment as they look to take some of their core to the cloud or will it be more of a fulfillment via support for Azure is the way to
think about it. Thanks guys.
Yes. No, I think in the short term, it's very much a relationship tied to Azure. But there's nothing that precludes particularly with their investments in 5 gs and some of the recent acquisitions we made. As you know, service providers are a long term test of our patients, but when you win them, you win them well. So we are seeing Our own personal wins independent of Microsoft very much tied to upgrades to 5 gs where we are the back the core routing and platform and spine.
But specific to Microsoft, I think it will take time. It will probably emerge in the next several years. Today, it's primarily Azure.
Okay. We have time for one more question. Thank you, Jim.
Last but not least.
This question comes from the line of Kyle McNealy with Jefferies.
Hi, thanks a lot for the question. This is Kyle on for George Notter. Curious if there's any change to the mix of customers or ports using Cloud EOS versus the traditional standard EOS going with a hardware sale. Maybe still quite small, but any quantifiable color you can provide around what the mix might currently be? And could that help your gross margin at all or make you a little are sensitive to the supply chain issues that you're seeing in some areas.
Thanks, Kai. Now Clouda US is an example of a very strategic software platform, but It's very, very tiny in ports and it has more to do with our multi cloud hybrid network strategy where almost every one of these enterprise customers also has on premise strategies. So I would say the strong influence of millions of ports is still on the mainstream platforms and Cloud EOS is on top of that to connect into multi cloud.
Okay, great. That's helpful. Thanks.
Thanks, John. Will be available for the Q2 2020 information on our fiscal results, which you can access on the Investors section of our website. Thank you for joining us today.
Thank you
for joining, ladies and gentlemen. This concludes today's call. You may now disconnect.