Welcome to the 4th Quarter 2020 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. As a reminder, this conference is being all participants will be available for replay from the Investor Relations section at the Arista website following this call.
I will now turn call over to Mr. Charles Yeager, Director of Product and Investor Advocacy. Sir, you 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' President and Chief Executive Officer and Ita Brennan, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal Q4 ending December 31, 2020. 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 for the Q1 of the 2021 fiscal year, longer term financial outlooks, our total addressable market and strategy for addressing these market opportunities, the potential impact of COVID-nineteen on our business, our product innovation and the benefits of recent 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 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 apply as of today and you should not rely on them as we are presenting 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, Charles. Thank you, everyone, for joining us this afternoon for our Q4 2020 earnings call. If there's one thing the pandemic has taught us, it's the importance of adapting in real time. In 2020, our world changed quickly and rapidly. As a cohesive leadership team, we had to prepare for a lot of unknowns and uncertainties where our offices were closed, our contract manufacturers were shutting down and supply chain constraints resulted in longer lead times.
2020 created new norms as we found many virtual ways of communicating with our customers, including access to our products for their business continuity. With vaccines emerging, we certainly hope that all of you and your families are safe and healthy during unprecedented times. I am so proud of our employees and how we've handled this and thank our partners and customers as well for placing their trust in us. Back to some Q4 2020 specifics. We delivered revenues of $648,500,000 for the quarter with a non GAAP earnings per share of $2.49 AKI Services and Software and Support renewals contributed approximately 20% of our revenue.
Our non GAAP gross margins at 65% was influenced by software and services mix all of our customers are in the range of $1,000,000 and a higher enterprise contribution for the quarter the year. We've registered a record number of new customer logos and $1,000,000 customers, we'll be conducting a direct result of our momentum in the enterprise vertical and campus this quarter. We now have surpassed all of our customers have reached 7,200 cumulative customers over the past decade. In Q4 2020, cloud titans was our largest vertical. Enterprise was 2nd, followed by Financials in 3rd place and the Providers, both Service Provider and Cloud Specialty Providers, tied for 4th place.
All participants are in the range of $1,000,000,000 in terms of sector trends, we see cloud titans at approximately 36%, enterprises including financials at approximately 36% and providers at approximately 28%, consistent with the sector ranges we have provided. Microsoft was the only greater than 10% customer concentration at 21.5% for the year 2020. 74% for Q4 2020. Despite a turbulent 2020, especially with cloud titans, we believe Arista is going to emerge stronger with more diversified products and customers. We reiterate our multiyear growth path based on 3 major product line evolution.
1, our core cloud and data center products built on our highly differentiated Arista EOS, leaf spine architecture and our cloud first principles based on the 5 A's. We expect this to contribute approximately 60% to 65% range in the future. Our second market is the network adjacencies with routing replacing routers and our entry into the cognitive campus workspaces. We expect these 2 adjacencies together to contribute approximately in the range of 10% to 15% as a compelling alternative to incumbent legacy networks. Our 3rd category is network software and services.
Based on subscription models such as Arista ACare CloudVision, Multi Cloud EOS Router, VIC Switch DANs Monitoring Fabric or DMS and Advanced Network Detection and Response with the recent Awake Security acquisition. We predict that these subscription based network services and software will contribute approximately in the 25% range. Please note that perpetual software licenses are not included here and are generally counted in our core or adjacent product lines. As we look ahead, analysts' research has shown that customers believe that COVID-nineteen has actually increased the value and relevance of the network in the post pandemic era. And in our opinion, we concur.
The networking industry is undergoing a metamorphosis from point silos or places in the network to a seamless cognitive cloud network that is data driven. Arista is helping customers with their digital transformation to this data centric, cloud first paradigm. As we experience the explosion of users, Office, IoT, OT, more video, more mobility of workloads and workflows, the boundary between all the locations, whether it's your office, cloud, our home, teleworker in transit and user is really blurring into Elastic Workspaces. We believe Arista is well positioned to address the data driven networks for this client to cloud workspaces. We are powering some of the world's largest data centers and cloud providers as a trusted partner.
And this expertise that we have gained has helped us modernize networking to a software driven cognitive experience. A good example of this is Arista's Q4 2020 introduction of DMS or DANS Monitoring Fabric all that we launched this month also cements the relevance of a differentiated network protection and security. A holistic 0 Trust network requires a union of network segmentation, situational awareness and visibility, and network detection and response security. A key part of our strategy is to bring these cloud first principles to every aspect of our cloud network.
All participants are
ready to take their questions. So we bring it to routing, observability and security functions, and it must be inherently designed as a part of the Arista state we will be conducting an AI Driven Network Architecture and Foundation. So with this, I'd like to invite Ken Duda, our Founder and Chief Technology Officer I'm Senior Vice President of Software Engineering to share some of our latest innovations on security. Ken?
Thanks, Jayshree. A 0 Trust framework for security is top of mind at Arista. For so many years, on the call, we are very pleased with the progress we have made in the past. This was fine in the 1980s, but it makes no sense today, where security is a greater concern than ever for many of our customers, more important than connectivity itself. Arista is addressing the needs of security conscious operators by integrating security directly into our network devices, So that the network is secure from day 1 without bolt on security products.
You've already heard about the Awake acquisition and progress in AI Driven Network Detection and Response. I'd like to go a little deeper on this call into another innovative Arista Security feature call, Macro Segmentation Service Groups or MSSG. With MSSG, the operator assigns endpoints to segments based on the type of device that's connecting, the user of that device and or the application they are using. The operator then specifies a segmentation policy specifying which pairs of segments are permitted to communicate. For example, the The policy might permit corporate engineering laptops to connect to manufacturing applications, but not to the finance applications and not even to one another.
MSSG enforces that policy uniformly, whether wired or wireless, whether on the campus or in the data center, on premises or working remotely, the operator can change the policy, including reassigning an endpoint to a different segment without requiring any other changes to the network. In particular, the policy is completely independent of network address assignment, which can be quite important. For example, So that the compromised device can be quarantined and investigated without tipping off the adversary that they have been detected. Arista's MSSG works with 100% standards based we will be conducting a few key factors to identify the key metrics and the key factors that we have to make sure that we are ready to deploy incrementally into existing networks. Finally, enforcement is implemented entirely in hardware for high performance without relying on expensive we'll switch TCAMs for classification, which has led to scale problems in competing solutions.
Our view is that MSSG is an example of a larger trend in networking, all participants are ready to take questions. This integration is essential to move beyond security as an afterthought and provide solutions that are secure off the shelf. And I'm delighted in the role Arista is able to play in helping customers address the challenges of building and operating a modern network, not just from a performance and scale perspective, But including so many other aspects such as visibility, manageability, monitoring, provisioning, process automation and of course, security. Thanks. Back to you, Jayshree.
Thank you, Ken. Clearly, customers are fatigued with the proprietary and silo networking you just mentioned. And just as we all modernize the cloud network, security must turn from a noun to an adjective to build secure networks. Ken, your world class engineering team has mastered the art of quality and software architecture with best in class agility and programmability. Credit to you for founding and building this innovation and greatness in Arista, and I can't wait to see more of it.
In addition to our campus workspaces progress that I spoke about last time, next generation routing is another key adjacent market. Our investments in simplification of Arista's routing stack has been going on for many years we are also executing on our strategy with standards based EVPN, VXLAN, BGP and segment routing and these are yielding good traction in cloud service provider and enterprise we will have to move in. To give you context on this, just in 2020 alone, we introduced 6 EOS software releases we have delivered over 800 features in routing. The result of these investments we have made in our routing our innovation and footprint have brought us over 200 customers in 2020. In summary, Arista demonstrates a stark contrast to the current fatigue of silos and different operating systems for WAN, campus, cloud, data center, each one generating its own disparate data silos.
We are building upon our cloud networking heritage to unify datasets consistently and harnessing and archiving data across we'll open up the call to our 1 Software Stack EOS and 1 Cloud Vision. The networking industry is truly ripe for this transition and change to data driven networking. Simply put, a good enough mediocre network is no longer good enough and acceptable. And this is why we believe that we're poised for multiyear inflection ahead. All participants are
ready to take questions.
With that, I'd like
to turn it over to Ida for the financial specifics. Ida? Thanks, Jayshree, and good afternoon. This analysis of our Q4 and full year 2020 results and our guidance for Q1, 2021 is based on non GAAP call, we will now begin the call to discuss our financial results and financial results and financial results. A full reconciliation of our selected GAAP to non GAAP results is provided in our earnings release.
Total revenues in Q4 were 648,500,000 we are also up 17.4% year over year and well above the upper end of our guidance of $615,000,000 to $635,000,000 While we continue to strive for improvements on the supply chain front, shipments remained somewhat constrained in the quarter with some COVID second and third wave related disruptions. Service and software support renewals represented approximately 20% of total revenue, down slightly from 21% last quarter. International revenues for the quarter came in at $165,700,000 or 26% of total revenue, up from 25% in the 3rd quarter. While the shift in geographical mix on a quarter over quarter and year over year basis is largely due to the location of deployments by our cloud titan customers, we did see some incremental improvement in our in region businesses this quarter. Overall gross margins in Q4 were a healthy 60 5% at the upper end of our guidance of approximately 63% to 65%, reflecting a heavier mix of shipments to our enterprise and financials customers in the period.
Operating expenses for the quarter were $178,100,000 or 27.5 percent of revenue, up from last quarter at $159,400,000 We continued to increase operating expense investments during the quarter as our top line performance for the year continued to R and D spending came in at $110,200,000 or 17 percent of revenue, up from $106,100,000 quarter, this reflected increased employee costs, somewhat offset by lower new product introduction spending in the period. Sales and marketing expense was $54,900,000 or 8.5 percent of revenue, up from $43,100,000 last quarter with increased variable compensation and other headcount related charges. As a reminder, we continue to benefit from lower COVID related travel and marketing expenses.
Our G and A costs came in at
$13,000,000 or 2 percent of revenue, up from last quarter at approximately $10,200,000 reflecting normal Q4 compliance related activities. Our operating income for the quarter was $243,500,000 or 37.6 we will be at 1% of revenue. Other income and expense for the quarter was a favorable $1,400,000 and our effective tax rate was approximately 19.3%. Other income and expense included $2,500,000 of interest income, offset by some unfavorable FX amounts. The favorable tax rate included the release of some tax reserves for which the statute of limitations expired in the period.
This was a one time effect The rate will likely return to our more structural rate of 21.9% in future periods. Overall, this resulted in net income for the quarter of $197,700,000 or 30.5 percent of revenue. Our diluted share number was 79,300,000 shares, resulting in a diluted earnings per share number for the quarter of $2.49
we are
confident that we will be able to deliver
on our financial
results and earnings call of approximately 9% from the prior year. Now turning to the balance sheet. Cash, cash equivalents and investments we ended the year at approximately $2,870,000,000 To recap on our uses of cash for the year, we generated $735,000,000 of cash from operations in addition, we used approximately $227,000,000 or 31 percent to fund cash consideration for 2 acquisitions which closed during the year, retaining the balance of approximately $113,000,000 in the business. To date, we have repurchased $661,000,000 or 3,200,000 shares we will continue to execute against our Board authorization to repurchase $1,000,000,000 worth of shares over 3 years commencing in Q2 2019. We will continue to execute opportunistically against the remaining mandate.
Turning to the operational cash performance for the 4th quarter. We generated $186,900,000 of cash from operations in the period, reflecting solid net income performance and continued investments in working capital. Our DSOs came in at 55 days, up from 46 days in Q3, reflecting the linearity of billings in the period. Inventory turns were 1.8 times, down from 2 times last quarter. Inventory increased to $480,000,000 in the quarter, we are also up from $438,000,000 in the prior period as we continue to buffer certain components and products.
Our total deferred revenue balance was 651,000,000 up from $562,000,000 in Q3. This increase largely reflected typical 4th quarter service renewal activity we will conduct a small amount of deferred product revenue related to new product deployments. The level of services deferred revenue is directly linked to the timing and term of service renewals, which can vary on a quarter over quarter basis. The pounds payable days were 54 days, down from 70 days in Q3, reflecting the timing of inventory Capital expenditures for the quarter were $3,200,000 Now turning to our outlook for the Q1 and beyond. We saw good diversification of the business in fiscal 2020, with expected declines in cloud titan revenue somewhat offset by growth in our other market sectors.
Looking to 2021, we expect continued growth with our enterprise and provider customers combined with a solid cloud titan contribution. From a product perspective, we expect strength in adjacencies and software and services continue to make these areas a more meaningful contributor to the business over time. We believe the combination of these trends combines a favorable year over year comparative, allow for a top line growth rate for the year, which is in line with annual consensus growth rate on a 14% to 15%. You should also note that our second half twenty twenty top line recovery will likely result in some deceleration we'll be conducting a quarterly year over year growth rates as we move through 2021. On the gross margin front, we continue to reiterate our overall gross margin outlook we are confident that we will be able to deliver a significant amount of
63% to 65%, with customer mix
remaining the key driver.
Turning to our investments. We remain committed to making go forward results based we will conduct
our investments in the business.
This includes continued go to market expansion to support enterprise and campus growth and investments in R and D to support innovation across the business. Finally, our outlook discussion evolves and our guidance for Q1 reflects our current understanding of COVID-nineteen and its impact on our business and supply chain. This is, however, an inherently uncertain situation, and we will need to continue to monitor and attempt to mitigate new challenges as the situation unfolds. With all of this as a backdrop, our guidance for the Q1, 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 $630,000,000 to $650,000,000 gross margin of 63% to 65% Operating margin of approximately 37%. Our effective tax rate is expected to be approximately 21.9% we will conduct 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 Thank you for your understanding.
Operator, take it away.
We will now begin the Q and A portion of the Arista earnings call. We ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from I'll be Nina Marshall with Morgan Stanley.
Your line
is open. Great. Thank you. Maybe just comments around you just announced the kind of macro segmentation kind of security portfolio. Just as you're Broadening out the campus portfolio, just other security features and functionalities that you think you will need or other partnerships that you think you'll need to expand upon to just kind of address that customer base that maybe the needs are different than the data center needs.
Thanks. Thanks, Lita. As you know, we've had a very robust set of partnerships. So we will be working on securing the network, But protecting the network is only one aspect of the data center or campus. You have to make sure you work with different types of firewall vendors.
You have to protect the cloud And the multi cloud zones, you have to protect the devices and the identity. So our macro segmentation has multiple fronts. We enforce rules on the host with our partnership with VMware especially. And then more recently, we've also done with our macro segmentation that Ken talked about, more and more identity mapping and enforcement with our partners like Forescout as well as Aruba, ClearPass and Okta. So the first thing I want to say is security is too important for just Arista to do.
We'll be securing and protecting the network and working with these partners. Looking ahead, we see other forms of security too. And I'd love for Ken or Anshul to comment because whether it is securing the network through segmentation and the many forms we talked about, but also more and more in the data center encryption capabilities and privacy, whether it's network wide or hop to hop and in the campus, bringing security all the way down to our wireless. Also Ken or Akshay, do you want to say something more about that?
Sure. Jayshree, helping our enterprise customers connect to the cloud is extremely important. And as you know, there's no one single way to connect your enterprise apps to these cloud apps, there are 1,000 different ways, whether it's Express Cloud, Direct Connect, different hubs, meet me in the middle, different service providers. And we are quite focused on enabling more and more functionality there with different forms of tunneling, taking our VXLAN EVPN approach for enterprises and marrying it to what happens on the cloud side, different types of encryption channels and so on. Ken, anything you want to add?
Yes, I just wanted to add that we our segmentation is simply the newest announcement that we've made in this area, but we have a robust portfolio of security features already, including hardware support for MACsec and IPsec to secure individual links, including multistage Jackals for advanced packet classification and several other features, wireless intrusion prevention. So I think that all customers are already able to build a fully secured network on NiRIS' solutions. That said, we'll of course be looking to partner in the future with anyone who can help us build a more secure solution.
Great. Thanks. Thanks, Lydia.
Your next question comes from Ryan Coons with Rosenblatt Securities. Your line is open.
Hi, thanks for the question.
I wanted to ask you about the semi supply Shane, you talked about building inventory in the quarter on key parts. Can you give us a little more color on what's going on there? We do hear about production capacity issues and obviously lead times are starting to stretch out. You feel you give us some Comfort you feel comfortable with your commitments from your suppliers and what you're seeing out there? Appreciate it.
Thank you.
Sure. Ryan, as we said, we have been constrained much of 2020 starting with March. So this has been a real issue for the entire supply We have products with extremely large lead times that we plan ahead for. And I would be remiss if I didn't say while we have some great partners that the semiconductor supply chain is still constrained. Ita and her team as well as Anshul and the team have taken some very important steps to build out our inventory for some of these long lead time components, but because we use a lot more parts than we still have.
Helpful. Thanks very much.
Thanks, Brian. Your next question comes from Jason Ader with William Blair. Your line is open.
Yes. Thank you. Jayshree, can you talk about what's driving your momentum in the enterprise? Would you say it's more of the Product portfolio that's expanded or is it just the build out of your sales and distribution infrastructure or maybe it's both?
Yes. I think the simple answer, Jason, is it is both. We've been making multiyear investments on both the product side. First of all, both in the data center, but also going beyond the data center to different roles and use cases. And we've, Anshul and Krishmit and Ashwin and the team have been building out our capacity both in the U.
S. And internationally. But I would say the third thing that's also clicking is our best of breed product capability. It's one thing to invest The customers are really resonating with a single OS, CloudVision being a huge differentiator. We just across over 1,000 CloudVision customers since we started shipping this product a few years ago.
So I think the ability to not just build a great network, to operate it and for them to experience that quality of experience has made it much more complete. So I would say great products, great go to market and then a high quality operation and experience.
Great. Thank you.
Thanks, Jason.
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yes, thanks for the question. I just wanted to ask about the verticals With regards to providers, you guys beat that pretty solidly against our expectations. So maybe a little bit more color there. And then cloud was a little bit weak. And I'm just curious if you guys are still thinking you can grow cloud this year and is it a single digit growth rate, etcetera, maybe you don't want to talk I'm just curious what your thoughts are on cloud growth this year.
Thanks.
All right, Rod. Well, as you know, cloud has been tough for us and pretty volatile. The visibility on cloud titans was very difficult last year. On the other hand, as we've been telling you, we're starting to make good penetration in both all of our Tier 2, Tier 3 service providers as well as our Tier 2 cloud providers. So that has come up nicely to make up for some of the volatility in our titans.
In terms of answering your question, one of the things we felt in Q4 we did achieve was we were firing on all 5 verticals and on all three sectors. But because we had so much volatility in Titan's, overall in the year, we were down. And Achal, you may want to add to that is that in our view, there is no reflection on the strength and an intimacy of our preferred partnership with our cloud titans. We did have some delays in their qualification of 400 gig and in spite of all the new product we had decisions took longer to happen. Anshul, you want to comment on
Sure. Jason, our work with the Cloud Titan's collaboration, co development partnership is coming along fairly well, Both for 400 gig as well as 200 gig, we believe we will start to see these ramping second half of the year And we believe we will do well with the cloud. The cloud title numbers for us are already large. So obviously, you'll never get the same growth rates, But we believe our business will remain solid with them.
Okay. And during the next
I was
going to say in providers, I don't know if you had any comment on that, but
Providers are doing well for us. They tend to be seasonal. It depends on when a provider is investing. So I think our specialty providers, some of them are coming back very strong and they had less investments the prior year. And some of them are also recognizing that they need to be a specialty cloud just as the name suggests and not just rely on the public cloud.
So it's a segment we are feeling more optimistic about.
Great. Okay. Thanks, Jayshree.
Thanks, Troy.
Your next question comes from Amit Dariani with Evercore. Your line is open.
Yes. 1st of all, congrats on a really good quarter, given all the craziness the year has had. I guess my question really is, as I think about the calendar 2021 guide, March, I think, will be up 22%, 23% year over year. And I think the full year guide is implied to be around 14%. Beyond the compares, could you just maybe talk about why do you think growth will decelerate as we go through the year, especially given the comments I think Anshul made about 400 gig Ramping up in the back half.
Thank
you. Yes. I mean, I think it's really all about kind of if you look at the trend from last Look, it was really a year of 2 halves, right? You had some very constrained lower numbers in the first half and then Obviously, we started to recover and exit the year with a very respectful revenue top line number. So a lot of it has to do with the comps.
I think you have to think about it more This year just in terms of progress as we move through the year, it's necessarily trying to target a particular year over year growth rate just because of how The volatility that we saw in 2020.
And Amit, just to add to that, yes, we are confident of our position with cloud titans. But as you know, our near term visibility is always better than our long term. So we'll know better as we go quarter by quarter. And I'm looking forward, Anshul, to you raising the forecast.
I mean, don't ask those questions again.
I like how she just backs up on you.
Thank you very much.
Thanks, Alex.
Your next question comes from Jeff Kvaal with Wolfe Research. Your line is open.
Yes.
Good afternoon. Thank you for taking the question. I guess, first, perhaps for Jayshree or Anshul, could you help us understand sort of where you Stand in the value proposition with Wi Fi and SD WAN and I bring that up because a lot of Your peers in the market will make much of what they are up to in both of those particular categories. And then I guess secondarily, Ita for you, could you perhaps frame for us a bit about the magnitude of the Revenue left on the table in the 4th quarter and to what extent that's a factor in your Q1 guidance as well?
Okay, Jeff. We'll try to address your 2 part question. We'll do our best. So specific to WiFi, We view this as a very important component of our overall cognitive workspaces portfolio, but we are not competing directly with Cisco or Aruba or anybody else on the controller based traditional Wi Fi architecture. So our approach to Wi Fi has been very much like our approach optics, we're not an optical vendor, but we view Wi Fi and optics as an accessory to provide that cognitive inference, we have an AI driven architecture so that you can seamlessly connect across wired and WiFi.
So CloudVision supports wired and WiFi. We have a unified edge that supports wired and WiFi. Our WiFi will lead to migration as customers may need into LTE or 4 gs or 5 gs. So to us, Wi Fi is almost a technology in a feature, not a market segment, but it's critical to bringing our wired, wireless, unified leaf spine architecture that we extended from the data center into the campus. So I think our competitors are looking at it more traditionally and we're looking at modern workspaces.
As for SD WAN, we've been very clear that we are not in that market space. We look at some of the SD WAN all attributes are features and an extension of our WAN routing. So, but other than that, we're not in that Low end market where we're supplying branch offices to SMBs like VeloCloud or Meraki might.
Your next question comes from Sami Badri with Credit Suisse. Your line is open.
Hi. Thank you very much. My question is more to do with quantification of the campus switching or enterprise opportunity. Would you be able to give us What kind of quantified number or revenue run rate that you guys came in at as of 4Q 2020? And Jayshree, I think You have guided us to where you want to be at some point from a run rate basis.
Has that timeline accelerated or has it contracted? Thank you.
Sami, I think we told you we wanted to achieve at least 100,000,000 dollars in 2020 and we certainly achieved that. In fact, we exceeded it. And our goal is to double that in this year And we'll give you more quantification as the year progresses. So we're on track. We're executing well.
I won't say it's changed dramatically. Obviously, COVID has slowed down some of the large campus decision making, but I think it's going to get better.
Got it. Thank you.
Thanks, Sam.
Your next our question comes from Paul Silverstein with Cowen. Your line is open.
Just a clarification question. A clarification, I'd take it as basic math that Facebook for the full year was less than $230,000,000 maybe meaningfully less, but it certainly wasn't more. If I did math correctly, that would be down over 40%. I'm just wondering, hoping you could confirm that, if not, tell us what it was. And then the question would be for Jayshree and the rest of the team.
Jayshree, can you talk about your entree into these various ancillary markets, Whether fabric monitoring, automation, etcetera, I think you gave us the breakdown, which I appreciate the contribution of revenue, but any thoughts on what type of growth, I suspect some of these like fabric monitoring are coming off essentially for ground 0. You just did the Big Switch acquisition, albeit I think you had a presence with monitoring for a while now. But any sense you can give us for what type of growth you're looking at Outside of data center switching with as much granularity as you can stomach.
Yes, Paul, just to close-up on the I mean, they were 16.6 percent of revenue last year and obviously they're down below 10% this year. So I think that gives you something to work with,
And Paul, as you know, there are 2 types of software. There's the perpetual licenses where we do some monitoring with what we call DANCE, data analyzer that's built in with our switches and routers. And then there's a subscription. So Unlike many of our peers, we're not just converting perpetual into subscription. Our subscription based software is really new markets, we'll continue to see new markets like our Big Switch, DANs Monitoring Fabric, CloudVision, obviously, multi cloud EOS router and then we're very, very And we're obviously starting off with small numbers.
So it would be remiss if we didn't grow double digits on those small numbers. We expect to grow much faster than our 14% to 15% annual growth that Ida described. I will leave
it
at that when we show our execution.
Any thoughts on what that could be in dollar contribution?
Well, what I did say is between ACARE Services, software renewals and all of these softwares, we we expect it to be in the 25% range looking ahead.
Looking ahead.
And again, I think it's important to think of that as trends, not exact revenue revenue lags the bookings.
Thank you, Paul. Best question.
Your next question comes from James Fish with Piper Sandler. Your line is open.
Hey, guys. Congrats on the quarter. Just actually wanted to go off of Rod's question before. Appreciate the year end disclosure, but I'm curious if you could actually talk about what did happen with your 2nd largest historical customer on why it was cut by Somewhere around 50%, even backing out the deferred haircut, it's still a pretty massive cut. And related to this, it would imply that Given the cloud vertical exposure that you had an uptick up, which I'm guessing was for Q4, not just the entire year, but that another large hyperscaler actually had So just kind of curious if you can walk us through the cloud titans vertical more specifically.
Thank you.
Sure, James. First of all, our Cloud Titan verticals consists of only the major cloud scale all of our customers, right? And we list them, but they are your usual suspects that you know. So we do have other cloud titan customers besides Microsoft and Facebook, to clarify your question. Facebook, we've discussed a lot in the past.
As you know, they had a change in their product line where they skipped the service cycle, And we saw the loss of that, especially in late 2019 and also much of 2020. So we're looking forward to it coming back. Anshul, do you want to add anything more to that on
No, J. C, that's it. We've been fairly transparent with what happened there on the CPU cycle, changed There are plans for deployment since the one and I think actually everything worked out as we had stated almost 4 quarters ago.
Got it. Thanks.
Your next question comes from David Vogt with UBS. Your line is open.
Thanks guys and great quarter. So just maybe a quick follow-up on the supply disruptions. Can you provide more detail around sort of the nature of the disruption you experienced? And what I mean by that is, can you comment on sort of the magnitude of the impact in the quarter, What it might look like in the Q1, maybe the sector where you're seeing more of an exposure and maybe timing around your ability to recover those lost sales? Thanks.
Yes, I mean, I think, look, it's more of an extended lead time environment than it is anything else, right? And we're working very closely with customers To make sure that we're not losing business, right, that we're actually planning carefully with them and prioritizing what's most important to them, right? So I think we had hoped, if we talked this time last quarter, we had hoped to see more of a recovery in the Q4 than we did just because we saw more COVID related Options around the loss of manufacturing capacity on and off because of COVID activities in different locations, The supply chain, some of the suppliers into that supply chain saw that as well, right. So it just I don't know that it's that different to where we have been. And as we head into Q1, I think we're in a similar position.
So there's no great disruption to the numbers. I think coming out of changes in that environment, We just didn't make maybe as much progress as we would have liked, right? So we're continuing to just stay close to customers and prioritize, but we're also trying to make sure we don't lose business as part of that.
And I just want to acknowledge that the manufacturing team led by John McCool is doing a really good job with Lancelot's leadership. We're doing the best we can, but we haven't recovered.
Your next question comes from Samik Chatterjee with JPMorgan. Your line is open.
Great. Hi. Thanks for taking the question. I guess, Jayshree, you guys have strong results in Enterprise and that's good to But you did mention campus sales cycles are probably still a bit long. But when we focus on the overall data center part of on Enterprise, I just wanted to check like how are you what are you seeing in terms of drivers of growth there?
Is it more of a land Expand with the existing customers? Are you what momentum are you seeing in relation to new logos on the core data center part of the enterprise customer base there?
Actually, Sandeep, that's a really good question. Many enterprise customers are looking at us as the thought leader on how they should proceed with their workloads in the cloud. So I think by virtue of being consultative with them, What we're finding is some workloads move to the cloud, but many of them end up creating more data center capability that they need for some of their premise workloads. So So this enterprise number that we are sharing absolutely includes more than campus. It includes existing customers land and expand as well as new logos.
We had one of our best we have a lot of our quarters on not only new customer logos, but $1,000,000 customers. So you can imagine that wasn't just campus and so there was a lot of data center in there.
Got it. Thank you.
Thanks, Samik.
Thanks, Samik. Your next question comes from Fahad Najim with MKM Partners. Your line is open.
Thank you for taking my question. I had a big picture question on architectures. We often hear from the cloud hyperscale operators Talking about 800 gig and using silicon photonics to expand the switch radite in order to reduce the number of layers In their data service network, how should we think about that impacting your revenue outlook from your hyperscale customers? Should they achieve Outstanding the RADI architecture that they are talking about today.
Yes. Just before I hand it to Anshul, he is perfect To answer this, we believe Arista is number 1 today in both 100 gig and 400 gig including 200, right? And the 100 gig market is easily forty all times bigger than the 400 gig and anybody planning 800 gig is typically doing so in a much longer term, Especially for optics, right? So in general, if you just step back and look at 400 gig, the calls have shifted out by a year And we expect production mainly in the second half. So we're still in a world of 100, 200, 400 gig I believe this year.
But Achal, do you have some more color?
Absolutely. Fahad, your question is right on point, but It is a sort of a futuristic discussion because this is not something that's going to happen in the next 1 or 2 years. Customers always like to collapse players in the network because that is significant saving on cost and power. At the same time, their business teams would like larger clusters, which results in adding this. And as a result of that, you have to balance that.
And as you may know, our largest switch can support 2 30 terabits of throughput in a single switch. And for some of these large cloud titans, that's still not big enough. They would like bigger to save one more layer of the network. So we're constantly engaged in these discussions As we move from 50 gig SerDes, which is where we are today, 400 gig world, to 100 gig SerDes, some of these architecture points will come up, but I think by the end, this really hits. It may be when 224 gig sorties come out, that's at least 6 years out, Maybe 5, it's really hard to predict that and that's when I think you'll see some of these changes.
That's very visionary. Thank you.
Your next question comes from Simon Leopold with Raymond James. Your line is open.
Thanks for taking the question. I wanted to see if you could touch on the routing use cases. You mentioned in the prepared remarks, The expansion of feature sets and I appreciate that there's a bit of a spectrum between switching and routing. But if you could give us a little bit more color in terms of
This is a very important part of our adjacency and I would sort of describe our success in routing in 3 areas. There are very specific use cases in service providers, we were doing very well exactly especially with routing in residential edge and bringing that edge capability for Mobile Edge or EVPN Edge, etcetera. Then there's a second, which is an extension of our data center where we go into peering points. And these could be cloud providers, but they could also be enterprises in conjunction with service providers. And then there's a third, which is building the telco cloud itself, where many people are looking many customers are looking to build the same cloud like principles inside their service provider network.
Marcin, do you want to add something more to that?
Yes, it's pretty much that. It's everything outside the data center, the cloud connecting to the backbone, backbone to the Internet, the Internet connecting to periodic points And then to the service providers and their customers. I think we're actually doing fairly well marching along that journey. Now there's a lot that has been done. There's still a lot more to be done.
So I think we'll do very well, keep growing in that space.
Any quantification you can offer?
As we said in the opening remarks, our goal is together with campus for this adjacent sector to be 10% to 15% of our business looking forward. And also remember, we struggled a little bit with how to count routing. So we try to be very disciplined about counting routing only when So if it's combined with switching, it still goes into core.
Thanks for that.
Thank you.
Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Yes. Thanks for taking the question and also congratulations on the quarter. I apologize to go back to this, but in the context of kind of your guidance and the discussion around your 2nd largest customer, I'm just curious how you thought about the move to this next generation server cycle with Ice Lake and AMD's Milan And also in the context of that 2nd largest customer giving a CapEx guide that looks like it's up about 40% year over year. How did you factor that into your outlook commentary for the full year? Or is that something that you consider, hey, let's see if This CapEx guide comes to fruition and it's I'd rather take a conservative view on how that filters into the Arista business.
Just curious how you thought about that?
Aaron, I think that's an excellent question. Given we got burnt the last time on some of the forecasts and we do think We are going to take a much more pragmatic view. And our view is really that it's a multiyear spend, not just in 2021. Also there's clearly going to be some good CapEx improvements from 2020 to 2021 specifically, but we're not counting at all for this year.
Just to be clear, remind me again of how you how your business trails kind of server cycle again?
Thank you.
Yes. That's a good question. Anshul, why don't you describe that.
Alan, what I would say here is do not try to correlate a short term to any cloud titan spend because they can spend their CapEx in Many different ways and it only correlates to our business in the long term, never the short term.
And typically there's a lag of a few quarters, right? So the CapEx can be building, cooling, air conditioning, server storage before we think
of the network. That's helpful.
Thank you very much.
Thanks, Aaron. Thank you, Aaron.
Your next question comes from Tim Wong with Barclays. Your line is open.
Thank you. Yes, just wondered if I could, could you talk a little bit about when we're starting to think about these adjacencies And the service and software lines, how are you thinking about getting to those growth out of those areas and those The splits of the business that you talked about, as far as kind of cross selling the core portfolio and the existing Customers, I would assume switch to routing is pretty synergistic. But could you talk a little bit about how much you're expecting Cross sell into new Canvas customers, new software customers or what might just might be some new growth areas outside of Where the core products are really strong? Thank you.
Yes. Tim, that's a really good question. I think we will rely very much on our sales force and our strength with our existing customers to achieve adjacency in campus and the same is true for routing as well. It's very natural way to go because it's a directed sales for large big bets and segments of customers. However, we will complement that.
So while in adjacencies we'll rely on our 7,000 or more customers, in the case of campus, we're spending a lot of time and energy we'll be conducting a question on how to augment that with channels and partner distribution. And in the case of software and subscription services, it's not always connected. So Anshul and the team are putting a fair amount of effort on not really Just hiring salespeople, but creating systems engineering expertise. So building that expertise for DMF, building that for Awake is an important aspect because often they may be the same customer, but they may be a different decision maker. So that go to market is a little more nuanced for the
your next question comes from Alex Henderson with Needham. Your line is open.
Thank you very much. I was hoping you could talk a little bit about the Emergence of Coda's infrastructure, the CICD pipelining of microservices, edge compute And how that's going to change traffic patterns and purchasing of your products over time And particularly around the implication of the service mesh at the edge, I would think that you've been talking about points in the cloud and places in the cloud for a really long time and this Architectural change effectively makes individuals and applications simply points in the cloud if we play out strategy and therefore data and flight protection becomes critical. So how are you thinking about those aspects of The emergence and adoption of Kubernetes, microservices, CICD pipeline and the like impacting your business.
I don't know if Ken is still on the line to address this in more detail, but I think in general, we believe a data driven Network coming to the edge, whether the sources are multi cloud, wireless, 4 gs, 5 gs, RAN, Kubernetes, etcetera, is very relevant to the way we develop our software. Ken, you want to add a little more?
Yes, sure. No, I think that we're very well aware of those directions and We're maximizing our relevance there, in a couple of ways. The first is what's required for that whole computing model all of our customers are currently using the same technology as the company's technology. We're also working on the platform for
scaling out your application horizontally across Kubernetes is a
uniform physical networking fabric. You need low latency from physical edge to physical edge regardless of where the Kubernetes clusters are deployed. And you need to be able to deploy them in a lot of Like you mentioned with edge compute, also some enterprises need to be on premises for various reasons, but want the same application architecture that they use in the cloud as well. And so there's a need to have a same sort of repeatable rollout process of the underlying infrastructure For those Kubernetes based environments, whether it's on prem, edge compute or in the cloud, and that's what we've achieved with CloudVision Studios. So I don't know if we've talked about this much in the context of the earnings call, The CloudVision Studios enables us to enables our customers to create automation frameworks so they can easily spin up New fabric deployments, new pods, absolutely with supporting Kubernetes in mind.
And this is probably a great topic for Analyst Day, Alex, but stay tuned for more here.
I appreciate the answer. Thank you.
Hey, Gavin.
Your next question comes from John Moltez with Vertical Group. Your line is open.
Hey, thanks so much. Ita, I was wondering if you could just talk a second about deferred. The short term and deferred was like really, really strong, best in multiple years. And I'm wondering what was in that, whether Awake had any influence on that? And then I think within that you talked about perhaps some product deferred in there.
And I was just wondering if you could talk to us about maybe when that layers in, so we don't get tripped up, Which happened a couple of years back. So sorry for that, but can you just maybe discuss all those things quickly?
Yes. I mean, driver
in the Uptick in Q4 was really around services and services renewals, right? I mean Q4 is a big typically a fairly large renewal quarter and we had some larger customers renew prior period renewals Of services, that's by far the biggest driver. There's a little bit of product, but it is small, just pure new customer, new product stuff, but that's much, much smaller part of it, right.
And a wake is too small and too early to call that number.
Got you. Okay. Thanks for the help.
Thanks, John. Thanks, John.
Your next question comes from George Notter with Jefferies. Your line is open.
Hi, George. Thanks a lot for the question. Just wanted to get your thoughts on how you see customers deploying 400 gig? And do you think there's Opportunity to upgrade some of that 100 and 80 installed base to 400 gig in the early stages or will much of the initial 400 gig ramp be coming from net new core growth?
Well, I think, George, I've always said this, there's a strong correlation, especially with our cloud customers on 1 104 100 gig being tried as we move to a 400 gig spine, you still need a lot of 100 gig tributaries. And in the past that besides We haven't had effective available optics. I think all of that is shifted 400 gig by a year, but This is a year we really feel 400 gig will be deployed especially in the second half. Just to give this in context, while we have over 7,000 customers, we have about 75 customers already deploying 400 gig in some fashion. So it's about 1% or less than 1% of our aggregate base.
And so, 100 gig will continue to be relevant as we augment with 400 gig both in our high end cloud and enterprise and service providers.
Your next question comes from Ben Bollin with Cleveland Research. Your line is open.
Good afternoon. Thank you for taking the question. Could you address a little bit more about the recurring software And service revenue opportunity, specifically I'd be interested in what types of customers and verticals do you see as really driving that transition? Do you have opportunities to gain traction there with your hyperscale accounts? And then, EDA, any High level thoughts on contract terms, average length or invoice methodology would be helpful.
Thanks.
Sure, Ben. I think the biggest and most attractive verticals for the software subscription would be enterprises and financials. Love to get it into others as well, but these would be the 2 big areas of target. And there's clearly a lot of verticals in there, sub verticals. And we're already seeing a lot of interest in the financial markets for that software and subscription, and I expect we'll see many more.
And a
lot of this is built upfront and it's a 2 to 3 year type kind of term contract term, if you like. And usually we're collecting kind of We're billing and collecting cash upfront so far. I mean that may change over time depending on the size of the customer, but so far that's kind of been the model.
Thank you.
Thanks.
Your last question comes from Jim Tula with Citigroup Research. Your line is open.
Thank you and my sincere congratulations on good results and outlook. In your prepared remarks, I think I heard some numbers thrown out like 36%, 36%, 28%, and I think that was for the vertical mixes. Is that more for the year out or long, long, long term? And the reason I'm asking the question is with your guidance of, I think, is it up 12% For next year and it's off easy comp. I'm just trying to figure out which of those three markets is seeing the most strength because if I look at those percent, it almost seems like it's A lot coming from service providers, but maybe I'm bridging that incorrectly.
Thank you.
Yes. Jim, thank you for the good wishes. So the trends are not exact revenue for Q4, but it is our best indicator of how we think The year ahead will roll out. So we'll keep updating it every quarter to give you an idea of not how it's rolling out, but how it's actually turning out. So there are 3 sectors in that, right?
The first sector is cloud titans because it's big enough, you just have to look at that number individual of others. The second is enterprise and financials together, which is the other 36 and the third is specialty cloud and service providers together. So if you look at Q4, we believe all of the 3 sectors contributed strongly to the number. And if you look ahead, As Anshul has pointed out, the cloud titans are vital to our growth, but they're operating off a large base. So we should be able to grow faster in the other sectors
Thank you so much. Thanks, Jim. This concludes the Arista Q4 2020 earnings call. We have we posted a presentation which provides additional information 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.