Welcome to the Third Quarter 2021 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 given at that time. .

As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. A - Liz Stine, Arista's Director of Investor Relations, you may begin..

Thank you, operator. Good afternoon, everyone, and thank you for joining us, with me on today's call are Jayshree Ullal, 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 third quarter ending September 30 2021. If you would 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 Fourth Quarter of the 2021 fiscal year. Longer-term financial outlook for 2022 and beyond. Our total addressable market and strategy for addressing these market opportunities.

The potential impact of COVID -19 on our business, product innovation the imply of supply -- the impact of supply shortages and manufacturing constraints on our business, including lead time and inventory purchases, and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC.

Specifically and our most recent Form 10-Q and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future.

We undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.

With that, I will turn the call over to Jayshree..

Thank you, Liz. And welcome to your first earnings experience. Thank you, everyone for joining us this afternoon for our Third Quarter 2021 earnings call. Today's call will be followed by our virtual analyst day at 3:00 PM Pacific Standard Time.

We delivered record revenues of 748.7 million for the quarter, with record non-GAAP earnings per share of $2.96, Acare services and software renewals contributed approximately 21.5%. Our non-GAAP gross margins at 64.9% was influenced by enterprise and Cloud Titan momentum.

We remain pleased with our healthy customer growth, including record million-dollar customers and new customer logos in our mainstream enterprise. In Q3 2021, Cloud Titans was once again our top vertical with enterprise being a close second followed by financials and specialty cloud providers tied at third and service providers at fourth place.

All verticals contributed to Arista's diversity and growth. International contribution was strong at 25% with the Americas at 75% for the quarter. No Earnings Call of these days is complete without supply chain commentary. We are clearly in the midst of an acute supply chain crisis with increased prices and long lead time.

We're changing our Arista mindset from our historical built to forecast in orders to build, to invest, doubling our purchase commitments in excess of 2 billion and planning for the next 1 to 2 years.

Lead times of many components have extended to 50 to 80 weeks with price hikes ranging from 15% to as high as 200% across our entire supply chain of copper, steel substrate, second board, memory, silicon, ICS, connectors, freight and labor. Arista has been deliberate and thoughtful about price increases so far as we've shared with you.

But we have recently announced increased list prices effective November 4, 2021, averaging above and approximately 10% to offset these very high escalating costs. Customer demand remains strong for Arista products as they're gaining market share in 100G, 200G, and 400G high-performance switching according to market analysts.

We truly appreciate our customers and partners for their patience and understanding as we navigate these turbulent times throughout 2022 as well. Recently, we've witnessed the progress of our routing products with key customers and the acceptance of our routing edge use cases.

Similar to Cloud Titans, carriers and large enterprise customers are deriving immense benefit from Arista's EOS and rich routing features. We deliver simplification and unified service delivery, with the support of segment routing, with traffic engineering, and EVPN, as well as rapid fail-over techniques.

This provides that ideal alternative to today's complex legacy router deployments with much more improved total cost of ownership and capex benefits. Since its founding of this debt has pioneered the transformation from routers to routing with these spine R series platforms.

Arista third-generation, R3-series based on EOS4.26, delivers three new edge use cases this year. The first one is a multi-cloud edge that brings provisioning and programmatic traffic stearing, The second is the Metro edge for similar protocol adoption across multiple edge VPN services into the Metro Ethernet fabric.

And the final new case is a 5G ran edge. With the 5G edge is this aggregating the radio area network with scale-out routing. Continuing our theme of big bet wins, I would like to highlight worldwide examples of our strength with specific customer names in routing and campus adjacencies.

The first customer was CD learn an international service provider in Italy that adopted Arista for their routing transformation. Arista solution get let them to take a fresh approach to routing for next-generation edge and backbone, reducing the complexity of protocols.

This delivered LTE-U and L3 services, with EVPN or on a segment routed backbone along with modern operations and superior services and experience.

The second customer was Connecticut education network, who standardized on Arista's R series with Arista EOS being instrumental in the transformation of the VPN edge, providing 100-gig density Internet rough scale stability and manageability.

The advantages and the relationship with CEN across service and engineering affirm that decision to choose us at Arista. Peering between ISVs, using a 100 gig and mPES to replace them large legacy routers.

Second customers then layer and international customer in Asia Pacific, who was delighted to partner with Arista and build a next-generation Cloud Edge and broader backbone for the infrastructure growth.

Arista's rich routing spec brought programmatic traffic engineering and the core of the segment routing without sacrificing quality performance of the liability. And finally, in the campus, we continue to make progress towards our goal of doubling to 200 million in the cognitive campus in 2021.

An example of this is an international customer win in Australia, the Australian Securities Exchange, providing cognitive campus for its corporate sites in Sydney, Melbourne, and Perth.

The new campus network is based on Arista's wired platforms, the 720 - XP series, and it's built on a multi-year relationship we've built between Arista and ASX utilizing U.S. and Cloud Vision for real-time insights across all devices in trading and non-trading environments.

In summary, Arista's customers strongly endorsed our client to cloud strategy, to SILO datasets consistently, we believe we are well-positioned for the next phase of growth in data-driven cloud networking. With proactive platforms predictive operations, and a prescriptive experience.

We look forward to sharing more of this and our vision and our goals with you at our Analyst Day later this afternoon. I will pass it over now to Ita Brennan, our Chief Operating Officer for financial specifics, Ita..

Thanks, Jayshree, and good afternoon. This analysis of our Q3 results and our guidance for Q4 2021 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.

Total revenues in Q3 were $748.7 million, up 23.7% year-over-year and above the upper end of our guidance of $725 to $745 million. Shipments remained constrained in the period as we continue to carefully navigate industry-wide supply chain shortages and COVID-related disruptions.

Services and subscription software contributed approximately 21.5% of revenue in the third quarter, down from 22.3% in Q2. International revenues for the quarter came in at a 191 million or 25% of total revenue down from 27% in the second quarter.

This shift and geographical mix on a quarter-over-quarter basis, reflected continued healthy performance from our Cloud Titan and in region businesses in EMEA with some volatility in our APAC business. Overall gross margin in Q3 was 64.9% at the upper end of our guidance range of approximately 63 to 65%.

We can see it's recognized from incremental supply chain costs in the period, and these were offset by a healthy mix of revenue from our enterprise customers in the quarter. Operating expenses for the quarter were 192.4 million or 25.7% of revenue, up from last quarter at a 189.8 million.

R&D spending commended a 125 million or 16.7% of revenue up from last quarter at a 119.6 million. This reflected increased headcounts and employee-related costs and higher new product introduction spending in the period.

Sales and marketing expense were $55.8 million or 7.4% of revenue, down from $57.9 million last quarter with lower demo and other variable expenses in the period. As a reminder, we continue to benefit from lower COVID-related travel and marketing expenses.

Our G&A costs committed $11.6 million or 1.5% of revenue, down slightly from last quarter but in line with normal quarterly seasonality. Our operating income for the quarter was $293.7 million or 39.2% of revenue. Other income expense for the quarter was a favorable $1.3 million and our effective tax rate was approximately 19.7%.

This resulted in net income for the quarter of $236.9 million or 31.6% of revenue. Our diluted share number was 79.9 million shares, resulting in diluted earnings per share number for the quarter of $2.96, up approximately 22.5% from the prior year. Now, turning to the Balance Sheet.

Cash equivalents and investments ended the quarter at approximately $3.4 billion. We repurchased a $134 million of our common stock during the third quarter at an average price of $357 per share.

As a recap, at the end of Q3 2021, we had repurchased $897 million or 3.9 million shares against our Board authorization to repurchase $1 billion worth of shares over three years, beginning in April 2019. In October 2021, a list Board of Directors increased the authorization by adding an additional $1 billion for the repurchase amount.

The actual timing and amount of future repurchases will be dependent on market and business conditions, business requirements, stock price, acquisition opportunities, and other factors. Now turning to the operating cash performance for the Third Quarter.

We generated 200% of $273 million of cash from operations in the period reflecting strong net income performance and continued investments in inventory and supply chain. DSOs came in at 49 days up slightly from 47 in Q2, reflecting the linearity of billings in the period.

Inventory returns were 1.7 times consistent with last quarter, inventory increased to 575.7 million in the quarter, up from 543.2 million in the prior period. As we continued to buffer a certain components and products. Our purchase commitments number for the quarter increased to 2.1 billion up from 1.1 billion in Q2.

This reflects the combination of increased new time for many components and improved demand visibility. We continue to prioritize newer early lifecycle products for inclusion in this strategy to help mitigate the risk of obsolescence. Our total deferred revenue balance was $800 million up from $746 million in Q2.

The majority of the deferred revenue balance is services-related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis.

Approximately $113 million of the balance, up from $90 million last quarter, represents product deferred revenue largely related to acceptance clauses for new products, most recently with our larger Cloud Titan customers.

As a reminder, we're currently in a period of significant new product introductions combined with a healthy new customer acquisition rate, and expanded use cases with existing customers.

These trends, in conjunction with reduced levels of upfront and parts and testing, have resulted in increased customer specific acceptance clauses and higher product deferred revenue amounts. Accounts payable days were 47 days down from 54 days in Q2, reflecting the timing of inventory receipts and payments.

Capital expenditures for the quarter were 45.9 million, including approximately 40 million of CapEx related to the purchase of land, construct a new data center on hardware engineering building in Santa Clara. We will provide more details of this project, over coming quarters. Now, turning to our guidance for the Fourth Quarter and beyond.

As outlined in our guidance, we now expect to achieve year-over-year revenue growth for the full-year 2021 of approximately 25%. This reflects continued healthy demand across all market sectors, tempered by the impact of a difficult supply environment.

On the gross margin front, industry supply constraints and elevated logistics costs continue to pressure gross margins, with customer price increases as a potential offset.

Based on our current outlook, we continue to reiterate our overall 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&D to support innovation across the business and sales and marketing to support our go-to-market expansion. Finally, we also announced today that Arista's Board of Directors has approved a 4 for 1 stock split.

Each Arista shareholder of record at the close of business on November 11th, 2021, will receive 3 additional shares for every share held. And trading will begin on a split adjusted basis on November 18, 2021.

The goal of this as a backdrop, our guidance for the Fourth Quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts and other non-recurring items is as follows; revenues of approximately &775 million to $795 million, gross margins of 63% to 65%, operating margin of approximately 37%.

Our effective tax rate is expected to be approximately 20.5% with diluted shares on our Pre -split basis of approximately 80 million shares. I will now turn the call back to Liz. Liz..

Thank you Ita. We are now going to move to the Q&A portion of the Arista Earnings Call. Due to time constraints, I would like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away..

We will now begin the Q&A portion of the Arista Earnings Call. We ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from the line of Samik Chatterjee with JP Morgan..

Thanks for taking my question and congrats on the strong result. Really impressive. So, let me give it broad-based, Jayshree, I think you mentioned strong demand that you're seeing and I think you highlighted Cloud customers in the press release.

But just generally, if you can talk to how broad-based is the demand that you're seeing growth cloud and then what does the kind of magnitude of demand that you're seeing from enterprise customers and how do you think about sustainability of that level of demand? Would what you're seeing this year, how do we think about the screen video turn into next year? Thank you..

Thank you, Samik, for the good wishes. It's a proud moment, and I really congratulate my entire leadership team and my employees for getting us here. I think demand is very strong, as I mentioned in my audio script, across all 5 verticals, across all 3 product lines, and across all 3 sectors as well.

So, I would not -- I would tell you we are growing in that -- what Ita highlighted as our 25% annual growth -- every sector is growing.

In some ways, I feel bad that I even have to rank and rate them, but if you ask me to highlight some of the growth vectors, I would say obviously Cloud Titans are back; we had a rough spell if you remember, two years ago, Halloween was not a treat, it was a trick.

And it's just come back and it is a volatile sector and its positively volatile right now. SiSo we're lver enjoying the growth of Cloud Titans, we're also enjoying many pieces of our enterprise market growing. And they really sell verticals there that are doing very, very well, not just the financials, but different parts of the enterprise.

I think it's fair to say Arista has arrived in the enterprise. We've been growing double-digits for a couple of years, and we expect to continue to see double-digit growth in the enterprise sector, and this is by far our largest momentum of all the verticals I would say.

But not -- as I mentioned, a lot of routing use cases -- these routing use cases are not only in the Cloud Titans, but are obviously also in-service providers and enterprises as well. So, we're just enjoying very diversified momentum of our business at the moment..

Congrats again. Thank you..

Thank you..

Your next question comes from the line of Fahad Najam with MKM Partners..

Thank you for taking my questions. I wanted to ask you a question on the visibility. You mentioned that certain components lead times have extended from 50 weeks to 80 weeks. I'd presume your customers in turn are giving you forward-looking guidance as well.

So, can you give us a sense on the visibility you are seeing and help us quantify that in any way you can..

Sure, I will say some few words and Ita you could add to that. I think because of these kind of long lead times on our components, first thing Ita and the team are doing, Ita and the entire team are planning ahead. And we're normally, like me said building to forecast on orders, but really building to a future demand.

Visibility becomes very important in that case, because it's normal 1 or 2 quarters. The Cloud tightness visibility has improved a lot this year. Typically, it used to be one to two quarters, right now, it's more like a year or more.

This is the best visibility we've ever had with the Cloud Titans, that's allowing us to build up inventory and to build a plan and to get ahead if you will. In the enterprise as well, nobody's lead times are very good right now and we're no different.

Although we talk and we believe we have a head start by starting on this problem as early as last year, we've several -- hundreds of suppliers and we've had to increase our strategic interface with these suppliers to -- and make again, that's on them long term. Visibility in the Enterprise is also 6 months to a year.

Visibility in the Cloud and specialty cloud providers is now exceeding a year. So, in general, we're now able to plan to buy components well ahead of the purchase orders and forecasts..

Ita, you want to add something more?.

Yes. I think the only thing I'd add out of this, it's hard to be too quantitative when you think about demand and bookings just because obviously the lead times and the time frames are very different.

I think from -- just from a business perspective we'll continue to focus on the revenue and the revenue metrics and then the bookings numbers will kind of ebb and flow but obviously right now you are getting a lot of visibility to what's happening with customers just because we need that to be able to drive the types of purchase commitments, etc., we're driving..

I appreciate the answer, thank you..

Thanks, John..

Your next question comes from the line of Rod Hall Goldman Sachs..

Thanks for the question. And again, I would like to echo the positive comments. These are phenomenal results in this environment.

I guess my question is regarding the cogs and that the cost of some of the products you are getting from Broadcom other companies we've talked to you during this earnings season has talked about really high expedite fees, and just wondering if you're seeing those and how they're factoring into the forward costs in the business like are you able because it has visibility to set your prices at a level that compensate for what we see higher COGS unwind, maybe the early part of next year, I'm just curious whether you've seen those expedite fees and then how they might affect margins at some point..

I think everybody is seeing -- I don't want to talk about a particular supplier, but we are seeing expedite fees, and incrementing costs kind of across the supply base. And you haven't seen those in the gross margins in the Income statement today just because the mix has been more enterprise heavy, and that's been kind of offsetting this.

But I think we are -- as Jayshree mentioned, we're in the process of instituting some price increases, etc., to help offset some of those costs, so that will help. I think we're comfortable thinking about that 63% to 65% range as still being reasonable, but you will see some more volatility quarter-by-quarter just as the mix of the business.

The customer mix is still going to be the biggest driver. The other cost we're managing with some of the price increases etc. when we have a heavier Cloud mix in particular corner etc., we will see some lower gross margins and what we've seen over the last couple of quarters..

And thank you for the good wishes, Rod..

Sure, Jayshree, no problem. Just a question -- are customer -- what about the Cloud customers? Are they willing to accept a little bit of price increase knowing that things are getting more expensive? Just curious what the conversations are like there..

I would say all our customers are very understanding, but nobody is willingly accepting price increases, including the rich Cloud Titans..

Right. Okay. Thanks a lot..

Thanks, Rod..

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

Thank you. Truly spectacular. And I got to just ask about the build to forecast versus build to order. When did you implement that? And what was the reaction of some of your customers or is it more internal? And what I'm wondering is how much further you may be ahead of some of your competitors.

It sounds like, it's actually maybe something that you're looking for the next couple of years if you have lead times going so long. Thank you..

First of all, I just want to give a big shout out to Anshul, John McCool, Susan Hayes, and the entire manufacturing team. Let me just step back, Jim, and thank you for the kind wishes. The traditional model for everybody has been built to forecast, lead times are based on supplier commits, there's some buffers, but most of it is just-in - time.

And very rarely does anybody pay for expedites. If you look at supply chain in 2022, first of all, expedites are a way of life. It doesn't matter which it is. You have to plan not just weeks ahead, but months ahead. Often you can get de -commits from suppliers. There’re shortages across-the-board. There's lots of orders, there's no buffers.

Everybody is coming at them sometimes and we used to think the high-tech industry is special, but some of the Cloud components we're talking about, we compete with the automotive industry and the consumer industry which makes it tougher. And it isn't surprising at all to see expedites involve not just CEO has been heads of countries literally.

That's how rough it. So, it's a very oversubscribed process. We thought we got a head start by starting. When was it? Either late last year when I trained the team put together a plan. So, we've definitely had heads. And if things have gotten better, we would be well ahead of everyone. But these things keep getting worse.

So now the head start is good, but we have to add to that head-start and hence the doubling of the inventory. And without naming any vendor just say, we've increased the strategic nature of our relationship with not just one or two vendors, but 25% of our vendors.

This is a much larger, relationship pool and we're committing to them long-term they're committing to us, but both of us have to be patient and understanding of the short-term troubles we have..

Thank you, and again, really big congratulations to you and your entire entity. Thank you..

Thank you. Say kudos to my team..

Your next question comes from the line of Paul Silverstein with Cowen..

Thanks for taking the questions. Two questions if I may. Were there any 200 gigs from Facebook in any 400-gig revenue from Microsoft in your third quarter and do you expect in the fourth quarter? And Jayshree, would you care to comment on their outlook for next year? I know with supply chain it's challenging..

I'm just checking to see, but there was 400-gig revenue overall. As I told you last time, we have increased our customer logos in the 400-gig category from 75 customers. last year to over the first half was 150 and trending to about 300 customers, so the definitely 400 gigs. I need to double check on whether there were any 200 gigs.

Let me beg off the question..

I'm just going to say, Paul, some of the commentary on the deferred is probably relevant here too, where we talked about the deferred balance becoming more Cloud Titan heavy this quarter, whereas before it has been more other verticals, etc., I think that's -- we maybe not have had revenue but we've, probably had activity.

Just trying to revenue, so we have some work to.

Just specific to issue the question specifically. since booking Microsoft, I assume a lot of that revenue is being deferred or maybe it's not, that's the best specific question..

I think we grew our deferred revenue when me mixed stepping towards Cloud and that includes new products..

So, 200-gig and 400-gig..

Would give any comment about.

We are going to at the Analyst Day how by then?.

I can wait 30 minutes..

All right.

I apologize for keeping you up late, but will make it shorter, I think our analyst day will be two hours?.

Yes..

So, you won't have to stay up too long..

I appreciate..

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

Thank you for the question. Jayshree, you've mentioned a couple of times talking about reference to Enterprise wins and that really kind of dialing up as far as momentum.

But if you were to bullet point the key reasons why you're winning -- you continue to win with what sounds like increasing momentum; can you just highlight them for us because most of the people on this call are used to hearing about very dependable sales channels and many other vendors with very comprehensive solutions.

Can you walk us through the key sales pitch and just what is resonating with the Enterprise customers?.

And again, I'll do some at it, but the analyst day, but. First of all, I think our relevance in the enterprise customer has increased from data center, Goodyear, much broader portfolio that's client to cloud going all the way from campus Wi - Fi.

designs for the data center to routing and a very large software well, everything from ACare to Cloud Vision, to Cloud US software, as well as our acquisition of Big Switch and Awake now contributing as well to segmentation, observability, and security as well. So, the completeness and the innovative nature of our close portfolio has helped.

The second thing that's helped is our Power of One, if you will. One OS, one image, one Cloud Vision. Customers just love that, not just the innovation, but the quality and support of not having device silo boxes, but having an innovative and much better operate experience with a much lower TCO.

And finally, at the enterprise customers, these got -- we have now -- much as we talked about products, we have invested in customers. Our investment and sales led by Krishna and Ashwin Kohli and the entire team worldwide really began in 2017. This is our third or fourth year of enterprise investment, and I think we're not seeing the results of that.

The first and second year and we were kind of getting in and we're just coming into the campus. And now I think we're coming onto our own in a complete holistic fashion..

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

Thanks for the question. First, I want to say horrible numbers; you guys need to do better.

But my question is can you quantify the backlog or book-to-bill or anything that might help us understand how much of a gap there is between demand and supply, and is there any risk that customers are over ordering right now where you could see an air gap in demand, maybe in some time in 2022?.

Yeah, Jason, I know lots of folks have been talking about bookings and trying to put some boundaries around that. I just think it's really hard from a timing perspective. When you have these lead times, of course, you're going to have accelerated bookings and larger bookings. And certainly, we have our fair share of that.

There's no -- it sounds difficult to talk about the business I think in that context, so we're more focused on what can we deploy and we're seeing - and that's how we're running it internally as well. What are the periods where these bookings will get deployed and building our deployment plans? And that's really what's going to matter.

I think when you think about the business that way, the pull-ins and push-outs of the actual booking’s numbers and how much visibility you are getting, etc., becomes less important. Not ducking your question, we have obviously lots of demand.

We've talked about the demand that we have, but these are extended lead times, so we're just focused on making sure we understand how it's going to get deployed..

And I want to echo what Ita just said. We're not going to get excited about backlog. We're going to get excited about deploying our customers with real revenue. And some of the backlog may materialize and remember, they're cancelable orders; some of them may not.

It's best to be responsible as a Company, as we always have been, and share with you that demand is certainly outstripping supply, no question about that and we're going to work hard as hell on fulfilling the supply and improving the supply..

Next question, please..

Your next question comes from the line of Meta Marshall with Morgan Stanley..

Thanks. I realized it's difficult to quantify the supply chain impact currently, but if any way to help us with the gross margin impact and should we see the gross margin step-down in the guide as more supply chain related or more related to the mix of revenue types? Thanks..

I think the best way to think about it is that we've been operating at the upper end of that range for the last couple of quarters. That's definitely a customer mix effect. It's offsetting some of the cost impacts as well, and we've been deferring some of the, as Paul was talking about, some of the larger customer revenue as well.

So, I think I should look forward, kind of outside of these quarters when the mix of the business comes back to something more balanced, I think you will see us back towards the bottom end of that range from time-to-time.

I think we believe we'll stay in the range over a long period of time, but there will be quarters where we could be pressuring the bottom end of that range and maybe even break the boss. I mean, the net range, while for vague and for four quarters, I think we can still be okay. So, there is definitely a customer element of this.

There's a cost increase element to this, and we will benefit from some customer price increases here that will help offset some of that, but I think the days of living at the upper end of that range, I wouldn't assume that we can do that on an ongoing basis as you look forward..

Got it. And not the Traveo, but like spending forward guidance, but just further price increases. I would say probably won't see most of that impact to Q4, you would expect the price increases impacts from Q1 in 2022..

Yes..

Thank you. Congrats..

Thanks Meta.

Thank you..

Thanks Meta.

Your next question comes from the line of David Vogt with UBS..

Great. Thank you, guys, for taking the question. This is a question for both, I guess Jayshree and Ita. I just want to follow up on the Cloud Titan capex and Hyperscale capex and the visibility.

I think it's fairly well documented that the balance of this year into 2022, there's going to be significant data center expansion and availability expansion by the hyperscale’s, so that's clearly reflected in your confidence. But you noted that you have a little bit more than a year visibility.

How should we think about 2023? I know we don't even have '22 guidance yet, but given the strength in the expansion in the availability, and the data center trajectory, how do we think about that? And then just as a follow-up on pricing, when you think about the 10% price hike that you're going to implement in a couple of weeks, in your mind, does that sort of more than offsets the supply chain or is it -- is there a way to quantify how we're thinking about price versus the margin impact from the higher components? Does it cut -- does it reduce it by 50%? Is there some way to think about it that we can model out going forward? Thank you..

We've tried to be very transparent with customers in terms of what we're seeing on the cost side and looking for them to help us kind of offset that. So, we're definitely not looking to increase margin or make margin on that, we've been we've been very open and transparent in what we're seeing on the cost side and looking for help to offset that..

Yes, and to ask your question on 2023, I guess I would say stay tuned for the analyst day, we'll try and give you a better visibility on 2022 and give you a sum of visionary statements on 2023 and beyond..

Great thank you guys..

Thanks David..

Your next question comes from the line of Amit Daryanani with Evercore ISI..

Perfect. Thank you. And Alex on (ph.) my congratulations as well to you. I guess, when I look at your performance in 2021 based on the midpoint of the guide for December, I think you would have clearly gained some sizable market share in the year.

I'd love to understand; do you think these share gains are coming from Whitebox vendors or coming more from the traditional competition that you have? And then maybe a second part of this, as you think about the next couple of years up, could you see customers that use Whitebox solutions today come to Arista and if so, what do you think would motivate them to do so? Thank you..

Both very good questions and related to each other. I would say, this year with all the supply chain issues, much more of our share gains is coming from Enterprise and Cloud Titans. Just getting our fair share from our peers in the industry, not necessarily white-box.

If you fast -forward to later years, I do think Arista will have an advantage, not just in product capability, but also in the ability to rapidly supply product probably better than some of the white boxes and Anshul has often alluded to this.

So, the make versus buy decision for many of our Cloud Titan s may shift in the direction of Arista rather than strictly white boxes. We look forward to that.

I'm not going to make any guesses on that, but I don't preclude that and neither has Anshul when he's spoken in the past so it certainly wasn't part of the market share gains and the growth this year, but it could be next year..

Perfect. Thank you..

Your next question comes from the line of Pierre Ferragu with New Street..

Thanks for taking my question. I'm very intrigued by the one-year visibility you have with your Cloud clients. And on that front, I was wondering first impact we planned CapEx on next year by 60, 65% or so last week. And I was wondering, is that something that is I would say aligned with the visibility you have or if you came as a set price.

And then along the same line within that visibility, how do you see the spending of Cloud Titans changing, in terms of, how it's displayed between what's happening inside the data center which is more on the switching side, and what is more happening outside today that's been there in the DCI and more on the routing side. Thanks, a lot..

Thanks, Pierra. Both again very good questions I'll take the second one first, I think Arista 's presence for most part until recently has been intro data center.

But what has been phenomenon to watch my Cloud Titan team do lead by Anshul, Martin, and others, is they use cases, have proliferated, not only outside the data center of a DCI, but routing AI use-cases top of rack use-cases, special customized use cases.

So, both within the datacenter and outside Arista is getting its fair share of opportunity to respond. And then we're doing a lot of proof-of-concepts and testing work with them.

Regarding the plot Titan capex spend, we're always surprising on the numbers actually come out of because they are in billions and, of course, they're nowhere close to the percentage they spend with us necessarily.

But our relationship with Facebook takes back now at useful five-years, we have done joint development with them in the FBOSS and we've jointly developed products with them. We have shared with you in the past that we're developing our next-generation of product with them, the 200 gigs.

We were pleasantly surprised, but we were not completely surprised..

Thanks, Jayshree. That's great..

Thank you..

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

Thanks for taking the question and congratulations as well for me. I think the one number that stands out the most to me is your 2.1 billion plus purchase commitment. And I think that's up over 4X relative to what it was exiting last year.

I think going into kind of the June quarter, the expectations, whereas that maybe some of these component constraints would start to ease as we move into the mid part of 2022 and certainly into the second half, and just curious, your best assessment right, now, where you stand on some of those lead times, starting to normalize or shortened back down.

And do I think that you're going to carry kind of this higher degree of visibility well into 2023 at this point. Thank you..

And presenter, are -- is your line muted?.

Sorry about that. I don't know when that -- when that happened. Where did I stop? Yes.

I think what the Sorry, Aaron, can you help me with how much of that you got?.

I -- actually I didn't hear any of it. I apologize..

Let me start. We probably have two dynamics happening. We've seen a push-out of lead times again with the products and the vendor that we were managing directly. That's probably -- I think now our view is that's probably the end of 2022 before we start to see things get better there.

In addition to that, we've also seen it kind of broaden out to other components.

And we're now managing vendors directly that would have normally gone through the supply chain, gone through the contract manufacturers, etc., and we're having to engage directly with those suppliers and then that's also driving some increase in those purchase commitments, and we're looking out longer with those suppliers as well.

And so, the combination I think of both of those is making that number increase. We are trying to focus on new products and products that have long life cycles. So that gives us a little bit more leeway there in terms of taking longer -- a longer view. And we'll continue to do that. But I don't think we've the point yet where things are improving..

Aaron, we see this as an important investment to the business.

It is a decision that Ita, myself and Anshul, have made very consciously we've got to invest in the business, and we've got to invest in getting product to our customers, we think this is an important part of our decision-making process because of the prolonged situation here with supply chains..

Very helpful. Thank you..

Thanks Aaron..

Your next question comes from the line of Ittai Kidron with Oppenheimer..

Thanks. Hey, ladies. Congrats, great quarter. I guess a couple of questions for me. First of all, with regards to the purchase commitments.

Can you give us a little bit more color whether this is a response to competitors of yours doing the same with your suppliers? And does this lock in volume or does it also lock in price for the components that you are buying?.

Yeah. No, I think it's totally off working on our own strategy, and as Jayshree mentioned earlier, we've started to do that right back at the beginning of last year even. So just a continuation of that.

I think the biggest driver is obviously what's happening in the supply chain and understanding what's happening in the supply chain and just the breadth of suppliers that we need to kind of manage directly and start to deal with directly right now.

And I think that's the biggest driver of the up the change as opposed to anything that anybody else doing, etc.

I'm sorry, what was the second part of your question, Ittai?.

Does it lock in just the volume or does it also lock into prices for you going forward?.

Yes. I mean, when you make long-term commitments, there is kind of a pricing element to that, but that you have that price base as things start to get better, we'll see how some of that plays out, but they are obviously isn't pricing in the market today in that pricing is kind of what you're making these commitments Athens.

But as time, as we've seen over time in the past, when things start to loosen up in some of that can change as lot, but right now it is the commitment to volume and price..

Thank you..

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

Thanks for taking the question. As you probably remember early in my career, I was told never to high-five managements on a public call. I'll leave it at that.

I wanted to see if maybe you could expand a little bit on the CapEx opportunity, which sounds like it's overshadowed by what's going on in datacenter, but just want to get a better sense of where you stand in that part of your business in the trajectory. Thank you..

Thank you, Simon. We will take your virtual high five. I think the campus business has been very relevant to a seat of the table with Enterprise customers. We're now starting to see Enterprise wins and logos where we win the campus before we win a data center because many of these Enterprises don't have large datacenters.

I think the conversations, the strategy, the ability to bring all of the silo datasets together, whether it's in your campus or data center, on the core is very important and customers are looking to us to build there and modernize their enterprise network.

So, from that standpoint, although the numbers are still small and we're talking about doubling from a 100 to 200, we think it will be extremely relevant strategically with our enterprise for our customers and will grow obviously, in the next few years. There's also a component of channels river still pretty nascent.

And most of our success and engagement to-date is direct, albeit fulfilled by channels. But we hope that will change over time and that will add further strength to our campus..

Thank you..

Thanks, Simon..

Your next question comes from the line of Tal Liani with Bank of America..

Hi guys. I have two questions. One is just if you can give us an update on campus switching, where you are versus your targets, if you said it, I apologize, I just didn't hear it. And second, I just want to understand about the accounting.

Can you go over again the price increases? When are they kicking in, if they kicked it already, and then what happens with your cost of goods sold since it's on I’m assuming it's on like everyone else? Does it mean that right now you're still recording cheaper components, so the margins are higher? I'm just trying -- or maybe I'm totally wrong.

I just want to understand the margin evolution as component pricing goes up and pricing increases kick-in..

Yeah..

Go ahead..

It's some combination of all of those, Tal. There are some expedite costs that doesn't end up being period expenses that we've been recognizing. We recognized a chunk last quarter; we had some again in Q3.

There are other costs like higher pricing increases at such as that will end up being inventoried and will flow with the inventory, and some of that obviously will burn through the inventory that we have in the supply chain and then we'll start to see those costs.

Those will line up better, hopefully, with some of the price increases that we are passing onto customers as well. It's going to be complex; it won't necessarily be perfect. But as we look at the various different scenarios, there's a better chance of those lining up with the price increases. So that will help offset some of that..

And finally, Tal, on the campus, we committed to double the $100 million achievement we had last year -- this year. And here we are sitting 2 months away from the end of the year. So, we believe we will and we will have to set a new goal for next year..

Got it.

And just going back to the margin, so I know you're probably going to discuss it tonight, but just in general, how do we think about gross margin going forward?.

It's definitely part of the discussion later..

Right. I think you already mentioned -- you -- that was mentioned already, we continue to believe with the price increase effective November 4th which will really be effective next year by the time customers realize it and see it, that we will be able to offset the escalating cost and our gross margin was depend on mix.

And as Ita often said, if we are heavily mixed on the Cloud Titans, we could be on the low-end of the 63 to 65 and pressured on gross margin there. If we're having a mixed on the enterprise, we could be on the mid-to-high-end, like we have been..

Great. Thank you..

Thanks Tal..

Your next question comes from the line of Ben Bohlen with Cleveland Research..

Good afternoon. Thank you for taking the question.

Jayshree, I was hoping you could talk a little bit about how you view the current technology build-out -- the new technology build-out for both enterprise and Cloud as they start to transition into 200 and 400, how you see similar or different versus what you saw from 2016 to 2018 with more Cloud Titan spilling out 100, any thoughts on duration, behavior, any puts and takes would be interesting.

Thanks..

Sure Ben. I think the Cloud Titan behavior will be different than the Enterprise behavior. On the Cloud Titan, you're going to see a much more rapid inflection to 200 gig and 400 gigs, especially in the spine layers and the uplinks at the top of rack.

And they've always been an early and faster adopter of speeds in technology, especially within the data center or even datacenter to datacenter. We are expecting an inflection of 200 gig and 400 gigs. That's -- basically at the start of this year was very challenged with ecosystem and availability of optics and even switches the last year.

The year of inflection in my view, is really late this year late this year goes well into 2022 on the enterprise still we expect to have, by the end of this year, 300 customers, 200 and 400 gigs. Primarily 400 gigs, I would say.

And as you know, our customer base is more than 7000, so obviously 100 gig and 400 gigs will continue to co-exist and live happily ever after together. But we will start to see the uptake and adoption of 400-gig in the end -- in the high-end, and early adopters of enterprise as well, like we're starting to see this year.

I think the next few years can be best characterized as inflection of new, higher speeds, like two hundred and four hundred and the continuation and adoption of 100 gig in the mainstream enterprise..

Thanks, Jayshree..

Your next question comes from the line of Erik Suppiger with GMP Securities..

Yes.

Congrats and curious, how is the constraints affected the 400-gig market? It sounds like you've been doing well there, but has that been a factor? And does that make a difference from a market share perspective? Do you have any advantage or disadvantage in terms of access for your 400 gig components?.

Eric, I'd say we're as constrained on 400-gig components as we are 100-gig components, it's been a factor for all speeds. We're just constrained what can I tell you. But our market share continues to be strong in both. We're doing well in both. I'll flagship platform, the 7800 because especially 400 gig dependents are one of the most popular products.

At the same during my and 100 gig versions of 7500 and 7800 are very popular too. So, supply-chain, is different for everything. It's not necessarily thinking one speed over the other..

Are the optics anything different?.

The optics is actually better than last year in terms of the ecosystem for 400-gig coming up, not different other than that, it's actually improved for 400 gigs..

Okay, very good, thank you..

Thank you..

Your next question comes from the line of George Notter with Jefferies..

Hi, guys. Thanks very much. I guess I wanted to go back to a statement earlier, I'm paraphrasing but I think you said you were running the business to demand rather than orders or something to that effect.

Could you go back and expand upon that, I'm just curious about what you meant on that, I assume you are trying to look through customer order books and try to see what they really need as opposed to excess ordering, maybe you could just expand on that. Thanks..

It's actually the other way around, George, what we said is all the just-in-time and built to forecast and being extremely disciplined about buying inventory only when the customer puts and in order has gone out the window a little bit.

And because of these long lead times, we're having to plan to order well, ahead of the customer orders of forecast, that's what we meant. It's built to purchase orders to our supply chain, rather than built a customer purchase order. Does that make sense? Since there's still constrained on long lead times.

So, we're making a bet that the supply chain constraints, which I hope will eventually improve, will favor those of us who make those kinds of purchase commitment. And so, we're having to get in there early and fast, even before the customer orders come in..

Out of curiosity, do you have any flexibility on those purchase commits? Are they cancelable on your side?.

Most of the Semiconductor components are non - cancelable, but that's just the way the business is run. We've been careful to choose components that we don't need to cancel, like picking new products and taking common componentry across them. We believe there's limited risk in the investment we've made..

Super. Okay. Thanks very much..

Thanks, George..

Operator, we have time for one more question..

Your final question comes from the line of Jon Lopez with Vertical Group..

Thanks so much for squeezing me in and I apologize because I understand the same topic. But hopefully will be the last one we can cover the rest of the stuff on the Analyst Day. This has been alluded to a few times.

If we look at your largest competitor, they've also, roughly doubled their purchase commitments fairly recently, you're now doing the same. The dollars collectively are like many multiples larger than either of you have ever carried.

I guess my question here is, to what extent do you think inventories actually evolving into a competitive weapon as we think about 2022 and 2023, and maybe like to what extent as in introduce risk, like if you can't get supply as fast or in the same quantities that you're envisioning now, can that influence your revenue outlook in 2022 or in 23?.

I think there's no doubt that supply is shaping our revenue line right now. Almost more so than demand, right? I think that, that is a factor we are constrained.

So, supply is definitely a factor, I think in terms of looking at the purchase commitments, we are working very carefully with the suppliers and again, we're expanding kind of the breadth of what we're doing. And we are expanding the lead times on the length of time that recovering with those purchase commitments. And I think that's important.

Then again, we're doing it on new products -- newer products that have significant lives ahead of them. So really, the risk we're taking somewhat is tying up some cash etc., it's not because of the lifecycle of the products and stuff.

It's not really an obsolescence risk, but it could take some time to burn through that inventory if things change but I think it's a bet that's worth making. We're making it obviously in consultation and discussion with customers, etc. But it is a longer lead time and then a broader set of suppliers than we'd normally carry.

That's why you're seeing that big uptick. We're not only doing it for the components that we used to offer in the past directly, but we're also now doing it for components that would have come to us through the CMs in a normal supply environment..

Understood. Okay, thanks for the thoughts..

Okay, thank you very much..

This concludes the Arista Q3 2021 earnings call. We have posted a presentation which provides additional information on our fiscal results, which you can access on the Investor section of our website. Thank you for joining us today..

This concludes today's conference call and thank you for participating. You may now disconnect..