Earnings Call Transcript - ANET Q4 2021

Venk Nathamuni, Head of Corporate Development, IR and Finance

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

Jayshree Ullal, President and CEO

Thank you, Ven. And welcome to your first earnings call at Arista. We’re excited to have you on board as our Executive Head of Corporate Development, IR and Finance. Thank you, everyone, for joining us this afternoon for our fourth quarter 2021 earnings call. If there’s one thing that the pandemic has taught us, it is that it comes with variant surprises. With vaccines and booster choices, we certainly hope that all of you and your families are safe during the latest spread of the Omicron variant. I am proud of our employees for adapting and thank our partners and customers for placing their trust in us during these ever-changing times. Back to Q4 2021. We delivered revenues of $824.5 million for the quarter, with a non-GAAP earnings per share of $0.82. Services and software support renewals contributed approximately 21% of the revenue. Our non-GAAP gross margin of 64.3% was influenced by increasing supply chain costs. We registered a record number of million-dollar customers as a direct result of our momentum in the enterprise and campus sectors that we have experienced throughout the year. We have now surpassed in excess of 8,000 cumulative customers. In terms of Q4 2021 verticals, Cloud Titans was our largest vertical, followed by the enterprise, followed by the specialty cloud providers in third place, financials in fourth place, and service providers in fifth place. All the verticals grew well at double-digit percentages in 2021. In terms of Q4 geographical mix, international contributions were strong at 29%, with the Americas at 71% for the quarter. Shifting to annual sector revenue for the year in 2021, Cloud Titans registered approximately 30% of the revenue, enterprise and financials came in at approximately 40%, and the providers at approximately 30%. Microsoft was the only greater than 10% customer at a 15% contribution. We do expect Meta, formerly Facebook, to become our second 10% revenue customer in 2022, as we improve lead time. I would now like to invite Anshul Sadana, our Chief Operating Officer, to shed more light on our Cloud Titan execution.

Anshul Sadana, Chief Operating Officer

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

Jayshree Ullal, President and CEO

Thank you, Anshul. We look forward to our continued partnership with the Cloud Titans, something you and the entire engineering team have been nurturing for over a decade. In terms of annual 2021 product lines, our core cloud and data center products, built upon our highly differentiated Arista EOS stack, are successfully deployed across 10, 25, 40, 100, 200, and 400-gig speeds. This drove approximately 64% of our revenue with strong cloud and enterprise spending cycles. We believe we will continue to be number one in market share for both 100-gig and 400-gig ports according to industry analysts. Our second market is network adjacencies comprised of routing, replacing routers, and the cognitive campus workspaces. We doubled our campus revenue at approximately $200 million in 2021 and aim to double again to $400 million in 2022. Our investments in the cognitive campus switching spines and wireless generated significant customer wins versus incumbents. We successfully deployed in many routing edge and peering use cases, winning Tier 1 and Tier 2, Tier 3 service provider projects for routing. Our investments in the simplification of the routing stack and the edge have yielded traction. Just in 2021 alone, we introduced 6 EOS software releases across 37 platforms. We delivered over 1,500 features in routing over the past two years. The total campus and routing adjacencies together contributed approximately 14% of revenue as a compelling alternative to legacy networks. Our third category is network software and services based on subscription models such as Arista A-Care, CloudVision, DANZ Monitoring Fabric, or DMF observability, and the advanced Network Detection and Response, NDR, with AVA sensors or security. Arista’s subscription-based network services and software contributed approximately 22% of total product revenue. We are proud that CloudVision has now exceeded over 1,300 cumulative customers as a highly differentiated integral element for our customers’ network agility and operations. To recap our discussion at November 2021 Analyst Day, the networking industry is ripe for this digital transformation to data-driven networking. Arista is well-positioned as a leader in this client-to-cloud networking. A key part of the strategy is to bring these cloud-first principles to every aspect of the data network. Software functions such as routing, security, and observability are inherently embedded into the Arista EOS. Our EOS has evolved to a third-generation software stack with both state and store-driven NetDL functions. NetDL, our Network Data Lake architecture that we launched in November 2021, is resonating well with customers. We are building upon our cloud network heritage to bring proactive platforms, predictive operations, and a prescriptive experience to unify data sets from multiple sources. We are consistently harnessing the powerful combination of NetDL and AVA, or Autonomous Virtual Assist, to gather, store, and process multiple modalities of network-generated data and network-related data. AVA uses a supervised AI/ML algorithm and natural language processing to help network operators with root cause analysis and threat hunting. Looking ahead into 2022, as I engage with worldwide customers, I’m observing fatigue and frustration with our peers’ discontinuity in products and low support and quality. In contrast, Arista’s pursuit of world-class data-driven networking is unwavering. It cannot be achieved by us alone. We joined forces with industry leaders to collaborate with Microsoft, VMware, Red Hat, Equinix, Palo Alto Networks, ServiceNow, Slack, Splunk, Zscaler, and Zoom to name a few, to build our collaborative ecosystem. In summary, I’m so proud of our team’s execution across multiple dimensions in 2021. With a record-setting year at $2.94 billion, 27% annual growth, and cash flow for the first time exceeding $1 billion, this was indeed an exciting and memorable year for Arista. It marked a time of the Cloud Titans’ growth, coupled with diversified momentum across our product lines and customer sectors. Arista’s profile and affinity with customers have heightened to earn a strategic seat at the table. And so, despite the supply chain obstacles that we now expect to continue into 2023, we have emerged stronger. We reiterate our 30% annual growth outlook mentioned at November’s Analyst Day as we now aim for $3.85 billion in 2022 and multiple years of growth ahead. Now, I’ll turn it over to Ita, our CFO, for financial specifics.

Ita Brennan, Chief Financial Officer

Thanks, Jayshree, and good afternoon. This analysis of our Q2 and full year 2021 results and our guidance for Q1 2022 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. In addition, all share-related numbers are provided on a post-split basis to reflect the 4-for-1 stock split completed in November 2021. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q4 were $824.5 million, up 27.1% year-over-year and well above the upper end of our guidance of $775 million to $795 million. We continue to see strong demand across all our market sectors with particular strength from our Cloud Titan customers as we ramp our new products. Shipments remained constrained in the quarter as we continued to carefully navigate industry-wide supply shortages and COVID-related disruptions. Services and subscription software contributed approximately 21.2% of revenue in the fourth quarter, roughly in line with Q3. International revenues for the quarter came in at $242.1 million or 29% of total revenue, up from 25% in the third quarter. This completes a year of strong international performance with international revenues for the year growing 46% on a year-over-year basis. This reflects healthy performance with our in-region customers combined with solid contributions from our larger Cloud Titan customers. Overall gross margin in Q4 was 64.3%, just above the midpoint of our guidance range of approximately 63% to 65%. We continue to recognize incremental supply chain costs in the period and began to see an increase in Cloud Titan revenue mix in the quarter. Operating expenses for the quarter were $206.2 million or 25% of revenue, up from last quarter at $192.4 million. R&D spending came in at $130.3 million or 15.8% of revenue, up from last quarter at $125 million. This primarily reflected increased headcount and employee-related costs in the period. Sales and marketing expense was $61.2 million or 7.4% of revenue compared to $55.8 million last quarter, with increased headcount and higher variable compensation expenses. As a reminder, we continue to benefit from lower COVID-related travel and marketing expenses. Our G&A costs came in at $14.7 million or 1.8% of revenue. Our operating income for the quarter was $324.2 million or 39.3% of revenue. Other income and expense for the quarter was a favorable $1.5 million, and our effective tax rate was approximately 19.4%. This resulted in net income for the quarter of $262.4 million or 31.8% of revenue. Our diluted share number was 319.75 million shares, resulting in a diluted earnings per share number for the quarter of $0.82, up approximately 32.3% from the prior year. Now, turning to the balance sheet. Cash, cash equivalents, and investments ended the quarter at approximately $3.4 billion. We repurchased $176 million of our common stock during the fourth quarter at an average price of $113 per share. As a recap, this completes the April 2019 $1 billion repurchase authorization, having repurchased a total of 16.7 million shares at approximately $60 per share. In addition, we initiated repurchases against the October 2021 $1 billion Board authorization, purchasing $72.9 million or 590,000 shares in the quarter at an average price of $124 per share. The actual timing and amount of future repurchases will be dependent on market and business conditions, business requirements, stock price, acquisition opportunities, and other factors. Now, turning to operating cash performance for the fourth quarter. We generated $225 million of cash from operations in the period, completing our first year with cash generation in excess of $1 billion. This reflects the strong earnings and cash flow potential of our business model even in a period of increasing investments, inventory, and supply chain. DSOs came in at 58 days, up from 49 days in Q3, reflecting the linearity of billings and deferred revenue growth in the period. Inventory turns were consistent with last quarter at 1.7 times. Inventory increased to $650.1 million in the quarter, up from $575.7 million in the prior period, reflecting increased component buffers and some added inventory costs. Our purchase commitments for the quarter were $2.8 billion, up from $2.1 billion in Q3. This is in response to increased lead times now extending into 2023 and continued strength in demand. As a reminder, we continue to prioritize newer early-life cycle products for inclusion in these strategies in order to help mitigate the risk of excess or obsolescence. Our total deferred revenue balance was $929 million, up from $800 million in Q3. The majority of the deferred revenue balance is services-related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis. Approximately $160 million of the balance, up from $113 million last quarter, represents product-deferred revenue, largely related to acceptance clauses for new products, most recently with our larger Cloud Titan customers. As a reminder, we remain in a period of significant new product introductions, combined with a healthy new customer acquisition rate and expanded use cases with existing customers. These trends, in conjunction with reduced levels of upfront in-person testing, have resulted in increased customer-specific acceptance clauses and higher product-deferred revenue amounts. Accounts payable days were 63 days, up from 47 days in Q3, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $8.5 million. Now, turning to our outlook for the first quarter and beyond. As outlined at our Analyst Day, we expect to achieve year-over-year revenue growth for 2022 of approximately 30%. This reflects continued healthy demand across all our market sectors, tempered by the impact of a difficult supply environment. On the gross margin front, we see continued industry-wide supply constraints and elevated logistics costs, with some offset from customer price increases. While we expect gross margins for the first quarter to be in the range of 63% to 64%, we would highlight the potential negative impact of customer mix in future quarters. If we are successful in improving supply, enabling our Cloud Titan contribution to accelerate, it would likely result in gross margins below the typical guidance range. Now turning to spending and investments. We remain committed to growing our investments in R&D to support innovation across the business and sales and marketing to support our go-to-market expansion. With all of this as a backdrop, our guidance for the first quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts and other nonrecurring items, is as follows: revenues of approximately $840 million to $860 million; gross margin of 63% to 64%; and operating margin at approximately 38%. Our effective tax rate is expected to be 21%, with diluted shares on a post-split basis of approximately 320 million shares.

Venk Nathamuni, Head of Corporate Development, IR and Finance

Thank you, Ita. We’re now going to move to the Q&A portion of the Arista earnings call. To allow for greater participation, I’d like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, please take it away.

Operator, Operator

Your first question comes from Rod Hall with Goldman Sachs.

Rod Hall, Analyst

My question is about the momentum in the enterprise segment. Given the disclosure on the split, enterprise growth in 2021 exceeded 40%. Could you provide more details about the verticals where you’re experiencing success and discuss the sustainability of this strong momentum? Additionally, congratulations on generating over $1 billion in revenue there. Can you share more insights into the enterprise situation and how it looks for 2022? Thank you.

Jayshree Ullal, President and CEO

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

Rod Hall, Analyst

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

Jayshree Ullal, President and CEO

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

Operator, Operator

Your next question comes from the line of Samik Chatterjee with JP Morgan.

Samik Chatterjee, Analyst

Congrats on the results as well. Jayshree, you mentioned in your prepared remarks about improving lead times with, I think, Meta, in particular, but maybe if you can just dig into that a bit more how’s visibility today in terms of improving lead times as we go through the year? Where do you see the supply chain standing today? Is it better or worse than maybe a quarter ago? And any sort of details on where you’re seeing the more shortages? Thank you.

Jayshree Ullal, President and CEO

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

Operator, Operator

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

Jason Ader, Analyst

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

Jayshree Ullal, President and CEO

Oh gosh. Maybe Ita, you can help me. I know the campus is excellent. It was double, right? I don’t have the numbers for me on software and routing off-hand. Maybe would...

Ita Brennan, Chief Financial Officer

The software piece was probably growing pretty much in line with the business, right, because the percentage of revenue is pretty constant. The routing piece itself, I don’t have that at hand.

Jason Ader, Analyst

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

Ita Brennan, Chief Financial Officer

Yes.

Jayshree Ullal, President and CEO

That has doubled. So, we know that 100%.

Operator, Operator

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

Simon Leopold, Analyst

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

Ita Brennan, Chief Financial Officer

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

Simon Leopold, Analyst

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

Ita Brennan, Chief Financial Officer

Yes, I think I’ll return to our usual comments regarding gross margin. As we work through our backlog priced at older rates, we will experience some pressure there. Eventually, we will start to see benefits from the customer price increases we have implemented, but that will take some time due to a significant backlog and extended lead times. Additionally, there will be shifts in the business mix. I believe we can maintain similar gross margins across the different segments of the business, but as the customer mix changes, it will have a greater impact. Therefore, while we’re improving supply and expanding the Cloud Titan segment of the business, this could negatively affect gross margins in future quarters. It’s somewhat sector-specific, and I think we can manage it effectively, but changes in the mix will influence the overall situation.

Operator, Operator

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

Amit Daryanani, Analyst

I would like you to explain the recent 7800R3 offering, which I believe is the AI spine offering. This was introduced around the same time as Facebook's super AI cluster, and I am eager to understand the details of this solution. Is this just an upgraded product that you already have, or is it aimed at new workloads and applications that could potentially increase your total addressable market? If that’s the case, what are the specific workloads, and by how much would your total addressable market expand with these offerings?

Jayshree Ullal, President and CEO

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

Anshul Sadana, Chief Operating Officer

So, just a little bit more, Jayshree did a great job describing the attributes. Amit, Ethernet classically has had hotspots when you try to saturate it with all these types of flows and heavyweight traffic. But the 7800 can provide lossless networking across all of these nodes, GPUs, CPUs, data sets being sliced around and chopped around, which creates the opportunity for us, especially with the 7800, and the product is doing fairly well in the new AI and spine use cases.

Jayshree Ullal, President and CEO

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

Operator, Operator

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

Tal Liani, Analyst

Hopefully, you can hear me okay. I spoke with Juniper about their solution for data centers and campus, and they’re seeing great growth in orders, and you are having, of course, great results. The question I have here is, between the underlying growth of the market and share gains from Cisco, where is the answer to why suddenly this market is growing so much? Meaning, are we seeing, finally, Cisco starting to lose share more substantially than before, and this is why you’re growing so much, or is the answer more about the acceleration of growth in the market itself? And if that’s the case, how do you look at it on a higher level, meaning what’s the driver?

Jayshree Ullal, President and CEO

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

Tal Liani, Analyst

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

Jayshree Ullal, President and CEO

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

Ita Brennan, Chief Financial Officer

I believe we are seeing good new logo closure rates in that part of the business. While it's difficult to comment on market share, there is definitely traction, which is evident in our numbers.

Operator, Operator

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

Meta Marshall, Analyst

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

Jayshree Ullal, President and CEO

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

Operator, Operator

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

Paul Silverstein, Analyst

Jayshree, if we could look further out, one concern that quite a number of investors have is the runway for both Microsoft and Facebook, and the respective 400-gig and 200-gig builds. And I recognize the world is probably not nearly as binary as many of us in the investment community think. But any insight you could share on the runway for those builds and on what’s next, assuming that at some point they hit peak levels, flatten out, and eventually roll over?

Jayshree Ullal, President and CEO

Well, look, we’re used to volatility from our Cloud Titan customers. We experienced the highs of 2018 and then the lows of 2019 and ‘20. So, we’re in a period where the Cloud Titans are clearly investing from a CapEx perspective. And increasingly, we are more directly correlated to their network CapEx. Anshul, do you want to shed more light on that?

Anshul Sadana, Chief Operating Officer

Absolutely, Jayshree. I think the Cloud Titans have a very strong business model, which is resulting in the investments they are making. So, there’s a real strength there to move on. Number two, all of these customers are planning fairly well. So, we appreciate the visibility. It’s clear they’re not trying to stock these products in the warehouse. They absolutely need them to go live into their network. So, the buildouts are very real. Paul, if we had visibility for two or three years, we would be delighted, but we should be happy of visibility for one year. So let’s not go beyond that. But for the near term, we believe the demand is strong.

Ita Brennan, Chief Financial Officer

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

Paul Silverstein, Analyst

But Jayshree, I know you’ve made the point in the past about AI build-outs involving far greater infrastructure consuming far greater bandwidth. And I assume, Meta, while it gets all the focus understandably from all of us, it’s not the only and it won’t be the last such buildout. But if I could get a clarification from Ita on something she said earlier. When cloud dominated your revenue earlier after you went public back in ‘14, you were doing 64% to 65-plus percent gross margin back then. I understand things change over time. But with cloud likely to increase as a percentage of revenue over the course of next year and you’re cautioning about the impact that customer mix impacts gross margin, why would it be different than what we saw back then? What’s changed?

Ita Brennan, Chief Financial Officer

Yes. I think there are a couple of points to consider. Referring back to our Analyst Day, we indicated that we could achieve 30% growth with reasonable rates across the business, keeping us in the 63% to 65% gross margin range. That still holds true. The guidance we're providing suggests that if we can accelerate our growth, especially in the cloud segment, we might start to approach the lower end of that range or even dip below it. The current environment, with its altered cost structure and various cost inputs, requires us to consider factors like increasing logistics costs. Our flexibility in managing these costs is not what it used to be. While we've effectively optimized our gross margin over time, our options are currently more limited. As our cloud presence continues to grow, we're acknowledging that this could put some pressure on the lower end of our gross margin range.

Operator, Operator

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

Sami Badri, Analyst

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

Jayshree Ullal, President and CEO

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

Operator, Operator

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

Jim Suva, Analyst

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

Jayshree Ullal, President and CEO

Thanks, Jim. I'm pleasantly surprised with the performance over the entire year, not just in Q3 and Q4. The level of activity in the enterprise sector is something we take great pride in. Additionally, our preferred partnership status with both major cloud providers and some niche cloud providers reflects that the team is executing exceptionally well. While Arista typically does not highlight backlog and order strength, I am particularly proud of how we have managed to turn those capabilities into revenue, which has been a pleasant surprise from Q3 to Q4.

Operator, Operator

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

Aaron Rakers, Analyst

I want to follow up on the previous comment, Jayshree, regarding the backlog. As you consider the 30% growth guidance for the full year, you're looking at both the increase in backlog and some deferred revenue accumulation that you've noticed over the past few quarters. For the 30% revenue growth guidance you provided, do you anticipate maintaining a similar level of backlog at the end of the calendar year along with deferred revenue and product, or do you believe that the 30% will largely depend on fulfilling the existing backlog?

Ita Brennan, Chief Financial Officer

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

Jayshree Ullal, President and CEO

Yes. I think it’s fair. I think, the broader thing to take away is demand is strong. Execution could be stronger if we had supply chain resolution.

Operator, Operator

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

Alex Henderson, Analyst

It’s great to speak with you. I’d like to discuss the overarching issue facing analysts in this sector. If we examine the orders at Extreme, Cisco, Juniper, and consider the growth rates of over 25% in 2021 and a forecast of 30% for 2022, it’s evident that this represents a significantly higher growth rate than the industry has experienced since the tech bubble. Therefore, we need to find a way to return to normalized growth, which, excluding the large players, is likely in the 0% to 5% range, and including them, probably no more than 5% to 10%. This leads to your guidance of 10% to 15%, considering some market share gains. How can we navigate the current situation with backlogs of 30% to 50% at several companies? Is there potential for this to result in a downturn in orders eventually? While you don’t face a backlog issue, could you clarify how we reconcile the current quarter's growth of 30% to 50% against an industry growth rate of 0% to 5%?

Jayshree Ullal, President and CEO

Yes, I'll try to answer. It's a very thoughtful question, Alex, whether this period of extreme growth will last indefinitely. The short answer is no; nothing lasts forever. Every aspect has its beginning and its end. However, for Arista, there's significant opportunity ahead. I want to emphasize that outside of the Cloud Titan capital expenditures, I believe we can achieve double-digit growth for quite some time in the non-Cloud Titan sector. I want to ensure you realize that, regardless of the current enthusiasm and excitement, Arista has a solid foundation to sustain double-digit growth for several years. Given the current lead times and heightened demand, companies are planning and we have better visibility, which I expect to extend beyond 2021 and 2022 into 2023. After that, I speculate we may enter a phase of more typical growth. Nevertheless, we are committed to ensuring that growth remains above single digits and we will strive to achieve much faster growth.

Alex Henderson, Analyst

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

Ita Brennan, Chief Financial Officer

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

Operator, Operator

Your next question is from the line of Erik Suppiger with JMP Securities.

Erik Suppiger, Analyst

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

Jayshree Ullal, President and CEO

Erik, Anshul is going to answer the second question while I look over the campus data.

Anshul Sadana, Chief Operating Officer

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

Jayshree Ullal, President and CEO

To address the campus question, I don’t have specific numbers, but a good guideline to consider is that approximately half of our customers come from existing accounts and half from new prospects. We are acquiring many new logos, and some of them start small but are expected to grow even larger this year.

Operator, Operator

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

James Fish, Analyst

Thanks. And happy Valentine’s Day to the entire team here?

Jayshree Ullal, President and CEO

Thank you, Jim. Same to you.

James Fish, Analyst

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

Jayshree Ullal, President and CEO

Well, let me just separate the question you’re asking, James. The titans, we historically had 1 or 2 quarters. And now we’re saying we have at least a year. That’s a huge factor in our planning. It’s also the volume of purchase we have to make, the projects, et cetera. On the enterprise, we’ve always enjoyed longer-term visibility. It’s always been 6 to 12 months. So, I would say, in general, one year is our visibility right now on projects. Not too much longer than that and not too much less than that. It’s just enjoying the benefit of greater visibility on the titans that has really changed.

Ita Brennan, Chief Financial Officer

It comes back to the deployments, James, where they’re not indicating that everything will be deployed immediately; instead, they are outlining project plans and deployment schedules over time. So, it's less about these orders being pull-ins and more about collaborating with them to determine when things need to be deployed. This will depend on their orders as well as the supply and timing of the deployments.

Jayshree Ullal, President and CEO

And as a campus example, invariably, it’s a new building they’re putting in or a new project they have. The project is most likely to be second half 2022 or early 2023, but they’re planning now. So, that happens all the time. That’s not new.

Operator, Operator

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

Ben Bollin, Analyst

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

Ita Brennan, Chief Financial Officer

The $2.8 billion includes a significant portion related to key components that we have consistently buffered, and we’ve extended the buffering period. This applies to new chips for new products, which have a relatively low risk of becoming obsolete and are challenging to secure. We are investing in this area. At least 50% of the total is tied up in this. We will receive these components and keep them until we need to use them. The remaining components highlight that the situation is no longer solely about key components. We must address a broader range of components across the supply chain since 100% of the BOM is required to ship. We've noticed decommitments are now involving smaller components that were previously not considered key. This broader perspective is why we've seen an increase in this area again this quarter. As for timing, the chips and other components will arrive, and we plan to hold them. Therefore, you can expect a significant amount of this to turn in 2022 as we retain the components.

Jayshree Ullal, President and CEO

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

Operator, Operator

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

George Notter, Analyst

I would like to continue discussing purchase commitments. We conducted an analysis where we compared your inventory and purchase commitments to our estimate of your hardware cost of goods sold for the next 12 months. Although this data is based on Q3 and the figures are considerably higher in Q4, we found that these commitments represent about 281% of your projected hardware costs for the coming year. The question arises because you seem to be significantly ahead compared to other companies regarding inventory and purchase commitments. Are we perhaps underestimating the volume of business you expect in the next year, or are there concerns about potential negative changes in the supply chain? What is your view on this?

Jayshree Ullal, President and CEO

Yes, George, it boils down to reconsidering the components and understanding the value of the BAM along with the commitments we're prepared to make concerning those key components. They might not all be utilized in the upcoming year, but we are prepared to take control of those components by making those commitments. Furthermore, we are focusing on early life products and early life silicon, which we believe to be a relatively safe investment, with the capital cost we are allocating. So, this reflects what you're seeing; it doesn't mean that all our purchase commitments will be utilized, delivered, and counted as revenue in 2022.

Operator, Operator

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

David Vogt, Analyst

Notwithstanding some recent operational issues at Meta, just wanted to kind of get your thoughts on how sort of double-digit data center expansion, both at Microsoft and Facebook this year plays into your sort of revenue visibility in the balance of this year and then how that plays into 2023. Obviously, there are some delays in terms of qualification and when revenue would be in the books in 2022 from last year. But just trying to get a sense for how we should think about that in ‘22 and ‘23, given their aggressive pace of investment? Thanks.

Anshul Sadana, Chief Operating Officer

Sure. David, Jayshree, and Ita mentioned that we spent considerable time at Analyst Day and today discussing our plans for over 30% growth. Both of these customers are essential to our business, with one already exceeding 10% and the other likely to reach that level soon. We have incorporated their strength into our models and guidance. We believe demand remains strong. As you noted, they are making significant investments globally in new build-outs and data centers with advanced technology, and we are clearly their preferred partner in networking. We will benefit from this relationship. In many ways, this offsets the lack of growth in 2019 and 2020, and we look forward to experiencing growth with them in this new cycle.

David Vogt, Analyst

Just to follow up, what percentage of that do you think carries over into 2023 if Microsoft experiences delays or is back-end weighted in their data center build-out of 400 gig this year?

Anshul Sadana, Chief Operating Officer

Probably hard to model all the volatility we have with supply. I think, right now, demand is strong. So, it’s really tied to the supply of products. These customers have enough other ways they can figure out how to deploy technology if they give them enough heads up. So, that’s lesser of a concern right now.

Venk Nathamuni, Head of Corporate Development, IR and Finance

Thanks, Anshul, and thanks, David. This concludes Arista Networks Fourth Quarter 2021 Earnings Call. We have posted a supplemental presentation, which provides additional information on our results. You can access that on the Investors section of our website. Again, thank you all for joining us today, and thank you for your interest in Arista.

Operator, Operator

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