Earnings Call Transcript
Arista Networks, Inc. (ANET)
Earnings Call Transcript - ANET Q3 2021
Operator, Operator
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. Liz Stine, Arista's Director of Investor Relations, you may begin.
Liz Stine, Director of Investor Relations
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 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, in 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.
Jayshree Ullal, President and CEO
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. Our services and software renewals contributed approximately 21.5%. Our non-GAAP gross margins at 64.9% were 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 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 times. We're changing our Arista mindset from our historical build-to-forecast 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 substrates, second boards, 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 approximately 10% to offset these very high escalating costs. Customer demand remains strong for Arista products as they are 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, traffic engineering, and EVPN, as well as rapid failover techniques. This provides that ideal alternative to today's complex legacy router deployments with much improved total cost of ownership and capex benefits. Since its founding, Arista has pioneered the transformation from routers to routing with these spine R series platforms. Arista's third-generation, R3-series based on EOS 4.26, delivers three new edge use cases this year. The first one is a multi-cloud edge that brings provisioning and programmatic traffic steering. 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, we are 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's solution allowed 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 on a segment-routed backbone along with modern operations and superior services and experience. The second customer was the 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 with rough stability and manageability. The advantages and relationship with CEN across service and engineering affirm the decision to choose Arista. The third customer is Layer, an international customer in Asia Pacific, who was delighted to partner with Arista and build a next-generation Cloud Edge and broader backbone for infrastructure growth. Arista's rich routing specs brought programmatic traffic engineering and the core of the segment routing without sacrificing performance and reliability. 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 Financial Officer for financial specifics.
Ita Brennan, CFO
Thanks, Jayshree, and good afternoon. This analysis of our Q3 results and our guidance for Q4 2021 is based on non-GAAP results 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 $191 million or 25% of total revenue, down from 27% in the second quarter. This shift in 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 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 $189.8 million. R&D spending committed was $125 million or 16.7% of revenue, up from last quarter at $119.6 million. This reflected increased headcounts and employee-related costs and higher new product introduction spending in the period. Sales and marketing expenses 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 were $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 expenses for the quarter were 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 $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, our 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 approximately $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 certain components and products. Our purchase commitment 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 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 to construct a new data center on hardware engineering building in Santa Clara. We will provide more details of this project over the 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. 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 margins 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 Stine, Director of Investor Relations
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.
Operator, Operator
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.
Samik Chatterjee, Analyst
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 about how broad-based is the demand that you're seeing growth in the 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.
Jayshree Ullal, President and CEO
Thank you, Samik, for the good wishes. It's a proud moment, and I want to congratulate my entire leadership team and my employees for helping us get here. Demand is very strong across all five verticals, all three product lines, and all three sectors. We are experiencing the 25% annual growth highlighted by Ita, with every sector contributing to this growth. Although I feel hesitant to rank them, I would highlight some growth areas. The Cloud Titans are back after a challenging period two years ago; currently, this sector is positively volatile, and we are enjoying its growth. Additionally, several segments of our enterprise market are thriving, not just within financial services but across various parts of the enterprise. It's fair to say Arista has established itself in the enterprise, with double-digit growth over the past couple of years, and we anticipate sustaining that in this sector, which is our largest momentum. Routing use cases are thriving not only in the Cloud Titans but also among service providers and enterprises. Overall, we are experiencing very diversified momentum in our business right now.
Samik Chatterjee, Analyst
Congrats again. Thank you.
Operator, Operator
Your next question comes from the line of Fahad Najam with MKM Partners.
Fahad Najam, Analyst
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 of the visibility you are seeing and help us quantify that in any way you can.
Jayshree Ullal, President and CEO
Sure, I'll say a few words, and Ita can add to that. Due to the long lead times on our components, Ita and the team are planning ahead. Typically, we build to forecast based on orders, but now we are focusing on future demand. Visibility is crucial in this situation, which is usually one or two quarters. The visibility with the Cloud Titans has significantly improved this year; it has shifted from one to two quarters to more than a year. This is the best visibility we have ever had with the Cloud Titans, which enables us to build inventory and formulate plans to get ahead. In the enterprise segment, lead times are not great either, and we share that challenge. However, we believe we have an advantage by addressing this issue early last year. We have several hundreds of suppliers and have ramped up our strategic interactions with them for long-term planning. Visibility in the Enterprise is also six months to a year, while visibility in the Cloud and specialty cloud providers has now exceeded a year. Overall, we can now plan to procure components well in advance of the purchase orders and forecasts.
Liz Stine, Director of Investor Relations
Ita, you want to add something more?
Ita Brennan, CFO
Yes. I think it's challenging to provide precise numbers when discussing demand and bookings due to the varying lead times and time frames. From a business standpoint, we will keep concentrating on revenue and its metrics, while the bookings will fluctuate. However, we currently have significant visibility into customer activity, which is essential for driving the purchase commitments we are making.
Fahad Najam, Analyst
I appreciate the answer, thank you.
Ita Brennan, CFO
Thanks, John.
Operator, Operator
Your next question comes from the line of Rod Hall Goldman Sachs.
Rod Hall, Analyst
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 compensates 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.
Ita Brennan, CFO
I don't want to focus on a specific supplier, but we are noticing expedited fees and rising costs throughout the supply chain. These have not yet impacted gross margins in the income statement because our current mix has leaned more towards enterprise, which has helped offset these costs. As Jayshree mentioned, we are implementing some price increases to counterbalance some of these expenses, which should be beneficial. We still consider the 63% to 65% margin range to be reasonable, but there may be increased volatility each quarter due to changes in our business mix, particularly the customer mix, which will continue to be a significant factor. Additionally, as we manage these costs through price adjustments, quarters with a higher Cloud mix may experience lower gross margins, similar to what we have observed in the previous quarters.
Jayshree Ullal, President and CEO
And thank you for the good wishes, Rod.
Rod Hall, Analyst
Sure, Jayshree, no problem. I have a question about the Cloud customers. Are they open to a small price increase given the rising costs? I’m curious about how those discussions are going.
Jayshree Ullal, President and CEO
I would say all our customers are very understanding, but nobody is willingly accepting price increases, including the rich Cloud Titans.
Liz Stine, Director of Investor Relations
Thanks, Rod.
Operator, Operator
Your next question comes from the line of Jim Suva with Citigroup.
Jim Suva, Analyst
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.
Jayshree Ullal, President and CEO
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 supplier it is. You have to plan not just weeks ahead, but months ahead. Often you can get de-commits from suppliers. There are shortages across the board. There's lots of orders, and 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. It isn’t surprising at all to see expedites involve not just CEOs but heads of countries literally. That's how rough it is. So, it's a very oversubscribed process. We thought we got a head start by starting when? Either late last year when I trained the team to put together a plan. So, we've definitely had a heads up. 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. 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.
Jim Suva, Analyst
Thank you, and again, really big congratulations to you and your entire entity. Thank you.
Jayshree Ullal, President and CEO
Thank you. Say kudos to my team.
Operator, Operator
Your next question comes from the line of Paul Silverstein with Cowen.
Paul Silverstein, Analyst
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.
Jayshree Ullal, President and CEO
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 there's definitely 400-gigs. I need to double-check on whether there were any 200-gigs. Let me beg off the question.
Ita Brennan, CFO
I'm just going to say, Paul, that some of the commentary on the deferred is probably relevant here too, where we talked about the deferred balance becoming more focused on Cloud Titan this quarter, whereas previously it had been more on other verticals. I think we may not have had revenue, but we've likely had activity.
Jayshree Ullal, President and CEO
Just trying to revenue, so we have some work to do.
Paul Silverstein, Analyst
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.
Ita Brennan, CFO
I think we grew our deferred revenue with the mixed stepping towards Cloud and that includes new products.
Jayshree Ullal, President and CEO
We are going to share at the Analyst Day how by then?
Paul Silverstein, Analyst
I can wait 30 minutes.
Jayshree Ullal, President and CEO
All right. I apologize for keeping you up late, but I will make it shorter; I think our analyst day will be two hours?
Ita Brennan, CFO
Yes.
Paul Silverstein, Analyst
I appreciate.
Operator, Operator
Your next question comes from the line of Sami Badri with Credit Suisse.
Sami Badri, Analyst
Thank you for your question. Jayshree, you've mentioned several times the increasing momentum in our Enterprise wins. Could you summarize the key reasons for your success? Many participants on this call are familiar with reliable sales channels and competitors who offer comprehensive solutions. Can you share the main points of our sales strategy and what is appealing to our Enterprise customers?
Jayshree Ullal, President and CEO
I believe our relevance with enterprise customers has significantly increased, driven by a broader portfolio that spans from data center solutions to cloud offerings. We cover everything from campus Wi-Fi designs to routing and a wide range of software products, including ACare, Cloud Vision, and Cloud US software. Our recent acquisitions of Big Switch and Awake are also adding value in areas like segmentation, observability, and security. The comprehensiveness and innovative nature of our offerings have had a positive impact. Additionally, our Power of One approach, which includes one operating system, one image, and one Cloud Vision, has resonated well with customers. They appreciate not just the innovation but also the quality and support it provides, eliminating the need for siloed devices and enhancing the overall operating experience while lowering total cost of ownership. Finally, our commitment to enterprise customers, bolstered by our investments in sales since 2017, is paying off. This is our third or fourth year focusing on enterprises, and we are now starting to see the results of these efforts as we establish ourselves more fully in the market.
Operator, Operator
Your next question comes from the line of Jason Ader with William Blair.
Jason Ader, Analyst
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?
Ita Brennan, CFO
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. 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 bookings 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.
Jayshree Ullal, President and CEO
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.
Liz Stine, Director of Investor Relations
Next question, please.
Operator, Operator
Your next question comes from the line of Meta Marshall with Morgan Stanley.
Meta Marshall, Analyst
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.
Ita Brennan, CFO
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.
Meta Marshall, Analyst
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.
Ita Brennan, CFO
Yes.
Meta Marshall, Analyst
Thank you. Congrats.
Ita Brennan, CFO
Thanks, Meta.
Jayshree Ullal, President and CEO
Thanks, Meta.
Operator, Operator
Your next question comes from the line of David Vogt with UBS.
David Vogt, Analyst
Thank you for taking my question. This is for both Jayshree and Ita. I want to follow up on the Cloud Titan capex and Hyperscale capex and visibility. It's well known that there will be significant data center expansion and availability from the hyperscalers for the rest of this year and into 2022, which reflects in your confidence. However, you mentioned that you only have a little over a year of visibility. How should we view 2023? I realize we don't have guidance for 2022 yet, but considering the strong expansion in availability and data center growth, what are your thoughts? Additionally, regarding the 10% price increase you plan to implement soon, do you believe this more than offsets the supply chain challenges? Is there a way to quantify the relationship between pricing and the margin impact from higher component costs? Does it reduce the impact by 50%? How can we model this for the future? Thank you.
Ita Brennan, CFO
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 very open and transparent in what we're seeing on the cost side and looking for help to offset that.
Jayshree Ullal, President and CEO
Yes, and to ask your question on 2023, I guess I would say stay tuned for the Analyst Day, we'll try to give you better visibility on 2022 and give you some visionary statements on 2023 and beyond.
David Vogt, Analyst
Great, thank you guys.
Ita Brennan, CFO
Thanks, David.
Operator, Operator
Your next question comes from the line of Amit Daryanani with Evercore ISI.
Amit Daryanani, Analyst
Perfect. Thank you. And Alex on 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.
Jayshree Ullal, President and CEO
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 are 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 products 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 Titans 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.
Amit Daryanani, Analyst
Perfect. Thank you.
Operator, Operator
Your next question comes from the line of Pierre Ferragu with New Street.
Pierre Ferragu, Analyst
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 if I plan 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.
Jayshree Ullal, President and CEO
Thanks, Pierre. Both again very good questions I'll take the second one first. I think Arista 's presence for the most part until recently has been in the data center. But what has been phenomenal to watch my Cloud Titan team do is lead by Anshul, Martin, and others, is the 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 data center 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 Cloud Titan capex spend, we're always surprised 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 FBOSS and we've jointly developed products with them. We have shared with you in the past that we're developing our next generation product with them, the 200 gigs. We were pleasantly surprised, but we were not completely surprised.
Pierre Ferragu, Analyst
Thanks, Jayshree. That's great.
Operator, Operator
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Aaron Rakers, Analyst
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 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 were 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 shorten back down. And do you think that you're going to carry kind of this higher degree of visibility well into 2023 at this point? Thank you.
Ita Brennan, CFO
Sorry about that. I'm not sure when that happened. Where did I stop? Yes. I think what I was saying was, Aaron, can you help me with how much of that you captured?
Aaron Rakers, Analyst
Actually I didn't hear any of it. I apologize.
Ita Brennan, CFO
Let me start. We are experiencing two dynamics currently. We have noticed an extension of lead times again with the products and the vendors we were managing directly. Our current perspective suggests that improvement in this area might not be seen until the end of 2022. Additionally, this issue has expanded to other components. We are now working directly with vendors that typically would have gone through the supply chain or contract manufacturers. This direct engagement with suppliers is leading to an increase in purchase commitments, and we are looking further ahead with these suppliers as well. The combination of these factors is driving that number up. We are focusing on new products and those with long life cycles, which gives us some flexibility in taking a longer-term view. We will continue to pursue this strategy, but it appears we have not yet reached a point of improvement.
Jayshree Ullal, President and CEO
Aaron, we see this as an important investment to the business. It is a decision that Ita, myself, and Anshul have made very consciously that 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.
Aaron Rakers, Analyst
Very helpful. Thank you.
Jayshree Ullal, President and CEO
Thanks, Aaron.
Operator, Operator
Your next question comes from the line of Ittai Kidron with Oppenheimer.
Ittai Kidron, Analyst
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?
Ita Brennan, CFO
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 manage directly and start to deal with right now. And I think that's the biggest driver of the change as opposed to anything that anybody else doing, etc. I'm sorry, what was the second part of your question, Ittai?
Ittai Kidron, Analyst
Does it lock in just the volume or does it also lock into prices for you going forward?
Ita Brennan, CFO
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 and that pricing is kind of what you're making these commitments against. But as time, as we've seen over time in the past, when things start to loosen up in some of that can change a lot, but right now, it is the commitment to volume and price.
Jayshree Ullal, President and CEO
Thank you.
Operator, Operator
Your next question comes from the line of Simon Leopold with Raymond James.
Simon Leopold, Analyst
Thanks for taking the question. As you probably remember early in my career, I was told never to high-five management 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 the datacenter, but just want to get a better sense of where you stand in that part of your business in the trajectory. Thank you.
Jayshree Ullal, President and CEO
Thank you, Simon. We will take your virtual high five. I think the campus business has been very relevant to a seat at the table with Enterprise customers. We're now starting to see Enterprise wins and logos where we win the campus before we win the data center, because many of these enterprises don't have large data centers. 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 their and modernize their enterprise network. So, from that standpoint, although the numbers are still small and we're talking about doubling from $100 million to $200 million, 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 channel growth, and it's still pretty nascent. 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.
Simon Leopold, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Tal Liani with Bank of America.
Tal Liani, Analyst
Hi everyone. I have two questions. First, could you provide an update on campus switching and where you currently stand in relation to your targets? If you've already mentioned this, I apologize for missing it. Second, I'd like some clarity on the accounting side. Can you explain the price increases again? When do they start, or have they already taken effect? Also, how does this impact your cost of goods sold? I'm assuming it's similar to others in the industry. Does this mean that right now you're still recording lower component costs, resulting in better margins? I'm trying to grasp the margin changes as component prices rise and pricing increases come into play.
Ita Brennan, CFO
Yeah.
Jayshree Ullal, President and CEO
Go ahead.
Ita Brennan, CFO
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 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.
Jayshree Ullal, President and CEO
And finally, Tal, regarding the campus, we committed to doubling last year's achievement of $100 million this year. With only two months left in the year, we believe we will reach that goal and will need to set a new goal for next year.
Tal Liani, Analyst
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?
Ita Brennan, CFO
It's definitely part of the discussion later.
Jayshree Ullal, President and CEO
I think it's already been noted that we continue to believe that with the price increase effective November 4th, which customers will really notice next year, we will be able to offset the rising costs. Our gross margin will depend on the product mix. As Ita often says, if we have a strong focus on the Cloud Titans, we could end up at the lower end of the 63% to 65% range, putting pressure on gross margin. However, if our focus is on enterprise, we could maintain a mid-to-high margin like we have previously.
Operator, Operator
Your next question comes from the line of Ben Bohlen with Cleveland Research.
Ben Bohlen, Analyst
Good afternoon. Thank you for taking the question. Jayshree, could you share your perspective on the current technology build-out for both enterprise and Cloud as they transition into 200 and 400? How do you see it as similar or different compared to what you observed from 2016 to 2018 with more Cloud Titans scaling out to 100? Any thoughts on duration, behavior, and other factors would be interesting. Thanks.
Jayshree Ullal, President and CEO
Sure, Ben. I believe the behavior of Cloud Titans will differ from that of enterprises. With Cloud Titans, we expect a much quicker transition to 200 and 400 gigs, particularly in the spine layers and top-of-rack uplinks. They have always been faster adopters of new technology speeds, especially in data centers and between data centers. We anticipate a shift to 200 and 400 gigs that faced challenges at the beginning of this year due to ecosystem issues and the availability of optics and switches last year. In my view, the significant changes will really start to unfold late this year and carry into 2022 for enterprises. By the end of this year, we expect to have 300 customers utilizing 200 and 400 gigs, primarily the latter. Our customer base exceeds 7000, so 100 gig and 400 gig will continue to coexist. However, we will begin to see increased uptake and adoption of 400 gig in the high-end and among early enterprise adopters, similar to what we are witnessing this year. The coming years can be described as a period of significant growth for new higher speeds, like 200 and 400, alongside the ongoing adoption of 100 gig in mainstream enterprises.
Ben Bohlen, Analyst
Thanks, Jayshree.
Operator, Operator
Your next question comes from the line of Erik Suppiger with GMP Securities.
Erik Suppiger, Analyst
Yes. Congrats, and curious, how has 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?
Jayshree Ullal, President and CEO
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. Our flagship platform, the 7800 because especially 400-gig dependence are one of the most popular products. At the same time, my 100-gig and 400-gig versions of 7500 and 7800 are very popular too. So, the supply chain is different for everything. It's not necessarily thinking one speed over the other.
Erik Suppiger, Analyst
Are the optics anything different?
Jayshree Ullal, President and CEO
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.
Erik Suppiger, Analyst
Okay, very good, thank you.
Jayshree Ullal, President and CEO
Thank you.
Operator, Operator
Your next question comes from the line of George Notter with Jefferies.
George Notter, Analyst
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.
Jayshree Ullal, President and CEO
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 in an 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 commitments. And so, we're having to get in there early and fast, even before the customer orders come in.
George Notter, Analyst
Out of curiosity, do you have any flexibility on those purchase commits? Are they cancelable on your side?
Jayshree Ullal, President and CEO
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.
George Notter, Analyst
Super. Okay, thanks very much.
Jayshree Ullal, President and CEO
Thanks, George.
Liz Stine, Director of Investor Relations
Operator, we have time for one more question.
Operator, Operator
Your final question comes from the line of Jon Lopez with Vertical Group.
Jon Lopez, Analyst
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 at 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 2023?
Jayshree Ullal, President and CEO
I believe that supply is currently a significant factor influencing our revenue, perhaps even more than demand. We are experiencing constraints related to supply, and we are carefully managing our purchase commitments with suppliers. We are also extending the lead times for recovering those commitments, which is critical. This strategy applies not only to our existing products but also to new products that have long life cycles. The main risk we are taking is the potential need to tie up cash; however, it is not related to product obsolescence. If circumstances change, we may take longer to deplete the inventory, but we consider this a worthwhile investment. We are making these decisions in collaboration with our customers, and we have a broader range of suppliers than usual, which contributes to the noticeable increase in our activities. We are not only securing components we have historically offered but are also obtaining components typically supplied through contract manufacturers in a more stable supply environment.
Jon Lopez, Analyst
Understood. Okay, thanks for the thoughts.
Jayshree Ullal, President and CEO
Okay, thank you very much.
Liz Stine, Director of Investor Relations
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.
Operator, Operator
This concludes today's conference call and thank you for participating. You may now disconnect.