Arista Networks Inc at UBS Global TMT Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Great. All right. So maybe let's -- obviously, there's been a tremendous amount of interest in how strong your business has been operating over the last couple of quarters. You just hosted an analyst event fairly recently. But I think a lot of investors that I've talked to sort of haven't really triangulated on how the business is actually operating by segment. So maybe we could just start with your recent results and your sort of 2022 framework and help investors understand what are sort of the driving forces of your sort of 30% revenue growth outlook to start for next year?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : And then -- and we get asked this question all the time, and I'm sure you must have gotten it during your meetings today. So when you think about the enterprise growth that you saw over the last couple of years and the strength that you're going to see in 2022 and hopefully beyond, what has been the sort of the competitive response by maybe some of your peers to your strength in that particular market, where it's been sort of the bread and butter of maybe some of your larger competitors in the past?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. I want to come back to the campus in a second. But maybe just -- I don't think you've given specific numbers, but you just mentioned that cloud is relatively the same size as enterprise going forward. And cloud has been sort of an underperformer as of late, as you referenced. So when we think about -- I think you said this at the Analyst Day as well, cloud, we're seeing an incredibly strong cycle in 2022. So cloud is going to be, I guess, pulling more than their fair share of the weight in 2022. And you have relatively good visibility in 2022. But in a normal environment, I know this is not a normal environment, what kind of cyclicality do you expect in that particular cloud business, right? So you -- in the past, there's been a year or 2 or 18 months of incredibly strong demand and growth, offset by maybe some digestion in the period shortly thereafter. How have the cycles changed? And how are you guys thinking about it longer term, given that you felt confident enough to give sort of a longer-term forecast at your Investor Day?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : And so maybe just to help clarify. So when I think about public cloud spend, I know directionally, CapEx is not necessarily a good correlative indicator for you, but it's directionally relevant. And when you think about the next cycle, so we're entering potentially a relatively strong 400-gig cycle, maybe not as strong as 100 gig has been, but you're going to have a relatively strong 400-gig cycle. How would you define sort of the duration of the cycle versus what we've seen with the 100 gig versus potentially 800 gig down the road? So are they becoming more compressed right, where companies, hyperscalers and enterprises spend significantly for many, many years on 100 gig and then maybe the 400-gig cycle is a little bit more compressed than maybe prior cycles and then you're getting into that sort of cyclicality again from the 800-gig perspective? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. And then since you mentioned supply, when you think about your near-term supply constraints, obviously, things move around a lot what. We were joking earlier in pre-call about where the headwinds might be and the bottlenecks might be. Anything on the margin has gotten better, worse? Obviously, it takes a complete solution to ship a million different components, to ship a particular product. So it could be something different today versus something different last week. But just maybe can you help us understand kind of where we are if anything really changed. I think publicly, you said, what, second half of 2022, maybe early 2023 where things get a little bit better?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Can I go back to your comment about purchase inventory and purchase commitments versus inventory right? So the model has been sort of rely on your contract manufacturers to take in the inventory at your sort of command or discussion, but those purchase orders are cancelable, right? Or not cancelable from your point of view. What I meant is there's not an agreed upon price effectively, right? So they can adjust price. Is that how the agreements are struck where like a year from now, if you have a commitment, one of your CMs can say this particular component is up 10%, 15%, 20% in price, and that's going to flow through back to you? Is that how the deals are typically structured? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : And then when you think about your -- follow-up on the inventory component side, a lot of companies have been sort of slowed by the ability to get just-in-time inventory. It's been a great supply chain for a decade. And this little bit of a wobble has caused, I think, a lot of consternation, a lot of companies that we talk to. So to your point about taking maybe some more in inventory, I know it's early days and this is an untested sort of strategy. But how would you feel -- how much would you feel comfortable having on your balance sheet? Is there turns metric that you might think to target? Is there an absolute level of cash flow that you need on your balance sheet that's committed to working capital? Is it -- just help us understand what this could look like over the longer term.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : The key components, got it. And then maybe just, obviously, on silicon. Obviously, you have a great relationship with a key provider of silicon. Where do you think they stand in terms of hitting their commitments for you in 2022, given the guidance that you laid out there? And is there some opportunity for some incremental capacity that could lead you to be able to ship more than you might originally have thought when you gave your initial guidance for 2022? Like is there a little bit of a buffer there or you're shipping to what you think you're going to get, and that's kind of where we are for 2022 at this point? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. And then you mentioned sort of long lead times. I just want to maybe go back to some of the conversations that you have with your hyperscaler customers or the cloud titan customers. Obviously, they're all spending relatively aggressively in the near term and into next year. Has the tenor or the duration of the conversations change with them over sort of COVID and where we are today from a supply chain perspective? And you've talked a little bit about this, I think, in the past, but do you have a little bit more visibility into what their sort of -- their needs are to get the sense that, that's sort of a potentially permanent change in how the communication or the dialogue would exist between the 2 of you or you and your customers? Or it's more of a temporary sort of phenomenon that probably reverts back to the normal way of doing business once we get past the supply chain initiatives?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Right. Well, along those lines, too, from a pricing perspective, so you're talking about taking pricing up, you're not going to get the benefit, as I understand it, until probably the second half of next year as it flows through your model. Customers are very sophisticated, and we've talked about this. How -- what's the kind of customer reaction to pricing? Obviously, I would imagine they're being amenable today to your point about supply chain. But how do you think that plays out as we go through 2022? And hopefully, there's some alleviation of some of the supply chain headwinds and that maybe there's some further discussion about maybe walking back those prices potentially as the supply chain gets better? I mean is that a reasonable outcome? Or you think prices are a little bit more sticky than maybe we might think? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : No, that's helpful. And then maybe just touching on margins along those lines. So I know it's been incredibly topical from an investor perspective and not just yourself, but a lot of other companies are experiencing sort of headwinds that are driven by the supply chain. I think you have a unique circumstance where your gross margins are going to be sort of affected by mix. You've talked about it. Can you kind of walk us through within sort of the construct of that 63% to 65% gross margin range that you talked about pretty regularly? How you see 2022 playing out, given the risk -- given the mix as well as sort of supply chain headwinds that we're facing today?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Right. And so I mean, is it a reasonable assumption to make -- obviously, in a given year, you're going to have different growth rates between cloud and enterprise and some of the other customers. And so the primary variability in gross margin over the long term is solely going to be mix for the most part, right? If we're in a normal stable environment. So in 1 year, if cloud is significantly larger part of the mix, gross margins maybe below that midpoint of the range, below 64%. And if enterprise has been through the roof, 30%, 40%, 50% growth, you're going to be at the top end of the range. Is that the best way for people to think about between now and, let's say, 2025 just in a given year? Without giving specific guidance...

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : And is there any -- from a software mix perspective, how does that factor in over the next 3 to 5 years, right? From a software perspective, most companies are moving in that direction to add more recurring component to their product offering. I mean is that a material driver in any way, shape or form to mix, to gross margin mix going forward? Or is it still just completely the right way to think about it, embedded in all of the products that you sell, and so it's already sort of captured in that sort of 65% to 63% range that we're talking about?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. And then maybe -- I don't think we've ever discussed sort of the implications of margin from campus. I mean, obviously, it's early days, $200 million revenue, growing to $400 million of revenue. Are campus margins comparable to enterprise margins where the -- I think the revenue is reflected in the enterprise segment. Are they sort of core enterprise margins right now? Or is it subscale, and we still have an opportunity to take some margin up there as well?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. And then maybe just along those lines on a campus perspective, obviously, I would imagine selling campus to existing data center customers has been sort of an easier sell. Have you disclosed or have you sort of given investors a sense for kind of the mix between campus-led sales versus traditional data center-led sales, where it's an existing customer versus a new logo or a new relationship?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : So that's actually a good point. I get a lot of questions on -- I think you laid out at the Investor Day, campus is going to double this year. And then by 2025, we're going to get to about $750 million of campus revenue, which sort of implicitly is tremendously strong growth, but it does suggest a little bit of a deceleration in '23 and beyond. Is the growth in enterprise -- campus, excuse me, should it reflect sort of the broader growth of Arista's revenue growth profile as we get into the outer years? Meaning a lot of -- as the base gets larger, it's going to be more difficult to grow and so it just sort of reflect the overall customer relationship, spending trends of your existing relationships. Obviously, you're going to add new logos but it's not going to be materially -- material outperformer, right? So if I think about 2022, you're adding $200 million of incremental revenue based on your guidance, which is a pretty big step function. Obviously, that's going to become less going forward. So it's kind of -- my guess, my question is, is it all going to kind of get lost within the broader enterprise, and it will just sort of reflect the growth rate of the core business going forward in the outer year?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Yes. But I mean 100% -- yes, I wouldn't expect you to grow to 100% back to back, but if I think just from $400 million to, let's say, $750 million, that's sort of a mid-20s sort of compounded annual growth rate over '23, '24, '25, when it sounds like you're just getting traction, right? You're just starting to invest in the channel. And it seems like a little bit of a deceleration, probably sooner than I would have thought over the next, call it, 2 to 3 years. I mean, is it just -- you just trying to be conservative in terms of penetration rates and where we are in the sort of supply chain constrained world? Like there's just not enough people, you just can't go out there and build the channel as effectively or you want to be a little bit slower and more prudent in terms of investing in this business right now to keep margins a little bit more robust than they might be if you had full speed ahead to drive that channel expansion.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. I've got some questions from the audience, but I've got a couple more that I want to get through first. Your balance sheet is in great shape. Cash flow is strong, '22 will be another strong year. You've talked about buying back stock to offset dilution. Given the supply chain issues, maybe this is more of a theoretical philosophical question, but when you think about how much cash you need to keep on your balance sheet to run this business, given what we've just all lived through, do you have a general sense for how you're thinking about what kind of excess cash that you need to keep on the balance sheet versus cash used for M&A and buybacks and other sort of initiatives over the intermediate term?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. And just to be clear, obviously, you have a high-class problem, your stocks are up a lot. It's harder to use your cash flow to offset dilution simply because your stock is higher. But I mean, -- do you think there's an opportunity to not just offset dilution, but just to modestly reduce sort of your diluted share count, using what, $3.5 billion of cash on the balance sheet. 2022 is going to be a really strong year. I'm just trying to get a sense for if there's another lever that you could pull to drive earnings growth a little bit faster in 2022 than people might be thinking.

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Got it. So I want to take this question from the audience. It's a couple of questions. I'll just pull them together as one. And the question is around your cloud titan contracts and your customer relationships. So when you enter a given year, like 2022, obviously, we're in a completely different environment. We have good visibility. If we take -- the question, I guess, is around what I asked earlier. If you take out the near-term challenges from supply chain, typically how long before COVID did customers give you an indication for what their orders -- what their plans would look like? Was it 90 days with sort of a typical sort of relationship discussion where like they gave you this is what we're going to do over the next 3 to 6 months? Or is it varied by customer? Because people are trying to understand what it could look like as we get back to more normalized operating environment in '23 and '24. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Great. And then we get this question a lot and someone just e-mailed me, when you look at, let's say, third-party data that talks about the growth in the public cloud, I know you're not off public cloud, but just using that as a proxy. Do you -- does the management team look at sort of that forecast, whether it's a Gartner, an IDC or Dell'Oro, whatever the case may be in terms of what the spending environment could look like over the next 3 to 4 years in terms of what the hyperscalers should be spending money on, given the growth in the public cloud market? I mean does that get factored into your planning and your forecasting for the next couple of years? Or is it more of a bottoms-up analysis customer by customer by customer? And I guess is there any sort of top-down overview on top of it as well?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : No, that's helpful. And then maybe just one final question from the audience that was sent to me. So when you look at cloud versus specialty versus enterprise, are there any holes in your product portfolio in any sort of maybe the end customer market verticals that going back maybe to M&A, it's more of an M&A question, I guess, that jumps off the page where you're looking at it going, if only we had this, we could be more competitive in this particular vertical? And where are you in terms of your overall portfolio from a philosophical perspectively? We're just going to operate the business for the next 3 to 5 years with some small bolt-ons, and we feel like we're competitively well positioned, given all the work that we've done over the last 3 to 5 years. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Great. No, that's helpful. I think maybe we'll just leave it there, but I'd like to give Liz just 30 seconds. Is there anything that we didn't cover that you guys want to impart your wisdom on the investment community that maybe we didn't touch on? Or do you think that maybe people haven't been focused on with regards to your sort of strategy and your outlook going forward?

Question: David Vogt - UBS Investment Bank, Research Division - Analyst : Great. No. And with that, I think maybe we'll end it there, Ita. Thank you, Liz. Thank you for your time. You've been incredibly generous. We appreciate it. And thank you everyone that joined, and we'll catch up soon. If anyone has any questions, please feel free to reach out, and have a great evening. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 06, 2021 / 11:00PM, ANET.N - Arista Networks Inc at UBS Global TMT Conference