Arista Networks Inc (ANET) — Q2 2021 Earnings Call Transcript

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 second-quarter ending June 30, 2021. If you'd like a copy of the release, you can access it online at our website. During the course of this conference call, Arista Network's management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2021 fiscal year, longer-term financial outlooks for 2021 and beyond, our total addressable market, and strategy for addressing these market opportunities, the potential impact of COVID-19 on our business, product innovation, and the benefits of the acquisition, 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.

Thank you, Charles. Thank you everyone for joining us this afternoon for our second quarter 2021 earnings call. I hope you're all being safe and vaccinated in these post-pandemic times, especially with the resurgence of the Delta variant. I would also like to take this opportunity to warmly welcome Liz Stein, our new Director of Investor Relations Advocacy, working closely with Charles. Liz is a long time Aristian with deep networking expertise and most recently ran our South-Central Region as the systems engineering manager. Welcome, Liz. Back to Q2 2021 specifics. We delivered revenues of 707.3 million for the quarter with a record non-GAAP Earnings per Share of $2.72. Services and software renewals contributed approximately 22% of revenue. Our non-GAAP Gross margin of 55.2% was influenced by the enterprise momentum and software and services contribution. We are pleased with the healthy customer traction, including new customer logos and record million-dollar customers in the mainstream enterprises. In Q2 2021, Cloud Titans were our largest vertical. The enterprise was a close second, followed by financial and specialty cloud providers tied at third place and service provider at fourth place. The international contribution was strong at 27%, with the Americas at 73% for the quarter. We surpassed a cumulative of 50 million cloud networking ports shipments this quarter. And we consider this to be a key golden milestone. In light of the industry-wide supply chain shortages and escalating cost of components, freight, and expedite logistics, I would like to invite John McCool, our Senior Vice President and Chief Platform Officer, to shed some more light on our manufacturing execution. Welcome, John.

Thanks, Jayshree. The continued industry-wide impact of COVID on global supply chain output, combined with an increase in demand for electronics across all segments, is expected to remain for the foreseeable future. Component lead times are the highest we've seen and have roughly doubled from pre-pandemic norms. Most notable are semiconductor lead times, which have extended in the range of 40-60 weeks. Factories are operating near full capacity, limiting flexibility for changes in demand. Therefore, we expect extended lead times and escalating product costs due to expedites and elevated component increases in 2021 and 2022. To mitigate these headwinds, we've taken a number of steps in Arista manufacturing. First, we improved manufacturing procedures to maximize capacity and material utilization. We are increasing our purchase commitments for 2022 forecasts to adjust for increased component lead times. We placed additional emphasis on inventory for our new products to offset supply constraints. Finally, we are working closely with our strategic suppliers to plan for capacity expansion programs. Clearly, we're redoubling our efforts and execution in this challenging macro environment. And we look forward to supply chain improvements in the second half of 2022 and beyond. Back to you, Jayshree.

Thanks, John. We really appreciate the diligent and disciplined work that you and the entire manufacturing team have stepped up to. We welcome Susan Hayes, your newest Vice-President of Manufacturing as a strong addition. We also thank our customers for their patience and understanding during our lead time constraints and will strive to keep doing better as we recover in the second half of 2022. Our enterprise customer momentum has never been stronger. Continuing on our theme of enterprise wins, I would like to share with you three examples of strength and success. The first win was in the retail sector for both data center and campus. We began with the data center win with Arista’s hallmark EOS, for DANS or data analysis switching and routing. We expanded in 2021 to the cognitive campus for both power over Ethernet wired switches and our wireless, providing a natural expansion into these use cases. Retail markets cannot tolerate downtime with the magnitude of IoT proliferation they have. Arista was able to perform real-time upgrades without downtime across 100 plus stores and warehouses. In the absence of retail, remote staff on hand, we drove automation across all these stores with open APIs and CloudVision. Our second win was a major U.S. financial for both data center and routing. Arista continues to expand its enterprise routing use cases, not just supporting the data center with Arista EOS features but also a more software-led, simplified, automated deployment of core routing in the spine using standard-based routing protocols with VXLAN, EVPN, and Multicast. Our customer was able to rapidly migrate from Legacy to Arista within a few months, enabling billions of transactions. An international media and entertainment campus win included a customer who wanted an extension of their data center in the campus with a simple operating system, easy to scale, common spine deployment using CloudVision. This customer took a build-as-you-go approach for flexibility and visibility. This also included device access for back-to-work applications with our cognitive Wi-Fi. In all of these three examples, enterprise customers often prefer an alternative, and Arista was chosen as the disruptor with superior product capability and a cohesive client-to-cloud strategy to unify silo datasets consistently. Arista's innovations combined with high quality and support are becoming the gold standard for customers to build cognitive cloud networking. According to industry experts, Arista continues to gain switching market share across large enterprises and providers. We're proud to be the number one market leader in 100 Gigabit Ethernet ports for the fifth consecutive year. We see 2021 as the first year of inflection for higher speeds, ranging from 100 to 200 to 400-gig after 18 months of trials. We have now shipped more than 2.5 million ports of high-performance ports in the first half of 2021, according to analysts; placing us also at number one leadership in the combined 100-gig, 200-gig, and 400-gigabit ethernet high-performance cloud switching. In summary, Arista is well-positioned for the next phase of our growth in cloud and data-driven networking. We do this with proactive platforms, predictive operations, and a prescriptive experience. And we believe we are poised to achieve increasing market share with greater business diversification. And while the path forward is paved with supply chain obstacles, volatile customer demand, and your normal typical competitive tactics, I believe Arista, which means to be great in Greek, will live up to its name, and with our A-game, our A-customers, and our A-team. With this, I'll pass it over to Ita, our Chief Financial Officer for financial specifics.

Thanks, Jayshree. And good afternoon. This analysis of our Q2 results and our guidance for Q3 is based on non-GAAP and includes 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 Q2 were 707.3 million, up 30.8% year-over-year and well above the upper end of our guidance of 675 million to 695 million. Shipments remain 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 22.3% of revenue in the second quarter, up from 21.4% in Q1. International revenues for the quarter came in at 193.2 million, or 27% of revenue, up from 25% in the first quarter. This shift in the geographical mix on a quarter-over-quarter basis reflected strong international deployments by our Cloud Titan and specialty Cloud customers combined with a healthy performance from our in-region businesses. Overall gross margin in Q2 was 65.2%, above the upper end of our guidance range of approximately 63% to 65%. While we recognized some incremental supply chain costs in the period, these were more than offset by a healthy mix of enterprise and software revenue for the quarter. Operating expenses for the quarter were 189.8 million or 26.8% of revenue, up from last quarter at 180.9 million. R&D spending came in at 119.6 million or 16.9% of revenue, up from last quarter at 110 million. This reflected increased employee-related costs and higher new product introduction spending in the period. Sales and marketing expense was 57.9 million or 8.2% of revenue, down from 59.5 million last quarter with lower demo related expenses in the period. As a reminder, we continue to benefit from lower COVID-related travel and marketing expenses. Our G&A costs came in at 12.3 million or 1.7% of revenue, consistent with last quarter. Our operating income for the quarter was 271.7 million or 38.4% of revenue. Other income and expenses for the quarter were a favorable 1.7 million and our effective tax rate was approximately 20.7%, reflecting an improved geographical mix. Other income and expenses for the quarter included approximately 2 million of interest income offset by some unfavorable FX amounts. This resulted in net income for the quarter of 216.8 million or 30.6% of revenue. Our diluted share number was 79.71 million shares, resulting in a diluted earnings-per-share number for the quarter of $2.72, up approximately 29% from the prior year. Now, turning to the balance sheet. Cash, cash equivalents, and investments ended the quarter at approximately 3.3 billion. We did not repurchase shares of our common stock during the second quarter. As a recap, we have now repurchased $763 million or 3.6 million shares against our Board authorization to repurchase $1 billion worth of shares over 3 years, commencing in Q2 '19. We will continue to execute opportunistically against the remaining mandate. Turning to operational cash performance for the second quarter. We generated 263 million of cash from operations in the period reflecting solid net income performance and continued investments in inventory and supply chain. DSOs came in at 47 days, down from 51 days in Q1, affecting the linearity of billings in the period. Inventory returns were 1.7 times, down slightly from last quarter at 1.8. Inventory increased to 543.2 million in the quarter, up from 483.2 million in the prior period, as we continue to buffer certain components and products. Our total deferred revenue balance was 746 million, up from 720 million in Q1. The majority of the deferred revenue balance is services-related and is directly linked to the timing and term service renewals, which can vary on a quarter-over-quarter basis. Approximately, 90 million of the balance, up from 70 million last quarter, represents product deferred revenue, largely related to acceptance clauses for new products across various customers and sectors. As a reminder, we expect 2021 to be a year of significant new product introductions, combined with the healthy new customer acquisition rate, and expanded use cases with existing customers. These trends in conjunction with reduced levels of upfront pricing testing may result in increased customer-specific acceptance clauses and increased volatility in our product deferred revenue amounts. Counts payable days were 53.7 days, up from 52.3 days in Q1, addressing the timing of inventory receipts and payments. Capital expenditures for the quarter were 4.5 million. Now, turning to the outlook for the third quarter and beyond. We reported strong year-over-year revenue growth of approximately 29% for the first half of 2021, reflecting healthy demand across all our market sectors combined with favorable comparisons from the first half of 2020. While we expect continued strength in demand as we move through the second half, we will likely see some deceleration in year-over-year revenue growth, given the top-line recovery experienced in the back half of 2020. Turning to gross margin. Industry supply constraints continue to pressure component costs. Some of these incremental costs will initially be recorded as inventory and only be recognized in the income statement when the products are sold in future periods. With this as context, we will continue to reiterate our gross margin outlook of 63% to 65%, with customer mix remaining the key driver of volatility on a quarter-by-quarter basis. Turning to spend 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 regards to cash flow, we expect to fund approximately 40 million of CapEx in the third quarter for the purchase of land to build a data center and engineering location in Santa Clara. We will provide more details of this project over the coming quarters. Finally, our outlook discussion discussed above, and our guidance for Q3 reflects our current understanding of COVID-19 and its impact on our business and supply chain. This remains an inherently uncertain situation and we will need to continue to monitor and attempt to mitigate new challenges as the situation unfolds. With all of this as a backdrop, our guidance for the third quarter to base on non-GAAP results and excludes any non-cash stock-based compensation impacts and other nonrecurring items is as follows. Revenues of approximately 725 million to 745 million, gross margin of 63% to 65%, operating margin at approximately 37%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 80 million shares. I will now turn the call back to Charles.

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

Thank you. I anticipate there will be a few questions on this topic today. Could you provide some insight into whether the supply chain constraints are more severe in any part of the portfolio? Additionally, could you update us on the inventory situation? I'm curious whether the issues are affecting high-speed products or the campus service provider portfolio more. Thank you.

Thanks Anita. I think just about every component is affected in our supply chain. I'll let John or Ita comment, but we're affected on chips, memory, copper, passive components, freight, logistics, expedite fees. I don't know if I can pinpoint; it affects all our products. And the lead times vary as you heard, they're all double so we've been experiencing anywhere from 20 weeks to 60 weeks, like you said, John, right?

Yes.

Depending on the part, we are experiencing component levels of increase across the board, campus, routing, switching, data center, you name it. And they're at the component level. Now, we're going to try and absorb as much of it and offset as much of it as we can, and not pass it onto our customers if we can help it, except in modest levels. But I don't think it's anything more than across-the-board.

Okay. Great. Thank you.

Thanks, Anita.

Thank you for taking my question. A competitor recently mentioned that they are seeing some orders placed earlier, which suggests a slight pull forward due to industry constraints. Could you explain how you're viewing visibility regarding your order book and backlog, considering the strong performance this quarter and the supply constraints? Does this provide better visibility over the next couple of months, and what implications does that have for the fourth quarter, without going into specific guidance? Thank you.

Sure, David. As you know, we've always had limited visibility, but the last few quarters, I've noted that our visibility has gone up due to our lead time. So, I think there's a direct proportion to long lead times, slightly longer visibility. So particularly with the Cloud Titans that Anshul works closely with, we have been able to get visibility beyond the one to two quarters that we normally get. And we do have visibility into 2022. And I think it's directly tied to them planning better and realizing that with longer lead times, they need to know what they're going to do in 2022 for us to supply the product. Anshul, do you want to add some more to that?

Yes, I would say we're not seeing order pull-ins, or if customers are doing it, they won't tell us. It's much more the non-binding demand signals we get is where the discussions happen with customers. That's how we get our visibility from them.

It's just prudent planning, David, from a customer.

Great. No, that's helpful. I appreciate it. Thank you very much.

Thank you.

Good afternoon. Thanks for taking my question. I guess my question's really around the 400-gig opportunity. And I think the last couple of years you've spent a lot of time explaining to folks how your software stack is really differentiated against white-box risk. I would love to get your perspective as the underlying technology gets more complicated with 400-gig and 800-gig, what's the potential for Cloud Titans that have historically relied more on the white box to start talking to Arista? And I'd love to know if you're seeing a shift in customers that have skewed more white boxes and always build their own products, now looking to perhaps buy.

Sure. The companies that visit on white boxes are fairly sophisticated, so they're not short on talent. If they are committed to a mission, they will go ahead with it. I don't believe if any changes happen in the industry, it will be simply because the next-gen is harder to boot. But it's much more about the collaboration we have with the vendor co-development partnership we have here. And we've talked about it in the past and nothing has changed on that front. We are moving along on our mission. And the few situations where customers consider buying from the outside, that will take a few years to actually materialize. No big change here expected.

Amit, I think the way to think of this is if you want commodity 100-gig without our software stack, and you just want to buy basic vanilla stuff, you'll continue. But if you really appreciate our collaboration, our engineering, our innovation, and our software stack, then that's when Arista gets chosen.

Perfect. Thank you.

Thanks, Amit.

Yeah. Thanks for taking the question and congratulations on the quarter. I wanted to actually ask about the progression of the subscription business within the model. As we look at the services line, is there any way or how we investors should start to think about that as being an increasingly visible growth driver for the Company? Thank you.

Thanks, Aaron. Thank you for the wishes. Wish we could ship more. I think the real issue to think of subscription is a long-term indicator of not necessarily just revenue, but the stickiness of our business, right? When you look at CloudVision and what we are doing with network detection and response to an AI-driven security, or Big Switch acquisition with DANZ Monitoring Fabric. These are all, if you will, layered icing on the cake. And the icing contributes a good margin and obviously has a long-term one-year, two-year, or three-year subscription so the revenue shows up a little bit later. But the bookings are very strong because you can imagine from that, so we'll continue to see strong software service renewals as well from our A-Care. And so, the two together, we believe we've always said, will be a 20% to 25% contributor to the business.

Hey, good afternoon. Thanks for taking my question. Jayshree, you did comment starting off that you're seeing strong demand from enterprise customers. Wondering if you can just talk about what you're seeing from the other customer verticals like is demand accelerating? Similarly, for example, the Cloud Titans as well as some of the Telcos. And keeping that backdrop in mind, it does look like the third quarter guidance is for like a percentage increase when traditionally we've seen like a high-single-digit. So, should I just infer that's all supply-driven in terms of the moderation rates to historical trends?

First of all, thank you. Historical aside, I think all our five verticals are doing well. In that, I would highlight Cloud Titans and Enterprise is stronger, but that doesn't take away from the contribution and success we are having with Specialty Cloud financials or the service providers. I guess it's a case of rising tides raise everything, so all of them are contributing well. Relative to our Q3, demand is strong, wish we could ship more, but I wouldn't compare it necessarily to our last Q3 in the post-pandemic era, I would just say on the basis of large numbers, we're doing well.

Yeah, I think if you look at last year, I mean, given the year that it was, you saw a very significant uptick in Q3, was up 12% or something quarter-over-quarter. That was just more of an assumption of what was happening with COVID at the time.

Right. And previous year.

I believe the Q3 guidance of 20% to 21% year-over-year at the midpoint is a solid starting point.

Thank you.

Thanks, Samik.

Thank you for taking my question. In terms of the pricing environment, can you comment on, are you planning on passing on any of the incremental costs that you're experiencing? Can you also talk about the dynamic you are seeing in the market in terms of pricing? Are your competitors increasing their pricing as well? Or are they using this as an opportunity to absorb the costs and maybe price aggressively? Maybe a comment there. I would appreciate it.

Well, Fahad, I'm not in a position to talk about competitors. Maybe they'll share that with you. They really don't with us. But I will say that we're going to try our best to absorb the costs. On selective models, we will have to where the increases are significant increase prices slightly, but we don't expect the impact on that on our backlog or existing inventory. So, the real impact of any changes we make will impact our gross margin or our price changes next year.

I appreciate the response.

Thank you.

Thank you. I'm curious about the deceleration you mentioned for the second half of the year, which makes sense. Are there any one-time factors you expect this year that we should take into account when considering the outlook for 2022? I understand you may not want to delve too deeply into this, but is there anything we should keep in mind as we plan ahead?

Yes. I mean, I think it is a little early to start getting too specific about 2022. This year did have an unusual slope to it just because of the pandemic and how 2020 played out. We're putting up some very good numbers now this year, that's obviously setting a good base for us to grow off next year. Bear that in mind, but the business is solid, it's strong demand. I think we're executing well and it's broader; it's across the verticals. We'll probably take a shot at giving you some book ends next quarter for 2022, but it's just a little too early yet.

Okay. Thank you, Ita.

Thanks. A clarification and question. Jayshree, did I hear you, or were you to say that you're expecting 20% growth now for the top line for the year?

No, you did not hear her say that.

Obviously, I would never say those things, Paul, but Ita what did you say?

We talked about the midpoint of the guidance for Q3 year-over-year growth.

Let me ask a question because last quarter, you mentioned that you were expecting 15% growth for the year during the Q&A. What are your current expectations for the year? Also, can you provide insights on how much the supply chain is impacting your revenue and margin structure?

I believe that when you consider Q3 and look ahead to Q4, you can form a reasonable perspective on the year's performance. While we don't intend to specify a number at this time, you can estimate it. Once we provide the Q3 results, it will clarify things significantly. Regarding revenue potential, lead times are currently quite extended, making it difficult to make comparisons to normal conditions. We could certainly generate more revenue if lead times were not so prolonged, but quantifying how much is challenging, and we don't plan to put a specific figure on that.

All right, given that response, can I ask you within Cloud Titans since historically, you've been highly concentrated in Microsoft and Facebook? But of more recent vintage, you prove you having some more success with some of those folks, I think Google in particular. Any insight you can share with us?

I think Paul, you summarized it very well. Actually, the team is doing a great job in both diversifications across all our sectors. And while Microsoft and Facebook are very strategic, very important customers, we have other Cloud Stack and customers also.

Next question, please.

Hi. Thank you. A little just a clarification on just Ita's commentary regarding the second half deceleration. Now, Ita, I was hoping you'd give us some sequential guidance. Is there any potential that sequential growth could be negative in 3Q and 4Q? And if I just extrapolated out and I forecast a little bit out from where we are today, and even out of balance, we're getting into the low 20% range. I just want to clarify if there would be any sequential decline in 2021?

Yes. We have provided Q3 figures at the midpoint, and there is clear growth quarter-over-quarter. We don't want to provide extensive guidance, but historically, Q4 tends to be a strong quarter. I leave it to you to interpret that, but I believe we have provided a comprehensive overview for the year.

Sami, I want to emphasize that demand is strong; we are performing well. We need to focus on our shipments, and we can only manage them one quarter at a time due to our constrained supply chain.

Got it. Thank you.

Thank you.

Hi, thanks for the question. I wanted to inquire about the gross margin guidance. When we spoke with Cisco, they mentioned that the supply impact on their margins was reaching a low point in their guidance. I'm interested to know if you view the guidance for September as being at that low point. In other words, does the gross margin at least maintain its level from there, or is it uncertain at this stage and could potentially decline further? That's my first question. I have a follow-up.

I believe, Rod, that in terms of supply chain issues, we experienced some significant impacts in Q2, but those were largely mitigated by our customer mix. Looking ahead, we're paying more for certain components than usual, and that cost will be recognized once we ship the products that include those components. Consequently, we will probably feel some pressure on gross margin for a while due to our inventory and purchase commitments. While our enterprise mix is improving, which helps to offset some of that pressure, the customer mix remains the primary factor. If we experience a quarter with a heavy cloud mix, that will apply pressure on our gross margin for that period. However, we believe we can maintain a gross margin in the 63% to 65% range over time, which we consider to be a solid and secure position.

I'm curious if you anticipate experiencing significant pressure on the margin next quarter since it has decreased by over a percent from this quarter. When you mention this potential drag, do you believe there’s a chance for a substantially lower margin, or do you see the possibility of maintaining that level for a longer period?

I believe the main factor will be the mix of customers. In a quarter with a significant customer mix, margins could drop to 64 or even lower. However, this would be due to a specific mix in that quarter, so I still think our range is valid. The mix of 52 plus to 65 plus that we observed this quarter is a solid enterprise mix that helps balance things out. Margins will fluctuate over time, but we are still confident in maintaining that range.

As Ita mentioned, Rod.

Okay.

As Ita mentioned, many of our inventory costs will be recognized later this year and next year. The gross margin is expected to come under more pressure when these higher costs are accounted for. If we have a strong enterprise mix, we could achieve a gross margin in the range of 63 to 65. However, with a higher cloud mix, it is possible that we might be at the lower end of that range. It's important to note that we are anticipating ongoing semiconductor supply cost issues and shortages will not be resolved in 2022.

No, absolutely not. This leads me to the enterprise trajectory; the indicators for enterprise spending are very strong as we look into the second half. I'm curious about your thoughts on the enterprise pipeline. Does it look equally strong, or how does it appear to you?

Rod, I think you've run out of questions, but the short answer is yes.

Okay. Thanks. Appreciate it.

Thank you, Rod.

HI, guys. My question is for Jayshree. How does this supply chain situation compare to prior periods in your career where you've seen supply constraints?

Well, I’m glad you're asking the oldest person here, close to the oldest. In my career of several decades, I’ve never seen it be dispersed. Never. This is the worst I've seen it. And there have been some pretty big ups and downs. And more than the worst I've ever seen it, I think it's also going to be prolonged. I guess we're all hopeful, we will all recover from the COVID pandemic. But everything from copper shortages to wafer starts to assembly to manpower, people, logistics, freight. Just about every aspect of it is challenged, too. Anshul, do you want to add anything more to that as the youngest person here?

I mentioned that the situation is very constrained, but what's happened is that the global supply chain wasn't prepared for such a significant mismatch in supply and demand. Consequently, when faced with a crunch, people attempt to plan and book ahead. However, this is not an industry where changes can be made quickly. This situation will likely continue for a long time, with the industry predicting a possible recovery in 2023, but it's uncertain what demand will be like at that stage. It could be necessary to prepare for a more extended period of challenges.

And is it inevitable that at some point we're going to see a demand air pocket, Jayshree, just because everyone will have ordered what they needed ahead of time and we'll hit some type of air pocket?

I don't know the answer to that, Jason, but I think given the business diversification we have, the planning of one type of customer will not affect the planning of others. So, I'm hoping that some of them are planning for 2022 and some are planning for ahead in 2023. And so, the air pockets will balance off, if you will.

I believe the visibility into the demand from larger customers is quite strong, which is helpful. It’s not that you’re deploying everything all at once; it happens gradually over time.

That's right. It's very much, as Ita says, a land-and-expand situation. You don't just land and then buy nothing from a long time.

Thank you for including me here. Jayshree, I just want to mention that age signifies wisdom, so I wouldn't describe it as being old, just wise. With that said, I’ll let you and Anshul have that discussion.

Thank you, James.

So, you guys are starting to see some 5G core spending, or at least the industry is, pick up and we even saw AT&T and Microsoft announce something that the core carrier grew pretty nicely, it looks like if you use the midpoint of those ranges you gave. Does your relationship with Microsoft help extend your regions ' carrier environment as they look to take some of their core to the cloud, or will it be more of a fulfillment via support for Azure is the way to think about it? Thanks, guys.

In the short term, our relationship is closely tied to Azure. However, there is nothing preventing us from leveraging investments in 5G and recent acquisitions. Service providers require a long-term commitment, but once we secure them, it’s very beneficial. We are experiencing our own successes independently of Microsoft, particularly related to the upgrade to 5G where we provide the core routing and platform infrastructure. As for Microsoft, it will take time, and we expect significant developments to emerge over the next few years, with the focus currently being on Azure.

Okay, we are timed for.

HI, thanks a lot for the question. This is Kyle in for George Notter. Curious if there's any change in the mix of customers or ports using cloud EOS versus the traditional standard EOS bundled with a hardware sale? It may be still quite small, but any quantifiable color you can provide around what the mix might currently be and could that help your gross margin at all or make you a little less sensitive to the supply chain issues that you're seeing in some areas?

Thanks, Kyle. Now cloud EOS is an example of a very strategic software platform, but it's very, very tiny in ports and it has more to do with our multi-cloud hybrid network strategy where almost every one of these enterprise customers also had some premise strategies. So, I would say the strong influence of millions of ports is still on the mainstream platforms, and Cloud U.S. is on top of that to connect into multi-cloud.

Okay. Great, that’s helpful. Thanks.

Thanks, Kyle.

This concludes the Arista Q2, 2021 Earnings Call. We have posted a presentation which provides additional information on our fiscal results, which you can access on the Investors section of our website. Thank you for joining us today.