Arista makes $4.3 billion bet on components amid supply drought
Arista Networks is committing billions more in orders to secure inventory as component availability in the networking world remains uncertain, with vendors sometimes canceling orders at the last minute.
Delivery times for key chips were extended to 60 weeks, according to Arista last August – twice the delivery time before the pandemic – and by November that number had increased to 80 weeks.
Speaking last night on a conference call to discuss the company’s first quarter profit and loss calendar results, Arista CEO Jayshree Ullal confirmed that a drop in its gross margin was ” influenced by persistent supply chain constraints and high costs”.
“Supplier churn for some components increased sharply in March 2022, with no clear relief in sight in the near term,” she said.
She added that the cancellations “literally happen the week we expect the components.”
The time we found a solution and found a big customer problem
To smooth out this lumpy supply, Ullal said Arista has committed to purchase $4.3 billion worth of components, up from $2.8 billion committed in Q4 2021. This should improve orders for 2023 and into beyond in hopes that “this long-term team environment continues,” said CFO Ita Brennan.
“Demand metrics remain strong across the business, with particular strength from our Cloud Titan, other cloud and enterprise customers. Although we have increased manufacturing capacity and component supply in response to this demand, supplier churns make it difficult to forecast accelerated shipment momentum,” Brennan added.
Arista posted revenue of $877 million for the quarter ended March 31, compared to $667.6 million in the same quarter a year earlier. It reported a profit of £272.2m from $180m.
Hyperscalers, called Cloud Titans, were the largest customer segment for Arista: Microsoft and Facebook owner Meta are expected to account for 10% of Arista sales this year. Enterprises, smaller cloud players and service providers make up the rest.
Asked by an analyst if Arista could be caught short with high inventories once normal buying cycles resume, CEO Ullal said the risk was “simply worth it”.
She said Arista buys the newest components that are least likely to become obsolete and said the purchase commitment would take several quarters or years to arrive.
“We see this as a sound investment for many common components,” she added.
Juniper Networks reported its first calendar quarter results a week ago, showing a 9% year-over-year revenue increase to $1.168 billion.
Rami Rahim, its CEO, said:
“We continue to experience significant supply chain headwinds associated with high component, freight and logistics costs, which are expected to continue throughout the year.”
Rahim told analysts on the earnings call that it was difficult to forecast supplies in “a given 90 days” and said the company expected “continued disruptions” to continue – that they are related to COVID-19 shutdowns, “logistical bottlenecks” or the war in Ukraine.
“At this point, I think it’s safe to assume that we will have more unpredictable disruptions for the next two [of] quarters. I have to admit, I was a bit more optimistic about seeing potential improvements in the second half of 22 at the start of the year than I am now.
“I don’t expect any more significant improvements throughout the year, and I think we will see improvements in 2023,” he added.
Juniper said backlog grew by $300 million in the first quarter to $1.8 billion in total. He expects revenue growth of 7-9% in 2022 and says he will be able to source to meet that financial goal. ®