Arista Networks makes $4.3b bet on components amid supplies drought

Component suppliers are cancelling orders on the same week they are due, says CEO

Arista Networks is committing billions of dollars more in orders to secure stock as component availability in the networking world remains uncertain, with suppliers sometimes cancelling orders at the last minute.

Lead times for key chips extended to 60 weeks, according to Arista last August – twice the length of delivery prior to the pandemic – and by November that number had risen to 80 weeks.

Talking last night on a conference call to discuss the firm's calendar Q1 profit and loss results, Arista's CEO, Jayshree Ullal, confirmed a tumble in its gross margin was "influenced by continuing supply chain constraints and elevated costs.

"Vendor de-commits for certain components increased sharply in March 2022, with no clear relief in sight in the near term," she said.

She added the cancellations "come literally the week we are expecting the components."

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To smooth out this lumpy supply, Ullal said Arista has committed to purchase $4.3 billion worth of components, up from the $2.8 billion committed in calendar Q4, 2021. This should improve orders for 2023 and beyond in the expectation that "this long lead 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. While we've added manufacturing capacity and component supply in response to this demand, supplier de-commits make forecasting accelerated shipment momentum difficult," Brennan added.

Arista turned over $877 million for the quarter ended 31 March, up from $667.6 million in the prior year's same quarter. It reported a profit of £272.2 million versus $180 million.

The hyperscalers, referred to as Cloud Titans, comprised the largest customer segment for Arista: Microsoft and Facebook owner Meta are forecast to account for 10 percent of Arista's sales this year. Enterprises, smaller cloud players and service providers make up the remainder.

Asked by an analyst if Arista could get caught short with high inventory once more normal buying cycles resume, CEO Ullal said that the risk is "simply worth it".

She said Arista was procuring the newest components least likely to become obsolete and said the purchase commitment would take multiple quarters or years to arrive.

"We look at this as a wise investment for a lot of common components," she added.

Juniper Networks recorded its calendar Q1 results a week ago showing a 9 percent year-on-year uplift in revenues to $1.168 billion.

Rami Rahim, its CEO, said:

"We continue to experience significant supply chain-related headwinds associated with elevated component, freight and logistics costs, which are expected to continue throughout the year."

Rahim told analysts on the earnings call that it is difficult to predict supplies in "any given 90 days" and said the firm expected "continuous disruptions" to run on – whether related to COVID-19 shutdowns, "logistics bottlenecks," or the war in Ukraine.

"At this point in time, I think it's prudent to presume we'll have more unpredictable disruptions for the next couple [of] quarters. I have to admit, I was a little more bullish on potentially seeing improvements in the second half of '22 at the beginning of the year than I am now.

"I now don't anticipate significant improvements throughout the entire year, and I do think we'll see improvements in 2023," he added.

Juniper said order backlog grew $300 million in Q1 to $1.8 billion in total. It is expecting revenue growth of 7 to 9 percent in 2022 and says it will be able to get supply to achieve this financial goal. ®

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