'This is the worst I've seen it' says Arista boss as entire network hardware sector battles component shortages, doubled lead times for semiconductors
Campus, routing, switching, and data centre kit all affected
Semiconductor lead times are running at up to 60 weeks or twice the pre-pandemic norms, according to networking biz Arista.
This chimes with talk in the UK channel that reached The Reg last week, which indicates delays in the delivery of orders as network hardware manufacturers try to juggle rising demand with the relative scarcity of silicon and other components.
On a conference call to discuss calendar Q1 earnings, John McCool, senior veep and chief platform officer at Arista, was asked to explain the industry-wide challenges.
"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," he said. "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 expedited 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 components 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."
Campus, routing, switching, and data centre products are all affected. "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."
Arista is "redoubling our efforts and execution in this challenging macro environment," said McCool, who forecasted improvements from the second half of this year.
Jayshree Ullal, CEO and president at the company, thanked customers for the "patience and understanding during our lead time constraints."
"I think just about every component is affected in our supply chain," she said. "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… they're all double."
She reiterated that Arista will try to absorb the rising costs of components, which could have a drag on gross margin, but admitted that next year "on selective models, we will have to [up prices] where the increases are significant."
Rival Cisco confirmed in May that it may raise prices if component cost increases are sustained.
Arista CFO Ita Brennan said the business still needs to "carefully navigate industry-wide supply chain shortages and COVID-related disruptions."
Despite this tough talk, Arista had a healthy Q2 with revenue up 30.8 per cent year-on-year to $707.3m. Some 73 per cent of the business was generated in North America, and the rest was classified as international. Pre-tax profit came in at $428.9m, versus $316.6m a year ago. Net profit grew to $377.2m from $283.2m.
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Other highlights from the quarter included the company surpassing 50 million cloud ports shipped cumulatively, and it launched the Arista 7310, a sub-100ns switch promising ultra-low latency for financial services customers.
Inventory turns were 1.7 times, down from 1.8 last quarter, and inventory increased to $543.2m, up from $482.5m in the prior three months. Brennan said: "We continue to buffer certain components and products."
CEO Ullal added: "Nobody is predicting the semiconductor supply costs of shortages are going away in 2022."
Well, one did: Gartner. We'll glaze over that.
On the supply chain, the CEO said: "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 stock to assembly to manpower, people, logistics, freight. Just about every aspect of it is challenged."
Last week, as it outlined Q2 financials, Juniper Networks CEO Rami Rahim said: "We, like others in our industry, are managing through significant supply chain challenges." He said customers were acutely aware of the problem and trying to head it off.
"Many are either placing orders early or providing significantly greater visibility into future projects. This is particularly true with some of our large strategic customers especially in the Cloud and Service Provider verticals. We view these early orders and insight into our customers' longer-term plans as a positive development."
CFO Ken Miller added: "We are experiencing ongoing supply constraints, which have resulted in extended lead times and elevated costs. We have invested to strengthen our supply chain and have increased inventory purchase commitments over the course of the last year. We continue to work closely with our suppliers to further enhance our resiliency and limit disruptions outside of our control to the best of our ability.
"Despite these actions, we believe extended lead times and elevated costs will likely persist for at least the next few quarters. While the situation is dynamic at this point in time, we believe we will have access to sufficient semiconductor supply to meet our full year financial forecast."
Extreme Networks, which closed off its fiscal '21 recently, also confirmed it is battling "increasing component and freight costs against the current backdrop of severe shortage of components," said Remi Thomas, CFO.
"We continue to proactively manage the supply chain, and our strategic relationship with Broadcom is helping us in this regard. Importantly, we have secured vendor commitments that will allow us to accelerate product delivery and bring down backlog as of Q2 (ending December 2021) and beyond."
Cisco is scheduled to report its Q4 financials for fiscal 2021 on 18 August. ®