Arista Networks, Inc. (NYSE:ANET) 16th Annual Needham Virtual Security, Networking, & Communications Conference Call November 15, 2022 3:00 PM ET
Company Participants
Liz Stine – Director, Investor Relations
Ita Brennan – Chief Financial Officer
Conference Call Participants
Alex Henderson – Needham & Co.
Alex Henderson
My name is Alex Henderson. I’m the Needham’s Security and Networking Analyst. It’s a pleasure to have Ita and Liz here. Ita Brennan is the CFO; Liz Stine is IR. And we’re going to do a fireside chat. And if you want to ask a question, there’s a dialogue box. You can type it in there, and I will report it on to management at any time, from the get go all the way through to the end. And you can also email me at ahenderson@needhamco.com. I can keep my email up and keep an eye on it for that. Having said that, welcome, guys.
Ita Brennan
Good to be here. Thanks, Alex.
Alex Henderson
So, wow. That’s probably the best thing I could say. I thought your Analyst Day was probably the most interesting Analyst Day we’ve seen in a really long time. And I really appreciate all of that great content. But I thought maybe we’d just start off with a little bit of a history around where you are in terms of the last couple of years’ worth of outstanding performance and then what you said on the Analyst Day in terms of your expectations for not just the fourth quarter, I think you gave that on the prior guide, but out into 2023?
Ita Brennan
Yeah. No, I think, look, we’ve been benefiting from some very healthy demand, you know, across the business really. Right. I mean, we saw – you’ve seen kind of the benefit of some of the clouds, you know, cloud is definitely back. You’ve seen some reacceleration in cloud spending. We talked about cloud being, you know, as much as 45% of the business for this year coming off of kind of 30% in the prior year. Right.
So, that’s one piece of the business where, you know, you’ve gone from some, you know, somewhat stable, lower investment levels and growth and investment to, kind of a recovery with the 400 gig product cycle heading into, kind of back-end of 2021, heading into 2022, and having that overlaid with a very constrained supply environment, giving us some good visibility to, kind of what’s happening in their business, at least within those supply constraint windows, you know, we had 6 to 12 months. It’s kind of the period of time that we can kind of, that we have that visibility.
I think across the rest of the business of the enterprise has continued to execute very, very nicely for us. You saw that 30% CAGR in the enterprise business. If that continues over time, we have been constrained from a supply perspective there, but certainly on a demand perspective, we’ve seen that business kind of outperformed that 30% that we had said, kind of coming into the year.
So, we’re very pleased about that because there’s a lot of effort that’s gone into, kind of building that enterprise business to continue to build that enterprise business. And you can see that it’s giving us, kind of the opportunity to, you know, to add products and add capabilities, you know, to satisfy, kind of that enterprise part of the business end-to-end. So, some of the, kind of exciting new announcements were around, honestly, serving those enterprise customers.
So, I think good strong demand across the business. Supply constrained, we’re assuming we’ll still be supply constrained, honestly, into 2023. We talked about, you know, a growth rate of 25% for 2023 and that is still a supply constrained number as we think about the business heading into next year.
Alex Henderson
So just to put that in some context, 2021, you grew 27%; and 2022, given the kind of the midpoint of the guide, you’re around 45%, even more impressively your product growth 30% in 2021 over 50% in 2022. That’s last quarter was 67% growth in product sales. [Indiscernible] Those are really impressive numbers. Can you talk a little bit about why you think 2023 you’re able to do a 25% type growth rate again, which would imply product sales somewhat above that. I assume the services don’t accelerate to that level?
Ita Brennan
Yes. I mean, the services probably continue to grow somewhere in the mid-to-high teens kind of rates. I think as our view. So, product does continue to grow healthily in our minds. And again, we’re fortunate to have more visibility, kind of into the business at this point than we’ve had in a long time, right, just because of the supply and because of the supply constraints. Right.
So, it’s not that 2023 is completely filled in, but we do have, you know, deployment schedules for a good chunk of the year. And that certainly helps you know, give you confidence around the growth rate. I think the underlying drivers for all of this is still kind of a cloud business that’s recovering from some underinvestment and looking to, kind of deploy the new products and new technologies.
Remember, we have we have new 100 gig products and 200 gig products and 400 gig products that are being deployed into that. And I think on the enterprise side, you know, you really have much more reliance on the network across enterprise customers, and, you know, the solution is really resonating with those enterprise customers.
All of the, you know, the simplicity of what we were doing for the cloud with CloudVision as a management tool on top of that is resonating really well with enterprise customers that are now more reliant on their networks than they’ve been in the past, right, whether you’re a healthcare customer or your retail customer or your commercial manufacturing, everybody has more reliance on their tech right, especially coming out of COVID, and they’re really looking for ways to kind of manage that better.
And I think we’re bringing some really interesting kind of solutions with CloudVision and with some of the capabilities that the team talked about at the Analyst Day to make that easier, to make that more manageable, to make that more efficient.
Alex Henderson
So, looking at the longer-term viewpoint of the company, you guys [espoused] [ph] a view of artificial intelligence adoption within the cloud that I think was a very powerful and accurate read on things. So, I think the way you described it was that if you think about AI, it’s 10x to 30x more asset intensive than traditional applications. The world is aggressively moving to it. I think about just one company I follow, like CrowdStrike adding trillions of events from their enterprise customers to their cloud petabytes a day of volume going to their cloud data like as a good example of what you’re talking about, but at the end of the day, if that’s accurate, I think the depiction was in a comparison to AWS.
When AWS launched with compute in 2006, then in 2010, you launched – the AWS launched the storage piece, and that was a massive inflection point in growth for public cloud, resulting in now a $60 billion company here today with a $105 billion backlog according to their queues. But you’re describing 2023 as that similar type of inflection point as we move to AI technologies.
I know you’re the CFO, but this is a big deal. If that’s accurate, you know, that strikes me as probably one of the most profound changes in the environment that we’ve seen in a long time and could set you up for a series of very good years as they build out that infrastructure.
Ita Brennan
Yeah. So, you’re going to get the CFO’s view [of what you] [ph] just described. I mean, to me, like, this is obviously a fundamental trend. Right. I mean, AI is going to drive, you know, demands and for compute and connectivity well into the future. And it has underpinned, you know, we’ve always had these conversations with these customers about the fact that over time, their investment in the network is going to continue to grow. And one of the reasons why it’s going continue to grow is obviously AI and the used cases that you can – that they can solution in all different areas of activity, you know, around that. Right.
You know, some of what we’re shipping today is, kind of is a building block in that, you know, in that AI evolution and there’ll be more for sure, and, you know, we’re doing everything we can to participate in that. Right. There’s a technology element to that, which is you know, can you solution more of what they need with Ethernet and with capabilities, and that’s very much fits in our pattern of, kind of looking for new used cases and with these customers where we can expand, you know, what we can do for them and benefit from that over time. Right.
So, I think, you know, it’s not that there’s a light switch that you’re going to turn on and everything is going to change overnight, but this is, you know, something that will underpin their investment and then if we do a good job from a technology perspective, etcetera, can increase, you know, where we can participate. And that’s, you know, one more used case, for us to drive with these customers.
Alex Henderson
Well, it’s more than just a uses case. It’s a major used case. It’s a huge change in the world environment if that proves to be accurate. And it, you know, the intensity of the infrastructure. So, is it fair to say that that theoretically could really drive a very rich period of growth in the [cloud, Brennan] [ph]?
Ita Brennan
Yeah. And I think, look, there’s a bit of a chicken and an egg to this thing. Right. We saw this kind of with the convergence of switch routing as well. Right? The more you, you know, the more economical you can make the deployment of the capacity and then the more capacity gets deployed. Right. So, that’s for sure the demand for, you know, for connectivity and compute is going to is astronomically higher, but then obviously, there’ll be compression and pricing and everything else.
There’ll be technology compression in that as well. But it definitely underpins, you know, over time, you know, a good, kind of future investment cycle. You know, how it plays out quarter-by-quarter, year-by-year we’ll have to see, but it does underpin, kind of continued investment in the network.
Alex Henderson
How important is the software element of your trust into enterprise? Obviously, we’re talking about AI. You guys are bringing AI in the optimization of the user experience combined with sharply lowering the cost associated with operating the infrastructure that enterprises use with the AI as a driver of it with CloudVision and the like. How important is that as a leading edge tool to win additional market share from the, you know, the incumbents in that world?
Ita Brennan
Yeah. I mean, I think it’s hugely important as a differentiator, but also as an enabler for enterprises to, you know, to really you think about a cloud company and the resources they have, kind of to run a cloud like architecture, you know, what we’re trying to do is give tools to the enterprise so they can run their own clouds in a similar way. Liz, I don’t know if you want to contribute to that from a technology perspective etcetera?
Liz Stine
Yeah. I think that, especially when you’re talking to the enterprises about EOS and CloudVision. EOS was built upon kind of that state database. It holds the state of the entire network device. Moving forward, we built, kind of CloudVision, which was on an aggregate of all the state. So that had the network state. And then last year you heard that we announced our NetDL, which is expanding this to, kind of third party applications and centralizing all that data within the enterprise network.
And if you have all that data, you can do some really interesting things. And I think that you kind of alluded to, you know, the AI that we’re running on top of, kind of these enterprise networks. If you look at AVA, which was part of our Awake acquisition, that’s running on top of that data set in order to detect network anomaly, so that we can alert you when something is happening across your enterprise network that is not normal. Right. This is the way that we can do detection, network detection and response.
So, there’s some really cool things that you can do once you have that aggregate set of data. And I think that you’ll see used cases come out as the enterprise realize as how valuable that data set really is?
Alex Henderson
So, sounds like that architecture, which is driven off of your [uniform of] [ph] [indiscernible] which is not the case with your large competitor, gives you a competitive advantage that is sustainable for the long-term in delivering better performance, less downtime, less – all of the values that you get in the cloud, you know, when you think about a cloud-operating environment where you’ve got a mile and a half long building being run by 10 people that is certainly widely different from what most enterprises look like. So, that’s the primary driver of it, and it’s highly sustainable. It’s not a speeds and feeds world anymore right?
Ita Brennan
Yeah. Certainly – sorry, Liz, you want to…
Liz Stine
I mean U.S. certainly has that base architecture, that’s hard to replicate, right And that’s taken a long time to kind of through multiple evolutions to get it to where it is today, where you can really, you know, start to use that data set to, you know, provide visibility, provide monitoring capabilities that you can have in-line sensors, you know, security sensors, monitoring traffic in the network in a unique way. Right.
So there’s, you know, can it be replicated? I mean, sure, but it’s going to take time and it’s and it’s not for want of trying, you know, on the part of, you know, other solutions, but there’s still something very unique about how EOS and that’s particularly the collection of that state was architected that’s pretty differentiated.
Alex Henderson
So, when I think about the company’s structure today, you’ve got a couple of years of spectacular growth. You’ve had some pressure on gross margin simply as a result of supply chain issues, but you still managed to deliver operating margins up in the 40% range, and not too long ago you were talking about a 30 to 35, kind of [reset operating margin] [ph] and now you’ve kind of reset that a little bit. Can you talk about the degree to which if you continue to grow at the 15% to 30% range that you would be able to produce leverage on that or would you be able just sustain it or would you see margin compression as you [hire] [ph] to catch up with the investments you’re making?
Liz Stine
Yeah. I mean, I think, you know, we’re benefiting right now from accelerated top line growth with somewhat constrained OpEx growth and hiring growth, right. So, you kind of have you know, the world of where the top line was outperforming and, you know, the market for talent, etcetera, was pretty constrained. Right. And so that’s what’s getting you, kind of this fall through to the bottom line on an accelerated cloud number, honestly, in spite of the gross margin pressure.
I think as you think about going forward, I mean, we do want to continue to invest in the business both on the R&D side and on the sales and marketing. We believe there’s lots of organic opportunities you saw in the kind of expanded TAM and some of the – what’s in front of us from a business perspective. So, we do want to invest and kind of grow resources. We will, you know, seek to hire in the software, kind of on the software side as much as we can, and if there’s an opportunity, kind of in this market going forward, we will be there. We will we will execute against that, right.
Same on the sales marketing side we are, you know, continuing to kind of grow the sales and marketing team in a pretty disciplined structured manner, but we do want to continue to do that as well, right. We talked about 40%, plus or minus for 2023 and reserving the right that over time, right, if there are investments that we can make that help to support and continue to grow into the future that we would do that with kind of a 38%, plus or minus operating margin as a longer-term target.
Alex Henderson
So, the company has a lot of cash on the balance sheet. You’ve done a number of acquisitions. Is it reasonable to think that you’re still active on the acquisition front and have prices gotten more reasonable so that you can do them at a more reasonable price in this environment or you’ve done a number of acquisitions? Do you need to integrate those and enroll some of that together before you bring in more complexity?
Ita Brennan
Yeah, I mean, I think what we’ve done to date has been very, I would say, adjacent, and, you know, it’s been somewhat tuck in, somewhat technology based. Right. So, we’ve, you know, we’ve acquired kind of some technology capabilities around wireless, around visibility, around the security and monitoring piece with Awake, all things that are very adjacent and focused on the network.
We’ve acquired some really good talent that’s come with that and expanded, kind of our security, kind of knowledge and understanding with that team. Right. So, I think that’s – those are things that, you know, there’s a lot of cultural alignments in terms of the folks that have come on board and the products are still very adjacent. We have to integrate them. We have to integrate them into CloudVision.
So, there’s work that has to be done there. But it’s very kind of aligned with, you know, our core product set and what we’re trying to do. So, I think we’ll continue to – you could – you should expect us to continue to look for opportunities like that? We get the question all the time. Are there larger acquisitions that you could do?
I mean, we’ll look at that too, but it’s been – today, it’s been hard to see opportunities that we can get high confidence around that truly fit, but kind of what we’re driving the business and the opportunity that’s there just organically with some, maybe with some tuck-ins is significance and executing against that is lower risk than a higher outcomes. So, I think that’s where the focus has been.
Alex Henderson
So from a perspective of, you know, cash position, you’re building a pretty nice cash of cash, it’s a lot of cash on the balance sheet. We’re approaching $10 a share. How do you see that if you’re not doing larger acquisitions? It’s – you’re generating a lot per quarter.
Ita Brennan
Yeah, I think, look, we have been returning cash and we’ll continue to do that. We, obviously, we’ve used the cash and this is one of the reasons why I think we will carry a larger cash position is, we have had the opportunity to use it competitively, you know, over time, right. You know, historically, we’ve used it kind of in some of the litigation and other stuff. Right now, we’re using it kind of as help us drive purchase commitments and be able to, kind of be aggressive in terms of supply.
So, we will probably always carry a larger cash balance, but we are also returning cash to shareholders and we’ll continue to look at that as we unravel some of the supplies up here that can be completed. We can set maybe some more structure around that, but we will definitely continue to return cash.
Alex Henderson
So, I’m pretty sure your inventory on your balance sheet has gone up quite significantly. I don’t remember the exact numbers, but I want to say it was in the vicinity of 100% over the last year and almost 200% over the last two years. You’ve also extended significant purchasing commitments, which when I take the inventory together with the purchasing commitments, it strikes me that it’s larger than your cost of goods sold out into the [2025, 2023] [ph] time frame. So, how do I reconcile the scale of those purchasing commitments and inventory build with that, kind of long-term outlook? Is there any risk that you have to back-off any of that or have any liability on some of that inventory getting long [indiscernible]?
Ita Brennan
Yeah. I mean, look, I think we – the inventory piece itself, yeah, it’s grown, but it’s grown. I think the turns are up – are down a little bit, but it’s not significant and then it’s just been growing with the business, right. And that’s largely components that are, kind of stuck if you like until we solve for some of the decommits and constraints that we’re seeing on the decommit side.
I mean, I think if you think about inventory, it will grow with the business. There’s no doubt. I think the turns probably don’t – hopefully we can manage to the kind of the current turns into next year. You know, even in a constrained environment, right. You know the purchase commitments, I mean, this is something that we obviously consciously have decided to do its multi-year in nature.
We’ve taken some strategic positions on some key components within that. We will continue to manage that number and to manage that view. You should expect that number to start to come down as lead times start to come in, right, and we’ll look to, kind of resize that, you know, to whatever the constraint is going to be, right. So that will move around. It’s not intended to be, kind of a predictor of revenue, a static predictor of revenue. It’s something that we’re going to continue to manage. And like I said, I would hope to start to see that come down.
In terms of risk, we’ve tried to target products that have, you know, a reasonable life ahead of them so that, you know, stuff does move around. You’ll still have the opportunity to sell at kind of into the future. That’s been an important part of, kind of thinking through that. It’s not going to be risk free, but obviously we’ve tried to try to make it a risk adjusted approach.
Alex Henderson
So, one of the areas that people have been a little nervous about lately is the service provider category. It’s not a huge category for you, but have you seen any volatility in that business that might be notable that we should be aware of? There was at least one company that sharply lowered their expectations for the fourth quarter after having held an Analyst Day on September 14 came back and promptly lowered their guidance a big time because of a curtailment of telco demand, which it sounds like it was more a U.S. service provider. So, what are you seeing on the service provider about the visibility into that business?
Ita Brennan
Yeah. I mean, obviously, it’s a much smaller part of our business, right. It has, I mean, the demand there has been growing. It’s kind of caught up on the whole supply constraint world as well, right, and that it is kind of limiting deployments to that business. There are, again, we have some more extended visibility because of that, right? I don’t think we’ve seen anything different there. But again, we’re not – we’re exposed to very particular used cases with kind of a constrained supply environment. So, I don’t know that we’ve seen anything different or that we would see anything different because of those factors.
Alex Henderson
Alright. And then I got a question here from the audience. Let me read this to you. Are any customer segments susceptible to excess inventory accumulation and digestion? I’m assuming he means of your product. And is there a cyclical element to demand or do the secular tailwinds offset this?
Ita Brennan
I mean, I think on the inventory side, I don’t think we’ve been able to get customers to a point where they could start to build inventory yet. Right. It’s still been very supply constrained. Anshul talked on the conference call about escalations when there’s, you know, decommits, etcetera. I think that’s very much the case still, right. So, we’re still, you know, in a world where we’re chasing supply and we’re trying to meet commitments to customers. And if you’re unfortunate to have to decommit because we’ve had to decommit and that’s a very difficult situation. So that doesn’t feel like an inventory type, you know, situation, right.
You know, in terms of cyclicality, I mean, we’ve talked previously, we talked to get at the Analyst Day a little bit, but you know, we have to look at the cloud business and think that maybe there’s some cyclicality to that spend, right. You know, we saw some pullback back in end of 2019 into 2020. So, when we think about, like a 5-year CAGR, we’re obviously building in some cyclicality there for cloud.
How exactly that plays out, honestly, we’ll have to see, but we think we have to at least run the business on the basis that that that can be the case, right. And then, you know, enterprise and some of the other pieces where we’re share gainers etcetera can be more consistent growers and cloud is, maybe a little bit more cyclical.
On the other hand, I think we’ve proven through multiple cycles now that we get to go back to the cloud and get our fair share of that cyclical upside as well, right. But it may be that cloud is more cyclical and not just a straight line up into the [right] [ph]
Alex Henderson
So, the other side of that coin though, could be that the AI adoption and the higher intensity of networking infrastructure builds around it proved to be early innings of a major acceleration in [demand per year] [ph], that offsets that cyclical decline that you might see if it was just conventional applications being deployed?
Ita Brennan
Yeah, I mean, I think certainly over a time period, it is absolutely positive for growth, but there’ll be technology cycles and other things, kind of embedded in that. And, you know, we’ll just have to see exactly how that plays out. I mean, again, you saw the Analyst Day, like, how consistently the business performs over time with that 20% plus, kind of CAGR. But, you know, there may be some volatility there.
Alex Henderson
Yeah. No doubt about it. No doubt about it. Going back into the cloud side of it, from the majors to the specialty cloud companies. Can you talk about what kind of growth you’re getting there? Some of that newer penetration. And a lot of that – some of that’s moving towards edge compute. How important is edge compute as part of that demand cycle?
Ita Brennan
Yeah. I’m going to let Liz chime in here as well. You know, I think that’s demand from the specialty cloud piece of the business has also been very healthy, right. I mean, they’re driving to the same technology trends, etcetera, as the cloud tightens, right. You know, we talked a little bit about how the large cloud companies were first, kind of to drive to worry about supply and therefore, kind of we’re earlier in terms of giving us some extended visibility, but we would expect, kind of as we head into next year that we’ll see, you know, we will see more supply going to those specialty cloud customers as well because they have, I mean, they have placed, you know, demand, and they have given us that extended visibility as well. I don’t know, Liz, if you want to take the [edge computing] [ph] piece of that question?
Liz Stine
Yeah. I mean, I think that, you look at kind of specialty clouds service providers. They’re all looking at getting their services closer to their customers, and that would, you know, possibly comprise of building out these, kind of micro data centers. In the end, you know, it’s still networking traffic that needs to be connected back. And so, you think about connecting all of these things and data center mesh is much like we do for some of the loud cloud – larger cloud providers, even enterprises that run, kind of DCI networks. So, I think it’s all positive for, you know, networking. It’s all about just getting services closer to customers.
Alex Henderson
And so with Kubernetes and other edge applications becoming more and more prevalent, does that change the resiliency and the real time nature of the traffic in a way that increases the demand for your high performance capabilities?
Liz Stine
I mean, I think that as you’re expanding out these applications, they still – there’s still requirements to have those connected back to kind of your data center, and they have to have those connected over high speed links. They have to have non-blocking. There’s going to be the same network requirements as you’re building out in local data centers. To get more in specifics, I’d probably call on Anshul to kind of talk a little bit more about some of the more fine features in tuning some of those traffic patterns?
Alex Henderson
Going back to the enterprise or the company as a whole, what’s going on with wage rates, and you know, attrition rates and staffing levels and things of that sort, is there any improvement in the, you know, the hiring environment?
Ita Brennan
Yeah. I mean, I think, you know, last year is – earlier this year was probably, kind of at a peak from a, you know, pressure on salary increases, your retention, etcetera. I think we’ve definitely seen things start to cool off a little bit in that and things, kind of start to return to something more normal and that probably continues just given some of the changes in the environment. So, I think if anything we’ve seen that get slightly better and hopefully that continues.
Alex Henderson
So, within your existing employee base, current present, current people not included. What kind of wage inflation are we looking at Arista that needs to be absorbed?
Ita Brennan
I don’t know that we’ve talked about specifics, but we did see, kind of merit increases, etcetera, kind of earlier in the year that were higher than normal. I think everybody did, right. And there was a lot pressure on hiring and on retention in that environment, but I think that is certainly starting to, kind of return to something more normal now.
Alex Henderson
Okay. So, just to just to remind us, which quarters do you actually do the performance, you know [risers] [ph], is that generally in the beginning of the year or is it and you approved for bonuses at the end of the year or how does that work?
Ita Brennan
Yeah, it moves around a little bit, but the bonuses tend to be annual, fiscal year, I think, pretty typical. And then the, you know, the salary increases and such a kind of moves around a little bit, sometimes usually middle of the year, plus or minus.
Alex Henderson
I see. Okay. In terms of the pricing environment, there was a lot of discussion about prices going up considerably for networking gear. Less so in the cloud, I think, than in the enterprise. Where are we on pricing increases in among your competitors and at Arista’s per se?
Ita Brennan
Yeah. I mean, so we talked about, kind of we had two price increases that we did, one back in November of last year that was pretty broad based, 5% to 10% showing customers, kind of some of the escalation and in costs and component costs, etcetera, and getting agreement that they would help fund those, right. And then we did something smaller scale in April and May of this year, roughly 5% for a subset of parts, and we’ll see that, kind of kick in here sometime middle of 2023, right.
So, that’s the extent of what we did. It was – we’ve tried to be pretty transparent with customers where we had significant cost increases. We’ve exposed those to customers and they’ve agreed to, kind of price increases to cover those. And that’s been our approach. It’s been very much a negotiated, kind of approach with customers with large enterprise customers and with the cloud. The competition, it’s hard for me to comment exactly on what they’ve done. I mean I think it depends on the …
Alex Henderson
I think you would see some idea that is, do you think the competitors have raised price more than you have? And that’s actually they’ve raised the umbrella or do you think it’s comparable?
Ita Brennan
I think it depends on which parts of the business and where that the actions were probably not uniform across the entire businesses and they’ve been different actions and different pieces of business.
Alex Henderson
Well, my presumption has been that, you know, your big competitor has taken price actions in enterprise and commercial and used it to subsidize trying to compete against you in cloud. Do you think that’s an [accurate read] [ph]?
Ita Brennan
Yeah, it’s hard for me to get too much into what they have been doing, too be [honest on that] [ph].
Alex Henderson
I can’t blame the guy for trying. Alright. So, are those price increases sticking?
Ita Brennan
I think for, I mean, it’s going to be linked to the cost structure and the supply chain, honestly, right. I think they’ll stick for as long as the cost escalations are in place. And then if we start to get improvements, which hopefully we will, you know, we’ll go drive the cost structure, and I would expect customers to come back and look for relief on some of those. Right. Exactly the timing of that. Everybody’s going to kind of make sure that, you know, you’ve secured kind of cost improvements and stuff before you start to unravel those. But I think over time, there will be some pressure to do this?
Alex Henderson
So, there’s been a lot of discussion around 400 gig as a cycle, I’ve never argued that people should be looking at speeds and feeds. That’s so 2,000 time frame. It’s such a legacy viewpoint, but 400 gig has gotten a lot of play. I think you’ve answered it quite clearly that it’s not 400, it’s 100, 200, 400. And in the future, probably 600, and 800. But has that changed the competitive landscape at all in terms of the ability of the competitors to be more in tune with what’s going on as opposed to late to the party and that have any impact on your business?
Ita Brennan
Look, I think, you know, what’s been great to see is, kind of the consistency with which the team has executed through these product cycles. Right. And the, you know, the ability to partner with these customers, and you know, ensure that you get your fair share of spend. I think we’ve seen that now multiple cycles. Right. I think 400 really, 400, 100, 200, 400 hasn’t really been any different. Right. We’ve brought good products to market on time, and, yeah, they’ve been well received by customers. Yeah. There’s new used cases. Pardon?
Alex Henderson
And much better software.
Ita Brennan
And much better software. I mean, it’s the whole package. Right. You’re not selling pieces. You’re selling a system. Right. And you’re selling a [system kit business] [ph]?
Alex Henderson
So, in the environment where enterprises are going into hiring phrases that put them into real challenges to try to cope with all of the technology that they want to deploy and the challenges of keeping that that running, does that accelerate the adoption of your technology and provide a tailwind, which might be counterintuitive?
Ita Brennan
Yeah. Look, I think for these enterprises, you know, if they’re thinking about their businesses and, you know, in a near term basis and they have plans to, kind of execute on new technologies that drives efficiencies, right, because I think most enterprises have found themselves more reliant on technology and on the network post-COVID than they were before, right.
So, as they make investments, as they choose to make investments, focus is absolutely on operational efficiency. And how do you maintain, you know, uptime quality, all the things that the cloud has historically cared about, right? And how do you manage those footprints, you know, in the most efficient way? And by the way, have time and resources to do time to service and to do other things as well, right? I think that’s the focus for the enterprise customers for us.
I think, you know, enterprises that are on that path and have decided to make those investments, I don’t know if that changes unless we see a really big disruption from a macro perspective, etcetera. Then obviously, if you see that, then, you know, all bets are off, but if, you know, if you’re continuing maybe in a somewhat constrained, you know, challenged environment, but this is positive, net positive for their business. I think you can see them continue to make those investments.
Alex Henderson
Got a question come in from the field, are R&D investments focused on evolutionary change or is there something more disruptive?
Ita Brennan
Again, I go back to the TAM that we kind of talked about at the Analyst Day. There’s major opportunities there. I don’t know if you could say to them to be, you know, revolutionary change or evolution? I think it’s revolutionary from, you know, when you think about some of the, let’s take for how networks are deployed, right? If you take the, you know, the CI Pipeline and just what that can do for a customer, that’s pretty revolutionary to be able to actually, you know, set up your network in advance, right, and test it in advance before you ever deploy it into your actual infrastructure.
I mean, that’s pretty revolutionary from a customer perspective versus, you know, world where the best you could hope for was maybe roll back if you had a problem. Right? So, I think we are doing things that, you know, make significance, have significant impact on enterprise deployments and enterprise network management.
It’s still within, you know, the scope of networking, which I think is a major positive, right, that you can have that kind of TAM expansion. Within your area of expertise. Yeah. Exactly. Within your area of expertise, that’s a much easier TAM to go address in some ways than if you were trying to do things that were maybe revolutionary outside of your core business, right. But we don’t need we don’t need to do that yet. There’s a lot for us to earn our fair share of within the networking realm.
Alex Henderson
And I think, differentially advantaged in executing against them as well.
Ita Brennan
That’s right. Where you really have a right to win, right? You have you have some technology and some capabilities that, you know, that give you a big head start in terms of solution in some of those things.
Alex Henderson
Well, we’ve run out of time. Unfortunately, I could have gone on for hours with you guys [indiscernible] to get more into it. I certainly appreciate you guys joining us at the conference. You’ve always been very generous with your time, and we appreciate that. And to the large audience that dialed in, thanks so much for tuning in and listening to this fireside, and thanks for the questions as well.
With that…
Ita Brennan
Thank you for having us.
Alex Henderson
… call it a wrap.
Ita Brennan
Alright. Thanks.
Question-and-Answer Session
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