The Transcripts, Transcripts
Arista Networks, Inc. (ANET) J.P. Morgan 51st Annual Global Technology, Media and Communications Conference (Transcript)
Arista Networks, Inc. (NYSE:ANET) 51st Annual J.P. Morgan Global Technology, Media and Communications Conference May 23, 2023 1:55 AM ET
Company Participants
Ita Brennan – Chief Financial Officer
Conference Call Participants
Samik Chatterjee – J.P. Morgan
Samik Chatterjee
Good afternoon, everyone. So we’ll move to the next session. Thank you, if you can take your seat. I’m Samik Chatterjee, I cover the hardware companies at J.P. Morgan. For the next session, we have Arista. And from Arista, we have Ita Brennan, CFO, as well as Liz Stine from Investor Relations. Thank you both for coming to the conference.
Question-and-Answer Session
Q – Samik Chatterjee
And I’ll really just start off with more sort of a macro question and few questions we’ve been asking most of our companies to comment on. Just remainder of the year where, obviously, the macro backdrop remains a bit more challenging, but as you think about macro risk, what are the biggest risk that you perceive to your business?
Ita Brennan
Yes. I mean, I think certainly the macro overall environment is offering lots of uncertainties. You think about debt ceiling, you think about all the banks, think about interest rates. So there is a lot happening at a macro level. I think when you take that back to the business, we still haven’t seen a tremendous kind of direct impact on the business. We talked about this on the earnings call a little bit where on the enterprise part of our business where we’re really targeting larger, big bet type companies, we’ve seen that continued engagement. In spite of kind of some of these backdrops, obviously, we’d be [foolish] (ph) to ignore those, we’re going to continue to monitor and look at that. Over time, but we haven’t really seen that impact on the business yet.
I think on the hyperscale side of the business, on the cloud part of the business, that’s more of a cyclical question, right? And we’ve talked about this a little bit where we’ve come off some very accelerated growth with cloud where cloud grew triple digits last year. So we do expect that there will be some moderation in that spending. Is that macro? Is that not macro? I mean, I think it’s just more of a — more of a cyclical kind of product cycle related trends and we’ll see where that goes as we move through the year and get some better visibility.
Samik Chatterjee
Okay. Just to follow-up on that, I mean, one of the things, as you mentioned, like you haven’t seen maybe the macro impact you as much. But we’ve seen with a lot of other hardware categories and I think even during the sessions I’ve hosted today, it’s come up that there was a pull forward of capacity by the hyperscalers in terms of their own investments towards capacity. How much of the slowdown you’re expecting is largely a function of maybe a pull forward of demand from their side to add capacity? And when you sort of look forward, it’s more sort of just waiting for them to digest that capacity and move forward? Or is there a change structurally in how they think about their growth rates on public cloud revenues and that’s changing their outlook for how they spend?
Ita Brennan
Yes. I think we had come through a very interesting period from a supply chain perspective where you definitely saw a lot more visibility from these customers in terms of what they needed to deploy, and we were able to kind of lay out deployment plans in advance and over a longer period of time than we would normally see. I think we’ve tried to be — to have a good understanding of what was being deployed and when, and we’re still working through that even now. I think the question is, kind of once you get through those deployments, what does the trajectory of that investment look like as you head into 2024 and beyond. Right? And I think that’s something that — there’s been — these companies are looking at their architectures, they’re looking for efficiencies, et cetera. They’ve talked about wanting to do the things that they need to do for their business. I think their CapEx has been reasonably resilient even through this. So I think we’re just going to have to wait a while to see exactly how that how that plays out. And we probably won’t get visibility to kind of into that time frame until later in the year.
Samik Chatterjee
Okay. Obviously, 1 of the questions that I’m sure you answered all morning is the impact of AI on your business. Largely, I think, obviously, sort of the infrastructure spend is what everyone’s focused on, but maybe flesh it out a bit more in terms of where you see the opportunities? Is there any sort of offset to think of in terms of where the business gets disrupted at the same time. Just help us think through that.
Ita Brennan
Yes. I mean, I think for us, it’s early. Jayshree talked on the earnings call about the fact that we’re at the beginnings of understanding what AI really means and what the technology will look like. We have deployed some AI use cases, but it’s relatively small. I think we look at it as — it’s a good underpinning of kind of future momentum and demand, particularly from some of the larger hyperscale customers. It’s a reason why these technology cycles that are coming — upcoming are going to be important. It’s a reason why everybody is so focused on making sure that those cycles happen and happen in a timely manner. So I think that’s all positive. It doesn’t necessarily mean that tomorrow everything changed. And there isn’t a lot of work to do to get to kind of those new products and to get to those cycles. There isn’t a lot of technology challenges to sort out. But that’s okay too. Right? That’s what — that’s really what we do. And so, AI as a driver for innovation and for new technology changes, speed of deployment, all of that is positive for us. Exactly what it looks like kind of in this time slotted period, it’s really too early to start to fully understand that yet.
Samik Chatterjee
Okay. Since we’re on the topic of AI, any way of sort of that you’ve quantified how big the opportunity for Ethernet switching is, how do you think about the risk from InfiniBand remaining a core part of that market or dominant in that market and Ethernet not being able to displace InfiniBand for the technology?
Ita Brennan
Yes. I mean, I think if you look at the data that we have today, high performance compute use cases, it’s roughly 50:50 split between Ethernet and InfiniBand today. Obviously, that’s almost pre AI, but it is — it does give you some indication or some place to start. Our belief is that, if AI turns out to be so critical and embedded in all of these business processes, if that’s really where this goes, then you’re going to want to deploy this technology pervasively across these large cloud footprints. And I think that’s where we believe that Ethernet has some advanced. Right? In terms of being able to scale, it’s standards based, it’s already deployed in a lot of these footprints already. Its standards based, there’s lots of expertise around it, et cetera. So there’s a lot of advantages when you think about getting to scale that we believe kind of comes with Ethernet.
It’s not completely solved today. We need the new speeds. The team’s working on — Anshul talked about near lossless fabric, but it doesn’t need to be near lossless or lossless fabric. So there’s work to do. But again, if you really think its scale, is your endgame, then we believe Ethernet has a role to play there. That’s where Ethernet kind of has some real advantages. Again, we’re going to have to work through this, but I think — if it’s a scale play, we think Ethernet can have player role there. It doesn’t mean that InfiniBand is not going to have a role, it’s just kind of the scale will in our minds favor Ethernet.
Samik Chatterjee
You mentioned moving to sort of next generation speeds or higher speeds and being critical in that. And obviously, there’s sort of latency, et cetera, that comes into the equation here. Does it change how fast these upgrades cycles are, because you’ve been in the midst of 400 gigs upgrade cycle. Does that 400 gigs sort of naturally then bleed into the next upgrade cycle muting some of the cyclicality that you’ve seen with your customers?
Ita Brennan
I think it’s too early to really know that, honestly. We’ve always want these cycles to go faster, and it seems like every time we’ve done one there’s some really urgent reason for why they have to go faster. I’m not sure how much that actually makes them go faster. Right? So I think there’s definitely going to be energy around trying to have this happen more quickly. But I think experience has taught us that it’s still hard, there’s real work that has to get done, there’s an ecosystem that has to get kind of formed around these deployments, particularly at scale. So I don’t know how much faster it really goes in the end. I think it’s great that there is energy and there is reasons why we want to make this happen faster, but I think it’s — yes, it may still take some time.
Samik Chatterjee
Okay. You mentioned on the last earnings call that you are already qualifying or sort of sampling some products with your customers. Maybe help us think through what that timeline looks like? Where you are today? How much sort of — how much of a timeline does it look like when you’re at that spot to sort of get something commercially into the market? Just trying to think about lead time to revenue here.
Ita Brennan
I mean, we do have some revenue today coming from AI use cases. It’s hard for us to track it exactly, because it’s, obviously, the 7,800 platform that’s being deployed, and it gets deployed into DCI and other use case as well. Right? But there is some — some traction around AI with that platform, but again, it’s small. Right? So I think it’s more — as customers kind of vet the solution and then start to deploy, we’ll start to see some more revenue. But again, I’d go back to Jayshree’s comments on the call. I think it will take some time for it to become a meaningful revenue driver.
Samik Chatterjee
When you say you track the use cases that this might be going into and it’s difficult. I think there has been some confusion on the investor side just given some of the other companies, including semiconductor companies mentioning more sort of exact revenue numbers that they’re doing in terms of AI chips. I mean, is it really that easy to discern at this point what’s going into AI use case for you? What’s not? And how are you classifying it? Are you looking at, like, the customer — do you have visibility into what the customers using it for? Or is it more of like trying to triangulate based on what chips are in those systems?
Ita Brennan
Yes. I mean, it’s not something that I can — that we can count kind of from a financial system with a very nice kind of black and white delineation, right? Which is, obviously, where we’d like it to be, because it’s a multi-use product set. Right? It’s not just an AI platform, and the 7,800 is our [workhorse] (ph) product that we will deploy into large spine use cases across the business. So it’s hard to get a very specific number. It’s much more qualitative when you try to put some numbers around that.
Samik Chatterjee
Okay. I think one of the things that’s come up is, obviously, Arista has gained a lot of share over the years and used the 100 gig and then the 400 gig as a key driver of share gains. As we think about AI, does it create an opportunity for further market share shifts, either in favor or does it open up more of the ecosystem to more suppliers, new suppliers to come in, how do you ensure you stay on top of sort of continuing that progress on market share?
Ita Brennan
Yes. I mean, it all still comes back to execution. Right? I mean, I think we’ve gone through multiple cycles coming into the 400 gig cycle. There was a lot of concern at the investor level about, could we maintain our position? I think we’re very happy with kind of how we came through that cycle. But it’s all about execution. So now you need to go do that again at 800 gig. But I think the more in times of change and customers having new demands, new needs, new use cases, that has favored Arista in the past. Right? And I think that the team is kind of excited about getting involved in some of those and helping to solve some of those use cases. But again, you have to execute. You got to deliver good quality products early in the cycle and have them scale. I mean, that’s the key to this. And so, we just need to stick to the playbook, if you like, and continue to execute on that.
Samik Chatterjee
Just going back to your last Analyst Day, you talked about a five-year revenue CAGR of 20%. As we look to future periods and I think this is again sort of asking you to think about what the AI sort of in relation to magnitude could be, but is this sort of natural to expect that when you think about longer term revenue CAGR, AI is sort of additive to it overall?
Ita Brennan
Yes. I mean, again, I think it’s hard to completely separate those at this point, right? I know some of the industry analysts have tried to put some numbers on kind of what an AI high speed switching, Ethernet switching number would look like. I think it’s extremely difficult to do that. Right? Because, again, it comes back to just how fast can you kind of resolve some of the technology issues, how fast do you have the new products and then, how does it ramp. So I think, for us, again, we come back to it more as it’s underpinning healthy growth, hopefully from the hyperscale piece of the business in particular over a period of time and a good period of time. And I think that’s very positive to come back to kind of, again, what slope the curve is like? I don’t think we have a good answer to that yet.
Samik Chatterjee
Okay. Staying on the topic. I think you said there are some modest amount of revenues that you’re seeing on the AI use cases. I think one of the question that coming up is, how much of the, like, your key customers like Meta have already been doing some level of AI investments, how much have you been able to leverage of that already? Particularly any insights on sort of which technologies each of your customers are trying to favor related to Ethernet versus InfiniBand? And Meta did have a recent announcement in terms of just sort of setting their priorities in relation to how they want to invest in AI versus the non AI sort of infrastructure? How do you think about implications on your switching business from that?
Ita Brennan
Yes, again, I think there’s going to be multiple paths here in terms of how these customers are going to go address this. Right? And it’s — we were talking earlier today about when there is lots of changes and the technology shifts, it’s messy. Right? So there will be — we will see customers have multiple different strategies. We’re going to see them have phased strategies. We’re going to see them try to drive efficiencies and drive better cost outcomes as they move through this. Right? And that’s not unusual when you’ve got kind of new — lots of new products kind of coming to market around the same time. So I think we’re going to have to work through that with each of these customers over the next while. But again, we have that relationship. So we do have kind of that engagement, but it’s going to take some time for us to work through it.
Samik Chatterjee
Ita you keep referring to that the ecosystem needs to build out further like on the Ethernet side, particularly to compete with InfiniBand. Traditionally or historically you’ve sort of taken the approach of more partnering on that side to really help it out. But as you think about where you stand today, is then this sort of a more active evaluation of whether you can sort of wait to partner with companies or do you want to sort of take a more active approach in vertical integrating and helping the ecosystem build out quicker?
Ita Brennan
Yes. I mean, I think the ecosystem — both of these technologies have to evolve if they’re going to satisfy the need. It’s not just that Ethernet has a challenge, you also have InfiniBand being limited in terms of how it scales, et cetera. So there’s going to be need to be development on both sides of that equation. Right? So I think it’s — on our side, it’s more as we move through these speeds, obviously, that will be optics and other things that come with that. We still don’t believe you have to control an individual entity to make that effective. You really want to be able to influence the ecosystem. Right? And I think we do a good job, a very good job of kind of engaging with the different partners and helping to kind of drive a road map, drive an outcome, and not having to choose or become an individual player there. You get a lot more leverage and ability to influence the ecosystem when you’re somewhat neutral. And you can help drive that road map. So I think that’s still the strategy. It has been effective for us, and I think we’ll continue to do that over time.
Samik Chatterjee
Let me open it up and see if any questions the audience has. Just wait for the mic. Sorry.
Unidentified Participant
Hi. Good afternoon. Just on the AI revenue opportunity, is there any sort of conceptual framework you’d be comfortable providing in terms of how to think about that specifically with respect to maybe as an attach rate to GPU sales. I mean, the concept being for every $100 you spend on GPUs, maybe you need making up a number of $10 of networking equipment to prevent any bottlenecks developing in the data transfer network? I mean anything similar to that that you could frame for us to help us quantify or think about that?
Ita Brennan
Yes. I mean, I don’t know that we’re quite there yet. Right? We haven’t offered or that we have enough kind of experience yet to be able to kind of build out that type of framework. Right? We’ve seen some very early data about the network being a bottleneck and causing kind of underutilization of the GPUs in certain cases. But again, that was a very early kind of point in time scenario. So I think we’re not quite there yet where we could kind of create a framework that will be predictive. I think we need to see some more experience before we’re going to be able to do that.
Samik Chatterjee
Any other questions?
Unidentified Participant
Thank you, Ita. You mentioned optics being one of the things that you guys are thinking about or working with? Can you just describe that ecosystem? When do you think that it could be really adopted in scale? I know that there’s a lot happening in innovation, but if you could just elaborate a bit more on your optics comment?
Ita Brennan
Yes. I think as we work towards a new product set, new speed transition, one of the things that’s important is to kind of work with everybody in the ecosystem to make sure that there’s alignment on all of the other pieces that we don’t necessarily control, but that you want to have kind of happen and be viable so that you’re able to kind of move at the speed that switch wants to move at, basically. Right? So we do spend quite a bit of time. The team spends quite a bit of time working with the different players in that optical space to make sure that there’s kind of clarity around what are their optics needs and how can they best be solution as we go through these cycles, right? And again, I’m not probably not the right person to try and get into the very specifics of those technologies, but that’s kind of a — you’ll here Andy, for example. Andy Bechtolsheim, our Founder talk a lot about optics. The reason why is, obviously, because you’re trying to make sure that there is a clean path for kind of the switching and those products coming to market.
Samik Chatterjee
When you think about your business today versus three years ago, would you say there’s been a shift in the importance of owning the customer relationship versus having the best product?
Ita Brennan
I think we’re fortunate that the best product is still super important in networking, right? And even — when you think about kind of these — even these large customers, they tend to want to buy best of breed. They tend to want to focus on and they’re very capable of putting all the pieces together themselves. Right? So they really want, like, technology drivers and technology visionaries, if you like, people who can help kind of plan ahead and solve problems for them. So I think that’s — that engineering to engineering connection is still fundamentally important and then executing against those, right? You can own — you won’t own a customer relationship for very long if you’re not kind of bringing the products and the technology to market and delivering kind of on what you commit to.
Samik Chatterjee
Okay. Let me take this question that came in and see if you have a comment on this. It says, could you comment on Ethernet versus InfiniBand debate? How that is evolving with AI? How could open source AI models change the dependence on vendor specific GPUs and InfiniBand for AI.
Ita Brennan
I’m sorry. Can you read that again?
Samik Chatterjee
Just the reliance on GPU and InfiniBand does the technology, so the same — pretty much the same question.
Ita Brennan
Yes. I mean, I think our view again is best of breed, best solution is what’s going to win out here, right? And they’ll be — each of these pieces will end up being evaluated on their own merits. And again, for the switching piece, we think Ethernet will have a role to play. And when you’re in that Ethernet space, we believe we have a role to play in that. Again, lots of work to do, but I think that’s kind of the — that’s how we see this.
Samik Chatterjee
Let me switch gears here. You’ve talked about engagement with Google as a customer sort of starting to build up a bit and Anshul has talked about it. Any sort of update on that, where’s progress? I think one of the questions we keep getting is then sort of when — how should we think about the insertion opportunity there? When is the right time? Is it really related to AI? Is it more related to sort of think about the next speed, 800 gig, how should we think about it?
Ita Brennan
Yes. I mean I think we’ve talked about this a little bit. There’s always been lots more discussion about it, that’s not necessarily originating from us. But I think, yes, from a technology perspective we’ve done some work. We’ll continue to do work there. At the end of the day, it’s going to be the customer’s decision. Right? If they want to deploy more broadly with the products, I think our job is to make sure we solution any technology gaps, et cetera. And then it’s really going to be up to the customer from there. There’s really nothing new to say to that until and it’s really their decision.
Samik Chatterjee
Okay. Coming back to the core business, if we talk about the 200 gig, 400 gig upgrade cycle, where are you in terms of those upgrade cycles with your two key customers there? And sort of how should we think about the length of that upgrade cycle? What are you seeing in terms of growth rates on those?
Ita Brennan
I mean, I think we saw probably first revenues, real revenues, material revenues and leveraging that silicon. And again, it’s kind of 100 gig, 200 gig, 400 gig. Right? It’s just the silicon’s been used to build its products with various different configurations depending on the customer and depending on their architecture. But we saw that first revenue probably back end of 2021. Right? So we still have — there’s still a fair amount of time left where you will be deploying these products right through until you have the next silicon and then you’ll see those 800 will get added to that, but you’ll also probably have a whole new slew of 100 gig, 200 gig and 400 gig products that leverage that silicon. So the cycles have become — it’s a little bit more complex, it’s not like there’s a black line between one cycle and the next. It’s just leveraging that silicon to get you the best, the densest, the best cost per port kind of at those various speeds. So I think 100 gig’s going to be with us for a long time. It’s just going to transition through the various silicon products.
Samik Chatterjee
Okay. And then sort of if I put that in context of what you just outlined at the start of the discussion in terms of a slowdown in the growth with the cloud companies, because they go through a digestion. So what you’re really sort of indicating is, the slowdown on account of some of the CapEx cuts that they’ve announced. I mean, help us think through sort of when you think about drivers of that slowdown, how much of that is just not as many new data centers coming in versus a slowdown in the upgrade cycle because you’ve gone through the peak of that?
Ita Brennan
Yeah. I think — look, the CapEx actually is — if you look at their CapEx, publicly shared CapEx numbers, it’s been reasonably resilient, right, through this. But there is a lot of — they’ve had a lot of discussion around optimization, improvements, et cetera. They’re sorting through kind of what their priorities are and what those are going to look like. So it’s not like we have perfect knowledge about what happens next with them, but I think having gone through the cycle between 100 and 400, it beholds us to think that there could be some cyclicality there. Right? And we’ll start to understand that better once we get closer to the end of the year. They’ve grown, we definitely think it’s going to moderate off of triple digit growth last year and healthy growth again this year. Where exactly that ends up? We’re just going to have to wait a while to get some bottoms up validity around that. Right? They’ll continue to spend for sure the questions at what level and what does that look like.
Samik Chatterjee
Okay. Pulling back a bit to the aggregate company level, not just cloud. I think most — you don’t disclose backlog or what’s happening with orders, but most of the other networking companies have this dynamic of backlog moderation orders being down double digit. How can we think about and sort of any ballpark way of thinking about your — what you’re seeing, which are the customer verticals you’re seeing sort of the most slowdown in terms of momentum? And in terms of when you think about backlog and sort of winding down that elevated backlog, when do you expect to have that sort of back to a normal level?
Ita Brennan
I mean, I think, look, we never talked about orders on the other side of this as well. For the simple reasons, it didn’t really make any sense, right, to take extended lead times, three, four times, extended lead times, orders were always going to be distorted by that. Right? So we try to stay very focused on let’s understand what needs to be deployed and when, right, and continue to kind of execute against that deployment schedule. What we’ve talked about now is, obviously, lead times are getting better. Visibility will reduce. Right? That’s not necessarily good or bad in itself. Right? It’s really more about when will you know kind of what that next period of time looks like, what that new — that next piece of business looks like. And instead of knowing that 12 months out, you’re going to know that six months out. And we have to work through that. We’re just moving back to a more regular lead time based business. Again, what actually happens is going to be more dependent on the things we’ve talked about. Right? Where do customers want to spend? I think our enterprise businesses remained reasonably robust so far, so we’ll see how that continues. And then we’ve had kind of the hyperscale conversation already.
Samik Chatterjee
Commentable enterprise remaining resilient, that’s [indiscernible] not just the revenue.
Ita Brennan
That’s engagement. I’m going to stay away from the order discussion just because, again, it’s all tied into the whole lead time extension and contraction just to start the whole thing. But engagement with customers, customers upcoming, winning customers, et cetera. I mean, that has remained reasonably resilient.
Samik Chatterjee
Okay. Let me just open it up again and see if any questions or I can move on to other parts of the business.
Unidentified Participant
Thank you. Just as a follow-up to my question before talking about having the best product being key. Is that the best product for the industry or is there any differentiation in terms of the best product for an individual customer? And if you’ve worked with that customer over time, does that put you in a better position to keep producing the best products for them?
Ita Brennan
I mean, I think there’s a base, obviously, level of discipline around software and hardware development that needs span all customers. Right? And then there’s a lot to be said for having these technical engagements, direct technical engagements with the R&D teams on both sides and planning for what that customer specifically needs. Right? I mean, ultimately, you’d like to be building a product that’s as leverageable and transferrable as possible. And we’ll always try to do that and find the best solutions that fit within that framework. But when you’re working very closely with a customer then being able to kind of solve their specific needs is very valuable in building relationships, solving problems, responding quickly to issues and problems, because stuff happens. It’s how fast can you — how quickly can you solve problems, fix problems. Those types of things are what build that customer experience and customer relationship. Can you have your customer look back on the last period of time and say, okay, that was a good strong technology partnership. That’s really important. That everybody remembers everything that ever happened to them in their data center in this industry for a very long time.
Samik Chatterjee
I’ll take this one that came in. How would you describe the relationship with Broadcom and the establishment of a long term supply agreement? Do you think the relationship could change in the future? Any chances of having a second supply?
Ita Brennan
Yeah. I mean, look, we have tried leveraged every merchant silicon option that has come along. So there’s no reticence in our part to go look at other suppliers, and honestly, Broadcom understands that. But it all comes back again to performance. They have executed really well on product by product, multiple families, they’ve moved faster than everybody else. And that’s — at the end of the day, that’s why the partnership works so well, because they’re doing everything that they’re supposed to do, we do what we need to do when you get to a compelling overall system solution. So hopefully that continues. I mean, they’re certainly very vested and interested in continuing to execute well in this space and they’ve been a good partner.
Samik Chatterjee
What is Arista lacking to gain higher traction in the service provider segment?
Ita Brennan
Yes. I think, we did not try to go back and rebuild all of the protocols and all of the software that have been deployed in that part of the business historically. We started out in switching, then we moved to routing. When we moved to routing, it was kind of switch router based product set with a completely new set of protocols to support that routing capability. So we need kind of the — we need the technology to shift towards cloud, which we believe it will eventually because that’s the best most cost effective solution, but it’s going to take time to do that. I don’t think even if we had gone back and retrofitted it, we would necessarily won because there’s lots of suppliers there doing that for a long time. But we believe if and when they move to that more cloud based kind of architecture, then we have a credible seat at the table, but that needs to happen.
Samik Chatterjee
I did want to go back to the long term supply agreements. And I think the biggest thing that stood out from the last earnings report was really the inventory increase on the balance sheet. I mean, you sort of explained some of it as the sort of the product that’s coming in as — on account of the supply agreements that you have and the purchase commitments that you’ve already done. How should we think about when does the inventory on the balance sheet peak on account of that?
Ita Brennan
Yes. I mean, there’s, obviously, lots happening around supply now. We’re very focused on kind of putting all of that back in the box. I mean, you had to kind of take things out of the box to make sure you had products and that you could supply products, now we’re kind of starting to put things back into the box. We’re starting to see lead times come in across a lot of components, and we’ll make sure that we benefit from that and that we leverage that and that we drive that. On the long lead time key components, obviously, we have to still live with the current lead times, and that’s some of what you’re seeing in that inventory build is really the build on raw materials for those key components. I think by the end of the year, we should start to see kind of the inventory flatten out and start to come down. We brought the purchase commitments plus inventory down about $400 million in this quarter just gone. So we’ll continue to drive kind of that back to more normal terms here over the next while, but it’s going to take a while because we knew we were in a multi-year kind of component game. So it’s going to take time to unravel.
Samik Chatterjee
Switching to margins on this question, it says you’ve consistently outperformed on the operating margin. Do you think you could envision the possibility to have a higher optimal gross and operating margin framework in the next three years?
Ita Brennan
I think we’ve still come back to — we’ve talked about this plus or minus 40% as a longer term operating margin model, assuming that we can find things that are accretive to the business and to the growth to invest in. And I think that’s still the way — the right way to think about it. We will outperform that sometimes, especially in periods of accelerated growth, top line growth, because you obviously don’t spend to that peak, you shouldn’t spend to that peak. But I think over time, we will reserve the right that if there’s things we can do that kind of will help the business in the future that we should go and make those investments.
Samik Chatterjee
Last quick one, capital allocation priorities. You’ve been building cash, and I think everyone sort of scratching their head what you do with it.
Ita Brennan
Right now, it’s an inventory to some degree, some of it anyway.
Samik Chatterjee
But how do you think about the uses of it longer term if you continue to sort of partner with companies rather than go the buy route on them?
Ita Brennan
Yes. I mean, we’ve been returning — we just looked at the capital, the repurchase program since its inception, and we’ve returned 50% roughly of what we generated, which is kind of what we set out to do an offset dilution. So I think that’s our baseline. It is opportunistic. We’ll continue to be opportunistic, but that’s kind of the baseline. And then once we’re through the working capital stuff, we can see kind of what do we do with that program in that environment, but for now we want to get through that.
Samik Chatterjee
Great. I’ll wrap it up there. Thank you. Thanks for the time. Thank you everyone.
Ita Brennan
Okay. Thanks for much. Thank you.