Arista Networks posted strong earnings for the first quarter (Q1) of its fiscal 2026, but worsening memory chip supply chain challenges have further darkened the vendor’s forecast for the rest of its financial year.

Arista’s revenues for Q1 increased 35% year over year to $2.7 billion, which came in slightly above guidance. However, gross margins dipped slightly both year over year and sequentially to 62.4% that was attributed to a lower mix of sales to higher-margin enterprise customers.

Despite those solid results, Arista’s management hinted at longer term challenges.

“Our demand is actually the best I've ever seen in my Arista tenure,” Arista long-tenured CEO Jayshree Ullal said during the vendor’s latest earnings call. “The supply, however, is a slightly different and opposite tale. We are experiencing industry wide shortages across the board, be it wafers, silicon chips, CPUs, optics, and, of course, memory that I referred to last quarter, coupled with elevated costs to procure these. Clearly, our demand is outstripping our supply this year.”

Ullal’s “last quarter” reference pointed to that then blunt assessment that due to those memory chip supply constraints “we're having to smile and take it just about at any price we can get, and the prices are horrendous.”

As with then, Ullal said that Arista was attempting to circumnavigate the chip challenge, but those efforts will have an impact.

“While we hope the supply chain will ease in the next year or two, the Arista operations team has been diligently engaging with our vendors in strengthening supply agreements and engaging in multiyear purchase commitments,” Ullal said. “We anticipate gross margin pressure due to mix and tradeoffs we are making to pay more to assure supply continuity to our customers.”

That “pay more” comment was echoed by Arista CFO Chantelle Breithaupt later noting that the vendor’s purchase commitments surged from $6.8 billion at the end of its last fiscal year to $8.9 billion during Q1.

“This expected activity mostly represents purchases for chips related to new products and AI deployments,” Breithaupt explained. “We will continue to have some variability in future quarters as a reflection of the combination of demand for our new products, component variability, and the lead times from our key suppliers. This could also result in quarters of elevated inventory balances ahead of the deployments.”

Ullal later admitted the initial thought was that this chip supply chain challenge was just tied to memory, “now it’s all the wafer fabrication facilities. Every chip is challenged.”

“We are experiencing such significant wafer fab shortages that we're not getting the chips in time,” Ullal continued. “I would just say our purchase commitments are multi-years because they're having to deal with forecasts that are out multiple years so that we get them in time, because the lead time of these chips is so long.”

Financial analyst firm William Blair in an Arista research note linked the vendor’s tight chip supply to Broadcom, which is Arista’s primary chip source as it builds its platforms on top of Broadcom’s Jericho and Tomahawk Ethernet chips.

“While management hopes these issues will ease in the next year or two, it is becoming a more acute constraint on Arista’s ability to deliver product and recognize revenues, potentially limiting some upside in the near term,” the firm wrote.

Ullal leaned into that notion, stating “as we continue to ship this year, we can give you a better visibility on next year, but I can just tell you we see multiyear demand, and we are going to do everything, including hurt our gross margins, to supply to that demand this year and next year because we believe that we certainly don't want to keep GPUs idle and AI infrastructures underutilized because Arista didn't supply the network.”

VeloCloud? Still integrating

Ullal also provided a small update on Arista’s billion-dollar VeloCloud purchase, noting those assets were “also integrating well into our branch and campus strategy, bringing more distributed enterprise use cases and a new channel motion with managed service providers (MSPs).”

Arista moved to purchase VeloCloud last summer from Broadcom in a deal targeted at enhancing Arista’s ability to connect branch offices back to campus headquarters.

Brendan Gibbs, area VP for Arista, previously explained that this connectivity includes multiple options, “whether it's cloud WAN connectivity from a cloud provider, whether it's a managed service from embedded service provider, or it's just direct enterprise connectivity over some sort of direct internet links from their own do-it-yourself-type of approach, it brings a multiplicity of connectivity options.”

That connectivity can plug into Arista’s campus switching products and Wi-Fi access points “for global SD-WAN and cloud WAN connectivity,” Gibbs said. “The VeloCloud edge solution really starts to be a perfect complement to the campus wired and wireless solutions that Arista has.”

Arista’s management had also previously touted VeloCloud’s VeloRAIN (robust AI networking) platform that infused AI into the SD-WAN platform. That infusion allows VeloRAIN to identify encrypted application traffic, which allows for it to prioritize edge AI applications that can support quality and service-level requirements.