Operator:

Welcome to the Second Quarter 2024 Arista Networks Financial Results Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.

Jayshree Ullal:

Thank you, Liz and thank you, everyone, for joining us this afternoon for our second quarter 2024 earnings call. As a pure-play networking innovator with greater than $70 billion TAM ahead of us, we are pleased with our superior execution this quarter. We delivered revenues of $1.69 billion for the quarter, with a non-GAAP earnings per share of $2.10. Services and Software Support renewals contributed strongly at approximately 17.6% of revenue. Our non-GAAP gross margin of 65.4% was influenced by outstanding manufacturing discipline realizing cost reductions. International contribution for the quarter registered at 19%, with the Americas strong at 81%. As we celebrated our tenth anniversary at the New York Stock Exchange with our near and dear investors and customers, we are now supporting over 10,000 customers with a cumulative of 100 million ports deployed worldwide. In June 2024, we launched Arista's Etherlink AI platforms that are ultra-Ethernet consortium compatible, validating the migration from InfiniBand to Ethernet. This is a rich portfolio of 800-gig products, not just a point product but in fact, a complete portfolio that is both NIC and GPU agnostic. The AI portfolio consists of the 7060 x6 AI [ph] switch that supports 64800 gig or 128 400-gig Ethernet ports with a capacity of 51 terabits per second. The 7800 R4 AI Spine is our fourth generation of Arista's flagship 7800, offering 100% nonblocking throughput with a proven virtual output queuing architecture. The 7800 R4 supports up to 460 terabits in a single chassis, corresponding to 576800 gigabit Ethernet ports or 1,152 400 gigabit port density. The 7700 R4 AI distributed Etherlink Switch is a unique product offering with a massively parallel distributed scheduling and congestion-free traffic spraying fabric. The 7700 represents the first in a new series of ultra-scalable intelligent distributed systems that can deliver the highest consistent throughput for very large AI clusters. Let's just say once again, Arista is making Ethernet great. First, we began this journey with low latency in 2009 time frame. And then there was cloud and routing in the 2015 era, followed by WAN and Campus in the 2020 era and now AI in our fifth generation in 2025 era. Our Etherlink portfolio is in the midst of trials and can support up to 100,000 XTUs in a 2-tier design built on our proven and differentiated extensible OS. We are quite pleased with our progress across Cloud, AI, Campus and Enterprise customers. I would like to invite Ashwin Kohli, our newly appointed Chief Customer Officer, to describe our diverse set of customer wins in 2024. Ashwin, over to you.

Jayshree Ullal:

Well, thank you, Ashwin and congratulations. Hot off the press is our new and highest Net Promoter Score of 87 which translates to 95%. Hats off to your team for achieving that. It's so exciting to see the momentum of our enterprise sector. As a matter of fact, as we speak, we are powering the broadcasters of the Olympics, symbolic of our commitment to the media and entertainment vertical. And so it's fair to say that so far in 2024, it's proving to be better than we expected because of our position in the marketplace and because of our best-of-breed platform for mission-critical networking. I am reminded of the 1980s when San [ph] was famous for declaring the network is the computer. Well, 40 years later, we're seeing the same cycle come true again with the collective nature of AI training models mandating a lossless highly available network to seamlessly connect every AI accelerator in the cluster to 1 another for peak job completion times. Our AI networks also connect trained models to end users and other multi-tenant systems in the front-end data center, such as storage, enabling the AI system to become more than the sum of its parts. We believe data centers are evolving to holistic AI centers, where the network is the epicenter of AI management for acceleration of applications, compute, storage and the wide area network. AI centers need a foundational data architecture to deal with the multimodal AI data sets that run on our differentiated EOS network data systems. Arista showcased the technology demonstration of our EOS-based AI agent that can directly connect on the NIC itself or alternatively, inside the host. By connecting into adjacent Arista switches to continuously keep up with the current state, send telemetry or receive configuration updates, we have demonstrated the network working holistically with network interface cards such as NVIDIA BlueField [ph] and we expect to add more NICs in the future. Well, I think the Arista purpose and vision is clearly driving our customer traction. Our networking platforms are becoming the epicenter of all digital transactions, be they campus center, data center, plan centers or AI centers. And with that, I'd like to turn it over to Chantelle, our Chief Financial Officer, to review the financial specifics and tell us more. Over to you, Chantelle.

Liz Stine:

Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Michael Ng:

As we head into next-generation GPUs with Blackwell and the MVL3672 [ph], there's been some discussion about whether the systems may be less modular in some of its components, particularly for back-end networking. I was just wondering if you could share your views and provide some clarity on the vendor modularity of Blackwell, particularly as it relates to networking? And how that might affect Arista's positioning over the next couple of years, if at all?

Operator:

Our next question comes from the line of Aaron Rakers with Wells Fargo.

Jayshree Ullal:

Yes. No, good question, Aaron. Let me start generically and of course, I'll hand to my CFO, Chantelle. Product deferred sort of ebbs and flows. It goes in, it comes out. And it's particularly high when we have a lot of new product and new use cases. But it's not extraordinary to see us running a higher product deferred in 1 quarter or in 1 year and then dipping down. So the long term is consistent, the short term can ebb and flow. Do you want to say a few words on that?

Operator:

Our next question comes from the line of Meta Marshall with Morgan Stanley.

Jayshree Ullal:

Yes. No, I'm going to speak to it and I want to turn it over to Ashwin since he's here with us. First of all, all 4 trials are largely in what I call Cloud and AI Titans. A couple of them could be classified as specialty providers as well, depending on how they end up. But those 4 are going very well. They started out as largely trials. They're now moving into pilots this year, most of them. And with any luck next year, maybe we won't be saying 4 to 5 and we could say 5 out of 5. That's my hope, anyway. But in addition to that, we have tens of smaller customers who are starting to do AI pilots. And Ashwin, you've been smack in the middle of a lot of those, maybe you want to speak to that a little bit?

Jayshree Ullal:

And they tend to be early adopters.

Jayshree Ullal:

They're about to build an AI cluster. It's a reasonably small size, not classified in thousands or 10 thousands. But you've got to start somewhere. So they started about a few hundred GPUs, would you say?

Operator:

Our next question comes from the line of Atif Malik with Citi.

Jayshree Ullal:

Yes, I get asked that question a lot. First of all, the TAM is far greater than the $750 million we've signed up for. And remember, that's early years. But that can consist of our data center TAM. Our AI TAM which we count in a more narrow fashion as how much of InfiniBand will move to Ethernet on the back end. We don't count the AI TAM that's already in the front end which is part and parcel of our data center. And then obviously, there's a campus TAM which is very, very big. It's north of $10 billion. And then there's the wide area in routing. So these 4 are the building blocks that I call the campus center, data center, AI center and ran center [ph]. And then laid upon that is some very nice software. If you saw, we had a nice bump in Software and Service renewals this quarter which would be largely centered around CloudVision observability and security. So I would say these are the 4 building blocks and then the 3 software components on top of it. Not -- of course, not to forget the services and support that are part of these TAMs as well.

Antoine Chkaiban:

I'd like actually to ask about the non-AI component of your Cloud and AI segment. What can you tell us about how investments in traditional infrastructure are trending? Because we heard from other vendors that inventory digestion is now easing. So are you seeing that too?

Operator:

Our next question will come from the line of Amit Daryanani with Evercore.

Chantelle Breithaupt:

Yes. I think that Jayshree and I came to this guide of at least 14% because we do see multiple scenarios as we go through the second half of the year. We do expect to continue to see some acceleration in growth but I would say that from the perspective of the forward scenarios, we are comfortable with at least 14% and we'll come back in Q3 and see where we were able to guide for the rest of the year.

Operator:

Our next question comes from the line of Tal Liani with Bank of America.

Jayshree Ullal:

Tal, you there?

Jayshree Ullal:

Yes, yes.

Jayshree Ullal:

So Tal, if you go back to November Analyst Day, to call out gross margin lower, I would disagree because I think we're just blowing it off our guide. Our guide was 63 to 64. And we have now shown 2 quarters of amazing gross margin. Hats off to my Mike Capas [ph] and John McCool, Alex and the entire team for really working on disciplined cost reductions. But yet, if you look at mix, in general, the costs and et cetera, I would say you should plan on our gross margins being as we projected. They're not lower. I think we just did exceptionally well the last 2 quarters, so it's relatively lower. That's the first thing. Second, in terms of growth, I would say we always aim for double-digit growth. We came in with 10% to 12%. And again, Q2 is just an outstanding quarter. I don't want to use it as a benchmark for how Q3, Q4 will be. But of course, we're operating off large numbers. We'll aim to do better but we'll have more visibility as we go into Q3 and we'll be able to give you a good sense of the year.

George Notter:

I guess I was just curious about what your expectations were coming into the quarter for product deferred revenue. I guess I'm curious how much you thought would be added to that product deferred category in Q2. And then also, do you have a view on product deferred revenue for Q3?

George Notter:

Got it. And I assume these are new products you've shipped to customers, you're waiting for customer acceptance. Any sense for when those customer acceptances might start to flow through? Is that a 2024 event? Is that a 2025 event? How do you think about it?

Jayshree Ullal:

And I think it's fair to say if it's AI, it takes longer, if it's classic cloud, it's shorter.

Samik Chatterjee:

And strong results here. But if I can just ask a question on the commentary that Ashwin had in the prepared remarks. Ashwin, you mentioned the Tier 2 customer, where you're refreshing the front end as I sort of interpreted it to alleviate some of the bandwidth sort of concerns from the back end. How do you think about that opportunity across your customer base? Particularly, how should we think about sort of that as being attached to the $750 million target for back-end revenues that you have for next year? Just help us think about the opportunity that you're seeing with your customers on that side.

Jayshree Ullal:

Yes. I was just going to add that -- there are 4 things Ashwin and the team are seeing in the enterprise and provider sector. I think the migration to 100 gig data center is pretty solidly going on. If anybody is still on a 10 and 40, they're definitely not a early adopter of technology. And some of them are even moving to 400 gig, I would say.

Jayshree Ullal:

So that's on the data center. Campus, I know, in general, is a slow market. But for Arista, we are still seeing a lot of desire. And you heard Ashwin talk about a campus win but they're really frustrated and they're struggling with existing campus deployments. So we feel really good about our $750 million target for next year. The routed ran, again, we're both in Tier 2 and service providers and even in enterprise, there's a lot of activity going on there. And finally, the AI trials you talked about, they tend to be smaller but it's a representation of the confidence the customer has. They may be using other GPUs, servers, et cetera. But when it comes to the mission critical networks, they've recognized the importance of best-of-breed reliability, availability, performance, no loss and the familiarity with the data center is naturally leading to pilots and trials on the AI side with us.

Karl Ackerman:

So there are several data points across the supply chain that indicate enterprise networking and traditional server units are beginning to recover. I was hoping you might discuss what you are hearing from your enterprise and service provider customers on their commitment to upgrade their services and networking gear over the next couple of quarters. And as you address that, perhaps you could discuss the number of new customers being added in these verticals over the last couple of quarters out of the 10,000 or so that you have today?

Karl Ackerman:

How to think about the adoption or the growth of server and networking gear on for campus environments and what you're seeing there.

Operator:

Our next question comes from the line of Ben Bollin with Cleveland Research.

Jayshree Ullal:

Well, I think there are a lot of market studies that point to today is still largely InfiniBand. You remember me, Ben, saying we were outside looking in just a year ago. So step 1 is we're feeling very gratified that the whole world, even InfiniBand players have acknowledged that we are making Ethernet great again. And so I expect more and more of that back end to be Ethernet. One thing I do expect, even though we're very signed up to the $750 million number -- at least $750 million, I should say, next year, is it's going to become difficult to distinguish the back end from the front end when they all move to Ethernet. For this AI center, as we call it, is going to be a conglomeration of both the front and the back. So if I were to fast forward 3, 4 years from now, I think the AI center is a supercenter of both the front end and the back end. So we'll be able to track it as long as there's GPUs and strictly training use cases. But if I were to fast forward, I think there may be many more edge use cases, many more inference use cases and many more small-scale training use cases which will make that distinction difficult to make.

Alex Henderson:

I was hoping we could talk a little bit about the spending biases in the Cloud Titans. Clearly, there's an enormous amount of spending going into the AI front end, back end networking elements as well as the GPUs. But there is a rebounding growth rate of application that is ultimately driving the traditional business that has historically been called the CPU side of the data center. And I'm wondering if they're under-investing in there and that there's going -- whether there's a potential for a catch-up in the spending in that area at some juncture because of the over bias to or whether that investment is ongoing at a reasonable rate, consistent with a moderate acceleration in the application growth?

Alex Henderson:

Does the reacceleration of application growth excluding the AI play into that? I mean clearly that...

Operator:

Our next question comes from the line of Ben Reitzes with Melius Research.

Jayshree Ullal:

Yes. Well, first, I just want to say, when you say competitive environment, it's complicated with NVIDIA because we really consider them a friend on the GPUs as well as the mix, so not quite a competitor. But absolutely, we will compete with them on the Spectrum switch. We have not seen the Spectrum except in 1 customer where it was bundled. But otherwise, we feel pretty good about our win rate and our success. For a number of reasons, great software, portfolio products and architecture has proven performance, visibility features, management capabilities, high availability. And so I think it's fair to say that if a customer were bundling with their GPUs, then we wouldn't see it. If a customer were looking for best of breed, we absolutely see it and win it.

James Fish:

Just wanted to circle back on the enterprise side of things. I guess -- is there a way to think about how many replacements you're seeing relative to prior periods? And really, I'm trying to understand if we're starting to see that core enterprise data center network refresh actually pick up versus kind of the share gains that you guys have historically seen. And is there an underlying change in enterprise customer behavior, whether it's for the data center or Jayshree, I know you were talking about the campus earlier.

Ashwin Kohli:

Yes. Sure, Jayshree, right? And so to answer your question, from what I'm seeing from customers, they're kind of fed up with being deployed in the data center, specifically, something which is proprietary lock-in, right? Something which is -- does not give them the flexibility to do -- join multiple use cases such as data center, campus, routing and they want something that just works. They want something that is just simple. They want to make sure that when they wake up in the morning, the network is not down. And so Arista today actually has a brand. It has a value for there. And we've actually been delivering this for the last 10-plus years. So James, I would say the message is echoing successfully in our existing customers who are taking Arista not only in the single use case of data center but expanding that across data center, campus, routing, WAN. And then the team is eagerly working with a new set of Global 2000 and Fortune 500 customers to go evangelize a message to them as well.

Ittai Kidron:

Nice numbers, ladies. I wanted to go back to gross margin. Jayshree, Chantelle, if you don't mind, in your prepared remarks, you talked about manufacturing efficiencies, cost reduction. I guess I'm wondering why is that not something that carries forward to the next quarter as well? I understand you're trying to be conservative but I'm sure these are not changes that have a very short lifespan that they can carry forward. So why not be a bit more optimistic on what the gross margin outlook should be?

Jayshree Ullal:

And if you look at -- this isn't just this quarter. John and the team have done a fantastic job for the last year. So yes, I'm going to go back to them and ask for more but I think they will say they've done so much and might be squeezing blood out of a stone. So we'll see if they respond to more cost reductions. But I absolutely agree with Chantelle. It's largely driven by mix. And I think we've taken a lot of the cost reductions out in the last year.

Simon Leopold:

I know that you typically hold off on the 10% customer disclosures until the end of the fiscal year. But what I'm hoping to gather is how customer concentration may be evolving from comparison to last year, do you expect with your past customers growing their spending so much that it stays similar or with the diversity of the new opportunities, the concentration you've had historically declined. Any kind of indication you could offer? I'd appreciate it.

Simon Leopold:

And does the pipeline suggest you can have new 10% customers next year? Or do you expect sort of a similar concentration next year?

Operator:

Our next question comes from the line of Tim Long with Barclays.

Jayshree Ullal:

Yes. Thank you. Thank you for the change in question. I appreciate that. I think we will be in the teens for some time because there are 3 building blocks and a lot of this, Ashwin, you know very well. There's the services building block that as product goes up, there's a lot of pressure on us on a percentage of service to be lower, right? So that, while it may -- historically has been in the teens, can be lower. Then the second one is our perpetual software which, again, is a strong function of use cases, particularly things like routing, et cetera, where we've done very, very well. The stronger we do there, the better we do there. An extension of that is CloudVision which can be -- is more a subscription service with CloudVision as a service, either Network-as-a-Service or on the premise. So that's the second building block for us that's going strong. The one I want to point to a little more which could help us is the security [indiscernible]. You may know in May, we introduced the micro and macro segmentation. We also announced UNO, our Unified Network Observability. And while this is new, Ashwin and I have great plans for that and I think this could be a swing factor. As the services components may reduce over time, these new product components may increase. So 17 points, whatever percentage was is a great number. And if we can consistently stay there, I'd be very proud, particularly as our numbers get larger.

Sebastien Naji:

Sorry to bring you guys back to the AI conversation but this 1 is a little bit more high level. I guess, we keep hearing about bigger and bigger API clusters that are being built. And as Arista is working on connecting these larger and larger clusters as they scale, I'm just wondering, does that impact your ability to capture more revenue? Is -- you've talked about 15% of CapEx. Does that maybe change or go up or go down as these clusters that you're having to connect get bigger and bigger?

Liz Stine:

Thanks, Sebastien. Operator, we have time for one last question, please.

David Vogt:

Maybe just to bring it back together and maybe both for Jayshree and Chantelle. I guess what I'm trying to think through is this is your product introduction. You have a pretty strong ramp of AI likely next year. But does the guide imply that we're going to start to see a much bigger contribution in Q4 driven by the comments around mix earlier and the gross margin discussion? Because I would imagine early in the stage of their life cycle plus the fact that they're hyperscalers, they're going to be a relatively more modest gross margin profile at the beginning of the glide path versus the end of the glide path. So just any color there in terms of what Q4 might look like from an AI perspective relative to your expectations from a glide path perspective?

Chantelle Breithaupt:

Yes. Yes. I think so. I completely agree, Jayshree. The only thing I would add to it is you have to think of the kind of the matrix we're working within. So we have cloud and enterprise customers and we have very, very different scopes of readiness at those customers. So Q3, Q4, Q1, Q2 next year, they're all eligible for timing for types, et cetera. So we just want to make sure that variability that I spoke to in my prepared remarks is understood in that context.

Liz Stine:

This concludes the Arista Networks second quarter 2024 earnings call. We have posted a presentation which provides additional information on our results which you can access on the Investors section of our website. Thank you for joining us today and thank you for your interest in Arista.

Operator:

Welcome to the First Quarter 2024 Arista Networks Financial Results Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.

We are quite pleased with the momentum across all our 3 sectors:

Cloud and AI Titans, Enterprise and Providers. Customer activity is high as Arista continues to impress our customers and prospects with our undeniable focus on quality and innovation. As we build our programmable network on delays based on our Universal Leaf/Spine topology, we are are also constructing network, as I said, the suite of overlays such as zero-touch automation, security, telemetry and observability. I would like to invite Ken Duda, our Founder, CTO and recently elected to the Arista Board to describe our enterprise NaaS strategy, as we drive to our enterprise campus goal of $750 million in 2025.

Kenneth Duda:

Thank you, Jayshree, and thanks, everyone, for being here. I'm Ken Duda, CTO of Arista Networks. Excited to talk to you today about NetDL, the Arista Network Data Link and how it supports our Network-as-a-Service strategy.

Jayshree Ullal:

Thank you, Ken, for your tireless execution in the typical Arista way. In an era characterized by stringent cybersecurity, observability is an essential perimeter and imperative. We cannot secure what we cannot see. We launched CloudVision and UNO in February 2024 based on the EOS Network Data Link Foundation that Ken just described for universal network observability.

On the cash front, while we will continue to focus on supply chain and working capital optimization, we expect some continued growth in inventory on a quarter-by-quarter basis, as we receive components from our purchase commitments. With these sets of conditions and expectations, our guidance for the second quarter, which is based on non-GAAP results and excludes any noncash stock-based compensation impacts and other nonrecurring items is as follows:

revenues of approximately $1.62 billion to $1.65 billion, gross margin of approximately 64% and operating margin at approximately 44%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 320.5 million shares.

Liz Stine:

Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Unknown Analyst:

It's Adrienne for Atif. I was hoping you could comment on your raised expectations for the full year with regards to customer mix it sounds like from your gross margin guidance, you're seeing a higher contribution from Enterprise, but I was hoping you could comment on the dynamics you're seeing with your Cloud Titans.

Chantelle Breithaupt:

Yes. No, I think we saw because of the diversified momentum and the mix of the momentum that gave us confidence.

Samik Chatterjee:

I guess, Jayshree and Chantelle, I appreciate the sort of raise in guidance for the full year here. But when I look at it on a half-over-half basis in terms of what you're implying. If I'm doing the math correct, you're implying about a sort of 5%, 6% half-over-half growth, which when I go back and look at previous years, you're -- probably there's only 1 year out of the last 5 or 6 that you've been in that sort of range or below that.

Jayshree Ullal:

It's like anything else. Our numbers are getting larger and larger. So activity has to translate to larger numbers. So of course, if we see it improve even more, we'll guide appropriately for the quarter.

Operator:

And your next question comes from the line of Ben Reitzes with Melius Research.

George Notter:

I want to key in on something I think you guys said earlier in the monologue. You mentioned that Ethernet was 10% better than InfiniBand. And I -- my notes are incomplete here. Could you just remind me exactly what you were talking about there? What is the comparison you're making to InfiniBand? And just anything, I'd love to learn more about that.

George Notter:

Got it. I assume you're talking about RoCE here as opposed to just straight up Ethernet, is that correct?

George Notter:

I know you guys are also working on your own version of Ethernet, presumably, it blends into the UEC standard over time. But what do you think the differential might be there relative to InfiniBand? Do you have a sense on what that might look like?

Benjamin Reitzes:

I was wondering if you can characterize how you're seeing NVIDIA in the market right now. And are you seeing yourselves go more head to head? How do you see that evolving? And if you don't mind also, I think NVIDIA moves to a more systems-based approach potentially with Blackwell. How you see that impacting your competitiveness with NVIDIA?

Operator:

Your next question comes from the line of Amit Daryanani with Evercore ISI.

Antoine Chkaiban:

So as you can see NVIDIA introduced in-network computing capabilities with NVSwitch, performing some calculations inside the switch itself. Perhaps now is not the best time to announce new products, but I'm curious about whether this is something the broader merchant silicon and Ethernet ecosystem could introduce at some point?

Antoine Chkaiban:

No, I'm asking specifically about in-network computing capabilities, NVSwitch can do some matrix multiply and add inside the switch itself. And I was wondering if this is something that the broader merchant silicon ethernet ecosystem could introduce as well?

James Fish:

Anshul, we'll miss having you around. I echo my sentiments there, but I hope to see you soon. Jayshree, how are you guys thinking about timing of the 800 gig optics availability versus kind of use in systems? And you keep alluding to kind of next-gen product announcements for multiple quarters, not just this one, but -- should we expect this to be more around adjacent use cases, the core, including AI or Software, kind of take us in the product road map direction, if you can?

W. Chiu:

This is Victor Chiu in for Simon Leopold. Do you expect Arista to see a knock-on effect from AI networking in the front end or at the edge as customers eventually deploy more AI workloads based -- I'm sorry, biased towards inferencing. And then maybe help us understand how we might be able to size this, if that's the case?

Operator:

And your next question comes from the line of Meta Marshall with Morgan Stanley.

Jayshree Ullal:

I wouldn't call them, Meta, bottlenecks. I would definitely say it's a time-based and familiarity-based situation. The Cloud everybody knows how to deploy that, it's sort of plug and play in some ways. And -- but even in the Cloud, if you may recall, there were many use cases that emerged. .

Benjamin Bollin:

Jayshree, you made a comment that back when we had guidance in November, you had about 3 to 6 months of visibility. Could you take us through what type of visibility you have today? And maybe compare and competes the different subsets of customers and how they differ?

Michael Ng:

It was very encouraging to hear about the migration of trials to pilots with ANET's production roll out to support GPUs in the range of, I think you said 10,000 to 100,000 GPUs for 2025. And First, I was just wondering if you could talk about some of the key determinants about where we -- how we end up in that range, high end versus low end?

Jayshree Ullal:

Yes. Thank you, Michael. I think we could do better next year. But your point is well taken that in order to go from 10,000 of GPUs to 30,000, 50,000, 100,000, a lot of things have to come together. First of all, let's talk about the data center or AI center facility itself.

Operator:

And your next question comes from the line of Matthew Niknam with Deutsche Bank.

Jayshree Ullal:

Chantelle, you want to take that? I've been talking of AI a lot. I think you should.

Jayshree Ullal:

It's not 0 this year Matt. for sure.

Operator:

And your next question comes from the line of Sebastien Naji with William Blair.

Jayshree Ullal:

Yes. Sebastian, we're probably doing a little more on investment than we have done enough progress on channel partners, to be honest. But last couple of years, we were getting very apologize about our lead times. Our lead times have improved. So we have stepped up our investment on go-to-market, where I'm expecting Chris Schmidt and Ashwin's team to grow significantly and judging from the activities they've had and the investments they've been making in '23 and '24, we're definitely going to continue to pedal to the metal on that.

Operator:

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Jayshree Ullal:

Yes. No, I think if you remember, there was this one dreadful year where we -- one of our customers skipped a service cycle. But generally speaking, on the front-end network now, we're going back to the cloud. And we do see service refresh and service cycles continue to be in the 3 to 5 years.

Karl Ackerman:

Jayshree, you spoke about how you are not seeing any slowness in Enterprise. I'm curious whether that is being driven by the growing mix of your software revenue? And do you think the deployment of AI Networks on-prem can be a more meaningful driver for your Enterprise and financial customers in the second half of fiscal '24? Or will that be more of a fiscal '25 event?

Liz Stine:

Operator, we have time for one last question.

David Vogt:

So Jayshree, I have a question about -- I want to go back to AI, the road map and the deployment schedule for Blackwell. So it sounds like it's a bit slower than maybe initially expected with initial customer delivery late this year. How are you thinking about that in terms of your road map specifically and how that plays into what you're thinking about '25 in a little bit more detail.

Jayshree Ullal:

Yes. We're not seeing a pause yet. I don't think anybody is going to wait for Blackwell necessarily in 2024 because they're still bringing up their GPU clusters. And how a cluster is divided across multiple tenants, the choice of host, memory, storage architectures, optimizations on the GPU for collective communication, libraries, specific workloads, resilience, visibility, all of that has to be taken into consideration.

Operator:

Ladies and gentlemen, thank you for joining. This concludes today's call, and you may disconnect now.

Operator:

Welcome to the Fourth Quarter 2023 Arista Networks Financial Results Earnings Conference Call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website, following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.

Jayshree Ullal:

Thank you, Liz. Thank you, everyone, for joining us this afternoon for our fourth quarter 2023 earnings call. 2023 has been another memorable year for Arista. We gave initial guidance of 25% year-over-year revenue growth and instead achieved well beyond that at 33.8%, driving revenue to $5.86 billion, coupled with a record non-GAAP earnings per share for the year of $6.94, up in excess of 50% annually. Back to some Q4 specifics. We delivered revenues of $1.54 billion for the quarter, with a non-GAAP record earnings per share of $2.08 due to a one-time favorable tax rate. Services and software support renewals contributed approximately 17% of revenue. Our non-GAAP gross margins of 65.4% was influenced by improving supply chain and greater enterprise mix. International contributions for the quarter registered at 22.3%, with the Americas at 77.7%. This was one of our strongest-performing international quarters in recent history. Shifting to annual sector revenue for 2023. Cloud titans contributed significantly at approximately 43%. Enterprises, including financials was strong at approximately 36%, while the providers were at 21%. Both Meta and Microsoft are greater than 10% customer concentration at 21% and 18%, respectively. Despite multiple CapEx reductions last year and the normal volatility of cloud titan and AI pivot, we cherish our privilege status with both M and M. Speaking of AI, in fall of 2023, Andy and I attended the 50th golden anniversary of Ethernet at the Computer History Museum. It truly is a reminder of how familiar and widely deployed Ethernet is with the speed increasing by orders of magnitude from a shared collision 2.95 megabits for file printed share to a terabit Ethernet switching in the AI and ML era. AI workloads are placing greater demand on Ethernet, as they are both data and compute-intensive across thousands of processes today. Basically, AI at scale needs Ethernet at scale. AI workloads cannot tolerate the delays in the network, because the job can only be completed after all flows are successfully delivered to the GPU clusters. All it takes is one culprit of worst-case link to throttle an entire AI workload. Three improvements are being pioneered by Arista and the founding members of the Ultra Ethernet Consortium to improve job completion time. Number one, packet spraying. AI network topology needs packet spraying to allow every flow to simultaneously access all parts of the destination. Arista's developing multiple forms of load balancing dynamically with our customers. Two is flexible ordering. Key to an AI job completion is the rapid and reliable bulk transfer with flexible ordering using Ethernet links to optimally balance AI-intensive operations, unlike the rigid ordering of InfiniBand. Arista is working closely with its leading vendors to achieve this. Finally, network congestion. In AI networks, there's a common incast congestion problem whereby multiple uncoordinated senders can send traffic to the receivers simultaneously. Arista's platforms are purpose-built and designed to avoid these kind of hotspots, evenly spreading the load across multi-packs across our virtual output queuing, VoQ lossless fabric. In terms of annual 2023 product lines, our core, which consists of cloud, AI and datacenter products, are built upon our highly differentiated Arista Extensible Operating software system stack. It is successfully deployed across 10, 25, 100, 200 and 400 gig speeds. Our cloud networking products deliver power-efficient, high availability zones without doubling the cost of redundancy as datacenters demand insatiable bandwidth capacity and network speeds for both the front-end and back-end storage and compute clusters. The core drove approximately 65% of our revenue. We continue to gain share in our highest performance switching of 100, 200 and 400 gig ports to obtain the number one position, at approximately 40-plus percent, according to industry analysts. We have increased our 400-gig customer base from 600 customers in 2022 to approximately 800 customers in 2023. We expect both 400 and 800 gigabit Ethernet will emerge as important pilots for AI back-end GPU clusters. We are cautiously optimistic about achieving our AI revenue goal of at least $750 million in AI networking in 2025. Our second market is network adjacencies comprised of routing, replacing routers and our cognitive campus workspaces. We continue to make progress in campus aiming for the $750 million revenue by 2025 that we have shared at many Analyst Days. Our investments in cognitive wired and wireless, zero-touch provisioning and the introduction of AGNI, Arista Guardian for Network Identity as well as AVA sensors for threat mitigation is resonating well with our campus customers. The post-pandemic campus is seeking network-as-a-service overlay and zero-trust network embedded in with high availability, observability and consistency across our OS and management domains. We are also successfully deployed in many routing edge and peering use cases. Just in 2023 alone, we introduced six EOS software releases across 600 new features and 50 platforms. In fall of 2023, we introduced our WAN routing system with a focus on scale, encryption and WAN transit routing capabilities. It has positioned us well, giving our customers a seamless enterprise LAN and WAN portfolio. The campus and routing adjacencies together contribute approximately 19% of revenue. Our third category is network software and services based on subscription models such as Arista A-Care, CloudVision, DANZ Monitoring Fabric or DMF observability and advanced threat sensors for network detection and response. Arista's subscription-based network services and software contributed approximately 16% of the total revenue. We surpassed 2,400 cumulative customers with CloudVision, pivotal to building a modern operating model for the enterprise. Please note that perpetual software licenses are not included here and are counted inside the core or adjacent markets. While 2023's headline has been mostly about AI we are pleased with the momentum of enterprise and provider customers as well. Arista continues to diversify its business globally with multiple use cases and verticals. We have more than doubled our enterprise revenue in the last three years and we are becoming the gold standard for client to cloud to AI networking with one EOS and one CloudVision foundation. Our million-dollar customer logos increased steadily in 2023 at approximately 35% as a direct result of our campus and enterprise momentum. Three principles continue to differentiate us as we are poised to be a market-share gainer in the enterprise. One, best-in-class, highly available proactive products with resilience and hitless upgrades at multiple levels. Two, zero-touch automation for predictive client-to-cloud one-click operations that relies less on human staff or manual operations and is instead software-driven. And finally, prescriptive insights based on AIML autonomous virtual assist AVA algorithms for increased security, observability and root cause analysis. Our foundational and network data lake architecture and the ability to gather, store and process multiple modalities of network data is the only way to reconcile all the incongruent silos for network operators. While legacy vendors that are 30 to 40 years old are aiming for consolidation, Arista remains the only pure-play networking innovator earning top spots in Forrester Wave's programmable switching and customer validation in Gartner's voice of customer for campus in 2023. In December 2023, we conducted one of our largest customer events called Innovate in Vegas. Well, not my most favorite location, our customers and prospects founded very exciting and compelling for their network transformation initiatives. They resonate deeply with our Arista 2.0 vision, building best-of-breed, data-driven networking platforms. In summary, as we wrap up another fantastic year in 2023, I am so proud of the team's execution across multiple dimensions. They have all worked tirelessly to improve our operational metrics such as lead times, gross margin and on-time shipments. Simply put, we outpaced the industry in quality, support and innovation. We set the direction for the future of networking, working intimately with our strategic customers. Despite limited visibility at this time, we reiterate our double-digit growth of 10% to 12% from Analyst Day, aiming for approximately $6.5 billion in 2024. With that, I'd like to turn it one last time to review our financial metrics with Ita Brennan. Ita?

Jayshree Ullal:

Thank you, Ita, first of all, for an incredible eight and a half years as our Chief Financial Officer. We're going to miss you a lot and wish you all the best in your next innings. And if you ever miss an earnings call, please come, we'll invite you for one. Now, to describe our Q1 2024 guidance, it's my pleasure to introduce our incoming Chief Financial Officer, Chantelle Breithaupt for her very first earnings call at Arista. Welcome, Chantelle.

Liz Stine:

Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Aaron Rakers:

Yeah, thanks for taking the question. And, Ita, it's been great working with you. Wish you the best in retirement. I guess my question is, Jayshree, just obviously the focus on AI and the build-out of the backend networks based on 400 and 800 gig ethernet, I'm just curious, like, as we progressed through these last three months, how has your views evolved? And just remind us of the cadence of kind of product cycles that really set the table for risk in this AI opportunity as we move through ‘24 and particularly into ’25? Thank you.

Operator:

Great. Your next question comes from the line of Tal Liani from Bank of America. Please go ahead.

Jayshree Ullal:

Yeah. So, Tal, first of all, as you know, Ita and I, or Chantelle and I, would never really comment on bookings, orders. We find these all to be kind of useless metrics, because ultimately what matters is what we ship, which is revenue. But just to sort of answer your question on ratio of CPUs, or for that matter, GPUs in the future to the network, typically, we have to have the CPUs or GPUs come in before we can outfit the network. They kind of go hand in hand, but as you know, in AI, we've been waiting for the GPUs and in the last couple of years, they've been waiting for everything with a long lead time. But I would say generally in the leaf architecture, they go hand in hand where you have to create a rack of 1,000 servers or whether they're CPUs and GPUs. And generally they look to rack and stack the cable, the CPUs and the network together. On the spine, which connects all of our leaf, that decision can be made independently even if the processors are not available. So on the leaf, it's more correlated, on the spine it's not.

Jayshree Ullal:

Thank you.

Sebastian Naji:

Great. Thank you. I just wanted to start and echo everyone's commentary and wish you the best, Ita. It's been a pleasure. My question has to do with white box. People have been talking about the threat for white box since Arista's been around and it hasn't really impacted Arista's ability to grow. Can you maybe articulate why you believe in the world of AI networks? More of the market would not move to white box or vice versa maybe why more of the market would move away from white box?

Liz Stine:

Thanks, Sebastian.

Operator:

Your next question comes from the line of Matt Niknam from Deutsche Bank. Please go ahead. Your line is open.

Jayshree Ullal:

Yeah, no, but Matt, that's a good question. I think on the cloud and AI, we feel pretty bulked up to deal with those customers because they don't look for size and bulk, they look for, as you know, networking innovation capabilities and this has been Arista's heritage for 10 years and will continue to be with the AI cycle for the next foreseeable 10 years. On the enterprise there are multiple markets and size helps. I think if you are targeting the early adopters, Arista has traditionally done very, very well there. And the last three years is a good example of how well we've done there, both in the data center and in the campus. If you look at the next category of sort of the, not necessarily the screaming early adopters, but maybe the fast followers, I think Arista will continue to do well there in the large enterprise. We are so underserved and under penetrated in both the Fortune 1000 and the Global 2000. We got a long, long ways to go. We probably have 20% of those customers. We've got 80% of them left to go. And I'm not even talking about the mid-market and the SMB, which is a whole other market that we are underserved in. So absolutely, we need to make more investments in enterprise there. When I look at what Anshul, Chris Schmidt, Ashwin are doing, this is exactly where we're doubling down. This is exactly where we doubled down in the last three years post pandemic. And we have more than doubled our revenue and increased our logo presence because of this investment in the enterprise. I can't comment about consolidation of vendors, but when vendors don't grow, five plus five sometimes is 10. But to be careful on integration, five plus five can sometimes be seven too. So that's somebody else's responsibility, not mine. I think we can get a lot of organic growth.

Meta Marshall:

Great, thanks. Jayshree, maybe just a question. You noted limited visibility and understand that this early during the year. But would you say that it's timing of when some of these back-end pilots scale into production, is it kind of level of front-end spending? Is it enterprise projects? Just like where you're finding just more commentary on the visibility comment? And then second question, you guys noted on the gross margin, but it's a portion of mix and kind of supply chain costs coming down. But just, if there's any one bias towards what led to the gross margin upside in the quarter. Thanks.

Jayshree Ullal:

And, Meta, to answer your question on enterprise and AI activity, I think Arista continues to drive the concept of EOS, multi-domain routing, campus, high availability, mission-critical enterprises for multiple verticals. We're making good progress there and this is going to be the part of our mainstream innovation and go-to-market. On the AI side, we continue to track well. I think we're moving from what I call trials, which is connecting hundreds of GPUs to pilots, which is connecting thousands of GPUs this year, and then we expect larger production clusters. I think one of the questions that we will be asking ourselves and our customers is how these production clusters evolve? Is it going to be 400, 800 or a combination thereof? The role of Ultra Ethernet Consortium and standards and the ecosystem all coming together, very similar to how we had these discussions in 400 gig will also play a large part. But we're feeling pretty good about the activity. And I think moving from trials to pilots this year will give us considerable confidence on next year's number.

Jayshree Ullal:

Thank you.

James Fish:

Hey, thanks for the question. Maybe, Ita, for you, and I'll miss having you on here, by the way, congrats on retirement.

James Fish:

But what's causing the delay being able to ship that we saw that product deferred revenue jump as much as we did or should we think about this as normal to see this level of jump in Q4 is based on what you've disclosed in the past? It doesn't seem like this is a normal jump. I guess what's the hang-up and with supply chain starting to go the other way, it's quite more readily available. Could we actually see the price increases you guys have enacted in the past now have to be given back at some point in '24 or '25?

James Fish:

Thanks again.

Ittai Kidron:

Thanks and congrats to you as well, Ita, I'll miss you. And, Chantelle, good luck, of course, to you in your new role. I guess a couple ones for me. First of all, on the cloud mix, it kind of declined a little bit on the year. Maybe you can tell us what are your underlying working assumptions for '24? And then more broadly on the '24 guide, Chantelle, Ita, it feels like you're talking about $600 million increase year-over-year in revenue. It feels like half of it can already come from the AI networking, given your '25 targets, and you seem very comfortable about your '25 targets, and I would think your '24 should be comfortable as well. So why -- if I assume that $200 million, $300 million come from AI networking this year, why should the rest of the business generate only $300 million to get to your annual targets? Why such an aggressive conservatism here on the guide?

Chantelle Breithaupt:

I'll start the [indiscernible], thank you for the well wishes. I think coming into 2024, it's a balanced view in the sense that we want to have multiple options to get to our year and so we'll work through what those mixes are and how to get to that performance that we've laid out for our guidance. I think that Jayshree very eloquently put in the sense of '23, '24, '25 on what we expect from AI going from trials to pilots to production. And so we'll work through what that means in 2024. But I think to change anything in Q1 at this time, we're just going to go a quarter at a time, especially with me coming in and we'll see how the year progresses.

Chantelle Breithaupt:

Thank you.

Alex Henderson:

Ita, I can't believe you're leaving us. I'm going to miss you. Go ahead.

Alex Henderson:

I’m sorry, go ahead.

Alex Henderson:

So, the question I have really is what are you hearing from the field, particularly in the enterprise segment. There's been a lot of noise about indigestion of large amounts of volume that have been shipped to various companies. And clearly, there's some concern that there's some oversupply over the last year into the enterprise market. And I think you've talked to a lot of CEOs. What are they telling you in terms of where their IT spending intentions are for '24? Where are they saying the spending is going relative to the networking gear versus alternative spending priorities? Thanks.

Alex Henderson:

Great. Thank you.

Operator:

Your next question comes from the line of Atif Malik from Citi. Please go ahead. Your line is open.

Jayshree Ullal:

Yeah. I don't understand the announcement as well as probably my competitor does. I think it has more to do with UCS and Cisco validated designs. Specific to our partnership, you can be assured that we'll be working with the leading GPU vendors. And as you know, NVIDIA has 90% or 95% of the market. So, Jensen and I are going to partner closely. It is vital to get a complete AI network design going. We will also be working with our partners in AMD and Intel. So we will be the Switzerland of XPUs, whatever the GPU might be, and we look to supply the best network ever.

Operator:

Your next question comes from the line of Tim Long from Barclays. Please go ahead. Your line is open.

Jayshree Ullal:

Yeah. Thanks, Tim. Okay. So let me just step back and say the first real consultative approach from Arista is to provide our expertise on how to build a robust back-end AI network. And so the whole discussion of Ethernet become -- versus InfiniBand becomes really important because as you may recall, a year ago, I told you we were outside looking in, everybody had an Ethernet -- everybody had an InfiniBand HPC cluster that was kind of getting bundled into AI. But a lot has changed in a year. And the popular product we are seeing right now as the back-end cluster for our AI is the Arista 7800 AI spine, which in a single chassis with north of 500 terabits of capacity can give you a substantial number of ports, 400 or 800. So you can connect up to 1,000 GPUs just doing that. And that kind of data parallel scale-out can improve the training time dimensions, large LLMs, massive integration of training data. And of course, as we shared with you at the Analyst Day, we can expand that to a two-tier AI leaf and spine with a 16-way CMP to support close to 10,000 GPUs nonblocking. This lossless architecture for Ethernet and then the overlay we will have on that with the Ultra Ethernet Consortium in terms of congestion controls, packet spring and working with a suite of UEC mix is what I think will make Ethernet the default standard for AI networking going forward. Now will it be sole source [indiscernible], I would be remiss if I didn't tell you that our cloud networking isn't sole sourced. So probably our AI won't be too. But today's models are moving very rapidly, relying on a high bandwidth, predictable latency, the focus on application performance requires you to be sole sourced initially. And over time, I'm sure it'll move to multiple sources, but I think Arista is very well positioned for the first innings of AI networking, just like we were for the cloud networking decade. And one other thing I want to say is, although a lot of these customers are doing AI pivots, these AI pivots will result in revisiting the front-end cloud network, too. So this AI anatomy is being really well understood. And if you take a deep look at the center piece of it, which is all the GPUs, they have to connect to something very reliable and this is really where we come in. And so this -- being actively involved has -- is going to pay a lot of dividends, but we're still very much in our first innings of AI.

Jayshree Ullal:

Thanks, Tim.

Ben Reitzes:

Hey, thanks for the question. And obviously, Ita, it's been great working with you. Thanks for all you've done for us. I wanted to ask about your guidance and the conservatism from another lens here. With regard to 2024, since your November 9 Analyst Day, some things have changed. Microsoft, Meta and Google have all raised their CapEx forecast for 2024. Obviously, your guidance for 2024 stays the same, and I know you're usually conservative. And then for 2025, AMD upped their TAM very significantly for AI and -- by a multiple. And I guess they're seeing something that many of us are seeing with regard to the future demand. And you've kept your guidance at $750 million. I just -- with that backdrop and the changes since November 9 and you guys keeping your guidance, and I understand you're conservative, do you mind addressing your conservativism or your guidance from those lenses, both with regard to '24 and '25, Jayshree?

Ben Reitzes:

Okay, great.

Ita Brennan:

Yeah. I think that says it all. I mean, all the drivers that you mentioned are great drivers, the timing of everything that's always complex, right? So we'll take it a quarter at time and see how things play out.

Ben Reitzes:

All right. Thanks a lot. Take care.

Operator:

Thank you. Your final question comes from the line of Karl Ackerman from BNP Paribas. Please go ahead. Your line is open.

Jayshree Ullal:

Yeah. Thank you, Karl. Again, I'll step -- history is a good indicator of future. And if you look at our 400-gig, everybody asked me the same question. They said, how come 400 gig isn’t taking off in 2019 or '20? And it turned out it took our ecosystem several years and of course, the pandemic didn't help when it was optics or NICs for the whole entire thing to come together. And I don't doubt we will have trials for 800 gig this year, but I think real production, 800 gig will happen in 2025. I'd like to be proven wrong and maybe it'll come in sooner in which case, like I said, we'll let you know. But at the moment, this is our best case prediction.

Operator:

Welcome to the Third Quarter 2023 Arista Networks Financial Results Earnings Conference Call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.

Jayshree Ullal:

Thank you, Liz, and happy Halloween, everyone. We delivered revenues of $1.51 billion for the quarter, with a non-GAAP earnings per share of $1.83. Services and software support renewals contributed approximately 16.8% of revenue. Our non-GAAP gross margins of 63.1% was influenced by improving supply chain overheads and higher enterprise contributions. As we have said before, gross margins have consistently improved every quarter this year and will stabilize next year in 2024. International contribution registered at 21.5%, with the Americas at 78.5%. As predicted, Arista's supply chain and lead times are improving steadily in 2023 and we expect it to normalize in 2024. We are now projecting 33% annual growth versus our prior Analyst Day forecast of 25% growth for the 2023 calendar year. During the past year, our cloud titan customers have been planning a different mix of AI networking and classic cloud networking for their compute and storage clusters. Our historic classification of our cloud titan customers has been based on industry definition of customers with or likely to attain greater than 1 million installed compute servers. Looking ahead, we will combine cloud and AI customer spend into one category called cloud and AI titan sector. And as a result of this combination, Oracle OCI becomes a new member of the sector, while Apple shifts to cloud specialty providers. This new cloud and AI titan sector is projected to represent greater than 40% of our total revenue mix due to the favorable AI investments expected in the future. In terms of enterprise momentum, Arista continues to focus on multi-domain modern software with architectural superiority based on our single EOS, Extensible Operating System, and CloudVision stack. This is truly a unique foundation and differentiator. We have demonstrated our strong execution and uncompromised quality with predictable release cadence that our customers have come to enjoy and appreciate. The power of our one consistent software stack across a breadth of use cases, be the WAN routing, campus, branch, or data center infrastructure, is truly unmatched by our industry peers. Let me illustrate with a few customer wins. Our first customer win is an international one where the customer is providing services for their interconnect of high-performance compute, HPC, clusters, which are often its foundation for GPU as a service offering. Arista's Ethernet modular switch coupled with EOS created a perfect combination of a phishing platform with real-time telemetry leveraging our EOS state-driven publish/subscribe model. Our next win showcases our expansion of Arista in the public sector with their AI initiative. This grant-funded project utilizes Arista's simplified operational models with CloudVision. New AI workloads require high scale, high radix, high bandwidth, and low latency, as well as a need for granular visibility. This build out of a single EVPN VXLAN-based 400 gig fabric is based on deep buffer spines and underscores the importance of a lossless architecture for AI networking. This last but not least customer is an example of a campus WAN. Couple of years ago, the customer was looking to do a complete refresh of their aging campus network which comprises of four major headquarter campuses and several remote sites. The customer was able to leverage the Arista Validated Design models, AVD, all the way from data center into the campus network. The customer chose Arista because they were able to offer best-of-breed operational excellence, as well as security with our zero trust AVA sensors for threat mitigation across the entire campus of wired switches. Arista's innovative macro segmentation, MSS, combined with Leaf access and core Spine, delivered a compelling two-tier cognitive campus solution. These three customers illustrate our power of the platform and software innovations for a modern network model with a low total cost of operation. We are pleased with our trajectory, setting the gold standard in our industry with the lowest CVEs and vulnerabilities and the highest Net Promoter Score for cloud networking. And with that, I'd like to hand to Ita, our CFO, for financial specifics.

Liz Stine:

Thank you, Ita. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everybody please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Samik Chatterjee:

Hi, thank you for the question, and congrats on the results. I guess just to keep it simple, Jayshree, if you can give us an update on when we think about the last 90 days, how have the two sort of verticals, cloud titans and enterprise, sort of shown up in terms of momentum of orders and demand relative to where your expectations were 90 days ago? I know some of the cloud companies have talked about their CapEx outlook for next year as well. So, an update on that would be helpful. And on the last call, you did talk about a target for double-digit growth next year. So, how are you thinking in relation to that number still going into the Investor Day? Thank you.

Samik Chatterjee:

Okay. Thank you. Thanks for taking my question.

Operator:

Your next question comes from the line of Antoine Chkaiban with New Street Research. Your line is open.

Jayshree Ullal:

Yes, thank you, Antoine. I'll share some of my thoughts and I'd like to hand it over to Anshul for further thoughts. We've always looked at the cloud network as a front-end and a back-end. And as we said last year, many of our customers are favoring spending more on the back-end with AI, which doesn't mean they stopped spending on front-end, but they've clearly prioritized and doubled down on AI this year. My guess is as we look at the next few years, they'll continue to double down on AI, but you cannot build an AI back-end cluster without thinking of the front-end. So we'll see a full cycle here where, while today the focus is greatly on AI and the back-end of the network, in the future we expect to see more investments in the front-end as well.

Antoine Chkaiban:

Thank you.

Operator:

Your next question comes from the line of Matt Niknam with Deutsche Bank. Your line is open.

Ita Brennan:

Yeah, look, I think every now and again you see kind of a pop on the services line. It's usually either somebody has consumed services faster than they intended to or we've been negotiating a contract and then when we do actually finally sign the renewals contract, there's some flush of prior periods into the quarter. So, if you look back historically, you'll see that happens from time to time. I don't think it changes the kind of fundamental growth and services we've talked about that's kind of mid to maybe a little bit higher teens growth on an ongoing basis year-over-year. I don't think it changes that. It's just you do have these little spikes from time to time.

Liz Stine:

Thanks, Matt.

Karl Ackerman:

Yes, thank you. I suppose this is a question for Ita, but is the upside in the quarter an outlook coming from a combination of better bookings and working down some of your prior backlog? Just any thoughts in terms of maybe where your backlog may end up relative to normal levels pre-pandemic would be super helpful. Thank you.

Liz Stine:

Great. Thanks, Karl.

Amit Daryanani:

Good afternoon, everyone, and congrats on a nice set of numbers here. I was hoping you could talk a little bit more on the enterprise side. You're seeing some really good strength over here clearly. But maybe you can talk about, is the strength more coming from campus versus the data center side, maybe just qualitatively where you're seeing better trends? And really the context of this is I think a lot of your peers are seeing a very severe drop in their growth rates as their backlogs have gone away. You don't seem to be having that issue. So I'm wondering like what is the offset to that and what's enabling the growth? And to the extent, you can talk about campus versus the data center that would be really helpful. Thank you.

Anshul Sadana:

Amit, this is Anshul here. We have a great team being led by Chris Schmidt and Ashwin Kohli in this space. And now we sell in many, many countries around the world. And as Jayshree mentioned, both data center and campus, customers are coming to us for the automation for the higher quality, for the visibility, that we're able to bring to them across the board in one architecture, one OS, and one CloudVision. That message resonates with every CIO today, and they are no longer worried about Arista being this new kid on the block that's risky move for them. We are, in fact, becoming the de facto and they like it. So, which is why the momentum just continues. It's good execution by the team and getting to more and more customers around the world.

Operator:

Your next question comes from the line of Ben Bollin with Cleveland Research. Your line is open.

Jayshree Ullal:

Sure. Again, this is an area that Anshul lives and breathes more than I do, so I'll give you some executive comments. But, Ben, as I see it, the back-end network was something we didn't even see a few months or years ago and was largely dominated by InfiniBand. Today, if I look at the five major designs for AI networking, one of them is still very InfiniBand dominated, all the others we're looking at are adopting a dual strategy of both Ethernet and InfiniBand. So, I think AI networking is going to become more and more favorable to Ethernet, particularly with the Ultra Ethernet Consortium and the work they're doing to define a spec, you're going to see more products based on UEC. You're going to see more of a connection between the back-end and the front-end using IP as a singular protocol. And so, we're feeling very encouraged that especially in 2025, there will be a lot of production rollout of back-end and of course front-end based on Ethernet. Over to you, Anshul.

Ben Bollin:

Thank you.

Liz Stine:

Thanks, Ben.

Aaron Rakers:

Yeah, thanks for taking the question. I just want to kind of dovetail off that last question a little bit. I know, Jayshree, last quarter, I think it was you commented that you'd expect to see pilot deployments for these AI opportunities in '24 and then meaningful volume in 2025. First of all, do you reaffirm that view, or has that changed at all? And then on that, can you give us some context of how you see network spend intensity for these AI fabrics relative to, I think in the past, it's been kind of high-single-digit percent of compute spend on networking in classical cloud infrastructure environments?

Aaron Rakers:

Okay. Thank you.

Operator:

Your next question comes from the line of Tal Liani with Bank of America. Your line is open.

Jayshree Ullal:

What do you think, Ita?

Jayshree Ullal:

And Tal, I think I need to focus on my tone and maybe sing a song or something, because I felt really [enthusiastic] (ph) last quarter and this quarter.

Jayshree Ullal:

I'm a happy kind of gal at the moment.

Jayshree Ullal:

Thanks, Tal.

Operator:

Your next question comes from the line of Sebastian Naji with William Blair. Your line is open.

Jayshree Ullal:

Yeah, no, we don't do it based on wallet share of Arista. We do it based on definition. So, I think OCI has become a meaningful top-tier cloud customer, and they belong in the cloud titan category in addition to their AI investments as well. So, for reasons of classification and definition, the change is very warranted. And yes, they happen to be a good customer of Arista. That's nice as well.

Liz Stine:

Thank you.

Meta Marshall:

Great, thanks. Jayshree or Anshul, maybe just some commentary on the tier-two and specialty providers, and just what you're seeing in terms of other people kind of building out some of these AI clusters? You classify some of those customers as largely focused on back-end today and those represent opportunities going forward, or just kind of what the discussion is outside of the cloud titans amongst some of these other guys that are building very large networks? Thanks.

Jayshree Ullal:

I think they're also waiting for GPUs like everyone else is. So, there's that common problem that we're not the only one with lead time issues. But to clarify the comment on scale, Anshul and I are also seeing some very interesting enterprise projects against smaller scale. So, a lot of customers are trying AI for small clusters, not too different from what we saw with HPC clusters back in the day.

Meta Marshall:

Thank you.

Michael Ng:

Hey, good afternoon. Thank you very much for the question. I just had one on the OpEx outperformance in the quarter. We saw an unseasonal decline quarter-on-quarter, And I think you mentioned lower product introduction costs that may have helped R&D. I was just wondering if you could talk a little bit more about that aspect of it. Any way we should think about product introductions going forward to help us understand the trajectory of OpEx? Thank you.

Jayshree Ullal:

So, Michael, when the chips are down, our spending is down, but when the chips come on hot, our spending gets hot too. So, expect our prototypes to have some high variability and we've got a lot and lot of new products in the pipeline that Andy, Anshul, Ken, you are all working on. So, we expect that number to go up over the next four quarters.

Operator:

Your next question comes from the line of Atif Malik with Citi. Your line is open.

Jayshree Ullal:

Yeah, Atif, we have been strong proponents in our last 15, 17 years of Arista Korea on merchant silicon. We look for the best of breed chips. It's something my team, engineering team, has built a lot of chips in their past before, but we decided to work with the best of breed companies, Broadcom being one of our favorite and major suppliers. Of course, in the past, we worked with Intel, Cavium, and we don't rule out other suppliers as well. But this is clearly an area where you can't just build one chip, you have to build a portfolio of silicon. And what Broadcom has done in building that portfolio not only for cloud networking, but for campus and AI is impressive. And you have to not just look at performance, you have to look at price, density, power. These are all very important metrics as we look ahead. The root issue here, and we'll share this more with you going forward as well, is not just the merchant silicon, but how you can enable the merchant silicon with the right software and drivers. And this is an area that really Arista excels in. If you just have chips, you can't build a system. But our system-wide features, whether it's in dynamic load balancing or latency analyzer to really improve the job completion time and deal with that frequent communication and generative AI is also fundamentally important. You're going to hear a lot more about this next week, so stay tuned.

Operator:

Your next question comes from the line of Ben Reitzes with Melius Research. Your line is open.

Ita Brennan:

So, Ben, I think what Jayshree commentary, my commentary, is we have been seeing it incrementally improve as we've gone through the year. We expect it to stabilize. So not that we expect it to go down next year, but more that it will stabilize. And then it will become more dependent on customer mix and other thing again, similar to where we've been before. But obviously, we'll provide more outlook on -- discussion on this next week too. But the intention was not to say that we think it starts to decline again. It was more that we think it will stabilize after a period where we've been seeing these incremental improvements.

Liz Stine:

Thanks, Ben.

Tim Long:

Thank you. I just wanted to hit on the cloud titan vertical or cloud titan AI vertical now if I could. I think, Ita, one of your comments was down a little or something in the quarter. Could you just -- two parts here, talk a little bit about that comment? Is this just timing or are there some different market share dynamics there? And then, secondly, if you could talk a little bit about opportunities at other hyperscalers? I know that's something where there's been trial activity and potential and sounds like it might take a little while, but any updates on other cloud titans that could become larger customers? Thank you.

Anshul Sadana:

Sure. Tim, the engagement with other cloud titans who are customers -- our customers is still very positive. They're good customers, as many of you know, in routed layers, backbone, WAN use cases as well. In the next week, we'll touch a little bit more on the whole build versus [by topic] (ph).

Operator:

Your next question comes from the line of James Fish with Piper Sandler. Your line is open.

Jayshree Ullal:

All right. Okay. Well, Anshul, you want to answer the product question first?

Jayshree Ullal:

And Anshul, just to put this in perspective, back in the day, it used to be 500 nanoseconds, right?

Jayshree Ullal:

Yeah, faster than the speed of light. And James, just to give you a clarification, I was saying as a company, Ita and myself, Anshul, we're aiming for at least double digits in '24 and years beyond, but I wasn't making any forecasts for exact numbers.

Liz Stine:

Thank you, James.

Ittai Kidron:

Thanks, ladies. Quick question on gross margin. Nice improvements there. Ita, maybe you can go into the details of how much room is there more to go? And I'm just kind of wondering with your customers now looking at your excellent financials and your recovering gross margins, what are the odds that pricing pressures start coming back? Something you probably have not seen much in the last couple of years since COVID, now that margins are normalizing, could prices come down potentially, perhaps even for the -- more specifically, to the larger customers of yours?

Anshul Sadana:

Ittai, as Jayshree mentioned, I want to emphasize this. The market is very competitive and it has been ever since we started. The gross margin that we report is not the reason why customers try to negotiate price and the gross margin is simply a result of what we've been executing on. I think the [indiscernible].

Liz Stine:

Thank you, Ittai.

Simon Leopold:

Thanks for taking the question. I wanted to see if you would be able -- willing to comment on your customer concentration year-to-date. I appreciate it can be lumpy quarter-to-quarter, but given sort of where you were in 2022, I'd just like to get a better understanding of what essentially the progress has been in 2023. And in that context, how big is enterprise as a percent of revenue this year, year-to-date versus where it was last year? Thank you.

Ita Brennan:

Microsoft was 17%.

Liz Stine:

Thanks, Simon.

David Vogt:

Great. Thanks, guys, for taking the question. I just want to follow up on Simon's question, maybe put it a little bit differently. So, if I think about your market sector trend update, how much of the shift to that 40% to 45% cloud and AI titans reflects the inclusion of new AI use cases going forward and the shift of Oracle combined with maybe some normalization at Meta and Microsoft? Can kind of help us think through the dynamics there? And if it looks like shares going to be unchanged with the enterprise and financials, does that suggest to you that those markets are going to grow comparably over the long-term across the cycle? Is that the right way to look at it? Thanks.

Ita Brennan:

Yeah, it's more of a forward-looking impact, to be honest. Historically, this doesn't really change the trends that we've been talking about previously. It's really more about the future and how do you think AI will impact these numbers going forward.

David Vogt:

Great. Understood. Thank you.

Erik Suppiger:

Yeah, thanks for taking the question, and congrats. I know you don't want to talk about backlog, but can you give us a sense at what point or what time you think your book to bill will return back to 1 or greater than 1, or when will your lead times reach normalized level? And then I have a quick follow-up after that.

Jayshree Ullal:

I'm very -- I just want to add that I'm very proud of the progress the team has made. When you look back a few years ago, we were short of components, we were making multi-year purchases. There was a risk of a very large exposure, because you can't get all these forecasts right. And then obviously the mix changes from time to time, especially with the cloud and AI. So, it's very hard to measure our business on book to bill and backlog at a given time. But if you have to look at it as an overall multi-year trend.

Jayshree Ullal:

Yeah, and I think we said this. It's been improving consistently and we expect it to be normalized just like our gross margins in 2024.

Liz Stine:

Operator, we have time for one last question.

Woo Jin Ho:

Oh, great. Thanks. I made the cut. Happy Halloween, folks. So, I think there was a mention on merchant silicon earlier in the Q&A. And one of your merchant silicon partners has actually moved up the stack towards a surface provider routing. I'm just curious if there's any intention on going after that piece if that chip is made available to you?

Woo Jin Ho:

Yeah, the Qumran3D.

Jayshree Ullal:

And the investments, Woo Jin, we have made in our routing stack over the last 10 years, I want to say, has just gotten better and stronger. Powering the internet, powering the cloud, powering the AI, these are hard problems. And they require thousands of engineers of investment to build the right VXLAN, BGP routing, EVPN, et cetera. So, it's not just the chip, it's how we enable the chip to do these complicated routing algorithms.

Liz Stine:

Thanks, Woo Jin. Thank you. This concludes the Arista Network's third quarter 2023 earnings call. We have posted a presentation, which provides additional information on our results which you can access on the Investors section of our website. As a reminder, Arista will be hosting our 2023 Cloud and AI Innovators Analyst Day on Thursday, November 9. If you are interested in attending virtually, you may register from the Investors section of our website. Thank you for joining us today, and thank you for your interest in Arista.

Operator:

Welcome to the Second Quarter 2023 Arista Networks Financial Results Earnings Conference Call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.

Jayshree Ullal:

Thank you, Liz, and happy last day in July, everyone. We delivered revenues of $1.46 billion for the quarter with a non-GAAP earnings per share of a $1.58. Services and software support renewals contributed approximately 15.2% of revenue. Our non-GAAP gross margins of 61.3% was influenced by improving supply chain overheads and higher enterprise contribution. We do expect gross margins consistently improve every quarter this year and stabilize in 2024. International contribution registered at 21%, with the Americas at 79%. As we surpass 75 million cumulative cloud networking ports, we are experiencing three refresh cycles with our customers, 100 gigabit migration in the enterprises, 200 and 400 gigabit migration in the cloud and 400 going to 800 gigabit for AI workloads. During the past couple of years, we have enjoyed significant increase in cloud CapEx to support our cloud titan customers for their ever-growing needs, tech refresh, and expanded offerings. Each customer brings a different business and mix of AI networking and classic cloud networking for their compute and storage cluster. One specific cloud titan customer has signaled a slowdown in CapEx from previously elevated levels. Therefore, we expect near-term cloud titan demand to moderate, with spend favoring their AI investments. We do project, however, that we will grow in excess of 30% annually versus our prior Analyst Day forecast of 25% in 2023. The AI opportunity is exciting. As our largest cloud customers review their classic cloud and AI networking plans, Arista is adapting to these changes, thereby doubling down on our investments in AI. Arista is a proud founding member of the Ultra Ethernet Consortium that is on a mission to build open, multi-vendor AI networking at scale based on proven Ethernet and IP. There are a lot of software and EOS considerations for AI. AI traffic and performance demands are different as it comprises of a small number of synchronized high bandwidth flows, making them prone to collisions that slow down the job completion time of AI cluster. As they connect thousands of GPUs, generating billions of parameters for petascale cloud clusters, Arista's EOS capabilities must also scale along with our AI spine and leaf platforms to achieve that consistent performance and throughput. Arista has been developing EOS features such as intelligent load balancing and advanced analyzers to report and rebalance flows that can achieve predictable performance. Customers can now pick and choose programmable packet header field for better entropy and efficient load balancing of their AI workloads. Network visibility is also important in the training phase for large datasets to improve the accuracy of large language models. Arista's new AI Analyzer monitors and reports traffic counters at microsecond-level windows to detect and address microbursts. Our AI strategy and platforms are resonating well with our early customers. Presently, in tech 2023, we are in the middle of trials for back-end AI networks, leading to pilots in 2024. We expect larger clusters and production deployments in 2025 and beyond. In the decade ahead, AI networking will become an extension of cloud networking to form a cohesive and seamless front-end and back-end network. In the non-cloud enterprise category, we continue to experience good momentum in both data center and campus. Let me illustrate with a few customer wins. The first is a -- is an international new classification win where the customer was seeking to modernize their legacy campus. Their endpoints included large and small campus locations, internal communication devices, various IoTs, CCTV, display boards, and much more. The customer mandated a fully automated workflow. Arista presented a highly optimized best-of-class cognitive campus where there is a single binary EOS image across all campus platforms, complete with a universal API and built-in automation features. The customer was set on a path to continued campus modernization. The next enterprise win involves both data center and campus with advanced EVPN L3 VPN over VXLAN routing architectures instead of the traditional Layer 2 extension. Distributed AVA sensors were strategically positioned within the network to capture and analyze traffic at critical points. This zero-trust approach emphasizes strict mitigation throughout the network as opposed to relying solely on silo security. The integration of real-time streaming telemetry and visibility [at pivot] (ph) capabilities proved to be paramount in obtaining this operational acceptance. The final win was in a large public sector, connecting redundant data centers to hundreds of campus locations with a large routing environment. They were challenged with complex MPLS routing that was hard to operate across the WAN and campus network. An upgrade of any magnitude implied several million dollars, impacting change controls to touch on all their sites. Arista demonstrated that the customer could use a single spine for both LAN and WAN to dramatically simplify and automate the whole environment within 30 days. This 80% reduction in total cost of ownership was made possible with Arista's modern cloud operating model. You can see a recurring theme here across all these customer wins, which is the power of our platform innovation, quality, and support with a low TCO and a single cloud vision and EOS software stack. Arista is diversifying its business to transform the enterprise to a modern network operating model. Before I hand to Ita, I would like to share with you that Ita is planning to retire sometime next year in 2024. She has had a stellar career at Arista as our Chief Financial Officer. Ita has been our business partner and friend for the past eight years. She has displayed the Arista away, always prioritizing our customers, employees and shareholders. Ita has demonstrated and delivered both growth and profitability with a very, very small G&A investment, often only 1.5% of revenue. These type of pristine financials are so rare in a fast-growing tech company and only possible with a shared vision between the CFO and CEO. Ita, thank you for your steady leadership and contribution. Undoubtedly, we will miss you next year when you retire. Over to you for financial metrics.

Liz Stine:

Thank you, Ita. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Mike Ng:

Hey, this is Mike Ng from Goldman Sachs. Thanks for the question. I was just wondering if you could talk a little bit more about the outlook for -- in excess of 30% year-over-year growth this year on revenue? What's gotten better relative to last earnings call? If you could talk about it in the context of cloud titans versus enterprise, that would be helpful. I'm just trying to reconcile the revenue upgrade versus the commentary about near-term cloud titan growth moderating. Thank you.

Liz Stine:

Thanks, Mike.

Liz Stine:

Question.

Tim Long:

Thank you. Jayshree, I was hoping you could dig more into some of the comments around AI. It sounds like there's -- a large pipeline there, and you talked about kind of the stages with 2025 being the big growth area. I'm curious if you can just talk a little bit about a few things related to that. One, do you see that the move to AI expanding or diversifying more your cloud titan or your cloud customers? And second, can you talk about kind of the next year or two the entire -- the InfiniBand versus Ethernet debate? I think you guys have been trialing some Ethernet inside clusters. Can you just give us an update on how you think that competition between those two technologies? How you think that's going to play out? Thank you.

Tim Long:

Okay. Thank you. That's very helpful.

Meta Marshall:

Great. Thanks. Just revisiting kind of the cloud titan commentary, does the change that you're seeing mean that they're completing kind of one upgrade cycle? There might just be time between the next upgrade cycle or are there are real changes to kind of current deployment plans or kind of deployment of the current upgrades? Thanks.

Jayshree Ullal:

Sorry. Meta, were you addressing the question to Ita?

Jayshree Ullal:

Go for it, Anshul.

Jayshree Ullal:

I always [Technical Difficulty] for so long eventually you have to eat. So I think we will see a nice mix of AI and classic cloud networking over time.

Anshul Sadana:

Thank you.

Operator:

We'll take our next question from Ben Bollin with Cleveland Research.

Ita Brennan:

Yeah. I think, look, the lead times are mixed across products. I mean, our goal certainly is to try to get back to, like, a six-month lead time here, maybe the end of the year or certainly early year. But I think it is currently mixed across products. The commentary around customer inventory itself, we've been very diligent all the way through this process, the supply chain process of trying to make sure we understood demand when it showed up and that it was being put into reasonable deployment schedules and deployment plans. And we just want to continue to do that as we come through the other side of really that whole supply chain disruption. So it's really more, understanding kind of what customers need, when they need it and, again, being able to prioritize and make sure that we understand that. So it's really a continuation of what doing, honestly, on the other side of the supply chain when you have these -- when you have this kind of accelerated demand, and then we were very focused on deployment schedules and timing. And this is just the other side of that. Again, making sure we understand what's happening.

Operator:

We'll take our next question from Antoine Chkaiban with New Street Research.

Anshul Sadana:

So this gets asked very often, how we're doing that, and we continue to do well with them. As I mentioned before, not all titans are the same in terms of size. Some are small and we do very well with them, but they're just not as big as our two largest customers. And others who have the potential, we're still doing very well technologically with them but we haven't seen the opportunity materialize. It’s not that we're losing to anybody. It's just nothing has changed. And we continue to invest with them, and we believe the opportunity is still ahead of us.

Liz Stine:

Thanks, Antoine.

Amit Daryanani:

Hello. Yep. Thanks, and congrats on a nice quarter here. I guess my question is really, there's been a fair bit of debate, I mean, investors on what does calendar ‘24 looks like for Arista. And the fear, always, it could look like calendar ‘20 when you had some cloud digestion. I realized it's really early for you to guide ‘24, but if you just sort of think about the puts and takes into next year, that would be helpful. And maybe, Jayshree, you could talk about how do you think Arista is different today versus in the calendar ’19 and the ‘20 time frame, that would be helpful?

Liz Stine:

Thank you, Amit.

Tal Liani:

Hi, Ita. I have to ask you a tough one before you go, so you have good days for the rest few years. How much of the growth this time is coming from backlog drawdown? Can you give us some information about the order trends rather than revenues? And the reason why I'm asking it is because your guidance for 3Q is 25% growth. When I look at 4Q, it's the implied 11%, so there is a sharp deceleration in growth in 4Q and I'm wondering if it's a function of backlog -- end of elevated backlog? Thanks.

Jayshree Ullal:

Tal, I think -- this is Jayshree. I know you asked a difficult question. Look, it’s -- we'll know more as time goes on. And we think the business is strong and whether that comes in strongly in ‘24 or ‘25 or somewhere in between [Technical Difficulty] we shall see. Right? And the reality is it'll be difficult to repeat the last two years of exceptional cloud CapEx for cloud networking. So as they go through that deployment and as they look at AI, and as we bring in the enterprise and Tier 2 clouds, we've got a nice mix of things. And I urge everyone to think of our business as Ita has always alluded to, not in one quarter or even one year, but really a three-year CAGR. And I think our three-year CAGR will continue to be in double digits and good numbers.

Liz Stine:

Thanks, Tom.

Sebastien Naji:

Great. Thanks for taking the question. Can you maybe just update us on the visibility in your customer base? Is it still around six months, or are we now down closer to three months? And maybe just longer term, do you think that generative AI could help improve that visibility from where it's historically been just given that many of these hyperscalers have what seems like decent visibility into a pretty robust pipeline over the next few years?

Operator:

We'll take our next question from Samik Chatterjee with JPMorgan.

Jayshree Ullal:

Look, I think, Samik, this scenario that we feel pretty good about. And it's an area of great execution from Anshul, Chris Schmidt, Ashwin, and the entire team, where we have really diversified our business globally in the enterprise. We're not just in the high end financials. We're in just about every major vertical, healthcare, transportation, public sector, education, banks, insurances. So I feel enterprise, barring any macro issue, which is the thing we were always worry about for 2024. So If macro doesn't let us down and you don't have to worry about the economy, we will have a strong year in enterprise.

Operator:

We'll take our next question from Aaron Rakers with Wells Fargo.

Anshul Sadana:

Aaron, we had the same discussion when the world went to 400 gig, switching from 100 gig to 400gig. The reality was customers continue to buy both, 100 gig and 400 gig for different use cases. 51T and 800 gig, especially, are being puller by AI clusters, the AI teams, are very anxious to get their hands on it, move the data as quickly as possible, and reduce the job completion times. So you'll see early traction there. You'll see, as we mentioned, trial study in ‘24 going into volume in ‘25. And that should be the ramp we'll follow for 800 gig. But that does not mean everything they just bought last few years at 400 gig for DCI or the spines and so on for classic clusters are going to get upgrade to 800 gig. I think that's going to be a longer cycle. So you will see 100, 200, 400, and 800 get deployed in parallel as we enter that cycle in ‘24, ‘25.

Liz Stine:

Thanks, Aaron.

Matthew Niknam:

Hey, thanks for taking the question. I'm just wondering on the supply chain, if you can talk about how that's evolved over the last quarter? And as it relates to gross margin, I think you're messaging incremental improvements in 3Q and 4Q. Is that purely a function of easing supply chain, or is there also maybe greater relative contribution from enterprise relative to cloud titans envisioned in the second half of the year as well? Thanks.

Jayshree Ullal:

Yeah. I want to give a shout out, Mark Brillhart, our new Senior VP of Manufacturing, and John McCool, both in Anshul's team, have done a fantastic job of optimizing the supply chain. So those improvements are really playing a role in our quarter-to-quarter gross margins.

Operator:

We'll take our next question from James Fish with Piper Sandler.

Ita Brennan:

Yes. I think it’s absolutely right? And I think that, we kind of forget that cloud is still an important part of 2023. Right? We're still executing on deployments and planning that we did some time back, right, all the way through this year. So cloud is still a significant piece of the of the business in in 2023.

Liz Stine:

Thanks, James.

Simon Leopold:

Thanks for taking the question. I wanted to see if you could maybe do a little bit of unpacking in terms of what's driving your enterprise business in that I think the conventional wisdom is that enterprises are challenged by recessionary forces on the cycle, and then the secular challenge around public cloud adoption need slowing. So what do you see happening? How much of this success is related to market share gains? How much to general cycles, products, et cetera, if we could unpack the enterprise traction? Thank you.

Simon Leopold:

Thank you.

Operator:

We'll take our next question from David Vogt with UBS.

Ita Brennan:

So, now you want to go to '25 as well. I don't think we're ready to do that. But that's a really good conversation for the Analyst Day honestly. I think, we obviously, are very focused internally. As Jayshree reiterated earlier on, the business is a lot more robust with many different drivers. As you go through that period, cloud will ebb and flow, but it's still a healthy business. It has been a healthy business through those cycles. So, I think we've got a lot of the building blocks, but how we're going to assemble them, maybe we'll save for the for the Analyst Day.

David Vogt:

Great. Thanks, guys. And congrats, again.

Operator:

We'll take our next question from Erik Suppiger with JMP Securities.

Anshul Sadana:

Sure. There is no uniform recipe, but in general, when they're buying GPUs, [Technical Difficulty] to connect. These could be off few quarters depending on their timing of deployments till they build the network [Technical Difficulty] very large things. But it takes some -- a couple of months sometimes, a quarter or more, to fine-tune the cluster and benchmark and test everything before it is actually released to production. So, you can think of that as sort of the basis, a couple of months, a couple of quarters minimum before you can get there. Sometimes it adds up to about a year before you really ramp into production.

Operator:

We'll take our next question from George Notter with Jefferies.

Jayshree Ullal:

Yes, George. So, I think you can look at 2023 as really a year of planning for AI, because as I said, there's tons and tons of GPUs being purchased. And then the question is how is it being connected. So, depending on whether they are small, medium, or large, they're different technologies, but I'm going to stay focused on the large because that's the biggest problem. You are right to say some of them maybe Ethernet or even a non-networking technology, just an IO or a bus for smaller networks. But generally speaking, we're focusing on things that are much larger than 200 or even 1,000 GPUs. So that's the first thing. So, a lot of planning is going into that. And the planning basically is, how do they get the GPUs, what is their application, what is the size of the cluster, what is the time, what is the large language model datasets, et cetera, and what is their network foundation. In some cases, where they just need to go quick and fast as I explained before, it would not be uncommon to just bundle their GPUs with an existing technology like InfiniBand. But where they're really rolling out into 2025, they're doing more trials and pilots with us to see what the performance is, to see what the drop is, to see how many they can connect, what's the latency, what's the better entropy, what's the efficiency, et cetera. That's where we are today. Now, we expect next year this will translate to some, what I call, pilots, because majority of them will happen in '25, but in '24, you'll start seeing, what do you say, Anshul, maybe 4,000 to 8,000 GPUs, something like that?

Jayshree Ullal:

In that range, okay. 4,000 to 8,000 GPUs at about 400 gig type clusters. So we will actually put some production workloads on it. So, I call them smaller pilots. But the real test of why you buy these expensive GPUs in 2025, when you want to have not just 4,000 to 8,000, but 30,000, 50,000, maybe even 100,000, and this is why 2025 is so critical. And taking -- testing and taking out all the kinks out of the GPUs and networks is important because your network is so -- a good network is so pivotal to getting the most out of your GPUs. If you have idling cycles on those GPUs, you wasted thousands, if not millions, of dollars. And so, I think these next two years are crucial to getting the most out of these expensive GPUs and that's where the network really comes in. Anshul?

Jayshree Ullal:

Yeah, really good point. Simple things like power and space are still vital.

Operator:

We'll take our next question from Karl Ackerman with BNP Paribas.

Jayshree Ullal:

Sure. So, as you're probably well aware, the white box question has remained with the Arista as one of the most popular questions asked right from the time of our IPO, whether it's a 10 gig, 40 gig, 100 gig, 400 gig, or now you ask it at 800 gig, I think there will always be an element of white box if somebody is just looking to build something and throw in some quick traffic. But for some of these most mission-critical networks, it's less about the box and more about the software stack and how much performance availability, power you really get out of this. So, the cost of putting in the box, if you save something, if you even save something, is far dwarfed by the total OpEx you need to make that box work. So, we continue to believe that we will coexist with white box in some of our cloud titan customers. We will continue to run both SONiC and FBOSS in the case of Microsoft and Meta along with our EOS. But at the end of the day, whether it's a white box or a blue box, it's the software stack that really wins.

Operator:

Thank you. We'll take our last question from Ben Reitzes with Melius Research.

Jayshree Ullal:

Hey, Ben. Thank you. What do you mean by the market pickup? I don't follow the question.

Jayshree Ullal:

I would say to you that probably our enterprise demand has always been strong and not subdued, far from that, however, dwarfed by the excellence of our cloud performance. You didn't notice it and now you're noticing it.

Operator:

Thank you for joining, ladies and gentlemen. This concludes today's call. You may now disconnect.

Operator:

Welcome to the First Quarter 2023 Arista Networks Financial Results Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista’s Director of Investor Relations, you may begin.

Jayshree Ullal:

Thank you, Liz, and happy Monday, everyone, and a happy month of May. We delivered revenues of 1.35 billion for the quarter with a non-GAAP earnings per share of $1.43. Services and software support renewals contributed approximately 13.5% of the revenue. Our non-GAAP gross margins of 60.3% was influenced by supply chain overheads and cloud titan concentration. We expect our gross margins to improve every quarter throughout this year. International contribution registered at 17.5% with the Americas strong at 82.5% for the quarter. While we will shift to reporting our vertical segments on an annual basis, I would like to share some overall trends we’re seeing. We do expect cloud titans will moderate compared to our 2022 triple digit growth, while enterprise is likely to be more steady state. It is evident that our lead times are improving. Our visibility to customer forecast therefore are now beyond six months or now below six months, I should say, and they are shrinking. Despite macro uncertainty, we endorsed consensus of 26% annual growth to approximately 5.5 billion revenue in 2023. On the product side, we made many exciting Q1 announcements. At OFC 2023, we introduced our vision for Linear Drive Optics for intra and intra-datacenter connectivity at 800 gig and beyond. This was a highlight for both Arista and the optical industry at large, delivering the promise of low power and improved price performance for demanding AI workloads. Speaking of AI, the mandate to avoid idle states in expensive and large AI processor clusters requires that specialized AI network. Key characteristics include wire rate and lossless delivery of large and synchronized bursts of data at 400 to 800 gig speeds. Today, the combination of RDMA mix, RDMA stands for remote direct memory access; and ROCE, which is RDMA over converged Ethernet along with the switches, allows Ethernet to become that predictable transport network. Ethernet of course brings familiarity, great economics, massive install base, standards with industry-wide interoperability, and many merchant silicon options. This is supporting compute and data intensive workloads based on generative AI, inference, and large language model training applications. Arista's cloud customers are resonating with our AI and switching strategy for platforms. Presently, we are in the midst of trials leading to production deployments this year in 2023. We expect AI networking to become meaningful throughout the years and through the decade ahead. In Q1 2023, Arista also formalized our new entry into the wide area network with our WAN routing system. Our enterprise class routing platform is based on carrier and cloud neutral transit with CloudVision Pathfinder Service. Not surprisingly, we support Arista's EOS operating system stack, delivering that operational model for network as a service and wide area as a service. We are targeting mission critical enterprises where [high-volume] [ph] and encrypted traffic matter in a modern WAN. Arista has partnered with Equinix to develop and deploy the WAN routing system and WAN routing will be included as part of our network adjacency category. In the non-cloud category, we have registered a solid number of million dollar customers, which is a direct result of our momentum in the enterprise and campus throughout the past year. Let me illustrate with a few customer wins. The first used case is an international government win. The customer's objective was to detect illegal activities such as money laundering, terrorism, scams, and other criminal behavior in real time by collecting and analyzing data. Arista's data-driven AI clusters are optimizes network assurance for mission critical AI and ML workloads. Using advanced features like microburst and fan in congestion management, ultra deep packet buffer memory with latency analyzer provides real time telemetry, visibility, automation, and dynamic controls for their AI and ML data centers all based on open standards Ethernet. Our second win continues on the international theme and highlights our ever growing strength in the education vertical, where Arista's proposal for Edge Campus platforms ranging from power over Ethernet switches, wireless access points, and automation was a decision factor. We leveraged [CloudVision Q] [ph], cognitive unified edge, coupled with Arista validated designs as an automation framework across multiple distributed locations bringing unmatched flow visibility. The next win is in the U.S. Financial sector. This customer had grown organic and inorganically through acquisitions and is looking to modernize their entire infrastructure, moving their data closer to the cloud to enable a hybrid cloud architecture. This design included multiple greenfield data centers, hosted in Equinix, requiring active-active 400 gigabit Ethernet fine, securely encrypted data center interconnect and Internet connectivity at each site. For a smooth upgrade in their campus environment without disruption to their end users, Arista's SSU or smart systems upgrade feature played a prominent role. We also help them build a digital twin of their environment modeling their designs for automation. The next customer highlights healthcare as a critical win for network monitoring and security analysis tools at their remote data center facilities. This holistic view of Port Mirroring sessions for traffic analysis from all their remote data centers was a superior approach. Arista’s centralized DMS, DANZ Monitoring Fabric was better than disparate and expensive tools at each remote location. A final customer win was looking for real-time in-house video streaming and editing capabilities. Video would be stored on their storage arrays, which could be connected at 100 gigabit Ethernet and then accessed and rendered by the clients, be they PCs or Max with 25 gigabit Ethernet. Arista’s core strength in the media vertical comes from its deep buffer virtual output queuing architecture with our R3 platforms. The simplicity, scalability, and flexibility aligns this – shows this elegant design and highlights our strength in the media and entertainment vertical. So, as you can see, this is a recurring theme in all our customer wins, where Arista is deploying innovative solutions based on a consistent architecture, allowing each and every customer to modernize their network with the power of our platform. And with that, I'd like to hand to Ita, our CFO for financial metrics.

Liz Stine:

Thank you, Ita. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Aaron Rakers:

Yes, thanks for taking the question. I'm just curious, kind of the commentary around the hyperscale cloud as component lead times shrink, how would you characterize if at all, you know the visibility in that vertical? And specifically how maybe that's evolved or changed relative to let's say the commentary or the thoughts a quarter ago? Thank you.

Liz Stine:

Thank you, Aaron. We can go ahead and take the next question.

Antoine Chkaiban:

Hi. Thank you very much for taking my question. So, at the CMZ, I think you provided an AI intensive network stand of 2 billion, 3 billion in the next few years. And during last earnings, [Broadcom] [ph] said that their Ethernet switch chips deployed in AI was well over 200 million in 2022 and did forecast that this could grow to well over 800 million in 2023. So, I imagine that that would correspond to 4 billion or 5 billion in revenues. This is therefore already well above the [TAM] [ph] that you estimated. Am I missing anything or did the TAM expand considerably more than you are anticipating at the CMD?

Jayshree Ullal:

Yes. And just to add to what Anshul said, our forecast of 2 billion to 3 billion is more in the 2025 arena. Market analysts are already showing larger numbers than that, 2025 to 2027 arena. I think market analysts are already projecting it's double that. And certainly Broadcom is enthusiastically looking at their chip deployments. But again, as Anshul alluded, by the time Broadcom has a chip, the chip gets built into a system by us, and then the system gets deployed by our cloud customers. It can be 1 to 2 years.

Operator:

Your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open.

Ita Brennan:

Hi, Samik. This is Ita. When you think about the purchase commitments that we have and that we made some time ago, right? We're going to have to continue to work through those as we go through the rest of this year, particularly on some key components there were long lead times We had to place commitment for, kind of this year well earlier last year in order to secure those that supply. So, those components will continue to come into inventory and obviously they'll go out of inventory, as well as we build products, etcetera. So, we have a healthy deployment pipeline in front of us on the system side, but we are still going to gather components based on when those purchase commitments were made on the timing of those purchase commitments. So, if you look at the total of inventory plus purchase commitments, it came down in excess of 400 million this quarter. We will continue to, kind of work that down over time, but you will see the shift from purchase commitments into inventory parts and then obviously we'll sell that inventory.

Samik Chatterjee:

Thank you. Thanks for taking my question.

Operator:

Your next question comes from the line of David Vogt with UBS. Your line is open.

Jayshree Ullal:

Hey, David. I think first of all, the TAM we took up was for 2027, not Q3, Q4, 2023, just to be clear. And I think we continue to feel very optimistic about our long-term demand in enterprise cloud and AI. So, we shouldn't confuse the comps and difficulty of comparing Q3 2022 with Q3 2023 with our long-term demand and TAM. Both are valid statements. But as you know, the cloud is a volatile market and the titans will spend a lot one year and then spend a little less the other year as they're digesting it and deploying it. So, if you look across multiple years, we're going to have the strong demand and [do well] [ph].

Jayshree Ullal :

Right. We said 25 in November, now we're saying 26.

Jayshree Ullal :

Thank you.

Meta Marshall:

Great. Thanks. Maybe just zeroing in, kind of on the cloud titans vertical. You mentioned kind of reduced visibility, but just wanted to clarify, you know, had you seen any changes in orders or any push outs, kind of within the quarter of orders or – and within, kind of your near-term guidance of orders that you thought were going to take place that are maybe getting pushed out? Thanks.

Anshul Sadana:

Meta, if I can add some more color to key areas that we've been tracking. I know we're only going to talk about AI. This [BPI market] [ph] is backbone, which is what started the 400-gig cycle in the first place. Those deployments are progressing as expected as well. So that part is steady state. And obviously, AI is growing compared to what we knew before.

Operator:

Your next question comes from the line of Sebastien Naji with William Blair. Your line is now open.

Jayshree Ullal:

Sure. I think I said this before, but I think the Number 1 advantage of Ethernet is the fact that you're building a standard space, multi-vendor, highly interoperable network, where everything from troubleshooting to familiarity when you're connecting to the GPU clusters is very well known. So from a best-of-breed horizontal approach, Ethernet can win every time and [Ethernet technologies] [ph] generally struggle. Having said that, the vertical approach that InfiniBand adopted for high-performance computing can be applied to GPU clusters as well. So, I think it all depends on the customers' clusters and how large they are and the larger they become, the more it favors Ethernet.

Tal Liani:

Hi guys, thanks very much. I want to ask about non-cloud titans, the other part. Last year, it grew about 14.5% and it was supposed to grow – by your guidance, kind of supposed to grow much faster this year? What happened this quarter? And again, you don't provide exact numbers even qualitatively, what happens this quarter with non-cloud titan, how is demand shaping up when it comes to orders, I'm trying to neutralize the supply chain issue? Thanks.

Operator:

Your next question comes from the line of Michael Ng with Goldman Sachs. Your line is open.

Jayshree Ullal:

Sure, Michael. As we said, the 7,800 is Arista's flagship AI platform. And we expect the better part of last year, maybe even the year before, Anshul, and you could correct me, doing a tremendous amount of simulation on how we work with GPU clusters and different types of stuff, network interface cards, the performance, the [indiscernible] list, dealing the diversity traffic, the latency, the transaction. And we believe that this will be a critical year in seeing those trials come into production. So, we do expect AI to be meaningful this year as opposed to not material the last couple of years. And we believe the 7,800 will be the flagship product for that.

Jayshree Ullal:

We ship [the boxes] [ph]

Michael Ng:

Thanks, Jayshree. Thanks, Anshul.

Alex Henderson:

Great, thanks. I've got a question that I want to split into two pieces. The first one is, as you're looking at market share in the AI arena, does the networking piece, gain share within the AI wallet budgets? And then second, I know that you've had a very significant share advantage in high-speed. You've gained significant share from your competitors for every year that I can remember. And I guess the question is, will AI drive an acceleration in your share given your dominant experience so far in delivering it? So, share within the CapEx wallet and then share within the AI market? Two related questions.

Alex Henderson:

Great. Thank you so much.

Amit Daryanani:

Good afternoon. Thanks for taking my questions. I guess, I just want to go back to this reduced visibility that you're seeing with the cloud titan. I guess, is it your sense that you just had extra-long visibility at four quarters and now going back to two quarters, which is normal or do you think there's a risk that it actually ends up an outright pause at some point given these companies did have a really big spending cycle with you in the last 4 or 5 quarters already. So, I'm just wondering, like is this a return to normalcy or do you think there's risk that we end up in a pause with one or both of them the way we've been in 2019? Thanks.

Operator:

Your next question comes from the line of Fahad Najam, an Independent Analyst. Your line is open.

Anshul Sadana:

So a good way to look at this market and the introduction of G3, G3 AI, you know 400 gig is not going to end quickly and suddenly get replaced with Jericho3. 400-gig will go on for some time, customers will take time to make changes. And so, especially when they don't need more bandwidth just yet. At the same time, you'll see a quick adoption of 800-gig technology and there’s a complementary chip that was also announced with [indiscernible] and Jericho3 AI, the AI teams will absolutely consume these as quickly as the market can get them out there. And you may have read some white papers that were also published along with the announcement, which showed that Jericho3 AI is scaled to very large clusters, we can scale to 4,000 GPUs quickly at 800-gig, and the cluster performs at 10% better throughput than InfiniBand. So that is why there's such needs for this technology out there, and everyone thanks us to get it. But just remember, the chips have just been announced. It takes time to get the chips, build systems, ship it to customers, [indiscernible] with the trials, and then go to the volume production.

Operator:

Your next question comes from the line of Matt Niknam with Deutsche Bank. Your line is open.

Jayshree Ullal:

Yes, Matt, I'd say that usually, we see a very strong activity in the month of March, but in Q1, we did see some seasonality in certain regions, especially internationally. And I don't know how – one quarter, this is a trend base, but we're definitely watching this.

Jayshree Ullal:

Too early to say. No. You mean has it changed in the sense it's improved in April. Is that your question?

Jayshree Ullal:

Yes, April is good so far.

Operator:

Your next question comes from the line of Michael Genovese with Rosenblatt. Your line is now open.

Jayshree Ullal:

Can we tell you six months before 2024 spending because we don't know. We don't have the visibility.

Michael Genovese:

But what about on the timing of switches? I mean, as you go through all of these GPUs or processing units now, training, all of these things, when do you think the timing for switching deployments will inflect positively?

Michael Genovese:

Well, specific – I mean, AI is clearly happening now, but 80% to 90% of the spending is in stuff that you don't do. When do you think that there will be a significant uptick in that percentage of switching deployments in AI cluster data centers?

Michael Genovese:

That’s fair. Thanks for clarifying. Thank you.

Operator:

Your next question comes from the line of James Fish with Piper Sandler. Your line is open.

Ita Brennan:

Yes. Look, I think if I have my ways, the purchase commitment number will come down significantly over the next, I don't know, 12 to 18 months right, because we don't need it once we start to see some of these component lead times come in. So, we need to – obviously to manage that. Some have long lead times that we do want to receive, and you will see that grow in inventory, some, we'll look to reposition, if we can. But obviously, there's a keen focus on kind of managing that number now. But the net of it is, I think you grow inventory through the year, it will consume some cash, and then it will flip in 2024, where we'll actually start to, kind of generate more cash as we start to bring that inventory number down. Do we ever go back to kind of where we were before? I think probably not. I mean we probably will carry a little bit more inventory and more buffers, having just gone through what we went through the last couple of years, but it should certainly get – come down from where it is today.

Ita Brennan:

Yes. I think for this year, inventory is a consumer of cash. So, it's probably – it's hard to know exactly what that looks like, but I think every quarter, we'll increment that inventory balance as we go through the year, that will concern some cash. But I mean the P&L is highly cash positive with the guidance that we've put out. So, I think we'll still be generating a healthy amount of cash, but we will build inventory balance.

Ittai Kidron:

Hi, thanks. Hi ladies, nice quarter. Ita, I wanted to dig into the comments on gross margin where you expect them to improve through the year? [Two things] [ph] there. Number one, what – now the supply chain is getting better. What is it in the supply chain that's still expensive that's hurting you on the gross margin side? And how does that get mitigated? And second, the improvement that you anticipate, is that just a reflection of the mix, meaning cloud perhaps moderating to your point or is most of the improvement driven again by supply chain – better pricing on the supply chain side?

Operator:

Your next question comes from the line of Ben Bollin with Cleveland Research. Your line is open.

Ita Brennan:

Yes. I think we talked about a little bit in the script, but when we are continuing to hire, and we are continuing to make some investments, and we'll continue to do that, certainly within the envelope as we think about the business for the year today, we will continue to do that. It probably doesn't grow quite as fast as the top line, we'll see. But we are continuing to increment that quarter-over-quarter, and you'll see us continue to grow those investments. But again, it's headcount around R&D and go-to-market and really looking for good talent and places where we win an opportunity, right? But we will continue to invest, just given the envelope of business that we have in front of us.

Tim Long:

Thank you. Can I ask a two-parter on the adjacencies. First, just curious on the campus side. Obviously, you guys have been growing nicely there. How do you think that tends to be more macro sensitive? So, how do you view being able to grow the same level in that sector when there becomes more natural headwinds like we're starting to see? And then on the routing side, I'm curious now that you're out with the full platform. Jayshree, if you – or Anshul, if you could just give us a little view of kind of what feedback has been and what you think kind of the revenue path would look like for increased routing business? Thank you.

Anshul Sadana:

There's a lot of disruption happening in the market, even at the edge, right? When you talk about campuses, when you go and talk about what's inside the building, but there's an edge that connects to the outside, too. We have plenty of interest from our customers in this area. It is a bit too early. We just announced this offering. So, too early to jump up and down and say it's plus of membership. We'll watch it how it grows. But having the integrated solution is important to go after the broader enterprise market.

Tim Long:

Okay. Thank you.

Erik Suppiger:

Thanks for taking the question. Can you speak at least qualitatively about how much backlog you're using up at this point? And how long do you expect to continue working down backlog orders on a quarterly basis?

Erik Suppiger:

Is that a multiyear process?

Jayshree Ullal:

Yes. We've pretty much said it will take us the back half of 2023. So, I think normal is early next year.

Operator:

Your next question comes from the line of Simon Leopold with Raymond James. Your line is now open.

Jayshree Ullal:

Yes. Thanks, Simon. I think most of our software is not stand-alone software. It's bundled either in CloudVision or EOS. There's very few stand-alone pieces, of course, as the MDR and the DANZ Monitoring Fabric. Specific to the campus, I would say they tend to look at it more as a solution where they bring in wired, wireless, they want an automation framework with CloudVision. They want some security capabilities. In RSA, we announced some of the missing gaps we filled. Historically, we've partnered with other vendors for Network Access Control and Arista introduced its first one. I'll talk about it more next quarter. But I think some of the gaps we are now starting to fill ourselves. But in the campus, it always tends to be a combination of platforms and software never stand-alone software alone.

Jayshree Ullal:

Yes. I was going to save this for next quarter, but I'll just give you the condensed version is the Arista Guardian for network identity, Agni, means fire in Indian language, Sanskrit. So, we'll spread some of the ice with our fire.

Ita Brennan:

Yes. I think it's up about between 50 million to 60 million quarter-over-quarter. It did pick up a little bit on the software and services side, but not in that range. Still small numbers, a long way to go, yes.

Operator:

Your next question comes from the line of Sami Badri with Credit Suisse. Your line is open.

Ita Brennan:

Yes. I don't think we're going to try to prevent the vertical split. I think what we said is, we think our two biggest customers will be at least 10% customers for the year, but it's not all we've really said on that front.

Liz Stine:

Operator, we have time for one last question, please.

George Notter:

Hi, guys. Thanks a lot. I guess just following on, on some of the questions about visibility and customers. Any evidence of customers building inventory of your products whether that's just stand-alone inventory or whether it's inventory that's maybe installed in the network, but not being fully utilized. I guess what I'm really asking is, any thoughts about excess inventory rather than just, kind of the normal buffers that are out there? Thanks.

Ita Brennan:

[And supply] [ph], there’s so constrained. George. I mean, you are just guiding to …

George Notter:

Thanks so much.

Operator:

Thank you for joining. Ladies and gentlemen, this concludes today's call. You may now disconnect.

Operator:

Welcome to the Fourth Quarter 2022 Arista Networks Financial Results Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista’s Director of Investor Relations, you may begin.

Jayshree Ullal:

Thank you, Liz. And I am glad we avoided Valentine’s Day this time. Thank you, everyone, for joining us this afternoon on our fourth quarter 2022 earnings call. 2022 has certainly been a record year for Arista. You might recall, in November 2021 Analyst Day, we had given you a guidance of 30% growth and instead have achieved well beyond that at 48% growth for the year, driving to an annual revenue of $4.38 billion with a non-GAAP earnings per share of $4.58, translating to an EPS growth of 58% for 2022. Indeed, a memorable year. Let’s get back to some Q4 2022 specifics. We delivered $1.276 billion for the quarter, with a non-GAAP earnings per share of $1.41. Services and software support renewals contributed approximately 15.8% of the revenue. Our non-GAAP gross margin was 61%, influenced by our supply chain overhead and cloud titan concentration. International contribution registered at 23.5% with the Americas at 76.5% in 2022. This was one of our strongest performing international quarters in recent history. In terms of Q4 2022 verticals, cloud titans was our largest and first, followed by enterprise and then specialty cloud providers at third place, financials at fourth, and service providers at fifth place. In 2023, we will report the three segment sectors instead of the verticals. Shifting to the segment sector revenue for 2022, cloud titans contributed significantly at approximately 46%, resulting in a triple-digit growth annually. Enterprise and financials together was strong at approximately 32%, while the providers were at approximately 22%. Both Meta and Microsoft are now far greater than 10% customers at 25.5% and 16% contribution respectively. Clearly, we continue to enjoy a strong and strategic partnership with M&M. With that, I’d like to now invite Anshul Sadana, our Chief Operating Officer, to shed more light on our cloud titan performance.

Jayshree Ullal:

Thank you, Anshul. Wow, 2022 was indeed a phenomenal year with the cloud titans and these partnerships have been nurtured for well over a decade with expanded use cases such as these AI workloads. We remain confident of our meaningful share with both Microsoft and Meta and we expect both of them to once again contribute greater than 10% of our total revenue in 2023. In the non-cloud category, we have registered solid number of million-dollar customers as a direct result of our momentum in the enterprise and campus throughout the year. We have now surpassed 9,000 cumulative customers. In terms of 2022 product lines, we have three categories

Liz Stine:

Thank you, Ita. We will now move to the Q&A portion of the Arista earnings call. [Operator Instructions] Thank you for your understanding. Operator, take it away.

Jason Ader:

Yes. Thank you. Good afternoon, everyone. I just wanted to ask, I guess, Ita, for you on the order trend. We all know that the revenue is incredibly strong right now because of all the lead time supply chain issues, but maybe some visibility on how orders are trending versus revenue.

Jayshree Ullal:

No. I think you said it well. Order trends in 2022 were good. We will wait watch and see if the macro has broader effects in ‘23, but our guide and our tone effects that we are pretty positive at the moment.

Jayshree Ullal:

When we have something to state, we will, Jason. So far, we don’t.

Ita Brennan:

Thanks, Jason.

Operator:

Your next question comes from the line of Amit Daryanani with Evercore. Please go ahead. Your line is open.

Jayshree Ullal:

Okay. Well, I’ll take the first one, and I’m sure Anshul will have a few words on the second. How does this break down? If you look at 20 – let me go back to 2021. We had a very nice even split, and cloud titan was actually kind of on the low side. It was 30%, if I remember right, 30-30-40. And if you look at 2022, which we are called titan was outsized when the 30 went to 46. If I had to guess, I would say we’d be between those two numbers. I still think we will have a very healthy cloud titan mix. But enterprise momentum continues to be strong, and you’ll see a contribution from that as well as the Tier 2 specialty cloud providers and service providers as well. So I think it will – my guess is it will look somewhere between ‘21 and ‘22 in terms of split. We will see as the quarter progressed. In terms of the CapEx and the impact of that cloud titans, look, we don’t exactly and equivalently track to CapEx, but eventually, CapEx is an indicator of future – of our future cloud titan progress. I don’t believe at this point that our progress is coming from white box or specific things like commodity, things like that. It’s really coming from, as Anshul pointed out, a very strategic seat at the table on new use cases like AI workloads, which has a multiplicative factor on our bandwidth. So I believe we will have a real seat at the table, especially with Microsoft and Meta. And we will continue to see what the use cases are that we can imagine beyond ‘23. But we’ve been working on this for 10 years, and I think it will continue to be strong.

Operator:

Our next question comes from the line of Paul Silverstein with Cowen. Please go ahead. Your line is open.