Arista Networks, Inc. (ANET) Earnings Call Transcript & Summary

Hi, I am Rob Muller. I am the enterprise hardware analyst here at RBC, and we are happy to have Arista Networks with us today. Joining us is Ita Brennan, Chief Financial Officer. Hello. If you -- I don't know if you have any intro or anything you want to say, and then we can dive right into the Q&A.

Yes. I think let's just dive right into the Q&A. Obviously, all our forward-looking statement language and risk factors reflected in the latest 10-Q apply to this conversation as well. But other than that, we should just go ahead and go straight to Q&A.

Great. So on your last earnings call, you highlighted some network adjacencies as areas that you're targeting, specifically routing. I was hoping you could touch on the routing mark a little bit. What do you see as the opportunity set there? And why do you believe you'll be successful in gaining ground in this adjacency?

Yes. I mean, Arista entered the routing market, honestly, as part of the 100-gig cycle, right? And we -- that was our first product that leveraged some new silicon development and some incremental software work that we had done and allowed us to route outside of the data center, and it was a major shift from -- prior to that, really, the routing requirements were solution by large kind of proprietary and designated routing products. And with the introduction of that product, we were able to provide customers with essentially a switch router platform. The much denser, leveraging merchant silicon, a much lower kind of cost per port to deploy those -- that routing capability. And with a whole new feature set focused on kind of go-forward routing features. And we've -- so we've been selling those products with the routing capabilities targeting initially the hyperscale customers, right, because they were looking for solutions that enable them to more economically connect their data centers. And then also in the enterprise, because now you had a platform where an enterprise customer could use the same hardware product with the addition of a software license to route both to act as their data center switch but also to route between their data centers as well. And we've seen some good traction there. So I think it's a continued evolution, right? We started out in switching. We've seen kind of the switching extend into the routing, leveraging this platform, and we continue to make investments around routing features and capabilities to support that platform. And I think we've seen some traction also with service provider and with other cloud provider customers over time. And we continue to add features and develop features, particularly targeting kind of an even further expansion into the service provider market and address some of their needs when they kind of migrate from the legacy router capabilities to this kind of new switch router platform and capability. So I think it's been a very natural extension when we engage with an account on the switching side. There's a very natural adjacency to expand into routing and use those routing capabilities and customers find those -- the same drivers that made them choose the -- the switching capability extends out to the router, they get the same ease of use, single operating system across both use cases and that they can leverage that. And then continue to use that to solve some of the routing problems as well, right? And I think that's been the expansion of routing. So it's a significant piece of the business today. And really, we're looking to extend it into other parts of our customer set more broadly into service provider and some other parts of the market as well.

Yes. And with that expansion into service providers, can you discuss a little bit of your 5G opportunity set where you think you can make more inroads?

Yes. I think 5G and some of the innovations that are likely to come to the service provider market is an opportunity for us to see incremental Telco cloud, what we call Telco cloud-like architectures in their networks. And that's an opportunity for us to, again, leverage the technology that we just talked about and play a more meaningful role in their networks. Their need for more cloud, Telco cloud type architectures, more cloud networking, cloud data center architectures allows us to insert more easily and provide a very differentiated solution, leveraging this new switch router platform that we just talked about. So while we're not solutioning maybe the direct 5G transition itself, it does give us an opportunity to solution more of their broader data center needs as they make that transition.

And then just as a reminder to the people on the line, you can submit the question through the Q&A bank, and I'll try and work them into the conversation. So moving on to -- from 1 adjacency into your campus push, I believe you're targeting $200 million of revenue over the next 4 or 5 quarters or so. I was wondering if you could give us a little bit more granularity on the breakdown of these customers in terms of whether it's end markets or where you think you can be successful from a customer segmentation standpoint? And I was also hoping you can discuss sort of the impact on your sales efforts that's been caused by pandemic? I know that there's been a little bit of a delay and a little hindrance in your sales effort, just the lack of face-to-face meetings and getting out there for sales efforts. So I was just hoping you could frame how that has evolved as we worked our way through since kind of the darker days in March?

Yes. So I think the campus initiative for us is another extension, right, not dissimilar to routing. In terms of approach, right? We have a substantial customer set who are using Arista in the data center, are using Arista in the routing and now are looking for a solution for their campus footprint, and they look to Arista to continue to extend kind of the same capabilities to the campus. And that's what drew us to campus initially was really customers asking us to extend the OS to the campus and to extend the same feature set, the same management tools, CloudVision, et cetera, to their campus footprint, so that they could manage their network end-to-end using the Arista product set. And so it's a -- again, a very natural extension. So the most logical place for some initial campus business to come from is those customers as we -- as they make campus decisions, they would look to Arista to pre part of those decisions for existing customers. And then as we continue to add more data center customers, that that's also almost like a land and expand to the campus over time as they look to deploy products into their campus. So that's an important kind of element of how we will approach that market. And we've seen those customers continue to focus and make decisions around their campus. As we've gone through this last -- it's been 3 quarters of kind of COVID, post-COVID activity. So they're continuing to -- some leveraging the opportunity when their buildings are less utilized to make some decisions around campus, some focused on what type of campus network and management tools, et cetera, do they want to have for when they return to work and when maybe the work environment becomes a little bit more fluid or more flexible over time, right? So I think that's definitely one avenue of existing customers, new data center customers, land and expand into the campus. We also saw new campus customers come to us who are not existing Arista customers. And again, they're in a position where they're looking at their campus footprint, and maybe they have some legacy products that are kind of end of sailing in, end of support, and they're making decisions around the campus. And again, if a customer is looking at that now with Arista's new product suite, I think we've got a good complete solution for a campus customer, we get a seat at the table than looking at those opportunities, too, right? And I think that was the area where we thought maybe it's going to be more difficult to drive a decision or for a decision to get made in those situations where we don't already have an established relationship or established technology. But we've seen some good traction there, too. It may take a little bit longer to make those decisions, and we kind of reflected that in our outlook and commentary, but we are still seeing new engagements with Campus as our entry point, if you like, and almost a reverse of kind of the -- that will be our starting point, then we'll look to expand from that campus footprint. A lot of the sales activities have moved to online. As the sales team has done a really nice job of engaging customers and proof of concepts and other things that we would maybe have done physically in the past, but now they're opening those up and able to demonstrate the product online and have maybe larger participation with the customer because there's less travel and less engagement, et cetera. But there's still -- for a new customer, we obviously have to invest significantly more time and effort to kind of form those relationships and have that engagement at the same level. But the team has done a very nice job of, I think, focusing on that and driving that over the last couple of months.

And you recently unveiled your 750 Series Campus switch. We'd be curious what early feedback or customer response have you seen so far? It's still early days in the launch, but I'd be curious on what the initial feedback has been?

Yes. I mean that was something that, obviously had been in planning and in discussion with customers for some time, right? And particularly for our larger customers, it was something that they needed and wanted to have us add to the toolkit to help address their needs. So some of it, for sure, was almost designed and specked with some key customers in mind. So I think, again, the product addresses their needs, and I think it's well received by that customer set because of that. Curtis, I don't know if you want to add anything to that discussion.

I think from a -- Rob, from a 750-point of view, the size of the chassis is very innovative, too. And so it's compressing 384 ports in a much smaller form factor than what the competitors have today in the market. So I think that's gotten a lot of praise as well from customers that have more confined spaces that they're looking to either add more capacity or trying to bring the chassis into some areas that were not attainable before.

Okay. And then as part of your sales efforts, especially with the enterprise-facing accounts, it were still very early, but have you had any constructive or any type of conversations following the recent vaccine news? Is just last week, Pfizer first came out, and earlier this week, we had sort of an update to another vaccine candidate. So curious if you're seeing more optimism or how those discussions have changed, if at all?

Yes. I mean, I think most people are in a wait-and-see mode, to be honest, around some of the stuff, right? I think people have settled into a -- and particularly kind of our enterprise customers and kind of their size and where they play. I think they've settled into a work motion that's operating successfully for them. And everybody obviously has an eye to the future, but I think we're going to wait and see some more certainty around kind of the next steps. I think a lot of customers feel like at this stage, the status quo, until you have some kind of incremental improvement that's demonstrable, is really the right way to approach it. And with some of the COVID kind of upticks that we've seen, et cetera, I think your steady-state kind of work from home, essential services in the opposite that's needed, tight model seems to be where a lot of people are happy to stay until we see some incremental improvement that's long-lasting, right.

Great. And then with longer-lasting, do you -- what are your views on what the longer-lasting work from home environment could be in terms of a permanent shift? Any sort of hybrid setups? How do you see the workplace of the future evolving, given what we've gone through and then particularly, how does that adjust? Or how do you adjust your sales efforts with those enterprise customers?

Yes. I mean I think our view is that we probably end up in a more flexible environment at the end of the day. I don't know that we'll ever go back to exactly how it was pre-COVID. I think we'll end up at a hybrid where it's -- people will have more flexibility in terms of where they work from. But there will still be a desire for certain activities, certain meetings, certain face-to-face interactions to happen in-person and in the office. And I think that's the same with customers. There will be certain interactions where it will be more efficient to continue to use technology to drive those, and there'll be other occasions when really you're going to want to have that kind of face-to-face interaction. So I think the hybrid kind of more flexible, more fluid dynamic is how we see it evolving over time.

Great. And so I want to shift to sort of to your strength in the data center and the cloud customers. I'd love to hear about sort of the early feedback that you've gotten on your 400-gig products. They've been qualified by major customers. What's the major feedback that you received so far?

Yes. I mean, I think we're finally inside that window -- planning window where we start to actually get some feedback from customers and some -- we start to plan some product transitions and such. And I think the feedback has been very positive. Products have been well received. Up until now, there's just been a lot of noise in the system around these accounts and obviously, this opportunity because it's a key opportunity to partner with these customers. And we haven't really been in a position to have an opinion until now. But now we're really starting to see get feedback from customers. We think the products are doing very well, meeting customer requirements, et cetera. And we can start to see some improved activity around planning for those products as well. So I think that's been a big improvement versus maybe where we were earlier in the year, and we didn't quite have the same visibility in those trials and qualifications were still in process.

Okay. And then with that, how do you believe that this market and the launch of 400 is going to be different and similar to the 100-gig launch?

Yes. I mean, I think the criteria for success is very similar, right? At the end of the day, it's all about delivering a product set that with a robust software stack, that allows you to have a high-quality, high-scale, ability to scale high-volume product early in the cycle, right? And I think that's the contributors to that, if you like, our consistent architecture, and our consistent and robust software stack. And we're on our fourth and fifth generation of EOS and of our silicon platforms to support this. For us, it's a very natural kind of evolution from 100-gig to 400-gig. And it's going to be -- the underlying kind of product sets and configuration of product sets, et cetera. There's a lot of new product activity that happens as you go through these cycles. And so demonstrating your ability to continue to execute through all of those various steps in the process, if you like, is critically important, right? So putting products out there yet again that are robust and that scale and that have the required -- meet the required quality and performance metrics is very important. So that's still the biggest deciding factor when you think about how you move through these cycles. I think with 400-gig, and we've said this now for some time, that we think the cycle is more gradual. You've heard Anshul top in our earnings call about there will be certain use cases where 400-gig will proven an from an economics perspective, like Data Center Interconnect, et cetera. And then over time, it will become more broadly adopted. And I think what you've seen is a new set of products and configurations, leveraging some of the silicon associated with 400 gig, that has enabled these customers to have a path from, say, 100-gig and if they want to deploy 200-gig, they can do that. And ultimately, to 400-gig, and they'll have the flexibility to choose when they make those transitions and what use cases they make those transitions in. For Arista at this point, we're somewhat agnostic as to when and how they make those transitions. We need to plan for them. But in terms of -- once you feel that your products have been well accepted across kind of that portfolio, then where they spend their money, in what particular port configuration, at what point in time is almost -- we're almost indifferent to that, right? As long as we're satisfying their needs across the total portfolio. So I think that flexibility as we go through this 400-gig cycle is important. And we'll see 400-gig prove in when their supply and economics kind of warrant it, based on their architectures, and we'll transition through that with them.

Okay. And so you brought up a couple of times. You mentioned the silicon that you're utilizing. We've seen competitors try and utilize new silicon offerings. How come you've been pretty steadfast in sticking with the merchant ?