Arista Networks Inc (ANET) Earnings Call Transcript & Summary

[Presentation] That was a great video. Welcome, everybody, to the Arista Networks fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Todd Nightingale, who's the President and COO; and Martin Hull, who's the VP and General Manager of Cloud and AI Platforms. My name is Mike Ng, and I cover Arista and networking equipment here at Goldman Sachs. We have about 35 minutes for today's presentation. First and foremost, thank you so much to both of you for being here today. It's really a pleasure.

Awesome.

Great. So Todd, September marks 2 months since you joined Arista as COO and President. Now that you've been able to spend a little bit of time here, what opportunities at Arista excite you the most? Where do you anticipate you'll be spending most of your time? And maybe you can talk a little bit about the video that we just saw as well.

Sure. Yes. Super excited to be here. Thank you. This is my first conference. I'm super interested in all the discussions we've had today. I come from a networking background. I ran the Meraki business at Cisco and the Enterprise and Cloud business there as well, campus, data center, cloud. I guess for me, there's really two enormous opportunities in front of us. And I'm sure with the video and all of the excitement today, we'll be talking a lot about AI, which is the first really big one and the whole industry is talking about it. But for us, there's also an enormous opportunity in the campus. Arista for years has delivered truly best-in-class data center networking. And our DNA is delivering the most reliable networks in the world. It's 2025, and the time has come to bring that like true reliability to every network. It doesn't have to be your most mission-critical data center in the world. Every network is mission-critical now, whether it's at a hospital, government, school, an enterprise. These are all mission-critical networks, including the one we're broadcasting on today and it's time to bring that Arista value proposition with the rest of network, that is incredibly exciting to me. The second one would be reaching more customers with our traditional focus in cloud and data center, we've been able to become market leaders and really focused most of our go-to-market effort on really the Global 2000, but there's so much more TAM when it comes to campus and the rest of that space. And we're just scratching the surface of that opportunity, yet we have so much expertise, so much IP to leverage there. So I'm super excited about that. Of course, I'll be focusing a large part of my time also on the manufacturing and supply chain because the demand -- as the demand has been surging for so long and we see it to continue, we're focused on making sure we can deliver. So that's what's exciting.

It's a great overview. And maybe we can dig into those things a little bit more. Last quarter, Arista raised its revenue guidance 25% year-on-year. And you really saw broad momentum across the entire business. AI, classic, enterprise, both on the data center and the campus side. So I was wondering if you could just talk about these drivers in a little bit more detail, what's informing your confidence for the rest of the year? And where maybe there possibly be opportunities for upside as well.

Well, maybe I'll start on the campus and Martin will talk a little more about AI. But we've been targeting $750 million campus number we raised back to $800 million. And that's exciting momentum for us, not only because we're moving faster and we're reaching more of the market, but because we completed the VeloCloud acquisition, that completes the campus portfolio for us, meaning there isn't really a campus network that we can't compete for now, WiFi, switching, large site traditional routing and now SD-WAN backed with a NAC network security solution on the back end. With a very complete offering, we can really go after that and raising that number and now looking forward to how we continue to drive growth, not just on the revenue side, but in customer acquisition, new logos, driving more revenue diversification, that's exciting. And from an enterprise point of view, reaching new TAM. Yes, it's awesome.

Yes. And on the AI and cloud side, we came into this year talking about a $750 million AI back-end number. We also talked about a $750 million incremental front end, and that is the pull-through from the additional business there. We started at the beginning of the year talking about 5 customers. We pared that back to 4. But we've reiterated that $750 million plus $750 million and in the last earnings, we talked about having 25 to 30 incremental customers who are AI customers, large enterprises, cloud specialty providers, AI providers, neo clouds, [indiscernible] without disclosing names. We might have seen some of them in the video. But that gives us the confidence that the growth through this year continues, which is why we then increase the guidance for the rest of the year, and we're increasingly confident about how the AI business is playing out between the large, largest customers and then the next set of large customers after that.

Great. Arista is often called and viewed as a best-of-breed solution certainly in the high-end data center networking market. And EOS is commonly cited as something that's been a point of competitive differentiation for Arista. I was wondering if you could talk a little bit about how Arista EOS differentiates itself versus ODMs and white box solutions? And how does this also extend from the data center into the campus as well?

Yes. I mean we are one of the only, if not the only, pure-play networking company now. So the Arista EOS extensible operating system is the crown jewels. It's the heart of everything we do from a software perspective that runs on our switches, our routers, our campus products. And unlike some other companies out there, when we talk about EOS, it's a single image that runs across the data center to the AI to the campus to the branch. It's the same source code, it runs fundamentally the same way on everything we ship. That differentiates us, but only if it's a quality product, right? Having the same software everywhere doesn't help you if it's buggy or unreliable. So one of the fundamentals about everything we do is quality first, and then we can add features and worry about shipping time, but it has to be quality first. If you get the chance watch the video from Ken Duda talking about how quality is in everything he does. From an engineering down, the auto test infrastructure that we have that makes sure that we don't only test new versions of software. We test every single release of software every single day in our auto test environment. Because of that, we don't make mistakes. People don't get tired and go home. We have compute clusters running our own software, doing chaos tests. That software quality then makes it way into the shipping product. I can't tell you how many times I've had a conversation with the customer and they say, "Yes, yes, I've heard that before from everybody else. Everybody else says their quality is best." Hopefully, we will then win that customer, I go back a few years later. They say, "okay, now I believe you." So it's become that reputation in the industry that our quality is the highest. And that comes from software, it's EOS. Did that address the question or compared to ODMs, right? Without software, we don't have anything. I'm the hardware guy, right? It's software first.

The one thing I'd add here is these two things feed off each other. There's exactly one version of EOS. That means that all of the investment that has ever been made in that test suite is -- has been compounding upon itself for years and years. And from the outside in, the validation, the verification of this stuff is it's truly amazing. That quality focus baked into the DNA of Arista is real.

And on the hardware side of the equation, what is Arista doing on the hardware side or the silicon side that might contribute to your market share leadership. Obviously, you're working with Broadcom as one of your merchant silicon providers. What are the advantages of doing that?

Yes. As a company, we're fully committed to merchant silicon. We're not half committed. We're fully committed to merchant silicon. Now within that, we have a diverse portfolio of products using different types of silicon fit for purpose. So an enterprise product, a hyperscaler scale product. We have cloud-grade routing, all using merchant silicon. So a range of products based on that. We differentiate by making the right choices. We differentiate by having a detailed in-depth architecture level conversations with our customers about what's the right form factor, what's the right timing, what's the right combination of features that solve their problems rather than say, well, we have a product, whatever your problem is, our product will solve it. Now we have that diverse range of products. And then the other way of coming at that is that we do innovate, right? It's merchant silicon. Anybody can go to Broadcom and get the same chips, they can put them on a PCB. They can wrap it and sheet metal and ship it. So what makes Arista products different? The depth and knowledge we have about the silicon. We don't just take the off-the-shelf silicon with the off-the-shelf SDK. We write the drivers, the forwarding agents that integrate the silicon into our software. The abstraction layer, the programming layer, we can get functionality out of the silicon so our competitors using exactly the same chips aren't able to achieve. They can't unleash the features, they can't hit the scale. We have capabilities and innovations in our products that other people just don't have, literally the same silicon. And we've got examples of that, we had internet scale routing with some telemetry capabilities and counters, returning features on that were supposed to be there. That depth of knowledge built up over almost 20 years of experience in silicon now stands to our ability to continue to execute as the new silicon comes to market, we can get it into a product and get it shipping at scale with reliable features.

Shifting gears a little bit and focusing more on the campus side of things and enterprise within campus. There's obviously been a tremendous amount of momentum. Todd, as you mentioned, the guidance raised for this year. Why does Arista have a right to win in campus? And does best-in-breed matter as much in campus where you have peers that have just an incredible amount of investment in go-to-market.

I think completing the campus solution here with VeloCloud, bringing SD-WAN into the portfolio gives us a full architecture. A lot of times, when people talk about best-in-breed in campus networking, they would say like, well, a wireless-only solution or a routing-only solution is best of breed. If you can deploy the whole campus, you become an architectural win. And so that campus part of the market, I think we're maybe maturing beyond best-of-breed and into a complete -- a really complete solution as that type of buyer would see Arista. I think that's the real power of that VeloCloud acquisition. It's like the last pin to fall. The other piece of the opportunity here is the expansion of the go to market. I mean I don't mean to minimize the technology, but reaching those customers matters. With the VeloCloud acquisition, we brought in a real expertise in approaching and building businesses with MSPs that we really barely started scratching the surface with before. And we're already seeing those MSP players starting to find interest in the rest of the Arista portfolio and the rest of our go-to-market being able to bring that VeloCloud, that SD-WAN solution across. And it's this kind of momentum in this heartbeat that I think will be focused on for years here, which is building out the rest of the pieces of the enterprise go-to-market to reach the rest of the TAM beyond that Global 2000, beyond direct sales motion, we've been so successful in the last decade.

Yes. And could you expand on that just a little bit more in terms of what is a full suite solution for enterprise go-to-market look like? And how does SD-WAN from VeloCloud kind of filling that gap for you all?

Yes. So as far as campus networking goes, the buyer is largely going to be looking for a WiFi solution, a switching solution that could connect all of the clients, both the wired and the wireless, that includes all the IoT devices, all the screens, et cetera, the wireless access points and then some kind of routing. The biggest sites in the world, big campuses are going to use like traditional high-capacity routing. We've been shipping that at Arista for years and years. But small branch sites, are likely to use technology, SD-WAN routing, which is designed to operate over broadband links, multiple broadband links, 5G, et cetera, and gives a lot more flexibility in how it's deployed. By being able to offer all of those things, all those different networking components, you wind up with a full solution. And finally, you can approach enterprises with the total solution even if they have a 1,000 tiny branch sites or 2,000, 2,500 little stores or even large stores across the world, that SD-WAN component is an important linchpin and it's especially important in retail, hospitality, the rest of the professional services, distributed professional services verticals, we kind of earn our way into a seat at the table there.

That's great. And could you talk a little bit about the go-to-market for enterprise customers. Arista has obviously had a tremendous track record with very large customers, the cloud titans, but it does feel like the campus go-to-market had been less invested in and for good reason. So where are we today? And how are you thinking about having enough support from a go-to-market perspective, whether that be in your direct sales or relying on the channel to succeed?

Yes. I mean the way this market has operated, and we believe it will continue to operate, is those large cloud titans there, we are deeply engaged with them directly, and there's nothing that's going to change, not just at the kind of go-to-market level, at engineering to engineering level. And then in the Fortune 100, it can look similar, but it's deep, deep direct engagement. As you start walking down to midsize and smaller organizations, the direct sales motion, it doesn't necessarily go away, certainly not right away, but it becomes more working in partnership with a systems integrator, with a service provider or managed service provider or some kind of channel, indirect channel play. And as you get all the way down to the market in the small business, it's really fully channel-led. We have had so much success in the Global 1000, Global 2000. And that's been primarily a direct sales motion for us. but we've had a lot of channel interaction even up there. We see a ton of those customers using systems integrators to fulfill, for logistics, et cetera. So we already have those relationships and now as we've started to really put together a channel program, even really just for the last 12 months, we're starting to see real traction. And I'm excited to really kind of invest in that, put fuel on that fire so that we can start working our way down market. When it comes to the data center TAM, a ton of it is upmarket. But when it comes to the campus, it's much more spread out. There's a ton more opportunity in the next 5,000 and the next 20,000 customers.

Okay. And how does security and SASE fit into all of this, and -- versus obviously announced partnerships with Palo Alto and Zscaler and -- why do that instead of have an in-house solution, would you like to do that at some point?

Yes, I think Martin said it right. We're a pure-play networking shop, and we take that seriously. We are going to deliver the best possible network social. And that includes the network security. We have a NAC solution, micro segmentation, a whole host of like sort of network security features and functionality firewall, et cetera, that critical to be built and integrated into the network. But when it comes to the cloud security proxy, the SASE cloud solutions in the world, we lean into choice. We want customers to be able to choose frequently the security buyer, not the networking buyer. And we want our customers to be able to plug in, whether it's Zscaler or Palo or Netskope or something else and have the strongest possible integration into our network and certainly not try to lock them in to one particular solution. That certainly won't be right for everyone. And so for us, being sort of that best-in-class networking solution means providing choice.

Right. And maybe if I could squeeze one more in on campus before going back to data center. I was just wondering if you could shed some light into what's happening as it relates to campus networking refresh, WiFi 7, AI and campus networking how meaningful are those as drivers over the next couple of years?

I think any refresh triggers a -- campus buyer to look at their architecture decision. And that's really where the -- where our opportunity comes is. Anytime a campus operator is going to take a look and decide if they're going to continue with their existing vendor or make a change. And so for us, whether it's WiFi 7 or look at increased client density, especially with explosion of IoT devices, et cetera, potentially increased bandwidth with AI on the campus, but we'll see how that evolves like any time that operator takes a moment to rethink if they're going to continue or open up to competition. That is an opportunity for us. We are a share gainer in this space. And so like at back is kind of our currency. I would say WiFi 7 is a real opportunity there. We're starting to see some people who are picking their head up and taking a look before they decide to what vendor to use, and we'll leverage that across the network -- across the entire campus architecture.

Great. Martin, shifting back to you. I was wondering if you could talk a little bit more about the major AI clusters and customers that you're working with. You reiterated the at least $750 million of back-end switching revenue. How are those 4 major AI customers progressing along. We continue to see increasing CapEx forecast, at least from consensus across several of your major customers, Meta, Microsoft, Oracle. How does that inform how you look at demand over the next several years?

Yes. So there's 2 time frames to that, right? There's the Chantelle, CFO, perspective, right. This year, $750 million, reiterate it, stay on track. As I said, earlier in the year, we were talking about 4, maybe 5 customers, the pace they were doing for pilots to trials to production. We've incrementally added to that number of customers and when we think about the front end network and the back-end network, the product that we ship is the same. It's 800-gig networking products. So as we get into 2026, I think we're probably going to move away from trying to differentiate front end and back end, it is getting harder, and I don't know it's necessary serving any value. We look at the year-over-year growth in that, increasingly, CapEx budget increase is obviously, a good thing. But we have to continue to engage with those customers on the 12-, 18-, 24-month horizon, anticipating where they will be a year to 2 years from now not just continuing to sell the same product to the same customers. We have to evolve the portfolio. We're in an 800-gig growth phase now. 800-gig has gone from nothing to a lot, and there's industry reports out there now about how fast the 800-gig adoption has grown, that's going to continue next year. But we're not that far away from seeing the introduction of the next speed, 1.6 terabit. So that will be a new round of product development. So then we have to get those early products into those same customers' hands and start the next round of pilots and trials and then production. And then scale of Ethernet will come along shortly after that maybe, but it's not that far away from doing 3.2 terabit. These speed changes, the silicon generations are coming at us faster and faster on each generation. And that's largely because the appetite for GPUs, accelerators, compute is growing faster than we can keep what we're just purely shipping the same boxes. So we're seeing that acceleration in the technology cycles. We're seeing an acceleration in the customer demand, and that is then underpinned by the acceleration in CapEx. So Chantelle's worried about this year -- not worried, but she's focused on the next 6 months. But looking out 18 months to 2 years from now, we're thinking about 800-gig going to 1.6 going to 3.2, and that's where we're kind of looking at the horizon of where we think we're going to be in 2 years' time.

One threat I just wanted to pull on from comments that you made earlier is this acknowledgment that there were 25 to 30 enterprise and Neo cloud customers that was incremental. I think it was 15 at the beginning of the year. So how are those neo cloud and enterprise customers that are doing more in AI different than the cloud titans. Are they consuming the same way? Are they more likely to use a branded solution versus a white box solution within branded, why Arista versus a more integrated solution that comes with compute.

Yes. So they're different from the hyperscale or the hyperscale, it tends to buy and build, repeat function quarter-over-quarter, year-over-year, it's just a continued rollout. Some of the specialty providers are going to make a purchase. There might be a Phase II, there might be a Phase III, but it's not necessarily going to be constant build like a hyperscaler would. And then if you think about some of the neo clouds maybe they're won and done because that's what their capacity is. If you look at the early entry large enterprises who are deploying AI on-prem, it's going to be a project-based technology. So that's that 25 or 30 individually. They're not massive, but you start to add them up, they start to become meaningful at that point. That's why we call them out. In terms of their technology decision criteria, the neo cloud, the cloud specialty providers have got a whole bunch of smart people who maybe have worked at other places previously. So they've got the same level of technology awareness but they maybe don't have the 3 years, 5 years to investigate, get it right. So they might be making quicker buying decisions, and they're going to do that based on what's available now, how quickly can I move to take advantage of this opportunity. So we're going to see that kind of play into the decision criteria on branded versus not branded, Ethernet versus something else. They're going to go with what they understand what they know and what's available, what's proven. And that's where our reputation plays into that. We're recognized as being the networking vendor of choice for AI networks, front end and back end. So it gets us a seat at the table, gets us to the voice in the room. It doesn't guarantee success, but certainly, we get invited and then we have to execute and then win that customer opportunity.

That's great. And when you think about an AI cloud customer or an enterprise customer that may be doing AI on-prem, and they choose a branded solution. Could you just help place Arista versus a Cisco or Juniper or a Spectrum or if you'd like, just talk about what differentiates Arista versus other branded solutions.

So we start with not assuming what we know the answer to be. We start with saying what's the requirements. What do you need? What are your application choices? How fast is this going to grow? Now this is networking 101 almost, discovery. We see with some of the other networking vendors out there that they pre-assume what the answer is and trying to sell what their product is. We start with a deep engagement understanding the requirements and trying to fit together requirements and capabilities. That's the right thing for the customer. The other aspect of that one is, again, we have a reputation, but when we go into labs and trials, that quality starts to show through. And we have examples within that 25 to 30 of customers that didn't necessarily choose Arista first, but they chose Arista the next time around. Why is that? Their experience the first time around, maybe wasn't as complete as it could have been, and they were minded to make a change and they look to Arista for that next choice. So those kind of aspects come into that. I don't want to name any particular competitors, but you kind of get a feel for kind of what's out there.

Okay. Great. There was some recent press about Meta using Arista switches in a data center interconnect use case, and I think it was in Ohio. Could you just maybe just talk about like the DCI opportunity overall? Is this a newer opportunity that has emerged? And is there go to market, the competition different than maybe more considered traditional back end?

Yes. So I mean you're saying to multiple people through the course of the day, data center interconnect isn't a new technology as such. We've been doing data center interconnect since it was 100-gig with WDM, building out a full mesh between multiple sites in metro areas. It quickly evolved to 400-gig and now we're at 800 gig. What's changed is the customer's requirement to build multiple back-end networks and then interconnect those back-end networks across the data center interconnect. So the fundamental building blocks haven't changed. It's still high-speed networks, deep buffer solutions to make sure you can handle the dynamic traffic patterns. And now we're just starting to see that, oh, that's a back-end DCI. Is it really different to the front-end DCI? Not necessarily, but maybe the bandwidth requirements have gone up. We've got the tools. We've got the building blocks. So for us, it's data center interconnect. But yes, it's that recognition that I need to join together multiple clusters because my buildings are fixed size, fixed power, fixed cooling, I need more than that. I need to join together 4 buildings, 6 buildings, 8 buildings. So I let them better build myself a DCI mesh between those sites. So it's not surprising to us, it's may be more surprising to other people outside the industry.

Great. And the public service announcement that I have for everybody is at Arista is hosting an Analyst Day this Thursday at their headquarters, so we can go straight from the conference to Arista's HQ. Could you maybe just share a little bit of a preview of what investors should expect to hear from the event? And then, I guess, relatedly, what part of the Arista story are you most excited about in the mid- to long term?

Yes.

Yes. Well, we're not supposed to share too much like leave some -- leave some suspense. But I think it's going to be an amazing combination of discussing the business, hearing right from Jayshree and our CFO, Chantelle, on how we see the business dynamics changing. I don't want to spoil anything on that front. But on the technology side, there's going to be some really interesting discussion here, especially on how the very high-performance demands of the customer base, the power limitations and where that sort of intersection is and what the next evolution is going to be. I think it really is worth a shot. So I hope you all come. It's going to be great. And we'll try to make it worth your while.

Great. And then kind of the medium to long-term part of the story that you're most excited about -- I mean apart from the Analyst Day?

Except for the Analyst Day. I mean, it's hard not to be excited about the AI momentum across the market, and we're hearing that buzz top to bottom. The challenges people are seeing are, I think, small compared to the opportunity that this really has to change the world. So don't get me wrong. I'm a campus networking guy, but there's something changing about the way we build networks, and this will be going on for a decade.

That's awesome. Todd, Martin, it's been such a privilege and pleasure to have you on stage here. Thank you for being with us here at the conference. We really appreciate it.

Thank you, Michael.