Arista Networks, Inc. ($ANET)

My name is Sebastien Naji. I'm the research analyst here at William Blair, who covers Arista Networks. I am required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. I'm very happy to have Chantelle, the CFO of Arista; as well as Rudy, VP of Investor Advocacy, with us here today. And I think Chantelle will begin with a quick presentation overview of the company, and then we'll jump into some questions.

Sure. Are we good to go? Arista. And so just a couple of slides to orient. Many of you know our story, but just in case you haven't seen this in a while or new, I just wanted to give you an overview. So here, we're 12 years past IPO, and here we are guiding $11.5 billion this year, incredible journey from a technology perspective, originally started with the high performance compute getting into hyperscalers, cloud, enterprise data center and now we're talking all things that are AI. An incredible journey being $200 billion market cap, 12 years post IPO, and we feel we're just getting started. So thanks for being here with us. Very happy to show different sections in the sense of where we're recognized by Gartner. So you can see from left to right, some of the Gartner positioning in the top right quadrant. 2025 for data center switching, 2026, just happy to see this here that we're now there for enterprise wired and wireless. Very happy to see that just getting into the campus an enterprise wired and wireless LAN. And 2024 with the acquisition of VeloCloud also being the Magic Quadrant for SD-WAN. So I feel like we're making ground in a lot of different aspects of networking and very proud to have these positions to show you. Why do over 10,000 customers choose Arista? They can see the robust of our quality in our product and our ability to serve the customer extensible performance and platform. We don't like vendor locking. We like best-of-breed choices and are happy to compete in that environment. And then just having this really great real-time telemetry and AI ops that will get into a little bit through the Q&A, I think, with Sebastien. That really makes us a great total cost of ownership choice when you're thinking about getting the highest utilizations from your XPUs. And it's not just how we feel this is the customer representation. So I think you'll find very few in the industry can say they have an 89% score on NPS. And you can read some of the comments on the bottom, how they interact with our company. Very delighted in the response time, very delighted in the technical capability of the team they interact with and just the approach that we're there until the. I started in January 2024. Just before that, we were at about a $60 billion TAM than $70 billion at the New York event we had in June 2024 and then Analyst Day updated that from $70 billion to $105 billion, so some pretty great growth there. And you can see at the bottom the different categories. Of course, a lot of it is driven by AI and data center, but also some great aspects that we see now that we have our campus portfolio underway. We're working on the next revision of this. And so stay tuned as we look at even a larger TAM amount in the different categories and the nomenclature that we'll use going forward. We also like to position our incredible platform and portfolio over what we call centers of data. So we have the AI center campus center data center and the WAN center SD-WAN. And it's just to show the breadth of optionality that we provide to our customers. It's really we have a portfolio of products in what use case are they being used for across the different segments of our customers. So very proud to have this to get to their outcomes and their cost of ownership that they're looking for. And now we have this new nomenclature. We're talking about scale up, scale out, scale across, and I know we'll talk about that Sebastien. But just to say, we're ready for this. We've been planning for this. We'll be working on it and very well positioned, I think, with our customers on this kind of coengineering journey. What are they looking for from the just hyperscaler and AI customer down to the enterprise. From a revenue growth perspective, I think it's important to look at the growth that we've seen. We finished Q1 results in the sense of 35% growth. And if you look at the combined growth in the P&L 35% plus what it goes into deferred, which means it's shipped and invoiced and cash collected. You could say, basically, it was 54% growth. And you can see the subsequent quarters beforehand in the sense of where we've seen the growth combined between P&L and deferred revenue growth. And just to remind you of our guidance for this year, we did call out our guidance again, looking at 28% growth, $11.5 billion, maintained gross margin, which we're very proud to do in this kind of environment where it's a little tougher from a supply chain perspective. World-class, I would say, operating margin for a company like ours of 46%. We have given ourselves accountability goals when it comes to AI and campus. And you can see the growth in AI and campus goals versus our last year performance, pretty healthy growth for both of those sectors. If you think about $3.5 billion of AI at $11.5 billion, a high percentage of our revenue is coming from AI. And then we've raised our CAGR for 25% to 28% to be 20-plus percent growth before that was mid-teens? So hopefully, you'll see these kind of signs of the demand we're seeing and how we're showing them through our guidance. And I think now we can go to the questions, Sebastien. Okay. Thank you.

Great. Thank you, Shane. I mean, maybe my first question, I wanted to start off very broadly. Arista really made its name over the last 10 years, filling this need for high-performance networking the Today, as we enter the AI era, you really hear from all the networking vendors about how strong their businesses have become, Cisco, NVIDIA, they're all talking about huge amounts of growth. So as we enter this AI era, how would you talk about Arista's maybe right to win or how it really differentiates itself versus all these other networking providers that are also talking about really good momentum from AI.

Yes. I think -- so thank you for the question because I think it's important to look at apples-to-apples in this conversation. But my leading answer in this is that we're -- I think Arista is very well positioned for AI. We've been waiting our whole 12 years post IPO for this moment. So I think all of the innovation we've seen up until now and the way we interact with the market leads us to be very well suited. And I'll give you some examples and Rudy. Obviously, if you have anything you can chime in. So let me start first with networking for AI, and then I'll talk about AI for networking. So networking for AI, if we look at our product portfolio, some of the things I just showed here in the presentation, we announced the 800-gig Etherlink portfolio in June 2025. And so we've had that for coming up to a year, and we were very happy to see that AI was a great use case for 800 gig, and we were ready. And so I think if you take that 800 gig kind of Etherlink portfolio, combined with EOS, which is -- which was an operating system and software, which allows great utilization of the XPUs and all the performance criteria that we're looking for. And you look at the sense and the fact of all the experience we have with some of the largest, most complicated deployments. There's a reason that we're currently the #1 branded vendor for front-end and back-end AI networking. And I think as long as we continue to innovate in the ecosystem, so we've been leaders in open standards when it comes to UEC, the Ultra Ethernet Consortium. We've been working on. You saw Andy announce XPO as a technology and working on ESN, so we're working with the ecosystem there. And I think probably most importantly, combined with those things is that we offer networking that allows flexibility. We're agnostic when it comes to the NIC, we're agnostic when it comes to the XPU, we're agnostic when it comes to the optics choice. And so that allows -- because every customer wants to do it differently to reach their goal, and we're happy to do things differently with each customer. And I think that will continue to innovate. And if we keep that pace, we absolutely have a right to win if we execute with the customer. So that's not working for AI. AI for networking. Now we're talking about all the things we're doing to help AI help networking, and we have this great suite of products called AI Ops. It includes AVA, which is our virtual assistant. We have agents and we have insights that we provide that sit on top of net DL. And so when you combine all of these things, I think we are the best positioned AI pure-play networking company when you're talking about the networking data center part of it.

All right. Great. That's helpful. And then I want to maybe ask about what I think a lot of investors are curious to talk about, which is in your most recent earnings call, you started to talk about more acute supply tightness, having to manage very longer lead times. I mean could you maybe talk a little bit about how you are managing that supply and whether you see lack of supply potentially being a headwind to your growth, either near term or even over the next couple of years?

Yes. I think it's a good question. I think you're starting to see more companies at least speak a bit more openly about -- the supply chain has some constraints, but it has no constraint in the sense of us reaching our FY '26 guidance and we'll continue to take quarter-by-quarter what that could mean for future guidance calls as we go through this year and next year. I think from the perspective of looking at the different arrangements we have. So we deal with some of the biggest suppliers and have great arrangements and histories with -- history with them, along with working with our largest customers. And so I think we're well positioned in the sense of when it comes to availability, I consider it more about when not and if and so if you think about a lot of our customer conversations, our 12 months, excuse me, in design, 12 to 18 months into design, the 52-week lead time we have on average, I think we'll serve that well. You've seen our purchase commitments go up pretty substantially to lean into the next 52 weeks coming into next year. So I think we're managing it well. I think where we're talking about the constraint. The constraint could come in if someone's asking to have something not within the lead time that's material. How do we work within the ecosystem to have that kind of demand. I think that's the part we're just acknowledging it's not as easy as it was but we'll do everything we can with our arrangements to have that. We're seeing incredible demand. We just want to make sure people understand within the lead times, that's okay, but perhaps between a burst of demand. We just need to think a little differently how we can serve that.

And that supply tightness, I mean, is it is it really broad-based? Or is it more acute in chips and wafers and memory all...

It's a bit of. I think that memory was the first one, and I think we started talking about November last year, and I think we've gotten to a good spot on memory. I think other components come and go. I think that from a perspective of -- it's not just 1 vendor, 1 supplier on product. It really depends on the time and what's happening with a specific deployment. And so I think it's not bespoke, but it's not generalized. So I'd hate to generalize too much across 1 category. It really depends on timing and innovation and what our customers are looking to deploy. So from that perspective. Now on the other hand, we've actually reduced campus lead times. So our campus lead times are now down to 6 weeks, which I think absolutely gives us an advantage as we start to go after the campus market share.

Got it. And then I think the other area that investors have a lot of interest is in this product deferred balance that has really continued to grow over the last 12, 18 months. And -- my estimate is that it's around $3.5 billion, $3.6 billion, which way larger than it's historically been. Could you maybe unpack a few things first. Is that mostly driven by some of these AI products, these new SKUs. And then you've talked in the past about you have to hit an acceptance criteria for that to flow into revenue. What does that acceptance criteria entail? Is it the networking hardware is plugged in? Is it when the GPU rack has a certain utilization. Maybe just help us understand how we should think about that deferred product starting to flow through into the income statement?

Yes. I think that -- so absolutely, so the concept and construct of deferred has been with Arista since basically we start doing cloud deliveries. And so -- but what you're seeing now is it's the same construct, just much bigger market and deals, right? So during cloud -- and we have some information in our earnings deck, if you go to our Investor Relations website, but you see there, there was like a cloud cycle, and now we're in this AI cycle and the icycle definitely surpasses from just pure dollars, the cloud cycle during that time frame. So same construct, bigger dollars flowing through and more complicated. So it is new use cases. It is new products and sometimes new customers. And so from that perspective, things are arranged with the customer where we have to meet certain criteria, acceptance criteria. So it means it's shipped and it's invoiced and cash is collected, but it is in deferred until those milestones are reached. Those milestones can take 12 to 18 months, sometimes a little bit longer for the most complicated largest deployments. And it could be a variety of things. It can be by site, it can be certain engineering things that we've promised to co-work with the customer. It could be that, from their perspective, a certain design element has been reached. And so there are different -- again, back to every customer does it differently, but the premise is the same until we're sure that it's up and running the way we have agreed to, that's when we take the revenue. So it is mostly AI that's in deferred right now because that's the largest use case we're seeing. And it's a great example of demand, but customers also enjoy that we have skin in the game until they're seeing great performance outcomes.

And then I think you started to talk about -- historically, you've had 2 major cloud titan customers M&M as you guys like to refer to a Microsoft and Meta. More recently, you talked about expanding that to 3 customers with 10% plus, maybe even 4 customers over time. What is driving that increased diversification and some of that traction you're seeing with hyperscalers that maybe historically haven't worked as much with Arista?

Yes. I think that we're absolutely -- as we get older as a company or further in our growth cycle as a company, we are looking to diversify. It just takes some time, right? So we have A and B now that we call them, we're using a letters to denote now that we expect more of them to come in. I think that -- so there's a few things that can drive it. One is, AI is a great use case. But generally, anywhere that we're switching to Ethernet networking being an option, that's where we're going to start to see where we can have some more business that we didn't have before. Now obviously, to get to this greater than 10% customer at the -- I'm sorry, I can't see you guys, the range we're talking about, they're not coming in with just 1 deal and becoming over 10% customers. So they have some existing business, and they're getting to over that 10%. And so it can be companies that are using Ethernet that didn't use it before. It could be new kinds of customers coming to market in some of these segments you've talked about maybe the new cloud sovereign AI, these sorts of new customers that are coming in, so we'll wait and see where we reported at the end of the year. But we're fairly confident that third one will come in. The fourth one, as we mentioned on the call with Jayshree, we'll have to see exactly where that lands.

Got it. Great. And I think I'd be remiss if I didn't ask you a question about white box. So -- so we'll ask you a question on what are you seeing in terms of the competitive dynamics there? I think over the last year, Arista has done a good job of kind of laying out your blue box strategy and your differentiation there. But given that a lot of these white box vendors are reporting really, really strong results. Are you seeing any increased traction at your customers for white box? Are there certain sockets where white box makes sense and others where you have to go with Arista?

Yes. I think -- I don't think anything has changed in the dynamic in the sense of which use case is a white box use case versus a branded vendor. I don't think that has changed at all. so that remains the same, and that's a boring answer to that question. I think -- so that remains the same. I think what you're seeing is potentially when you're talking about these growth vectors Sebastien, it's okay. At a point in time you ship, you drop it on a dock and you're done. Okay. Well, that's recognized right away. So that feels good in that moment because all that's coming through at that point in time. So there's probably a difference in the sense of the timing deployment and how that comes through because you have to also take into account our model, which has the deferred. But we're not seeing anything that changes in the use case. It's the same -- and we appreciate the dynamic. And so I think that we understand there's a spot for white box in the deployments, there's a spot for branded vendor. And sometimes that choice for very select customers because you have to be able to have the team to support a NOS on a white box environment or a blue box environment. So you're not talking smaller companies that can usually do this because then you're talking a CapEx versus OpEx trade-off, it's usually not for free, right? And so from that perspective, we find it very few customers that can even attempt to get into that scenario from a just a cost ROI perspective. So we don't think anything has changed. We don't think there's anything moving differently. If anything, we would probably double down that it's becoming more complex and the utilization of the is becoming more important and critical, and that would be in our favor.

And maybe staying on the theme of competition, NVIDIA has really emerged over the last couple of years is a real networking competitor. They talked, I think, on the last earnings call about a tripling of their Ethernet business. How do you go about competing with someone like NVIDIA, particularly given that they have an ability to potentially bundle their networking with their compute and all the other parts of the stack that they're selling. And where do you really see that you differentiate when you're talking to customers versus the NVIDIA spectrum portfolio?

Yes. So first, just so we are completely thankful to NVIDIA for basically opening up this GPU market, and so we're very thankful because we participate in connecting those GPUs. So it's not all just competitive relationship between us. There is a partnership relationship that way. But if you get down just to networking, the type of networking we do, we have to be careful we're looking at apples-to-apples, and then I'll get to the competitive differentiation. So Ethernet growth can also have NIC that can have NVLink, it can have other parts that aren't part of what Arista would compete in. So I would encourage everyone to look at the apples-to-apples comparison growth and see what that growth is. And I don't think it's the same growth number trajectory you were just mentioning. And I think that aside, so how can we compete because we can speak to what Arista can do I think, again, with that phenomenal portfolio optionality, what we can do is compete on the options you have to have to build best-of-breed the agnostic capability to bring in other XPUs, et cetera, and the best-of-breed usually is a good choice for our customers. They want to have the optionality. So if they're open to that, we have a good chance of winning. I think that in the sense of if you look at the other factors we talked about, things like EOS and the AI for ops, those are also things that they're delighted to have. And sometimes we see customers get into a vertical stack and then come back later realizing they want to go best-of-breed. So maybe it's not the first time, but even the second time that we see them. So there's lots of options where we can see them and come back to them. But those are some of these scenarios where we absolutely can win for the networking part.

Really helpful. And then I wanted to ask maybe about a longer-term trend, which is this shift to co-packaged optics that everyone is starting to talk more and more about -- and then I think relatedly, Arista right before the optical conference in March, introduced this concept of an XPO pluggable cable. Could you maybe just talk about across both co-packaged and the XPO cable? What exactly is Arista's opportunity? Is there a way for you to monetize these trends? Is any of this threat, particularly the CPO aspect.

Rudy, do you want to take this?

Yes, sure. So in general, optics are not a big part of our revenue, right? So we certify and kind of resell optics, but it's not a big part of our revenue. So really, our work in optics has really been about moving the industry forward. If you go back 10 years, we introduced OSFP, which is kind of getting to the end of its usefulness, if you will, right? And so we were really ready for a next generation. Now when you get to that next generation, you certainly have 1 option, which is going down the co-package route. Or can you extend pluggables. And so what XPO allows you to do is extend plug balls and comes with the benefits that when it's pluggable, it's a lot easier for customers to service them in the field. It also uses the same supply chain that OSFP has used for the last 10-plus years, right? So there's significant advantages there. And one thing that I think sometimes goes unnoticed with XPO is it shrinks the physical size of the networking stack, right, by reducing that density or I guess, increasing the density and therefore, shrinking the size. What that does is it opens up a whole bunch of other options for doing things like scale up, right, where you can do things like copper for longer, where you can do things like micro LEDs or RF. So frankly, solutions that are more efficient from a power perspective, from a dollar perspective, then going down a purely optical front. Now perhaps we get to a point where co-packaged optics are inevitable. We are absolutely agnostic to it, right? Like we don't believe that co-packaged optics is a negative for us, we -- if anything, the engineering involved with co-packaged optics and making it successful, it's going to be super important. But I think what we're hearing from customers is, a, delay co-package as long as possible. That's where I think XPO comes in. And when you do go down the road of co-package make it as open as possible because what customers don't want to do is be locked into a single supplier, a single vendor. Because today, they're not buying their optics from their switching maker. They're not buying their optics from even the chip maker. They're going out to Asia and buying the optics directly from the supplier. And that's given them tremendous leverage they don't want to be stuck in a place where they're having to deal with margin stacking and things of that nature. There's more tactical reasons and financial reasons why I think we're trying to delay as an industry CPO for as long as possible. And that's kind of what we hear from customers. But when CPO is ready and necessary, we feel very, very well equipped to be there.

Got it. And is it right to think that a CPO chip just becomes part of your bill of materials that you build around this pretty much?

Yes. Yes. With -- again, like I think the bar for failure in the CPO switch is far higher, right? Because if a switch fails with CPO, essentially the switch has to be taken down. Today, with a pluggable, if 1 optic fails, you take that 1 optic out of commission, which means whatever workload is plugged into that, not the entire switch. So if anything, I think the hardware design, the reliability that we've done so well with over the last 20 years is going to become even more paramount. So we feel very well equipped for that. But customers do want us to try and delay that inevitability, if you will as long as possible.

Okay. SP1 And then maybe on the theme of maybe longer-term risks or threats Google uses a lot of optical switching inside of their TPU racks. What -- are you concerned at all that you could see more and more hyperscalers move to optical switching? And if so, does that present a risk to the packet level switching that you guys are so good at?

I'll take that 1 as well. I mean, I think what we've seen is optical switching has a very specific niche use case, right? Google, as you pointed out, has been the most -- the biggest proponent of it. But if you've seen some of the recent announcements from Google, I think even they're admitting that once you go beyond a certain scale, really go beyond a scale-up domain where you're dealing with a fairly uniform kind of workloads, right? You have to go Ethernet because that per packet switching capability, the ability to decide, okay, where does this packet go as you look at each packet and look at the header is tremendously useful, right? With optical switching, what happens, you're literally pointing the mirror in a different direction, right, as you want to move stuff around. So it doesn't really work well for any kind of real-time decision-making on, okay, what this package should go there. So as workloads get more heterogeneous, as workloads get more -- have higher entropy, really, over time, Ethernet is always on, right? So we don't feel like that's a threat. And like I said, the recent Vergo announcements if anything a testament that while OCS has a space in the network, it's more confined to these narrower use cases. And once you want to go beyond a certain scale and be on certain types of workloads, really, I think Ethernet won that battle time and time again over the last 50 years.

Sort of simple optical path, simple connects.

Correct. wine to point where you're not expecting to change things dynamically on the fly. Yes.

Okay. And then maybe here in the last few minutes, I to turn the questions a little bit to the enterprise business. You guys closed this acquisition of VeloCloud, which is an SD-WAN technology about a year ago. Could you maybe just give us an update on where you are with that integration? And if you started to see any success in cross-selling either the VeloCloud customers to more Arista. .

We are functionally integrated. So everyone's kind of going and join the teams that they recognize functionally. But most importantly, we've had great conversations with the customers. I think the customers are very excited that now it's part of the Arista family. It's part of -- in the sense of the carat attention we can give it, given we're 5,000 people who focus on the portfolio and networking. So I think the customers have received it well. They've given us great feedback in the things they love us to focus on, and we have a team dedicated to working through those. So I think it's gone as well as expected and very happy to have the team there, a very talented team, and they've stayed with us. So I think that's a testament that they're enjoying their time and happy to be part of what we do as a company culture. For cross-selling, I think that given it's just coming up to a year, I think it's pretty good progress. We've gone through all the functional integration of everything from quote to cash and getting all the renewals and licenses sorted out. So that was a lot of just transactional work. Now the real customers of the cross-selling are happening. We're seeing it in a few of the enterprise segment, and it's both ways. It's VeloCloud into existing Arista customers. And Arista into customers we did not have before. So it's good customer acquisition. But it's still early days, but definitely a pipeline is building. And I would say that's on track with what our expectations were from a deal perspective.

Two things I would maybe add there as well, right? One is it has opened up a new route to market through the service providers because they had a pretty robust service provider business as well. And then the other thing is from a campus RFP perspective, often SD-WAN is becoming a checkbox requirement, right? And so having that whole portfolio allows us to bid on campus. So even if it's not a direct upsell, cross-sell, it allows us to bid on a project that maybe a year back, we would have been disqualified because we didn't have an SD-WAN solution.

That's great. Okay. And then maybe just last question, again, on the enterprise space. I think last year, you had talked about the pending Juniper HP acquisition is potentially driving more leads, more interest from customers. That acquisition closed about a year ago. Frankly, it sounds like it's going quite smoothly for the company. I'm wondering, is that still an opportunity for Arista to take share from that customer base? Or has that maybe become less of an opportunity?

Yes. I think that from our position, we're starting at market share in campus. So we're super excited to the upside. And we're also excited that there's a great refresh cycle coming up in the next few years and perhaps there's a pull in of the refresh cycle as campuses get ready for AI and their AI story. So there's a lot of goodness there and we have the portfolio to serve. I think at 3% market share in the overall market is growing maybe high single digits, we're -- our growth is going to be share taking. And so I won't comment on specific who we're taking it from, but I can say that if our road map is clear, and we're winning campus first deals, and I think the more we can rent repeat that and have them as references I think our share taking from whoever the incumbent is what we'll be looking to do.

Right. So we only have a few minutes -- seconds left. So maybe just if you could give us your updated view on capital allocation. I mean, that's one of the benefits of Arista as you guys have great margins and very high free cash flows and they're only going up. You made some acquisitions, but not huge ones historically. Could you maybe just talk about how you think about M&A versus potentially dividend, potentially more share buybacks?

Yes, sure. So our capital allocation just in a nutshell, remains the same. Organic investment marketable securities because we're still getting very strong interest income in this environment. And then it would be share repurchases and then M&A. When it comes to M&A to answer your question, nothing obvious. We don't want to break the culture, and we don't want to go into something in new adjacency. But if we see something more maybe in the AI space, either talent or tech, that's probably where we'd be looking.

Great. Thank you very much. Thank you all for coming. We're going to have a breakout in Cana, where is it? Mar? In Mar.