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    Arista Networks Inc (ANET)

    Business Description

    Arista Networks is a leader in data-driven, client-to-cloud networking solutions for large data centers, campuses, and routing environments. The company specializes in delivering high availability, agility, automation, analytics, and security through its advanced network operating stack, with the Arista Extensible Operating System (EOS) at its core. Arista's product offerings are divided into three main categories: Core, Cognitive Adjacencies, and Network Software and Services, catering to a diverse customer base that includes large cloud customers, service providers, financial services, and government agencies .

    1. Core - Provides high-speed data center and cloud networking systems and AI Ethernet switching platforms, serving as the primary revenue driver.
    2. Cognitive Adjacencies - Offers campus wired and wireless products and advanced routing systems, enhancing connectivity and network performance.
    3. Network Software and Services - Delivers subscription-based solutions like CloudVision and advanced threat sensors, focusing on network management and security.

    Q3 2024 Summary

    Initial Price$88.68July 1, 2024
    Final Price$95.46October 1, 2024
    Price Change$6.78
    % Change+7.65%

    What went well

    • Arista expects its AI center networking revenue to double its back-end target of $750 million, aiming for approximately $1.5 billion in 2025. This growth is due to increased demand in both back-end AI networking and front-end networks connecting AI clusters. ,
    • Arista is progressing well with 4 out of 5 major AI customers, with 3 of them moving from trials to pilots this year and expected to become 50,000 to 100,000 GPU clusters in 2025. This indicates strong adoption of Arista's AI networking solutions among leading tech companies.
    • Arista's enterprise opportunity has never been stronger, with increased traction in multiple verticals such as financials, healthcare, media, retail, and federal markets. The company is expanding its presence in campus and data center networking, leveraging its universal spine architecture and strength in wired networking.

    What went wrong

    • Arista Networks acknowledges weakness in its WiFi segment, indicating potential challenges in effectively competing in this market.
    • Increasing competition from NVIDIA in Ethernet switching could impact Arista's market share, as NVIDIA is both a partner and a fierce competitor.
    • Anticipated margin pressures due to customer mix may lead to future declines in gross margins, with it getting harder to maintain 10% customers.

    Q&A Summary

    1. AI Trials Progress
      Q: How are the five major AI trials progressing and what scale is expected?
      A: Arista now believes they are 5 out of 5 in AI trials, progressing well in 4 out of the 5 clusters. Three customers are moving from trials to pilots this year, expecting to become 50,000 to 100,000 GPU clusters in 2025. The fifth customer is in trial mode and moving slower than expected due to challenges like awaiting new GPUs and power cooling issues. Overall, they feel good about their guidance for 2025.

    2. Competition with NVIDIA
      Q: Are you seeing increased competition from NVIDIA in data center switching?
      A: Arista views NVIDIA as both a good partner and a fierce competitor. While NVIDIA has increased its market share, Arista doesn't frequently encounter their Ethernet capabilities, perhaps at 1 or 2 customers. Arista is considered the expert in Ethernet switching, especially in large scale-out networking and smaller enterprises. They welcome competition with NVIDIA on Ethernet switching while partnering on GPU connectivity.

    3. Competitive Landscape with Cisco
      Q: How is the competitive landscape changing with AI, including competitors like Cisco and Juniper?
      A: In the back end, Arista is gaining credibility in connecting to GPUs but doesn't claim market leadership; any share they get, including the $750 million, is incremental. In the front end, Arista is viewed as the gold standard, with a superior portfolio and competitive differentiation. They feel extremely bullish with their flagship 7800 product, the newly introduced 7700, and the 7060 series.

    4. Revenue Guidance and Non-AI Growth
      Q: Why does guidance imply slower growth in non-AI, non-campus business next year?
      A: Visibility only extends to about six months, so they are cautious in guidance. Large cloud customers are continuing to refresh but are pivoting aggressively to AI. They expect to grow faster in AI and campus, and slower in classic markets like data center and cloud.

    5. Gross Margin Expectations
      Q: What's underlying the expectations of gross margin declines in the 2025 outlook?
      A: The outlook reflects customer mix. They expect supply chain discipline to continue. As the denominator gets bigger, having multiple 10%+ customers gets tougher. They believe existing major customers will remain significant but don't anticipate new ones at that level in the near term.

    6. Deferred Revenue Increase
      Q: Why is product deferred revenue increasing significantly while revenue guidance decelerates?
      A: The increase in deferred revenue is due to the type of use case, customers, and product mix, which have bespoke time frames and can take longer to manifest, sometimes multiple years. It may not all happen in 2025.

    7. Adoption of 400G vs. 800G Products
      Q: Are hyperscalers deploying 800G switches or staying with 400G?
      A: Majority of trials and pilots are on 400G because the ecosystem for 800G is still developing, including NICs and packet spraying capabilities. While there are early trials on 800G, the majority of 2024 will be at 400G. They expect a better split between 400G and 800G as they go into 2025.

    8. Expansion into Campus and Verticals
      Q: Where are you seeing traction in campus opportunities and which verticals?
      A: Arista's enterprise opportunity has never been stronger, with traction in data center, campus center, WAN center, and some AI. They're seeing strength in verticals like financials, healthcare, media, retail, and federal markets. Activity with their universal spine has started, and they're focusing on wired and spine, aiming to improve in WiFi.

    9. Additional AI Opportunities
      Q: Are there opportunities beyond the five main AI trials, including Tier 2 or sovereigns?
      A: Yes, there are additional trials, but the five main ones can go to 100,000 GPUs and more, significantly impacting numbers. They have 10 to 15 trials in classic enterprises with smaller GPU counts. There will be more opportunities in both Tier 1 and Tier 2 categories.

    10. Ethernet Portfolio Opportunities
      Q: Could you comment on opportunities across the three Ethernet families?
      A: The fixed 7060 switches are very popular in terms of units. The 7800 is strategic in dollars, serving as a flagship product. The 7700 offers capabilities of the 7800 in a mini configuration up to 10,000 GPUs. Customers are optimizing a mix of these products based on deployment sizes and GPU counts.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDQ2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Product1,172.0941,261.541,285.51,310.375,029.51,328.81,423.271,523.807
    Service179.257197.39223.9230.15830.7242.5267.13287.129
    Total Revenue1,351.3511,458.921,509.51,540.435,860.21,571.41,690.401,810.936
    Revenue by Geography - in Millions of USDQ2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Americas1,115.0111,154.5091,184.71,196.984,651.21,255.3911,374.31,480.071
    - United States--------
    - Other Americas--------
    Europe, Middle East, and Africa128.316167.623173.2201.86671.0141.554178.8191.189
    Asia-Pacific108.024136.792151.6141.58538.0174.429137.3139.676
    Total Revenue1,351.3511,458.9241,509.51,540.435,860.21,571.3741,690.41,810.936
    KPIs - Metric [Unit: USD Billion]Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Expected Receipt within 12 Months2.41.91.71.5472-1.42511.72.0
    Expected Receipt after 12 Months0.50.30.30.0395-0.03260.40.4

    Executive Team

    NamePositionStart DateShort Bio
    Jayshree UllalChief Executive Officer, President, and Chairperson of the BoardOctober 2008Jayshree Ullal has been serving as the CEO, President, and Chairperson of Arista Networks since October 2008. She became Chairperson of the Board in December 2023. Previously, she held various positions at Cisco Systems, Inc. .
    Chantelle BreithauptSenior Vice President, Chief Financial OfficerFebruary 12, 2024Chantelle Breithaupt joined Arista Networks in January 2024 and was appointed as the Senior Vice President, Chief Financial Officer effective February 12, 2024. She previously served as CFO of Aspen Technology and held leadership roles at Cisco Systems Inc. and GE .
    Kenneth DudaFounder, Chief Technology Officer, Senior Vice President, Software Engineering, and DirectorSeptember 2011Kenneth Duda is a founder of Arista Networks and has served as CTO and SVP of Software Engineering since September 2011. He became a board member in December 2023. Prior to Arista, he was CTO of There, Inc. and worked at Cisco Systems, Inc. .
    John McCoolChief Platform Officer, Senior Vice President of Engineering and OperationsMarch 2017John McCool joined Arista Networks in March 2017. Before Arista, he was SVP and GM at DellEMC and CEO of Firetide, Inc. He also held various positions at Cisco Systems, Inc. .
    Anshul SadanaChief Operating Officer (on leave, intends to resign effective May 21, 2024)March 2019Anshul Sadana has served as COO since March 2019. He previously held roles as Chief Customer Officer and SVP of Customer Engineering at Arista. He intends to resign effective May 21, 2024 .
    Marc TaxaySenior Vice President, General CounselMarch 2016Marc Taxay has been SVP, General Counsel at Arista Networks since March 2016 and General Counsel since February 2013. He previously served as SVP and General Counsel of MedeAnalytics, Inc. .
    Ashwin KohliChief Customer OfficerMay 2024Ashwin Kohli serves as Chief Customer Officer, promoted as part of a restructuring in May 2024. He has been with Arista for over a decade .
    Chris SchmidtChief Sales OfficerJuly 1, 2024Chris Schmidt serves as Chief Sales Officer, effective July 1, 2024, to address global enterprise and provider opportunities alongside Ashwin Kohli .

    Questions to Ask Management

    1. Your 2025 outlook assumes some gross margin declines; can you elaborate on what's underlying these expectations and how customer mix and potential 10%+ customers factor into this?
    2. Given the extended lead times for advanced semiconductors and your increased purchase commitments and on-hand inventory, how are you managing the risks of overstocking or obsolescence if AI deployments slow down?
    3. With the progress of your five major AI trials being uneven and one customer moving slower than expected, how do you plan to mitigate the risks associated with such concentration, and what steps are you taking to expand beyond these key customers?
    4. Considering the competitive landscape in AI networking, especially with NVIDIA's increased market share and offerings like Spectrum X, how do you plan to defend your position against competitors including NVIDIA, Cisco, Juniper, and Nokia?
    5. You mentioned that WiFi is currently your weakest area in campus networking; what specific strategies are you implementing to improve in this segment, and how will you address the lack of sales coverage to fully capitalize on enterprise opportunities?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateOctober 2021 May 2024
    End Date/DurationQ4 2024 May 2027
    Total Additional Amount$1.0 billion $1.2 billion
    Remaining Authorization$0.0 billion $1.0 billion
    DetailsPrior Repurchase Program New Repurchase Program

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025
    • Guidance:
      • Revenue Guidance: Approximately $8 billion for 2025, with targets of $750 million each for campus and back-end networking and $1.5 billion for AI center networking .
      • Growth Rate: Annual growth rate of 15% to 17% .
      • Deferred Revenue: Increase in deferred revenue indicating future growth .
      • AI Networking: Significant growth expected, with AI center networking projected to reach $1.5 billion in 2025 .
      • Customer Mix and Margins: Changes in customer mix could affect gross margins, with strong supply chain discipline anticipated .
      • Product Mix: Trials and pilots on 400-gigabit technology, with expectations for a better split between 400-gigabit and 800-gigabit in 2025 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Revenues: Approximately $1.72 billion to $1.75 billion for Q3 2024 .
      • Gross Margin: Approximately 63% to 64% for Q3 2024 .
      • Operating Margin: Approximately 44% for Q3 2024 .
      • Effective Tax Rate: Approximately 21.5% for Q3 2024 .
      • Diluted Shares: Approximately 321 million shares for Q3 2024 .
      • Revenue Growth: At least 14% for FY 2024 .
      • Gross Margin Outlook: 62% to 64% for FY 2024 .
      • Operating Margin: Raised to approximately 44% for FY 2024 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Revenues: Approximately $1.62 billion to $1.65 billion for Q2 2024 .
      • Gross Margin: Approximately 64% for Q2 2024 .
      • Operating Margin: Approximately 44% for Q2 2024 .
      • Effective Tax Rate: Approximately 21.5% for Q2 2024 .
      • Diluted Shares: Approximately 320.5 million shares for Q2 2024 .
      • Revenue Growth: Raised to 12% to 14% for FY 2024 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      • Revenue: Approximately $1.52 billion to $1.56 billion for Q1 2024 .
      • Fiscal Year Revenue Growth: 10% to 12%, aiming for approximately $6.5 billion for FY 2024 .
      • Gross Margin: Expected range of 62% to 64% for FY 2024, with Q1 2024 at the lower end due to a heavier cloud mix .
      • Operating Margin: Approximately 42% for both Q1 2024 and FY 2024 .
      • Effective Tax Rate: Approximately 21.5% for Q1 2024 .
      • Diluted Shares: Approximately 319.5 million for Q1 2024 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Cisco: Historically dominated the data center and campus networking markets .
    • Nvidia: Competes in the data center and campus networking markets .
    • Extreme Networks: Competes in the data center and campus networking markets .
    • Dell/EMC: Competes in the data center and campus networking markets .
    • Hewlett Packard Enterprise: Competes in the data center and campus networking markets; has entered into an agreement to acquire Juniper Networks .
    • Juniper Networks: Competes in the data center and campus networking markets .
    • Broadcom: Acquired VMware; competes in cloud networking solutions .
    • DarkTrace: Competes in the network detection and response (NDR) market .
    • ExtraHop: Competes in the NDR market .
    • Gigamon: Competes in the network packet broker (NPB) market .
    • Keysight: Competes in the NPB market .
    • Netscout: Competes in the NPB market .
    • AVIZ Networks: Competes in the NPB market .
    • White box networking vendors: Compete in the data center and campus networking markets .