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    Arista Networks Inc (ANET)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$73.07April 1, 2024
    Final Price$89.18July 1, 2024
    Price Change$16.11
    % Change+22.05%

    What went well

    • Arista is seeing strong demand in both AI and traditional cloud infrastructure, with AI expected to grow faster but classic cloud continuing to be an important contributor.
    • Enterprise customers are increasingly adopting Arista's networking solutions, moving away from proprietary lock-in towards Arista's flexible, reliable, and high-performance platforms that "just work," leading to expansion across data center, campus, routing, and WAN use cases.
    • Arista is well-positioned to benefit from the shift towards Ethernet in AI networking, as AI centers evolve to combine front-end and back-end networks, and more of the back-end moves to Ethernet, increasing Arista's opportunities in this space.

    What went wrong

    • Uncertainty in revenue recognition due to customer-specific acceptance clauses: Arista Networks indicated that the increase in product deferred revenue is influenced by new product introductions and contracts with customer-specific acceptance clauses, which adds variability to when revenues can be recognized. This uncertainty could impact financial results in upcoming quarters.
    • Potential competition from NVIDIA's Spectrum switches: The company acknowledged competition from NVIDIA's Spectrum switches, noting they have encountered it with at least one customer where it was bundled. The emergence of NVIDIA as a competitor in the switching market could challenge Arista's market share.
    • Guidance suggests slower growth and potentially lower gross margins in Q4 2024: Analysts pointed out that the implied growth for Q4 is only 9% year-over-year, lower than previous quarters. Arista's management also mentioned that gross margins might appear lower compared to recent exceptional quarters, which could indicate slowing momentum.

    Q&A Summary

    1. 2025 AI Outlook
      Q: Does guidance imply bigger AI contribution in Q4?
      A: While we are progressing from trials to pilots involving thousands of GPUs this year, significant AI contributions are expected next year, targeting at least $750 million in AI revenue for 2025. We focus on the entire year's growth rather than just Q4.

    2. Deferred Revenue Increase
      Q: What's driving the increase in deferred revenue?
      A: Product deferred revenue is up 95% year-over-year to about $520 million. This rise is due to a mix of new products and use cases, including AI opportunities. Deferred revenue naturally ebbs and flows with new product introductions.

    3. Growth Expectations and Guidance
      Q: Can growth accelerate in H2 despite lower Q4 guidance?
      A: We expect continued acceleration in growth but remain conservative, guiding at least 14% growth for 2024. We're confident about the second half and traditionally provide cautious estimates.

    4. AI Trials Progress
      Q: Update on AI trials and their impact on revenues?
      A: Our four major AI trials with Cloud and AI Titans are progressing well, moving from trials to pilots this year. Additionally, we have tens of smaller customers initiating AI pilots, reflecting growing confidence in our solutions.

    5. $70B TAM and $750M AI Target
      Q: How does the $70B TAM relate to the $750M AI target?
      A: The $70 billion Total Addressable Market includes data center, AI (transitioning InfiniBand to Ethernet on the back end), campus (over $10 billion), and wide-area routing. The $750 million AI networking revenue target for next year is a portion of this TAM, focusing on back-end AI opportunities.

    6. Competition with NVIDIA
      Q: Are you seeing competition from NVIDIA's Spectrum switches?
      A: We haven't significantly encountered NVIDIA's Spectrum switches, except in one bundled case. While we consider NVIDIA a partner on GPUs, we feel confident competing against their switches due to our strong software and product portfolio.

    7. Customer Concentration
      Q: How is customer concentration evolving with new deals?
      A: Microsoft and Meta are expected to remain over 10% customers this year. No other customer is anticipated to reach that level, and we continue to develop strategic partnerships with them in both cloud and AI.

    8. Enterprise Networking Trends
      Q: Are enterprise network refreshes picking up?
      A: Yes, we're seeing activity across all segments: early adopters moving to 400 gig, fast followers migrating to 100 gig, and some customers repatriating workloads from public cloud back to data centers.

    9. Traditional Infrastructure Spending
      Q: How are traditional infrastructure investments trending?
      A: Despite a pivot towards AI spending, we're experiencing refresh cycles in classic cloud infrastructure, with customers upgrading from 100 to 200 gig or 200 to 400 gig. Classic cloud remains a significant contributor.

    10. Gross Margin Outlook
      Q: Why not be more optimistic on gross margin outlook?
      A: While we've achieved exceptional gross margins recently, we're maintaining our guidance due to expected changes in customer mix in the second half. Significant cost reductions have already been realized, making further improvements challenging.

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