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    Arista Networks Inc (ANET)

    Q4 2023 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$46.13October 1, 2023
    Final Price$58.88December 31, 2023
    Price Change$12.75
    % Change+27.64%

    What went well

    • Arista Networks has strong momentum in the enterprise segment, with demand stronger now than a year ago. CIOs recognize Arista as the pure-play innovator, and the company has only penetrated 20% of Fortune 1000 and Global 2000 customers, leaving 80% of this market as significant growth potential.
    • The company is successfully capturing AI networking opportunities, having won 4 out of 5 recent large AI networking bids using Ethernet over InfiniBand. Arista is tracking well towards their $750 million AI networking revenue goal for 2025.
    • Arista is partnering closely with leading GPU vendors like NVIDIA, AMD, and Intel to supply the best network for AI workloads, solidifying their position in the AI networking market.

    What went wrong

    • Delay in 800 Gigabit Ethernet adoption could impact revenue growth, as the CEO anticipates real production of 800 gig deployments to happen in 2025, later than some expect.
    • Potential slowdown in enterprise spending due to oversupply and IT budget constraints, as concerns about oversupply and reduced IT spending were discussed.
    • Increased competition from rivals partnering with key industry players, such as competitors collaborating with NVIDIA on Ethernet AI solutions, which could affect Arista's Ethernet back-end business.

    Q&A Summary

    1. AI Revenue Outlook
      Q: How is Arista's AI performance tracking, and what are the expectations for '24 and '25?
      A: Arista's AI performance continues to track well toward the $750 million revenue goal set last November at Analyst Day. Over the last year, we've participated in large AI bids and won 4 out of 5 AI networking clusters using Ethernet over InfiniBand. Last year was the year of trials; this year is for pilots connecting thousands of GPUs, with true production expected in 2025.

    2. Guidance Conservatism
      Q: With increased CapEx from cloud giants and AI TAM growth, why hasn't Arista raised its guidance for '24 and '25?
      A: While we acknowledge positive drivers, we're maintaining our guidance to reflect what we believe will materialize in '24. Changes since November don't warrant adjusting our annual outlook at this time, and we'll take it one quarter at a time. If our conservatism shifts to more optimism, especially in the second half or in 2025, we'll keep you posted.

    3. AI Wins over InfiniBand
      Q: Can you provide more color on Arista's recent AI wins and competitive landscape?
      A: We're seeing strong adoption of our 7800 AI spine, capable of connecting up to 1,000 GPUs in a single chassis. In recent clusters, we've successfully migrated customers from InfiniBand to Ethernet. Initially, deployments may be sole-sourced due to performance needs, but over time they may involve multiple vendors. We're well-positioned in the first innings of AI networking, similar to our role in cloud networking.

    4. Competitor Partnerships
      Q: What impact does the competitor's collaboration with NVIDIA have on Arista's Ethernet back-end business?
      A: We don't see significant impact; the announcement seems related to UCS and validated designs. Arista continues to partner closely with leading GPU vendors like NVIDIA, which holds 90–95% of the market. We'll also work with AMD and Intel, aiming to be the "Switzerland of XPUs", supplying the best network regardless of GPU provider.

    5. White Box Threat in AI Networks
      Q: Why won't AI networks move toward white box solutions?
      A: While white box suits commodity products, mission-critical AI networks demand reliability and performance. Customers investing millions in GPU clusters won't risk downtime with a "throwaway" network. Arista's EOS software stack offers availability, analytics, and automation, making it a preferred choice.

    6. Enterprise Demand and Visibility
      Q: What's influencing Arista's visibility into enterprise demand?
      A: Our enterprise momentum is stronger now than a year ago. Customers seek innovation and modern network models, integrating DevOps, NetOps, and SecOps. With a $30 billion TAM in enterprise, we're recognized as a pure-play innovator. We're moving from trials to pilots in AI, connecting thousands of GPUs this year.

    7. Deferred Revenue and Supply Chain
      Q: What's causing the increase in deferred revenue, and are supply chain issues affecting pricing?
      A: The deferred revenue increase is due to timing and new projects we're trialing with customers, not underlying business issues. Supply chain improvements haven't led to significant pricing adjustments; we continue to compete in a normal pricing environment.

    8. Cloud Mix and 2024 Assumptions
      Q: With cloud mix declining slightly, what are your assumptions for 2024?
      A: Our cloud mix remains strong, but exceptional enterprise performance affected the overall mix. We're performing well across all sectors and proud of our enterprise momentum. AI contributions will gradually increase but were a small part of 2023 revenues.

    9. M&A and Competition
      Q: How do you view peers scaling up through M&A in serving cloud and AI markets?
      A: In cloud and AI, customers prioritize innovation over size. Arista is well-equipped with our heritage of networking innovation. In enterprise, we're underpenetrated—having only 20% of the Fortune 1000 and Global 2000—offering significant room for organic growth.

    10. Gross Margin Upside Drivers
      Q: What drove the gross margin upside in the quarter?
      A: The upside was primarily due to customer mix, with a heavier weighting towards enterprise in Q4, which naturally drove margins higher.

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