Arista Networks Inc — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome to the First Quarter 2024 Arista Networks Financial Results Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks' Chairperson and Chief Executive Officer; and Chantelle Breithaupt, Arista's Chief Financial Officer.
Thank you, Liz. Thank you, everyone, for joining us this afternoon for our First Quarter 2024 Earnings Call. Amidst all the network consolidation, Arista is looking to establish ourselves as the pure-play networking innovator, for the next era, addressing at least a $60 billion TAM in data-driven client-to-cloud AI networking.
Thank you, Jayshree. The Arista journey has been a very special one. We've come a long way from our startup base to over an $80 billion company today. Every milestone, every event, the ups and downs are all etched in my mind.
Anshul, thank you for that very genuine and hard-sell expression of your huge contributions to Arista. It gives me goosebumps hearing your nostalgic memories. We will miss you and hope someday you will return back home.
Cloud and AI Titans, Enterprise and Providers. Customer activity is high as Arista continues to impress our customers and prospects with our undeniable focus on quality and innovation. As we build our programmable network on delays based on our Universal Leaf/Spine topology, we are are also constructing network, as I said, the suite of overlays such as zero-touch automation, security, telemetry and observability. I would like to invite Ken Duda, our Founder, CTO and recently elected to the Arista Board to describe our enterprise NaaS strategy, as we drive to our enterprise campus goal of $750 million in 2025.
Thank you, Jayshree, and thanks, everyone, for being here. I'm Ken Duda, CTO of Arista Networks. Excited to talk to you today about NetDL, the Arista Network Data Link and how it supports our Network-as-a-Service strategy.
Thank you, Ken, for your tireless execution in the typical Arista way. In an era characterized by stringent cybersecurity, observability is an essential perimeter and imperative. We cannot secure what we cannot see. We launched CloudVision and UNO in February 2024 based on the EOS Network Data Link Foundation that Ken just described for universal network observability.
Thank you, Jayshree, and good afternoon. The analysis of our Q1 results and our guidance for Q2 2024 is based on non-GAAP and excludes all noncash stock-based compensation impacts, certain acquisition-related charges and other nonrecurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Supply chain productivity gains led by the efforts of John McCool, Mike Capes and his operational team, a stronger mix of Enterprise business and a favorable revenue mix between product, services and software.
revenues of approximately $1.62 billion to $1.65 billion, gross margin of approximately 64% and operating margin at approximately 44%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 320.5 million shares.
Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.
[Operator Instructions] And your first question comes from the line of Atif Malik with Citi.
It's Adrienne for Atif. I was hoping you could comment on your raised expectations for the full year with regards to customer mix it sounds like from your gross margin guidance, you're seeing a higher contribution from Enterprise, but I was hoping you could comment on the dynamics you're seeing with your Cloud Titans.
Yes. So as Chantelle and I described, when we gave our guidance in November, we didn't have much visibility beyond 3 to 6 months, and so we had to go with that. The activity in Q1 alone, and I believe it will continue in the first half, has been much beyond what we expected. And this is true across all 3 sectors, Cloud and AI Titans, Providers and Enterprise. So we're feeling good about all 3 and therefore, have raised our guidance earlier than we probably would have done in May. I think we would have ideally liked to look at 2 quarters, Chantelle, what do you think, but I think we felt good enough.
Yes. No, I think we saw because of the diversified momentum and the mix of the momentum that gave us confidence.
And your next question comes from the line of Samik Chatterjee with JPMorgan.
I guess, Jayshree and Chantelle, I appreciate the sort of raise in guidance for the full year here. But when I look at it on a half-over-half basis in terms of what you're implying. If I'm doing the math correct, you're implying about a sort of 5%, 6% half-over-half growth, which when I go back and look at previous years, you're -- probably there's only 1 year out of the last 5 or 6 that you've been in that sort of range or below that.
It's like anything else. Our numbers are getting larger and larger. So activity has to translate to larger numbers. So of course, if we see it improve even more, we'll guide appropriately for the quarter.
And your next question comes from the line of Ben Reitzes with Melius Research.
I want to key in on something I think you guys said earlier in the monologue. You mentioned that Ethernet was 10% better than InfiniBand. And I -- my notes are incomplete here. Could you just remind me exactly what you were talking about there? What is the comparison you're making to InfiniBand? And just anything, I'd love to learn more about that.
Certainly, George. Historically, as you know, when you look at InfiniBand and Ethernet in isolation, there are a lot of advantages of each technology. Traditionally, InfiniBand has been considered lossless and Ethernet is considered to have some loss properties.
Got it. I assume you're talking about RoCE here as opposed to just straight up Ethernet, is that correct?
In all cases, right now, pre UEC, we're talking about RDMA or Ethernet, exactly. RoCE version too, which is the most deployed NIC you have in most scenarios. But with [indiscernible] RoCE, we're seeing 10% improvement, Imagine when we go to UEC.
I know you guys are also working on your own version of Ethernet, presumably, it blends into the UEC standard over time. But what do you think the differential might be there relative to InfiniBand? Do you have a sense on what that might look like?
We have metrics yet, but it's not like we're working on our own version of Ethernet, we are working on the UEC compatible and compliant version of Ethernet. And there's 2 aspects of it. What we do on the switch and what others do on the NIC, right? So what we do on the switch, I think, will be -- we've already built an architecture we call it, the Etherlink architecture that takes into consideration the buffering, the congestion control, the load balancing and largely, we'll have to make some software improvements.
Your next question comes from the line of Ben Reitzes with Melius Research.
I was wondering if you can characterize how you're seeing NVIDIA in the market right now. And are you seeing yourselves go more head to head? How do you see that evolving? And if you don't mind also, I think NVIDIA moves to a more systems-based approach potentially with Blackwell. How you see that impacting your competitiveness with NVIDIA?
Yes. Thanks, Ben, for a loaded question. First of all, I want to bank NVIDIA and Jensen. I think it's important to understand that we wouldn't have a massive AI networking opportunity if NVIDIA didn't build some fantastic GPUs. So yes, we see them in the market all the time, mostly using our networks to their GPUs and NVIDIA is the market leader there, and I think they've created an incremental market opportunity for us that we are very, very reduced by.
Your next question comes from the line of Amit Daryanani with Evercore ISI.
I guess, Jayshree, given some of the executive transitions you've seen at Arista, can you just perhaps talk about [indiscernible] you can, the discussion you've had with the Board around your desire, your commitment to remain the CEO, does anything [indiscernible] that would be really helpful.
Well, first of all, you heard Anshul, I'm sorry to see Anshul decide to do other things. I hope he comes back. We've had a lot of executives make a U-turn over time, and we call them boomerangs. So I certainly hope that's true with Anshul. But we have a very strong bench. And we've had -- we've been blessed to have a very constant bench for the last 15 years, which is very rare in our industry and in the Silicon Valley.
And your next question comes from the line of Antoine Chkaiban with New Street Research.
So as you can see NVIDIA introduced in-network computing capabilities with NVSwitch, performing some calculations inside the switch itself. Perhaps now is not the best time to announce new products, but I'm curious about whether this is something the broader merchant silicon and Ethernet ecosystem could introduce at some point?
Antoine, are you asking what is our new products for AI? Is that the question?
No, I'm asking specifically about in-network computing capabilities, NVSwitch can do some matrix multiply and add inside the switch itself. And I was wondering if this is something that the broader merchant silicon ethernet ecosystem could introduce as well?
Yes. So just for everyone else's benefit, a lot of the in-network compute is generally done as closest to the compute layer as possible, where you're processing the GPU. So that's a very natural place. I don't see any reason why we could not do those functions in the network and offload the network for some of those compute functions.
And your next question comes from the line of James Fish with Piper Sandler.
Anshul, we'll miss having you around. I echo my sentiments there, but I hope to see you soon. Jayshree, how are you guys thinking about timing of the 800 gig optics availability versus kind of use in systems? And you keep alluding to kind of next-gen product announcements for multiple quarters, not just this one, but -- should we expect this to be more around adjacent use cases, the core, including AI or Software, kind of take us in the product road map direction, if you can?
Yes. James, you might remember like deja vu, we've had similar discussions on 400 gig too. And as you well know, to build a good switching system, you need an ecosystem around it, whether it's the NICs, the optics, the cables, the accessories. So I do believe you'll start seeing some early introduction of optical and switching products for 800 gig, but to actually build the entire ecosystem and take advantage, especially in the NICs, I think will take more than a year. So I think probably more into '25 or even '26.
And your next question comes from the line of Simon Leopold with Raymond James.
This is Victor Chiu in for Simon Leopold. Do you expect Arista to see a knock-on effect from AI networking in the front end or at the edge as customers eventually deploy more AI workloads based -- I'm sorry, biased towards inferencing. And then maybe help us understand how we might be able to size this, if that's the case?
Simon, just [indiscernible] in your question. We haven't [indiscernible] consideration, that's Phase 2 production. But you're absolutely right to say as you have more back end than the back end has to connect to something, which typically rather than reinventing IP and adaptive routing, you would connect to the front end of your compute and storage and WAN networks.
And your next question comes from the line of Meta Marshall with Morgan Stanley.
Maybe I'll flip James' question and just kind of ask what do you see as kind of some of the bottlenecks from going to -- from pilots to ultimate deployments? It sounds like it's not necessarily 800 gig. And so is it just a matter of time? Are there other pieces of the ecosystem that are -- that need to fall into place before some of those deployments can take place?
I wouldn't call them, Meta, bottlenecks. I would definitely say it's a time-based and familiarity-based situation. The Cloud everybody knows how to deploy that, it's sort of plug and play in some ways. And -- but even in the Cloud, if you may recall, there were many use cases that emerged. .
Yes. Thanks, Jayshree. Look, I think that what's lacking people's deployment is the availability of all the pieces. And so there's a huge pent-up demand for this stuff and we see these clusters getting built, as fast as people can build the facilities, get the GPUs and get the networking they need.
And your next question comes from the line of Ben Bollin with Cleveland Research Company.
Jayshree, you made a comment that back when we had guidance in November, you had about 3 to 6 months of visibility. Could you take us through what type of visibility you have today? And maybe compare and competes the different subsets of customers and how they differ?
Thank you, Ben. That's a good question. So let me take it by category, like you said. In the Cloud and AI Titans in November, we were really searching for even 3 months visibility, 6 would have been amazing. Today, I think after a year of tough situations for us where the Cloud Titans were pivoting rather rapidly to AI and not thinking about the Cloud as much.
And your next question comes from the line of Michael Ng with Goldman Sachs.
It was very encouraging to hear about the migration of trials to pilots with ANET's production roll out to support GPUs in the range of, I think you said 10,000 to 100,000 GPUs for 2025. And First, I was just wondering if you could talk about some of the key determinants about where we -- how we end up in that range, high end versus low end?
Yes. Thank you, Michael. I think we could do better next year. But your point is well taken that in order to go from 10,000 of GPUs to 30,000, 50,000, 100,000, a lot of things have to come together. First of all, let's talk about the data center or AI center facility itself.
And your next question comes from the line of Matthew Niknam with Deutsche Bank.
I got to ask one more on AI. Sorry to beat a dead horse. But as we think about the stronger start to the year and the migration from trials to pilot specific in relation to AI, is there a ramp towards getting to that $750 million next year? And I guess more importantly, is there any material contribution baked into this year's outlook? Or is there any contribution that may be driving the 2 percentage point increase relative to the prior guide for '24.
Chantelle, you want to take that? I've been talking of AI a lot. I think you should.
Yes, I can take this AI question. So I think that when you think about the $750 million target that has become more constructive to Jayshree's prepared remarks, that's a glide path. So it's not 0 in '24, It's a glide path to '25. So I would say there is some assumed in the sense of it's a glide path, but it will end in 2025 at the $750 million in the glide path, not a hockey stick. Yes.
It's not 0 this year Matt. for sure.
Yes.
And your next question comes from the line of Sebastien Naji with William Blair.
I've got a non-AI question here. So maybe you can talk a little bit about some of the incremental investments that you're making within your go-to-market this year, particularly as you look to grab some share from competitors. A lot of them are going through some type of disruption, one or the other acquisitions, et cetera. And then what you might be doing with the channel partners to land more of those mid-market customers as well?
Yes. Sebastian, we're probably doing a little more on investment than we have done enough progress on channel partners, to be honest. But last couple of years, we were getting very apologize about our lead times. Our lead times have improved. So we have stepped up our investment on go-to-market, where I'm expecting Chris Schmidt and Ashwin's team to grow significantly and judging from the activities they've had and the investments they've been making in '23 and '24, we're definitely going to continue to pedal to the metal on that.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
I'm going to shift gears away from AI actually. Jayshree, if we look at the server market over the past handful of quarters, we've seen unit numbers down quite considerably. I'm curious, as you look at some of your larger Cloud customers, how you would characterize the traditional server side and whether or not you're seeing signs of them moving past this kind of optimization phase and whether or not you think a server refresh cycle in front of you could be a incremental catalyst to the company?
Yes. No, I think if you remember, there was this one dreadful year where we -- one of our customers skipped a service cycle. But generally speaking, on the front-end network now, we're going back to the cloud. And we do see service refresh and service cycles continue to be in the 3 to 5 years.
And your next question comes from the line of Karl Ackerman with BNP Paribas.
Jayshree, you spoke about how you are not seeing any slowness in Enterprise. I'm curious whether that is being driven by the growing mix of your software revenue? And do you think the deployment of AI Networks on-prem can be a more meaningful driver for your Enterprise and financial customers in the second half of fiscal '24? Or will that be more of a fiscal '25 event?
Well, that's a very good question. I have to analyze this some more. I would say our Enterprise activity is really driven by the fact that Ken has produced some amazing software quality and innovation. And we have a very high quality, universal topology, where you don't have to buy 5 different OSs and 50 different images and operate this network with thousands of people.
Operator, we have time for one last question.
And your final question comes from the line of David Vogt with UBS.
So Jayshree, I have a question about -- I want to go back to AI, the road map and the deployment schedule for Blackwell. So it sounds like it's a bit slower than maybe initially expected with initial customer delivery late this year. How are you thinking about that in terms of your road map specifically and how that plays into what you're thinking about '25 in a little bit more detail.
Yes. We're not seeing a pause yet. I don't think anybody is going to wait for Blackwell necessarily in 2024 because they're still bringing up their GPU clusters. And how a cluster is divided across multiple tenants, the choice of host, memory, storage architectures, optimizations on the GPU for collective communication, libraries, specific workloads, resilience, visibility, all of that has to be taken into consideration.
Thanks, David. This concludes the Arista Networks First Quarter 2024 Earnings Call. We have posted a presentation, which provides additional information on our results, which you can access on the Investors section of our website. Thank you for joining us today, and thank you for your interest in Arista.
Ladies and gentlemen, thank you for joining. This concludes today's call, and you may disconnect now.