Q3 2019 Earnings Call

Anytime during the conference you need to reach an operator. Please press the star followed by Zero. As reminder, this conference is being recorded and will be available for replay from Investor Relations section at the Arista website. Following this call I will now turn the call over to Mr., Charles Yeager, Drucker product and Investor advocacy, Sir you may begin.

Thank you operator, good afternoon, everyone and thank you for joining US with me on today's call or Jaish real while Arista networks, President and Chief Executive Officer, and either Brendan Aristas Chief Financial Officer.

Afternoon, Arista networks issued a press release announcing the results, which fiscal third quarter ended September Thirtyth 2019, if you like a copy of the release you can access it online at the company's website. During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the fourth quarter of the 20.

18 fiscal year longer term financial outlooks industry innovation or market opportunity the benefits of recent acquisitions.

Active litigation, which are subject to the risks and uncertainties that we discussed in detail on or documents filed with the FCC specifically at her most recent Form 10-Q , and Form 10-K add which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as of today and you should not rely on them as representing our views.

In the future we undertake no obligation to update these statements. After this call also please note certain financial measures. We use on this call or expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures and our earnings press release with that I will turn the call.

Jayshree.

Thank you Charles Thank you everyone for joining us this afternoon for our third quarter 2019 earnings call.

Oh profitability girls combination was once again demonstrated with a non-GAAP revenue of 654.4 million with a non-GAAP earnings per share that grew to a record $2.69.

So this is contributed approximately 15% of revenue.

We delivered non-GAAP gross margins of 64.4% influenced by a solid performance from our cloud Titan and enterprise vertical.

In terms of customer trends, we registered a record number of new customers in Q3 and continue to drive this new customer they'll go expansion at the rate of one to two per day throughout the quarter.

For calendar 2019, we do expect to have to customers that will be greater than 10% of my revenue Microsoft on Facebook.

In Q3, the cloud Titans vertical segments remained our largest why.

The Mona modern enterprise segment is now consistently becoming our second largest it's financials in third place and service provider and tier two specialty cloud providers coming in at fourth and fifth grade.

In terms of geography in Q3, the international contribution was 19% would be up because at 81%.

In terms of new products, we introduced important enhancements to our cloud vision platform dubbed cloud vision 2019.

This is clear vision is bringing clock I supposed to network operators across places in the cloud Opex as we call it.

The largest cloud providers in the world have driven advancements in telemetry and automated netbook operations that improved many of the same netbook operation staff for the enterprise.

Vision up C N P to deliver these analytic and telemetry capabilities to organizations in the enterprise of many sizes.

Key highlights of Cloudvision 2019 include dynamic scale elastic agility deep visibility and open integration Bobby can divide visibility metrics from SDK and that's an empty capable platforms, including managing third party devices to bring multivendor capabilities across the entire an entire enterprise.

Yeah.

I would like to office and for the color on Q4 2019 guidance given our significant drop.

After we experienced a pause of a specific cloud Titans orders in Q2 29 team we were expecting a recovery in second half 2019 full cloud Titans spend in fact Q3 2019 is a good evidence of that.

However, we were recently informed of a shift in procurement strategy with a material reduction in demand from a second cloud Titan reducing their forecasts dramatically from original projections for both Q4 2019 and for calendar 2020.

Naturally this type of volatility brings a sudden I'm, saying, yeah impact to walk you full guidance.

Given this tepid forecast and volatility off this cloud segment, we believe the cloud Titans forecasts shouldn't be model the S flat to down in calendar 2020 .

I do want to take an opportunity to reiterate that our market share for both hundred gig and overall high performance switching remain solid and strong.

We are proud about strengthened the enterprise and financial segment, but growing success in our very first quarter, all shipping cognitive campus portfolio products, which is now on truck 400 million in the first full year of shipments.

That I'd like to turn it over to eat up for more specific financial metrics. Thanks, Jayshree and good afternoon. It's analysis of our Q3 results and guidance for Q4 19 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 all selected GAAP to non-GAAP results as provided allergy actually.

Total revenues in Q3 were 654.4 million up 16% year over year above the midpoint of our guidance of 647 to 657 million.

Service revenues remain strong representing approximately 15.2% of revenue fell from 15.6% last quarter.

I think typical seasonality service renewal.

International revenue for the quarter came in at 122.1 million a 19% of total revenue.

Jonathan 27% in the prior period, this volatility and geographical mix largely driven by shifts towards U.S. deployments in our cloud Titans business.

Overall gross margin in Q3 was 64.4% above the midpoint of our guidance of 63% to 65% and down slightly from 64.7% last quarter.

That's reflected a healthy cloud Titan contribution combined with the performance from our enterprise and financial verticals.

Operating expenses for the quarter over 163 million or 24.9% of revenue up slightly from last quarter at 158.7 million.

R&D spending came in at longer than 5.3 million or 16.1% of revenue from 101.7 million last quarter.

Perfect and head count growth and slightly higher levels of product related injury and prototypes funding in the period.

Sales and marketing expense was 46.8 million I, 7.1% of revenue.

Up from last quarter with increased headcount somewhat offset by reductions another sales Pos.

<unk> costs were consistent with last quarter at approximately 11 million a 1.7 percentof revenue.

Operating income for the quarter was 258.2 million.

39.4% of revenue.

Other income and expense for the quarter was a favorable 14.9 million how effective tax rate of approximately 20.5%.

Resulted in net income for the quarter of 217.1 million or 33.2% of revenue.

I needed share number for the quarter was 80.75 million shares resulting in diluted earnings per share number for the quarter of $2.69 up 27.5% from the prior year.

Now turning to the balance sheet cash cash equivalents and investments entered the quarter to approximately 2.4 billion.

We repurchased $115 million, how our common stock during the quarter at a weighted average price of $224 per share.

As a reminder, a board of directors has authorized a three year $1 billion stock repurchase program commencing in Q2 19. This program allows us to repurchase shares about common stock Opportunistically I will be funded with operating cash flows.

We generated 269 million of cash from operations in the third quarter, reflecting strong net income performance at a decrease in working capital requirements for approximately 25 million.

Dsos came in at 63 days up from 51 days in Q2, reflecting the timing of billings in the period.

Inventory turns were 3.1 time up from 2.4 last quarter inventory decreased to 239.8 million in the quarter down from 314.2 million in the prior period.

Our total deferred revenue balance with 529 billion up from 502.2 million in Q2.

As a reminder, our deferred revenue balances now almost exclusively services related with any significant product deferred revenue amounts haven't been recognized the income statement the first half of fear.

Payable days with 31 days down from 37 days in Q2 affecting the timing of inventory receipts and payments.

Capital expenditures for the quarter.

Point 7 million.

Now turning to our outlook for the fourth quarter and beyond we continue to experience significant volatility of demand from outside business.

We saw strong recovery from the customer who would Paul's activity in the second quarter only to be surprised by a dramatic reduction forecast for Q4 and 2025 another key title.

All indications are these actions you're not looking into losses positioning our share for Arista at these customers, but we'll likely effect will likely result in demand from this part of the business being flat to down on a year over year basis for the remainder of 2019 and into 2020 [noise].

Well, we're not at this point in a position to provide overall guidance for 2020, we did want to make the following points.

First the a recap on deferred revenue and its impact on 2019 resolved.

Outlined on prior calls recognized 80 million I'm 38 million of non Microsoft product deferred revenue.

Do you want in Q2 19 respect.

These amounts are essential product sale ship unbilled and the prior year for which revenue deferred pending customer acceptance of legal Redesigns and features [noise].

Well not impacting our 2020 cash metric the skill set up some tough comps for year over year revenue growth, particularly in the first quarter of 2020.

At this point, we believe this trend combined with typical Q1 seasonality and the recent updates to cloud forecast described above May result in revenue for the first quarter funny, there are approximately 5% below.

For 19 levels.

On the gross margin front, we would reiterate our overall gross margin outlook.

63% to 65% customer mix being the key driver.

We'll continue to manage investments in the business carefully we targeted growth sales in R&D headcount balancing the need to expand our market coverage with prudent financial management.

Finally, you should expect to see us continuing to execute against the stock repurchase mandate in an opportunistic manner.

With all of this as a backdrop guidance for the fourth quarter, which is based on non-GAAP results.

Excludes any noncash stock based compensation impacts other nonrecurring items is as follows.

Revenues of approximately 540 to 560 million gross margin of approximately 63% to 65% operating margin of approximately 36%.

Our effective tax rate is expected to be approximately 20.5%, but diluted shares from approximately 80 point threemillion.

I would not trying to call back stuff Charles Thank you either.

To move to the Q and a portion of the Arista call to time constraints I'd like to request that everyone. Please limit themselves to a single restaurant.

[laughter], we will now be can the company portion of the rest <unk> earnings call in order to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question press the pound Keith we ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from line of sight.

In Leopold with Raymond James Your line is open.

Well. Thank you very much fruit for taking a question appreciate the added disclosures in details you you've given us on this call. So.

Thanks for that I wanted to maybe get a better understanding of the 2020 commentary given that at least looking at capex as an indicator or revenue for a business lines like as youre in in eight of U.S. seem to be encouraging, suggesting 2020 could be a better year in terms of the capex forecast.

Going back up double digits for the web scale guys.

Just wondering how you think we should square up your more cautious tone on the cloud relative to looks like better capital spending trends in healthy revenue trends from from the web Titans. Thank you.

Thank you Simon well I've.

As I was trying to explain our Q4 forecast is actually conns quite consistent with many of the cloud Capex a reported in recent calls which is overall flat to down.

There's a lot of volatility going on.

Going down, but the overall trend from Q4 is down and we're projecting that same flat to down trend for Capex next year for the overall cloud Titans spend now one of the things that as you know you may have remembered this we were not tracking or something that's looking point of view in prior years cloud capex nearly as smells <unk> as well so there's not a one day.

One correlation and in some cases, what we're seeing in the cloud Capex is a redistribution to infrastructure not the networking. So if you look at the two reasons a web why we believe it go slow down also in 2020 , it's because many of the cloud taking customers extending their use off so.

Over assets and delaying the netbook purchase longer and buying other infrastructure, all or investing in other aspects and the second does the 400 gig adoption.

We had predicted initially that deployments good start as early as second half. This year. We are shipping 400 gig products. My initial trials this year, but the initial deployments have shifted by more than a yellow to second half 2020, and we think mainstream production will be 2021. So the change in you know customize extending the investor.

And the deployment of 400 gig is causing us to be more muted about 2020.

Thank you very much for that.

Hi, Simon Your next question comes from Tim Long with Barclays. Your line is open.

[noise] you or just just follow up on the cloud Titans again.

Maybe just a two parter number one could you talk a little bit about the customer that had the recent change and it seems has a long tail to it as well.

Visibility into why they're doing it is their business is changing or is it just so she said just the the spending is changing and secondly, do you think this is a trend that you know highlights more even more than flat to down risks for somebody the other large customers. Thank you.

Okay. So specific to that could tighten a host forecast a reduced dramatically I think that two main reasons and I'm going ask actual are all cloud expert on C. O to elaborate first is they're managing the capex oneneck booking and modulating the inventory and shifting to more of a just in time type four.

Yes, so typically they gave us two quarter visibility, sometimes even three and four and now they're moving much more to a real time forecast a quarterly into those.

And the second does this particular cloud Titan is extending back I says by more than New York.

And once the sub assets get extended that is significantly delaying the network spend to actually do you want to add to that.

Just a housekeeping right. The so were reprints Julie.

So well specimen decision point. This one block Biden did you know ROI and doing the reprints just point nasty my read on generation.

You know thing is one because they want all create the not focusing on.

[noise] and stuff to do actually or what are the other part of your question Tim on other cloud Titans.

I will be stronger or some of the flat some will be weaker but it would be average all of that we see flat to down.

Okay alright, thank you.

Your next question comes from you tie Kidron with Oppenheimer. Your line is open.

Hi.

I guess I want to follow up then on your recent explanation here just Sri M. D. I mean, the Capex moving to just in time that shouldn't affect your business you might not have visibility, but that's still means businesses to call me as long as the keep building I guess moving to do a server.

Refresh cycle.

The bulk of your.

Your business, we've got cloud tightened wasn't just kind of refresh upgrades of existing platforms. There was no new builds well with this customer.

But the bulk of it was you know there's there's always multiple levels of connectivity bulk of it is obviously this the Fortunately are you got to build severance for us to put a network. The second layer is usually regional spine and dataset.

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Ladies and gentlemen, please standby works currently experiencing technical difficulties the conference will resume momentarily. Thank you for your patience.

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But anyway.

Okay.

You are connected in the main.

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No no loading please.

[laughter].

Did you hear about.

Yeah, if you could repeat it I think everybody got disconnected in in the Middle I hope it wasn't something I said.

No no I have to remember your question to repeat the answer.

The question is all again refer you to raising the question regarding the <unk>.

Yes, the nature of your business with them is it just try to several refreshes there are no new you build your greenfield deal with them.

Yeah, no and the answer is we need all stock, but if you don't have seven storage, we can connect with their networks. So the nature of our use cases starts but rather spend correlates to Netflix then we can turn create millions of additional by as much can be the aggregation other business lines as well, but that's the symptom.

The causes more networking spend now that doesn't mean, they don't spend on new data centers I think the capex of many of the cloud Titans, including the one we're discussing reflects that they will spend and a healthy fashion on the infrastructure when new data center.

To correlate that back to Nick looking would take time, because they have to by the new servers and then they have to buy the network would you could go well into they 2020 on 2021, most likely.

Very good maybe as a follow up.

Microsoft just wanted to Jay that contract what does that mean to you or how do you look at that and what do you could do for your business.

Well you know Oh, the very pleased with that and as you can imagine actually led the team worked very hard on federal certifications in partnership with I thought I can vendor, having said that the first thing that happens with these large contracts as they get contested and so while the award maybe give and we think it'll be time for us to see material benefit may take six to 12 month.

Very good good luck.

Thank you.

Your next question comes from a semiconductor T. with JP Morgan Your line is open.

Oh, Hi, Tom Thanks for taking my question, just moving beyond the upcoming Triple deepwater acuity in spending from the CLO items I just wanted to Oscar Board do you have to go providers. It sounds like you have more visibility or more stability in terms of what you're seeing.

Spending by comes from them is that kind of fed or what you. If you can elaborate on what you see on that site and does this kind of drive you to focus more on that segment going forward.

Yes, let me. Thank you one majority of found Guyton was due to the specific cloud Titans you might have no noticed in my commentary that both the service provider and the specialty tier two classified as came in at fourth and secondly, I think this is the first time, especially tier two cloud providers have been.

Good luck.

And in my view this segment this week and the results have been mix.

I think they knew trucking company, that's what the cloud companies that started growing very well for us in 2017 18.

Now having to the new their investment and beside from a matter of economics, which ones make more sense is today rely on their own cloud all go to the public cloud Titans and some other tier two companies all finding it difficult to can there be some are continuing to this strategy. So it isn't mixed bag right and especially.

In Q4, we don't expect much success from this category.

Okay. Thank you.

Okay.

Your next question comes from Alex Henderson with Needham and company. Your line is open.

Great. Thank you very much.

I was hoping you could spend a little bit of time.

This cloud issue.

What extent.

There's no competitive incursion here, that's causing it.

<unk>.

You have sustained Sharon.

Customer.

Hi.

Judge.

How do you get your.

Clarity.

I think that's a very good question from my perspective, the competitive dynamics have not changed in the cloud Orange and realistically, we always have aggressive competition and we will continue to see a direct addressing there, but what gives us confidence that the cloud Titans, though you know delaying that spend are distributing that cash capex differently.

I didn't know, we always prided ourselves in a close partnership and relationship it's not Titan and generally, especially in the case, a Facebook and Microsoft they've been not only a vendor customer relationship, but really a core development.

The quite the kind of partnership which is engineering to engineering not just doesn't.

So when you look at that there's no evidence that competitive new old White Black box wise, it's been anything there's been a processing is better inventory management and better procurement optimization et cetera.

And you can always expect these cloud customers of I still want to be multi source.

But it isn't any different than you've seen in the past and behavior and relationships in our innovation. We have 10 400 people products and none of them on trial, so relationship and the technology partnership couldn't be better I think he went after that.

Thanks, Andrea I think they'll be woke week movie with these.

The point, you're working on these 2021 roadmap Longview, most like Oh.

And on quite going a little <unk> they'll make into the architecture is low.

And I'm really directly Buckman buckman.

No well to me, that's even though it's simply the demand has gone down.

They'll break on couldn't all or a sure Ren Benjamin come back as well.

<unk>.

We're not worried about it done because from a pretty big pretty direct as well.

Oh sure are going to someone else their demand could you.

Okay. Thank you very much.

Your next question comes from James <unk> with Morgan Stanley . Your line is open.

Thanks, very much adding my follow ups to to the other questions have already been asked on this change in.

Architecture, and architecture and strategy and what they're doing what their servers.

I see is this related to how they're implementing servers and networking obviously by extension.

So that we're looking at a permanent lengthening of replacement cycles, whereas this somehow.

Just related to the current cycle I guess I'm trying to get a sense for what the even at the customers come back what the opportunity is and how we should think about the frequency that they'll need to come back and add additional capacity or upgrade networking equipment et cetera.

Yeah No. Good question, Dan you May know that seven cycles tend to go in 18 months to fear.

Generally they get upgraded and that type of timeframe in this particular case, because they saw the vendor and architecture that some of them, but there's no change in silver architecture, I hopped emphasize that.

Choosing to delay the server you saw the deployment by be figure.

Well no more no no no change in architecture, but really a delay its everything which is causing it to their networks and.

I remember some sort them and back on the all you need from these so there's no new for one of them in order.

That's what we're planning on but in the long drawn these things do balance though does.

Okay. So somewhat so one your table cycle on to the dog.

Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.

Yeah. Thanks for taking a question maybe I'll shift gears, a little bit <unk> as you think about the model into growth rates that you outlined.

Outlined looking into next year I'm, just kind of curious do you take a a more active stance in kind of project you know protecting the margin profile the company and how do I think about you know just the investments that the company's previously kind of alluded to that would be required to really.

You know positioning yourself for campus ramp as we move into next year and just any kind of commentary on how you've seen a campus thus far.

Yeah, I think I'll take the.

Yeah.

Yeah.

The businesses.

I think.

Operating.

And.

Plus or minus 35% operating margin.

<unk>.

The long term.

30.

Before.

But.

We do have some flexibility there.

Yeah.

Oh.

I see the 30, 940%.

The number.

We will continue to make investments.

I will continue to.

Right.

<unk>.

We think we still do isn't it.

Yeah, and regarding Iran regarding campus as I said in my opening remarks, we're lucky well to the $800 million in shipments for the first full quarter. Since he was our first quarter, what surprised me pleasantly on campus accepting it huh, that's the most existing but when you.

Thank you I'd asked me to forecast that I wouldn't embedded that I would've thought 80% would be existing so we're really getting a lot of interest in our cancer. In fact, I would say one of the song reasons I helped by segment is number two is not only because of the data center, but it's more lumpy isn't the campuses you see but I believe there the two will influence.

And we will become more relevant Indiana price because of both campus and.

And enterprise and not on the architectural shifts that we can guide to public workloads versus private I think when I look at why they're very differentiated the weren't cognitive to us is really architectural both on a wife by MPSV switches and just like the cloud vision.

No problem I really be appreciating our differentiation on flow analysis on security Oh on bringing in integrated.

Positive.

Your software driven integration together much like we did visitor center, so oh, we like our early progress and execution there.

Your next question comes from Alex Kurtz with Keybanc capital markets. Your line is open.

Yeah. Thanks.

More of a clarification. Then then a question I just want to make sure. We all understand that the be account. That's driving this this downside here is not here historically largest customer and then the second part of that is.

Given the disruption that you saw from from Microsoft earlier in the year I guess, what's the context that their spend level as they go into Q4 and ended the 2020.

Yeah. This is just to clarify Alex it's a second cloud type and it's not the one we mentioned.

The last time that had a Q2.

19.

And as specific and Microsoft projecting we expect that when do you expect them to be a north of 10%.

Customer concentration for 2019, and we expect to have a second you could tighten customer we should be Facebook.

And just ended 2020 run Microsoft they just given the disruption we saw this year Jayshree. How do you any early read on on kind of returning to more normal I spend in 2020 with them I actually wanted 150 worked for.

So far.

We don't have on long term bargain from Mark So, but yes. There is no nothing different than they are all newsroom Ben.

I'm not exactly when.

No blip no problem, that's not yet yeah.

Okay. Thank you.

Your next your next question comes from it Tejas I can tell us what you'd be asked your line is open.

Thank you as you reflect on the fundamental technology drivers of bandwidth growth in the cloud that contribute very strong growth over the years as anything fundamentally changed I ask because this year, we've had sort of oh, two different cloud vendors have some sort of pick up one was probably a public cloud.

And grow the other a constant.

Uh huh.

Content cloud vendor, so [laughter] completely different drivers and yet you're seeing a pot. So is there any sort of technology fundamental change.

Goodness I don't see any fundamental change I think our strategy and Pam is valid I think that strategy that they want to embed has been very strong the last four or five years. That's the only change I haven't done due to his daddy Makassar, well optimization more care and feed into that forecasting what this is minimal.

But I don't see any other team I think they continue to invest with scale and as you noted all doing very well, but that doesn't mean, they will spend equally well.

Hi, so.

The board sentiment and then you do agree probably put them into them and I said, starting for the coal mine and many people unexplored nothing to do with young thanks.

And the second and.

No.

Okay.

Yeah no difference.

Uh huh.

One of these are long gone better known seen in there.

Uh huh.

Both from a balance standpoint.

Backbone that.

Okay.

And we do right now.

Going.

The more and more.

No not trenching.

But obviously be after we've come back on to that.

Thank you and as a quick follow up any change in enterprise spending I realize your share of that market is lower but are you seeing any dealer long duration and so forth at all.

Hey, we're not the bellwether on enterprise. So I I think we know we understand the cloud much better, but because there are new entrants and we have new product. So we're probably not the best indicator of King.

Thank you take that question.

Your next question comes from Jim Suva with Citi. Your line is open.

Thank you I have just a one question.

Page in the procurement strategy of this cloud Titan.

Why won't it spread to both other cloud type and maybe even the second tier <unk> clock deserved the risk of out or any visibility of why this challenge spread thank you.

Thank you, Jim I'll comment, but I'd have gone from elaborate I think thats sort I see no. We don't see a lot of risk of bad because anyway, our visibility with two quarters with this particular tightened they've optimizing the one quarter. So if we were always relying on wanting to your forecast I wouldn't be a big a dramatic change to our our belief system and how we plan.

Dan This is always been one or two corridor.

Further refinement on this particular blocks I can cost him at the one quarter only you don't see a big change of excess.

Right I know this is number one and doing a cross something landing on hold the man made working well into the one good thing to do you kind of put somebody is going.

Optimizing their profit season, and Oh God thing.

Uh huh.

Does not apply.

Right.

This isn't a company.

In industry.

Right.

Your next question comes from Rod Hall with Goldman Sachs. Your line is open.

Yeah, Hi, guys. Thanks to the question I wanted to I was just check what you're thinking on growth in 2020, I'm, just playing around with the verticals here and thinking about what maybe you're implying with does.

So I wonder if maybe you could put us in some sort of a ballpark for overall revenue growth and then.

Talk to sit down why you know the down eight or so that your employed in the guidance doesn't kind of mid materialize through the better part of next years ago end up with even lower revenue growth or maybe that's what you're already thinking obviously that that's one thing if you could just put us in some kind of revenue growth ballpark for next year.

And then the other thing I wanted to ask is enterprise spending is clearly very weak and a lot of the rest of this growth depends on enterprise and so wonder if you could just update us on what you're seeing there how much risk you think there is your enterprise numbers as we look into 2020 or at least early part of it with the.

Slowdown that we're observing thanks.

Yeah, I'll take the first part of that and then maybe handouts. It usually on the last part I mean, I think from a modeling perspective, we're not yet.

I'm trying to call it 2020, Oh wait for the overall.

To put some point is out there and make sure everybody is aligned on some of the impact from deferred.

We ended the year.

We will have a tough comp for the first or second or in the second quarter as well.

Makes sense.

Hi, This is a card I'm talking about the cloud vertical being flat.

Pretty consistently is.

Right part of the business and financial verticals, I've been going well and that's been.

Setting that although not entirely.

And we hope.

Well, that's kind of enough that too.

The other part of the business, which is moving cloud.

Right.

Happens happens.

I think you want I think we pretty much guidance in Q1 number.

Only because we want to make sure.

Correctly.

And the seasonality.

Okay, and then enterprise if you want to be somewhat.

On enterprise you know I I do believe so my demand and time perspective, we have a lot of opportunity for execution and Oh, we could do very well both in enterprise on financial.

If we get affected by macro situation that affects everyone not just us. So we would be influenced by that but barring any macro situation. We feel very good about our execution to date and going into two anything and better hopefully offset some of the.

Flatness in the cloud.

That's okay.

Just coming back on the numbers I I mean, I just to see whether.

Okay I have got okay.

Well I was just going to say I mean, it looks to me like it could easily be mid single digits growth next year and I don't know what got.

You know a crazy number from your point of view or is that a plausible scenario.

I don't think it's a crazy number a we'd have to grow enterprise.

The significant double digit I think at this point, we're not feeling wrongly optimistic about the mid teens girls that'd be projected it at the analyst day because of how poorly cloud is doing right everybody else is you know, Indiana person finances is doing well, but how about could give us you know looking into Q4 Q.

One and then we'll come back to you we don't know.

Okay. Appreciate injury. Thank you.

Your next your next question comes from at dairy any with Evercore. Your line is open.

Oh, Thanks, a lot for taking my question guys I'll I guess I'm a question that certification all just to ensure the entire 130 million Rep. You Miss forces. The street at least was all attribute it to this cloud tighten customers shifting patterns or was it something else. That's one part and then secondly, maybe just touch on what do you feel the enterprise side.

And do you think Oh, Mojo could be a meaningful drug for revenue growth as you wouldn't get into college 20.

Yeah, So typically I see no question I'm it.

That's exciting wouldn't be absolutely be larger are.

Now that the gap the in guidance, but they weren't decline because you know we've had a deteriorating declining performance and service provider and a new to the mix wasn't deteriorating a declining performance in tier two specialty cloud too.

It was a combination of all see with majority being one specific contact.

Now specific the module just very much factored into a campus numbers. When you think the whole wired wireless cognitive edge is really getting excited with the Mojo product. We have completed I integration of cognizant and bye bye.

Oh distributed cloud managed module is better than any many of the standard control the offerings and legacy offerings in the marketplace.

So we believe our campus is doing well in a good contributions on dies merger.

Your next question comes from Brian Yoon with Deutsche Bank. Your line is open.

Hi, I'm <unk> can you talk about what's changed on the 400 gig side. It sounds like the anticipated deployments for 400 gig had been pushed out one year from your initial estimates.

So I kind of interested to get your view on what you think is causing those delay departments.

I think when before it began a 400 gig foray you may have remembered I'd be back, which I spoke about and we were always concerned not whether we would have products and differentiated one which we do like shipping time types of products now, but whether the optics was vetting and ecosystem is ready so we thought ecosystem and be ready by now.

Oh, and the optics that pretty much moved a you're correct me if I'm wrong I'm sure, but not so he can I just want to be products anything more than trial. If you don't have don't have good optics to connect to it.

Most of the 400 Gigoptix moving I'd be really most of the initial deployments will move from second half this year, which is what we thought before the second half 2020 between production installations production installations is when you go can thousand supports a million poor will really be 2021.

So, but I want to be clear they'd be our shipping quarter, because thats, a very proud of them and as always there ahead of the industry.

Your next question comes from Paul Silverstein with Cowen and company. Your line is open.

She is true hits be on seems person to ask you about club or our movie.

Two related questions upon my one.

I want to make sure I heard you correctly first before the question, which is you said searching for some quotes on customers, Microsoft and Facebook for 2019 was that the Stephen in terms of the time.

Yeah.

Okay and you all.

He also said that the particular fun question. That's the problem is shifted to one quarter from a true quarter forecast.

Right, Okay, what we're anywhere from two to four quarter Andy's analysis to specific PD one quarter.

All right here in the two questions one.

With respect to the softness in 2020, putting aside for Q2 0.9 see you spoke to 2020 you made the point previously that when Microsoft when you had that when they were cold Turkey. Previously you said the real question isn't been coming back to what degree. So when you talk about the softness the significant decline in 20.

20.

I presume they've given you that insight notwithstanding the shift to one quarter of forecast away from previous two to four quarter forecast. It sounds like there given your visibility into next year.

How much softness or you talking about where you expect to this point youre going related question so with different.

If you can allow me to answer that Paul and then you can get to the other question. This particular cloud Titan has not only given us a dramatic reduction for Q4, 20, Nike, but has given us a dramatic reduction from mature 2020 .

So I like the other cloud Titans that as a pause and they come back and is more consistent we fully expect this this particular cloud Titans 'cause with you next year.

Significantly.

Alright, then on the broader question <unk> 400 to Congress in the wrong, but I think you've made this point publicly in the past that with respect to your business is sold year to date assumes switches relieve spine and soft rock. There's a 12.8 turbett upgrade cycle driven by new Broadcom sold can tomahawk and Triton is.

Pulls through November equivalent.

Matt.

400, gigoptix aren't ready.

There is cloud Titans will buy before the before higher capacity switches that you and Cisco and juniper, introducing and they'll just deployed in high density 100 gig configurations, and sort of 400 gig is ready and or is that the right price points that sounds like it sounds like you change your thinking on that.

No there's no change in thinking back on Jericho and talking about pride and will be used with higher capacity in hundred get configuration.

Well, we'll continue to see you know incremental deployments of that no change there.

But well won't be a wholesale they won't be a wholesale change from hundred three to 400 gig and despite the 2021.

Well just your general statement, though.

We can't ask it speaks for customers that would be unfair, but does not it doesn't imply that theres been in maybe this is student me obvious but does not imply that there's been a change in demand on the part of cloud Titans in general to extend that if the demand were there.

Yeah again, instead of <unk> point 400 gigabit would just deploy a lot more 100 gig and the impact to you as they switched vendor would be relatively nominal we won't see you want to we once you.

Clearly appears that there is a <unk> general softness in demand.

On.

No deal.

Yes, we do very well and have good product set up for the Wendy <unk> hundred 2500 gig.

HM.

Uh Huh point has been a cohort and customer Dubai Oh.

Thanks.

The robotics Union for one of the cloud Titans is really coming from them to name this old refreshed.

With delays on Mexico, saying that the otherwise what I've done.

Uh huh.

Oh it gets delayed onto this thought that's interesting because these are going to go hand in hand, you don't that's an excellent can become independent.

Sure.

Thanks.

On the 400 good side.

Hi, Good news.

Because everything there.

And many LP <unk> companies are going about.

It really doesn't work and that's all companies because foreign <expletive> Hobbs.

100 on the other side than on other ones are going up.

And I've got going <unk> motion so good.

Moving.

<unk>.

Thanks, Paul.

Your next question comes from truck haul, what's the more Instinet. Your line is open.

Yes, Thank you I guess I completely understand the.

The downtick in cloud spending over the course next few quarters and because now we will have to start thinking about what your comments mean about when we might come through the other side is on.

It sounded as though.

12, or 18 24 months after a server refresh is over is the typical timeframe.

You know as you pushed it out six months for whatever reason that would strike me as being maybe in the fourth quarter of 2020, but more likely 2021 is what does that mass kind of work out.

Yeah, I guess I think the reason we are saying the cloud Titans forecast to be flat to down it's funny training is because any projections of optimism and Roe.

As early as possible is Q4 2020.

Anything came back to study for anyone.

You get beyond this flat to down forecasts and you're right. So it's over cycles, that's delayed by here I mean I.

So you're from now.

It means any impact to I olysio from though any kind of production deployment is over the years from now.

I think 12 months is a good deal with them.

As a minimum.

Okay. Your next question comes from Sammy Battery with Credit Suisse. Your line is open.

Hi, Thank you.

Just trying to square away some of the commentary here and to give you. Some context before my next question is that some of the third party multi tenant co location providers have reported some of their strongest backlog quarters offer data center capacity commencing in Europe and 2020 now the fair majority of those big bookings are actually being driven by cloud.

So as these called trying to expand internationally.

Different than topology.

Architecture that is taking place because of the way. They are building for the way. They are connecting that means that possibly alternative vendors would be more favorable or is this just.

A completely different you know are we looking at something that's completely uniquely different I've ever seen before.

Oh, sorry, typically the cloud Titans deployed globally as you know we have a lot of international data centers that they had both the though.

And I think back to additional data centers. The only difference is not architecture, but size of the good thing so depending on whether they're going into highly populated densities are smaller they don't they live racing to repeat the same architecture, but the scale and size Newberry, which means they really really wanted to be one uniform architect so ideally.

And one consistent sulfur and one vendor so it isn't very good to see that they would repeat it with a different vendor.

So I don't I don't see any uniqueness and international data centers, except site.

Thank you for that color.

Yes, just sorry, one follow up on the [laughter].

Hi.

Your next question comes from Erik Suppiger with JMP Securities. Your line is open.

Yeah. Thank you for taking my question.

I just want to understand if this issue with the Titans is beyond this one customer as you get into 2020, because it looks like you're reducing the outlook for Q4 by call. It twentyish percent of revenue.

And <unk> and I'm not sure if we should carry that through and it seems like one customer presumably is not 10% why would we be cutting it that much. So is this is this more endemic across the broader tighten a universe or or how should we be thinking about this.

I think what we're saying is our number is a very large with the cloud type thing and we usually do very well with some smaller ones.

Maybe flattish to down with a larger ones depending on this thing and when you cumulatively add all of this it's going to be flat to down in revenue.

I I don't think it means it's not a trend for overall the next three to five years, it's a projection oh, what specifically what happened in 2020, especially because then going to you know military servers never say existing infrastructure keep adding hundred get to that not quite move to 400 gig we see 2020 as it stands.

This India without cloud Titans in terms of high performance as well, so I wouldn't read anything more to the forecast except for two anything that's things could pick up later on.

[laughter] so.

Your next question comes from Tali any with Bank of America Merrill Lynch. Your line is open.

Right.

So.

I want to understand just one thing most of the questions were asked with I want to understand if you look at 2020 and you were moved this one customer because next quarter, you're gonna have a down year revenue down year over year.

And I think you said also pointed 20, so now I'm trying to understand if I remove this one customer that was really bad this quarter and provided this Andre and 20 million hundred $30 million shortfall then what's the underlying growth of everything else is 2020. The story of one best customer who is kind of re.

Thinking strategy or 2020 going to be down even if you remove that particular customer.

Oh noted question I think the way to think of this is they have three types of cloud Titans.

Some large ones that have remained flat.

Some that are going down and some that go up and the aggregate of that is flat to down.

I said, he will add to that or did I get that right.

Right I know I I understand but that's a very general answer I mean at the end of today. There is one be customer who is down hundred 20 million off Sixseventy. That's a giant number so we have to remove that to understand what's happening with the rest of it. So when you do the math is the rest of it still off or it's still gonna be.

Now.

[laughter] remember the rest of it we don't have hundreds of customers yeah, we have a handful.

So the club just trying to fight TV right. It per quarter is still 550, I mean, it's it's still meaningful.

Right.

I think that the stepped back a little bit it's not like we have perfect visibility of what we think it's going to happen.

I think what we're saying is like we have this issue at this particular customer because a large customer has had some significant in.

We have the rest of cloud would have been unpredictable this year that's the reality.

We'll see how it plays out next year, but I'm sure we're not.

We're not aggressively forecasting that right now.

We have service provider, which hasn't been performing well and we just saw especially cloud verticals kind of goes about those go to the bottom.

Offsetting that has been good traction enterprise and financial and they saw the grow well in Q3.

But it's not enough to offset completely which is why we say you know.

Lots of Dallas.

Right.

Oh.

Your next question comes from George Notter with Jefferies. Your line is often [noise].

Hi, guys. Thanks, very much I know that you guys, you're making quite a bit of progress on the routing side I know there were a number of on larger cloud provider customers that were looking at your routing products is that.

An opportunity for you to offset some of the softest you're seeing them. If outside is a incremental success with routing and any insights there would be great and then one other clarification.

If you could just repeat the deferred revenue metrics that you referenced earlier that would be helpful. Thanks.

Yeah, George we are very right, we're doing our strongest use cases routing I would the cloud providers. So despite all the server et cetera. These tend to be obviously.

Stronger and no value and fewer in number, but we're doing very well, but luckily all the cloud providers Titan on writing I've been doing very well in general in routing it's improving for us.

Landscape with tier two cloud providers as well.

In the routing escape specifically, so we do look at that I saw.

An opportunity.

Your next years, though.

And then just sounds affairs.

So the first half.

We had recognized $80 million.

One.

$30 million.

Yes.

In the apart from a revenue perspective.

From a cash perspective.

Because.

Right.

Yes.

Yes.

Thanks, Thank you.

Your next question comes from NDC Santana with Gabelli Your line is open.

Thank you for taking my questions I would like to understand more about the cloud Titans phenomenon of delaying this.

So for us that's it's ever reach that other customers widrick cloud type and or not maybe hasty middleby, perhaps you can share some technical insights when the large customer can extend the use of sort of for a sets and wendy's cannot.

So how do the soon.

One of the slowdown and got smoke did a one off the pictured on the choice so Nick and on the 25 do something your dog.

The main.

And if you look at the industry.

The cloud is obviously not aligned to the exact same so was it to you upgrade cycle that often from each other they are not the Gulf mono line, but though to talk a bit somebody industry.

The political or this is Doug being the only one bite into no told this somebody went on.

When do those people on adding capacity of the need to but this one goes more for them because there wasn't enough or wise.

Upgrade.

We did the way we on boarded from August was and I would not.

Okay. Thanks.

Your next your next question comes from John The Machete with Stifel. Your line is open.

Thanks, very much I just wanted to go back to come and make sure that I heard you write Jayshree went when you were talking about the overall outlook for 20 X to the cloud business. If I go back to that analyst day, a presentation and how you guys talked about sort of cloud it youre, adding a few points.

Growth to take you up into that sort of upper teens range. If we strip that out altogether for next year or even assume it's down a little bit do we still consider the rest of the other business ex that cloud still being in that sort of low double digit to to mid teens range I just wanted to make sure I I I.

Hurt you know <unk> the way that you answered rods question.

Right no.

The question John I think it's just going back to that I understand what he does said.

Oh Arista said, most specifically was it the cloud did really well we'd be into high teen if the cloud bid average we'd be in the mid teen the current projections who've been given to you on the cloud below that average.

We thought was the norm, so with the new norm being flat to down.

Mid teens is off the table right now.

2020.

You know you want to add to that no I think that's right.

Contemplated a world.

That point, where cloud will be flat.

No that's I wasn't.

And then kind of thinking between.

The only schools and faster.

Anybody that.

Yeah.

Our.

Yeah.

Thank you Doug we have time for one more question operator.

Your last question comes from Andrew at home with Wolfe Research. Your line is open.

Hi, Thank you recognizing the revenue pressures in Fourq you in 2020, silver lining potentially could be through growth in other segments, maybe campus starts to ramp over the medium term enterprise showed strength.

Maybe service provider recovers and you would eventually start to have more of a structural business pivot to higher overall gross margin.

Is that something that you, perhaps just go ahead and embrace with more immediacy and invest faster and even more heavily in non cloud maybe the expense of cloud it than you previously would have anticipated.

You're right to point out that our business haven't fundamentally think <unk> fundamentals I've read out gross margins at the 50 to 65 I time is valid.

Yeah, we could grow in other places.

But I don't think we would want to forecast been no beyond the 60 560 to 65.

As I think when the bad because if I if I caught goes down we should be on the higher end of the bad if I could goes up will be at the lower end of the Ben We don't see the bad itself going up more that being said, we're absolutely committed to R&D, we're absolutely committed to targeted hiring and investing we think we can do that like Ito said with a 35 ish percent operating margin.

And so no change in strategy is continuing to invest in R&D and sales and marketing I suppose M&A, but it makes sense.

Well, our other businesses and segment.

Thank you and that's helpful. Thank you.

The Arista Q3 2019 earnings call.

The presentation.

Promotion or fiscal results.

Taxes on Investor section of our website.

Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.

[noise].