Q4 2019 Earnings Call
[noise] welcome to the fourth quarter 2019, Arista networks financial results earnings Conference call. During the call all participants will be no listen only mode. After the presentation. We will conduct a question and answer session and instructions will be provided at that time, if at any time 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 the Investor Relations section up your rest of website. Following this call I will now turn the call over to Mr. Curtis Mckee director of corporate and Investor development, Sir you may begin.
Thank you operator, good afternoon, everyone and thank you for joining up.
With me on today's call or Jayshree will all Arista networks, President and Chief Executive Officer.
Brendan Aristas Chief Financial Officer.
This afternoon Arista networks issued a press release announcing the results for fiscal fourth quarter ending December 31019.
He would like a copy of this 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 first quarter of the 2020 fiscal year [noise].
Longer term financial outlooks.
Industry innovation, our market opportunity the benefits of recent acquisitions and the impact of litigation, which are subject to the risks and uncertainties that we discussed.
In detail in our documents filed with the FCC.
Typically in our most recent form 10-Q influencing okay.
In 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 students after this call.
Also please note that certain financial measures. We use on this call are expressed on a non-GAAP basis, there have been adjusted to exclude certain charges.
It provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release with that I'll turn it over to Jayshree.
Thank you Curtis and welcome to your first Arista earnings call.
Thank you everyone for joining us this afternoon for our fourth quarter 2019 earnings call.
We delivered a non-GAAP revenue of 552.5 million with a non-GAAP earnings per share of $2.29 services contributed approximately 19% of the revenue consistent with it typically higher renewals at the year end.
Our non-GAAP gross margins was 65.2 person influenced by a strong performance of the enterprise vertical and associated software attached products overall, our 2019 gross margin came in at 64.7%.
We registered a record number of million dollar customers in Q4 as a direct result of our enterprise momentum.
By the end of 2019, we have acquired over 6300 customers cumulatively with Microsoft at 23% of total revenue and Facebook at 16.6%.
In Q4, 2019, and actually much Terravia cloud Titans was the largest vertical.
The enterprise segment is now consistently the second largest and strongest segment followed by the financials in third place tier two cloud specialty providers and fourth and service providers insists please.
Service providers and tier two cloud providers have been slow for us.
I'm just as you know.
In terms of geography, 2019 International contribution was 24% with the Americas at 76%.
In terms of new products in 2019, or just as you know delivered a banner year of disruptive products redefining networking with a highly differentiated software stack management I'm flagship lots on.
The 70 to 80, and 7500 series, especially have become the gold standard in hundred Gigabits find networking.
We also introduced substantial 400 gigabit innovations that 10 new platform.
We launched a new portfolio of cognitive campus edge products for wired power over Ethernet switches and wireless including why Fysixteen.
Our inherent software flexibility brings federated management and control planes across multiple merchant silicon data planes and this is one of our key differentiators.
We continued our systematic innovations and cloudy U.S. and cloud vision feature.
In particular, we have doubled our cloud vision customers delivering real time streaming calamity availability scale automation would change control as bad as third party and profitability.
We are pleased with the increased acceptance of total software bookings both in subscription and perpetual licenses now approaching 5% of total revenue annually.
We began Q1 2020 would the close of our third acquisition Big switch networks, NFC and pine, Yeah, founded almost a decade ago.
This is a strategic step for us and bringing a phone combination of engineering expertise deeper entry into the network packet broker market and increase software multi cloud visibility.
As you know we've always been focused on software driven networking as a mission in a vista, but big switchback, expanding that mission to a more deep analytics trends complementing our switch base dance or data analyzed the platform with big switches depot monitoring fabric across public private and hybrid clouds.
Both companies also share a unique visionary status of good data center next looking in the Gartner Magic quadrant.
We welcome the BCN team BFN team into Arista family and really look forward to a strengthened partnership not only with them, but with Dell technologies as buttons that approximately 300 customers, we're getting to know better.
While the big switch acquisition is not material, we do expect us to contribute to our software strength and bookings and our goal is to become accretive in calendar 2021.
As we wrap 2019, I really do believe that Arista isn't that clear forefront of making cloud area networking more and more mainstream.
We see that networking and the future of it is not silos of boxes with multiple operating systems and spaghetti Oasis.
But a new uniforms software driven place in the cloud architecture.
We are proud of how market leadership with a number one spot and hundred gigabit Ethernet switching and ready for 400 gigabit migration ahead of us.
We are experiencing trials that are going well with several customer.
We are poised to achieve our first hundred million target for the first four quarters of campus revenue as well.
I'll go to market strength continues to be an important investment area for us as they have doubled the sales and systems engineering capacity over the past two years.
With the promotion of Krish met to senior Vice President of worldwide sales and Ashwin co lead to senior Vice President of customer engineering reporting to onto a sedona that transition to their new roles has been seamless following the departure of many rivelo to a PE farm in conjunction with his executive advisory role to us.
Both Christian Ashman have long tenure with us and Epitomise the Arista ways.
As I've traveled the world, including hundreds of customers to be touch it is clear to me the winning strategic enterprise franchises across high Tech media banking healthcare insurance and retail sectors to name a few.
Large enterprises are increasingly frustrated and anxiously seeking better quality and architectural leveraged to cloud based principles.
Our program the program ability with software and quality with the lowest critical vulnerabilities and the networking industry is a refreshing and welcome change to them.
Arista is gaining strategic relevance almost doubling a million dollar customers within the past few years I expect this momentum momentum to continue and I happened across all the non cloud verticals with that I'll turn it over to either from all financial specific thanks, Jayshree and good afternoon, this analysis or Q4.
And full year 2019 results and our guidance for Q1 20 based on non-GAAP excludes all non cash 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.
Total revenues in Q4 were 552.5 million down 7% year over year and above the midpoint of our guidance.
540 to 560 million.
Service revenues represented approximately 19% of total revenue up from 15.2% last quarter.
Affecting typical fourth quarter severance renewal seasonality in conjunction with a lower product revenue number.
International revenue for the quarter came in at 137.7 million or 25% of total revenue.
Up from 19% in the third quarter.
Looking to the year International revenues accounted for 24% of total revenue down from 28% from the prior year.
Shift and geographical mix for the year was largely driven by heavier less deployments by our cloud tightened customers.
Overall gross margin in Q4 was 65.2% above the upper end of our guidance range of 63% to 65% and up from 64.4% last quarter.
This reflected a lighter cloud Titans contribution in the period combined with good performance from our enterprise and financials verticals.
Operating expenses for the quarter were 154.3 million or 27.9% of revenue down from last quarter at 163 million.
R&D spending came in at 96.2 million or 17.4% of revenue down from 105.3 million last quarter.
This decline largely reflected lower engineering and prototype costs in the period.
Sales and marketing expense was 46.4 million, our 8.4% of revenue with increased headcount somewhat offset by reductions and other sales costs.
DNA costs were consistent with last quarter had approximately $12 million or 2.1% of revenue.
Our operating income for the quarter was 205.8 million a 37.3% of revenue.
Other income and expense for the quarter was a favorable 11.2 million and our effective tax rate was approximately 15.5%.
This lower tax rate reflected the release of some uncertain tax position related reserves falling final agreement with a relevant tax authorities.
Please note however that we do expect to see some upward pressure on the effective tax rate over time at various tax jurisdictions continue to modify their tax rules.
This resulted in net income for the quarter of 183 point Fourmillion, 33.2% of revenue.
Our diluted share number for the quarter was 80.26 million shares resulting in diluted earnings per share number for the quarter of $2, a 29 cents up 1.8% from the prior year.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately 2.7 billion.
We repurchased $51.5 million common stock during the quarter at a weighted average price of $189 per share.
This brings our total repurchases for the year to 266 million over three quarters.
As a reminder of order board of directors has authorized a three year $1 billion stock repurchase program commencing in Q2 90.
The program allows us to repurchase shares of our common stock Opportunistically and his thunder from operating cash flows.
We generated 327 million of cash from operations in the fourth quarter, reflecting strong net income performance and a decrease in working capital requirements of approximately 115.4 million.
Dsos came in at 65 days up from 63 days in Q3, reflecting the timing of billings in the period.
Inventory turns were 2.9 times down from 3.1 class quarter inventory increased to 244 million in the quarter up from 240 million in the prior period.
Our total deferred revenue balance with 575 million up from 529 million in Q3.
As a reminder, our deferred revenue balances now almost exclusively services related with any significant product deferred revenue amounts having been recognized for the income statement in the first half of the year.
As Jerry mentioned, we had to greater than 10% customers at the year, Microsoft to 23% and Facebook is 16.6%.
If you exclude the recognition of product deferred revenue referenced above Facebook would have represented approximately 12% of revenue for the year.
Accounts payable days were 44 days up from 31 days in Q3, exactly the timing of inventory receipts and payments.
Capital expenditures for the quarter or 2.4 million.
Now turning to our outlook for the first quarter and beyond.
While we're not in a position at this point to provide full year guidance. We wanted to reiterate the various puts and takes discussed on our last call.
2019 has been a challenging year for cloud business with significant volatility and an overall muted demand picture.
As we look forward to 2020, we believe this right. This trend continues with demand from this part of the business being flat to down on a year over year basis.
This trend combined with tough year over year revenue comparisons due to the recognition of a 118 million of product deferred revenue in the first half of 2019 will likely result in a meaningful decline in cloud revenue for 2020.
Enterprise and financials are expected to grow healthily, but are not yet large enough to fully offset the expected revenue declined from cloud.
Service provider and specialty cloud will likely remain sluggish for the year.
On the gross margin front, we would reiterate our overall gross margin outlook of 60, 365% the customer mix being the key driver.
Focusing specifically on Q1, we expect to trend lower in this range given a lighter revenue number on a typical first quarter waiting towards cloud.
We'll continue to manage investments in the business carefully targeted growth in sales and R&D headcount balancing the need to expand our market coverage with prudent financial management.
We announced the acquisition of Big switch network barrier. Today. This represents an immaterial transaction, who brings us some additional software capabilities and a strong engineering talent pool.
From a financial perspective. This is a software subscription business with upfront license revenue recognition and a fair amount of services deferred revenue.
We are beginning the business and accounting integration now and the acquisition will be recorded in our financials for the first quarter.
We have included a small revenue contribution from two months of expenses for big switch and our guidance for the first quarter.
We will provide additional clarity on the go forward income statement impacts once we've completed the purchase accounting analysis.
Finally, our guidance for Q1 does not reflect any impact from the ongoing Kona virus outbreak in China.
While we do not have a significant direct manufacturing footprint in China. There may be some indirect supply chain impacts will look to monitor and attempt to mitigate these as the situation unfolds.
With all of this as a backdrop our guidance for the first quarter for today for non-GAAP results and excludes any noncash stock based compensation impacts and other nonrecurring items is as follows revenues of approximately 522 to 532 million gross margin of approximately 63% operating margins of approximately 34.
With that.
Fact of tax rates to be is expected to be approximately 21% diluted shares for approximately 80.5 million shares I will now turn the call back to Curtis Curtis. Thank you Peter we're now I'm going to so to the Q and a portion of the Arista earnings call due to turn from three large reports that everyone. Please limit themselves to a single question. Thank you for.
Your understanding.
We will now begin the call any portion of the Arista 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 key we ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from appear Barracuda.
New Street Research your line is open.
Hi, Thanks Thats all thank you my question.
I was wondering on the like Jay you saw you flagged tied to new clients.
Sure, we understand like flat to slightly down.
You on year, which means that we how you'd be tissue recovery during the year.
Good.
You're probably thinking that interest to each other construction from trusting that Mitch with which we search firm.
On the compute side.
No you side, we've said Mitch.
Got it all members and assume parcels last year.
And Mitch liquidity is going to answer the first time. So this year. So you didn't seem to be on assumed it off cycle thing seems to be coming back slower for your guys and show you where you could help us understand you actually be great.
Yeah shop here I will take part of the question and onshore can elaborate.
The club Capex spending has never correlated one to one with Arista netbook.
Numbers and the reason as many because as you know it's a very small part of their total capex, it's almost negligible the network piece and often they make the compute and storage decisions first and the network comes later, so there's a lag.
So you know our visibility right now as of often told you is one to two quarters and we can't say much about the whole year, let alone.
Q2, or second half so while we are making predictions based on our 2019, both be absorption of deferred revenue and this and the current understanding of their plans things might change, we're reflecting what we know best as of now, especially when you look at our year over year comps for 28.
In a 19.
Actual says I did good enough for you to has nothing more to add right [laughter]. Thanks tissue.
Your next year. Your next question comes from meta Marshall with Morgan Stanley. Your line is open.
Great. Thanks, I just wanted to know if you could kind of give a little bit of an update on campus business traction and just whether you had seen any kind of pause in purchasing activity due to macro thanks.
Well, Thank you Matt and thank you I think is the first call for you with the risks so welcome.
So you know as you know our campus businesses and it's very early stages. We only started shipping in Q3 2019, we've had two full quarters now of campus.
And I'm very encouraged by the enthusiastic response from both our existing customers as well as new customer acquisition as I look at our million dollar customers that I was talking about and the record number we have achieved many of them have also been campus and so we I see that.
At least from our little Oasis All island, we're not really a macro bellwether, where more of a technology bellwether and the technology and bolt on ARPU and Wi Fi has been very well accepted along with us lines and cloud vision and Q4 was a very good indication of that.
Great. Thank.
Your next question comes from Eric Percher with JMP Securities. Your line is open.
Yes, thanks for taking my question.
One.
The priorities in terms of integration with Big switch Wonder what are you going to be doing which products are going to be focusing on.
Secondly is there anything that we should be concerned about was trying to did you see any evidence.
Impact from the virus issues going on there.
So I'll take the first question International maybe you where the off COO title, you know model by what's going on there.
So on the what's the priorities for the big switch well as I said first of all we were incredibly impressed by the engineering team. So we have a selected the best of the best and they're very much part of the acquisition has closed and I want to give a big shout out to Mark taxi Anita for their hard work that went into that it's a 10 year old company, there's a lot of detail.
So a D at the end of the close of the acquisition, we have absorbed approximately 75 employees.
Mitch a large percentage of them in engineering and there are two product lines that big switch carries the BMS, which is the monitoring product, which is just as I explained is a perfect complement to dans dances aristas inline integrated switching product and BMS is just icing on the cake it has deep UV.
His ability service knows it acorda notes and monitoring fabric et cetera.
And then Bcf switches meant for more of a converged fabric.
And and Ah, we fully expect that to be a very important piece, especially with a converged infrastructure partners like Dell technologies.
So both products will be fully supported and carried through but with different channels.
Your question on China on supply chain with this but to put on the water.
As you dimension, we don't do any direct manufacturing in China. So it's really comes down to begin to give thanks long haul on Fox Rose suppliers will this helps us lots in the raw materials coming from China.
So far we haven't seen any big impact.
This is just being a few weeks off towards the.
Really a few days after the end of the tender.
And our manufacturer this thing.
Okay for the short term however, if the situation continues for a long period and those little supply available of raw material.
Over an extended time than a ton of impact in the future. So it's too early to see and things like no.
And we expect more on so from the Chinese suppliers to the factories.
Through the rest of the month and even in March.
So again too early but for now.
Thank you aren't you.
Next question comes from Rod Hall with Goldman Sachs. Your line is open.
Hi, guys. Thanks for the question and growth I wanted to I.
I guess I wanted to or goals and guys is probably the right water for that actually I wanted to ask that you will recall.
Question.
So you had commented that cloud you expect a meaningful decline and I don't know if.
If you could give us any more feeling for what you mean by that we were thinking kind of low double digits sort of decline this year, but I don't know is that sounds like more than that and then the other on the positive side of this equation does service provider commentary you said sluggish we were thinking that'd be declining this year, but it almost just want to clarify.
You think that that are you expecting a little bit of growth. There are stabilization there kind of flattish revenue there.
And then a bigger picture question Jay Sri is.
Have you guys consider disclosing these verticals there are some subset of them what is that something we could maybe look forward to at some point in the future at least on an annual basis. So we can.
All track kind of what's happening under the covers in the verticals.
Okay rock I'll try and answer all as many of your questions. The last one first.
So the answer is we tried to do our best buy ranking ranking them.
And I guess, you're looking for more granularity, so but definitely taken under advisement like we do anything you suggest and maybe that's a data point for analyst day.
Going back to your cloud decline and service provider flat to down I think definitely means flat to double digit down we don't exactly know how much now because we're in the first quarter I think onshore in the team will get much more visibility in maybe analyst day or second half because that's when we really get a good sense, but Q1 is such a season.
The quarter, we don't have enough data, it's more an extension of Q4.
So ask US. This question again in May or June and I think we'd have a lot more to say service providers.
I think of when when a eat actually explain the definition of sluggish to me to.
It's not that bad and I think the worst with last year. So it's bottomed out and it can only get slightly better. It is our feeling but we're not be like holding our breath or anything, but we believe it can get worse.
The sluggish you would it be some range around zero jayshree not.
Well I feel minus yeah negative no not minus not minus not declining further out I think zero, our hope right I mean, it did decline a fair amount in 2019, and we'd like to think that.
Yes, it starts cover a little bit from there, but sluggish kind of imply slowly [laughter].
Okay, that's better than I thought so I appreciate that okay. Thank you.
Your next question comes from John Machete with Stifel. Your line is open.
Thanks, very much Christie Ju sure just as we're getting closer to this.
Reaching the end of this sort of first hundred million on the campus side and you've added a couple of pieces. There just curious as we look out. The next couple of years, how maybe we should think about that business trending up towards a little bit more of a meaningful contribution to the overall growth rate and then either just real quick on the tax rate I just wanted to make sure that I heard it.
Correctly that at least starting in 2000, we should expect this lower rate to continue and that it may tick back up over time, but that were at least expecting that that lower tax rate to continue over the near term. Thanks.
Yeah, Let me take the tax on first maybe for the Q4 tax rate at the 15% I mean, that's a once off right. If it's a some very specific reserves that were released in the period.
As we go forward, we've been thinking about the structural tax rate somewhere around 21%, that's what we guided for Q1.
There's probably more upward pressure than downward pressure on that overtime.
So I think 20 121 of the habits in that range somewhere, but I think for now you're in the 21% range for Q1, and then maybe you see a couple of basis tens of basis points kind of increase overtime, but it's a.
It'll take time that was more a kind of a longer term structure a rate statement at the 21% plus or minus hasn't really changed in the current timeframe.
Okay and John to take your question on the campus.
We think you know.
Being a new kid in the block a when that's been a fairly mature market and a 10 billion.
All the time, largely largely Cisco and maybe HP Aruba.
Just for us to enter in and be taken seriously is the first order of business and I have to see of the enthusiasm for Vista. The software. The cognitive Cloudvision has been very well received so I think delivering the first four quarters of 100 million will really establish a baseline for more growth as I said.
The last analyst meeting I'd be very disappointed if we didn't have that more growth translated into.
Doubling and doubling again, so I'm I'm I'm my team would be looking to take that hundred million to 200 million and then to 400 million and then some.
But more on analyst day, maybe on exactly how we do that in the details.
[music].
And colors as a reminder, please keep one question per call.
Thank you very much.
Yes.
Your next question comes from Jason Adder with William Blair. Your line is open.
Thank you.
Just for you guys have prided yourself from day, one on a single or less.
Now with big switch, you're going to how the second unless I'm just wondering how we should be thinking about future of fixed switches or less.
Yeah, I know that's a really good question, yeah, we've actually done three acquisitions and had to deal with though S twice before so do and before I ask you a big switch question, let's take the other two minute Mako very F.F.C.G. centric. It was really for the high frequency trading market low latency you know the O.S. did not play a big role and when it does it will be U.S.
Right.
Mojo really a radio management why Fivea immediately integrated into cloud vision and the again the o. less was less important than the cloudvision integration to bring wired and wireless together fix which we fully expect that same cloudvision integration with dance and.
Diego BMS the monitoring fabric.
So the west will be somewhat transparent and unification of inline dance and monitoring fabric will be much more important the big cost fabric is is the unique product and we believe them go to market channel. There is not necessarily a typical arista customer who is looking for U.S. and cloud vision, but a technology partner.
Like Dell technologies on new tactics that wants to integrate this with their servers and storage. So very much like Sonic RF boss is this is a converged infrastructure solution.
So as you're right to think about.
That serving a part of a market that you probably never would have served and therefore, you can reconcile it with the overall strategy.
That's correct.
Again, it's early days and we're still learning.
And you know, both Doug Murray and Kyle the co founder of teaching us as we speak.
But if we look at their over 300 customers the overlap with our customers there's only one third.
So 60%, 65% of the customers are new to us.
Great.
Thank you Jason.
Your next question comes from Brian units Deutsche Bank. Your line is open.
Hi, Thanks for taking the question.
I wanted to ask about 400 400 gig opportunity can you talk about <unk>.
Expected market share for 400 gig, maybe just at a high level, especially versus your peers I think it's fair to say that you are dominant and 100 gig hyperscale cloud, but is the expectation to to win the majority of 400 gig deals or are you taking a more conservative you work.
Your peers might see sizable wins as well thank you.
You know I think appears should have seen sizable wins 100 gig too I don't know why the Miss the boat, but it's very unnatural for incumbent to lose a speed transition. So the fact that Arista became number one is just never been done in the networking industry before.
Now what they see that 400 gig overall timeline is we have been consistent on that we are seeing early trials, we expect mainstream devote deployments this year, particularly in the second half and obviously the cloud will play a big role, but it will also be some of the high end enterprises and service providers as well and so given the trials were seeing a.
We don't expect materials revenue of 400 gig until the second half of the CEO and really 2021 and the other thing I'd point out is nobody just below 400 gig in isolation. It always happens in conjunction and there will always mixing and matching hundred gig and a 400 gig so I actually want to add to that.
Yes, we do comments.
Brian I know everyone focused on 400 gig I do want to remind you and everyone is 100 gig is actually growing and 2020.
No not please just shit than many of the accretion coming soon as well, whether it's by 50 going to four by 100 8500 as well.
I will just fingers on listen, but our customers are planning or working with us on multiple so you just three years in recent years roadmap.
Lastly.
There is some dependency on the DCR backbone networks on reliability of the our optics of skin and that's still expected to be picking up maybe even end of the year.
Hence any material deployments and bucks piece will be in 2021.
I'm not sure just to reiterate your point the Tam for 100 gig is four and a half billion.
No. The time for 400 gig will even hit a few hundred million. This here or there is another time, yeah pilot is not a time, it's a pilot okay. Good one liner.
Thanks, Brett.
Your next question comes from Eatec headroom with Oppenheimer. Your line is open.
Hi, guys.
Yes, hi, ladies.
Two questions for me I know Curtis tries to limit it to one well try to stick one and.
Yes.
Yes regarding the acquisition of Big switch I do want to understand their relationship with deal and also if theres a revenue concentration for big switchers from remember correctly, Microsoft is a bit customer potentially if we could discuss that and then on Dell. They also have other companies their work refer in this space cumulative from remember correctly.
Help me understand how do you think the nature of that relationship is going to look like going forward.
Oh, that's a good question first of all we didn't see any significant revenue concentration and certainly not Microsoft that could have been a path statistic, but not true now so there's a there's obviously some big customers and they have some top 10, but not specifically one that is a 10% or concentration.
So coming back to your question on how do we see this we do see the partnership Adele getting stronger.
How big such was selling was really software only disaggregated.
From hardware and a lot of the hardware was down switches, we continue to plan to offer that model and strengthen our partnership with Dell and make that stronger. So we're not changing the sales motion and it complements what Arista is doing in the you know in the high end enterprise and cloud Titans very very well so no change.
Very good too.
Thank you either.
Your next question comes from emit dairy any with Evercore. Your line is open.
Hi, this is urban dialing in for <unk>.
I also had a question about your campus switching business continues to do very well for you, but can you perhaps help us understand what's the margin profile for this business looks like versus your broader portfolio.
Oh, Okay, I would generally say the margin is about the same but if you see versus our route of portfolio as opposed to whats itself.
No not indicated broader okay yeah.
At the same Oh, no more pricing pressure and the campus always because it if the market is defined that way, but the margins on significantly different.
Got it thank you.
Thanks, Jeremy.
Next question comes from Ben Bollin with Cleveland Research Your line is open.
[music].
Good afternoon. Thank you for taking the question I wanted to go back to 400 gig I was hoping you could talk a little bit about.
How you think that builds for 400 gig.
Differ from what you saw in 100, and specifically I'm interested in any thoughts you have on how your partners approach.
Their own office development efforts any switch standardization efforts I, just any high level thoughts there and then how you think the margin opportunity for 400, how does that compare to what you saw with 100.
Sure.
Ben and don't stop the 400 gig architecture, and how our largest customers are leading the way there.
The other architectural needs to contemplate so low, let's say 100 to being able to go through the net book do you have to upgraded into and you cannot just upgrading silos and be done with it.
For large scale architectures upgrading the backbone and the DCR networks is almost have to necessary step one before you can do for under did indeed quarterly plan design.
The depend on the auto the optics and so on it but that's where the testing is going on already and the lab trials that are in more than today.
Yeah, Hi, which have lower cluster.
Hold on to date has already starting to see a little bit of deployment, but these are still most Q.
Simply are pretty two by 400 to type of design.
Mini leaf spine.
On the real working with our customers railroad with core development.
It would be just the AWS dot problem I think we've already.
Our best customers and partners doesn't go development with the Nick can be Expedia and the GPU and so on that is also happening already.
Great.
Your next question comes from Sammy Battery with Credit Suisse. Your line is open.
Hi, Thank you.
Had a question for you regarding fixed switch and just the operating margin drag that fixed with the big switch acquisition is going to create in 2020, and maybe I was hoping for some specifics on 2021 accretion that you mentioned is this a one Q2 Q 2021 accretion or is this a back half 2021 accretion that you are anticipating.
I'll answer the second question and then eat out if you could I wouldn't call it too much of a drag but maybe.
But in terms of when it will be accretive a you know the first of the forecast we have challenged the team with is to be accretive by the end of 2021, obviously I'd like to see it sooner.
Yeah, I think once we get out of Q on Q1 was always going to be a quarter that was you know tight pharma operating margin perspective, just because the where the revenue came in at and the mix of business that we have cloud being heavier.
You are seeing a lower kind of you know operating margin in Q I think once once we get out of Q1, you know we've talked in the last call about a 35% operating margin.
Being kind of the target and I think we can absorb pick switch within that right as we move through the year and then well have more to say a kind on the top line on the next call once we sort out some of the purchase accounting and other stuff that we need to work through.
Got it just actually a clarification as the 100 million dollar run rate for campus.
Does that include any big switch contribution or is that just.
The stuff X X, which.
No VIX, which was not there in December 2019 rights as I was talking about.
Q3 in Q4, we're well on our way to 100 million and I just want to clarify its non run rate its revenue.
So real revenue.
Your next question comes from a Tejas Venkatesh from yes. Your line is open.
Thank you it looks like Microsoft was only down 5% in 2019, a bit better than what you were expecting.
Given that in the past you've provided early color on work Microsoft could be as a percentage of revenue I was hoping joshi. It could do that for 2020, [laughter] then that [laughter] secondly, JJ secure I do we have four lifestride nice try stages, but I'd be a flow to do that right now or wouldn't get say after the surprises we had last yeah.
[laughter] confusing you.
Well, that's why it better.
But but the second thing I wanted to ask back was is do you have to cloud now less than 10% of revenue in is the visibly piece sort of improving given it was such a such a drag in 2019. Thank you. So that's a good question Dave doesn't none of our five verticals that are report how are less than 10% revenue.
Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Thanks for taking question I kind of want to build on that last question is as you look forward I think I think last quarter you alluded to that one of your large cloud type customers were actually just flat out pausing a with regard to their spending dynamic as it relates to maybe a server.
Cycle.
Variable kind of consideration as you as you think about your outlook today, how would you characterize if whether or not that's changed at all how it has a slow down to become more pervasive.
Cross your cloud tightened customers just on any kind of update on how you kind of roll up that cloud Titans forecast this year relative to what you thought coming out of last quarter.
Yeah. That's a good question Aaron So first of all just to.
Reiterate oldest surprises we received from that specific cloud Titans remain and are being factored into the 2020 forecasts I'm. So those numbers will be lower this year and right.
So the other cloud Titans each one is unique so it's not necessarily feeding into the others. So that is specific to that one and each one has their architecture that timeline stand migrations to their specific capex plans. So I wouldn't rule one into the other.
Okay. Thank you think.
Your next question comes from Paul Silverstein with Cowen Your line is open.
Right sure gross similar question, but from a different angle with respect to cloud so.
Over quarters goes spoke about dramatic pause.
Thank you also mentioned stacks that it wasn't just a question when they would return to what magnitude when they do.
So the question I now have for you is assumed by definition your visibility for Microsoft answers looks not what it was at its peak for from it but what visibility how would you characterize at this point today well can you downstream.
Just the next quarter, but further out so you have any visibility.
So what those customers will look like you're from now in adults when you've got a quarterly group, but obviously speaking.
Annual standpoint, what the contributions.
Hi, Paul So if you go back consistently to our last three years I think we've always said, we we don't have more than a one to two quarter visibility on any of our cloud Titans and that hasn't changed so I wouldn't be able to give you annual visibility or what the spend this year versus next year would be I do think.
Get greater visibility in the second half of this year on holiday next year will look like but in terms of broad trends, but does that answer hasn't changed despite the pause and puts and takes.
All right if I can I do not reliant on visibility into their surprises.
[laughter] sure enough good process.
Just for you could work consumed a million plus do you said, it's almost doubled over the past three years can you tell us how many million dollars deals and enterprise.
Hundreds.
Many hundreds.
Well not many hundreds.
You'd be well beyond your home.
I'm talking about campus.
Are you talking about campus Oh, I see I don't have that answer, but I was talking about overall enterprise including campus.
Okay.
Yes.
[noise] hearing.
Your next question comes from Jeff well with Nomura Instinet. Your line is open.
Yes, thanks, very much we have been hearing from some of the.
Larger Oems the server chipset availability is a little tighter than they might have hoped.
No I wouldn't have necessarily films that there'd be an implication for arista a year ago, but but given to the tenor of the conversation we had last quarter I'm wondering if that is something that we should be monitoring just in case. Some of your other web scale customers can't get all the service they want or some of the tier two players can't get to serve as they want.
And that May.
Impinge upon your and your switch sales to them.
No.
It doesn't really impact us as much on our short term liberation over there.
Especially the cloud companies the decouple supply chain planning for these issues and had one or two month of Gaaps anyway, if it's a fluctuation on one or two months it doesn't really impact us.
Okay. Thanks onshore and then as a clarification I think in the past you've talked about.
The likelihood of coming back to year over year revenue growth in the fourth quarter of 2020 is that still.
Reasonable place for us to to stick a yard mark.
Yeah, Jeff that's I hope.
Okay, We hope that you right.
Thank you.
Your next question comes from Alex Kurtz with Keybanc capital markets. Your line is open.
Thanks, I just wanted to clarify the comment about the sluggishness for cloud cloud service provider and service provider that sluggish comment jayshree needed that was for both big verticals, Yes, I can best combined okay.
Okay. Thank you Jayshree last quarter.
You outlined changes in how you thought that the cloud service provider segment was.
Considering on Prem versus.
On Prem infrastructure spend than maybe some of the moving back to cloud can you just give us an update on how you see that vertical I know you you outlined it here in the growth projection, but does it does it change from prior view. So I was just wondering if there's any that's correct update on that segment specifically.
Nothing's changed significantly although some of the tier two cloud providers have resumed some small spends and some of them I still evaluating so.
Alright, Okay, so no longer.
You don't see it as a near term.
Secular opportunity right now from from what you can see.
No not into first half no I think there's lots of not a drag how many lot of drag, but not a amazing upside either right.
All right. Thanks, Your and your next question comes from Tal Liani with Bank of America. Your line is open.
Hi, guys as two questions first.
If I remove Facebook, which I had sorry.
Amazon, sorry, Microsoft, which I have perfect and I'm confused.
And then general ledger them get together the right then say, yes, so if I remove Microsoft which I have perfect numbers for both years and then I assume.
Facebook at 9% last year, because that's the highest number below 10%.
This is what it this year the growth is only 6%.
I assume for Facebook, 5%, which again it wasn't a 10% customers. So it has to be below that so if I assume any anything below the gross is even lower than 6%. So the question is why aren't you growing faster with everyone else forget Facebook and Microsoft why don't we see foster growth like we used to do because because.
We've always always been doing this exercise without Microsoft and the growth was always very strong.
And the second question not related but otherwise Harlan.
No. We don't processing. Your first question might be because there's still trying to understand how you computed. This did you compute deferred revenue in your question.
No I didn't know part of I, just part of Okay issue right. Yeah part, Okay issue going from 2019 to 2020 is that you have this deferred revenue 118 million, which is like 5% of revenue effectively right close right that you have to backfill effectively in 20 rights that kind of that the drag on the on the growth rate before you start.
I see after you adjust for that but even with that what we think is that that cloud vertical will be will be kind of flat to down from a demand perspective right yeah.
Deferred one of the ways, the deferred related to Microsoft or Facebook or the deferred related to everyone else. If you traced back in time. It was the non Microsoft and obviously, it's a large number side I think he can fit you can figure out that it is a it's a facebook impact side and we talked about that as a.
16 for 16.6 present with the deferred probably 12% high revenue without the deferred right.
Okay.
Your next question comes from Simon Leopold.
Right.
We're not signed are fine I had.
It probably wouldn't 12 of them well come back to you. If we have time yeah. Okay.
Your next question.
Your next question comes from a Simon Leopold with Raymond James Your line is open.
Great. Thank you God I got confused not only from Tom's question there.
Anyway.
Wanted to ask you about the commentary several of the the Hyperscale providers made about extending the useful east useful lives of their servers wondering how how that translates into your business for intra data center.
Switching and if this was an aspect that you were aware of when you had provided your forecast last quarter or whether the commentary we heard during this earnings season was also due to you. Thank you.
No Simons when we bid on his call last quarter, we very much stated what we've seen from at least one of the cloud Titans, where they were delaying the repurchase and all you've seen a market that some of the other it sounds like some other than just as well.
But they're not seeing this for the other Arista customers also fall even in the cloud space, but what else is limited to one customer.
We don't deal, but the other lots knock on the other thing to as much so they're not as exposed there, but it's not a market whites and it's very specific to that architecture. The mix and recent there on the sort of pipe of outflows to looking forward to decide whats the views in relation to select.
And is there a way or some math to figure out how to translate if say they extend the life by one year. So instead of three year replacement. They got a four year is there some arithmetic or rule of thumb to help us think about how to quantified the impact for you.
We don't have it I'm quite so someone on this call has models around that.
But no that's not something we try to focus.
Mostly a delay of a year in the spend.
Alright, Thanks for taking my question.
Thank you Jeremy Your next question comes from Jim Suva with Citi Investment Research. Your line is often.
Thanks to everyone I sincerely just had one question because I'm just a very simple guy.
Mark is others, but whether it be jayshree are either Curtis.
A quarter to go you talked about.
Slide cloud Titans, skipping, a refresh cycle or you'd long, beating their purchasing.
Some of the commentary after that was well maybe they are using white box or maybe they found a better compute standard or wait if it more true.
Compression or duplexing or some other standard now that we've had several months behind us can you give us any visibility of do you feel more confident that it truly is used to delay are they looking at other solutions or just kind of revisit that topic. Thank you.
Yes, so Jim I.
I think all of that theories of those answers are not true I think the customer has been pretty straightforward with us.
But they have always been using arista as well as some internal developing and we've been working with them on the internal development. So we may feel very comfortable that their forecast just changed.
And they continue to be an important partner with us.
Okay. Thank you so much appreciated.
Thank you Jeff. Your next question comes from Samik Chatterjee with Jpmorgan. Your line is open.
Oh, Hi, Peter Thanks for taking my question I, just wanted to kind of.
Given kind of your commentary on the school spending you're seeing from your customers.
You will just be hobble Q1 seasonality, that's a weaker than what you've seen historically as we look for the rest of the Youre Oh is it kind of fit with you and given the visibility you have right now that the seasonality.
Through the remainder of the yield will be weaker than what we saw in.
Normally goes liquidity 18 for example, and you see kind of comfortable reiterating the full Giotti fighting guide that you gave last language has put a modest decline in revenues.
Okay. So I I somebody down little confused by a question Oh, we did not give you talked about cloud customers our customers at large.
Uh huh.
Okay cloud customers, okay, Okay that makes it.
Yes. So look we we feel the same way as we did last time, which is we had a lot of a week this into spending and it's reflected in our Q1 I think we will know better about the rest of the our when we get to the second half more but as it stands nothing's changed.
The the Capex that they will spend arista fields in a very strong position to compete differentiate and get the business. So we're not losing market share we're winning the sockets, but the the rate to spend an adoption. We do believe will be a flat to down you know this yeah.
Okay. Thanks.
Your next question comes from James finished with Piper Sandler Your line is open.
Hey, it came Uh huh.
Happy.
Okay, Oh [laughter]. It Didnt go guys go over the money area.
Summers over the course of the year.
Backup neighborhood at all and I, just want to be clear cloud Titans going be flat.
Flat to down double digits on top of the 189 deferred headwind or is the flat to down double digits.
We said Oh go ahead.
Right. So the the meaningful revenue decline on the double digit are all referencing revenue, but so saying basically the revenue numbers.
It will decline meaningfully right that includes onto an 18 million right. When we talked about demand and we said no that we expected to be flat to down that's not referencing that double digit number right.
That's it all commentary that obviously will play out as we see where it goes but it's a it's not trying to say that it's a double digit number.
A and then to answer your question on Q4 linearity I'm just looking at the chart my fosters, giving me, it's pretty linear across the three months, we had a record million dollars. This customers in Q4.
And good spend across our top 50 customers, so nothing unusual except more campus.
Thank you.
Your next question comes from Tim Long with Barclays. Your line is open.
Hi, Dan.
They might you there.
Tim.
Let's go to the next one a sim call back.
Your next question comes from Ryan Krueger with Rosenblatt Securities. Your line is open.
Hi, Thanks, a question I was perfect could speak to your outlook for international obviously Hyperscale has been a big piece of that ship into their interaction destinations, but you can speak to kinda is there any updates and strategy or channel development, there that's going to supercharge at business for thanks.
And that actual and the team have invested pretty significantly in international especially of course, the developed countries in Europe and Asia Pac we had a strong corridor.
And we're starting to see some important customer wins in the enterprise and even some small service providers.
We.
Obviously I'm much more channel led in and international that's always been the case. So that's been a strong area of experience for us and I actually want to add to that I think thats no longer a area of growth. So I was really both in our heads on growth. We obviously have.
I don't have had other two international and on the tunnel side Dishonor development plan, we have.
As a this is something on for your sort of some good one fall in yet on the back of the different ecosystem different sort of hard on the upcoming along reasonably low.
Yes, I mentioned the last locations some mostly by channel, but no good working with them to make it sounds a little growth.
So moves out and so on the list of the organic international business is doing well.
And one other just one quick add to our financial said generally our customer logos, a higher internationally than in the U.S. lower purchase Oh sale.
But out of the 6300 cumulative customers have come Internet.
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Yes. Thank you for next question comes from Ken Wong with Barclays. Your line is open.
Okay, sorry, sorry about that.
Yeah, just want to date, that's hi, how are you doing I just wanted to ask kind of two related questions first.
Could you talk a little bit there's been a lot of chatter about silicon diversification in switching area. So can you give us your views obviously with the big customer.
Beginning announcement and starting to talk about some some traction there. So what do you think the impact is there and related what do you. What are you seeing or just overall on white box. These days, you're seeing any any change to he is using it or how they're using it. Thank you.
Oh, Okay love.
As you know a rest has always been a victim opponent of merchant silicon.
And you know a six notwithstanding this new announcement have been around 30 years, it's not it's except by themselves are not new.
We do see three dimensions first of all as from a best of breed Silicon standpoint, we couldn't be more pleased with our silicon we receive from Broadcom. Both on the tried and Tomahawk side and Jericho, we have very high confidence. It's a case, where you can't just the one point product you have to have a full roadmap and we've always been ahead of vendor specific cases.
And we believe that will continue.
In terms of software you know silicon by itself is not so interesting. If you can build the system. So obviously U.S. We feel is the most competitive software differentiated across any merchant silicon devices I think it be supported it over 18 or fam silicon families maybe more than that.
And so in general we feel like that leaves only one other thing, which osisko selling chips and obviously, that's not our business, they're gonna be competing with Intel and brought come on that one.
[noise]. Your last question comes from Tony any well with Bank of America. Your line is open.
[noise] tells me that sorry.
Uh Huh [laughter] Vida vital way I, just want to common something we'll take it offline, but we should then to remove the deferred than I can explain later why the number is the number you remove both sides, but in any case I wanted to ask about the gross margin wise a declining sequentially next quarter I don't think anyone asked this question.
No. They didnt large customer our customer mix right. We were heavy a enterprise and financials in Q4 and will be were heavier cloud mix. In Q1 do you want to always has a heavier cloud next because enterprise just takes time to to ramp in the first quarter.
Got it thank you great alright, okay.
Okay well. This concludes the Arista Q4 2019 earnings call. Thank you for joining US today. Please note that moving forward our earnings calls, we'll move to Tuesdays starting with the Q1 2020 call, which will take place on Tuesday may fit lastly, we have posted a presentation, which provides additional information on our fiscal results, which.
You can access on our Investor section of our website.
Thank you for joining ladies and gentlemen. This concludes today's calls you may now disconnect.
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