Q3 2023 Arista Networks Inc Earnings Call
Speaker 1: transcript
Speaker 1: Please wait, the conference will begin shortly.
Please wait the conference will begin shortly.
Yes.
Speaker 2: transcript
Speaker 2: Welcome to the third quarter, 2023, a RISTA Network's financial results earnings conference call.
Welcome to the third quarter 2023, Arista networks financial results earnings Conference call.
Speaker 2: transcript
Speaker 2: During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. All participants will be provided...
During the call all participants will be in a listen only mode.
After the presentation, we will conduct a question and answer session.
Instructions will be provided at that time.
Speaker 2: transcript
Speaker 2: If at any time during the conference you need to reach an operator, please press the star followed by zero. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the ARISTA website following this call. Ms. Liz Stein, ARISTA's Director of Investor Relations, you may begin.
If at any time during the conference you need to reach an operator. Please press the star followed by zero.
As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website. Following this call Mr. Stein, our risks as director of Investor Relations you may begin.
Thank you operator, good afternoon, everyone and thank you for joining us.
Speaker 3: transcript
Speaker 3: Thank you, operator. Good afternoon, everyone, and thank you for joining us.
Speaker 3: transcript
Speaker 3: With me on today's call, our J. Shrew Lul, a RISC-the-networks president and chief executive officer, and Eda Brennan, a RISC-the-chef financial officer.
With me on todays call are Jay for you long Arista Networks', President and Chief Executive Officer, and either Brennan, it's cheap.
<unk> financial officer.
This afternoon Arista networks issued a press release announcing the results for its fiscal third quarter ending September 30th 2023.
Speaker 3: transcript
Speaker 3: This afternoon, Arista Networks issued a press release announcing the results for its fiscal third quarter, ending September 30, 2023.
Speaker 3: transcript
Speaker 3: If you would like a copy of the release, you can access it online at our website.
If you would like a copy of the release you can access it online at our 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 2023 fiscal year.
Speaker 3: transcript
Speaker 3: During the course of this conference, Paul, a RISCEN Networks Management will make forward looking statement, including those relating to our financial outlook for the fourth quarter of the 2023 fiscal year, longer term financial outlook for 2024 and beyond.
Longer term financial outlook for 2024 and beyond.
Speaker 3: transcript
Speaker 3: Our total addressable market and strategy for addressing these market opportunities, including AI, customer demand trends, supply chain constraints, component cost, manufacturing output, inventory management and inflationary pressures on our business, lead time, product innovation, working capital optimization and the benefits of acquisition, which are subject to the risk and uncertainties that we discuss in detail in our documents filed with the SEC.
Our total addressable market and strategy for addressing these market opportunities, including AI customer demand trends supply chain constraint component car manufacturing output inventory management and inflationary pressures on our business.
Lead time product innovation, working capital optimization, and the benefits of acquisition, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC.
Speaker 3: transcript
Speaker 3: specifically in our most recent Form 10Q and Form 10K, and which could cause actual results to differ materially from those anticipated by these statements.
Specifically in our most recent Form 10-Q, and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements.
Speaker 3: transcript
Speaker 3: 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 that certain financial measures we use on the call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
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.
So please note that certain financial measures we use on the call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
Speaker 2: transcript
Speaker 3: We have provided reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to Jay Sree. Thank you.
We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.
With that I will turn the call over to Jay shrink.
Thank you Liz and happy Halloween everyone. We.
Speaker 4: transcript
Speaker 4: We delivered revenues of $1.51 billion for the quarter with a non-GAAP earnings per share of $1.83.
We delivered revenues of 1.51 billion for the quarter with a non-GAAP earnings per share of $1 83.
Speaker 4: transcript
Speaker 4: Services and support renewals contributed approximately 16.8% of revenue.
Services and software support renewals contributed approximately 16, 8% of revenue.
Our non-GAAP gross margins of 63, 1% was influenced by improving supply chain overhead and higher enterprise contribution.
Speaker 4: transcript
Speaker 4: Our non-gap gross margins of 63.1% was influenced by improving supply chain overheads and higher enterprise contribution. As we have said before, gross margins have consistently improved every quarter this year and will stabilize next year in 2024.
As we have said before gross margins have consistently improved every quarter. This year and will stabilize next year in 2024.
Speaker 4: transcript
Speaker 4: International contribution registered at 21.5% with the Americas at 78.5%.
International contribution registered a 21, 5% with the Americas at 78, 5%.
Speaker 4: transcript
Speaker 4: As predicted, the RISTA supply chain and lead times are improving steadily in 2023, and we expect it to normalize in 2024. We are now projecting 33% annual growth versus our prior analyst day forecast of 25% growth for the 2023 calendar year.
As predicted this just supply chain and lead times are improving steadily in 2023, and we expect it to normalize in 2024 yeah.
We are now projecting 33% annual growth versus our prior analyst day forecast of 25% growth for the 'twenty two 'twenty three calendar year.
Speaker 4: transcript
Speaker 4: During the past year, our cloud tech and customers have been planning a different mix of AI networking and classic cloud networking for their compute and storage cluster.
During the past year, our cloud Titan customers have been planning a different mix of AI networking and classic cloud networking for the compute and storage clusters.
Speaker 4: transcript
Speaker 4: Our historic classification of our cloud-typing customers has been based on industry definition of customers with or likely to attain greater than one million installed compute service.
Our historic classification of our cloud Titan customers has been based on industry definition of customers win or likely to attain greater than 1 million installed compute service.
Speaker 4: transcript
Speaker 4: Looking ahead, we will combine Cloud and AI customers then into one category called Cloud and AI TITAN.
Looking ahead, we will combine cloud and AI customer spend into one category called cloud and AI tightened sector.
Speaker 4: transcript
Speaker 4: And as a result of this combination, Oracle OCI becomes a new member of the sector, while Apple shifts to cloud specialty providers.
As a result of this combination Oracle OCI becomes a new member of the sector, while apples shifts to cloud specialty providers.
Speaker 4: transcript
Speaker 4: This new cloud and AI type in sector is projected to represent greater than 40% of our total revenue mix due to the favorable AI investments expected in the future.
This new cloud and AI tightened sector is projected to represent greater than 40% of our total revenue mix due to the favorable AI investments expected in the future.
Speaker 4: transcript
Speaker 4: In terms of enterprise momentum, Arista continues to focus on multi-domain, modern software with architectural superiority based on our single EOS extensible operating system and Cloud Vision stack. This is truly a unique foundation and differentiator. We have demonstrated our strong execution and uncompromised quality with predictable release cadence that our customers have come to enjoy and appreciate.
In terms of enterprise momentum Arista continues to focus on multi domain modern software with architectural superiority based on a single.
Extensible operating system.
Cloud vision stack.
This is truly a unique foundation that differentiator, we have demonstrated our strong execution and uncompromised quality with predictable release cadence that our customers have come to enjoy and appreciate.
Speaker 4: transcript
Speaker 4: the power of our one consistent software stack across a breadth of use cases, the DeWan routing, campus, branch, or data center infrastructure, is truly unmatched by our industry peers. Let me illustrate with a few customer wins.
The power of our one consistent software stack across a breadth of use cases be the Wan routing campus branch or data center infrastructure is truly unmatched by our industry peers.
We illustrate with a few customer wins.
Speaker 4: transcript
Speaker 4: Our first customer win is an international one, where the customer is providing services for the interconnect of high performance compute, HPC clusters, which are often its foundation for GPU as a service offering.
Our first customer win is an international one where the customers providing services for the interconnect of high performance compute H B C clusters, which are often its foundation for GPU as a service offering.
Speaker 4: transcript
Speaker 4: Arista's Ethernet modular switch coupled with EOS created a perfect combination of a switching platform with real-time telemetry leveraging our EOS state-driven publish-subscribe model.
Arista is Ethernet modulus, which coupled with Eos created a perfect combination of switching platform with real time telemetry leveraging our Eos state driven publish subscribe model.
Speaker 4: transcript
Speaker 4: Our next win showcases our expansion of Arista in the public sector with their AI initiatives.
Our next win showcases our expansion of our Mr. In the public sector with the AI initiative.
Speaker 4: This grant funded project utilizes a risk of simplified operational models that cloud vision.
This grant funded projects utilizes Arista simplified operational models that cloud vision new.
Speaker 4: transcript
Speaker 4: New AI workloads require high scale, high radix, high bandwidth, and low latency, as well as a need for granular visibility. This build out of a single EVPN VXLAN based 400 gig fabric.
<unk>, new AI workloads require high scale high ratings high bandwidth and low latency as well as the need for granular visibility. This build out of a single E V. P. N VX Lan based 400 gig fabric.
Speaker 4: transcript
Speaker 4: is based on deep buffers finds and underscores the importance of a law-flessing architecture for AI net.
Is based on deep buffers fines and underscores the importance of a lossless architecture for AI networking.
Speaker 4: transcript
Speaker 4: This last but not least customer is an example of a campus.
This last but not least customer as an example of a Kansas sprint.
Speaker 4: transcript
Speaker 4: A couple of years ago, the customer was looking to do a complete refresh of their Aging Campus Network, which comprises of four major headquarters campuses and several remote sites.
A couple of years ago, the customers looking to do a complete refresh of the agent campus network, which comprises of four major headquarter campuses and seven road remote sites.
Speaker 4: transcript
Speaker 4: The customer was able to leverage the Arista validated design models, AVD, all the way from data center into the campus network. The customer chose Arista because they were able to offer test-to-breed operational excellence as well as security with our zero trust Averse sensors for threat mitigation across the entire campus of wired switches.
The customer was able to leverage the Arista validated design models, a b D. All the way from datacenter into the campus network.
Customer chose Arista because they weren't able to offer best of breed operational excellence as well as security with a zero trust Ava sensors, but threat mitigation across the entire campus wired switches.
Speaker 4: transcript
Speaker 4: Arista's innovative macro segmentation, MSS, combined with leaf access and course find, delivered a compelling two-tier cognitive campus solution.
Arista is innovative macro segmentation MSS combined with beef access and coarse fine delivered a compelling two T. A cognitive campus solution.
These three customers illustrates a power of the platform and software innovations for a modern network model with a low total cost of operations.
Speaker 4: transcript
Speaker 4: These three customers illustrate our power of the platform and software innovations for a modern network model with a low total cost of operation.
Speaker 4: transcript
Speaker 4: We are pleased with our trajectory, setting the gold standard in our industry with the lowest CVEs and vulnerabilities and the highest Net Promoter Score for cloud network.
We are pleased with our trajectory setting the gold standard in our industry with the lowest C D E and vulnerabilities and the highest net promoter score for cloud networking.
Speaker 4: transcript
Speaker 4: And with that, I'd like to hand to Ita, our CFO for financials specific.
And with that I'd like to hand to ETA, our CFO for financial specifics.
Thanks Jeffrey.
Speaker 5: transcript
Speaker 5: Thanks, J. Shrey, and good afternoon. This analysis of our Q3 results in our guidance for Q423 is based on non-GAP. It's full of non-CASH stock based compensation impacts, certain acquisition related charges, and other non-recurring items. A full of reconciliation of our selected GAP to non-GAP results is provided in our area.
No.
This analysis of our Q3 results and our guidance for Q4 23 is based on non-GAAP excludes all noncash stock based compensation impacts certain acquisition related charges and other nonrecurring items.
A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Speaker 5: transcript
Speaker 5: Total revenues in Q3 were $1.51 billion, up 28.3% year over year, and well above the upper edge of our guidance of $1.45 to $1.5 billion.
Total revenues in Q3 were $1 five 1 billion up 28, 3% year over year and well above the upper end of our guidance of $1 45 to $1 5 billion.
Harrington subscription software contributed approximately 16, 8% of revenues in the third quarter up from 15, 2% in Q2.
Speaker 5: transcript
Speaker 5: Services and subscription software, contribute to approximately 16.8% of revenues in the third quarter, up for 50.2% in Q2.
International revenues in the quarter came in at $324 7 million or 21, 5% of total revenue up from 29% last quarter.
Speaker 5: transcript
Speaker 5: International revenues for the quarter came in at 324.7 million, or 21.5% of total revenue, off from 20.9% vast quarter.
Speaker 5: transcript
Speaker 5: This quarter of a quarter increase already in effect to the healthy contributions from our enterprise customers in Amir and APEC and some reduction in domestic shipments to our cloud type.
This quarter over quarter increase already has affected a healthy contribution from our enterprise customers in EMEA and APAC and some reduction in domestic shipments from our cloud Titan customers.
Speaker 5: transcript
Speaker 5: Overall, gross margin in key three was 63.1%, well above guidance that approximately 62%, and up from 61.3% last quarter.
Overall gross margin in Q3 was 63, 1% well above guidance of approximately 62% and up from 61, 3% last quarter.
Speaker 5: transcript
Speaker 5: We continue to see incremental improvements in gross margin quarter over quarter with higher enterprise shipments and better supply chain costs somewhat offset by the need for additional inventory reserves as customers refine their forecast products.
We continue to see incremental improvements in gross margin quarter over quarter entire enterprise shipments and better supply chain costs somewhat offset by the need for additional inventory reserves as customers will find their forecasted product mix.
Operating expenses for the quarter were $255 6 million or 16, 9% of revenue down from last quarter at 287 3 billion.
Speaker 5: transcript
Speaker 5: Operating expenses in the quarter were 255.6 million or 16.9% of revenue. Down from last quarter at 287.3 million.
Speaker 5: transcript
Speaker 5: R&D spending came in at 164.4 million, or 10.9% of revenue, down from 188.5 million in mass-corder. This primarily reflected increased head count, more than offset by lower new product introduction costs in the period.
R&D spending came in at $164 4 million or 10, 9% of revenue down from $188 5 million last quarter. This primarily reflected increased head count more than offset by lower new product introduction costs in the period.
Speaker 5: transcript
Speaker 5: Sales and marketing expense was 79 million, or 5.2% of revenues consistent with last quarter, with increased headcount and some reduction in product demo cost.
Sales and marketing expense was $79 million or five 2% of revenue consistent with last quarter with increased head count and some reduction in product demo costs our.
Speaker 5: transcript
Speaker 5: Our GNA costs came in at $12.1 million, our 0.8% of revenue, down from last quarter and reflecting the recovery of some bad debt amounts reported in prior periods.
Our G&A costs came in at $12 1 million or 0.8% of revenue down from last quarter, reflecting the recovery of some bad debt amounts recorded in prior periods.
Speaker 5: transcript
Speaker 5: Our operating income for the quarter was $696.2 million, or 46.1% of revenue. Other income expense for the quarter was a favorable $42.3 million, and our effective tax rate was 21.3%.
Our operating income for the quarter was $696 2 million or 46, 1% of revenue.
Other income and expense in the quarter by the favorable $42 $3 million and our effective tax rate was 21, 3%.
Speaker 5: transcript
Speaker 5: Mr. Zousin net income to the quarter, a 581.4 million, are 38.5% per revenue.
Since 1000 net income for the quarter of $581 4 million or 38, 5% revenue.
Speaker 5: transcript
Speaker 5: Our limited share number, Western 17.6 million shares, resulting in a diluted earnings per share number from the quarter, a $1.83, up 46.4% from the prior year.
Our diluted share number question 17, 6 million shares, resulting in a diluted earnings per share number for the quarter of $1 83 up 46, 4% prior year.
Speaker 5: transcript
Speaker 5: Now it turns to the balance sheet. Cash cash equivalents and investments into the quarter to approximately 4.5 billion.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately $4 5 billion.
Speaker 5: transcript
Speaker 5: We did not report to share the requirement stocks in the court.
We did not repurchase shares of our common stock in the quarter.
Speaker 5: transcript
Speaker 5: To recap our repurchase program today, we have repurchased $855.5 million or $8 million shares at an average price of $107 per share under our current $1 billion board authorization.
To recap our repurchase program to date, we have repurchased $855 $5 million or 8 million shares at an average price of $107 per share under our current $1 billion Board authorization.
Speaker 5: transcript
Speaker 5: If you leave $144.5 million, they will also repurchase the future quarter.
This leaves a $144 $5 million available for repurchase in future quarters.
Speaker 5: transcript
Speaker 5: The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price and other facts.
The actual timing and amount of future repurchases will be dependent on market and business conditions stock price.
<unk>.
Speaker 5: transcript
Speaker 5: Now turning to operating cash performance for the third quarter, we generated approximately $699 million of cash from operations in the period, reflecting strong earnings performance combined with some increase in deferred revenue and taxes payable.
Now turning to operating cash performance for the third quarter, we generated approximately $699 million of cash from operations in the period, reflecting strong earnings performance combined with some increase in deferred revenue in taxes payable.
Speaker 5: transcript
Speaker 5: The ESL is committed 51 days up to 49 days in Q2, reflecting the strong collections quarter and a good linearity of filling.
Dsos came in at 51 days up from 49 days in Q2, reflecting the strong collections quarter and a good linearity.
Inventory turns were one one times down from one two last quarter inventory remained flat to last quarter and $1 9 billion setting the ongoing received from consumption of components from our purchase commitments and an increase in switch related to finished goods.
Speaker 5: transcript
Speaker 5: Invented turns were 1.1 times, down from 1.2 last quarter. Inventory remained flat to last quarter at $1.9 billion, affecting the ongoing receipt and consumption components from our purchase commitments and an increase in switch-related finish cuts.
Speaker 5: transcript
Speaker 5: Our purchase commitments at the end of the quarter were $2 billion, down from $2.2 billion at the end of Q2.
Our purchase commitments at the end of the quarter when 2 billion down from $2 2 billion at the end of Q2.
Speaker 5: transcript
Speaker 5: We expect the overall purchase commitment number to change it to Klein as we further optimize our supply conditions. However, we will maintain a healthy position that keeps components, especially as we focus on new products.
We expect the overall purchase number to continue to decline as we further optimized optimize our supply position.
We will maintain a healthy position related to key components, especially as we focus on new products.
Speaker 5: transcript
Speaker 5: Our total deferred revenue balance is 1.195 billion up from 1.085 billion, thank you, too. The majority of the deferred revenue balance in services related and directly linked to the timing and the term of service context, which can vary on a quarter by quarter basis.
Our total deferred revenue balance was $1 195 billion up from 1.085.
5 billion Q2.
The majority of the deferred revenue balance and services related and directly linked to the timing in term of service contracts, which can vary on a quarter by quarter basis.
Speaker 5: transcript
Speaker 5: Our product deferred revenue balance increased by $47 million from last quarter.
Our product deferred revenue balance increased by $47 million from last quarter.
Speaker 5: transcript
Speaker 5: Some stable days were 44 days, some 57 days of Q2 reflecting the timing of inventory receipts payments. Capital expenditures in a quarter were 11.2 minutes.
Payable days were 44 days.
Seven days in Q2, reflecting the timing of inventory receipts and payments.
Capital expenditures for the quarter were $11.
Now turning to our outlook for the fourth quarter.
Speaker 5: transcript
Speaker 5: Customer planning horizons for new deployments have shortened in concert with steadily improving lead time. On the supply side, we expect to continue to shift against previously committed deployment plans for some time, targeting supply improvements where most needed, but also careful not to create redundant customer inventory.
Customer planning horizons for new deployments have shortened in concert with steadily improving lead time.
On the supply side, we expect to continue to ship against previously committed deployment plans for some time targeting spines movements, where most needed but also careful not to create redundant customer inventory.
Speaker 5: transcript
Speaker 5: As outlined in our guidance, we expect to make incremental improvements to our 2020 3 outlook. We can now call for Euro-era revenue growth of approximately 33%. On the growth margin front, we expect growth margins of approximately 63% to the fourth quarter, accepting ongoing supply chain and manufacturing benefits on maintaining a reasonably healthy cloud contribution.
As outlined in our guidance, we expect to make incremental improvements to our twin Smith's three outlook, which now calls for year over year revenue growth of approximately 33%.
On the gross margin front, we expect gross margins of approximately 63% in the fourth quarter.
Testing ongoing supply chain and manufacturing benefits, while maintaining a reasonably healthy cloud contribution.
Speaker 5: transcript
Speaker 5: turning to spending and assessments to expect to monitor the overall macro environment carefully, while engaging in targeted hiring, R&D, go to market at the team's UC opportunities to acquire talent.
Turning to spending and investments we expect to monitor the overall macro environment carefully while engaging in targeted hiring R&D go to market at the team sees the opportunity to acquire talent.
Speaker 5: transcript
Speaker 5: On the cash front, while increases in working capital needs with onto moderated recent quarters, are here today, 2023 tax payments have been deferred to October . This will represent a significant incremental use of cash in the fourth quarter at approximately to 352 million.
On the cash front, while increases in working capital to moderate in recent quarters.
Year to date 2023 tax payments have been deferred to October this will represent a significant incremental use of cash in the fourth quarter at approximately $352 million.
Speaker 5: transcript
Speaker 5: With all of this as a backdrop, our guidance to the fourth quarter, which is based on non-GAF results and excludes any non-cash stock-based compensation impacts and other non-recurring items, is as follows. Revenues of approximately 1.5 to 1.55 billion, gross margin of approximately 63%, operating margin approximately 42%.
With all of this as a backdrop our guidance for the fourth quarter, which is based on non-GAAP results and excludes any noncash stock based compensation impacts and other nonrecurring items is as follows.
Revenues of approximately one five to $1 $5 5 billion gross margin of approximately 63% operating margin of approximately 42%.
Speaker 5: transcript
Speaker 5: Our effective tax rate is expected to be approximately 21.5%, with alluded shares of approximately 319 million shares. I will now turn the call back to this. And this.
Our effective tax rate is expected to be approximately 21, 5% with diluted shares of approximately 319 million shares.
Now I'll turn the call back.
Yes.
Speaker 3: transcript
Speaker 3: Thank you, Edas. We will now move to the Q&A portion of their research earnings call to allow for greater participation and life requests that everybody please limit themselves to a single question. Thank you for your understanding, operator, take it away.
Thank you Peter we will now move to the Q&A portion of the Arista earnings call. So I'll allow for greater participation I'd like to request that everybody. Please limit themselves to a single question. Thank you for your understanding operator take it away.
Okay.
Speaker 2: transcript
Speaker 2: We will now begin the Q&A portion of the ERISTA earnings call. In order to ask a question during this time, simply press star then the number 1 on your telephone keypad.
We will now begin the Q&A 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.
Speaker 2: transcript
Speaker 2: If you would like to withdraw your question, press the star and the number one again.
If you would like to withdraw your question press the star and the number one again.
Speaker 2: transcript
Speaker 2: We ask that you pick up your handset before asking questions in order to ensure optimal sound quality.
We ask that you pick up your handset before asking questions in order to ensure optimal sound quality.
Your first question comes from the line of Snake Chatterji with J P. Morgan Your line is open.
Speaker 2: transcript
Speaker 2: Your first question comes from the line of Simeik Jadadji with J.P. Morgan. Your line is open.
Oh, hi, Thank you for the question and congrats on the results I guess just to keep it simple jetstream. If you can give us an update on when we think about the last 90 days.
Speaker 6: transcript
Speaker 6: Thank you for the question and congrats on the result. I guess just to keep it simple.
The tool set of verticals cloud Titans in enterprise sort of showing up in terms of momentum of autos.
Really a different way in your expectations with 90 days ago and some of the cloud companies have talked about the capex outlook for next year as well so.
Speaker 6: and update on that would be helpful and on the last call you did talk about a target for double digit growth.
That would be helpful. And then on the last call you did talk about a target for double digit growth next deal. So.
How are you thinking in relation to that number still going into the Investor day. Thank you.
Speaker 4: transcript
Speaker 4: Okay, thanks, Sam. So, make first of all, we are looking forward to sharing more detail on the analyst day.
Okay. Thanks that I mean first of all we're looking forward to sharing more detail on analyst day, but just to reiterate.
Speaker 4: transcript
Speaker 4: But just to reiterate, our team has always projected at least a double digit growth for next year and years beyond. So that goal remains.
Our team has always projected at least a double digit growth for next year and years beyond so that gold remains unchanged and we will share more with you soon.
Speaker 4: transcript
Speaker 4: and we'll share more with you. Coming back to the last 90 days, as you know, as our returns improve, our visibility declines, but we don't see significant change in improvements or declines in the last 90 days. We continue to see good momentum on enterprise.
Back to the last 90 days.
As you know as our lead times improve our visibility declines.
But we don't see significant change in our improvements or declines in the last 90 days, we continue to see good momentum on enterprise and we did did you just see a good.
Speaker 4: transcript
Speaker 4: And we did to do to see a good, you know, expected push on the combination of both cloud and AI together.
Expected pushed on the combination of both cloud and AI together.
Okay. Thank you thanks for taking my question.
Yes.
Thanks, Amit.
Your next question comes from the line of Antoine check upon with New Street Research. Your line is open.
Speaker 2: transcript
Speaker 7: transcript
Thanks, very much for taking my question, so accelerated cluster deployment security waiting on traditional infrastructure deployment. This year and then I'm keen to hear how sustainable you think this is because the vast majority of workloads run on traditional infrastructure right. So is it fair to expect a rebound in traditional <unk>.
Restructure spend the next year.
Speaker 4: transcript
Speaker 4: Yes, thank you, Antoine, that I'll share some of my thoughts and I'd like to hand it over to Anshel for further thoughts. You know, we've always looked at the cloud network as a front end and a back.
Yes. Thank you aren't one that I'll share some of my thoughts and I'd like to.
I hand, it over to onshore before the thoughts.
We've always looked at that the cloud network and it's a front end and the back end and as we said last year. Many of our cloud customers are favoring spending more on the backend with AI.
Speaker 4: transcript
Speaker 4: And as we said last year, many of our customers are favoring spending more on the backend with AI, which doesn't mean they stop spending on front-end, but they've clearly prioritized and doubled down on AI this year.
Which doesn't mean to stop spending on front end, but they are clearly prioritized and doubled down on AI. This year.
Speaker 4: transcript
Speaker 4: My guess is as we look at the next few years, they'll continue to double down on AI, but you cannot build an AI back-end cluster without thinking of the front end. So we'll see a full cycle here, where, while today, the focus is greatly on AI and the back end of the network, in the future, we expect to see more investments in the front end as well.
My guess is as we look at the next few years, you'll continue to double down on EI, but you cannot build any add back end cluster without thinking of the front end. So we will see a full cycle here, where it was today. The focus is greatly on AI and the back end of the network in the future we expect to see more investments in the front end as well.
Speaker 8: transcript
Speaker 7: No, just, especially that's right. As you said, it's hot on AI is everyone's priority right now. And the rest will get touched at the right time.
So is it just me Thats right.
Spot on.
Everyone's priority right now and the rest will get done at the right time.
Thanks, Andrew.
Your next question comes from the line of Matt nickname with Deutsche Bank.
Speaker 2: transcript
Speaker 2: Your next question comes from the line of Matt Nickname with Duage Bank.
Your line is open.
Hey, Yeah. Thank you for taking the question.
Speaker 9: transcript
Speaker 8: Hey, thank you for taking the question. One question, very simple one on services. Pretty nice improvement, about 13% of the question improvement in the quarter. She's, I think we've seen those single digits, mid-single digits, anything you would call out and how are we thinking about that for the fourth quarter. Thanks.
One question very simple one on services.
Nice improvements about 13% a sequential improvement in the quarter.
Excuse me I think we've seen low single digits mid single digits anything you would call out and how are we thinking about that.
For the fourth quarter. Thanks.
Yeah look I think every now and again you see kind of a pop on the services line that's usually.
Speaker 5: transcript
Speaker 5: Yeah, look, I think every now and again, you see kind of a pop on the services line. It's usually.
Speaker 10: transcript
Speaker 9: You know, either somebody is consumed, services faster than they intended to, or we've been negotiating a contract, and then when we do actually finally sign the renewals contract, there's some flush of prior periods into the quarter. So if you look back at Starric, you'll see that happens from time to time. I don't think it changes the kind of fundamental, you know, growth and services we've talked about. This kind of needs to be a little bit higher, teams growth on an ongoing basis year over year. I don't think it changes that. It's just, if you do have these little spikes from time to time. Thank you.
Either somebody is consumed services faster than they intended to or we've been negotiating a contract and then when would you actually finally sign the renewal of this contract.
Prior.
Periods into the quarter. So if you look back historically, you'll see that happens from time to time I don't think it changes the kind of fundamental growth in service as we've talked about this kind of mid to maybe a little bit higher teens growth on an ongoing basis year over year I don't think it changes that you.
We do have these spikes from time to time.
Thank you.
Thanks, Matt.
Your next question comes from the line of Karl Ackerman with BNP Paribas. Your line is open.
Speaker 2: transcript
Yes. Thank you.
Speaker 11: transcript
Speaker 10: Yes, thank you. I suppose this is a question for Ita, but is the, is the upside in the quarter an outlook coming from a combination of better bookings and working down some of your prior backlog? Does any thoughts in terms of maybe where your backlog may end up relative to normal levels pre-pandemic would be super-healthy?
I suppose this is a question for <unk>, but.
Is the is the upside in the quarter and outlook coming from a combination of better bookings and working down.
Some of your prior backlog just any thoughts in terms of maybe where your backlog may end up relative to normal levels.
Pre pandemic would be super helpful. Thank you.
Speaker 5: transcript
Speaker 5: Yeah, Carl, we don't talk about backlogs, you know, specifically, I think what we have said is, you know, as
Yeah, Karl we don't talk about backlog.
You know specifically I think what we have said is you know as.
Yes.
Speaker 10: transcript
Speaker 9: lead times improve your your expectancy.
Lead times improve.
Do you expect to see some reduction in visibility from customers at the time, where they have to place orders changes over time, Brian. So I think that we are seeing that dynamic we've talked about that dynamic that we are a few times get better we are seeing kind of customer planning horizons are shortening.
Speaker 5: transcript
Speaker 5: some reduction in disability to fill customers the time where they have to place orders changes over time. So I think that we are seeing that dynamic, we've talked about that dynamic that we are, as it be times get better, we are seeing kind of customer planning arises or shortening. We will be still deploying, if you listen to my prepared remarks, when we are still deploying equipment into next year from plans that we made some time ago. And that's just kind of, again, working with customers and laying out their plans. But in terms of giving specific knowledge.
We will be still deploying if you listen to my prepared remarks, I mean, we are still deploying equipment into next year from plans that we made some time ago and Thats just kind of again working with customers on laying out their plans.
But in terms of giving specific numbers, we haven't done that.
Speaker 12: Thank you.
Speaker 11: think that
Great. Thanks Carl.
Speaker 2: transcript
Speaker 2: Your next question comes from the line of a meat Daria Nani with Evercore. Your line is open.
Your next question comes from the line of of meat dairy and Nani with Evercore.
Your line is open.
Speaker 13: transcript
Speaker 12: Good afternoon, everyone, and congrats on a nice set of numbers here. You know, I was hoping to talk a little bit more on the enterprise side. You're seeing some really good strength over here clearly, but maybe you can talk about, you know, is the strength more coming from campus versus the data center side, maybe just qualitatively, where you're seeing better trends? And really, the context of this is, I think, a lot of your peers.
Good afternoon, everyone and congrats on a nice set of numbers here. Yeah. I was hoping you could talk a little bit more on the enterprise side, you're seeing some really good strength that we are clearly, but maybe you can talk about is the strength more coming from campus versus the data center side, maybe just qualitatively what are you seeing better trends.
And really the context of this is I think a lot of your peers are seeing a very severe drop in the growth rates as the backlogs have gone away you don't seem to be having the issues I'm wondering like what is the offset to that and what's enabling the growth and to the extent you can talk about campus versus the data center that would be really helpful. Thank you.
Speaker 13: transcript
Speaker 12: are seeing a very severe drop in the growth rate as the backlogs have gone away. You don't seem to be having that issue. So I'm wondering like, what is the offset to that and what's enabling the growth? And to Vixen, you can talk about campus versus the data and the value would be really helpful. Thanks.
Speaker 4: transcript
Speaker 4: Okay, I mean, again, I'll share a few words and I'd love for our children to step in and say some too. Look, if you look back three years ago, we started seriously investing in the enterprise. And, you know, back in 2020, we had a small enterprise business and it was largely comprised of you rightly pointed out data center and some high performance compute and low latency, HFC counter, forget our original heritage.
Oh, Okay, I mean, again I'll share a few words and not enough box just to step in and say something to look if you look back three years ago, we started seriously investing in the enterprise and.
Back in 2020, if you had a small enterprise business and it was largely comprised of 19 pointed out data center and some high performance compute and no legacy HFC content against our original heritage, but in the last three years, we have made an investment and seen a significant uptick in any.
Speaker 4: transcript
Speaker 4: But in the last three years, we have made an investment and seen a significant uptake in enterprise customers wanting to do business with the VISTA. Historically, it's been the high-tech enterprise and the financials. And today, we're seeing a much better cross-section of verticals, including healthcare, education. We expect to see more and more distributed enterprises. And to your question on data center versus campus, the answer is yes to both.
Apprise customers wanting to do business with their desktop historically its been the high Tech enterprise and financials and today, we're seeing a much better cross section of verticals.
<unk> health care education, we expect to see.
More and more distributed enterprises and to your question on data Center versus campus. The answer is yes to both.
Speaker 4: transcript
Speaker 4: we actually see one uniform architecture where you can have a universal spine that connects into a wired leaf, a wireless leaf, a storage cluster, a compute cluster, a border leaf for routing and WAN transit. It's pretty exciting that Arista is truly and remarkably setting the tone for a two-tier leaf spine architecture across the enterprise and building that modern operating model based on cloud.
Actually see one uniform architecture, where you can have a universal spine that connects into a wired leaf a wireless nice storage cost startup compute cluster in a boarder leave for routing and when transit that's pretty exciting, but I was just truly and remarkably setting the tone for a two tier.
Leaf spine architecture across the enterprise and building that modern operating model based on cloud vision.
Speaker 8: transcript
Speaker 7: Amit, this is Anshul here. We have a great team being led by Chris Smith and Ashwin Kohli in this space. And now we sell in many, many countries around the world.
Amit this is onshore.
Have a great team being led by Chris Smith, and Ashwin Kohli in this space and now we sell in many many countries around the world.
Speaker 8: transcript
Speaker 7: And as you mentioned, both days in our campus, customers are coming to us for the automation for the higher quality, for the visibility, that they are able to bring to them across the board in one architecture, one OS, and one cloud vision.
And just you mentioned both data center encompass.
Most are coming to us for the automation with a high quality the visibility would be able to bring to them across the board in one architecture, one with and one cloud vision.
Speaker 8: transcript
Speaker 7: That message resonates with every CIA attorney and they are no longer worried about or is there being this new kid on the block that's risky move for them. We are in fact becoming the de facto and they like it. So which is why the momentum just continues. It's good execution by the team and getting to more and more customers around the world.
Message resonates with every CIO Tony.
There are no longer worried about <unk> Youll Kid on the block that's a risky move for them. We are in fact, becoming the de facto and they like it. So this is why the momentum just continued good execution by the team and getting more and more customers around the world.
Thank you Amit.
Your next question comes from the line of Ben Bolan with Cleveland Research. Your line is open.
Speaker 14: transcript
Speaker 13: Your next question comes from the line of Ben Bowlin with Cleveland Research. Your line is open. Thanks for taking the question. Good evening.
Thanks for taking the questions good evening everyone.
Ah <unk> onshore I was hoping you might be able to comment a little bit about your thoughts as you make progress in the backend network around GPU cluster opportunity, how you see that developing versus what you've shared with us previously.
Speaker 11: transcript
Speaker 10: J.S.T. and Anshul, I was hoping you might be able to comment a little bit about your thoughts as you make progress in the backend network around GPU cluster opportunity. How you see that developing versus what you've shared with us previously. And any color in particular around both pre-existing and the opportunity for net new wins would be helpful. Thanks.
And then any color in particular around both pre existing and the opportunity for for net new wins would be helpful. Thanks.
Speaker 4: transcript
Speaker 4: Sure. Again, this is an area that aren't should listen, breathe more than I do. So I'll give you some executive comments. But then I, as I see it, you know, the, the backhand network was something we didn't even see a few, few months or years ago and was largely dominated by in cinabend. Today, if I look at the
Sure.
Again. This is an area that answer lives and breathes more than I do so I'll give you some executive comments, but then I was actually at.
The backend network was something we didn't even see a few few more.
Two years ago and was largely dominated by Infiniband.
If I look at the five major.
Speaker 4: transcript
Speaker 4: major designs for AI networking. One of them is still very InfiniBand dominated. All the others we're looking at is adopting a dual strategy of both Ethernet and InfiniBand.
Designed for AI networking one of them is still very infiniband dominated all the others have been looking at is are adopting a dual strategy of both Ethernet and it's been a bad so I think AI networking is going to become more and more.
Speaker 4: transcript
Favorable to Ethernet, particularly with the Entre Ethernet consortium and the work they're doing to define expect youre going to see more products based on you you see you're going to see more of a connection between the back end and the front end using ideas a singular protocol and so we're feeling very encouraged that especially in 2025, there will be a lot of production rollout.
Backend and a sports front end based on Ethernet.
Speaker 8: transcript
Speaker 7: Over to you, Akshay. Thanks, Aishwet. Ben, our Cloud Titan customers, as well as the specialty providers, have been great partners of ours. So the level of partnership and core development that's going on in this space is high. It's just like in previous cycles, previous products that we've done with.
Over to you and thanks for the story.
Our cloud Titan customers as well as the.
Especially as they provide us.
<unk> been great partners with us so the level of partnership and co development that's going on in this space is high just like in previous cycles previous products that we've done with them.
Speaker 8: transcript
Speaker 7: There's a lot of fine tuning needed in these back-end networks to get the maximum utilization of debuts. And as you know, we are good at these engineering projects. So I think they're enjoying it. The activity is much, much higher than before. And the goal is to scale these clusters as quickly as possible. So our customers can run their jobs fast.
There's a lot of fine tuning needed.
These Bakken net for us to get the maximum utilization of Gpus.
And as you know we are good at these enduring projects. So I think for enjoying it the activities are much much higher than before.
And the goal is to scale. These clusters as quickly as possible so that customers can run their jobs faster.
Speaker 8: transcript
Speaker 7: We're feeling good about it. You've heard comments from Jayashree as well in the past. And you'll hear more on the analyst on this topic too. But all good on the activity front over here.
We're feeling good about it.
You've heard comments from the industry has been in the past you have more on the analyst day on this topic to it but so all good on the activity front or warehouse.
Thanks.
Speaker 4: transcript
Speaker 4: I think one thing to just add is the entropy and efficiency of these large language models and the job completion time is becoming so critical that it's not just about packet latency, it's really about end-to-end latency. And this is something our team, especially our engineers, know a lot about from the early days. So we're really working this end-to-end.
One thing to just add as the entropy and efficiency of use large language models in the job completion time is becoming so critical that it's not just about you know packet latency is really about end to end latency and this is something.
Our team, especially our engineers know a lot about it from the early days, so we're really working to send to them.
Thanks Ben.
Speaker 2: transcript
Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.
Yes, thanks for taking the question I just wanted to kind of dovetail off that last question a little bit I know you know January last quarter. I think it was you commented that you would expect to see pilot deployments for these AI opportunities in 'twenty, four and then meaningful volume in 2025.
Speaker 15: transcript
Speaker 14: Yeah, thanks for taking the question. I just want to kind of dovetail off that last question a little bit. I know, you know, J. Sri, last quarter, I think it was you commented that you'd expect to see pilot deployments for these A. I. Opportunities in 24 and then meaningful volume in 2025.
Speaker 15: transcript
Speaker 14: First of all, do you reaffirm that view or has that changed at all? And then on that, can you give us some context of how you see network spend intensity for these AI fabrics relative to, I think, in the past. It's been kind of high single digit percent of compute spend on networking in classical cloud infrastructure.
First of all do you reaffirm that view or has that changed at all and then.
Operator: Please wait, the conference will begin shortly Welcome to the third quarter 2023 Arista Networks Financial Results earnings conference call During the call all participants will be in a listen only mode After the presentation we will conduct a question and answer session 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 a reminder this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call Ms. Liz Stein, Arista's Director of Investor Relations, you may begin Thank you operator, good afternoon everyone and thank you for joining us With me on today's call are J.
Can you give us some context of how you see network spend intensity for these AI fabrics relative to I think in the past, it's been kind of high single digit percent of compute spend on networking.
In classical cloud infrastructure environments.
Speaker 4: transcript
Speaker 4: First of all, the first session is easy. I reaffirm that view and more later on November 9th at our Analyst Day. So I tell you everything now, you may not attend that session.
Yeah, well first of all there and the first question is easy I reaffirm that view and more later on November 19th at our Analyst day. So I told you everything now you may not attend that session.
Speaker 4: transcript
Speaker 4: Coming back to this networking spend versus the, you know, the rest of the GPUs and etc.
Coming back to this networking spend versus the.
The rest of the Gpus and et cetera.
Speaker 4: transcript
Speaker 4: I would say it started to get higher and higher with 100 gigs, 400 gigs, 800 gigs, where the optics and the switches are more than 10 percent, perhaps even 15 in some cases 20. A lot of it's governed by the cables and optics too. But the percentage hasn't changed a lot in high-speed networking. In other words, it's not too different between 100, 200, 400 and 8 months.
I'd say, its starting to get higher and higher with 100 gig 400 gig 800 gig, where the optics and the switches are more than 10%, perhaps even 15 in some cases 20 lot of it is governed by the cables and optics too, but the percentage hasn't changed a lot and high speed networking in other words, it's not too different between 10 <unk> hundred two.
Liz Stein: Shrew Lull, Arista Networks President and Chief Executive Officer, and Eda Brennan, Arista's Chief Financial Officer This afternoon Arista Networks issued a press release announcing the results for its fiscal third quarter ending September 30th 2023 If you would like a copy of the release you can access it online at our website During the course of this conference call Arista Networks Management will make forward looking statement including those relating to our financial outlook for the fourth quarter of the 2023 fiscal year longer term financial outlook for 2024 and beyond Our total addressable market and strategy for addressing these market opportunities including AI, customer demand trends, supply change and strength, component cost, manufacturing output, inventory management and inflationary pressures on our business, lead time, product innovation, working capital optimization and the benefits of acquisition which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC Specifically in our most recent form, thank you and form 10k and which could cause actual results to differ materially from those anticipated by these statements These forward looking statements supply 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 that certain financial measures we use on the call are expressed on a non-gap basis and have been adjusted to exclude certain charges We have provided reconciliation of these non-gap financial measures to gap financial measures in our earnings press release With that, I will turn the call over to Jay Schring Thank you Liz and happy Halloween everyone We delivered revenues of 1.51 billion for the quarter with a non-gap earnings pressure of $1.83 Services and software support renewals contributed approximately 16.8% of revenues Our non-gap gross margin of 53.1% was influenced by improving supply chain overheads and higher enterprise contribution As we have said before, gross margins have consistently improved every quarter this year and will stabilize next year in 2024 International contribution registered at 21.5% with the Americas at 78.5% As predicted, Arista supply chain and lead times are improving steadily in 2023 and we expect it to normalize in 2024. We are now projecting 33% annual growth versus our prior analyst day forecast of 25% growth for the 2023 calendar year.
408 hundred so you'll continue to see that 10% to 15% range.
Speaker 4: transcript
Speaker 4: So you'll continue to see that 10 to 15 percent range.
Okay. Thank you.
Thanks Darren.
Speaker 2: transcript
Speaker 2: Your next question comes from the line of Italian Leone with Bank of America. Your line is open.
Your next question comes from the line of Tal Leone with Bank of America. Your line is open.
Speaker 16: transcript
Speaker 15: Hi, J. Sri Yurtone is definitely better this quarter than last quarter. It's more confident in the numbers and I want to understand that something changed in the last three months that made you more optimistic. I'm looking at the consensus estimates.
Hi gesture.
<unk> your tone is definitely better this quarter than last quarter.
And.
So you sound more confident in the numbers and I want to understand if something changed in the last three months that.
Made you more optimistic.
I'm looking at the consensus estimates.
Speaker 16: transcript
Speaker 15: And it looks like the growth rate has been declining for four quarters from like 54% to about 20% next quarter.
And it looks like the growth rate has been declining for four quarters from like 54% to about 20% next quarter.
Speaker 16: transcript
Speaker 15: and then it troughs at Q1, stays there and recovers after that. Do you agree that we are nearing kind of the end of the down adjustment to the growth rates and then it's going to stabilize and go up from there? Or how do you look at the risks of that not materializing?
And then at trough set Q1 stays there and it recovers after that.
Do you agree that we are nearing kind of the end of the down adjustment of the growth rates and then it's going to stabilize and go up from there or how do you. How do you look at the risks of that not materializing.
Speaker 10: transcript
Speaker 9: What do you think, Hida? That's all I think. Look, we've been talking about kind of the...
What do you think kita, so Tal I think.
We've been talking about kind of the the <unk>.
Speaker 10: transcript
Speaker 9: You know, the growth is decelerating as it moves through the year, just because it comes.
Both decelerating as you move through the year, just because the comps are so high.
Speaker 5: transcript
Speaker 5: so high. I think if you look at the discussion we've had so far about 24 and obviously there's more to come next week. We've talked about double digit growth but again we are expecting that there is some moderation on the downside of the business next year. I think within the bounds of the plans that we've laid out, the discussions that we've laid out, I think we're executing well, we're giving you some upside.
I think if you look at the discussion we've had so far by 'twenty four and obviously, there's more to come next week, we've talked about double digit growth, but again, we are expecting that.
There is some moderation on the outside of the business.
Next year, so I think within the bounds of kind of the plans that we've laid out of the discussions that we've laid out I think we're executing well, we're giving you some upside.
Speaker 4: transcript
Speaker 4: on the you know in the guide for 23 and by default almost kind of some up to 24 right so I did work for getting well but within the bounds of what we talked about you do believe that there's moderation at times bending as we head into 24 and and I think I need to focus on my tone and maybe sing a song or something that's out really in order and this quarter it's pretty happy last quarter
On the <unk>.
In the guide for 'twenty, three and by default almost kind of some upside down 24, right. So I think we're executing well, but within the bounds of what we talked about you do believe that this moderation of type lending.
As we head into 2020, and Tom I think I need to focus on my phone and maybe sing a song or something is that fair.
Yeah.
And this quarter, but you're pretty happy last quarters, I'm unhappy kind of gal at the moment.
Speaker 16: transcript
Speaker 15: We read in between the lines, you know. As you all know the
We were reading between the lines you know.
Thanks, Tom.
Your next question.
Speaker 2: transcript
Your next question comes from the line of Sebastian Nudge them with William Blair. Your line is open.
Oh, Hey, thanks for taking the question I wanted to ask about the change in revenue breakdown and the inclusion of OCI and this new cloud Titan in AI segment. Because this is a result of the material change in Arista as wallet share at Oracle or is that business, becoming a larger portion of revenue anything you can provide there.
Speaker 11: transcript
Yeah, No we really we don't do it based on wallet share of Arista, we do it based on definition. So I think OCI has become a meaningful.
Speaker 17: transcript
Speaker 16: Yeah, no, we don't do it based on walletshare of Arista. We do it based on definition. So I think OCI has become a meaningful top tier cloud customer and they belong in the cloud type and category and in addition to their AI investments as well. So for reasons of classification and definition, the change is very warranted. And yes, they happen to be a good customer of Arista. That's nice as well.
Liz Stein: During the past year, our cloud-tightened customers have been planning a different mix of AI networking and classic cloud networking for their computing storage clusters. Our historic classification of our cloud-tightened customers has been based on industry definition of customers with or likely to attain greater than 1 million installed compute servers. Looking ahead, we will combine cloud and AI customers spend into one category called cloud and AI-tightened sector. And as a result of this combination, Oracle OCI becomes a new member of the sector while Apple shifts to cloud specialty providers.
Top tier cloud customer and they belong in the cloud Titan category and in addition to their AI investments as well so for reasons of classification and definition the changes very warranted.
Yes, they happen to be a good customer of risks that's nice as well.
Got it okay. Thank you.
Speaker 2: transcript
Speaker 2: Got it. Okay. Thank you. Thank you. You're your next question comes in the line of Mita Marshall with Morgan Stanley . Your line is open.
Thank you.
Your next question comes from the line of meta Marshall with Morgan Stanley. Your line is open.
Speaker 18: transcript
Speaker 17: Great, thanks. Usually, or until maybe just some commentary on the Tier 2 and specialty providers, and just what you're seeing in terms of other people kind of building out some of these AI clusters, you know, you classify some of those customers as largely focused on backend today and those represent opportunities going forward or just kind of what the discussion is outside of the cloud tightens amongst some of these other guys that are building very large networks.
Great. Thanks mm two three or onshore maybe just some commentary on the tier two and specialty providers and just what you're seeing in terms of other people kind of building out some of these AI clusters, you know what.
Liz Stein: This new cloud and AI-tightened sector is projected to represent greater than 40% of our total revenue mix due to the favorable AI investments expected in the future. In terms of enterprise momentum, Arista continues to focus on multi-domain modern software with architectural superiority based on our single, EOS, extensible operating system and cloud vision stack. This is truly a unique foundation and differentiator. We have demonstrated our strong execution and uncompromised quality with predictable release cadence that our customers have come to enjoy and appreciate. The power of our one consistent software stack across a breadth of use cases, either when routing, campus, branch, or data center infrastructure is truly unmatched by our industry peers.
You classify some of those customers is largely focused on back end today and those represent opportunities going forward or just kind of what the discussion is outside of the cloud Titans amongst some of these other guys that are building very large networks fix.
Speaker 8: transcript
Speaker 7: Sure, me and other launchers, you know, the tier two cloud providers are doing exactly what the tier one is, they just add a smaller scale. So the activity is out there. Many companies are trying to build these clusters, maybe not hundreds of thousands of GPUs, but thousands of GPUs together in their real estate, if they can get them.
Sure.
Sure.
The tier two cloud providers are doing exactly what the tier one other thing just at a smaller scale. So the activity is out there.
Many companies are trying to build is tough so maybe.
Maybe not.
Hundreds of thousands of Gpus, but.
Thousands of Gpus together in the real estate, if they can get them.
Speaker 8: transcript
Speaker 7: But the design stuff you're working on with them, the type of sort of features, fine tuning is actually very, very similar to the cloud, just at a smaller scale. So we're very happy with that activity. And as I crossed the board, it's very positive to see this in the ecosystem that it's not limited to just four or five times.
But the designs that we're working on with them. The type of sort of features and fine tuning is actually very similar to that just sort of smaller scale. So we're very happy with that activity.
Jayshree Ullal: Let me illustrate with a few customer wins. Our first customer win is an international one where the customers providing services for the interconnect of high performance compute, HPC clusters, which are often its foundation for GPU as a service offering. Arista's Ethernet modular switch coupled with EOS created a perfect combination of a switching platform with real time telemetry leveraging our EOS state-driven public-subscribe model. Our next win showcases our expansion of Arista in the public sector with their AI initiative.
Cross the board.
Sure.
A very positive we'll see this in the ecosystem.
Implemented at just four or five customers.
Speaker 4: transcript
I think they are also waiting for Gpus like everyone else's. So there's that common problem that we're not the only one with lead time issues.
I think they're also waiting for GPUs like everyone else's. So there's that common problem that we're not the only one with lead time issues. But to clarify the common on scale, I actually and I are also seeing some very interesting enterprise projects against smaller scale. So a lot of customers are trying AI for small clusters, not the difference from what we saw with HPC clusters back in the day. Yeah.
But just to clarify the comment on scale of actually and I are also seeing some very interesting enterprise projects against smaller scale. So a lot of customers are trying AI for small clusters nothing different from what you saw with HBC questions back in the day.
Yes.
Great. Thank you.
Speaker 2: transcript
Your next question comes from the line of Michael <unk> with Goldman Sachs.
Jayshree Ullal: This grant funded project utilizes Arista simplified operational models with cloud vision. New AI workloads require high scale, high ratings, high bandwidth and low latency, as well as a need for granular visibility. This build out of a single EVPN, DXLAN based 400 gig fabric, is based on deep offers finds and underscores the importance of a lossless architecture for AI networking.
Your line is open.
Speaker 19: transcript
Hey, good afternoon. Thank you very much for the question. I just had one on the OPEX outperformance in the quarter. We saw an unseasoned all the client quarter on quarter. And I think you mentioned lower product introduction cost that may have helped R&D. I was just wondering if you could talk a little bit more about that aspect of it. Any way we should think about product introductions going forward to help us understand the trajectory of OPEX. Thank you. Yeah, I'm in love with this timing.
Good afternoon, and thank you very much for the question I just had one on the Opex outperformance in the quarter, we saw an unseasonal declined quarter on quarter.
And I think you mentioned lower product introduction costs that may have helped R&D.
Was just wondering if you could talk a little bit more about that aspect of it.
Any way, we should think about product introductions going forward to help us understand the trajectory of Opex. Thank you.
Jayshree Ullal: This last but not least customer is an example of a campus win. A couple of years ago, the customers looking to do a complete refresh of their aging campus network, which comprises of four major headquarter campuses and several remote sites. The customers able to leverage the Arista validated design models, AVD, all the way from data center into the campus network. The customer shows Arista because they were able to offer festive breed operational excellence, as well as security with our zero trust Averse sensors for threat mitigation across the entire campus of wired switches.
Yes, I mean, a lot of it is timing right. We've got a lot of different projects a lot of different products kind of falling through the R&D labs right. Now. So there is got to be some kind of volatility in terms of when to spend shows up when the project spend happens et cetera. So I think we were lower this quarter in Q3 than maybe we even anticipated coming into the quarter.
Speaker 10: transcript
different projects, a lot of different products kind of flowing through the R&D labs right now, so there is going to be some
Speaker 5: transcript
kind of volatility in terms of when the spend shows up, when the product spend happens, et cetera. So I think we were lower this quarter Q3 than maybe we even anticipate coming into the quarter. I expect that to come back in kind of the guide for Q4. And again, there may be some volatility in that even going forward just because it's all about timing. Nothing unusual in that. There's just a lot of products going to the R&D lab.
I expect that to come back and kind of that guidance.
Guidance for Q4.
And again the way it may be some volatility in that even going forward.
Just because it's all about timing nothing unusual in that Theres, just a lot of products kind of gone through the R&D labs. So Michael when the chips are down our spending John but then the chips come on hot dogs spending gets hot too so.
Jayshree Ullal: Arista's innovative macro segmentation, MSS, combined with leaf access and coarse fine delivered a compelling two-tier cognitive-campus solution. These three customers illustrate our power of the platform and software innovations for a modern network model with a low total cost of operations. We are pleased with our trajectory, setting the goal standard in our industry with the lowest CVEs and vulnerabilities and the highest net promoter score for cloud networking.
Speaker 14: transcript
So Michael, when the chips are down, our spending's down, but when the chips come on hot, our spending is hot too. So, expect our prototypes to have some high variability. And we've got a lot, a lot of new products in the pipeline that Andy, Anshul, Ken, you are all working on. So, we expect that number to go up over the next four quarters. Great, very helpful. Thanks, Jay. Thanks.
Expect our prototypes to have some higher variability and we've got a lot not a lot of new products in the pipeline that are Andy I'm sure. Ken you are all working on so we expect that number to go up over the next four quarters.
Great that's very helpful.
Thanks Richard.
Uh huh.
Your next.
Your next question comes from the line of <unk> Malik with Citi. Your line is open.
Speaker 2: transcript
Your next question comes from the line of Autof Malak with Fiddy. Your line is open.
Ita Brennan: And with that, I'd like to hand to Ita, our CFO of Financial Specific. Thanks, Jayshree, and good afternoon.
Hi, Thank you for taking my question a J.
Speaker 20: transcript
Hi, thank you for taking my question. Jishi at the recent Open Compute College of Conference, Marvel and Broadcom leading.
The open compute project conference.
Ita Brennan: This analysis of our Q3 results in our guidance for Q423 is based on non-GAP. It excludes all non-CASH, stock based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAP to non-GAP results is provided in our earnings rate. Total revenues of Q3 were 1.51 billion, up 28.3% year-over-year, and well above the upper edge of our guidance, up 1.45 to 1.5 billion. Services and subscription software contribute to approximately 16.8% of revenues in the third quarter, up from 15.2% in Q2.
<unk> and Broadcom, leading Ethernet.
Speaker 20: transcript
switch merchant ship providers sound very constant in terms of Ethernet adoption at hyper-scalers like meta and Oracle as well and one of your peers has talked about 500 million AI orders.
Switch merchant chip providers sounded very confident in terms of Ethernet adoption at Hyperscale is like meta.
Article as well and then one of your peer has talked about 500 million in AI holders, whether it's custom chip. So was curious about your thoughts on the dynamics.
Speaker 4: transcript
with its custom shape. So, what's curious about your thoughts on the dynamics between custom shape and merchant switch ship providers and how does that help Rista? Thank you. Yeah. Atif, we have been strong proponents in our last 15, 17 years of Rista career on merchant silicon. We look for the best of breed chips.
We've got some shape.
So chip providers and how does that help the Arista. Thank you yes.
So we have been strong proponents and our last 15 17 years off of Mr. Korea on merchant Silicon, we look for the best of breed chips. It's something my team engineering team has built a lot of chips in the past before but we've decided to work with the best of breed companies Broadcom being one of our favorite and major suppliers.
Speaker 4: transcript
It's something my team, engineering team, has built a lot of chips in their past before, but we've decided to work with the best to breed companies, Broadcom being one of our favorite and major suppliers. And of course, in the past, we worked with Intel, Kavium, and we don't rule out other suppliers as well. But this is clearly an area where you can't just build one chip, but you have to build a portfolio of silicon and what Broadcom has done in building that portfolio not only for cloud networking, but for campus and AI is impressive.
Ita Brennan: International revenues of the quarter came in at 324.7 million, or 21.5% of total revenue, up from 20.9% of last quarter. This quarter of a quarter increased, largely due to the healthy contributions from our enterprise customers in Amia and APEC, and some reduction in domestic shipments to our cloud-type customers. Overall, gross margin in Q3 was 63.1%, well above guidance of approximately 62%, and up from 61.3% of last quarter. We continue to see incremental improvements in gross margin, quarter of a quarter, with higher enterprise shipments and better supply chain costs, somewhat offset by the need for additional inventory reserves as customers refine their forecast product mix.
Of course in the past, we worked with Intel Cambium, and we don't rule out other suppliers as well, but this is clearly an area where you can't just build one chip. So you have to build a portfolio of silicon and what Broadcom has done and building that portfolio not only for cloud networking for campus and AI is impressive and you have to not just look at performance you have to look.
Speaker 4: transcript
And you have to not just look at performance, you have to look at...
Uh huh.
Speaker 4: transcript
Price, density, power, these are all very important metrics as we look ahead.
<unk> density power is they're all very important metrics as we look ahead.
Speaker 4: transcript
The root issue here, and you'll share this more with you going forward as well, it's not just the merchant silicon, but how you can enable the merchant silicon with the right software and drivers. And this is an area that really arrists to excel, then if you just have chips, you can't build a system.
You know the the root issue here and you mentioned that this is more with you going forward as well, it's not just a merchant silicon, but how you can enable the merchant silicon with the right software and drivers and this is an area that really Arista excels than if you just have chips you can know the system, but our system wide feature, but that's an kinetic load balance.
Ita Brennan: Operating expenses of the quarter were 255.6 million, or 16.9% of revenue, down from last quarter at 287.3 million. R&D spending came in at 164.4 million, or 10.9% of revenue, down from 188.5 million last quarter. This primarily reflected increased headcount, more than offset by lower new product introduction costs in the period. Sales and marketing expense was 79 million, or 5.2% of revenue, consistent with last quarter, with increased headcount and some reduction in product several costs.
Speaker 4: transcript
But our system wide features, whether it's a genetic load balancing or latency analyzer to really improve the job completion time and deal with that frequent communication and generative AI is also fundamentally important. You're gonna hear a lot more about this next week, so stay tuned.
Thing or are they see analyze to really improve the job completion time and deal with that frequent communication engineering of the eye is also fundamentally important you're going to hear a lot more about this next week. So thank you.
Thank you.
Yeah.
Your next question comes from the line of Ben Reitzes with Melius Research. Your line is open.
Speaker 2: transcript
Your next question comes from the line of Ben Reats with Melius Research. Your line is open.
Ita Brennan: Our G&A costs came in at 12.1 million, or 0.8% of revenues, down from last quarter, and reflecting the recovery of some bad debt amounts recorded in prior periods. Our operating income to the quarter was 696.2 million, or 46.1% of revenue. Other income expense to the quarter was a favorable 42.3 million, and our effective tax rate was 21.3%. This resulted in net income to the quarter, a 581.4 million, or 38.5% of revenue. Our limited share number was 300.7 million shares, resulting in a diluted earnings per share number for the quarter, a $1.83 of 46.4% from the prior year.
Yeah, Hey, thanks for the question.
Speaker 21: transcript
Yeah, thanks for the question. Gay Shree Anita.
Okay, Sri Anita.
Speaker 21: transcript
Can you discuss a little more your gross margin commentary that it should moderate next year from the 63 levels in the back half? I mean, are we talking about it going to the first half, 23 kind of levels or just a little bit of a degradation next year and what would be the reason behind it other than lead times? Is there any other mix or other issues that would cause it to go down? Thanks.
Can you discuss a little more your gross margin commentary.
Is that a ship moderate next year from the 63 levels in the back half I mean are we or are we talking about going to the first half 'twenty three kind of levels.
Or just a little bit of a.
Degradation next year, and what would be the reason behind it.
Yeah.
Other than lead times is there is there any other mix or other issues that would cause it to go down.
Speaker 10: transcript
And also that I think what's the issues commentary, my commentary is, you know, we have been seeing it incrementally improve if it's gone through the year. We expected to stabilize. So not that we expected to go down next year, but more that it will stabilize. And then it will become more dependent on customer makes and other things again, similar to where we've been before. But obviously provides more. I would look on the discussion on this next week too. But the intention was not to say that we think it starts to decline again. It was more that we think it will stabilize after a period where we've been seeing this incrementally improved.
And also that I think well that's issued commentary in my commentary, we have been seeing and incrementally improve as it has gone through the year, we expect it to stabilize so not that we expect it to go down next year, but more than it will stabilize and then it'll become more dependent on customer mix and other things again.
Ita Brennan: Now it turns to the balance sheet, Cash Cash Equivalence and Investments into the quarter to approximately 4.5 billion. We did not repurchase shares of our common stock in the quarter. To recap our repurchase program today, we have repurchased $655 million, or $8 million shares, at an average price of $107 per share, under our current $1 billion word authorization. This leads $144.5 million, available to repurchase the future quarters. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price and other factors.
Similar to where we've been before but obviously provides more outlook on.
Discussion on this next week too, but the intention was not to say that we think it starts to decline again. It was more than we think it will stabilize after a period, where we didn't see these incremental improvements.
Okay. Thanks, a lot I appreciate the color.
Speaker 22: transcript
Thanks friend.
Thanks, Brian.
Speaker 2: transcript
Your next question comes from a line of Tim Long with Barclays. Your line is open.
Your next question comes from the line of Tim Long with Barclays. Your line is open.
Speaker 23: transcript
Thank you. I just wanted to hit on the Cloud Titan vertical or Cloud Titan AI vertical now. I could, I think, either one of your comments was.
Thank you.
Just wanted to hit on the cloud Titan vertical or cloud Titan AI vertical now could I think either one of you.
Ita Brennan: Now it's going to operate in cash performance for the third quarter. We generated approximately $699 million of cash from operations in the period, affecting strong earnings performance, combined with some increase in deferred revenue and taxes payable. The SLS committed 51 days, up to 49 days in Q2, reflecting the strong collections quarter and a good linearity of earnings. Inventory Charons were 1.1 times, down to 1.2 last quarter. Inventory remained flat to last quarter at 1.9 billion, selecting the ongoing receipt and consumption of components from our purchase commitments and an increase in switch-related finishes.
Your comments was.
Speaker 23: transcript
down a little or something in the quarter. Could you just...
<unk>.
Down a little or something in the quarter could you just.
Speaker 23: transcript
You know, two parts here talk a little bit about that common. Is this just timing or are there some, you know, different market share dynamics there? And then secondly, if you could talk a little bit about, you know, opportunities that other hyper scalars, I know that's something where there's, there's a trial activity and potential and sounds like it, it might take a little while, but any updates on other cloud titans that could become larger customers. Thank you.
Two parts here talk a little bit about that comment is this just timing or are there some different market share dynamics, there and then secondly.
If you could talk a little bit about opportunities that other hyperscale.
Hyperscale or as I know, that's something where there's there's been trial activity and potential and it sounds like it might take a little while but any updates on other cloud.
Cloud Titans that could become larger customers. Thank you.
Ita Brennan: Our purchase commitments at the end of the quarter were $2 billion, down from $2.2 billion at the end of Q2. We expect the overall purchase commitment number to continue to climb as we further optimize our supply conditions. However, we will maintain a healthy position related to key components, especially as we focus on new products. Our total deferred revenue balance is 1.195 billion, up from 1.085 billion in Q2. The majority of the deferred revenue balance in services related and directly linked to the timing and the term of service context can vary on a quarter by quarter basis. Our product deferred revenues balance increased by 47 million from last quarter. Our sales days were 44 days, down from 57 days in Q2, reflecting the timing of inventory receipts payments.
Speaker 10: transcript
It's just in terms of cloud. I mean, it's going to be a good cloud year again in 2023 for us. I think, but we did come into the air, and we wanted if it could to, you know, balance supply. It has been toward enterprise. And we have been doing that. It's been some, you'll see it. It's not a huge makeshift, but there has been some makeshift towards enterprise when we can. And we're pleased that we've been able to do that. I'm sorry, I'm not going to take that other cloud.
And then just in terms of pilot.
It's going to be a good crowd here again and try and phase III for us I think but we did come into the year, saying, we wanted if we cut too.
Supply has been towards enterprise I mean, we have been doing that there's been some yeah youll see it it's not a huge mix shift, but there has been some mixed shift towards enterprise. When we can and we're pleased that we've been able to do that I'm, sorry, I'm not going to take them on their cloud journey.
Speaker 8: transcript
Sure, then the engagement with other clock tighten who are customers but are customers is still very positive. They're good customers have many optionoing routed layers, backbone, van use cases as well.
He has been with other cloud Titans.
Customers, but talk US most is still very positive they're good customers. Many of you know in.
Relative lows backbone bond use cases as well the next peak will touch a little bit more on the whole bird losses by topic.
Speaker 8: transcript
The next week will touch a little bit more on the whole bed versus biopic.
Thanks, Dan.
Your next question comes from the line of James Fish with Piper Sandler.
Speaker 2: transcript
Your next question comes from the line of James Fish with Piper Sandler. Your line is open.
Ita Brennan: Capital expenditures from the quarter were 11.2 million. Now to our outlets from the fourth quarter. Customer planning horizons for new deployments have shortened and concerted with steadily improving lead time. On the spline side, we expect to continue to ship against previously committed deployment plans for some time, targeting supply improvements for our most leaders, but also careful not to create resundant customer inventory. As outlined in our guidance, we expect to make incremental improvements to our 2020 and 2020 outlook, which now call for your over your revenue growth of approximately 33%.
Your line is open.
Speaker 24: transcript
Hey ladies and on show great to great quarter. Just on the product side, you guys released a new 25 gig offering recently. I guess what's been the early feedback, what kind of differentiates down there. And, Jason, we just got to clarify here. When you talk about that double digit growth rate for next year and years beyond, are you talking about a multi-year cager or for 24 specifically and then for 25 and 26 and beyond, just trying to clarify here. Thanks.
Hey, ladies and onshore great great quarter.
Just on the product side that you guys released a new 25 gig offering recently I guess, what's been the early feedback what kind of differentiates down there.
Just to clarify here when you talked about double digit growth rate for next year and years beyond are you talking about.
About a multiyear kanger or for 2000 and for specifically have been for 25, and 26 and beyond just trying to clarify here.
Speaker 8: transcript
Okay, well, I'm sure you want to answer the product question first. Sure. James, the recent announcement was the launch of our 25 gig ultra low latency switches. These are the 71 30 series.
Okay, well I'm sure you want to answer the broader question first sure.
Ita Brennan: On the growth margin front, we expect growth margin for approximately 63% to the fourth quarter, affecting ongoing supply chain and manufacturing benefits on maintaining a reasonably healthy cloud contribution. Turning to spending and assessments to expect to monitors, the overall macro environment carefully, while engaging in targeted hiring, R&B, go to market at the team's use the opportunity to acquire a talent. On the cash front, while increases in working capital needs with onto moderated recent quarters, our year today, 2023 tax payments have been deferred to October, and this will represent a significant incremental use of cash in the fourth quarter at approximately 352 million.
<unk> seen a recent announcement was the launch of our 25 gig ultra low latency switches. These of the 70 136.
No the whole world can upgrade the high frequency trading infrastructure going from 10 to 25.
Speaker 8: transcript
The whole world can upgrade the high frequency trading infrastructure going from 10 to 25.
Speaker 8: transcript
At very, very low latency, you're talking about, you know, with cross-point technology, you're talking about seven nanoseconds.
Very very low latency you are talking about with cross point technology Youre talking about seven nanoseconds, but we also introduced layer two layer three features at about 100 to 139 seconds.
Speaker 8: transcript
But we also now introduced layer two, layer three features at about 100 to 130 nanoseconds.
Speaker 4: transcript
And I'm not sure just to put this in perspective back in the day, it used to be 500 nanoseconds, right? That's right, only keeps going down. Yeah, faster than the speed of light. And James just to give you a clarification, I was saying as a company, either on my self-ancho, we're aiming for at least double digits in 24 ad years beyond. And I wasn't making any forecast for exact numbers.
And actually just to put this in perspective back in the day. It used to be 500, nanoseconds, let me keep going down faster than the speed of light and James just to give you a clarification I was saying as a company you know myself onshore we're aiming for at least double digits in 'twenty four and years beyond when that wasn't making any forecast for.
Ita Brennan: With all of this as a backdrop, our guidance to the fourth quarter, which is based on non-gap results, and excludes any non-cash, stock based compensation impacts, and other non-recurring items, which is as follows, revenues of approximately 1.5 to 1.55 billion, gross margin of approximately 63 percent, operating margin of approximately 42 percent, our effective tax rate is expected to be approximately 21.5 percent, the diluted shares of approximately 319 million shares.
<unk> numbers.
Okay.
Okay.
Your next question comes from the line of Thai kitchen with Oppenheimer. Your line is open.
Speaker 25: transcript
Your next question comes from the line of ETI Kidron with Oppenheimer. Your line is open. Thanks, ladies. Quick question on Gross Margin. Nice improvements there.
Ladies a quick question on gross margin nice improvements there.
Speaker 25: transcript
So, Eta, maybe you can go into the details of how much room is there more to go and...
Maybe you can go into the details of how much room is there more to go and.
Jayshree Ullal: I will now turn the call back to you.
Operator: Thank you, Eda. We will now move to the Q&A portion of their RISTA earnings call to allow for greater participation and life requests that everybody please limit themselves to a single question. Thank you for your understanding, operator, take it away.
And I'm just kind of wondering with your customers now looking at your excellent financials and Youre recovering gross margins what are the odds desktop pricing pressures start coming back something you probably have not seen much in the last couple of years since COVID-19.
Speaker 25: transcript
And I'm just kind of wondering, we're customers now looking at your excellent financials and your recovering gross margins. What are the odds that pricing pressures start coming back? Something you probably have not seen much in the last couple of years since COVID. Now that margins are normalizing.
Operator: We will now begin the Q&A portion of the RISTA earnings call. In order to ask a question during this time, simply press star to the number one on your telephone keypad. If you would like to withdraw your question, press the star and the number one again. We ask that you pick up your hands that before asking questions, in order to ensure optimal sound quality.
Margins are normalizing.
Speaker 25: transcript
and what, you know, could prices come down potentially, perhaps even for the most specifically to the larger customers of yours.
Okay.
Crude prices come down potentially perhaps even for the more specifically to the larger customers of yours.
Yeah, I'll just start by saying prices are always coming down as well.
Speaker 17: transcript
I'll just start by saying prices are always coming down. As we go from one speed factor to another, between the 30s technology and the density, the dollar per gigabit is always coming down. So pricing pressure doesn't change in dependent on our growth margin. We're always in competitive view.
Go from one speed factor to another you know between the <unk> technology in the density.
Samik Chatterjee: Your first question comes from the line of Simeik Jatterjee with J.P. Morgan. Your line is open. Hi. Thank you for the question and congrats on the result. I guess just to keep it simple, J.Sri, if you can give us an update on when we think about the last 90 days, how have the two sort of verticals, cloud tightens and enterprise sort of shown up in terms of momentum of orders and demand relative to where your expectations were 90 days ago.
The dollar per gigabit is always coming down so we're pricing pressure doesn't change independent of our gross margin always in competitive deals where the value really comes in and again as I alluded to this is capex versus opex.
Speaker 4: transcript
where the value really comes in. And again, I alluded to this as cat X versus off X. We expect pricing to be reasonably stable. But we expect the operational cost to be significantly advantageous with the risk of technology, the total TCO, because of singular cloud vision, because of our self-redubbing approach, because of the fact that we have single digit vulnerabilities while our industry peers have 100 to 500 of them in a given five-year factor. These are all now.
<unk> pricing to be reasonably stable and we expect the operational costs to be significantly advantages that the Arista technology. The total that T C L.
Cause a singular cloud vision because of our software driven approach because of the fact that we have single digit vulnerabilities vine our industry peers have 100 to 500 of them in a given five year factor. These are all now paying customers and enterprises, especially a very fatigued with the poor quality.
Samik Chatterjee: Some of the cloud companies have talked about their graphics outlook for next year as well. An update on that would be helpful and on the last call you did talk about a target for double digit growth next year. So how are you thinking in relation to that number still going into the industry? Thank you.
Speaker 17: transcript
Customers are enterprises, especially a very fatigued with the poor quality of our competitors and are paying a lot of attention to that and willing to pay for that quality.
All of our competitiveness and obtain a lot of attention to that and willing to pay for that quality.
Jayshree Ullal: Okay. Thanks Simeik. First of all, we are looking forward to sharing more detail on analyst day. But just to reiterate, our team has always projected at least a double digit growth for next year and years beyond. So that goal remains unchanged and we'll share more with you coming back to the last 90 days. As you know, as our returns improve our visibility declines. But we don't see significant change in improvements or declines in the last 90 days. We continue to see good momentum on enterprise and we continue to see a good expected push on the combination of both cloud and AI together. Thank you. Thanks Simeik.
Speaker 8: transcript
It I as Jesui mentioned by what I emphasize this, you know, the market is very competitive and it has been ever since we started. The gross margin that we report is not the reason why customers try to negotiate price and the gross margin is simply a result of what we've been executing on. I think the country will be itself.
Hi.
As we mentioned, but I want to emphasize this the.
The market is very competitive and it has been ever since we started.
The gross margin that we report is not the reason like US most of it or negotiate price on the gross line is simply a result of what we've been executing on and I think other countries beautiful.
Alright, great. Thank you.
Thank you bye.
Speaker 2: transcript
Your next question comes from the line of Simon Leopold with Raymond James. Your line is open.
Your next question comes from the line of Simon Leopold with Raymond James Your line is open.
Speaker 26: transcript
Thanks for taking the question. I want to see if you would be able willing to comment on your customer concentration year to date. I appreciate it can be lumpy quarter to quarter, but.
Thanks for taking the question I wanted to see if you would be able or willing to comment on your customer concentration year to date I. Appreciate it can be lumpy quarter to quarter, but given sort of where you were in 2022, I'd just like to get a better understanding of what.
Speaker 26: transcript
given sort of where you were in 2022. I'd just like to get a better understanding of what, essentially the progress has been in 2023 and
Antoine Chkaiban: Your next question comes from the line of Antoine Chikaban with new street research. Your line is open. Thanks very much for taking my question. So accelerated AI cluster deployment is clearly waiting on traditional infrastructure deployment this year. And I'm kidding to hear how sustainable you think this is because the vast majority of workloads still run on traditional infrastructure. Right.
Essentially the progress has been in 2023.
Speaker 26: transcript
In that context, you know, how big is enterprise as a percent of revenue this year or year-to-date versus where it was last year? Thank you.
In that context, how big is enterprise as a percent of revenue this year versus year to date versus where it was last year. Thank you.
Speaker 17: transcript
The famine, we're very proud of our customers, even if they're concentrated, we love it. And as you know, the last year we had some outsized concentration.
So I mean, I I've been very proud of our customers, even if they're concentrated we love it and as you know the last year, we had some outsized concentration.
Jayshree Ullal: So it is very to expect a rebound in traditional infrastructure spend the next year. Yes, thank you Antoine.
Speaker 17: transcript
If I recall the numbers, matter was the 26% and what was Microsoft data?
If I recall the numbers matter was at 26% and what was Microsoft Dita.
Speaker 17: transcript
You know, while we...
<unk> seven <unk> seven.
Jayshree Ullal: I'll share some of my thoughts and I'd like to hand it over to Anshel for further thoughts. You know, we've always looked at that the cloud network is a front end and a backend. And as we said last year, many of our customers are favoring spending more on the backend with AI, which doesn't mean they stop spending on front end, but they've clearly prioritized and double down on AI this year. My dresses as we look at the next few years, they'll continue to double down on AI, but you cannot build an AI backend cluster without thinking of the front end.
You know what.
While we expect you to many of the Capex news you've seen a shift in the eye spending that it's possible they come down, but they're still going to be very strong north of 10% contributors to our 2023 our results.
Speaker 17: transcript
I expect you to many of the Capix use you've seen and shift in the eye spending.
Speaker 4: transcript
that it's possible they come down, but they're still going to be very strong north of 10% contributors to our 2023 results.
Speaker 4: transcript
And we continue to, even as the denominator may get larger in the forthcoming years, we continue to look at them as two very important and strategic customers for us.
And we've continued to even as the denominator gets larger and the forthcoming yes. We continue to look at them as two very important and strategic customers for us.
Thanks Simon.
Speaker 2: transcript
Your next question comes from the line of David Vought with UBS. Your line is open.
Your next question comes from the line of David <unk> with UBS. Your line is open.
Jayshree Ullal: So we'll see a full cycle here, where well today the focus is greatly on AI and the backend of the network in the future we expect to see more investments in the front end as well. You said it's part on AI, is everyone's priority right now, and the risk will get touched at the right time.
Speaker 27: transcript
Great, thanks guys for taking the question. I just want to follow up on Simon's question, maybe put it a little bit differently. So if I think about your market sector trend update, how much of the shift to that 40% to 45% cloud in AI tight?
Great. Thanks, guys for taking the question.
Just want to follow up on Simon's question, maybe put it put it a little bit differently. So if I think about your market sector.
<unk> update.
Jayshree Ullal: Thank you.
Much of the shift to that $40 to 45% cloud and AI Titans reflects the inclusion of new AI use cases going forward and the shift of Oracle combined with maybe some normalization at met Ed Microsoft can kind of help us think through the dynamics there and if it looks like share is going to be unchanged.
Speaker 27: transcript
reflects the inclusion of new AI use cases going forward and the shift of Oracle combined with maybe some normalization at Meta and Microsoft can kind of help us think through the dynamics there. And if it looks like shares going to be unchanged with enterprise and financials, does that suggest to you that those markets are going to grow comparably over the long term across the cycle? Is that the right way to look at it?
Matt Niknam: Your next question comes from the line of Matt Niknam with Duage Bank. Your line is open. Thank you for taking the question. One question, a very simple one on services, a pretty nice improvement. About 13% of the financial improvement in the quarter. Easily, I think we've seen low single digits, mid single digits, anything you would call out and how are we thinking about that for the fourth quarter. Thanks. Yeah, look, I think every now and again you see kind of a pop on the services line.
With enterprise and financials does that suggest to you that those markets are going to grow comparably over the long term across the cycle is that the right way to look at it. Thanks.
Speaker 17: transcript
Yeah David, your analysis is really deep on this one. Let me just say how innocently we reported this, which is...
David Your analysis is really deep on this one let me just say how innocently be reported this but yes.
Matt Niknam: It's usually either somebody is consumed services faster than they intended to or we've been negotiating a contract. And then when we do actually finally sign the renewals contract, there's some flush of prior periods into the quarter. So if you look back historically, you'll see that happens from time to time. I don't think it changes the kind of fundamental growth in services we talked about this kind of mid to a little bit higher teams growth on an ongoing basis year over year. I don't think it changes that it's just if you do have these little spikes from time to time. Thank you. Thanks, Matt.
Speaker 4: transcript
Oracle is a greater than $1 million in stores of a company right now. And they both, their cloud spend as OCI and AI is significant both as a company and for RISTA. But we're not making any assumptions and that'll vary every year, of course, on the mix of methamphetamine, crystal-sauce or Oracle or any other for that matter. We're simply saying AI is going to become such an important component of all of the cloud typeies that is now combined.
Oracle has a greater than $1 million install silver.
Company right now.
And they are both their cloud spend is OCI and EI insignificant, both as a company and for Arista, but we're not making any assumptions and that'll vary every year of course on the mix of NATO, Microsoft Oracle or any other for that matter. We're simply seeing AI is going to become such an important component of all our cloud Titans.
And it's now a combined vertical.
Speaker 5: transcript
So don't read too much more into it. And it's more of a forward looking impact to be honest, try to be fit starkly. This doesn't really change the trends that we've been talking about previously. It's really more about the future. And how do you think AI will impact these over-cut forms?
Read too much more into it it's more of a forward looking <unk>.
Impact to be honest tried it historically this doesn't really change the trends that we've been talking about previously it's really more about the future.
Karl Ackerman: Your next question comes from the line of Carl Ackerman with BNP Parabess. Your line is open. Yes, thank you.
How do you think AI will impact these numbers going forward.
Yeah, all right. Thanks, guys.
Speaker 4: transcript
Yeah, AI is too far with shortcuts. Much right now, it's right, you know that. But as it starts to become important, then this combined will go north of the 39% we have normally forecast.
Much like no. That's right Yeah, you know that but as it starts to become important and then the and then this combined will go north of the 39% we have normally forecast.
Ita Brennan: I suppose this is a question for it, but is the is the upside of the quarter and outlook coming from a combination of better bookings and working down some of your prior backlog. Just any thoughts in terms of maybe where your backlog may end up relative to normal levels. Pre pandemic would be super helpful. Thank you.
Great understood. Thank you.
Speaker 2: transcript
Your next question comes from the line of Eric Supager with JMP Securities. Your line is open.
Your next question comes from the line of Eric Xu Picture with JMP Securities. Your line is open.
Speaker 28: transcript
Yeah thanks for taking the question and congrats. I know you don't want to talk about backlog, but can you give us a sense?
Yes, thanks for taking the question and congrats.
I know you don't want to talk about backlog, but can you give us a sense.
Ita Brennan: Yeah, Carl, we don't talk about backlogs, you know, specifically. I think what we have said is, you know, as lead times improve, you know, you expect to see some reduction and disability, the customer is the time where they have to play as orders changes over time. Right. So I think that we are seeing that dynamic, you know, we've talked about that dynamic that, you know, we are, as it be times get better, we are seeing kind of customer planning arises are shortening.
Speaker 28: transcript
At what point or what time you think your book to bill will return back to one or greater than one Or or when will your lead times reach a normalized level and then I have a quick follow-up after that?
At what point or at what time do you think your book to Bill will return back to one or greater than one.
Or or when will your lead times reached normalized levels and then I have a quick follow up after that.
Speaker 5: transcript
Nancy, not going to talk about those people if we don't talk about backlog areas. I think, honestly, we're making improvements on the audience. Usually, we talked about how these times are much improved. Right. So we'll continue to do that. That's a positive thing for the customers and for the business. And, you know, we're, we're still not back to kind of the turns business that we had some time ago. We're making progress, but we're still.
Definitely not going to talk about book to Bill if we don't talk about backlog area.
I think honestly, we're making improvements.
So you talked about how lead times are much improved right. So we'll continue to do that that's a positive thing for the customers and for our business.
Ita Brennan: We will be still deploying into my prepared remarks when we are still deploying equipment into next year from plans that we made some time ago, and that's just kind of, again, working with customers and laying out their plans. But in terms of giving specific numbers, we haven't done that. Thanks, Carl.
And we're still not back to kind of the turns business that we had some time ago, where we're making progress, but we sent out there I'm very I just want to add that I'm very proud of the progress. The team has made you know when you look back two years ago. We were short of components, you are making multi year purchases. There was a risk of a very large exposure because you can't get all these forecast.
Speaker 4: transcript
I'm very, I just want to add that I'm very proud of the progress the team has made. You know, when you look back two years ago, we were short of components who were making multi-appurchases. There was a risk of a very large exposure because you can't get all these forecasts right. And then obviously the mixed change, she's changes from time to time, especially with the cloud and AI. So it's very hard to measure a business on, you know, book the bill and backlog at a given time. But as you look at it as an overall multi-year trend.
Amit Daryanani: Your next question comes from the line of a meet Daria Nani with Evercore. Your line is open. Good afternoon, everyone and congrats on a nice set of numbers here. You know, it's hoping to talk a little bit more on the enterprise side. You're seeing some really good strength over here, clearly, but maybe you can talk about, you know, is this strength more coming from campus versus the data center side? Maybe just qualitatively, very using better trends.
Right and then obviously the mixed change changes from time to time, especially with the cloud and AI.
It's very hard to measure our business on book to Bill and backlog at a given time, but as you look at it as an overall multiyear trend.
Yeah.
Speaker 4: transcript
Can you comment then on just when will the lead times be at a normalised level? Yeah, and I think we said this. It's been improving consistently and we expected to be normalised just like Abros margin since 2024.
Can you can you comment there not just when will the lead times be at a normalized level.
Amit Daryanani: And really, the context of this is, I think a lot of peers are seeing a very severe drop in the growth rates as their backlogs have gone away. You don't seem to be having that issue. So I'm wondering, like, what is the offset to that and what's enabling the growth into the extent you can talk about campus versus the data center that would be really helpful. Thank you.
Yeah, and I think we said this it's been improving consistently and we expect it to be normalize just.
Just like our gross margins in 2024.
Speaker 3: transcript
All right, very good. Thank you. Operator, we have time for one last question.
Alright, very good thank you.
Later, we have time for one last question.
Your last question today comes from the line of Woo Jin Ho with Bloomberg Your line is open.
Speaker 2: transcript
Your last question, today comes from the line of Wu Jin Ho with Bloomberg. Your line is open.
Jayshree Ullal: Okay, again, I'll share a few words and I'd love for Anshul to step in and say some too. Look, if you look back three years ago, we started seriously investing in the enterprise. And, you know, back in 2020, we had a small enterprise business and it was largely comprised of, you rightly pointed out, data center and some high performance compute and low latency HFC counter ever forget our original heritage. But in the last three years, we have made an investment and seen a significant uptick in enterprise customers wanting to do business with Arista.
Speaker 29: transcript
Oh great, thanks. I made the cut. Happy Halloween, folks. So I think there was a mention on March and Silicon earlier in the Q&A. And one of your March and Silicon partners has actually moved up the stack towards the surface of running routing. I'm just curious if there's any intention on going after that piece if that chip is made up.
Oh, great. Thanks, I made the cut happy Halloween folks.
[laughter]. So so I think there was I mentioned on our merchant silicon earlier in the Q&A and one of your merchant Silicon partners has actually moved up the stack towards the service provider routing I'm just curious if there's any intention on going after the piece if that chip is made available to you.
Sure.
Speaker 8: transcript
So, Volgyn, I believe you are referring to the Linus Nance Madd.com on their 25.60 Jericho chip that was announced recently. Thank you very much.
I'll leave you are referring to the latest Nonslip broadcom on their 25 60, Genco chip that was announced recently.
Jayshree Ullal: Historically, it's been the high tech enterprise and the financials and today we're seeing a much better cross section of verticals, including healthcare, education, we expect to see more and more distributed enterprises and key to a wired lease, a wireless lease, a storage cluster, a compute cluster in a border lease for routing and wind transmit. It's pretty exciting that Arista is truly and remarkably setting the tone for a two-tier, these fine architecture across the enterprise and building that modern operating model based on cloud vision.
The government greatly.
Complementary to exactly so.
Speaker 8: transcript
So, with the same family, same features. And as you know, we've been a great partner of God come for a long time and we're gonna build a new product.
At the same family same features and as you know we've been a great partner Broadcom for a long time.
The new products.
Speaker 8: transcript
This is not a new entry I sort of speak. We've been building these products that can be used as switches our orders for a while. And that bandwidth just doubled going to now 25.60. You can expect some products from us in the future.
This is not.
A new entry.
We've been building these products starting to use our switches our artist for awhile.
But just double going for now at 25, six so you can expect some products from us in the future, but those variances, but really nothing really changes just innovation continued on merchant silicon customers Thats the case.
Speaker 8: transcript
with those variants as well, but really nothing really changed. It's just innovation continuing and emergency-lican continuity is a great.
Speaker 17: transcript
And the investment surgeon we have made in our routing stack over the last 10 years I want to say, has just gotten better and stronger. Power in the internet, power in the cloud, power in the AI, these are hard problems. And they require thousands of engineers of investment to build the right BX land, BGP routing, EVPN, et cetera. So it's not just a chip, it's how we enable the chip to do these complicated routing algorithms.
And they invest so it shouldn't be you have made in our routing stack over the last 10 years I want to say it has just gotten better and stronger.
Jayshree Ullal: I met Ms. Anshul here. You know, we have a great team being led by Chris Smith and Ashwin Colate in this space and now we sell in many, many countries around the world. And as I just mentioned, both data center and campus, customers are coming to us for the automation for the higher quality, for the visibility that they were able to bring to them across the board in one architecture, one OS and one cloud vision.
No part of the Internet as far as the cloud R&D AI. These are hard problems and then they require thousands of engineers of investment to build the right expand BGP routing EVP and Sandra So it's not just a chip it's how we enable the chip to do these complicated routing algorithms.
Great.
Speaker 3: transcript
This concludes the Arista Network's third quarter, 2023, Erning's Fall. We have posted a presentation which provides additional information on our results which you can access on the Investor section of our website. As a reminder, Arista will be posting our 2023 Cloud and AI Innovators analyst day on Thursday, November 9th. If you are interested in attending virtually, you may register from the Investor section of our website. Thank you for joining us today and thank you for your interest in Arista.
Thank you. This concludes the Arista Networks' third quarter 2023 earnings call. We have posted a presentation, which provides additional information on our results, which you can access on the investors section of our website.
Jayshree Ullal: That message resonates with every CIO today, and they are no longer wired about Arista being the new kid on the block that's a risky move for them. We are in fact becoming the de facto and they like it. Which is why the momentum just continues. It's good execution by the team and getting to more and more customers around the world. Thank you.
As a reminder, arista will be hosting our 2023 cloud and AI innovators analyst day on Thursday November nine.
We are interested in attending virtually you may registered from the investors section of our website.
Thank you for joining us today and thank you for your interest interest.
Ben Bolin: Your next question comes from the line of Ben Bolin with Cleveland Research. Your line is open. Thanks for taking the question. Good evening, everyone. I was hoping you might be able to comment a little bit about your thoughts as you make progress in the back end network around GPU cluster opportunity, how you see that developing versus what you've shared with us previously. And any color in particular around both pre-existing and the opportunity for net new wins would be helpful. Thanks.
Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.
Speaker 2: transcript
Thank you for joining Ladies and Gentlemen. This concludes today's call. You may now disconnect.
Speaker 30: transcript
Please wait. The conference will begin shortly. Welcome to the conference. Welcome to the conference. Welcome to the conference. Welcome to the conference. Welcome to the conference. Welcome to the conference.
Please wait the conference will begin shortly.
[music].
Yeah.
Yeah.
Jayshree Ullal: Sure. Again, this is an area that I should live and breathe more than I do. So I'll give you some executive comments. But then I, as I see it, you know, the back end network was something we didn't even see a few months or years ago and was largely dominated by infiniband. Today, if I look at the five major designs for AI networking, one of them is still very infiniband dominated. All the others we're looking at is are adopting a dual strategy of both ethernet and infiniband.
Yeah.
Yes.
[music].
Jayshree Ullal: So I think AI networking is going to become more and more favorable to ethernet, particularly with the ultra ethernet consortium and the work they're doing to define and spec. You're going to see more products based on UEC. You're going to see more of a connection between the backend and the front end using IT as a singular protocol. And so we're feeling very encouraged that especially in 2025, there will be a lot of production rollout of backend and of course front end based on ethernet.
Anshul Sadana: Over to you, Anshul. Thanks, Ashwin. When, you know, our cloud-tightened customers as well as the special data providers have been great partners with us. So the level of partnership and core development that's going on in this space is high. It's just like in previous cycles, previous products that we've done with them. There's a lot of fine-tuning needed in these back-end networks to get the maximum utilization of GPUs. And as you know, we are good at these are doing projects.
Yes.
[music].
Yes.
Yeah.
Yeah.
Yes.
Anshul Sadana: So I think for enjoying it, the activity is much, much higher than before. And the goal is to scale these clusters as quickly as possible so customers can run their jobs faster. We're feeling good about it. You know, you've heard comments from Josh Fales, well in the past, and you hear more on the analysts on this topic too, but all good on the activity one trying to wear us. I think one thing to just add is the entropy and efficiency of these large-language models and the job completion time is becoming so critical that it's not just about, you know, packet latency. It's really about end-to-end latency. And this is something our team, especially our engineers know a lot about from the early days. So we're really working this end-to-end. Thanks, Ben.
[music].
Aaron Rakers: Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open. Yeah, thanks for taking a question. I just want to kind of dovetail off that last question a little bit. I know, you know, J. Sherry last quarter, I think it was you commented that you'd expect to see pilot deployments for these AI opportunities in 24 and then meaningful volume in 2025. You know, first of all, do you reaffirm that view or has that changed it all?
Aaron Rakers: And then, you know, on that, can you give us some context of how you see network spend intensity for these AI fabrics relative to I think in the past, it's been kind of high single-digit percent of compute spend on networking in classical cloud infrastructure environments?
Yes.
Okay.
[music].
Jayshree Ullal: Well, first of all, Aaron, the first question is easy. I reaffirm that view and more later on November 9th at our analyst day. So if I tell you everything now, you may not attend that session. Coming back to this networking spend versus the, you know, the rest of the GPUs and et cetera, I would say it started to get higher and higher with 100 gig, 400 gig, 800 gig, where the optics and the switches are more than 10 percent, perhaps even 15 in some cases 20.
Jayshree Ullal: A lot of it's governed by the cables and optics too. But the percentage hasn't changed a lot in high-speed networking. In other words, it's not too different between 100, 200, 400 and 800. So we'll you'll continue to see that 10 to 15 percent range. Okay, thank you. Thanks Aaron.
Tal Liani: Your next question comes from the line of Tal Leoni with Bank of America. Your line is open. Hi. J.S.R. Your tone is definitely better this quarter than last quarter and it's more confident in the numbers and I want to understand if something changed in the last three months that made you more optimistic, I'm looking at the consensus estimates and it looks like the growth rate has been declining for four quarters from like 54 percent to about 20 percent next quarter, and then he troughs at Q1, stays there and recovers after that.
Tal Liani: Do you agree that we are nearing kind of the end of the down adjustment to the growth rates and then it's going to stabilize and go up from there, or how do you look at the risks of that not materializing? What do you think, Eda?
Ita Brennan: That's all I think. Look, we've been talking about kind of the growth decelerating as it moves through the year, just because it comes, or so high, I think if you look at the discussion, we've had so far about 24 and obviously there's more to come next week. We've talked about double digit growth but again, we are expecting that there is some moderation on the downside of the business next year. I think within the bounds of kind of the plans that we've laid out, discussions that we've laid out, I think we're executing well, we're giving you some upside on the in the guide for 23 and by default almost kind of some upside on 24, so I think we're executing well but within the bounds of what we talked about, we do believe that there's moderation at times bending as we head into 2024.
Ita Brennan: And Tal, I think I need to focus on my tone and maybe sing a song or something, because that sounds really... That quarter and this quarter. You're pretty happy last quarter. I'm a happy kind of gal at the moment. We're reading between the lines, you know.
Ita Brennan: Thank you.
Sebastien Naji: Your next question comes from the line of Sebastian Najim with William Blair. Your line is open. Hi, thanks for sticking to the question. I wanted to ask about the change in revenue breakdown and the inclusion of OCI in this new Cloud Titan and AI segment. Was it the result of the material change in Arista's wallet share at Oracle or is that business becoming a larger portion of revenue? Anything you can provide there?
Sebastien Naji: Yeah, no, we don't do it based on wallet share of Arista. We do it based on definition. So I think OCI has become a meaningful top-tier cloud customer and they belong in the Cloud Titan category and in addition to their AI investments as well. So for reasons of classification and definition, the change is very warranted. And yes, they happen to be a good customer of Arista. That's nice as well. Got it.
Ita Brennan: Okay, thank you.
Meta Marshall: Thank you. Your next question comes from the line of Mita Marshall with Morgan Stanley. Your line is open. Great. Thanks. Usually or until maybe just some commentary on the tier two and specialty providers and just what you're seeing in terms of other people kind of building out some of these AI clusters. You know, with you classify some of those customers as largely focused on backend today and those represent opportunities going forward or just kind of what the discussion is outside of the Cloud Titans amongst some of these other guys that are building very large networks.
Meta Marshall: Thanks. Sure. Mita Marshalls, you know, the tier two cloud providers are doing exactly what the tier one is doing just at a smaller scale. So the activity is out there. Many companies are trying to build these clusters, maybe not hundreds of thousands of GPUs, but you know thousands of GPUs together in their real estate if they can get them. But the design stuff you're working on with them, the type of sort of features fine tuning is actually very similar to the cloud just at a smaller scale. We're very happy with that activity. And as I crossed the board, it's very positive. We'll see this in the ecosystem that it's not limited just for a backup.
Jayshree Ullal: I think they're also waiting for you to use like everyone else's, so there's that common problem that we're not the only one with lead time issues, but to clarify the common on scale, I actually and I are also seeing some very interesting enterprise projects against smaller scale, so a lot of customers are trying AI for small clusters, not a difference from what we saw with HPC clusters back in the day. Yeah. Great. Thank you.
Michael Ng: You're in next question.
Ita Brennan: Come to the line. Michael with Goldman Sachs, your line is open. Hey, good afternoon. Thank you very much for the question. I just had one on the OPEX outperformance in the quarter. We saw an unseasonal decline quarter on quarter, and I think you mentioned lower product introduction costs that may have helped R&D. I was just wondering if you could talk a little bit more about that aspect of it. Anyway, we should think about product introductions going forward to help us understand the trajectory of OPEX.
Ita Brennan: Thank you. Yeah. I mean, a lot of this timing, right? We've got a lot of different projects, a lot of different products kind of flowing through the R&D labs right now, so there is going to be some kind of volatility in terms of when the spend shows up, when the product spend happens, etc. I think we were lower this quarter Q3 than maybe we even anticipated coming into the quarter. I expect that to come back in kind of the guide for Q4.
Ita Brennan: And again, there may be some volatility in that even going forward. Just because it's all about timing, nothing unusual in that. There's just a lot of products kind of going through the R&D labs. So Michael, when the chips are down, our spending is down. When the chips come on hot, our spending gets hot too. So, in expect of prototype to have some high variability. And we've got a lot, a lot of new products in the pipeline that Andy, aren't so can you are all working on? So we expect that number to go up over the next four quarters.
Ita Brennan: Great, very helpful.
Atif Malik: You're next. You're next question comes from the line of audit Malik with city. Your line is open.
Jayshree Ullal: Hi, thank you for taking my question. Jishi at the recent open compute project conference. Marvel and Broadcom leading Ethernet switch merchant chip providers sound very constant in terms of Ethernet adoption at hyper scalers like meta and Oracle as well. And one of your people has talked about 500 million in AI orders, whether it's custom chip. So what was curious about your thoughts on the dynamics in between custom shape and merchant switch chip providers and how does that help Rista?
Jayshree Ullal: Thank you. We have been strong proponents in our last 15, 17 years of a risk to career on merchant silicon. We look for the best of breed chips. It's something my team engineering team has built a lot of chips in their past before. But we've decided to work with the best of breed companies, Broadcom being one of our favorite and major suppliers. And of course, in the past we worked with Intel, Cavium and we don't rule out other suppliers as well.
Jayshree Ullal: But this is clearly an area where you can't just build one chip. You have to build a portfolio of silicon and what Broadcom has done in building that portfolio not only for cloud networking, but for campus and AI is impressive. And you have to not just look at performance, you have to look at price, density, power. These are all very important metrics as we look ahead. You know, the root issue here and you'll share this more with you going forward as well.
Jayshree Ullal: It's not just the merchant silicon, but how you can enable the merchant silicon with the right software and drivers. And this is an area that really arrests cells. And if you just have chips, you can't build a system. But our system wide features, whether it's an genetic load balancing or latency analyzer to really improve the job completion time. And deal with that frequent communication and generative AI is also fundamentally important. You're going to hear a lot more about this next week.
Jayshree Ullal: So stay tuned.
Ben Reitz: Your next question comes from the line of Ben Reitz with Melius Research. Your line is open. Yeah, hey, thanks for the question.
Matthew Niknam: Gayshree and Ida, can you discuss a little more your gross margin commentary that it should moderate next year from the 63 levels in the back half? I mean, are we talking about it going to the first half, 23 kind of levels or just a little bit of a degradation next year and what would be the reason behind it other than lead times? Is there any other mix or other issues that would cause it to go down?
Matthew Niknam: Thanks. And so I think what's the issues commentary, my commentary is, you know, we have been seeing it incrementally improved that we've gone through the year, we expected to stabilize. So not that we expect to go down next year, but more that it will stabilize. And then it will become more dependent on customer makes another thing. And again, similar to where we've been before, but obviously provides more discussion on this next week too.
Matthew Niknam: But the intention was not to say that we think it starts to decline. Again, it was more that we think it will stabilize after a period where we've been seeing these incremental improvements. Okay, thanks a lot. Appreciate the color.
Tim Long: Thanks, friend. Your next question comes from the line of Tim Long with Barclays. Your line is open.
Ita Brennan: Thank you. I just wanted to hit on the Cloud Titan vertical or Cloud Titan AI vertical now. I could I think either one of your comments was down a little or something in the quarter. Could you just, you know, two parts here to talk a little bit about that common. Is this just timing or are there some, you know, different market share dynamics there? And then secondly, if you could talk a little bit about, you know, opportunities that other hyperscalers. I know that something where there's, there's been trial activity and potential and sounds like it might take a little while, but any updates on other Cloud Titans that could become larger customers.
Ita Brennan: Thank you. It's just in terms of cloud, I mean, it's going to be a good cloud year again in 2023 for us. I think we did come into the air and we wanted if we could to, you know, balance supply. It has been towards enterprise and we have been doing that. There's been some, you'll see it. It's not a huge makeshift, but there has been some makeshift towards enterprise when we can.
Ita Brennan: And we're pleased that we've been able to do that. I'm trying not to take that other cloud. So, then the engagement with other Cloud Titans who are customers with our customers is still very positive. They're good customers have many of you know, and routed layers back on one use cases as well.
Ita Brennan: The next week we'll touch a little bit more on the whole build versus by topic. Thank them.
James Fish: Your next question comes from the line of James fish with Piper Samler. Your line is open. Hey, ladies and on so great to a great quarter. Just on the product side, you guys released a new 25 gig offering recently. I guess what's been the early feedback, what kind of differentiates down there.
Jayshree Ullal: And Jason, just to clarify here, when you talk about that double digit growth rate for next year and years beyond, are you talking about a multi year cager or for 24 specifically and then for 25 and 26 and beyond just trying to clarify here. Thank you.
Anshul Sadana: Okay, well, Anshul, you want to answer the product question first? Sure, James, the recent announcement was the launch of our 25 gig ultra low latency switches, these are the 71.30 series and now the whole world can upgrade the high frequency trading infrastructure going from 10 to 25 at very, very low latency, you're talking about, you know, with cross point technology, you're talking about 7 nanoseconds, but we also now introduced layer 2, layer 3 features, so at about 100 to 130 nanoseconds.
Jayshree Ullal: Anshul, just to put this in perspective, back in the day, it used to be 500 nanoseconds, right? That's right, when it gets going down. Yeah, faster than the speed of light.
Jayshree Ullal: And James just to give you a clarification, I was saying as a company, either myself, Anshul, we're aiming for at least double digits in 24 and years beyond, but I wasn't making any forecast for exact numbers.
Ita Brennan: You think your next question comes from the line of ETI Kidron with Oppenheimer, your line is open. Thanks, ladies. Quick question on gross margin, nice improvements there. ETI, maybe you can go into the details of how much room is there more to go and I'm just kind of wondering, we're customers now looking at your excellent financials and you're recovering gross margins. What are the odds that pricing pressures start coming back? Something you probably have not seen much in the last couple of years since COVID now that margins are normalizing.
Ita Brennan: I think what, you know, could prices come down potentially, perhaps even for the most specifically to the larger customers of yours? Yeah, I was just start by saying prices are always coming down, you know, as we go from one speed factor to another, you know, between the 30s technology and the density, the dollar forgiving bit is always coming down. So we're pricing pressure doesn't change independent of our gross margin for always in competitive deals where the value really comes in.
Ita Brennan: And again, I alluded to this as cat X versus off X. We expect pricing to be reasonably stable, but they expect the operational cost to be significantly advantageous with the risk of technology. The total, the TCO, you know, because of singular cloud vision, because of our software driven approach, because of the fact that we have single digit vulnerabilities while our industry peers have 100 to 500 of them in a given five year factor.
Ita Brennan: These are all now paying customers and enterprises, especially a very fatigued with the poor quality of our competitors and are paying a lot of attention to that and willing to pay for that quality. If I actually mentioned, I want to emphasize this, you know, the market is very competitive and it has been ever since we started. The gross margin that we report is not the reason why customers try to negotiate price and the gross margin is simply a result of what we've been executing on. I think it'll continue to be so. Very good. Thank you.
Ita Brennan: Thank you, guys.
Simon Leopold: Your next question comes from the line of Simon Leopold with Raymond James. Your line is open. Thanks for taking the question. I want to see if you would be able willing to comment on your customer concentration year to date. I appreciate it can be lumpy quarter to quarter, but given sort of where you were in 2022. I'd just like to get a better understanding of what essentially the progress has been in 2023 and in that context, you know, how big is enterprise as a percent of revenue this year or year to date versus where it was last year.
Simon Leopold: Thank you. Simon, we're very proud of our customers, even if they're concentrated, we love it. And as you know, the last year, we had some outsized concentration, if I recall the numbers, Meta was at 26% and what was Microsoft Ida? Well, you know, while we expect you to many of the Capix news you've seen and shift in AI spending, that it's possible they come down, but they're still going to be very strong north of 10% contributors to our 2023 results. And we continue to, even as a denominator may get larger in the forthcoming years, we continue to look at them as two very important strategic customers for us. Thanks, Simon.
David Vogt: Your next question comes from the line of David Vought with UBS. Your line is open. Great, thanks guys for taking the question. I just want to follow up on Simon's question, maybe put it, put it a little bit differently. So if I think about your market sector trend update, how much of the shift to that 40 to 45% cloud and AI Titans reflects the inclusion of new AI. That use case is going forward and the shift of Oracle combined with maybe some normalization at Meta and Microsoft can kind of help us think through the dynamics there.
David Vogt: And if it looks like shares going to be unchanged with enterprise and financials, does that suggest to you that those markets are going to grow comparably over the long term across the cycle. Is that the right way to look at it? Thanks.
Jayshree Ullal: David, your analysis is really deep on this one. Let me just say how innocently we reported this, which is Oracle is a greater than million dollar installs of a company right now. And they both their cloud spend as OCI and AI is significant, both as a company and for Rista. But we're not making any assumptions and that will vary every year, of course, on the mix of Meta and Microsoft or Oracle or any other for that matter.
Jayshree Ullal: We're simply saying AI is going to become such an important component of all of the type that is now combined vertical. So don't read too much more into it. And it's more of a forward looking impact to be honest, right? Yeah, historically, this doesn't really change the trends that we've been talking about previously. It's really more about the future and how do you think AI will impact these numbers got forward? Yeah. Much right now is right. You know that. But as it starts to become important, then this then this combined will go north of the 39% we have normally forecast. Great. Understood.
Jayshree Ullal: Thank you.
Eric Supager: Your next question comes from the line of Eric Supager with JMP Securities. Your line is open. Yeah, thanks for taking the question and congrats. I know you don't want to talk about backlog, but can you give us a sense at what point or what time you think your book to bill will return back to one or greater than one? Or when will your lead times reach normalize level? Then I have a quick follow up after that.
Ita Brennan: Nancy, not going to talk about the bill if we don't talk about backlog Eric. I think honestly, we're making improvements on the industry talked about how these times are much improved, right? So we'll continue to do that. That's a positive thing for the customers and for the business. And, you know, we're we're still not back to kind of the turns business that we had some time ago, we're making progress, but we're still out there.
Ita Brennan: I just want to add that I'm very proud of the progress the team has made, you know, when you look back two years ago, we were short of components who are making multi approaches. There was a risk of a very large exposure because you can't get all these forecasts right. And then obviously the mixed change changes from time to time, especially with the cloud and AI. So it's very hard to measure a business on, you know, book the bill and backlog at a given time. But if you look at it as an overall multi-year trend.
Ita Brennan: Can you comment then on just when will the lead times be at a normalized level? Yeah, and I think we said this. It's been improving consistently and we expect it to be normalized just like Abros Margin since 2024. All right, very good. Thank you.
Operator: Operator, we have time for one last question.
Wu Jun Ho: Your last question. Today comes from the line of Wu Jun Ho, with Bloomberg. Your line is open. Oh, great. Thanks. I made the cut. Happy Halloween, folks. So, so I think there was a mention on merchant silicon earlier in the Q&A. And one of your merchant silicon partners has actually moved up the stack towards the surface of my routing. I'm just curious if there's any intention on going after that piece of that chip is made available to you.
Wu Jun Ho: Sure, Wu Jun, I believe you're referring to the Linus Nance.com on their 25.60 Jericho chip that was announced recently. Yeah, exactly. Covering three days, exactly. So it's the same family, same features. And as you know, we've been a great partner of dot com for a long time and we're going to build new products. This is not a new entry, I sort of speak. We've been building these products that can be used as switches or orders for a while.
Wu Jun Ho: And that bandwidth just doubled going to now 25.60. So you can expect some products from us, the future with those radiance as well, but really nothing really changes. Just innovation continued and merchant silicon continuity. And they invest so we can we have made an out routing stack over the last 10 years, I want to say, has just gotten better and stronger. You know, power in the internet, power in the cloud, power in the AI.
Wu Jun Ho: These are hard problems. And they require thousands of engineers of investment to build the right BX land, BGP routing, European, etc. So it's not just the chip, it's how we enable the chip to do these complicated routing algorithms. Thanks to Jack. I do.
Jayshree Ullal: This includes the risk and networks third quarter, 2023 earnings call. We have posted a presentation which provides additional information on our results that you can access on the investor section of our website. As a reminder, a risk will be posting our 2023 cloud and AI innovators analyst day on Thursday, November 9th. If you are interested in attending virtually, you may register from the investor section of our website. Thank you for joining us today. And thank you for your interest and arrest. Thank you for joining ladies and gentlemen.
Operator: This concludes today's call. You may now disconnect. Please wait.
Operator: The conference will begin shortly. Thank you very much.