Q2 2024 Arista Networks Inc Earnings Call

Welcome to the second quarter 2024 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.

Operator: Conference call. During the call, all participants will be in a listen-only mode.

Operator: 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 star followed by zero. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of the Arista website following this call. Ms. Liz Stine, Arista's Director of Investor Relations, you may begin. Thank you, Operator. Good afternoon, everyone, and thank you for joining us.

If at any time during the conference you need to reach an operator, please press 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.

Liz Stine: Ms. Liz Stine, Arista's Director of Investor Relations, you may begin.

Liz Stine: With me on today's call are Jayshree Ullal, Arista Networks Chairperson and Chief Executive Officer, and Chantelle Breithaupt, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal second quarter ending June 30, 2024. If you would like a copy of this release, you can access it online at our website.

Liz Stine: Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks Chairperson and Chief Executive Officer, and Chantelle Breithaupt, Arista's Chief Financial Officer.

Speaker Change: This afternoon, Arista Networks issued a press release announcing the results for its fiscal second quarter ending June 30, 2024. If you would like a copy of this release, you can access it online at our website.

Liz Stine: During the course of this conference call, Arista Networks management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2024 fiscal year, longer-term financial outlooks for 2024 and beyond, our total addressable market and strategy for addressing these market opportunities, including AI, customer demand trends, supply chain constraints, component costs, manufacturing output, inventory management, and inflationary pressures on our business, lead times, product 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. 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.

Speaker Change: During the course of this conference call, Arista Networks Management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2024 fiscal year.

Speaker Change: Longer Term Financial Outlooks for 2024 and Beyond

Speaker Change: Our Total Addressable Market and Strategy for Addressing These Market Opportunities, including AI,

Speaker Change: Customer Demand Trends

Speaker Change: Supply Chain Constraints, Component Costs, Manufacturing Output, Inventory Management, and Inflationary Pressures on our Business, Lead Times, Product Innovation, Working Capital Optimization, and the Benefits of Acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC.

Speaker Change: 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 Change: 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.

Liz Stine: 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. 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 Jayshree. Thank you, Liz.

Speaker Change: We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.

Jayshree V. Ullal: And thank you everyone for joining us this afternoon for our second quarter 2024 earnings call. As a pure play networking innovator with greater than 70 billion TAM ahead of us, we are pleased with our superior execution this quarter. We delivered revenues of $1.69 billion for the quarter with a non-gap earnings per share of $2.10. Services and software support renewals contributed strongly at approximately 17.6% of revenues. Our non-gap gross margin of 65.4% was influenced by outstanding manufacturing discipline, realizing cost reduction.

Jayshree V. Ullal: With that, I will turn the call over to Jayshree. Thank you, Liz, and thank you everyone for joining us this afternoon for our second quarter 2024 earnings call. As a pure play networking innovator with greater than 70 billion TAM ahead of us, we are pleased with our superior execution this quarter.

Jayshree V. Ullal: We delivered revenues of $1.69 billion for the quarter with a non-gap earnings per share of $2.10. Services and software support renewals contributed strongly at approximately 17.6% of revenue.

Speaker Change: Our non-gap gross margin of 65.4% was influenced by outstanding manufacturing discipline realizing cost reductions.

Jayshree V. Ullal: International Contribution for the quarter registered at 19%, with the Americas strong at 81% As we celebrated our 10th anniversary on the New York Stock Exchange with our near and dear investors and customers, we are now supporting over 10,000 customers with a cumulative of 100 million ports deployed worldwide. In June 2024, we launched Arista's EtherLink AI platforms that are Ultra Ethernet Consortium compatible, validating the migration from InfiniBand to Ethernet. This is a rich portfolio of 800 gigabyte products.

Speaker Change: International contribution for the quarter registered at 19%, with the Americas strong at 81%.

Speaker Change: As we celebrated our 10th anniversary at the New York Stock Exchange with our near and dear investors and customers, we are now supporting over 10,000 customers with a cumulative of 100 million ports deployed worldwide.

Speaker Change: In June 2024, we launched Arista's EtherLink AI platforms that are Ultra Ethernet Consortium compatible, validating the migration from InfiniBand to Ethernet.

Jayshree V. Ullal: Not just a point product, but in fact, a complete portfolio that is both NIC and GPU agnostic. The AI portfolio consists of the 7060X6 AID switch that supports 64, 800 gigabit or 128, 400 gigabit ethernet ports with a capacity of 51 terabits per second. The 7800 R4 AI Spine is Arista's fourth generation of its flagship 7800, offering 100% non-blocking throughput with a proven virtual output queuing architecture. The 7800R4 supports up to 460 terabits in a single chassis, corresponding to 576 800 gigabit ethernet ports or 1152 400 gigabit port density.

Speaker Change: This is a rich portfolio of 800 gig products, not just a point product, but in fact a complete portfolio that is both NIC and GPU agnostic.

Speaker Change: The AI portfolio consists of the 7060X6 AID switch that supports 64, 800 gig or 128, 400 gig ethernet ports with a capacity of 51 terabits per second.

Speaker Change: The 7800 R4 AI Spine is our fourth generation of Arista's flagship 7800, offering 100% non-blocking throughput with a proven virtual output queuing architecture.

Speaker Change: The 7800R4 supports up to 460 terabits in a single chassis, corresponding to 576 800 gigabit Ethernet ports or 1152 400 gigabit port density.

Jayshree V. Ullal: The 7700 R4 AI Distributed Etherlink Switch is a unique product offering with a massively parallel distributed scheduling and congestion-free traffic spraying fabric. It represents the first in a new series of ultra-scalable intelligent distributed systems that can deliver the highest consistent throughput for very large AI clusters. Let me just say once again, Arista is making Ethernet great. First, we began this journey with low latency in the 2009 time frame, and then there was cloud and routing in the 2015 era, followed by WAN and campus in the 2020 era, and now AI in our fifth generation in the 2025 era.

Speaker Change: The 7700R4AI Distributed Etherlink Switch is a unique product offering, with a massively parallel distributed scheduling and congestion-free traffic spraying fabric.

Speaker Change: The 7700 represents the first in a new series of ultra-scalable intelligent distributed systems that can deliver the highest consistent throughput for very large AI clusters.

Speaker Change: Let's just say, once again, Arista is making Ethernet great.

Speaker Change: First, we began this journey with low latency in 2009 timeframe, and then there was cloud and routing in the 2015 era, followed by WAN and campus in the 2020 era, and now AI in our fifth generation in 2025 era.

Jayshree V. Ullal: Our Etherlink portfolio is in the midst of trials and can support up to 100,000 XPUs in a two-tier design built on our proven and differentiated, Extensible OS. We are quite pleased with our progress across cloud, AI, campus, and enterprise customers. I would like to invite Ashwin Kohli, our newly appointed Chief Customer Officer, to describe our diverse set of customer wins in 2024. Ashwin, over to you.

Speaker Change: Our Etherlink portfolio is in the midst of trials and can support up to 100,000 XPUs in a two-tier design built on our proven and differentiated

Speaker Change: Extensible OS

Speaker Change: We are quite pleased with our progress across cloud, AI, campus, and enterprise customers.

Ashwin Kohli: I would like to invite Ashwin Kohli, our newly appointed Chief Customer Officer, to describe our diverse set of customer wins in 2024. Ashwin, over to you.

Ashwin Kohli: Many thanks, Jayshree. Thank you for inviting me to my first earnings call. Let me walk everybody through the four global customer wins. The first example is an AI enterprise win with a large tier two cloud provider, which has been heavily investing in GPUs to increase their revenue and penetrate new markets. Their senior leadership wanted to be less reliant on traditional core services and work with Arista on new reliable and scalable Ethernet fabrics. Their environment consisted of new NVIDIA H100s.

Ashwin Kohli: Many thanks, Jayshree.

Ashwin Kohli: Thank you for inviting me to my first earnings call. Let me walk everybody through the four global customer wins.

Ashwin Kohli: The first example is an AI enterprise win with a large tier 2 cloud provider which has been heavily investing in GPUs to increase their revenue and penetrate new markets.

Ashwin Kohli: Their senior leadership wanted to be less reliant on traditional core services and work with Arista on new reliable and scalable Ethernet fabrics.

Ashwin Kohli: However, it was being connected to their legacy networking vendor, which resulted in them having significant performance and scale issues with their AI applications. The goal of our customer engagement was to refresh the front-end network to alleviate these issues. Our technical partnership resulted in deploying a two-step migration path to alleviate the current issues using 400-gig 7280s, eventually migrating them to an 800-gig AI Ethernet link in the future. The second win highlights our adjacencies in both campus and routing.

Ashwin Kohli: Their environment consisted of new NVIDIA H100s, however, it was being connected to their legacy networking vendor, which resulted in them having significant performance and scale issues with their AI applications.

Speaker Change: The goal of our customer engagement was to refresh the front-end network to alleviate these issues.

Speaker Change: Our technical partnership resulted in deploying a two-step migration path to alleviate the current issues using 400G 7280s, eventually migrating them to an 800G AI Ethernet link in the future.

Speaker Change: The second next win highlights our adjacencies in both campus and routing.

Ashwin Kohli: This customer is a large data center customer that has deployed us for almost a decade. Their team was able to leverage that success to help them demonstrate our value for their global campus network, which spans hundreds and thousands of square feet globally. The customer had considerable dissatisfaction with the current vendor, which led them to a last-minute request to create a design for the new corporate headquarters. Given only a three-month window, Arista leveraged the existing datacenter design and adapted this to the campus topology with a digital twin off the design in minimal time.

Speaker Change: This customer is a large data center customer which has deployed us for almost a decade.

Speaker Change: Their team was able to leverage that success to help them demonstrate our value for their global campus network which spans across hundreds and thousands of square feet globally.

Speaker Change: The customer had considerable dissatisfaction with the current vendor, which led them to a last-minute request to create a design for the new corporate headquarters.

Speaker Change: Given only three months window, Arista leveraged the existing data center design and adapted this to the campus topology with a digital twin off the design in minimal time. Cloud Vision was used for visibility and lifecycle management.

Ashwin Kohli: Cloud Vision was used for visibility and lifecycle management. The same customer, once again, was struggling with extreme complexity in their routing environment, as well as multiple parallel backbones and numerous technical complexities. Arista simplified their routing network by removing legacy routers, increasing bandwidth, and moving to a simple fixed form factor platform router. The core spine leverages the same EOS software.

Speaker Change: The same customer, once again, was struggling with extreme complexity in their routing environment, as well with multiple parallel backbones and numerous technical complexities.

Speaker Change: Arista simplified their routing network by removing legacy routers, increasing bandwidth, and moving to a simple fixed form factor platform router. The core spine leverages the same EOS software.

Ashwin Kohli: Streamlining their certification procedures and instilling confidence in the stability of the products. Once again, CloudVision came to the rescue. The third example is the next win in the international arena of a large automotive manufacturer that, due to its size and scale, previously had more than three different vendors in the data center, which created a very high level of complexity, both from a technical and also from an operational perspective. The customer's key priority was to achieve a high level of consistency across the infrastructure, which is now being delivered via a single EOS binary image and Cloud Vision solution from Arista

Speaker Change: Streamlining their certification procedures and instilling confidence in the stability of the products. Once again, Cloud Vision came to the rescue.

Speaker Change: The third example is the next win in the international arena.

Speaker Change: of a large automotive manufacturer that, due to its size and scale, previously had more than three different vendors in the data center, which created a very high level of complexity, both from a technical and also from an operational perspective.

Speaker Change: The customer's key priority was to achieve a higher level of consistency across their infrastructure, which is now being delivered via a single EOS binary image and cloud vision solution from Arisa.

Ashwin Kohli: Their next top priority was to use automation, consistent end-to-end provisioning, and visibility, which can be delivered by a Cloud Vision platform. This simplification has led the customer to adopt Arista beyond the data center and extend the Arista solution into the routing component of the infrastructure, which includes our 7500 R3 Spline platforms. This once again shows a very clear example of the same Arista 1 EOS and 1 Cloud Vision solution delivering multiple use cases and Jayshree.

Speaker Change: Their next top priority was to use automation, consistent end-to-end provisioning, and visibility which can be delivered by a Cloud Vision platform.

Speaker Change: This simplification has led the customer to adopt Arista beyond the data center and extend the Arista solution into the routing component of the infrastructure, which included our 7500 R3 spine platforms.

Speaker Change: This once again shows a very clear example of the same Arista 1 EOS and 1 Cloud Vision solution delivering multiple use cases.

Ashwin Kohli: This last win demonstrates our strength in the service provider routing space. We have been at the forefront of providing innovative solutions for service provider customers for many years. As we all know, we are in the midst of an optical and packet integration. As a result, our routers support industry-leading dense 400 gigabit ZR plus coherent pluggable optics.

Speaker Change: And Jayshree, this last win demonstrates our strength in service provider routing space.

Speaker Change: We have been at the forefront of providing innovative solutions for service provider customers for many years. As we all know, we are in the midst of an optical and packet integration as a result. Our routers support industry-leading dense,

Jayshree V. Ullal: In this service provider customer example, we provided a full turnkey solution including our popular 7280 R3 routers and our newly announced AWE 7250 WAN router as a BGP route reflector, along with Cloud Vision and professional services. We showcased our strength in supporting a wide variety of these pluggable coherent optics along with our SR and EVPN solutions, which allowed this middleware service provider customer to build out a 400 gigabit statewide backbone at CloudStale Economics. Thanks, Rishi, and back over to you.

Speaker Change: 400 gig ZR plus coherent pluggable optics

Speaker Change: In this service provider customer example, we provided a full turnkey solution, including our popular 7280 R3 routers and our newly announced AWE 7250 WAN router as a BGP route reflector, along with Cloud Vision and professional services.

Speaker Change: We showcase our strength in supporting a wide variety of these pluggable coherent optics, along with our SR and EVPN solutions, which allow this middle-minded service provider customer to build out a 400GB

Speaker Change: Statewide Backbone at Cloudsdale Economics

Jayshree V. Ullal: Wow, thank you, Ashwin, and congratulations. Hot off the press is our new and highest net promoter score of 87, which translates to 95%. Hats off to your team for achieving that. It's so exciting to see the momentum of our enterprise sector. As a matter of fact, as we speak, we are powering the broadcasters of the Olympics, symbolic of our commitment to the media and entertainment vertical. And so it's fair to say that, so far in 2024, it's proving to be better than we expected because of our position in the marketplace and because of our best-of-breed platforms for mission-critical networking. I am reminded of the 1980s when Sun was famous for declaring that the network is the computer.

Speaker Change: Thanks, Rishi, and back over to you.

Speaker Change: Thank you, Ashwin, and congratulations.

Speaker Change: Hot off the press is our new and highest net promoter score of 87, which translates to 95%. Hats off to your team for achieving that.

Speaker Change: It's so exciting to see the momentum of our enterprise sector. As a matter of fact, as we speak, we are powering the broadcasters of the Olympics, symbolic of our commitment to the media and entertainment vertical.

Speaker Change: And so it's fair to say that so far in 2024, it's proving to be better than we expected because of our position in the marketplace and because of our best-of-breed platforms for mission-critical networking.

Speaker Change: I am reminded of the 1980s when Sun was famous for declaring, the network is the computer.

Jayshree V. Ullal: Well, 40 years later, we're seeing the same cycle come true again with the collective nature of AI training models mandating a lossless, highly available network to seamlessly connect every AI accelerator in the cluster to one another for peak job completion time. Our AI networks also connect trained models to end users and other multi-tenant systems in the front-end data center, such as storage, enabling the AI system to become more than the sum of its parts.

Speaker Change: Well, 40 years later, we're seeing the same cycle come true again, with the collective nature of AI training models mandating a lossless, highly available network to seamlessly connect every AI accelerator in the cluster to one another for peak job completion times.

Speaker Change: Our AI networks also connect trained models to end-users and other multi-tenant systems in the front-end data center, such as storage, enabling the AI system to become more than the sum of its parts.

Jayshree V. Ullal: We believe data centers are evolving to holistic AI centers, where the network is the epicenter of AI management for acceleration of applications, compute, storage, and the wide area network. AI centers need a foundational data architecture to deal with the multi-modal AI data sets that run on our differentiated EOS network data lake systems. Arista showcased a technology demonstration of our EOS-based AI agent that can directly connect to the NIC itself or, alternatively, inside the host.

Speaker Change: We believe data centers are evolving to holistic AI centers, where the network is the epicenter of AI management for acceleration of applications, compute, storage, and the wide area network.

Speaker Change: AI centers need a foundational data architecture to deal with the multi-modal AI datasets that run on our differentiated EOS network data lake systems.

Speaker Change: Arista showcased a technology demonstration of our EOS-based AI agent that can directly connect on the NIC itself or alternatively inside the host.

Jayshree V. Ullal: By connecting to adjacent Arista switches to continuously keep up with the current state, send telemetry, or receive configuration updates, we have demonstrated the network working holistically with network interface cards such as NVIDIA BlueField, and we expect to add more NICs in the future.

Speaker Change: By connecting into adjacent Arista switches to continuously keep up with the current state, send telemetry, or receive configuration updates, we have demonstrated the network working holistically with network interface cards such as NVIDIA BlueField, and we expect to add more NICs in the future.

Chantelle Breithaupt: Well, I think the Arista purpose and vision are clearly derived from our customer traction. Our networking platforms are becoming the epicenter of all digital transactions, be they Campus Center, Data Center, Plan Centers, or AI Center. And with that, I'd like to turn it over to Chantelle, our Chief Financial Officer, to review the financial specifics and tell us more. Over to you, Chantelle.

Speaker Change: Well, I think the Arista purpose and vision is clearly deriving our customer traction.

Speaker Change: Our networking platforms are becoming the epicenter of all digital transactions.

Speaker Change: Be they Campus Center, Data Center, Plan Centers, or AI Centers.

Chantelle Breithaupt: And with that, I'd like to turn it over to Chantelle, our Chief Financial Officer, to review the financial specifics and tell us more. Over to you, Chantelle. Thanks, Jayshree. It really was great to see everyone at the New York Stock Exchange IPO celebration event. Now, turning to the numbers.

Chantelle Breithaupt: Thanks, Jayshree. It really was great to see everyone at the New York Stock Exchange IPO Celebration event. Now, turning to the numbers. This analysis of our Q2 results and our guidance for Q3 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings

Chantelle Breithaupt: This analysis of our Q2 results and our guidance for Q3 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.

Chantelle Breithaupt: Total revenues in Q2 were $1.69 billion, up 15.9% year-over-year, significantly above the upper end of our guidance of $1.62 to $1.65 billion. Growth was delivered across all three sectors of cloud, enterprise, and provider. Services and subscription software contributed approximately 17.6% of revenue in the quarter, up from 16.9% in Q4. International revenues for the quarter came in at $316 million, or 18.7% of total revenue, down from 20.1% in the prior quarter. This quarter-over-quarter decrease was driven by a relatively weaker performance in our APJ. The overall gross margin in Q2 was 65.4%, above our guidance of 64%, up from 64.2% last quarter and up from 61.3% in the prior year quarter. The year-over-year gross margin improvement was primarily driven by a reduction in inventory-related resources.

Chantelle Breithaupt: Total revenues in Q2 were $1.69 billion, up 15.9% year-over-year, significantly above the upper end of our guidance of $1.62 to $1.65 billion.

Chantelle Breithaupt: Growth was delivered across all three sectors of cloud, enterprise, and providers. Services and subscription software contributed approximately 17.6% of revenue in the quarter, up from 16.9% in Q1.

Chantelle Breithaupt: International revenues for the quarter came in at $316 million, or 18.7% of total revenue, down from 20.1% in the prior quarter. This quarter-over-quarter decrease was driven by a relatively weaker performance in our APJ region.

Chantelle Breithaupt: The overall gross margin in Q2 was 65.4%, above our guidance of 64%, up from 64.2% last quarter, and up from 61.3% in the prior year quarter. The year-over-year gross margin improvement was primarily driven by a reduction in inventory-related reserves.

Chantelle Breithaupt: Operating expenses for the quarter were $319.8 million, or 18.9% of revenue from last quarter at $265 million. R&D spending came in at $216.7 million, or 12.8% of revenue, up from $164.6 million in the last quarter. This primarily reflected increased headcount and higher new product introduction costs in the past. Sales and marketing expense was $85.1 million, or 5% of revenue, compared to $83.7 million last quarter, with a double-digit percentage increase in headcount in the quarter versus the prior year.

Chantelle Breithaupt: Operating expenses for the quarter were $319.8 million, or 18.9% of revenue, up from last quarter at $265 million. R&D spending came in at $216.7 million, or 12.8% of revenue, up from $164.6 million in the last quarter.

Chantelle Breithaupt: This primarily reflected increased headcount and higher new product introduction costs in the period.

Chantelle Breithaupt: Sales and marketing expense was $85.1 million or 5% of revenue compared to $83.7 million last quarter, with a double-digit percentage increase of headcount in the quarter versus the prior year.

Chantelle Breithaupt: Our G&A cost came in at $18 million, or 1.1% of revenue, up from last quarter at $16.7 million. Our operating income for the quarter was $785.6 million, or 46.5% of revenue. Other income and expense for the quarter was a favorable $70.9 million, and our effective tax rate was $21.5 million. This resulted in net income for the quarter of $672.6 million, or 39.8% of the total. Our diluted share number was 319.9 million shares, resulting in a diluted earnings per share number for the quarter of $2.10, up 32.9% from the prior year.

Chantelle Breithaupt: Our G&A cost came in at $18 million or 1.1% of revenue, up from last quarter at $16.7 million. Our operating income for the quarter was $785.6 million or 46.5% of revenue.

Chantelle Breithaupt: Other income and expense for the quarter was a favorable $70.9 million and our effective tax rate was 21.5%. This resulted in net income for the quarter of $672.6 million or 39.8% of revenue.

Chantelle Breithaupt: Our diluted share number was 319.9 million shares, resulting in a diluted earnings per share number for the quarter of $2.10, up 32.9% from the prior year.

Chantelle Breithaupt: Turning to the balance, Cash, Cash Equivalents, and Investments ended the quarter at $6.3 billion. In the quarter, we repurchased $172 million of our common stock at an average price of $282 million dollars and 20 cents. At $172 million, $82 million was repurchased under our prior $1 billion authorization, which is now complete, and the remaining $90 million was purchased under the new program of $1.2 billion approved in May of 2021. The actual timing and amount of future purchases will be dependent upon market and business conditions, stock price, and other factors.

Chantelle Breithaupt: Turning to the balance sheet, cash, cash equivalents, and investments ended the quarter at $6.3 billion. In the quarter, we repurchased $172 million of our common stock at an average price of $282.20 per share.

Chantelle Breithaupt: Of the $172 million, $82 million was repurchased under our prior $1 billion authorization, which is now complete, and the remaining $90 million was purchased under the new program of $1.2 billion approved in May of 2024.

Chantelle Breithaupt: The actual timing and amount of future repurchases will be dependent upon market and business conditions, stock price, and other factors.

Chantelle Breithaupt: Now, turning to operating cash performance for the second quarter, we generated $989 million of cash from operations in the period, reflecting strong earnings performance, with a favorable contribution from working capital. DSOs came in at 66 days, up from 62 days in Q1, impacted by large service renewals at the end of the quarter. Inventory turns were 1.1 times, up for one turn last quarter. Inventory decreased to $1.9 billion in the quarter, down from $2 billion in the prior period, reflecting a reduction in our raw materials inventory.

Chantelle Breithaupt: Now, turning to operating cash performance for the second quarter, we generated $989 million of cash from operations in the period, reflecting strong earnings performance, with a favorable contribution from working capital.

Chantelle Breithaupt: DSOs came in at 66 days, up from 62 days in Q1, impacted by large service renewals at the end of the quarter.

Chantelle Breithaupt: Inventory turns were 1.1 times up for one turn last quarter.

Chantelle Breithaupt: Inventory decreased to $1.9 billion in the quarter, down from $2 billion in the prior period, reflecting a reduction in our raw materials inventory.

Chantelle Breithaupt: Our purchase commitments and inventory at the end of the quarter totaled $4 billion, up from $3.5 billion at the end of Q1. We expect this number to stabilize as supplier lead times improve, but it will continue to have some variability in future quarters as a reflection of demand for our new product introduction. Our total deferred revenue balance was $2.1 billion, up from $1.7 billion in Q1.

Chantelle Breithaupt: Our purchase commitments and inventory at the end of the quarter total $4 billion, up from $3.5 billion at the end of Q1. We expect this number to stabilize as supplier lead times improve, but will continue to have some variability in future quarters as a reflection of demand for our new product introductions.

Chantelle Breithaupt: Our total deferred revenue balance was $2.1 billion, up from $1.7 billion in Q1. The majority of the deferred revenue balance is services-related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis.

Chantelle Breithaupt: The majority of the Deferred Revenue Balance is services related and directly linked to the timing and term of the service contract, which can vary on a quarter by quarter basis. Our product deferred revenue increased approximately $253 million versus last quarter. As a reminder, we expect 2024 to be a year of new product introductions, new customers, and expanded use. These trends may result in increased customer trials and contracts with customer-specific acceptance clauses and increase the variability and magnitude of our product-deferred revenue balance. Accounts payable dates were 46 days, up from 36 days in Q1, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $3.2 million.

Chantelle Breithaupt: Our product deferred revenue increased approximately $253 million versus last quarter. As a reminder, we expect 2024 to be a year of new product introductions, new customers, and expanded use cases.

Chantelle Breithaupt: These trends may result in increased customer trials and contracts with customer-specific acceptance clauses and increase the variability and magnitude of our product-deferred revenue balances.

Chantelle Breithaupt: Accounts payable days was 46 days up from 36 days in Q1, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $3.2 million.

Chantelle Breithaupt: As we enter the second half of fiscal year 2024, we are encouraged by the momentum that we see in the market. Our existing innovative product portfolio, along with our new product introductions, are well suited for our cloud, AI, enterprise, and service provider customers; we will continue to invest in our R&D and go to market through both people and process. With all of this as a backdrop for fiscal year 24, our revenue growth guidance is now at least 14%.

Chantelle Breithaupt: As we enter the second half of fiscal year 2024, we are encouraged by the momentum that we see in the market. Our existing innovative product portfolio, along with our new product introductions, are well suited for our cloud, AI, enterprise, and providers customers.

Chantelle Breithaupt: We will continue to invest in our R&D and go-to-market through both people and processes.

Chantelle Breithaupt: Gross margin outlook remains at 62 to 64%, while operating margin is now raised to approximately 44%. Our guidance for the third quarter based on non-GAAP results and excluding any non-cash stock-based compensation impacts and other non-recurring items is as follows: revenues of approximately $1.72 to $1.75 billion, gross margin of approximately 63% to 64%, and operating margin of approximately 44%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 321 million.

Chantelle Breithaupt: With all of this as a backdrop for fiscal year 24, our Revenue Growth Guidance is now at least 14%. Gross Margin Outlook remains at 62-64%, and Operating Margin is now raised to approximately 44%.

Chantelle Breithaupt: Our guidance for the third quarter based on non-GAAP results and excluding any non-cash stock-based compensation impacts and other non-recurring items is as follows.

Chantelle Breithaupt: Revenues of approximately $1.72 to $1.75 billion, gross margin of approximately 63 to 64 percent, and operating margin at approximately 44 percent.

Chantelle Breithaupt: Our effective tax rate is expected to be approximately 21.5%, with diluted shares of approximately 321 million shares.

Liz Stine: With that, I now turn the call back to Liz. Thank you, Chantelle. We will now move to the Q&A portion of the Arista Earnings Call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question.

Liz Stine: With that, I now turn the call back to Liz. Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Operator: Thank you for your understanding. Operator, take it away. 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 1 on your telephone keypad.

Operator: If you would like to withdraw your question, press star 1 again. We ask that you pick up your handset before asking your question in order to ensure optimal sound quality. Our first question comes from the line of Michael Ng at Goldman Sachs. Please go ahead. Hi, good afternoon.

Speaker Change: 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 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. We ask that you pick up your handset before asking your question in order to ensure optimal sound quality.

Speaker Change: Our first question comes from the line of Michael Ng with Goldman Sachs. Please go ahead.

Michael Ng: Thank you for the question. As we head into next-generation GPUs with Blackwell and the MVL3672, there's been some discussion about whether the systems may be less modular in some of their components, particularly for backend networking. You know, I was just wondering if you could share your views and provide some clarity on the vendor modularity of Blackwell, particularly as it relates to networking, and how that might affect Arista's positioning over the next couple of years, if at all. Thank you very much.

Speaker Change: Hi, good afternoon. Thank you for the question. As we head into next-generation GPUs with Blackwell and the MVL3672, there's been some discussion about whether these systems may be less modular in some of its components, particularly for backend networking.

Michael Ng: I was just wondering if you could share your views and provide some clarity on the vendor modularity of Blackwell, particularly as it relates to networking, and how that might affect Arista's positioning over the next couple of years, if at all. Thank you very much.

Jayshree V. Ullal: Sure, Michael. I think as the GPUs get faster and faster, obviously, the dependency on the network for higher throughput is clearly related, and therefore, our timely introduction of these 800 gigabit products will be required, especially for Blackwell. And so that density depends more on the AI accelerator and how they choose to connect. As I've often said, it's more a bus technology. So eventually, where Arista plays strongly, both on the front end and back end, is on the scale-out, not on the scale-up. So independent of the modularity, whether it's a rack-based design, a chassis, or multiple RUs, the ports have to come out Ethernet, and those Ethernet ports will connect to scale-out switches from Arista.

Michael Ng: Michael Laipinkam

Speaker Change: As the GPUs get faster and faster, obviously the dependency on the network for higher throughput is clearly related.

Speaker Change: And therefore, our timely introduction of these 800-gig products will be required, especially more for Blackwell.

Speaker Change: In terms of its connection and modularity with NVLink and 72Port,

Speaker Change: There's always been a market for what I call scale-up, where you're connecting the GPUs internally in a server, and the density of those GPUs connecting in in the past has been more PCIe and CXL and now NVLink, and there's a new consortium now for

Speaker Change: It's called UAL. It's going to specify that. I believe eventually, by the way, even there, Ethernet will win.

Speaker Change: And so that density depends more on the...

Speaker Change: AI Accelerator and how they choose to connect. As I've often said, it's more a bus technology.

Speaker Change: So, eventually, where Arista plays strongly, both on the front end and back end, is on the scale out, not on the scale up.

Speaker Change: So independent of the modularity, whether it's a rack-based design, a chassis, or a multiple RU, the ports have to come out Ethernet, and those Ethernet ports will connect into scale-out switches from Arista.

Jayshree V. Ullal: Thank you, Jayshree. Thank you, Michael. Our next question comes from the line of Aaron Rakers with Wells Fargo. Please go ahead.

Speaker Change: Great. Thank you, Jayshree. Thank you, Michael.

Speaker Change: Our next question comes from the line of Aaron Rakers with Wells Fargo. Please go ahead.

Aaron Christopher Rakers: Yeah, thank you for taking the question. I guess the metric that stands out to me the most is the deferred revenue balance, which looks like 95% in total year on year. And it looks like, based on what you disclosed, you're now at about 520 million of product deferred, you know, on the product deferred line. Can you help us appreciate, you know, what we think about that number?

Aaron Christopher Rakers: Thank you for taking the question. I guess the metric that stands out to me the most is the deferred revenue balance up, you know, looks like 95% in total year on year. And it looks like you, based on what you disclosed, it looks like you're now at about 520 million of product deferred.

Speaker Change: On the product deferred line, can you help us appreciate, how do we think about that number, is that related to these AI opportunities, just the cadence of how we should expect the revenue recognition from that, again, being, looks like almost 60% above what was previously the peak level of product deferred?

Aaron Christopher Rakers: Is that related to these AI opportunities? Just the cadence of, you know, how we should expect revenue recognition from that? Again, it looks like almost 60% above what was previously the peak level of product deferred. Yeah. No, good question, Aaron.

Chantelle Breithaupt: Good question Aaron. Let me start generically and of course I'll hand to my CFO Chantelle here.

Jayshree V. Ullal: Let me start generically, and of course, I'll hand this to my CFO Chantelle here. Product deferred sort of ebbs and flows. It goes in, it comes out.

Chantelle Breithaupt: Product Deferred sort of ebbs and flows. It goes in, it comes out, and it's particularly high when we have a lot of new product and new use cases.

Speaker Change: But it's not extraordinary to see us running a high product deferred in one quarter or in one year and then dipping down.

Jayshree V. Ullal: And it's particularly high when we have a lot of new products and new use cases. But it's not extraordinary to see us running a high product deferred in one quarter or in one year and then dipping down. So the long term is consistent, while the short term can ebb and flow. You want to say a few words on that? Yeah. Thank you, Jason. The only thing I would add to that is that the deferred balance is always a mix of customers and use cases. So I wouldn't rotate on any one particular intersection of those.

Speaker Change: So, the long term is consistent, the short term can ebb and flow. You want to say a few words on that? Yeah, thank you Jayshree. The only thing I would add to that is that, you know, the deferred balance is always a mix of customers and use cases, so I wouldn't rotate on any one particular intersection of those. It really is a mix of those kinds.

Meta A. Marshall: It really is a mix of those combined. Thank you. Thanks, Aaron. Our next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Amit: and Amit combined.

Speaker Change: Thank you.

Sharon: Thanks, Aaron.

Sharon: Our next question comes from the line of Meta Marshall with Morgan Stanley . Please go ahead.

Jayshree V. Ullal: Great, thanks. Jayshree, last quarter, you had mentioned kind of four major AI trials that you guys were a part of. Obviously, you guys, or Ashwin, listed off a list of the four wins that you had during the quarter.

Meta A. Marshall: Great, thanks. Jayshree, last quarter you had mentioned kind of four major AI trials that you guys were a part of. Obviously, you guys, or Ashwin, listed off a list of kind of the four wins that you had during the quarter. Just trying to get a sense of maybe if that tier two win was a part of those AI trials or just any update on where those four AI trials stand or what the current count of AI trials is currently. Thank you.

Jayshree V. Ullal: Just trying to get a sense of maybe if that tier two win was a part of those AI trials or just any update on where those four AI trials stand or what the current count of AI trials is. Yeah, now I'm going to speak to it, and I want to turn it over to Ashwin since he's here with us. First of all, all four trials are largely in what I call cloud and AI titans. But, a couple of them could be classified as specialty providers as well, depending on how they end up. But those four are going very well. They started out as largely trials.

Meta A. Marshall: I'm going to speak to it and I want to turn it over to Ashwin since he's here with us. First of all, all four trials are largely in what I call cloud and AI titans. A couple of them could be classified as

Ashwin Kohli: Specialty providers as well, depending on how they end up.

Ashwin Kohli: But those four are going very well. They started out as largely trials. They are now moving into pilots this year, most of them. And with any luck next year, maybe we won't be saying 4 out of 5, and we can say 5 out of 5. That's my hope anyway.

Jayshree V. Ullal: They are now moving into pilots this year, most of them. And with any luck, next year, maybe we won't be saying four out of five, and we can say five out of five. That's my hope. But in addition to that, we have tens of smaller customers who are starting to do AI pilots. And Ashwin, you've been in the middle of a lot of those.

Ashwin Kohli: But in addition to that, we have tens of smaller customers who are starting to do AI pilots.

Ashwin Kohli: Maybe you want to speak to that a little bit. Yeah, absolutely, Jayshree. Hi Meta.

Anshul: And Ashwin, you've been in smack in the middle of a lot of those. Maybe you want to speak to that a little bit. Yeah, absolutely Jayshree. Hi Meta. So I just wanted to clarify the example that I shared with you was more around a tier 2 cloud provider.

Ashwin Kohli: So I just wanted to clarify the example that I shared with you was more around a tier 2 cloud provider. And if I take a step back, the types of conversations my team is having with customers are either around general purpose enterprise customers, or they're around tier 2 cloud providers, which are different from the ones Jayshree is referring to, and they tend to be early adopters.

Speaker Change: And if I take a step back, the types of conversations my team is having with customers is either around general purpose enterprise customers, or it's around to cloud providers, right, which are different to the ones Jayshree is referring to.

Ashwin Kohli: They're about to build an AI cluster. It's a reasonably small size, not classified in thousands or tens of thousands, but you've got to start somewhere. So they started with about a few hundred GPUs, would you say? Absolutely. Our next question comes from the line of Atif Malik with Citi. Please go ahead.

Speaker Change: And they tend to be early adopters. They're about to build an AI cluster. It's a reasonably small size, not classified in thousands or ten thousands, but you've got to start somewhere. So they start at about a few hundred GPUs, would you say? Absolutely, yes.

Speaker Change: Great, thank you.

Speaker Change: Thanks, Mena.

Speaker Change: Our next question comes from the line of Atif Malik with Citi. Please go ahead.

Atif Malik: Hi Jayshree, you mentioned a 70 billion TAM number in your prepared remarks. Can you help us understand what is in that TAM and how does that relate to the 750 million AI networking revenue number you have provided for next year? Oh yeah, I get asked that question a lot.

Atif Malik: Thank you for taking my question. Jayshree, you mentioned a 70 billion TAM number in your prepared remarks.

Atif Malik: Can you help us understand what is in that TAM and how does that relate to the $750 million

Jayshree V. Ullal: First of all, the TAM is far greater than the 750 million we've signed up for, and remember that's in the early years. But that TAM consists of our data center TAM, our AI TAM, which we count in a more narrow fashion as how much of InfiniBand will move to Ethernet on the back end. We don't count the AI TAM that's already in the front end, which is part and parcel of our data center. And then, obviously, there's the campus TAM, which is very, very big. It's north of 10 billion.

Speaker Change: A.I. Networking Revenue Number you have provided for next year. Oh yeah, I get asked that question a lot. First of all, the TAM is far greater than the 750 million we've signed up for, and remember that's early years.

Speaker Change: But that TAM consists of our data center TAM, our AI TAM, which we count in a more narrow fashion as how much of InfiniBand will move to Ethernet on the back end. We don't count the AI TAM that's already in the front end, which is part and parcel of our data center.

Speaker Change: And then obviously there's the CampusTAM, which is very, very big. It's north of $10 billion.

Jayshree V. Ullal: And then there's the wide area and routing. So these four are the building blocks that I call the campus center, data center, AI center, and WAN center. And then layered upon that is some very nice software.

Speaker Change: And then there's the wide area and routing. So these four are the building blocks that I call the Campus Center, Data Center, AI Center, and WAN Center. And then layered upon that is some very nice software. If you saw, we had a nice bump in software and service renewals this quarter, which would be largely centered around Cloud Vision.

Jayshree V. Ullal: If you saw, we had a nice bump in software and service renewals this quarter, which would be largely centered around cloud vision, observability, and security. So I would say these are the four building blocks and then the three software components on top of them. Of course, not to forget the services and support that are part of these TAMs as well. Thank you, Atif. Thank you, Atif. Our next question comes from the line of Antoine Chkaiban with New Street Research. Please go ahead.

Speaker Change: Observability and Security. So I would say these are the four building blocks and then the three software components on top of it. Not to always, of course, not to forget the services and support that are part of these TAMs as well.

Speaker Change: Thank you all.

Speaker Change: Thank you, Atif. Thank you, Atif. Our next question comes from the line of Antoine Chkaiban with New Street Research. Please go ahead.

Antoine Chkaiban: I'd actually like to ask about the non-AI component of your cloud and AI segment. What can you tell us about how investments in traditional infrastructure are trending? Because we heard from other vendors that the inventory digestion is now easing. So are you seeing that too? We saw that last year.

Antoine Schaben: I'd like actually to ask about the non-AI component of your cloud and AI segment.

Speaker Change: What can you tell us about how investments in traditional infrastructure are trending because we heard from other vendors that the inventory digestion is now easing, so are you seeing that too?

Jayshree V. Ullal: We saw that there was a lot of pivot going on from the classic cloud, as I like to call it, to the AI in terms of spend. And we continue to see favorable, you know, preferences for AI spend in many of our large cloud customers. Having said that, at the same time, simultaneously, we are going through a refresh cycle where many of these customers are moving from 100 to 200 or 200 to 400 gigabytes.

Speaker Change: We saw that last year. We saw that there was a lot of pivot going on from the classic cloud, as I like to call it.

Speaker Change: to the to the AI in terms of spend.

Speaker Change: And we continue to see favorable, you know, preferences to AI spend in many of our large cloud customers.

Speaker Change: Having said that, at the same time, simultaneously, we are going through a refresh cycle where many of these customers are moving from 100 to 200 or 200 to 400 gig. So while we think AI will grow faster than cloud, we're betting on classic cloud continuing to be an important aspect of our contributions.

Jayshree V. Ullal: So while we think AI will grow faster than cloud, we're betting on classic cloud continuing to be an important aspect of our contribution. Our next question will come from the line of Amit Daryanani with Evercore. Please go ahead. Question related to the updated 24 guide, and I realize it's at least 14% growth for the year. But your comparisons actually get much easier in the back half of the year versus what you've had in the first half.

Speaker Change: Our next question will come from the line of Amit Daryanani with Evercore. Please go ahead.

Amit Jawaharlaz Daryanani: Good afternoon and thanks for taking my question. Just a question related to the updated 24 guide and I realize it's at least 14% growth.

Amit Jawaharlaz Daryanani: [inaudible]

Jayshree V. Ullal: So just from an H2 versus H1 basis, is it reasonable to think that growth can actually accelerate for you in the back half of the year? And if it doesn't, why do you think it does not accelerate in the back half?

Chantelle Breithaupt: Thank you. Yeah, I think that Jayshree and I came up with this guide of at least 14% because we do see multiple scenarios as we go through the second half of the year. You know, we do expect to continue to see some acceleration and growth. But I would say that, from the perspective of the forward scenarios, we were comfortable with at least 14%, and we'll, you know, come back in Q3 and see where we're at. Amit, look at us. You know, we're known to be traditionally conservative.

Speaker Change: Yeah, I think that, you know,

Speaker Change: You know, Jayshree and I came to this guide of at least 14% because we do see multiple scenarios as we go through the second half of the year.

Speaker Change: We do expect to continue to see some acceleration and growth, but I would say that from the perspective of the forward scenarios, we are comfortable with at least 14%, and we'll come back at Q3 and see where we're ready to guide for the rest of the year.

Jayshree V. Ullal: We went from 10 to 12, 12 to 14. And now my CFO says we need at least 14. So let's see how the second half goes.

Amit Jawaharlaz Daryanani: Amit, look at us. We're known to be traditionally conservative. We went from 10 to 12, 12 to 14, and now my CFO says at least 14.

Amit Jawaharlaz Daryanani: Let's see how the second half goes. But I think at this point, you should think we are confident about second half and we're getting increasingly confident about 2025.

Jayshree V. Ullal: But I think at this point, you should think we are confident about the second half, and we're getting increasingly confident about 2025. Perfect. Thank you. Thank you. Our next question comes from the line of Tal Liani with Bank of America. Please go ahead. Was it me, by the way?

Amit Jawaharlaz Daryanani: Perfect, thank you.

Speaker Change: Our next question comes from the line of Tal Liani with Bank of America. Please go ahead.

Tal Liani: Good. Tal, are you there? Yes, can you hear me? Yes. Okay, my question is more in line with the kind of the previous question. I calculated the implied growth in the fourth quarter. And I'm getting much lower growth in the fourth quarter than what we've seen this quarter or next quarter. I'm wondering, you said conservatism in the last answer, and the question is, is it just conservatism, or is there anything special about the fourth quarter that the implied growth is only 9% year over year?

Tal Liani: Was it me, by the way?

Tal Liani: Chantelle, are you there? Thank you.

Chantelle Breithaupt: Yes, can you hear me? Yes.

Tal Liani: Okay, my question is more in line with kind of the previous question. I calculated the implied growth in the fourth quarter.

Tal Liani: It goes across everything, the implied growth, revenue growth is lower, the gross margin is lower, so some of it is conservatism, but is there anything special with 4Q, timing of recognition or seasonality or anything that drives a lower implied guidance?

Tal Liani: And I'm getting a much lower growth in the fourth quarter than what we've seen this quarter or next quarter.

Tal Liani: And I'm wondering if it's...

Speaker Change: You said conservatism in the last answer, and the question is, is it...

Speaker Change: Just conservatism or is there anything special with the fourth quarter that the implied growth is only 9% year-over-year and It goes across everything. It goes, you know, the implied growth, revenue growth is lower

Speaker Change: The gross margin is lower, so I you know some of it is conservatism, but is there anything special with 4Q timing of recognition or seasonality or anything that drives a lower implied guidance?

Jayshree V. Ullal: So Tal, if you go back to November Analysts Day, you know, to call our gross margin lower, I would disagree because I think we're just blowing it off. Our guide, our guide was 63 to 64, and we have now shown two quarters of amazing gross margin. Hats off to my campus and John McCool, Alex, and the entire team for really working on discipline cost reduction. But yet, if you look at mix and general, the costs, et cetera, I would say you should plan on our gross margins being as we projected. They're not lower.

Speaker Change: So Tal, if you go back to November Analyst Day, you know, to call our gross margin lower, I would disagree because I think we're just blowing it off our guide. Our guide was 63 to 64.

Speaker Change: And we have now shown two quarters of amazing gross margin, hats off to my campus and John McCool, Alex and the entire team for really working on discipline cost reductions.

Speaker Change: But yet, if you look at MIGS in general, the costs, etc., I would say you should plan on our gross margins being as we projected. They're not lower. I think we just did exceptionally well the last two quarters, so it's relatively lower.

Jayshree V. Ullal: I think we just did exceptionally well the last two quarters, so it's relatively lower. That's the first thing. Second, in terms of growth, I would say we always aim for double-digit growth. We came in with 10 to 12, and again, Q2 is just an outstanding quarter. I don't want you to use it as a benchmark for how Q3, Q4 will be.

Speaker Change: That's the first thing. Second, in terms of growth, I would say we always aim for double-digit growth. We came in with 10 to 12, and again, Q2 is just an outstanding quarter. I don't want you to use it as a benchmark for how Q3, Q4 will be.

Jayshree V. Ullal: But of course, we're operating off large numbers. We'll aim to do better, but we'll have more visibility as we go into Q3, and we'll be able to give you a good sense of the outcome. Thank you. Our next question comes from the line of George Notter with Jeffries. Please go ahead.

Speaker Change: But of course we're operating off large numbers. We'll aim to do better, but we'll have more visibility as we go into Q3 and we'll be able to give you a good sense of the year.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of George Notter with Jeffries. Please go ahead.

George Charles Notter: Hi guys, thanks very much. I guess I was just curious about what your expectations were coming into the quarter for product deferred revenue. I guess I'm curious how much you thought would be added to that product deferred category in Q2 and then, and then also, do you have a view on product deferred revenue for Q3? Thanks. Yeah, hi.

George Charles Notter: Hi guys, thanks very much. I guess I was just curious about what your expectations were coming into the quarter for product deferred revenue.

George Charles Notter: I guess I'm curious how much you thought would be added to that product deferred category in Q2. And then also, do you have a view on product deferred revenue for Q3? Thanks.

Chantelle Breithaupt: Yeah, nothing's changed in our philosophy that we don't guide product-deferred revenue, so there's nothing new there to report. I would say, in the sense of coming to this quarter, you know, we don't guide product-deferred revenue. We have an idea in the sense of where we're going to land as we go through the quarter, but I would say that it met expectations from what we were having in our planning forecast. Got it.

Speaker Change: Yeah, nothing's changed in our philosophy that we don't guide product deferred revenue, so there's nothing new there to report, I would say, in the sense of coming to this quarter.

Speaker Change: We don't guide the product-deferred revenue. We have an idea in the sense of where we're going to land as we go through the quarter, but I would say that it met expectations from what we were having in our planning forecast process.

Chantelle Breithaupt: And I assume these are new products you've shipped to customers; you're waiting for customer acceptance. You know, any sense for when those customer acceptances might start to flow through? Is that a 2024 event? Is that a 2025 event?

Speaker Change: Got it. And I assume these are new products you've shipped to customers, you're waiting for customer acceptance, you know, any sense for when those customer acceptances might start to flow through? Is that a 2024 event? Is that a 2025 event? How do you think about it?

Chantelle Breithaupt: How do you think about it? Yeah, they all have different timings because they're unique to the customer, the use case, AI, classic cloud, etc. So they're all unique and bespoke in that way.

Jayshree V. Ullal: So there's no, there's no set trending on that. And so as we roll through the quarters, you know, they'll come off as they get deployed. And I think it's fair to say if it's AI, it takes longer; if it's classic cloud, it's shorter. Okay, thank you. Our next question comes from the line of Samik Chatterjee with J.P. Morgan. Please go ahead.

Speaker Change: Yeah, they all have different timings because they're unique to the customer, the use case, AI, classic cloud, etc. So they're all unique and bespoke that way. So there's no, there's no set trending on that. And so as we roll through the quarters, you know, they'll come off as they get deployed and

Speaker Change: And then that's where it will land from a forecasting perspective. And I think it's fair to say if it's AI it takes longer, if it's classic cloud it's shorter.

Speaker Change: Okay, thank you. Yes, George, thank you.

Speaker Change: Our next question comes from the line of Samik Chatterjee with J.P. Morgan. Please go ahead.

Samik Chatterjee: Hi, thanks for taking the question and giving such strong results here. But if I can just ask a question on the commentary that Ashwin had in his prepared remarks. Ashwin, you mentioned the tier two customer where you're refreshing the front end, as I sort of interpreted it, to alleviate some of the bandwidth, sort of concerns from the back end. How do you think about that opportunity across your customer base? Particularly, how should we think about that sort of thing as being attached to the 750 million target for back-end revenues that you have for next year?

Samik Chatterjee: Hi, thanks for taking the question and strong results here, but if I can just ask a question on the commentary that Ashwin had in the prepared remarks. Ashwin, you mentioned the

Speaker Change: It's a great way to connect with a tier 2 customer where you're refreshing the front end as I interpreted it to alleviate some of the bandwidth concerns from the back end.

Speaker Change: How do you think about that opportunity across your customer base, particularly how should we think about sort of that as being attached to the $750 million target for back-end revenues that you have for next year? Just help us think about the opportunity that you're seeing with your customers on that side.

Samik Chatterjee: Just help us think about the opportunity that you're seeing with your customers on that side. Yes, Amit, it's hard to say, right? I mean, I don't want to attach the 750 to this one customer, right?

Jayshree V. Ullal: The goal around this one customer was to demonstrate our wins in enterprise and, you know, in the non-cloud space. But outside that, it would be very hard to translate that to what's happening within the 750 million. I don't know, Jayshree, if you've got any comments around that at all. Yeah, I was just going to add that there are four things Ashwin and the team are seeing in the enterprise and provider sector. I think the migration to 100 gigabyte data centers is pretty solidly going on. If anybody's still on a 10 and 40, they're definitely not an early adopter of technology.

Speaker Change: Yes, Amit, it's hard to say, right? I mean, I don't want to attach the 750 back to this one customer, right? The goal around this one customer was to demonstrate

Amit Jawaharlaz Daryanani: are wins in enterprise and in the non-cloud space. But outside that, it would be very hard to go translate that to what's happening within the 750 million.

Jayshree V. Ullal: I don't know, Jayshree, if you've got any comments around that at all? Yeah, I was just going to add that there are four things Ashwin and the team are seeing in the enterprise and provider sector.

Jayshree V. Ullal: I think the migration to 100-gig data center is...

Jayshree V. Ullal: Pretty solidly going on.

Jayshree V. Ullal: And some of them are even moving to 400 gigabytes, I would say, right? Absolutely, Jayshree. So that's on the data center. Campus, I know, in general, is a slow market, but for Arista, we are still seeing a lot of desire. And you heard Ashwin talk about a campus win, but they're really frustrated, and they're struggling with existing campus deployments. So we feel really good about our 750 million target for next year.

Speaker Change: If anybody's still on a 10 and 40, they're definitely not a...

Jayshree V. Ullal: and Jayshree Ullal.

Speaker Change: We are still seeing a lot of desire, and you heard Ashwin talk about a campus win, but they're really frustrated and they're struggling with existing campus deployments.

Jayshree V. Ullal: The routed WAN, again, we're both in tier two and service providers and even in enterprises; there is a lot of activity going on there. And finally, the AI trials you talked about. They tend to be smaller. But it's a representation of the confidence the customer has. They may be using other GPUs, servers, et cetera, but when it comes to the mission-critical network, they've recognized the importance of best of breed, reliability, availability, performance, and no loss.

Speaker Change: So we feel really good about our $750 million target for next year.

Speaker Change: The Routed WAN, again, we're both in Tier 2 and Service Providers and even in Enterprises, a lot of activity going on there.

Speaker Change: And finally, the AI trials you talked about, they tend to be smaller, but it's a representation of the confidence the customer has.

Speaker Change: They may be using other GPUs, servers, etc., but when it comes to the mission-critical networks, they've recognized the importance of best of breed, reliability, availability, performance, no loss, and the familiarity with the data center is naturally leading to pilots and trials on the AI side with us.

Jayshree V. Ullal: And the familiarity with the data center is naturally leading to pilots and trials on the AI side with us. Thank you. Our next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Yes, thank you. There are several data points across the supply chain that indicate enterprise networking and traditional server units are beginning to recover. I was hoping you might discuss what you are hearing from your enterprise and service provider customers on their commitment to upgrade their servers and networking gear for the next couple quarters. And as you address that, perhaps you could discuss the number of new customers being added to these verticals over the last couple quarters out of the 10,000 or so that you have today. Thank you. Yeah, let me take the second question.

Karl Ackerman: Yes, thank you. So there are several data points across the supply chain that indicate

Speaker Change: Enterprise Networking and Traditional Server Units are beginning to recover.

Speaker Change: I was hoping you might discuss what you are hearing from your enterprise and service provider customers on their commitment to upgrade their servers and networking gear for the next couple quarters.

Speaker Change: And as you address that, perhaps you could discuss the number of new customers being added into these verticals over the last couple quarters out of the 10,000 or so that you have today. Thank you.

Jayshree V. Ullal: I think we are adding systematically, you know; we celebrated the 10,000. And so because we, in the past, we used to add large numbers of customers. Now we're adding many small customers. So we're pleased with the systematic addition of hundreds of customers every quarter. And that's going very, very well. On the other hand, what was your other former question?

Speaker Change: Yeah, let me take the second question. I think we are adding systematically, you know, we celebrated the 10,000. And so because of, in the past, we used to add large numbers of customers. Now we're adding many small customers, so we're pleased with the systematic add of hundreds of customers every quarter. And that's going very, very well. What was your other former question?

Jayshree V. Ullal: How to think about the adoption or the growth of server and networking gear on for campus environments and what you're seeing. So, perhaps it may come as a surprise to you, but servers aren't always related to campuses. Devices and users are much more related to campus, right? Servers tend to be dealing with more data center upgrades. So, on campus, we're tending to see two things right now.

Speaker Change: How to think about the adoption or the growth of server and networking gear on campus environments and what you're seeing there?

Speaker Change: Okay.

Speaker Change: So perhaps it may come as a surprise to you, but servers aren't always related to campus. Devices and users are much more related to campus, right? Servers tend to be dealing with more data center upgrades. So in the campus, we're tending to see two things right now.

Jayshree V. Ullal: Greenfield buildings that are, they're planning for 25, 26, and we're smack in the middle of those RFPs, or they're trying to create a little oasis in their desert and prove that our, you know, post-pandemic campus is much better with a leaf spine topology, wireless connecting to it as a leaf, and then enabling things like zero-touch automation, method segmentation, capabilities, analytics, et ce

Speaker Change: Greenfield, the links that they're planning for 2025-2026, and we're smack in the middle of those RFPs.

Speaker Change: All they're trying to create a little oasis in the desert and prove that our, you know, post-pandemic campus is much better with the LeafSpine topology, wired, wireless, connecting to it, at least.

Speaker Change: and then enabling things like zero-touch automation, method segmentation, capabilities, analytics, etc.

Jayshree V. Ullal: So, the campus is really turning out to, in a somewhat sluggish overall market, we are finding that our customers are very interested in modernizing their campus. And again, it has a lot to do with their familiarity with us in the data center, and that's translating to more success on the campus. Thanks, Kyle. Our next question comes from the line of Ben Bollin with Cleveland Research. Please go ahead. Good evening, everyone.

Speaker Change: So, the campus is really turning out to be in a somewhat sluggish overall market.

Speaker Change: We are finding that our customers are very interested in modernizing their campus. And again, it has a lot to do with their familiarity with us in the data center. And that's translating to more success in the campus.

Speaker Change: Thanks, y'all.

Speaker Change: Our next question comes from the line of Ben Bollin with Cleveland Research. Please go ahead.

Benjamin James Bollin: Thanks for taking the question. Jayshree, I'm interested in the bigger picture, as you think about backend network architectures gradually capturing more of the traditional front end. What do you think that looks like over the next several years?

Benjamin James Bollin: Good evening, everyone. Thanks for taking the question.

Benjamin James Bollin: Jayshree, I'm interested in a bigger picture as you think about back-end network architectures gradually capturing more of the traditional front-end.

Benjamin James Bollin: What do you think that looks like over the next several years? How quickly could that become a more realistic opportunity to capture more of that true fabric of overall compute resources?

Jayshree V. Ullal: How quickly could that become a more realistic opportunity to capture more of that true fabric of overall compute resources? Well, I think there are a lot of market studies that point to, you know, today, it's still largely InfiniBand. You remember me, Ben, saying we were outside looking in just a year ago? So step one is we're feeling very gratified that the whole world, even InfiniBand players, have acknowledged that we're making Ethernet great again.

Benjamin James Bollin: Well, I think there are a lot of market studies that point to, you know, today, it's still largely InfiniBand. You remember me, Ben, saying we were outside looking in just a year ago. So step one is we're feeling very gratified that the whole world

Benjamin James Bollin: Even InfiniBand players have acknowledged that we're making Ethernet great again, and so I expect more and more of that back-end to be Ethernet.

Jayshree V. Ullal: And so I expect more and more of that back end to be Ethernet. One thing I do expect, even though we're very signed up to the 750 million number, at least 750 million, I should say next year, is that it's going to become difficult to distinguish the back end from the front end when they all move to Ethernet. So this AI center, as we call it, is going to be a conglomeration of both the front and the back.

Benjamin James Bollin: One thing I do expect, even though we're very signed up to the 750 million number, at least 750 I should say next year, is it's going to become difficult to distinguish the back end from the front end when they all move to Ethernet.

Benjamin James Bollin: So this AI center, as we call it, is going to be a conglomeration of both the front and the back. So if I were to fast forward three, four years from now, I think the AI center is the super center of both the front end and the back end. So we'll be able to track it as long as there's GPUs and strictly training use cases.

Jayshree V. Ullal: So if I were to fast forward three, four years from now, I think the AI center will be the super center of both the front end and the back end. So we'll be able to track it as long as there are GPUs and strictly training use cases. But if I were to fast forward, I think there'll be many more edge use cases, many more inference use cases, and many more small-scale training use cases, which will make that distinction difficult to make. Our next question will come from the line of Alex Henderson with Needham.

Benjamin James Bollin: But if I were to fast forward, I think there'll be many more edge use cases, many more inference use cases, and many more small-scale training use cases, which will make that distinction difficult to make.

Speaker Change #101: Our next question will come from the line of Alex Henderson with Needham. Please go ahead.

Alexander Henderson: Please go ahead. Great, thank you very much. I was hoping we could talk a little bit about the spending, biases in the cloud type. Clearly, there's an enormous amount of spending going into the AI, front-end, back-end, network-elements, as well as the GPU. But there is a rebounding growth rate that is ultimately driving the traditional business that has historically been called the CPU side of the data. And I'm wondering if they're under-investing in there and that, whether there's a potential for a catch-up, Spending in that area at some juncture, because of the overbias. Itai Kidron, David Vogt, Tal Liani, Martin Hull, Antoine Chkaiban, Kenneth Duda, Ashwin Kohli, Arista Networks Inc.; Transcripts provided by Transcription Outsourcing, LLC.

Alexander Henderson: Great, thank you very much. I was hoping we could talk a little bit about the spending.

Speaker Change #103: Biases in the cloud titans.

Speaker Change #104: Clearly, there's an enormous amount of spending going into the AI front-end, back-end networking elements as well as the GPUs, but there is a rebounding growth rate of application

Speaker Change #105: Um, you know, uh,

Speaker Change #105: that is ultimately driving the traditional business that...

Speaker Change #105: has historically been called the CPU side of the...

Speaker Change #106: Data Center.

Speaker Change #107: And I'm wondering if they're under-investing in there and whether there's a potential for a catch-up.

Speaker Change #108: Thank you very much.

Jayshree V. Ullal: The Bulletproof Executive 2013, Alex. It's a very thought-provoking question. I would say there's such a heavy bias towards the cloud titans towards training and super training and the bigger and better the GPUs, the billion parameters, you know, the open AI, chat, GPT, and llamas that you're absolutely right that, at some level, the classic cloud, what you call traditional, I'm still calling classic, was a little bit neglected last year and this year.

Jayshree V. Ullal: Having said that, I think once the training models are established, I believe this will come back, and it'll sort of be a vicious cycle that feeds on each other. But at the moment, we're seeing more activity on the AI side and more moderate activity on the cloud. Does the re-acceleration of applications..., https://www.youtube.com.uk? I don't know how to measure it, but I think the more AI backend we put in, we expect that to have a pressure on the front end of X percent.

Speaker Change #109: Alex, it's a very thought-provoking question. I would say there's such a heavy bias towards, in the cloud titans, towards

Speaker Change #110: Jayshree Ullal, Liz Stine, Chantelle Breithaupt, Anshul Sadana, Jayshree Ullal, Liz Stine,

Speaker Change #111: OpenAI, Chad GPT, and Llamas.

Speaker Change #114: That you're absolutely right that at some level, the classic cloud, what you call traditional, I'm still calling classic.

Speaker Change #110: It's a little bit neglected last year and this year. Having said that, I think once the training models are established, I believe this will come back and it'll sort of be a vicious cycle that feeds on each other. But at the moment, we're seeing more activity on the AI and more moderate activity on the cloud.

Speaker Change #112: Does the re-acceleration of application growth, excluding AI, play into that? I think it does. I don't know.

Speaker Change #112: I don't know how to measure it, but I think the more AI backend we put in, we expect that to have a pressure on the front end of X percent. We're still trying to assess whether that's 10, 20, 30 percent. And so we do not count that in our 750 million number, to be accurate.

Jayshree V. Ullal: We're still trying to assess whether that's 10, 20, 30 percent. And so we do not count that in our $750 million number, to be accurate, to only include GPU native connections. But absolutely, as the two holistically come together to form this AI center, I believe the front end will have pressure. Thank you so much, and thanks for the questions.

Speaker Change #112: to only GPU native connections, but absolutely. As the two holistically come together to form this AI center, I believe the front end will have pressure.

Benjamin Alexander Reitzes: Thank you, Alex. I appreciate your support. Our next question comes from the line of Ben Reitzes with Emilius Research. Please go ahead.

Speaker Change #113: Great, thank you so much and thanks for the great quarter.

Speaker Change #113: Thank you, Alex. Appreciate your support.

Speaker Change #113: Our next question comes from the line of Ben Reitzes with Emilius Research. Please go ahead.

Jayshree V. Ullal: Hi Jayshree and Chantelle, this is Jack Adair for Ben. Congratulations on a good quarter. We were wondering if you could comment on the competitive environment and if you're seeing Spectrum X from NVIDIA, and if so, how you're doing against it. Yeah, but first I just want to say when you say competitive environment, it's complicated with NVIDIA because we really consider them a friend on the GPUs as well as the NICs, so not quite a competitor, but absolutely we will compete with them on the Spectrum We have not seen the Spectrum except in one customer where it was bundled, but otherwise, we feel pretty good about our win rate and our success for a number of reasons.

Jack Adair: Hi Jayshree and Chantelle, this is Jack Adair for Ben. Congrats on the good quarter. We were wondering if you could comment on the competitive environment, and if you're seeing Spectrum X from NVIDIA, and if so, how you're doing against it.

Speaker Change #116: When you say competitive environment, it's complicated with NVIDIA because we really consider them a friend on the GPUs as well as the NICs.

Speaker Change #117: So not quite a competitor, but absolutely we will compete with them on the spectrum switch. We have not seen the spectrum except in one customer where it was bundled.

Speaker Change #117: But otherwise, we feel pretty good about our win rate and our success.

Jayshree V. Ullal: Great software, portfolio products and architecture that's proven, performance, visibility features, management capabilities, high availability, and so I think it's fair to say that if a customer were bundling with their GPUs, then we wouldn't see it. If a customer were looking for best of breed, we absolutely see it and win it. Thank you for that. Our next question will come from the line of James Fish with Piper Sandler. Please go ahead

Speaker Change #117: For a number of reasons, great software, portfolio products, and architecture that's proven, performance, visibility features, management capabilities, high availability,

Speaker Change #117: And so I think it's fair to say that if a customer were bundling with their GPUs, then we wouldn't see it. If a customer were looking for best of breed, we absolutely see it and win it.

Speaker Change #118: Thanks, Jeff. Thank you for that.

Speaker Change #119: Our next question will come from the line of James Fish with Piper Sandler. Please go ahead.

James Edward Fish: Thanks for the question. Just wanted to circle back on the enterprise side of things. Is there a way to think about how many replacements you're seeing relative to prior periods?

James Edward Fish: Thanks for the question. Just wanted to circle back on the enterprise side of things. I guess, is there a way to think about how many replacements you're seeing relative to prior periods? And really, I'm trying to understand if we're starting to see that core enterprise data center network refresh

James Edward Fish: What do these companies actually pick up versus kind of the share gains that you guys have historically seen? Is there an underlying change in enterprise customer behavior, whether it's for the data center, Jayshree, I know you were talking about the campus earlier?

Jayshree V. Ullal: And really, I'm trying to understand if we're starting to see that core enterprise data center network refresh actually pick up versus kind of the share gains that you guys have historically seen. And, you know, is there an underlying change in enterprise customer behavior, whether it's for the data center or the campus? Jayshree, I know you were talking about the campus earlier. Yeah, James, let me talk, and Ashwin, I'm sure you have more to add since you're closer to the problem.

Jayshree V. Ullal: Yeah, James, let me talk, and Ashwin, I'm sure you have more to add since you're closer to the problem.

Jayshree V. Ullal: I believe we have three classes of enterprise customers. The early adopters, and I think Ashwin's team is seeing a lot of refresh going on, you know, they already have 100 gigabytes, and they're potentially planning their 400 gigabyte, right? Then the fast followers, and those guys, I think, are still looking at 100 gigabyte migrations, right?

Jayshree V. Ullal: I believe we have three classes of enterprise customers.

Jayshree V. Ullal: The early adopters, and I think in that category, Ashwin's team is seeing a lot of refresh.

James Edward Fish: They already have 100 gig and they're potentially planning their 400 gig, right?

James Edward Fish: Then the fast followers.

Ashwin Kohli: And then the real risk averse, and we're still getting to know them because, you know, this is an untapped opportunity for us, right? And probably a fourth category where some of them are disillusioned with the public cloud and want to repatriate some of their workloads back into the data center. So I would say there's activity in all four, no saturation, and still a lot of opportunity for us, largely in the speed upgrades and also in the class of customers and what stage they are in.

And those guys, I think, are still looking at 100 gig migrations, right?

James Edward Fish: And then the real risk averse, and we're still getting to know them because, you know, our...

James Edward Fish: This is an untapped opportunity for us, right? And probably a fourth category where some of them are disillusioned with the public cloud and wanna repatriate some of their workloads back into the data center.

James Edward Fish: So I would say there's activity in all four, no saturation, still a lot of opportunity for us, largely in the speed upgrades and also in the class of customers and what stage they are.

Ashwin Kohli: Ashwin, do you want to add anything to that? Yes, sure, Jayshree, right? And so to answer your question, from what I'm seeing from customers, they're kind of fed up with being deployed in the data center specifically, something which is proprietary lock-in, right? Something which does not give them the flexibility to do, you know, join multiple use cases such as data center, campus routing, and they want something that just works. They want something that is just simple. They want to make sure that when they wake up in the morning, the network is not down.

Ashwin Kohli: Ashwin, do you want to add anything to that? Yes, sure, Jayshree. To answer your question, from what I'm seeing from customers, they're kind of fed up with being deployed in the data center specifically, something which is proprietary login, something which does not give them the flexibility to join multiple use cases such as data center, campus, routing. They want something that just works. They want something that is just simple. They want to make sure that when they wake up in the morning, the network is not down. Arista today actually has a brand. It has a value for there. We've actually been delivering this for the last 10 plus years. James, I would say the message is echoing successfully in our existing customers.

Ashwin Kohli: And so Arisa today actually has a brand. It has a value for there. And we've actually been delivering this for the last 10 plus years. So, you know, James, I would say that message is echoing successfully in our existing customers who are taking Arisa not only in the single use case of data center but expanding that across data center, campus, routing, WAN, and then the team is eagerly working with a new set of global 2,000 and Fortune 500 customers to go evangelize the message to them as well. Our next question will come from the line of Ittai Kidron with Oppenheimer. Please go ahead.

Speaker Change #121: who are taking Arista not only in the single use case of datacenter but expanding that across datacenter, campus, routing, WAN and then the team is eagerly working with a new set of Global 2000 and Fortune 500 customers to go evangelize the message to them as well.

Speaker Change #122: Thank you.

Speaker Change #123: Our next question will come from the line of Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron: Thanks. Nice numbers, ladies. I wanted to go back to gross margin, Jayshree and Chantelle, if you don't mind. In your prepared remarks, you talked about manufacturing efficiencies and cost reduction. I guess I'm wondering why that is not something that carries forward to the next quarter as well.

Ittai Kidron: Thanks, nice numbers ladies. I wanted to go back to gross margin, Jayshree and Chantelle, if you don't mind, in your prepared remarks you talked about manufacturing efficiencies,

Ittai Kidron: Cost reduction. I guess I'm wondering why is that not something that carries forward to the next quarter as well. I understand you're trying to be conservative, but I'm sure these are not changes that have a very short lifespan that they can carry forward. So why not be a bit more

Chantelle Breithaupt: I understand you're trying to be conservative, but I'm sure these are not changes that have a very short lifespan that they can carry forward. Why not be a bit more optimistic about what the gross margin outlook should be? Yeah, no, it's a great question.

Chantelle Breithaupt: And so, you know, our goal is always to try to do better than our guide. But within that guide, the question is, mostly what's influencing the second half consideration is the expected mix of customers. As you can appreciate, we do have different mixes, depending on the. We will keep looking for variable cost productivity and cost management as we go through and hope to deliver more, but at this point in time, what's mostly built into it is the mixed assumption and the statistical assumptions.

Ittai Kidron: optimistic on what the gross margin outlook should be

Speaker Change #125: Yeah, no, it's a great question. And so, you know, our goal is always to try to do better than our guide. But within that guide, the question is, there's mostly what's influencing the second half consideration is the expected mix of customers, as you can appreciate, we do have different mixes, depending on the the

Speaker Change #125: demographics of who we're selling to. So I think that's a big part of our second half, why we kept the guide as it is, we will keep looking for variable cost productivity and cost management as we go through and hope to deliver more. But at this point in time, what's mostly built into it is the mix assumption in the second half.

Chantelle Breithaupt: If you look at this isn't just this quarter; John and the team have done a fantastic job over the last year, so yeah, I'm going to go back to them and ask for more, but I think they will say they've done so much, you might be squeezing blood out of a stone, so we'll see if they respond to more cost reductions. I absolutely agree with Chantelle.

Speaker Change #125: And if you look at, this isn't just this quarter, John and the team have done a fantastic job for the last year.

Speaker Change #126: So, yeah, I'm going to go back to them and ask for more, but I think they will say they've done so much and might be squeezing blood out of a stone.

Chantelle Breithaupt: It's largely driven by mix, and I think we've taken a lot of the cost reductions out in the last year. Appreciate it. Our next question will come from the line of Simon Leopold with Raymond James. Please go ahead.

Speaker Change #126: So we'll see if they respond to more cost reductions, but I absolutely agree with Chantelle. It's largely driven by MECs, and I think we've taken a lot of the cost reductions out in the last year.

Speaker Change #127: I appreciate it.

Speaker Change #128: Our next question will come from the line of Simon Leopold with Raymond James. Please go ahead.

Simon Matthew Leopold: Thank you very much. I know that you typically hold off on the 10% customer disclosures until the end of the fiscal year. But what I'm hoping to gather is how customer concentration may be evolving from comparison to last year. Do you expect, with your past customers growing their spending so much that it stays similar, or with the diversity and the new opportunities, the concentration you've had historically has declined? Any kind of indication you could offer, I'd appreciate it. I'll try, but you're right to say that we don't know. It's only half the year.

Simon Matthew Leopold: Thank you very much. I know that you typically hold off on the 10% customer disclosures until the end of the fiscal year.

Simon Matthew Leopold: But what I'm hoping to gather is how customer concentration may be evolving from comparison to last year. Do you expect with your past customers growing, they're spending so much that...

Simon Matthew Leopold: If they're similar or with the diversity and the new opportunities, the concentration you've had historically declined, any kind of indication you could offer, I'd appreciate it.

Jayshree V. Ullal: I expect both Microsoft and Meta to be greater than 10% customers for us. I don't expect any other 10% concentration. Now, Microsoft and Meta, how they will pivot to AI and how they will reduce the spend and all of those things, that movie will play out in the next six months, so we'll know better. But at this point, I think you can assume they won't be exactly the same. Some may go up, and some may go down.

Speaker Change #130: I mean, I'll try, but you're right to say that we don't know. It's only half the year. I expect both Microsoft and Meta to be greater than 10% customers for us. I don't expect any other 10% concentration.

Speaker Change #130: Now, in Microsoft and Meta, how they will pivot to AI and how they will reduce the spend and all the things, that movie will play out in the next six months, so we'll know better.

Jayshree V. Ullal: But these are two extremely vital customers, strategic customers. We co-develop with them. We partner with them very, very well.

Speaker Change #130: But at this point, I think you can assume they won't be exactly the same. Some may go up, some may go down. But these are two extremely vital customers, strategic customers. We co-develop with them. We partner with them very, very well. And we expect to do well with them, both in cloud and AI.

Jayshree V. Ullal: And we expect to do well with them, both in the cloud and AI, depending on their priorities, of course. And does the pipeline suggest you can have new 10% customers next year, or do you expect sort of a similar concentration next year? We're not aware of any customer that will approach 10% this year or next year.

Speaker Change #130: depending on their priorities, of course.

Speaker Change #131: And does the pipeline suggest you can have new 10% customers next year or do you expect sort of a similar concentration next year?

Speaker Change #132: We're not aware of any customer that will approach 10% this year or next year.

Timothy Patrick Long: Thank you very much. Our next question comes from the line of Tim Long with Barclays. Please go ahead.

Speaker Change #133: Thank you very much.

Simon Matthew Leopold: Sure, Simon.

Speaker Change #134: Our next question comes from the line of Tim Long with Barclays. Please go ahead.

Jayshree V. Ullal: Thank you. Maybe we'll go over to the software services, since the AI stuff's been a little bit out of date here. Thanks, Tim. You, in a good way, in a good way.

Speaker Change #135: Thank you. Maybe we'll go over to the software services since the AI stuff's been beating up a little bit here.

Jayshree V. Ullal: You talked a lot about, you know, some of the software capabilities. It seems like, you know, Arista might be leaning in a little bit more to this revenue line. It's been growing faster than the hardware product the last multiple quarters. So, could you talk about kind of the sustainability of that strong focus that you guys have on this service software area and what that would mean for, you know, the growth rate going forward?

Timothy Patrick Long: In a good way. You talked a lot about some of the software capabilities. It seems like Arista might be leaning in a little bit more

Timothy Patrick Long: to this revenue line. It's been growing faster than the hardware product the last multiple quarters. So could you talk about kind of sustainability of that strength focus?

Speaker Change #137: that you guys have on this service software area and what that would mean to growth rate going forward. Thank you.

Jayshree V. Ullal: Thank you. Yeah, thank you. Thank you for the change in question. I appreciate that. I think we will be in the teens for some time because there are three building blocks, and a lot of this, Ashwin, you know very well, there's the services building block, that as product goes up, there's a lot of pressure on us on a percentage of service to be lower, right? So that, while it may, you know, historically has been in the teens, can be lower.

Speaker Change #138: Yeah, thank you. Thank you for the change in question. I appreciate that.

Ashwin Kohli: I think we will be in the teens for some time because there are three building blocks and a lot of this, Ashwin, you know very well. There's the services building block that as product goes up, you know, there's a lot of pressure on us on a percentage of service to be lower, right? So that while it may, you know.

Jayshree V. Ullal: Then the second one is our perpetual software, which again is a strong function of use cases. An extension of that is Cloud Vision, which is more of a subscription service, with Cloud Vision as a service, either networked as a service or on the premise. So that's the second building block for us that's going strong. The one I want to point out a little more, which could help us, is security and observability. You may know, in May, we introduced micro and macro segmentation. We also announced UNO, our Unified Network Observability.

Speaker Change #139: The second one is our perpetual software, which again is a strong function of use cases, particularly things like routing, etc., where we've done very, very well. The stronger we do there, the better we do there.

Speaker Change #139: An extension of that is Cloud Vision, which is more of a subscription service. Cloud Vision as a service, either network as a service or on the premise. So that's the second building block for us.

Speaker Change #139: Going strong. The one I want to point to a little more, which could help us.

Ashwin Kohli: is the security and observability. You may know in May we introduced the micro and macro segmentation. We also announced UNO, our Unified Network Observability. And while this is new, Ashwin and I have great plans for that, and I think this could be a swing factor.

Jayshree V. Ullal: And while this is new, Ashwin and I have great plans for that, and I think this could be a swing factor. As the service components may reduce over time, these new product components may increase. So 17 points, whatever percent it was, is a great number.

Speaker Change #141: As the services components may reduce over time, these new product components may increase. So, 17 point whatever percent it was is a great number, and if we can consistently stay there, I'd be very proud, particularly as our numbers get larger.

Jayshree V. Ullal: And if we can consistently stay there, I'd be very proud, particularly as our numbers get larger. Okay, thank you. Our next question comes from the line of Sebastien Naji with William Blair. Please go ahead.

Speaker Change #140: Thank you.

Speaker Change #142: Our next question comes from the line of Sebastien Naji with William Blair. Please go ahead.

Sebastien Cyrus Naji: Hey, thanks for taking the question. And sorry to bring you guys back to the AI conversation. But this one's a little bit more high level, I guess. We keep hearing about bigger and bigger AI clusters that are being built. And as Arista is, you know, working on connecting these larger and larger clusters as they scale, I'm just wondering, does that impact your ability to capture more revenue? You've talked about 15% of CapEx; does that maybe change or go up or go down as these clusters that you're having to connect get bigger and bigger?

Sebastien Cyrus Naji: Hey, thanks for taking the question, and sorry to bring you guys back to the AI conversation, but...

Sebastien Cyrus Naji: This one's a little bit more high-level, I guess.

Speaker Change #146: You know, we keep hearing about bigger and bigger AI clusters that are being built.

Speaker Change #144: And as Arista is working on connecting these larger and larger clusters as they scale, I'm just wondering, does that impact your ability to capture more revenue? You've talked about 15% of CapEx, does that maybe change or go up or go down as these clusters that you're having to connect get bigger and bigger?

Sebastien Cyrus Naji: If you look at an AI network design, you can look at it through two lenses, just through the compute, in which case you look at scale up and you look at it strictly through how many processors there are, but when we look at an AI network design, it's number of, But it all starts with number of GPUs, performance, and billions of parameters because the training models are definitely centered around job completion time, but then there's multiple concentric circles of additional things we have to add to that network, All this to say, a network design-centric approach has to be taken for these GPU clusters.

Speaker Change #145: Thank you.

Speaker Change #148: Scale up and you look at it strictly through how many processors there are but when we look at an AI network design It's number of GPUs or XPUs per workload Distribution and location of these GPUs are important

Speaker Change #147: and whether the cluster has multiple tenants.

Speaker Change #149: And how it's divvied up?

Speaker Change #147: Between the host, the memory, the storage, and the wide area plays a role.

Speaker Change #147: Then the optimizations you make on the applications for the collective communication libraries for specific workloads, levels of resilience, how much redundancy you want to put in, active-active, link-based, load balancing, types of visibility. So the metrics are just getting more and more. There are many more permutations and combinations.

Speaker Change #147: But it all starts with number of GPUs, performance, and billions of parameters.

Speaker Change #147: The training models are definitely centered around job completion time, but then there's multiple concentric circles of additional things we have to add to that network design.

Speaker Change #147: All this to say, a network design-centric approach has to be taken for these GPU clusters. Otherwise, you end up being very siloed, and that's really what we're working on. So it goes beyond scale and performance to some of these other metrics I mentioned.

Jayshree V. Ullal: Unknown Attendee, Anshul Sadana, Samik Chatterjee, Ittai Kidron, Thomas Blakey, Karl Ackerman, Thanks, Sebastian. Operator, we have time for one last question. Our final question comes from the line of David Vogt with UBS. Please go ahead.

Operator: Thanks, Sebastian. Operator, we have time for one last question, please.

Speaker Change #151: Our final question comes from the line of David Vogt with UBS. Please go ahead.

David Vogt: Great. Thanks, guys, for squeezing me in. Maybe just to bring it back together, and maybe both for Jayshree and Chantelle, I guess what I'm trying to think through is this is your product introduction.

David Vogt: Great, thanks guys for squeezing me in. Maybe just to bring it back together, and maybe both for Jayshree and Chantelle, I guess what I'm trying to think through is, this is your product introduction,

Speaker Change #153: You have a pretty strong ramp of AI likely next year.

Speaker Change #153: But does the guide imply that we're going to start to see a much bigger contribution in Q4, driven by the comments around mix earlier and the gross margin?

Speaker Change #153: Discussion, because I would imagine early in the stage of their life cycle plus the fact that they're hyperscalers, they're going to be a relatively more modest gross margin profile at the beginning of the glide path versus the end of the glide path. So just any color there in terms of what Q4 might look like from an AI perspective relative to your expectations from a glide path perspective. Thank you.

Jayshree V. Ullal: You have a pretty strong ramp of AI likely next year. But does the guide imply that we're going to start to see a much bigger contribution in Q4, driven by the comments around mix earlier and the gross margin discussion? Because I would imagine early in the stage of their lifecycle, plus the fact that they're hyperscalers, they're going to have a relatively more modest gross margin profile at the beginning of the glide path versus the end of the glide path.

Speaker Change #154: Yeah, let me just remind you of how we're approaching 2024, including Q4, right? Last year...

Jayshree V. Ullal: So just any color there in terms of what Q4 might look like from an AI perspective relative to your expectations from a glide path perspective. Thank you. Yeah, let me just remind you of how we are approaching 2024, including Q4, right? Last year, trials. So small, it was not material.

Jayshree V. Ullal: This year, we're definitely going into pilots. Some of the GPUs, and you've seen this in public blogs published by some of our customers, have already gone from tens of thousands to 24,000 and are heading towards 50,000 GPUs. Next year, I think there will be many of them heading into tens of thousands, aiming for 100,000. So, I see next year as more promising. Some of them might happen this year, but I think we're very much in the process of going from trials to pilots, trials being hundreds, and this year we're in the thousands.

Speaker Change #155: Trials. So small, it was not material. This year, we're definitely going into pilots. Some of the GPUs, and you've seen this in public blogs published by some of our customers, have already gone from tens of thousands to 24,000 and are heading towards 50,000 GPUs.

Speaker Change #155: Next year, I think there will be many of them heading into tens of thousands aiming for 100,000 GPUs.

Jayshree V. Ullal: But I wouldn't focus on Q4. I'd focus on the entire year and say, yeah, we've gone into the thousands. And I like Chantelle's term for this glide path, right? So, we expect to be single-digit small percentages of our total revenue in AI this year. And we are really, really expecting next year to be $750 million a year or more.

Speaker Change #155: So I see next year as more promising. Some of them might happen this year.

Speaker Change #155: But I think we're very much going from trials to pilots, trials being hundreds, and this year we're in the thousands. But I wouldn't focus on Q4. I'd focus on the entire year and say, yeah, we've gone into the thousands.

Speaker Change #155: And I like Chantelle's term for this, glide path, right? So we expect to be single-digit small percentages of our total revenue in AI this year.

Speaker Change #155: But we are really, really expecting next year.

Chantelle Breithaupt: Yeah, I think so. I completely agree, Jayshree. The only thing I would add to it is you have to think of the kind of matrix we're working within. So we have cloud and enterprise customers, and we have very, very different scopes of readiness for those customers.

Speaker Change #155: to be the 750 million a year or more.

Speaker Change #155: Yeah, yeah, I think so. I completely agree, Jayshree. The only thing I would add to it is you have to think of the...

Speaker Change #156: It's kind of the matrix we're working within. So we have cloud and enterprise customers.

Speaker Change #157: And we have very, very different scopes of readiness at those customers.

Speaker Change #157: So Q3, Q4, Q1, Q2 next year, they're all eligible for timing, for types, etc. So we just want to make sure that variability that I spoke to in my prepared remarks is understood in that context. Yeah, and simple things like power and cooling are affecting the ability to deploy in massive scale.

Speaker Change #157: So there's nothing magic about Q4, there's plenty of magic about the year in its entirety and next year.

Speaker Change #157: Great. Thanks, David. Thanks, Chantelle.

Speaker Change #158: Thanks, Liz. Thanks, David.

Speaker Change #159: This concludes the Arista Networks second quarter 2024 earnings call. We have posted a presentation which provides additional information on our results which you can access on the investor section of our website. Thank you for joining us today and thank you for your interest in Arista.

Speaker Change #160: Thank you for joining ladies and gentlemen. This concludes today's call. You may now disconnect.

Chantelle Breithaupt: So Q3, Q4, Q1, Q2 next year, they're all eligible for timing, for types, etc. So we just want to make sure that the variability that I spoke about in my prepared remarks is understood in that context. Yeah, and simple things like power and cooling are affecting the ability to deploy on a massive scale.

Jayshree V. Ullal: So there's nothing magical about Q4. But there's plenty of magic about the year in its entirety and next year. Great. Thanks, Jayshree. Thanks, Chantelle. Thanks, Liz. Thanks, David. This concludes the Arista Networks second quarter 2024 earnings call. We have posted a presentation that provides additional information on our results, which you can access in the investor section of our website. Thank you for joining us today, and thank you for your interest in Arista. Thank you for joining us, ladies and gentlemen. This concludes today's call. You may now disconnect. Please wait; the conference will begin shortly.