Q3 2024 Arista Networks Inc Earnings Call
The End
Speaker Change: Welcome to the third quarter 2024 Arista Network's 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.
Speaker Change: 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. Ms. Liz Stine, ARISTA's Director of Investor Relations, you may begin.
Speaker Change: Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Network's 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 third quarter ending September 30, 2024. If you would like a copy of this release, you can access it online at our website.
Speaker Change: During the course of this conference call, ERISA Networks Management will make forward-looking statements, including those relating to our financial outlook for the fourth quarter of the 2024 fiscal year.
Longer-Term Business Model and Financial Outlooks for 2025 and Beyond.
Speaker Change: Our Total Addressable Market and Strategy for Addressing These Market Opportunities, including AI, Customer Demand Trends, Supply Chain Constraints, Component Costs, and the
Manufacturing Output, Inventory Management and Inflationary Pressures on Our Business.
Speaker Change: 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.
Speaker Change: Also, please note that certain financial measures we use on this 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.
Speaker Change: With that, I will turn the call over to Jayshree. Thank you, Liz, and thank you, everyone, for joining us this afternoon for our third quarter 2024 earnings call. We delivered revenues of $1.81 billion for the quarter with a record non-GAAP earnings per share of $2.40.
Jayshree Ullal: Services and software support renewals contributed strongly at approximately 17.6% of revenue.
Jayshree Ullal: Our non-gap gross margin of 64.6% was influenced by both pressure from cloud type and customer pricing offset by favorable enterprise margin and supply chain hygiene.
Jayshree Ullal: International contributions for the quarter registered at approximately 18% with the Americas very strong at 82%.
Jayshree Ullal: Clearly Q3 2024 had a lot of bright spots in the quarter and we are encouraged by the strength and momentum of the company.
Jayshree Ullal: At the recent 10th anniversary in June in 2024 celebration and vision event we covered a lot of ground and what we would have otherwise said in an analyst day. So today I'd like to briefly expand on our Arista 2.0 plans for 2025.
Jayshree Ullal: We believe that networks are emerging at the epicenter of mission-critical transactions and our Arista 2.0 strategy is resonating well with customers. We are, we believe, the only pure-play network innovator for the next decade.
Jayshree Ullal: Our modern networking platforms are foundational for transformation from silos to centers of data. This can be a data center, a campus center, a WAN center, or an AI center.
Jayshree Ullal: At the heart of this is our state-oriented, publish-subscribe, network data lake, EOS software stack for multi-modal datasets.
Jayshree Ullal: One simply cannot learn without having access to all this data. So, it is all about the data. We provide customers the state foundation for data for AI and machine learning, without which AI and ML would just be buzzwords.
Jayshree Ullal: Arista is well positioned with the right network architecture for client to campus, data center, cloud, and AI networking.
Jayshree Ullal: Three principles guide us and differentiate us in bringing this data-driven networking.
Jayshree Ullal: Best in Class Highly Available Proactive Products with Resilience and Hitless Upgrade Built-in at Multiple Levels
Jayshree Ullal: Zero-touch automation and telemetry with predictive client-to-cloud one-click operations with that granular visibility that relies less on human stuff.
Jayshree Ullal: Prescriptive Insights for Deeper AI for Networking Delivering AIOps and AVA Algorithms for Security, Observability, and Root Cause Analysis.
Jayshree Ullal: Networking for AI is gaining a lot of traction as we move from trials in 2023 to more pilots in 2024, connecting to thousands of GPUs. And we expect more production in 2025 and 2026.
Jayshree Ullal: In our vernacular, ARISTA AI centers are made up of both the back-end clusters and front-end networks.
Jayshree Ullal: AI traffic differs greatly from cloud workloads in terms of diversity, duration, and size of flow. The fidelity of AI traffic flows where the slowest flow matters and one slow flow can slow down the entire job completion time is a crucial factor in networking.
Jayshree Ullal: Our Accelerated AI Networking Portfolio consists of three families with over 20 switching products and not just one point switch.
Jayshree Ullal: At the recent OCP in mid-October 2024, we officially launched a very unique platform, the Distributed EtherLink 7700, to build two-tier networks for up to 10,000 GPU clusters.
Jayshree Ullal: The 77R4 DES platform was developed in close collaboration with MEDA. And while it may physically look like and be cabled like a two-tier leased spine network, DES provides a single-stage forwarding with highly efficient spine fabric, eliminating the need for tuning, and encouraging fast failover for large AI accelerator-based clusters.
Jayshree Ullal: It complements our Arista flagship 7800 AI spine for the ultimate scale with differentiated fare and fully scheduled cell spraying architecture with a virtual output queuing fabric saving valuable AI processor resources and improving job completion time.
Jayshree Ullal: I would like to now invite John McCool, our Chief Platform Officer, to describe our 2024 Platform and Supply Chain Innovations after a challenging couple of years. John, over to you. Thank you, Jayshree. I'm pleased to report ARISTA 7700 R4
John McCool: Distributed Etherlink Switch, the 7800R4 Spine, along with the 7060X6 AI Leaf that we announced in June have entered into production, providing our customers the broadest set of 800 gigabit per second Ethernet products for their AI networks.
John McCool: Together with 800 gigabit per second parallel optics, our customers are able to connect two 400 gigabit per second GPUs to each port, increasing the deployment density over current switching solutions.
John McCool: This broad range of Ethernet platforms allows our customers to optimize density and minimize tiers to best match the requirements of their AI workload.
John McCool: These new clusters also increase bandwidth on the backbone to access training data, capture snapshots, and deliver results generated by the cluster. This trend is providing increased demand for our 7800R3 400 gigabit solution.
John McCool: While the post-pandemic supply chain has returned to predictability, lead times for advanced semiconductors remain extended from pre-pandemic levels. To assure availability of high-performance switching silicon, we've increased our purchase commitments for these key components.
John McCool: In addition, we will increase our on-hand inventory to respond to the rapid deployment of new AI networks and reduce overall lead times as we move into next year. Our supply chain team continues to work closely with planning to best align receipt of these purchases with expected customer delivery.
John McCool: Next-generation data centers integrating AI will contend with significant increases in power consumption while looking to double network performance. Our tightly coupled electrical and mechanical design flow allows us to make system-level design tradeoffs across domains to optimize our solutions.
John McCool: Our experience in co-design with the leading cloud companies provides insight into the variety of switch configurations required for these tightly coupled data center environments.
John McCool: Finally, our development operating software with SDK integration, device diagnostics, and data analysis supports a fast time to design and production with a focus on first-time results.
Jayshree Ullal: These attributes give us confidence that we will continue to execute on our roadmap in this rapidly evolving AI networking segment. Back to you, Jayshree.
Jayshree Ullal: Thank you, John. And congrats on a very high performance year for you to you and your new executives, Alex Rose, Mike Kappes, Luke Calero, and the entire team. You guys have really done a phenomenal job.
with the RIFTA's key contributions as a founding member.
Jayshree Ullal: The UEC ecosystem for AI has evolved to over 97 members. In our view, Ethernet is the only long-term viable direction for open, standard space AI networking.
Jayshree Ullal: Arista EOS delivers dynamic methods using cluster load balancing for congestion control and smart system upgrades where the traffic for AI continues to flow in the midst of an upgrade.
Jayshree Ullal: Arista continues to work with AI accelerators of all types and we're agnostic to NICS to bring advanced EOS ability visibility all the way down to the host.
Jayshree Ullal: Shifting to 2025 goals. As we discussed in our New York Stock Exchange event in June, our TAM has expanded to $70 billion in 2028.
Jayshree Ullal: And you know, we've experienced some pretty amazing growth years with 33.8% growth in 2023 and 2024 appears to be heading at least to 18% exceeding our prior predictions of 10 to 12%.
Jayshree Ullal: This is quite a jump in 2024, influenced by faster AI pilots. We are now projecting an annual growth of 15 to 17 percent next year, translating to approximately $8 billion in 2025 revenue with our healthy expectation of operating margin.
Jayshree Ullal: Within that $8 billion revenue target, we are quite confident in achieving our campus and AI back-end networking targets of $750 million each in 2025 that we set way back one or two years ago.
Jayshree Ullal: It's important to recognize, though, that the back end of AI will influence the front end AI network and its ratios.
Jayshree Ullal: This ratio can be anywhere from 30% to 100%, and sometimes we've seen it as high as 200% of the backend network, depending on the training requirements.
Jayshree Ullal: Our Comprehensive AI Center Networking Number is therefore likely to be double of our back-end target of $750 million, now aiming for approximately $1.5 billion in 2025.
Jayshree Ullal: We will continue to aim for double-digit annual growth and a three-acre forecast of teens in the foreseeable future of 2024 to 2026.
Jayshree Ullal: More details forthcoming from none other than our Chief Financial Officer. So over to you, Chantelle. Thank you, Jayshree. Turning now to more detail on the financials.
Chantelle Breithaupt: This analysis of our Q3 results and our guidance for Q4 fiscal year 24 is based on non-GAAP. It excludes all non-cash stock-based compensation impacts, intangible asset amortization, 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 reached $1.81 billion, marking a 20% year-over-year increase. This strong performance exceeded our guidance range of $1.72 to $1.75 billion. Services and subscription software contributed approximately 17.6% of revenues in the third quarter.
Chantelle Breithaupt: International revenues for the quarter came in at $330.9 million or 18.3% of total revenue, down from 18.7% last quarter. This quarter-over-quarter decrease reflects an increased contribution from domestic shipments to our cloud and enterprise customers.
Chantelle Breithaupt: Overall, gross margin in Q3 was 64.6%, above the upper range of our guidance of approximately 64%, down from 65.4% last quarter and up from 63.1% in Q3 prior year.
Chantelle Breithaupt: This year-over-year improvement is driven by stronger enterprise margins and supply chain discipline in the current quarter.
Chantelle Breithaupt: Operating expenses in the quarter were $279.9 million or 15.5% of revenue down from last quarter at $319.8 million.
Chantelle Breithaupt: R&D spending came in at $177.5 million or 9.8% of revenue, down from $216.7 million last quarter. An item of note is that there were additional R&D-related expenses originally expected in Q3 that are now expected to materialize in the Q4 quarter.
Chantelle Breithaupt: R&D headcount has increased low double-digit percentage versus Q3 in the prior year.
Chantelle Breithaupt: Sales and marketing expense was $83.4 million or 4.6% of revenue, down slightly from last quarter.
Chantelle Breithaupt: Our G&A cost came in at $19.1 million or 1.1% similar to last quarter.
Chantelle Breithaupt: Our operating income for the quarter was $890.1 million or 49.1% of revenue. This was favorably impacted by the shift of R&D-related expenses from Q3, now anticipated in Q4 of this year.
Chantelle Breithaupt: Other income and expense for the quarter was a favorable $85.3 million and our effective tax rate was 21.1 percent.
Chantelle Breithaupt: This resulted in net income for the quarter of $769.1 million or 42.5% of revenue.
Chantelle Breithaupt: This, too, was favorably impacted by the shift in R&D-related expenses from Q3 to Q4.
Now turning to the balance sheet.
Chantelle Breithaupt: Cash, cash equivalents and investments ended the quarter at approximately 7.4 billion dollars. In the quarter we repurchased 65.2 million dollars of our common stock at an average price of 318 dollars and 14 cents per share.
Chantelle Breithaupt: Of the $1.2 billion dollar repurchase program approved in May 2024, $1 billion dollars remains available for repurchase in future quarters.
Chantelle Breithaupt: Turning to operating cash performance for the third quarter, we generated approximately 1.2 billion dollars of cash from operations in the period, reflecting strong earnings performance combined with favorable working capital results.
Chantelle Breithaupt: DSOs came in at 57 days down from 66 days in Q2, reflecting a strong collections quarter combined with contributions from the linearity of billing.
Chantelle Breithaupt: Inventory turns were 1.3 times up from 1.1 last quarter. Inventory decreased to 1.8 billion dollars in the quarter down from 1.9 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 total $4.1 billion, up from $4 billion at the end of Q2. We expect this number to 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 $2.5 billion, up from $2.1 billion in Q2. 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: Fiscal 2024 continues to be a year of new product introductions, new customers, and expanded use cases. These trends have resulted in increased customer trials and contracts with customer-specific acceptance clauses and has and will continue to increase the variability and magnitude of our product deferred revenue balances.
Chantelle Breithaupt: Accounts payable days were 42 days down from 46 days in Q2, reflecting the timing of inventory receipt payments.
Chantelle Breithaupt: Capital expenditures for the quarter were seven million dollars. In October we began our initial construction work to build expanded facilities in Santa Clara and we expect to incur approximately fifteen million dollars during Q4 for this project.
Now turning to the fourth quarter.
Chantelle Breithaupt: Our guidance for the fourth quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts, intangible asset amortization, and other non-recurring items is as follows.
Chantelle Breithaupt: Revenues of approximately $1.85 to $1.9 billion, gross margin of approximately 63 to 64 percent.
Chantelle Breithaupt: Operating margin of approximately 44%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 321 million shares on a pre-split basis.
Speaker Change: This is primarily driven by increased inventory in order to respond to the rapid deployment of AI networks and to reduce overall lead times as we move into 2025, mentioned in John's prepared remarks.
Speaker Change: Additionally, in Q4, as part of our ongoing commitment to creating long-term value for our shareholders and enhancing the accessibility of our stock, we are pleased to announce that Arista's Board of Directors has approved a 4-for-1 stock split. This decision reflects our confidence in the continued growth and prospects of the company.
Speaker Change: It's important to note that while the stock split increases the number of shares outstanding, it does not change the intrinsic value of the company, nor does it impact our financial performance or strategy.
Speaker Change: The split is designed to make our stock more accessible and attractive to a wider range of investors, particularly retail investors, which we believe will ultimately support broader ownership and improve trading dynamics.
Speaker Change: Transitioning now to fiscal year 2025. As Jayshree mentioned, we are projecting revenue growth of 15 to 17%.
Speaker Change: The expected revenue mix is forecasted to have an increased weighting of cloud and AI customers, placing the gross margin outlook at 60-62%, and operating margin at approximately 43-44%.
Speaker Change: We are excited by the current and future opportunities to serve our customers as the pure play networking innovation company and to deliver strong returns to our shareholders. I will now turn the call back to Liz. Liz?
Liz Stine: 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.
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 one on your telephone keypad. If you'd like to withdraw your question, press star and the number one again.
Speaker Change: We ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from the line of Samik Chatterjee with J.P. Morgan. Please go ahead.
Samik Chatterjee: Hi, thanks for taking my question and strong set of results. But if I can ask one on the guidance, if you don't mind. Jayshree, you're guiding here to
Samik Chatterjee: And you're also guiding to sort of meet your campus revenue target. So if I take those two into account, it does imply that the X sort of AI and X campus business is only growing single digits next year. This is on the sort of heels of coming through a double-digit year in 2024, where you comped.
Speaker Change: backlog digestion in 2023. So just maybe help us parse through that as to why there's a significant desperation in the non-AI, sort of non-campus business implied in the numbers and what maybe is driving that sort of, in your expectations, what's driving that outlook. Thank you.
Thank you, Sameeka.
Speaker Change: As you know, our visibility only extends to roughly about six months, right? So we don't want to get ahead of ourselves on how much better we can do in 2025.
Speaker Change: And that's kind of how we started 2024 either, and we were pleasantly surprised with the faster acceleration of AI pilots in 2024.
Speaker Change: So, we definitely see that our large cloud customers are continuing to refresh on the cloud, but are pivoting very aggressively to AI.
Speaker Change: So it wouldn't surprise me if we grow faster in AI and faster in campus in the new center markets and slower in our classic markets called data center and cloud.
It's a pleasure to be here. Thank you. Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Antoine Schaben with Newstreet Research. Please go ahead.
Speaker Change: Hi, thank you very much for taking my question. Can you maybe provide an update on the four major AI trials that you gained in the past? How are things progressing versus your expectations of 90 days ago? And when do you expect that the move to production to happen? And what kind of scale are we talking about?
Speaker Change: Yeah, no, thank you, Antoine. That's a good question. Arista now believes we're actually five out of five, not four out of five.
Speaker Change: We are progressing very well in four out of the five clusters.
Speaker Change: Three of the customers are moving from trials to pilots this year, and we're expecting those three to become, you know, pilots.
50 to 100,000 GPU clusters in 2025.
Speaker Change: We're also pleased with the new Ethernet trial in 2024 with our fifth customer. This customer was historically very, very InfiniBand driven.
Speaker Change: And we are now moving, in that particular fifth customer, we are largely in a trial mode in 2024 and we hope to go to pilots and production in 2025.
Speaker Change: There is one customer who the three are going well one is starting the fifth customer is moving slower than we expected
Speaker Change: They may get back on their feet in 2025. They're awaiting new GPUs and they've got some challenges on power cooling etc.
Thanks a lot for the call.
The End of the Video
Speaker Change: Our next question comes from the line of Tal Liani with Bank of America. Please go ahead.
Hi, guys.
Speaker Change: NVIDIA in the last quarter, because of the launch of the Spectrum X, it shows that in data center switching their market share went up from like 4% to 15%.
Speaker Change: Does it mean that you're seeing increased competition from NVIDIA? And is it competing with you on the same spots or is it more competing with white boxes?
Speaker Change: The second question is about white boxes. What is the outlook for white box participation in Gen AI? Is it going to be higher or lower than in front-end data centers?
Charles: Okay. Hi. Thanks, Charles. Which question do you want me to answer?
Let's go with NVIDIA.
Charles: Somebody else may ask that question anyway, so you'll get your answer. Okay, but just to answer your question on NVIDIA First of all, we view NVIDIA as a good partner. If we didn't have the ability to connect to their GPUs We wouldn't have all this AI networking demand. So thank you NVIDIA. Thank you Jensen for the partnership
Charles: Now, as you know, NVIDIA sells the full stack and most of the time it's with InfiniBand.
Charles: And, you know, with the Mellanox acquisition, they do have some Ethernet capability.
Speaker Change: And so, generally speaking, Arista is looked upon as the expert there. We have a full portfolio. We have full software. And whether it's the large, you know, scale-out Ethernetworking customers like the Titans
Speaker Change: or even the smaller enterprises, we're seeing a lot of smaller GPU clusters of the enterprise. Arista is looked upon as the expert there. But that's not to say they're gonna win 100%.
Speaker Change: We certainly welcome NVIDIA as a partner on the GPU side and a fierce competitor and we look to compete with them.
on the Ethernet switching.
Thank you.
Speaker Change: Our next question comes from the line of Simon Leopold with Raymond James. Please go ahead.
Speaker Change: Thanks, I'll tag team with Tal. So we're partnered once again here. So I do want to sort of look at this competition or competitive landscape broadly in that
Speaker Change: What I'm trying to understand is how it may be changing with the advent of AI. So not just hearing from you about Whitebox, but also
Speaker Change: competitors like Cisco and Juniper and Nokia. So really an update on the competitive landscape would be helpful. Thank you. Yeah. Thank you, Simon. That's a nice broad question.
Speaker Change: So, since you asked me specifically about AI as opposed to cloud.
Speaker Change: Let me parse this problem into two halves, the back end and the front end, right? At the back end, we're natively connecting to GPUs. And there can be many times we just don't see it because somebody just muddles it in the GPU, in particular in video.
Speaker Change: You may remember a year ago I was saying we're outside looking in because most of the bundling is happening within Citibank.
Speaker Change: I would expect on the back end any share Arista gets, including that $750 million, is incremental. It's brand new to us. We were never there before. So we'll take all we can get, but we are not claiming to be a market leader there. We're in fact claiming that there are many incumbents there, with InfiniBand and...
become the gold standard for the backend.
Speaker Change: On the front end, in many ways we are viewed as the gold standard, so competitively it's a much more complex network. You have to build a least fine architecture.
Speaker Change: John alluded to this. There's a tremendous amount of scale with L2, L3, VPNs, VXLAN, visibility, telemetry, automation.
Speaker Change: And this, what I would call accelerated networking portfolio, complements NVIDIA's accelerated compute portfolio.
Speaker Change: And compared to all the peers you mentioned, we have the absolute best portfolio of 20 switches and three families and, you know, the capability and the competitive differentiation is bar none. In fact, I am specifically aware of a couple of situations.
Speaker Change: where the applications aren't even running on some of the industry peers you talked about and they wanna swap theirs for ours.
Speaker Change: So, feeling extremely bullish with the 7800 flagship product, the newly introduced.
7700 that we worked closely with MEDA.
The 7060, this product line, running today mostly at 400.
Speaker Change: because a lot of the NIC and the ecosystem isn't there for 800. But moving forward into 800, this is why John and the team are building the supply chain to get ready for it. So competitively, I would say we're doing extremely well in the front end, and it's incremental on the back end. So, and overall, I would classify our performance in AI coming from being a no one two years ago to where we are today, an A.
Thank you.
Thank you, Simon.
Speaker Change: Our next question comes from the line of Ben Reitzes with Melius Research. Please go ahead.
Hey, Jayshree and team. Thanks for the question.
Speaker Change: I wanted to ask a little bit more about the $750 million in AI for next year. Has your visibility on that improved over the last few months? I wanted to reconcile your comment around the fifth customer not going slower than expected.
Speaker Change: If that fifth customer going slower, you know, has is limiting upside or limiting your visibility there.
or has it actually improved and it's gotten more conservative?
Speaker Change: over the last few months. Thanks a lot. Somebody has to bring up conservative, Ben, but I think we're being realistic. So I think you said it right. I think on three out of the five, we have good visibility, at least for the next six.
Transcription by Transcription Outsourcing, LLC.
Speaker Change: about predicting how they'll do. They may step in nicely in the second half of 25, in which case we'll let you know. But if they don't, we're still feeling good about our guide for 25.
Speaker Change: Is that right, Chantelle? I would totally agree. It's a good question, Ben. But I think out of the five, the way Jayshree categorized them, I would completely agree.
Okay, thanks a lot, guys.
Speaker Change: Our next question comes from the line of Carl Ackerman with BNP Paribas. Please go ahead.
Speaker Change: Jayshree, could you discuss whether the AI programs you are engaged with on hyperscalers will be deploying your new Etherlink switches and AI spine products on 800 gig ports?
Speaker Change: In other words, have these pilots or trials been on 400 gig and production could be on 800 gig?
Speaker Change: And I guess if so, what's the right way to think about the hardware mix of sales on 800 gig and 25. Yeah. Yeah. Thank you. Good question.
Speaker Change: I mean, just going back to history again, it was always hard to tell between 100 and 400 because somebody can take that 400 and break it into
Speaker Change: So I would say today, if you ask John and I, the majority of the trials and pilots are on 400 because people are still waiting for the ecosystem at 800, including the NICs and the UEC and, you know.
Speaker Change: the packet spraying capabilities, et cetera. So while we're in some early trials on 800, majority of 2024 is 400 gig. I expect as we go into 2025, we will see a better split between 400 and 800.
Thank you.
Thank you, Carl.
Speaker Change: Your next question comes from the line of Ryan Kuntz with Needleman Company. Please go ahead.
Ryan Kuntz: Great, thanks for the question. I was hoping we could touch base on your your campus opportunities a bit And where you see in the most traction in terms of your applications is this
Things are looking great, thanks for having me.
Thank you.
Speaker Change: Yeah, yeah. Ryan, let me try and step back and say, tell you that our enterprise opportunity has never been stronger.
Speaker Change: As a pure play innovator, we are getting invited more and more into enterprise deals, even though sometimes we don't often have the sales coverage for it. And what I mean by that is…
I think ARISTA is being sought.
for a network design that doesn't have five operating systems.
Speaker Change: Inc., Seth Meyers, Jayshree Ullal, Anshul Sadana, Jayshree Ullal, Ita Brennan, Kenneth Duda, Jayshree Ullal, Ita Brennan, Jayshree Ullal, Ita Brennan, Ita Brennan, Jayshree Ullal,
Speaker Change: Inaugural Speaker, Dr. Anshul Sadana, Liz Stine, Jayshree Ullal, Ita Brennan, Unknown
So now let me address your campus question more specifically.
Speaker Change: Clearly one of the first places everybody went on our campus is the universal spine. They go, oh, okay, I can have the same spine for my data center and campus, this is so cool. So that activity has already started and a big part of our 750 million projection comes from the confidence that they've already put in a.
It sounds like Kumar, yeah.
Speaker Change: And so he would say, you got to get that right. And so number one, we're in this fine. Two, we're making stronger progress on the wired. Our weakest piece, partly because we're data center folks and we're still learning how to sell radio, is the Wi-Fi, but we plan to fix that.
Speaker Change: And this is where the extra coverage will come in. So I would say more of our strength is coming in the wired and spine. We are doing very well in pockets of Wi-Fi, but we need to do better.
Super helpful, Jayshree, thank you.
Chantelle Breithaupt: Chantelle, do you want to add something? Just to take the second part, I think you were asking about some of the verticals in your question. I just wanted to add some of the verticals. I think that where we're seeing some strength data center and campus, I would say financials, healthcare, media, retail, Fed and SLED.
Speaker Change: Yeah, Fed and SLED, that's a good one. We say, you know, this is historically an area we have not paid attention to. The federal market we're getting very serious about, including setting up its own subsidiary. So Chantelle, you've been a huge part of pushing us there. So thank you for that. Thank you.
Thanks so much.
Speaker Change: Thank you, Ryan. Our next question will come from the line of Amit Daryanani with Evercore. Please go ahead.
Unknown Speaker
Speaker Change: Good afternoon. Thanks for taking my question. I guess I'm hoping you could spend some time on the sizable acceleration we're seeing both on your total DeFord number, but also the product DeFord number is going up pretty dramatically.
Um...
Speaker Change: I'm going to let Chantelle, the expert, answer the question, but I will say one line.
Remember, in the case of those examples you're quoting,
Chantelle Breithaupt: The trials were typically, I don't know, six to 12 months. This can be multiple years and can take a lot longer to manifest. It may not all happen in 2025. Over to you, Chantelle. I think, yes. So thank you, Jayshree. So part of it is the
Jayshree Ullal, Ita Brennan, Unknown Executive, Kenneth Duda
Chantelle Breithaupt: And it's a mix of the variables that we told you before, and then as we move through 25, we'll continue to update.
Okay, comment. Got it.
Speaker Change: Our next question will come from the line of Amita Marshall with Morgan Stanley. Please go ahead.
Speaker Change: Great, thanks. Jayshree, I just wanted to get a sense of, you know, clearly you keep
Speaker Change: Yeah, this is a good question. So, we're not saying these five are the be-all-end-all, but these are the five we predict can go to 100,000 GPUs and more. That's the way to look at this.
Speaker Change: So they are the largest AI titans, if you will. And they can be in the cloud hyperscaler titan group. They could be in the tier two as well, by the way. Very rarely would they be in a classic enterprise.
Speaker Change: By the way, we do have at least 10 to 15 trials going on in the classic enterprise, too, but they're much smaller GPU counts, so we don't...
Speaker Change: We're focusing on the big five to make a point that they really skew our numbers and they're very important to establish our beachhead, our innovation, and our market share in AI.
Speaker Change: But there's definitely more going on. In terms of specifically your question on Tier 2 and will there be more, there will be more, but these are the five we see in that category and they're spread across both the Tier 1 Titan Cloud as well as the Tier 2.
Great. Thanks so much.
Thank you for joining me today. Thank you. Thank you.
Speaker Change: Our next question comes from the line of Sebastian Nagy with William Blair. Please go ahead.
Speaker Change: Yeah, good evening. Thanks for taking the question. Just specifically on the Etherlink portfolio, could you maybe rank order or comment on what you see is the opportunity across each of the three families, so single-tier, LeapSpine, and then the Etherlink switch as we're going into 2025 and beyond?
Speaker Change: I'll take a crack at it, but John, help me out here, because this is purely a guesstimate.
Speaker Change: It's probably one we should say no comment, but we'll try to give you color. On the Etherlink, I would say the FIX 7060 switches in terms of units are very popular because it's a single switch, it's one our customers are familiar with, it's based on our intense partnership with Broadcom, so we've done Tomahawk 1, 2, 3, 4, and here we are on 5, right? So I would say volume-wise, that's the big one.
Speaker Change: Going into the other extreme, the 7800, you know, in volume may be smaller, but in dollars is extremely strategic. And this is where we feel competitively, again, working with our partners and Broadcom with the Jericho and
Kumaran family, this is just
What would you say, John?
Transcription by CastingWords
That's the Steeler, if you will.
Speaker Change: And then the 7700 is kind of the best of both worlds. It gives you all the capabilities of the 7800 in a mini configuration up to 10,000 GPUs. It's brand new, but I think it's gonna, and competitively, there's no peer.
Speaker Change: for this. Nobody else does this but us with a scheduled fabric and a single stage. We did this in very close collaboration, John, with Metta, right? That's right. So you guys have been working together, John, for 18 months, two years, I would say?
Speaker Change: So, I think we know less about how to qualify that, but it could be very promising and it could be a fast accelerator in the next couple of years.
Yeah, I can just got it helpful
Speaker Change: Just to add to that, John, go ahead. Yeah, 7700, you know, people that are interested in the very large scale is attractive for the 7700. Between the 7060 and the 7800, we do see people that are optimizing a mix of both of those products in the same deployment, so they can get the minimum number of tiers but have the maximum amount of GPUs that fit their use case. So we do see a lot of tailoring now around the size of the deployments based on how many GPUs they want to deploy their data sets.
Speaker Change: It's a really good point. And then suddenly they'll go, okay, I want to go from a four-way radix to an eight-way and then suddenly we have to add more line cards in your 7800 and come running to you for more supply chain.
Thank you. Great.
Speaker Change: Our next question comes from the line of Erin Rakers with Wells Fargo. Please go ahead.
Speaker Change: Yeah, thanks for taking the question. I wanted to kind of segue off the competitive landscape and just ask you about, you know, when I look at your 2025 outlook, as well as the midterm model that you've provided, you know, what are some of the things that you think are going to be the most important things that you think are going to be the most important things that you're going to be able to get out of this year? I mean, you know, I think it's going to be a lot of
Speaker Change: It looks like you're making some assumptions of some margin declines. I'm curious of what's underlying.
Speaker Change: those expectations of gross margin declines? Is it, you know, mix of customers? Do you expect, you know, multiple 10% plus customers in 2025? Just any help on what's factored into that, you know, those margin expectations? Thank you.
Speaker Change: Yeah, thanks Erin for your question. I would say absolutely in the outlook that you referred to it is customer mix You know, we're expecting John to continue the great supply chain discipline that he's been doing with his team So it is a mix comment only
And that's for the 10% customers, I would say the...
Speaker Change: The one dynamic, maybe it's a bit cheeky to say it, but as the denominator gets bigger, that gets a bit tougher. So we'll see as we go in the out years. But right now, we'll just keep to the to the ones that we currently talk about. And we'll see how that goes in 25 and 26.
Speaker Change: It's going to get harder and harder to have 10 customers, so I believe M&M will still be that in 2025, but I don't anticipate there's any others at the moment.
Operator, we have time for one last question.
Speaker Change: Our final question will come from the line of Audith Mollett with Citigroup. Please go ahead.
Audith Mollett: Hi, thank you for taking my question. Jayshree, at some of the recent conferences you've talked about every dollar spent on back-end is at least 2x on the front-end. What signs are you looking for to see the lift from AI on the front-end or classic cloud from the pressure on the bandwidth?
Speaker Change: Job training completion and intense training models and it's a very narrow use case.
Speaker Change: But what we're starting to see more and more, especially with the top five,
Speaker Change: Like I said, for every dollar spent in the back end, you could spend 30% more, 100% more, and we've even seen a 200% more scenario, which is why our $750 million will carry over to, we believe, next year, another $750 million on front-end traffic that will include AI, but it'll include other things as well. It won't be unique to AI.
Speaker Change: So, I wouldn't be surprised if that number is anywhere between 30 and 100%, so the average is 100%, which is 2x our back-end number. So, feeling pretty good about that. Don't know how to exactly count that as pure AI, which is why I qualify it by saying increasingly if you start having...
Speaker Change: Inference, training, front-end, storage, WAN, classic cloud, all come together. The pure AI number becomes difficult to track.
Thanks so much, Aris.
Speaker Change: This concludes the Arista Network's third 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: Thank you for joining, ladies and gentlemen. This concludes today's call. You may now disconnect.