Q4 2024 Arista Networks Inc Earnings Call
Welcome to the 4th 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.
If you need to reach an operator at any time during the conference, please press the star key followed by zero. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section on the Arista website following this call. Mr. Rudolf Araujo, Arista's Head of Investor Advocacy, you may begin.
Rudolf Araujo: Thank you, Regina. 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 fourth quarter ending December 31st, 2024.
Speaker Change: If you want a copy of the release, you can access it online on our website.
Speaker Change: Longer-term business model and financial outlooks for 2025 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.
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.
Speaker Change: 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.
Jayshree Ullal: Thank you everyone for joining us this afternoon for our fourth quarter 2024 earnings call. First, I'd like to warmly welcome our new IR leadership duo of Rudolph Araujo, our Director of IR Advocacy, supported by Rod Hall that many of you may know as our leader for IR strategy.
Speaker Change: Special thanks to Liz Stine for her tenure both as a systems engineer and IR lead at ARISTA.
Jayshree Ullal: Well, I think you'll all agree that 2024 has been a memorable and defining year for RISD.
Jayshree Ullal: We started with an initial guidance of 10-12% annual revenue growth.
Jayshree Ullal: With the momentum of generative AI, we have achieved well beyond that at almost 20% growth, achieving a record revenue of $7 billion, coupled with a non-GAF operating margin of 47.5%.
Jayshree Ullal: Before I dwell on that more, let me get back to Q4 2024 specifics. We delivered revenues of $1.93 billion for the quarter, with a non-gap earnings per share of $0.65 adjusted for the recent 4-to-1 stock split.
Jayshree Ullal: Our non-gap gross margins of 64.2% was influenced by efficient supply chain and manufacturing as well as a good mix of enterprise and software in the quarter.
Jayshree Ullal: International contribution for the quarter registered at 16% with the Americas super strong at 84%.
Jayshree Ullal: Now shifting to annual sector revenue for 2024. Our cloud and AI titans contributed significantly at approximately 48 percent, keeping in mind that Oracle is a new member of this category.
Enterprise and financials were strong at approximately 35 percent.
Jayshree Ullal: While the providers, which now includes Apple, was at 17% approximately.
Jayshree Ullal: Both Microsoft and Meta are greater than 10% concentration customers at approximately 20% and 14.6% respectively.
Jayshree Ullal: As you know, we cherish our privileged partnerships with both of them very much. It has spanned over 14 years as we collaborate deeply with joint engineering and innovative AI and cloud products.
Jayshree Ullal: In terms of annual 2024 product lines, our core cloud AI and data center products are built off a highly differentiated extensible OS stack and it's successfully deployed across 10, 25, 100, 200, 400, and 800 gigabit ethernet speeds.
Jayshree Ullal: It delivers power efficiency, high availability, automation, and agility as the data centers demand insatiable bandwidth capacity and network speeds for both front-end and back-end storage, compute, and AI zones.
This core product line drove approximately 65% of our revenue.
Jayshree Ullal: We continue to gain market share in the highest performance of the switching category of 100, 200, and 400 gig ports to attain the number one position at greater than 40% market share according to industry analysts in ports.
Jayshree Ullal: We have increased our 400-gig customer base to approximately 1,000 customers last year in 2024.
Jayshree Ullal: We expect 800 gigabit Ethernet to emerge as an AI backend cluster in 2025.
Jayshree Ullal: We remain optimistic about achieving our AI revenue goal of $1.5 billion in AI centers, which includes the $750 million in AI backend clusters in 2025.
Jayshree Ullal: Our network adjacencies market comprised of routing, replacing routers, and the cognitive AI-driven campus is going well. Our investments in cognitive wired, wireless, zero-touch provisioning, and networked identity, as well as sensors for threat mitigation, is being received extremely well by our campus customers.
Jayshree Ullal: Our recent modern stacking introduction of SWAG, Switched Aggregation Group, is a fitting example of our compelling innovation for open and efficient networking, conserving IP addresses without proprietary methods.
Jayshree Ullal: The post-pandemic campus is very different and our customers are seeking alternatives to legacy incumbents with deep zero-trust security, high availability, and observability embedded in the network across our software stack with cloud vision management.
Jayshree Ullal: We are committed to the $750 million goal in 2025 and much more ahead.
Jayshree Ullal: We are successfully also deployed in routing, edge, and peering use cases. Just in 2024 alone, we introduced six EOS software releases with greater than 600 new features across our core and adjacent offerings.
Jayshree Ullal: The campus and routing adjacencies together contribute approximately 18% of revenue.
Jayshree Ullal: Our third category is network software and services based on subscription models such as Arista Acare, Cloud Vision, DMF observability, and advanced security sensors for network detection and response.
Jayshree Ullal: We added over 350 CloudVision customers, translating to literally one new customer a day. CloudVision is pivotal to building our network-as-a-service and deploying Arista-validated designs in the enterprise.
Jayshree Ullal: Arista's subscription-based network services and software contributed approximately 17% of total revenue. Note that perpetual licenses do not count here and go into the core or adjacent sections.
Jayshree Ullal: While the 2024 headline has clearly been about generative AI, Arista continues to diversify its business globally with multiple use cases and verticals.
Jayshree Ullal: We celebrated two milestones in 2024, our 10th anniversary of going public at the New York Stock Exchange and our 20th anniversary of founding.
Jayshree Ullal: In the past decade, we have exceeded 10,000 customers with a cumulative of 100 million ports of installed base as Arista drives the epicenter of mission-critical network transactions.
Arista 2.0 strategy is resonating exceptionally well with our customers.
Jayshree Ullal: Customers are not only looking to connect, but unify and consolidate their data across silos for optimal networking outcomes.
Jayshree Ullal: Our modern networking platforms are foundational for transformation, from incongruent silos to centers of data, and it places us in a very unique position as the best-of-breed innovator for data-driven networking.
Jayshree Ullal: These centers of data, as we call it, can reside in the campus as a campus center or data centers or WAN centers or AI centers, regardless of their location.
These are constructed with both back-end clusters and front-end networks.
Jayshree Ullal: And as I've shared with you often, the fidelity of the AI traffic differs greatly from cloud workloads in terms of diversity, duration, and size of flow. Just one slow flow can slow the entire job completion time for a training workload.
Jayshree Ullal: Therefore, Arista AI centers seamlessly connect to the front end of compute storage WAN and classic cloud networks with our back-end Arista EtherLink portfolio.
Jayshree Ullal: This AI-accelerated networking portfolio consists of three families and over 20 Etherlink switches, not just one point switch.
Jayshree Ullal: Our AI for networking strategy is also doing well and it's about curating the data for higher level network functions.
Jayshree Ullal: We instrument our customers' networks with our Publish-Subscribe State Foundation with our software called Network Data Lake to deliver proactive, predictive, and prescriptive platforms that have superior AI ops with ACARE support and product functions.
Jayshree Ullal: In 2024, we conducted three very large customer events in London, New York, and Santa Clara, California. Our differentiated strategy and superior products are resonating deeply as we touched over a thousand strategic customers and partners in these exclusive events.
Jayshree Ullal: Simply put, we outpace the industry in quality and support with the highest net promoter score of 87, which translates to 93% of customer respondent satisfaction.
Jayshree Ullal: Of course, we do that with the lowest security and vulnerabilities and steadfast network innovation.
Jayshree Ullal: In summary, 2024 has been a pivotal turning point for VISTA.
Jayshree Ullal: While I do appreciate the exuberant support from our analyst community on our momentum, I would encourage you to pay attention to our stated guidance. We live in a dynamic world of changes, most of which have resulted in positive outcomes for RISDA.
Jayshree Ullal: We reiterate, at the upper range of our 2025 guidance, of our double-digit growth at 17%, now aiming for approximately $8.2 billion in 2025 in revenue.
Jayshree Ullal: The Arista leadership team has driven outstanding progress across multiple dimensions.
Jayshree Ullal: In 2024, we are at approximately 4,465 employees rooted in engineering and customer investments. I'm incredibly proud of how we've executed and navigated the year based on our core principles and culture.
Jayshree Ullal: While customers are struggling with customer fatigue from our legacy incumbents, Arista is redefining the future of data-driven networking intimately with our strategic customers.
Speaker Change: With that, I'd like to turn it over to Chantelle, who has transitioned to become our core Ariston and Chief Financial Officer in record time, less than a year. Over to you, Chantelle, and welcome again.
and Happy One Year Anniversary!
Chantelle Breithaupt: Thank you, Jayshree, and congratulations on a great 2024. My first full year as CFO has been more than I could have hoped for, and I am excited about ARISTA's journey ahead.
Chantelle Breithaupt: Now on to the numbers. As a reminder, this analysis of our Q4, our full year 2024 results, and our guidance for Q1 2025 is based on non-GAAP and excludes all non-cash, stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items.
Chantelle Breithaupt: In addition, all share-related numbers are provided on a post-split basis to reflect the 4-to-1 stock split in December 2024. A full reconciliation of our selected GAAP-to-non-GAAP results is provided in our earnings release.
Chantelle Breithaupt: Total revenues in Q4 were $1.93 billion, up 25.3% year over year, and above the upper end of our guidance of $1.85 to $1.9 billion. For fiscal year 2024, we are pleased to have delivered 19.5% in revenue growth, driven by achievements in all three of our product sectors.
Chantelle Breithaupt: Services and subscription software contributed approximately 18.3% of revenue in the fourth quarter up from 17.6% in Q3.
Chantelle Breithaupt: International revenues for the quarter came in at $311.1 million, or 16% of total revenue down from 17.6% last quarter. This quarter-over-quarter decrease was driven by the relative increased mix of domestic revenue from our large global customers.
Chantelle Breithaupt: The overall gross margin in Q4 was 64.2%, slightly above the guidance of 63-64% and down from 65.4% in the prior year.
Chantelle Breithaupt: As a recap for the year, we delivered a gross margin result of 64.6% compared with 62.6% for the prior year. This increase is largely due to a combination of improved supply chain and inventory management.
Chantelle Breithaupt: Operating expenses for the quarter were $332.4 million or 17.2% of revenue, up from the last quarter at $279.9 million.
Chantelle Breithaupt: R&D spending came in at $226.1 million, or 11.7% of revenue, up from 9.8% last quarter. This matches the expectations discussed in our Q3 earnings call regarding the timing of engineering costs and other costs associated with the development of our next-gen products moving from Q3 to Q4.
Chantelle Breithaupt: This finishes the year of R&D at 11.2% of revenue, demonstrating a continued focus on product innovation.
Chantelle Breithaupt: Sales and marketing expense was 86.3 million dollars or 4.5 percent of revenue up from 83.4 million dollars last quarter. This was driven by continued investment in both headcount and channel programs.
Chantelle Breithaupt: Our G&A costs came in at $19.9 million, or 1% of revenue, up from $19.1 million last quarter, reflecting continued investment in scaling the company.
Chantelle Breithaupt: Our operating income for the quarter was $907.1 million or 47% of revenue. This strong Q4 finish contributed to an operating income result for fiscal year 24 of $3.3 billion or 47.5% of revenue. Congratulations to the Arista team on this impressive achievement.
Chantelle Breithaupt: Other income and expense for the quarter was a favorable $89.3 million and our effective tax rate was 16.7 percent. This lower than normal quarterly tax rate reflected the release of tax reserves due to the expiration of the statute of limitations and favorable changes in state taxes.
Chantelle Breithaupt: This resulted in net income for the quarter of $830.1 million or 43% of revenue.
Chantelle Breithaupt: Our diluted share number was 1.283 billion shares, resulting in a diluted earnings per share for the quarter of 65 cents, up 25% from the prior year. For FY24, we are pleased to have delivered a diluted earnings per share of $2.27, a 31.2% increase year over year.
Chantelle Breithaupt: Now turning to the balance sheet. Cash, cash equivalents, and marketable securities ended the quarter at approximately $8.3 billion.
Chantelle Breithaupt: In the quarter, we repurchased $123.8 million of our common stock at an average price of $94.80 per share. Within fiscal 24, we repurchased $423.6 million of our common stock at an average price of $77.13 per share.
Chantelle Breithaupt: Of the $1.2 billion dollar repurchase program approved in May 2024, $921 million dollars remains available for repurchase in future quarters.
Chantelle Breithaupt: The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price, and other factors.
Chantelle Breithaupt: Now turning to operating cash performance for the fourth quarter, we generated approximately $1 billion of cash from operations in the period, reflecting strong earnings performance combined with an increase in deferred revenue offset by an increase in income tax payments.
Chantelle Breithaupt: Inventory turns were 1.4 times up from 1.3 last quarter. Inventory increased marginally to 1.83 billion dollars reflecting diligent inventory management across raw and finished goods.
Chantelle Breithaupt: Our purchase commitments at the end of the quarter were $3.1 billion, up from $2.4 billion at the end of Q3. As mentioned in prior quarters, this expected activity represents purchases for chips related to new products and AI deployments.
Chantelle Breithaupt: Our total deferred revenue balance was $2.79 billion, up from $2.51 billion in the prior quarter.
Chantelle Breithaupt: 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: Our product deferred revenue balance increased by approximately $150 million over the last quarter. Fiscal 2024 was a year of new product introductions, new customers, and expanded use cases.
Chantelle Breithaupt: These trends have resulted in increased customer trials and contracts with customer-specific acceptance clauses that have and will continue to have increased the variability and magnitude of our preferred-deferred revenue balances. We expect this to continue into fiscal 2025.
Chantelle Breithaupt: Accounts payable days were 51 days up from 42 days in Q3, reflecting the timing of inventory receipts and payments.
Chantelle Breithaupt: Now turning to our outlook for the first quarter of 2025 and the remainder of the fiscal 25 year.
Chantelle Breithaupt: We continue to gain confidence in our view for fiscal year 25 and now place our revenue growth outlook at approximately 17% or $8.2 billion. This is up from our initial FY25 guidance of 15 to 17%.
Chantelle Breithaupt: This reflects our combined outlook for cloud, AI enterprise, and cloud specialty providers, along with a recognition of the volatility that we have seen in the market since the beginning of the year.
Chantelle Breithaupt: Similar to others in the industry, we will continue to monitor the fluid tariff situation and be thoughtful for both the short and long-term outcomes to both our company and our customers.
Chantelle Breithaupt: In terms of spending, we expect to invest in innovation, sales, and scaling the company, resulting in a continued operating margin outlook of 43-44% in 2025.
Chantelle Breithaupt: On the cash front, we will continue to work to optimize our working capital investments with some expected variability in inventory due to the timing of component receipts on purchase commitments.
Chantelle Breithaupt: Our structural tax rate is expected to remain at 21.5% back to the usual historical rate up from the unusually low one-time rate of 16.7% experienced last quarter Q4 FY24.
Chantelle Breithaupt: With all this as a backdrop, our guidance for the first quarter is as follows. Revenues of approximately $1.93 to $1.97 billion, a slightly stronger seasonality in Q1 than prior year trends, and outcome of the timing of our customers' priorities.
Chantelle Breithaupt: Gross Margin of approximately 63% and Operating Margin at approximately 44%. Our effective tax rate is expected to be approximately 21.5% with approximately 1.285 billion diluted shares.
Chantelle Breithaupt: In summary, we at Arista are enthusiastic about 2025 and the general networking outlook ahead.
Chantelle Breithaupt: With that, I too would like to welcome Rudy and Rod to the Arista IR team. Back over to you, Rudy, for Q&A.
Chantelle Breithaupt: 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. We ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Our first question will come from the line of Michael Ng at Goldman Sachs. Please go ahead.
Michael Ng: Hi, good afternoon. Thank you for the question. I was just wondering if you could talk about the timing of how the year might look like and
Speaker Change: Yeah, thank you, Michael. First, I want to say Arista is still committed to four out of our five AI clusters that I'm
Speaker Change: The fifth one is a little bit stalled, it is not a cloud titan, they are awaiting new GPUs and some funding too I think, so I hope they'll come back next year, but for this year we won't talk about them.
Speaker Change: Three out of the four customers are expected to this year roll out a cumulative of 100,000 GPUs.
Speaker Change: So we're going to do very well with three of them on the back end. And you can imagine they're all pretty much one major NVIDIA class of GPU.
Speaker Change: They will be waiting for the next generation of GPUs, but independent of that, we will be rolling out.
fairly large numbers.
Speaker Change: On the fourth one, we are migrating right now from InfiniBand to proving that Ethernet's a viable solution. So we're still, you know, there's historically been InfiniBand, and so we're still in pilot, and we expect to go into production next year. So doing very well on four out of four, the fifth one installed, and three out of the four are expected to be 100,000 GPUs this year.
Speaker Change: Our next question comes from the line of Amit Daryanani with Evercore. Please go ahead.
Speaker Change: There's always this concern around the impact of white box vendors to your revenue growth and clearly over the last decade I don't think it's been an impediment for the company.
Speaker Change: But can you maybe share your perspective that when it comes to AI networks?
Speaker Change: Especially the back-end networks, you know, how do you see the mix involving white box versus OEM solutions? And maybe just help us understand the differentiators that helped Arista be successful on the front end. Do they extend to the back-end networks as well, or is there something different we should be aware about? Thank you.
Speaker Change: Yes, sure Amit. Gosh, this feels like a deja vu question, but thank you for asking it. I'm sure it's on a lot of minds.
Speaker Change: We've been going through this for at least 10 years on the cloud, and the first thing I just want to say is this can is so huge and so large, we will always coexist with white boxes and operating systems that are non-EOS, much like Apple coexists on their iPhone with other phones of different types.
Speaker Change: When you look at the back end of an AI cluster, there are typically two components, the AI leaf and the AI spine.
Speaker Change: The AIDs connect to the GPUs and therefore is the first, if you will, point of connection. And the AI Spine aggregates all of these AIDs.
Speaker Change: Almost in all the back-end examples we've seen, the AI spine is generally 100% Arista-branded EOS. You've got to do an awful lot of routing, scale, features, capabilities that are very rich that would be difficult to do in any other environment.
Speaker Change: The AI leaf can vary, so for example, let's take the example of the five customers I've mentioned a lot. Three out of the five are all EOS in the leaf and spine. Two out of the five are kind of hybrids. Some of them have some form of Sonic or FBOS, and as you know, we co-developed with them
Speaker Change: You know coexist in a number of use cases where it's a real hybrid combination of EOS and an open OS
Speaker Change: So for most part, I'd just like to say that White Box and Arista will coexist and will provide different strokes for different folks.
Speaker Change: Now, in terms of differentiators, a lot of our deployments right now is 400 and 800 gig, and you see a tremendous amount of differentiation, not only like I explained to you in scale and routing features.
But plus the load balancing.
Speaker Change: It also depends on your information – speaking at 5 and talking to multiple questions at 3 minutes. Whether it's using one questions at a time or multiple requests at the same time. SmartSys is actually something that's very rare today.
Speaker Change: The network provides the ideal foundation that if a GPU is in trouble, we can automatically give it a different connection and an alternate connection. So tremendous amount of differentiation there and even more valid in a GPU which costs typically five times as much as a CPU.
Tim Long: Our next question comes from the line of Tim Long at Barclays. Please go ahead.
Thank you.
Speaker Change: We wanted to touch on the the cloud titan numbers a few part of their obviously one of them
Meta looks like based on the numbers you gave.
Speaker Change: Touch on that and then the other, you know, if we do the math for the other cloud titans Looks like it went up a lot. I don't know. I think Oracle was kind of in that already Was there anything else going on?
Speaker Change: Other than the oracle shift with the rest of the cloud titans where it looked.
I'm extremely strong in 2024. Thank you.
Speaker Change: Yeah, so speaking specifically to MEDA, we are obviously in a number of use cases in MEDA.
Keep in mind that our 2024 Meta Numbers
Speaker Change: is influenced by more of the 2023 CapEx and that was MEDA's year of efficiency.
Speaker Change: where their capex was down 15 to 20%. So you're probably seeing some correlation between their capex being down and our revenue numbers.
Speaker Change: being slightly lower in 24. In general, I would just say all our cloud tip items are performing well in demand. And we shouldn't confuse that with timing of our shipments. And I fully expect Microsoft and Meta to be greater than 10% customers in a strong manner in 2025 as well.
Speaker Change: Specific to the others we added in, they're not 10% customers, but they're doing very well, and we're happy with their cloud and AI use cases.
much higher in the first quarter.
Speaker Change: I would think that implies a significant cloud-titan mix, though, going throughout the rest of the year.
Speaker Change: Do you mind just giving some color on, you know, what is pushing down the gross margin a little more? And does that mean that cloud titans do accelerate throughout the year because the gross margin gets pushed down vis-a-vis, you know, in your guidance? Thank you.
Speaker Change: Yeah, absolutely. I think you got it right, Ben, from that perspective. As we entered Q4 last year, talking about 25 guidance, and as we enter into this quarter, it is and still remains a mix.
Speaker Change: You know, Jayshree kind of gave some thoughts on to the timing to the first question. So it is mixed driven. You know, there were some questions last quarter if it was price driven, this is just a mixed driven conversation.
Speaker Change: I would say we have absorbed a little bit of the specific tariffs on China in that number, so we are absorbing that on behalf of our customers, but otherwise it's mixed driven and we'll continue to update as we do the quarterly guidance through the year.
Our next question...
Speaker Change: Sorry, I was just going to add that John's done a fantastic job on the planning for China ahead of time. So while we're absorbing the costs, most of it is related to the mix, and some of it is related to the China tariffs. Would you say that? That's right. Absolutely. We've been working on China mitigation for some time, and happy to report we've made good progress.
Speaker Change: Our next question comes from the line of Amita Marshall at Morgan Stanley. Please go ahead.
Unknown Speaker 0
Speaker Change: Great, thanks. Maybe another topical question from investors just over the past month has been
Speaker Change: Yeah, thank you, Meeta. Well, DeepSeek certainly deep-fits many stocks, but I actually see this as a positive because, you know, I think you're now going to see a new class of...
Speaker Change: CPUs, GPUs, AI accelerators, and where you can have substantial efficiency gains that go beyond training. So that could be some sort of inference or mixture of experts or reasoning, and which lowers the token count and therefore the cost. So
Speaker Change: What I like about all these different options is Arista can be the scale-out network for all kinds of XPUs and accelerators.
Speaker Change: And I think the eye-opening thing here for all of our experts who are building all these engineering models
Speaker Change: is there are many different types and training isn't the only one. So I think this is a nice evolution of how AI will not just be a backhand training only limited to five customers type phenomena, but will become more and more distributed across a range of CPUs and GPUs.
Great, thanks.
Thank you, Mita.
Speaker Change: Our next question comes from the line of Erin Rakers at Wells Fargo. Please go ahead.
Speaker Change: Yeah, thanks for taking the question. Jayshree, I'm curious, just kind of thinking about some of the questions we've gotten recently is, you know, when you see announcements like Stargate, and obviously Stargate has the involvement of one of your newer cloud
Speaker Change: Titan customers. How do you conceptualize the opportunity set for Arista vis-a-vis both back-end and front-end networking in deployments like that? And then do you have any thoughts on just the broader context of what you're seeing on sovereign AI opportunities in your business? Thank you.
Speaker Change: Yes, thank you, Aaron. Stargate and Sovereign AI are not quite related, so let me take the first one, Stargate first. You know, if you look at how we have classically approached GPUs and collective libraries, you know, we've largely looked at it as two separate building blocks.
Speaker Change: There's the vendor who provides the GPU, and then there's us who provides the scale-out networking.
Speaker Change: This is not a 2025 phenomenon, but definitely in 2026 and 2027, you're going to see a new class of...
Speaker Change: about AI accelerators and a new class of training and inference, which is extremely different than the current more pluggable LEGO type of version. So we're very optimistic about it.
Speaker Change: Shall we say pushing Moore's law of improvements in density and performance that we saw in the 2000s is coming back And you can boost more and more performance per XPU which means you have to boost the network
Speaker Change: scaled from 800 gig to 1.16. There are other things to consider like liquid cooling and co-packaging of copper and optics. So lots going on there that Arista is in the middle of, best of breed hardware that John McCool's team is working on as well as Andy's team is.
Speaker Change: Our next question comes from the line of Atif Malik at Citi. Please go ahead.
Atif Malik: Hi, thank you for taking my question. Jayshree, I appreciate you calling out to pay attention to the guidance. Now, you are retracing 750 million AI back-end sales this year despite the stalled or the faked customer. Can you talk about where is the upside coming from this year? Is it broad-based or one to customers? And also, if you can talk to the 70 billion SAM number for 2028, how much is AI?
Speaker Change: Okay, so I'll take your second question first, Arteef. On the 70 billion TAM in 2028, I would roughly say a third is AI, a third is data center and cloud, and a third is campus and enterprise.
Atif Malik: And obviously, absorbed into that is routing and security and observability. I'm not calling them out separately for the purpose of this discussion. So roughly 20 to 25 on each to get to that 70 billion. So coming back to your original question, which was.
Help me out again. The 750 million in patents...
Atif Malik: Yeah, yeah. So, as I said, we're well on our way, and three customers deploying a cumulative of 100,000 GPUs is going to help us with that number this year. And as we increase our guidance to $8.2 billion, I think we're going to see momentum both in AI, cloud, and enterprises.
Atif Malik: I'm not ready to break it down and tell you which were. I think we'll know that much better in the second half, but Chantelle and I feel confident that we can definitely do the $8.2 billion that we historically don't call out so early in the year. So having visibility of that helps.
Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Samik Chatterjee with J.P. Morgan. Please go ahead.
Speaker Change: Thanks for taking the question. Jayshree, maybe I can sort of bring up one more topic that's come up a lot in the last few days, which is
Speaker Change: particularly in the discussion in terms of relative competition to like a white box player.
Speaker Change: How do you sort of emphasize the value of EOS to your customers? Can you sort of outline some of the sort of what are the key drivers we should keep in mind and again in that competitive landscape between Whitebox and Orista? Thank you.
Speaker Change: Yeah, sure Samek. First of all, when you're buying these expensive GPUs that cost $25,000, they're like diamonds, right? You're not going to string a diamond on a piece of thread.
Speaker Change: So, first thing I want to say is you need a mission-critical network, whether you want to call it White Box, Blue Box, EOS, or some other software, you've got to have mission-critical functions, analytics, visibility, high availability, etc.
Speaker Change: As I mentioned, and I want to reiterate, they're also typically a leaf spine network. And I have yet to see an AI spine deployment that is not EOS based.
Speaker Change: for high availability, for routing, for VXLAN, for telemetry. Our customers really see that and the 7800 is the flagship AI spine product that we have been deploying last year, this year, and in the future.
Speaker Change: Coming soon, of course, is also the product we jointly engineered with MEDA, which is the distributed ethylene switch. And that is also an example of a product that provides that kind of leaf-spine combination.
Speaker Change: both with FBOS and EOS options in it. So in my view, it's difficult to imagine a highly resilient system without Arista EOS in AI or non-AI use cases.
Speaker Change: On the leaf, you can cut corners, you can go with smaller buffers, you may have a smaller installation. So I can imagine that some people will want to experiment and do experiment in smaller configurations with non-EUS.
Speaker Change: But again, to do that, you have to have a fairly large staff to build the operations for it. So that's also a critical element. So unless you're a large Cloud Titan customer, you're less likely to take that chance because you don't have the staff.
Speaker Change: So all in all, EOS is alive and well in AI and cloud use cases, except in certain specific use cases where the customer may have their own operations staff to do so.
Thank you.
Speaker Change: Our next question comes from the line of Ben Bolin with Cleveland Research. Please go ahead.
Good afternoon, everyone. Thanks for taking the question.
Ben Bolin: Jayshree, I'm interested in your thoughts on your enterprise strategy within G2000 and how that may be evolving as it looks like refresh opportunities are intensifying. Thank you.
Yeah, no, listen.
Ben Bolin: We're always looking at three major threads, our classic cloud business, our AI, and the enterprise led by Ashwin and Chris is a very significant area of investment for us.
Ben Bolin: From a product point of view, you know, we have a natural trickle-down effect from our high-end data center products to the cloud. And so whether it's the enterprise data center or the campus.
Ben Bolin: I've never seen a portfolio be as strong as it is today. So a lot of our challenges and our execution is really in the go-to-market.
Ben Bolin: Right, and that just takes time. As you know, we've been slowly but steadily investing there and our customer count, the number of projects we get invited to, especially as you pointed out in the Global 2000, has never been stronger.
Ben Bolin: One area I'd like to see more strength, and Chris Schmidt and the team are working on it, as you can tell from our numbers, is international. We're bringing in some new leadership there and hope to see some significant contributions in the next year or so.
Speaker Change: Our next question comes from the line of Ryan Koontz with Needham & Company. Please go ahead.
Ryan Koontz: Thanks. Jayshree, can you comment? There's been a lot of chatter lately about co-packaged optics. Can you maybe speak about its place in your roadmap and how investors should think about that, the effect on your TAM and your opportunities to sell?
Well, first of all, you know...
Speaker Change: Andy has reminded me that co-packaged optics is not a new idea. It's been around 10 to 20 years.
Speaker Change: So, the fundamental reason, let's go through why whole package optics
Speaker Change: has had had relatively weak adoption so far is because of field failures and most of it is still in proof of concept today.
So, going back to networking, the most important...
and Jayshree Ullal.
Speaker Change: Now, we also see that if co-packaged optics improves some of the metrics it has right now, for example, it has a higher channel count than the industry standard of 8-channel pluggable optics, but we can do higher-channel pluggable optics as well, so some of these things improve.
Speaker Change: We can see that both CPC and CPO will be important technologies at 224 gig or even 448 gig.
Appreciate your thoughts. Thank you.
Simon Leopold: Our next question comes from the line of Simon Leopold with Raymond James. Please go ahead.
Simon Leopold: Thank you very much for taking a question. I was hoping you could maybe double click on the cognitive adjacencies. It's been a meaningful part of revenue. I think you said 18%. If you could offer a little bit more color about how the elements of that are trending and your expectations for how that part of the business is growing in your 2025 expectations. Thank you.
Simon Leopold: Out of our 8.2 billion, expect that to be over a billion this year, right? Now we don't, in the routing use case, which is particularly enterprise and service provider related, you know, it's, as I've often said, it's difficult to measure it in isolation. So we're very strict about the definition being, it has to be a combination of the software running with a dedicated routing hardware.
Simon Leopold: So, for example, if the hardware is shared across switching and routing, we don't count it there. So I think sometimes we shortchange the numbers a little bit and more of it goes in the core, but I just want you to be aware that's a very strategic piece. You add that to the fact that...
Simon Leopold: The SD-WAN market is now evolving. It's not just about how do you do encryption and tunnels and migrate from MPLS, but you really need a routed backbone.
Simon Leopold: So the combination of SD-WAN in the edge and a router backbone really falls into the sweet spot for Vista, both in the enterprise and service providers.
Simon Leopold: I don't need to tell you about our campus initiatives, we are very, very keen there.
Simon Leopold: A parting of those seas, if you will, where there's a lot of fatigue with subscription models on the campus.
from one competitor.
Simon Leopold: and another set of competitors who are trying to do a merger or acquisition.
So Arista is the only pure play campus innovator who...
Simon Leopold: can provide that best of breed. And we're particularly getting traction there where our data center customers are already familiar with us and they're using a data center spine and they can extend that same universal spine to wired and wireless leads.
Simon Leopold: So using Cloud Vision as a management domain, we're seeing much, much more traction.
or Observability.
Chantelle Breithaupt: with our campus products. So I think both of those are meaningful, and we expect them to exceed a billion dollars. Chantelle, you want to say a few words? Yeah, the only other things I'd add, Jayshree, to your points, which are completely showing the intent. The other things for campus are a couple fold. First is, you know, John, who's here with us, has spent a lot of time getting us better lead times coming into this year. So we have a great lead times conversation. We're very excited about that. And the customers seemed pretty excited as well. We also have a curated preferred partner program, particularly international to your point earlier.
Chantelle Breithaupt: earlier, Jayshree on growing the international revenue. And we're excited because we've seen some campus first wins where not only is the DC bringing us in, but we're actually bringing the DC through a campus win. So just add a couple more points to the enthusiasm for 2025. Thank you. Great, great reminders.
Speaker Change: Our next question will come from the line of Tal Liany at Bank of America. Please go ahead.
Speaker Change: Hi guys, two questions, one on routing and one on enterprise.
Speaker Change: Enterprise grew 16% this year. What drives it? Is it just regular growth of data centers or do you start to see enterprises investing because of AI and applications for AI?
Speaker Change: The second thing is about routing. Routing used to be a small opportunity when it was just a license.
Speaker Change: Can you elaborate on routing? What is your differentiation versus the others? Others are bundling it with optics. How do you sell it? And then how big is the opportunity, not in terms of numbers, but is it now a hardware with software or is it just software licensed like it used to be? Thank you.
Jayshree Ullal: Well, Jayshree, I can start with enterprise, and then you want to go ahead. Yeah, so I think for enterprise, there are a few ways I would describe, you know, kind of our growth vectors in 24 and continuing into 25 and into the following years.
Jayshree Ullal: One is coverage. You've seen we've invested in sales and marketing headcount in 23, 24, and going into 25, 24, we had double-digit increase in sales and marketing headcount, so we're just getting more coverage.
Jayshree Ullal: We're also using that Preferred Partner Program I mentioned to get into the enterprise.
Jayshree Ullal: We do have international kind of campaigns that we're working on. We do have a new logo focus. And so I think that all those land and expand motions are the growth vectors.
Jayshree Ullal: I would say for the AI perspective, you know, speaking with the customers, it's great to move from kind of a
Jayshree Ullal: And the way they describe it is it takes a bit of time, you know, they're working mostly with cloud service providers at the beginning, kind of doing some training, and then they're deciding whether they bring that on prem and inference. So they're making those decisions.
Jayshree Ullal: So I think those are early days, but we're having really great conversations for the AI part of that. Jayshree, did you want to cover routing? Yeah. So Tal, on routing, routing's always been a critical part of our offerings for the cloud and data center, where, as you rightly described, it was more of a software enhancement.
Jayshree Ullal: But as we are getting more meaningful and important to the service providers, as well as to the large enterprises, I was just with a very large bank in New York last week.
Jayshree Ullal: It was snowing there, so it was super cold, so I stayed indoors most of the time.
Jayshree Ullal: And the use case there is not data center, it's not campus, it's all a WAN routed fabric. It's pretty amazing. And then they're looking for us to not just build that core routing.
Jayshree Ullal: But today, our routing portfolio is much more complete. VXLANSEC, TunnelSEC, MaxSecEncryption, MPLS, Segment Routing, OSPF, BGP, we got it all. So we're no more apologizing for what we don't have in routing, and we obviously have the best software stack in terms of quality and support in the industry.
Great, thank you.
Thank you.
Thank you, Cal.
Speaker Change: Hi, thank you for taking my question. I'd love to get your latest perspective on what you're hearing from service providers in AI. One of your competitors mentioned that they were seeing AI driving demand for service providers because they're building out their network in anticipation of an increase in traffic driven by AI. So just wondering if you could comment on that as well. Thank you.
Speaker Change: Anton, do you mean the classic service providers or generally the neoclouds?
Speaker Change: The Catholic Service Providers. Okay, so we haven't seen a huge uptick there yet, I think.
Speaker Change: you know, maybe some experimental, but we have, you know, to answer a question you didn't ask.
Speaker Change: We have seen much more activity and somebody earlier that I didn't answer, the Sovereign Cloud, the NeoCloud.
Speaker Change: We are seeing a new class of Tier 2 specialty cloud providers emerge that want to provide AI as a service and want to be differentiated there. And there's a whole lot of funding, grant money, real money going in there. So service providers too early to call, but neoclouds and specialty providers, yeah, we're seeing lots of examples of that.
Thank you. Thank you.
Speaker Change: Our next question comes from the line of Matt Nicknam with Deutsche Bank. Please go ahead.
Speaker Change: Hey, thanks so much for taking the question. Maybe for Chantelle, I mean, you're sitting now on $8 billion worth of cash and equivalents on the balance sheet. So maybe just an update on how you'd prioritize uses of cash heading into 2025. Thank you.
Speaker Change: Yeah, no, it's great. Thank you for the question. You know, very pleased with the performance in our capital allocation strategy has not changed coming into FY25. You know, just to kind of reiterate and remind and I appreciate the opportunity to do so. You know, first of all, in the sense of investing that cash where we can still get a very reasonable and respectable return continues to be a priority. Repurchasing, you know, you saw the way we did through 24 and willing to do what we can through 25.
Speaker Change: Organic investment, so you saw that in the sense we're still looking to scale the company in R&D, sales, back office, and probably the one that's the
Speaker Change: Probably the one that's the least on the scale is, you know, sizable inorganic activity. So I would focus on the first four. And that's how we'll remain in 25.
Speaker Change: and John McCool. And that's it. I hope you enjoyed this video. If you did, please give it a thumbs up. And if you want to see more videos like this, please subscribe to my channel. And I'll see you in the next video.
Speaker Change: Our next question comes from the line of David Vogt with UBS. Please go ahead.
David Vogt: Great, thanks guys for taking my questions. So Jayshree, I have a question about sort of the
You know when we went from 200
Speaker Change: William Bollin IIT, Vinayak Raju, Vivek Mukaonkar Thanks for joining us.
Speaker Change: 25 and 26 I would say is more 800 gig and I really see 1.6 T coming into The the picture of a because we don't have chips yet. Maybe in what do you say John late 26?
and Anshul Sadana.
Speaker Change: But I think realistically, you're going to see a long runway for 400 and 800 gig.
Speaker Change: Now, as we get into 1.16, part of the reason I think...
Speaker Change: It's going to be measured and thoughtful. Many of our customers are still awaiting their own AI accelerators.
Speaker Change: or NVIDIA GPUs with liquid cooling that would actually push that kind of bandwidth. So new GPUs will require new bandwidth and that's going to push it out a year or two.
Great. Thank you very much.
Speaker Change: Thank you, David. Our next question comes from the line of Carl Ackerman with BNP Paribas. Please go ahead.
Carl Ackerman: Yes, thank you. Could you discuss the outlook for services relative to your outlook for March in the full year? I ask because services grew 40% year over year and your deferred revenue balance is up another 250 million or so sequentially, nearly 2.8 billion. So the outlook for that would be very helpful. Thank you.
Carl Ackerman: Yeah we don't we don't usually guide the piece parts of that so all I would say is that the thing to keep in mind with services is a little bit of timing in the sense of catching up to product especially kind of post COVID so I would I would kind of take the trending you see over the last few years and that's probably your best guide looking forward we don't we don't guide the piece parts
Thank you.
Thanks, Carl.
Speaker Change: Our next question will come from the line of Sebastian Nagy with William Blair. Please go ahead.
and Jayshree Ullal. Thank you.
Sebastian Nagy: Yeah, thanks for taking the question and we've talked about this a little bit, but there's been a lot of discussion over the last few months between, you know, the general purpose GPU clusters from NVIDIA and then the custom ASIC solutions from some of your popular customers. I guess just in your view, over the longer term, does Arista's opportunity differ across these two chip types? And is there one approach that would maybe pull in more Arista versus the other?
connect to them. And that's, that's been a predominant.
market for us. As we move forward,
Sebastian Nagy: We see not only that we connect to them, that we can connect to AMD GPUs and built-in in-house AI accelerators. So, a lot of them are in active development or in early stages. NVIDIA is the dominant market shareholder with probably 80, 90 percent. But if you ask me to guess what it would look like...
Sebastian Nagy: two, three years from now, I think, you know, it could be 50 50. So Arista could be the scale out network for all types of accelerators, we'll be GPU agnostic. And I think there'll be less opportunity to bundle by specific vendors, and more opportunity for customers to choose best of breed.
Speaker Change: This concludes Arista Network's fourth 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 for your interest in Arista.
Speaker Change: Thank you for joining ladies and gentlemen. This concludes today's call and you may now disconnect.
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