Q1 2025 Arista Networks Inc Earnings Call
Welcome to the first quarter, 2025, Arista Networks Financial Results Earnings Conference Call During the call, all participants will be in a listen-only mode After the presentation, we will conduct a question and answer session Instructions will be provided at that time [inaudible]
Speaker Change: If you need to read an operator at any time during the conference, please press the start 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. Rudolph O'Rajo, Arista's Head of Investor Advocacy, you may begin.
Rudolph Araujo: Thank you, Regina. Good afternoon, everyone, and thank you for joining us. With me in today's call, Ajayshree Ullal, Arista Networks Chairperson, and Chief Executive Officer, and Chantelle Wright-Up, Arista Chief Financial Officer.
Speaker Change: This afternoon, Arista Networks issued a press release announcing the results for its fiscal first quarter ending March 31, 2025. If you want a copy of this release, you can access it online at our website.
Speaker Change: During the course of this conference call, Arista Networks Management will make forward-looking statements, including those relating to our financial outlook for the second quarter of the 2025 fiscal year
Speaker Change: Longer term business model and financial outlook for the 2025 and beyond. A total addressable market and strategy for addressing these market opportunities, including AI.
Speaker Change: customer demand trends, tariffs and trade restrictions, supply chain constraints, component costs, manufacturing output, inventory management and inflationary pressures on our business, lead times, product innovation, working capital optimization, and the benefits of acquisitions.
Speaker Change: which are subject to the risk and uncertainties that we discuss in detail in our documents filed with the FEC, specifically in our most recent form, 10Q and from 10K, and which could cause actual results to defer materially from those anticipated by these statements.
Speaker Change: These forward looking statement supplies 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: This analysis of our Q1 results in our guidance for Q2 2025 is based on non-GAAP and excludes all non-cash stock-based compensation impacts certain acquisition required charges and other non-recurring items
Speaker Change: A full reconciliation of our selected gap to non-GAAP results is provided in our earnings release. With that, I will turn the call over to Jayshree.
Jayshree: Thank you, Rooney, and thanks everyone for joining us this afternoon for our first quarter, 2025 earnings call. I'm sorry I have a bit of a cold, so if I sound nasal, please excuse me.
Jayshree: Well, what a year it's already been with all the seasawing of terrorists. We had a good start in Q1 2025 with the momentum of the United of AI, data center, cloud, and campus enterprises, where we achieved our first $2 billion quarter, doubling just 11 quarters after our first $1 billion quarter.
Software and Service Reviews, Contributed Approximately 17.1% of Revenue
Jayshree: Our non-gab gross margin of 64.1% was influenced by fish and supply chain without tariffs, yet Amit Daryan and a nice mix of enterprise and cloud customers in the quarter International contribution for the quarter registered at 20% with the Americas super strong at 80%
Jayshree: Clearly, Arista is redefining the future of data-driven networking, working intimately with our top customers as we march on in the evolution of data centers, campus centers, branch centers, and AI centers.
Jayshree: Our cloud and AI momentum continues as we remain confident of our 750 million front-end AI goal in 2025.
Jayshree: We are progressing well in all four customers and continue to add smaller ones as well.
Jayshree: At the GTC event in March of 2025, we heard all about Nvidia's Plan GPU roadmap every 12 to 18 months, and Arista, instends to be the premier and preferred scale out network for all of those GPUs and AI accelerators.
Jayshree: Traditional JUPUs have a collective communication libraries, or CCL, as they're known, that try to discover the underlying network topology using localization techniques
Jayshree: With this accelerated compute approach, the discrepancies between the discovered topology and the one that actually happens can impact AI job completion times.
Jayshree: Arista's Etheling portfolio highlights the accelerated networking approach, bringing that single point of network control and visibility as a differentiation.
Jayshree: This makes it extremely crisp to identify and localize performance issues especially as the size of the AI cluster grows to 50,000 and 100,000 XPUs with the Arista AI spine and least network designs
Jayshree: Moving to campus and branch center trends in today's AI wave.
Customers can no longer tolerate land and land silos [inaudible]
Jayshree: The concept of what comprises a user, or a device, or a site fundamentally changes the building of a branch of campus in 2025. Agentic AI makes us question the very definition of what we might even consider a user.
Jayshree: Future campus and branch centers could be centralized or distributed, or they could be dispersed across laptops, smartphones, a house, an airplane, or any other location on the move. Data and applications can be located anywhere and add more dimensions, whether it's a data center or a public cloud or campus.
Speaker Change: Therefore, Arista's cognitive campus portfolio features a advanced spine with power over ethernet wired lease capabilities, along with a wide range of cost effective wireless 6 or 7 indoor and outdoor access points for the newer IoT and agentic application
Speaker Change: Our Enterprise Momentum continues. These initiatives are contributing greatly to customer momentum and so let me highlight a few customer wins we have achieved.
Speaker Change: Our first customer win is in the federal sector which is new to Arista, where Arista secured a strategic net new campus switching deployment with a major civilian agency displacing a longstanding incumbent
Speaker Change: Arista delivered the digital transformation for their return to office policy with resilient campus designs featuring Wi-Fi readiness and deep integration of cloud vision for real time telemetry, automation and compliance.
Speaker Change: This mission-critical, high-performance deployment, positions us for a broader entry in the federal market.
Speaker Change: Our next win comes from a high tech sector where Arista expanded its partnership with one of our business development partners following years of engagement.
Speaker Change: The customer made a strategic decision to transition, key parts of its data center and campus Netflix touristam, marking our first wins with them in both areas.
Speaker Change: Arista's consistent architecture across platforms based on a single and superior extensible operating system was a key differentiator. The rollout spans key platforms all managed through cloud vision for automation, compliance and visibility.
Speaker Change: With successful Wi-Fi evaluations underway, Arista's poised to complete and deliver
Speaker Change: And our final win comes from a web 3.0 infrastructure space where Arista was selected to support the build-out of a decentralized global backbone for distributed systems and blockchain networks.
Speaker Change: As the project shifted from Metro Expansion to upgrading core network capacity, Arista 7280 R3 routing at scale paired with our 7130 series for ultra low latency edged, formed the new 100 gigabit Wands Fine
Speaker Change: With edge processing, this delivers advanced security, programmable traffic filtering, all at scale It marks a strategic pivot towards high performance and reliable routing where legacy routers fall short [inaudible]
Speaker Change: You can see that all these three wins across three sectors underscore Arista's growing momentum as customers modernize their networks in response to legacy complexity, vendor consolidation and mission critical demands.
Speaker Change: As I wrap up, I want to share our conscious focus in cultivating our next generation of leaders.
Speaker Change: We have been fortunate and blessed to have a cohesive team for the past 15 years, but sometimes we must accept changes. Financial success gives people choices to our, especially our ARISTA executives. Some may retire, while others may elect to pursue new ventures.
Speaker Change: In the next phase of Arista 2.0 leadership, it's important to know that some things remain unchanged and steadfast
Speaker Change: Our engineering brains and bench strength, for example, with Andy, Ken, Hugh, as well as new vice president of software, Sivan Arainen, and new vice president of hardware engineering, Alex Rose, continue to be stronger than ever.
Speaker Change: You know, Arista's reputation for A-class engineering team, and this is a renowned fallmark in the valley.
Speaker Change: With the summer leave of absence of John McCool, my catas has been appointed as a new VP of manufacturing.
Speaker Change: Mike has been with us over 12 years and is doing just a fantastic job navigating the supply chain and uncertainties of tariffs.
Speaker Change: On the enterprise sales side, our dynamic dual, chief customer officer, Ashwin, and she's sales officer Chris, a driving success globally, expanding campus, data center, and AI footprints with increasing market share.
Speaker Change: Christian Usher and have brought changes in the sales and SE leadership team internationally, both in Asia and in Europe .
Speaker Change: For the America Sales, we have promoted a 16-year Arista Veteran, Chris Belmer to Senior Vice President, Chris embodies the combination of customer empathy, product expertise, and always doing the right thing [inaudible]
Speaker Change: You can see common traits across all these executives with incredible and ten-year talent, strong cultural synergies, and a mission to delight customers. We are executing very well, and we aim for 10 billion revenue and beyond, sooner than we previously expected.
Speaker Change: Speaking of Arista 2.0 Executive, over to you are TFO, Chantelle, who epitomizes our core values at Arista, and recently expanded her responsibilities to include legal, IT, and CSO functions. [inaudible]
Chantelle: Thank you, Jayshree. I am excited to extend my scope to cover these key functions. With that, there are a few organizational announcements to make regarding these teams.
Speaker Change: Our newly named leaders include Sandra Yuan, Promoted to be our VP of Information Technology, Jason Bevis, Promoted to be our Cybersecurity Leader in CISO, and Sean Kristofferson, who tomorrow becomes our General Counsel, replacing Mark Taxi who has decided after many dedicated and successful years at Arista to try a new adventure. Congratulations to all of you. [inaudible]
Speaker Change: By promoting proven leaders from within, we are reinforcing our culture of excellence in positioning ourselves for continued success. With that organizational momentum, let's review our financial results.
Speaker Change: Total revenues in Q1 worth $2.005 billion, up 27.6% year-over-year, and above the upper end of our guidance of 1.93 to 1.97 billion. This year-over-year growth was led by strength in the Cloud Titan vertical and non-cloud performing better than expected. This year-over-year growth was led by the Cloud Titan vertical and non-cloud performing better than expected.
Speaker Change: International revenues for the quarter came in at $406 million or 20.3% of total revenue up from 16% in the last quarter. This quarter over quarter increased reflects normal quarterly volatility and includes the impact of an unusually high contribution from our America's customers in the prior quarter. [inaudible]
Speaker Change: Gross Margin and Q1 was 64.1% above our guidance of approximately 63%. This is down slightly from 64.2% both last quarter and Q1 FY24.
Speaker Change: The Q1 result above our guidance was driven by a stronger than expected mix of non-cloud revenue and includes a minimal impact from the absorption of applicable tariffs [inaudible]
Speaker Change: Operating expenses for the quarter were $327.4 million or 16.3% of revenue down slightly from last quarter at $332.4 million.
Speaker Change: R&D spending came in at $209.4 million or 10.4% of revenue down from $226.1 million last quarter.
Speaker Change: This reflects a low double digit year-over-year headcount increase offset by lower new product introduction costs in the period due to timing of prototypes and other costs associated with our next generation products.
Speaker Change: Sales and marketing expense was $94.3 million or $4.7% of revenue compared to $86.3 million last quarter with a mid-single-digit growth and headcount versus last year.
Speaker Change: Income for operations for the quarter was $957.4 million or 47.8% revenue.
Speaker Change: Other income for the quarter was $90.7 million and our effective tax rate was 21.2%. This resulted in net income for the quarter of $826.2 million or $41.2% of revenue.
Speaker Change: Our diluted share number was 1.279 billion shares, resulting in a diluted earnings per share for the quarter of 65 cents, up 30% from the prior year. Note that this reflects our 4-to-1 stock split in December 2024.
Now turning to the balance sheet.
Speaker Change: Cash, Cash Equivalence and Investments ended the quarter at approximately $8.15 billion.
Speaker Change: To date, we have repurchased $13.3 million shares at an average price of $87.55, with $34 million remaining in the existing $1.2 billion board authorization.
Speaker Change: Now, turning to operating cash performance for the first quarter, we generated approximately $641.7 million of cash from operations in the period, reflecting a growth of 24.9% compared to Q1 fiscal year 24.
Speaker Change: DSOs came in at 64 days up from 54 days in Q4 driven by billing linearity. Imentary turns were 1.4 flat to last quarter. Imentary increased to approximately $2 billion in the quarter up from 1.8 billion in the prior period, reflecting an increase in finish goods.
Speaker Change: This is an intentional action regarding both tariffs and in the support of ramping new products.
Speaker Change: Our purchase commitments at the end of the quarter were $3.5 billion up from $3.1 billion at the end of Q4 .
Speaker Change: This was driven by continued investment in chips, as well as an increase in buffers due to the tariff uncertainty. From a cash flow perspective, we will continue to optimize our working capital investments with some expected variability in inventory due to the timing of receipts on purchase commitments.
Speaker Change: Our total deferred revenue balance was $3.1 billion up from $2.8 billion and Q4 fiscal year 24.
Speaker Change: The majority of the deferred revenue balances services related and directly linked to the timing and term of service contracts which can vary on a quarter by quarter basis. Our product deferred revenue balance increased by approximately $219 million versus last quarter.
Speaker Change: We remain in a period of ramping our new products, winning new customers and expanding new use cases.
Speaker Change: As mentioned in prior quarters, the deferred balance can move significantly on a quarterly basis, independent of underlying business drivers. This may be further amplified in 2025 due to the uncertainty around tariffs throughout the fiscal year and the resulting buying patterns of our customers.
Speaker Change: Accounts payable days were 49 days down from 51 days in Q4, reflecting the timing of inventory receipts and payments.
Speaker Change: Capital expenditures for the quarter were $32 million. In October , we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $100 million in CapEx during fiscal year 25 for this project. We are now at the end of the project. We are now at the end of the project. We are now at the end of the project.
Speaker Change: Now turning to our outlook, given the nature of the current macroeconomic environment, we will start with the second quarter and then move to fiscal year 25 25
Speaker Change: As is demonstrated by our Q1 results, we have seen good momentum at the beginning of fiscal year 25 .
Speaker Change: As Jayshree highlighted, there are opportunities across all three customer sectors, inclusive of Gen AI, data center, cloud and campus enterprises. That combined with favorable mix has allowed for better than expected margin outcomes. Building on this momentum are guidance for the second quarter is as follows. Thank you very much.
Speaker Change: Revenues of approximately $2.1 billion. This reflects stronger seasonality and Q2 than prior year trends and anticipate the outcome of the tariff uncertainty. Gross margin of approximately 63% including the absorption of known tariffs for the Q2 period. [inaudible]
and Operating Margin at approximately 46 percent.
Speaker Change: Our effective tax rate is expected to be approximately 21.5% with approximately 1.272 billion diluted shares.
Now turning to the full fiscal year 25.
Speaker Change: Despite the macro uncertainty, we remain confident in the demand from our cloud enterprise and provider's customers [inaudible]
Speaker Change: As is in the case of many other companies, the second half holds significant ambiguity related to the turf scenarios. Thank you very much.
Speaker Change: Given these unknowns, our guidance ref by 25 currently remains unchanged despite the strong results in guidance we are reporting today.
Speaker Change: As we move through the quarters, we will continue to revisit the annual guide hopefully in an environment unconstrained by tariff uncertainty.
Speaker Change: Energized by the current momentum, we continue to focus on operational discipline and innovation, ensuring we deliver strong outcomes for customers and shareholders . . . .
Speaker Change: Now back over to you, Rudy, for Q&A. Thanks, Chantelle. Just a quick clarification before we go into Q&A. Jayshree meant we were re-trading our back end goal of $750 million, not front end AI.
Speaker Change: With that, 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. Regina, please take it away. Thank you.
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 would like to withdraw your question Press Star and the number one again, we ask that you pick up your handset people were asking questions in order to ensure optimal sound quality. Our first question comes from the line up.
David vote: David vote with UBS. Please go ahead.
Speaker Change: Alright, Thanks, guys for taking my question, so maybe jewelry and Sean can you, maybe just dive a little bit deeper on how youre thinking about the impact of tariffs, obviously product deferred revenue was up sequentially.
Speaker Change: You guys said, it's uncertain going into the second half of the year. So maybe from a top line perspective, how are you thinking about what your customers are telling you what can you share with us and just give us a sense for how you thought about it relative to where tariffs are today versus what maybe is proposed by the administration. So I assume that is kind of the status quo of where we are today is kind of underpinning your outlook, but any.
Speaker Change: Clarity would be helpful. Thank you.
Speaker Change: Sure David I'll start then maybe shouldn't tell can clarify you know when we when we began this adventure on tariffs we were actually trying to get out of Mexico as fast as we could because the expectation was Mexico would have of tariffs in Q1 as the news came a bug you know we literally find ourselves in the middle of a notion trying to figure out which country to go to.
Speaker Change: Because the tariffs as you know the reciprocal terrorists are much higher and some of the Asia countries. So we are grateful for the measured approach that we do not have to deal mostly with any of these tariff till July 9th.
Speaker Change: We are absorbing whatever terrorists, we do have to deal with from China, and other things, but should that change we expect it to have some effect that shanteau.
Speaker Change: Alluded to you know gross margins that we have taken into consideration for the year and some we will absorb and suddenly they potentially have to pass to our customers, but we don't know what we don't know so we can just go at this one quarter at a time.
Speaker Change: Yeah, I think the only thing I would add so I think in regard to the topline G. Sri completely we saw the momentum in Q1, you saw our guide in Q2, which is I think a linearity wise a stronger Q2 than usual at holding the year, that's not because of our demand outlook. It's because of the fact, we just want to have any surprises after the pause. So that's why we'll take it quarter by quarter.
Speaker Change: On the tariff side in regards to gross margin you know if you were to take those commentaries that puts the range of our gross tariff impact to be one to one and a half points at the top layer with no mitigation, so that kind of bookends. The impact we expect worst case scenario without any mitigation to G. III point, there may be a point, where we have to have.
Speaker Change: The price increases, but we're looking to mitigate through absorption.
Speaker Change: And tariffs and supply chain.
Speaker Change: Fungibility and so from that perspective, we tried to bookend the impact we see momentum on the topline and will update quarter by quarter.
Speaker Change: Great. Thanks Fisheries Chantal.
Speaker Change: Sure David.
Our next question comes from the line of Amit <unk> with Evercore. Please go ahead.
Amit: Thanks for taking my question.
Amit: Jeffrey I think there's been a fair amount of noise and speculation intra quarter on the four five Bakken AI customers that you have.
Lori: Different things like Lori just from your perspective can you just talk about how all these customers in aggregate is progressing well.
For the back half ramp and is that one to one ratio for the front end and backend so impact from your perspective.
Lori: Oh, Yeah. So first let me start with the four customers all of them are progressing well one of them is still new to us they've been an infinite band for a long time, so there'll be small I would say two of them are heading towards 50000 GPU deployments by end of the year, maybe they'll be at 100, but I couldn't be more seconds.
Lori: Sure a 50 K heading to 100 K.
Lori: And then the other one is also in production. So I had talked about all fall going into production three are already in production. The fourth one is well underway.
Lori: So I think all backend number of $750 million I'm feeling good feeling confident and if you knew more or less about terrorists, maybe I'd feel more confident that on the front end. They chose you always said that generally want to one that's getting harder and harder to measure a front end and back end, maybe we look at this whole AI cluster differently next year, but I think one to one.
Lori: Well a good ratio it varies some of them just build a cluster and don't worry about the front end and others worry about it entirely holistically, but it does vary but I think the one that one is still a good ratio.
Lori: Thank you.
Lori: Excellent.
Speaker Change: Our next question comes from the line of <unk> Malik with Citi. Please go ahead.
Speaker Change: Hi, Thank you for taking my question. Sean tells you talked about <unk> being seasonally stronger can you give us a bit more color are you seeing any pull forward because of the concern on tariffs.
Speaker Change: Yeah, I think that I wouldn't I wouldn't call it significant or material, but enough to in a sense. If we wanted to be pretty clear on that top end guide. So yes, some but I wouldn't say it's significant.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Aaron Rakers with Wells Fargo. Please go ahead.
Aaron Rakers: Yes, thanks for taking the question and congrats on the results.
Aaron Rakers: The product deferred revenue balance from 900, and I think 90 million up to like $1 2 billion I can appreciate the timing of that and kind of given the tariff backdrop somewhat difficult but.
Aaron Rakers: I'm curious of how we should think about that from a forward perspective and in particular is it tied to kind of the distributed either linked platforms are the 51 to two you still look at are we still kind of early innings and see those.
Aaron Rakers: Actually materialized from our production deployment perspective.
Aaron Rakers: Be tied to the product deferred or any any kind of color around that would be great. Thank you.
Aaron Rakers: Right.
Aaron Rakers: You should remember that we had a similar phenomenon in a way back in 2016, when you had 100 gig deployments in the cloud, but maybe testing everybody's memory, but I think there's a similar phenomena going on here with all our Ito linked platforms, you mentioned the distributors need to link but it also includes the 7800 spine and eat the link 50.
Aaron Rakers: <unk> Standalone switches, we're experiencing a lot of interest in these products, but everybody is new to AI, they've never really put together a neck with design you know for foreign or a trail or how does it connect into the Gpus and what is the Nic attachment what is the accessories and tons of cables or optics that connect so you know this move.
Aaron Rakers: <unk> from trials to production.
Aaron Rakers: <unk> causes us to bring a whole ecosystem together for the first time. So you can see that's why it's impacting our deferred rent revenue some and this kind of timeframe can easily be 12 to 18 months.
Aaron Rakers: And in the cloud days it used to be more like six months because it wasn't as new.
Speaker Change: Thank you.
Aaron Rakers: Sure.
Speaker Change: Our next question comes from the line of Ben Reitzes with Melius Research. Please go ahead.
Ben Reitzes: Hey, guys. Thank you so much for the question.
Ben Reitzes: One just on the second half.
Ben Reitzes: In order to be in 15% range of 15 to 17, you know you have to kind of get into the single digits. There. So just wondering what the cloud providers that you serve.
Ben Reitzes: When they get this stuff I mean video noncancelable et cetera.
Ben Reitzes: And there's pretty good visibility into what they're going to do.
Ben Reitzes: You know with either X P use and Gpus because this stuff has all have some kind of a long lead time and the orders are already made so I'm just a little confused as to why you you really don't know.
Ben Reitzes: So much about the second half at least on the topline.
Ben Reitzes: And using these orders are noncancelable for so many other hyperscale or so that he can deal with thank.
Ben Reitzes: Thank you yeah.
Speaker Change: Yeah I think thank you for the question I'll start and then maybe just you might have commentary I think it's more from the perspective of not having to upscale the guide for every permutation and combination I think we prefer a jet update the guide once we have an answer on the pause button. So it's not it's not that we don't have a view it's more of we just went up to the guide ones with all the known variables.
Changed with some significance jewelry anything you'd point out yeah, no listen I think you're right to be confused. We're also confused about the terrorism because there were no terrorists, we'd be even more optimistic about the second half because we're being careful measured because we don't know what the terrorists. We don't we don't know if the country will go into a recession, but specific to your comment on visibility.
Speaker Change: And enthusiasm and momentum I think you've heard it from us and we're seeing it on the clock is ticking at any other thing it on campus enterprises. So if there were no other variables we'd be even more bullish.
Geoffrey: Okay. Thank you Geoffrey.
Speaker Change: Sure Ben.
Speaker Change: Our next question comes from the line of the stomach chatter D with J P. Morgan. Please go ahead.
Speaker Change: Hi, Thanks for taking my question, just maybe if I can go back to the.
Speaker Change: For tier ones that you're working with on the EIA backend that'd be progress that you updated on that front.
Speaker Change: These customers now, giving you more visibility just given the tariff landscape and that you would need to sort of build inventory for some of the finished goods and can you just update us how they're handling the situation on that front and particularly we then as you think about I think the investor focus is a lot about sort of <unk> 26, and potential sort of changes in the capex landscape from there.
Speaker Change: Custom with at that point are you getting any forward visibility from them and.
Speaker Change: He sort of early signs for Duane 26, some of these customers. Thank you.
Speaker Change: Right right. So make yeah. So we definitely have all the visibility in the world for this year and we're feeling good we're getting unofficial visibility because they all know our lead times are tied to some fairly long lead times from our partners and suppliers. So I would say 2026 is looking good.
Speaker Change: And based on our execution of 2025.
Speaker Change: Hum.
Speaker Change: And plans, we are putting together, we should have a great year in 2026 as well.
Speaker Change: For YOD crustose typically.
Speaker Change: Our next question comes from the line of Karl Ackerman with BNP Paribas. Please go ahead.
Karl Ackerman: Yeah. Thank you two or three.
Karl Ackerman: How do you see the general cadence of Hyperscale is deploying 800 gig switch cohorts. This year I ask because I believe your ether link family of switches became generally available in late 2024.
Speaker Change: I'm wondering if he switches relates to your growth of deferred revenue the last couple of quarters. Thank you.
Speaker Change: It's a good question you may remember Carl that I alluded to this earlier in 2020 for the majority of our AI.
Speaker Change: Trials were on 400 gig at that time, so you're right to observe that with our Ethernet portfolio really getting introduced in the second half of 'twenty four that a lot of our 800 gig activity has picked up in 2025, some of which will be reflected in shipments and some of it which will be part of our deferred so it's a good.
Speaker Change: Nation, an accurate one that this is the year of 800 like last year was the year of 400.
Michael English: Our next question comes from the line of Michael English Goldman Sachs. Please go ahead.
Michael English: Hi, Good afternoon. Thank you for the question Judiciary I was wondering if you could just expand upon your comment about.
Michael English: Your confidence in achieving the 10 billion dollar midterm revenue target a little bit sooner than.
Michael English: Previously expected and how do you how do you kind of balance that you know longer term optimism with some of the choppiness that we see now thank you.
Speaker Change: Michael I knew somebody would ask that question I'm surprised it took so long.
Speaker Change: So if those of you will remember the analyst day in November 2023, I had said it took nine years to get our first $5 billion and I thought we could achieve our next $5 billion in other words, our 10 billion and in half that time, which would have been four and a half years and if you added four and a half years to November 2023 would've put you into 2028.
Speaker Change: I think the recession not not at this point the advent of AI the momentum in the enterprise our top customers and are you know really intimate relationship with them I think we can achieve 10 billion sooner than 2020.
Great. Thank you Victoria.
Simon Leopold: Our next question comes from the line of Simon Leopold with Raymond James. Please go ahead.
Simon Leopold: Thank you very much I wanted to ask the question that doesn't seem to want to go away, which is really looking for the update on on White box I know you've talked about this quite a bit in the past it seems as if it's maybe come back and if you could help us understand how you split your business with white box.
Simon Leopold: Competitors and how you see that shifting if at all thank you.
Simon Leopold: Sure.
Simon Leopold: First I wanted to say, which I've always said that white box is not new it's been with us since the beginning of time in fact, when Arista got started a couple of our customers had already implemented internally various implementations of white box. So there is a class of customers, who will make the investments in engineering and operations to.
Simon Leopold: To build their own network and manage it and it's a very different business model. It operates typically a 10% gross margins I don't think he wanted us to go there and it's very hardware centric and doesn't require.
Simon Leopold: The rich software foundation and investments that we've made so first I'd start by saying that we will always and will continue to coexist with white box.
Simon Leopold: They're all kind of said you wouldn't even notice this too that because of its stability. Some very superior hardware that even if they don't use our E. O S. They like to have all blue boxes, often call. It the Arista hardware, that's engineered much better than any others with a more open a west like Sonic F boss.
Simon Leopold: At least the attributes of running both U S and and open source networking system.
Simon Leopold: I think we view this as a natural part of our selection in our customer base, where if it's a simple use case, they're going to use something cost effective but if it's a really complex use cases like the AI spine or roles that require and demand more mission. Critical features are just always plays a far bigger role and premium.
Simon Leopold: Highly scalable highly valued software and hardware combinations that'd be doing a standalone white box. So we will remain coexisting peacefully and we're not in any way threatened by it in fact, I would say we work with our customers to make sure that they are building permutations and combinations of what the white box that we can work with that.
Simon Leopold: And build the right complement to that without Ito linked portfolio.
Simon Leopold: Thank you.
Speaker Change: Our next question comes from the line of en Pointe Gabe <unk> with New Street Research. Please go ahead.
Speaker Change: Hi, Good afternoon. Thank you for asking a question I'd love to get your latest views around co packaged optics and visa introduce it first the CBO switches.
Speaker Change: See for scale out and I was wondering whether that had any impact on.
Speaker Change: On your views regarding CPU adoption and backend networks in coming years.
Speaker Change: No it's had no impact.
Speaker Change: It's very early days I think you've you've seen you know Arista doesn't build optics, but arista enables optics and we've always been at the forefront, especially with Andy Beck with Shane and his team of talented individuals that you know whether it's a slug of the optics that L. P O or our how we define the OSF P connector for them.
Speaker Change: Let's say for 100 gig 400 gig. It you know, it's it's something we take seriously and our views on C. P. O is it's not a new idea. It's been demonstrated in prototypes for I don't know 10 to 20 years.
Speaker Change: The fundamental lack of adoption to date on CPU, it's relatively high failure rates and it's mostly been in the labs.
Speaker Change: So what are some of the advantages of CPU well it hasnt linear in our interface. It has lower power than D. S. T for long haul optics. It has a higher channel count and I think it's plausible optics can achieve some of that in the best of both Wells. Then you can overcome that with plug a hole optics or even co packaged copper so arista has.
Speaker Change: No religion will do co packaged coffee with co packaged optics will do plug a hole optics, but it's too early to call. This a real production ready product, it's still in very early experiments in trials.
Speaker Change: Great thank trajectory.
Speaker Change: Sure.
Meta Marshall: Our next question comes from the line of meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall: Great. Thanks, I wanted to kind of ask about.
Meta Marshall: You reiterated the 750 million back on target, but you've kind of had this one and a half billion kind of target for 2025 and I'm. Just wondering is it capability of that more dependent on kind of the the tariffs given kind of some of the front end spend or just how are you thinking about that one and a half billion number. Thanks.
Meta Marshall: Sure I think we're aiming for the 750, because its more measurable the one and a half is a nice goal, but sometimes we cant tell whether it's AI traffic our cloud tariff.
Meta Marshall: Traffic, sorry, I got tariff on my brain regarding tariffs I don't think it'll have a material difference on the 750 million number or the $1 5 billion you've got the demand. So unless we have some real trouble shipping at all customers change their mind and I think we're good with both as targets for the year.
Meta Marshall: Thank you.
Meta Marshall: Sure Michael.
Speaker Change: Our next question comes from the line of Matt Mcmahon with Deutsche Bank. Please go ahead.
Speaker Change: Hey, thanks, so much for taking the question can.
Can you talk a little bit about what you're seeing on the macro front and I guess more specifically, how that's affecting spending claims and sales cycles across the different customer sets, whether it's cloud Titans enterprise or even.
Speaker Change: Tier two cloud and some of the service providers customers. Thank you.
Speaker Change: Sure I shouldn't tell you may also have a view on this love to hear that you know I've never been a good suite fair, a forecaster of macro trends and going back to my years at Cisco and now recessions don't give you a warning they just happen and at the moment, we do not see any warning of a recession in fact, we're seeing the opposite we're seeing.
Speaker Change: Lot of demand, whether it's people pulling it in for terrorists or just the general excitement of Arista products.
Speaker Change: So if unless things dramatically changed with terrorists, which forced the recession.
Speaker Change: Arista is really experiencing good momentum and therefore, it's very difficult for me to predict a recession unless something outside from a macro happens yeah and I would add to that you know if you think about the providers enterprise campus, specifically very pleased with our campus. You know Q1 outlook that we are results that we had.
Speaker Change: The campus has shown some strong momentum longer sales cycles, but continued strong momentum enterprise you know we continue to win new logos and have great land and expand conversations with our enterprise customers. The providers. The neo clouds are demonstrated interest and lots of great conversations there. So I think across the spectrum, we haven't seen anything that indicates.
Speaker Change: Kate's a recessionary.
Speaker Change: Kind of Tianjin and the conversations I guess I read we read the Doom and gloom in the news, but we're not feeling it here yeah.
Speaker Change: Our next question will come from the line of Polyone with Bank of America. Please go ahead.
Speaker Change: Hi, guys.
Speaker Change: If you if you go back can you hear me.
Speaker Change: Yes, we can hear you.
Speaker Change: If you go back a few years, we've seen your customers being nimble and buying ahead of development. For example are you.
Speaker Change: I remember when Microsoft three responded to the litigation you had with Cisco in both kind of six quarters worth of equipment in four quarters I remember he has happened and the question is whether the entire market behaves. This week now, meaning we know tariffs are coming later in the year, whether the strength youre seeing as a result of our early.
Speaker Change: Purchases of customers ahead of Paris in order to save some some dollars so.
Speaker Change: The question is twofold number one if it happens will you ever know about it meaning do you do you have enough visibility over the deployment schedules to note that they are buying ahead of the demand and number two is just the answer of what do you think about kind of the question and whether there is Oh you know.
Speaker Change: Early early ordering of equipment.
Speaker Change: Yeah, no fatalities are very thoughtful questions and.
Speaker Change: Thank you for reminding us that then we would like them you know $3 million to $500 million of Florida business. There are a lot bigger now and.
Speaker Change: And even if our customers try to pull it in and get it all by July we would be unable to supply. It so that would be the first thing so I'm not seeing the pull ins that are definitely any really material in any fashion I am seeing a few customers trying to save a dollar here a buck there to try and ship it before the tariff date.
Speaker Change: Nothing material regarding Poland for four to six quarters again, our best visibility is.
Speaker Change: Near term and if we saw that kind of behavior, we would see a lot of inventory sitting in our customers, which we don't in fact, that's causing us to ship faster and ship more.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Sebastian Nike with William Blair. Please go ahead.
Sebastian Nike: Yeah. Thank you for taking the question I mean, I think there's a lot of focus on AI demand, but some of the cloud Titans have also been reporting you know really robust growth in the non AI parts of their cloud businesses. So.
Speaker Change: Could you maybe comment on what you are seeing.
Sebastian Nike: More of that traditional cloud tightened demand and whether that's trending ahead of expectations for the year.
Speaker Change: That's a really good question too Sebastian see I don't know if you remember again two years ago I was very nervous because the entire cloud Titans pivoted to AI and slowed down their Claude now, we see a more balanced fund and while we can't measure of how much of its cloud and how much of it is a I if they're kind of.
Sebastian Nike: Cobbled together we are seeing.
Sebastian Nike: Less of a pivot more of a surgical focus on the eye and then a continued upgrade of their cloud Netflix as well so compared to 23 I would say the environment is much more balanced between E. I N class.
Sebastian Nike: Thank you.
James Fish: Our next question comes from the line of James Fish with Piper Sandler. Please go ahead.
James Fish: Hey, Thanks for the question here really a follow up on Simon's one before what functionality about the blue box actually makes it defensible versus what what Hyperscale is going kind of self developing conventional until I mean inventory side. I know you always talked to look at inventory and purchase commitments, but how are you feeling about where we should expect inventory turns.
James Fish: Throughout the year and long term just given the latest political here on the supply chain.
Speaker Change: Sure drank a frustration yeah and then let me give you a few attributes of what I call the blue box and I'm, not saying others don't habit, but Arista has built this as a mission you know, although we're known for our software. We're just is well known for our hardware. When you look at everything from a form factor of a one hour you that'd be build to a chassis.
James Fish: We've got a tremendous focus on signal integrity for example.
James Fish: All the way from layer, one multilayer PCB boards.
James Fish: Our focus on quality our focus on driving distances are focused on integrating upticks for longer distances are focused on driving Mac SEC et cetera. So that's a big focus the second is a hardware diagnostics internal to the company, we called it a risk to boot if you've got a dedicated team focused on not just the hardware.
James Fish: But the firm or to make it all possible intensive troubleshooting because of new sports gets Super complex.
James Fish: You don't even know where the failures and you're running at high speed 200 gig 30. So it's things are very complex for the ability to pinpoint and troubleshoot as a big part of what we do and then there's additional focus on the mechanical the power supplies. The cooling all of that all of which translate to better power characteristics.
James Fish: Along with our partners and chip vendors, there's a maniacal focus on not just high performance, but a low power. So some of the best attributes come from you know blue boxes, not only for 48 ports, but all the way up to 576 sports on an EI spine or double that if you're looking for dual capabilities. So.
James Fish: Well designed high quality hardware is a thing of beauty, but also think of complexity that not everyone can do.
Speaker Change: Yeah, and I think regards to the inventory turns you know I think I'm pleased in the progress. We've made we've kind of gone from the range of one turn to one four turns this quarter, even with some of the buffer we've put in for the tariff uncertainty I think generally your question is forward looking what turns are we looking for we're always looking to make improvements the only wrinkle. We have is this length of duration.
James Fish: On the tariff cycle so.
We work every months my campus and I and his team to look at the inventory turns and forecasting we aimed to go hire the only thing I would say as a caveat is what we need to do in the second half depending on the tariff scenarios.
Speaker Change: Our next question comes from the line of Ben Bollin with Cleveland Research. Please go ahead.
Ben Bollin: Good afternoon, everyone. Thank you for taking the question.
Ben Bollin: There were some comments you made shantou and the prepared remarks regarding our variability in customer acceptance.
Ben Bollin: Of the product deferred especially around tariffs.
Speaker Change: Could you share a little more detail what does that look like does this relate to the absolute size of their deployments and uncertainty in the bomb just any other considerations, we should be aware of thanks.
Speaker Change: Yeah, no. It's a it's a great question because I added that last comment. This go around in the sense of the new unknown of the tariff uncertainty and there I was just mentioning are you trying to give transparency that there may be quarters as we progress through these tariff scenarios, where our customers decide to pull in and where we can accommodate and if it's a new use case or new acceptance clause I would.
Speaker Change: The impact of deferred revenue. So it's just another item to consider and we will continue to discuss but that's the that's the general you know just in the sense of I think the uncertainty around that.
Ben: And to add to add to that Ben.
Ben: You know, obviously, the terrorists or an unknown, but I want to go back to that White box Blue box question, we had a customer again not material. He said you know I cant get these boxes I can't make them run I cannot get in AI network.
Ben: And one of my most technical sales leaders said, Hey, we got a chance to build an AI cluster here for.
Ben: A few hundred Gpus could be.
Ben: Jumped on it.
Ben: One obviously that customers small and had been largely using white boxes and is now about to install in a I D for any eye spine.
Ben: And we had to get it to him before the tariff deadline. So it was an example of not material, but how quickly. These decisions get made when you have the right product by performing strike quality right mission critical nature, and you can deal with that traffic pattern better than anyone else can.
Ben: So it happens it's not big because you got so much commitment in a given quarter from our customer but when it is it's.
Ben: We react with great deal of nimbleness and agility to do that.
Ben: But you know we have time for one last question.
Speaker Change: Our final question comes from the line of Brian Koontz with Needham and company. Please go ahead.
Brian Koontz: Great. Thanks, Chris.
Speaker Change: I wanted to ask.
Speaker Change: Ask about the kind of emerging new AI opportunities out there I think there's a general perception that most of them are buying nvidia define clusters in networking. So I wonder if you could comment on those trends their interests and moving past our infiniband and also are there opportunities develop.
Speaker Change: With some of these folks to kind of multi source there.
Speaker Change: The activity to different providers. Thanks, yeah.
That's a good question Ryan So in fact that we're seeing more adventurous spirit and the new cloud customers.
Speaker Change: Because you know they want to try alternatives. So some of them absolutely trying other AI accelerators like Lisa M D and my friends. There some of them are absolutely looking at Ethernet not infiniband as a scale out and that momentum has really shifted in the last year.
Speaker Change: With the Altra Ethernet consortium in the spec coming out in me I just wanted to give a shot out to that team and what we hold there because it's done so I think Ethernet as a given that there's an awful lot of legacy of Infiniband that will obviously sort itself out.
Speaker Change: And a new class of AI accelerators, we're seeing you know more niche players more internal developments from the cloud Titans all of which is mandating more Ethernet. So I think between your two questions I would say the progress from Infiniband Ethernet is faster the progress from you know the renowned the than the once they know and the hype.
Speaker Change: Performance Gpus from Nvidia less as the others, it's still taking time.
Speaker Change: Couple of two or three thank you.
Speaker Change: Absolutely. Thank you.
Speaker Change: This concludes the Arista Networks' first quarter 2025 of earnings call. We have posted a presentation that provides additional information on our results, which you can access on the investors section of our website.
Speaker Change: 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 you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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