Q2 2019 Earnings Call
At that time, if at any time during the conference you need to reach an operator. Please press star followed by zero as a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website. Following this call I will now turn the call over to Mr. truck and we get director of business and Investor development. Sir you may begin.
Thank you operator, good afternoon, everyone and thank you for joining US with me on today's call are Jewish Relo, Arista Networks', President and Chief Executive Officer, and either Brennan Aristas Chief Financial Officer.
This afternoon Arista networks issued a press release announcing the results for its fiscal second quarter ended June Thirtyth 2019, if you would like a copy of the release you can access it online at the company's website.
During the course of this conference call Arista networks management will make forward looking statements, including those relating to our financial outlook for the third quarter of the 2019 fiscal year.
Industry innovation, our market opportunity the benefits of recent acquisitions and the impact of litigation, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the FCC specifically in our most recent Form 10-Q on Form 10-K , and which could cause actual results to differ materially from those anticipated by these statements.
These forward looking statements apply as of today and you should not rely on them as representing our views in the future.
We undertake no obligation to update these statements. After this call also please note that certain financial measures. We use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release with that I will turn the call over to Jayshree. Thank you Chuck. Thank you everyone for joining us this afternoon for our second quarter 2019 earnings call.
Our profitability growth combination was once again demonstrated with a non-GAAP revenue of 608.3 million, while non-GAAP earnings per share grew to a record $2.44.
So this is contributed 15.6% of revenue.
We delivered non-GAAP gross margins of 64.7% influenced by a solid performance from our enterprise vertical.
We registered record number of new customers in calendar Q2, and continue to drive new customer logos expansion at the rate of one to two per day throughout the quarter.
In terms of verticals the cloud Titans segment remained our largest vertical.
The modern enterprise High Tech segment is now consistently becoming our second largest with financials and thirdly tier two specialty cloud providers and service provider coming in at fourth and fifth place.
In terms of geography mix in Q2 2019, the international contribution was 27% while the Americas were at 73%.
We had a bad quarter for new products in Q2, 2019, we launched two 400 gigabit product families. During Q2 with the Arista Arts, we see reasonable modular 70, 570 to 80 model.
As well as a brand new Arista 7800 chassis family for 400 gig switching and routing based on the Broadcom Jericho to silicon.
This is enabling a flagship U.S., an uncompromised multi terabit capacity and availability.
We have now launched 10 400 gig platforms and the Vista has more 400 gig products than any other pia.
We have begun active product qualification with more meaningful 400 gig revenue really expected next year in 2020.
Given the recent industry news I wanted to take this opportunity to comment on 400 Gigoptix. So to join me on this is Andy back to Shine, our Chief Development Officer, and Chairman, who will speak more about the sandy.
Thanks history. The first observation on optics is that in the cloud.
Pluggable optics afflicted with this aggregated business model between the switch and the optics vendors with virtually all optics.
On the call is being purchased directly from optics vendors.
Cloud providers typically qualify at least three optics business to ensure a lowest cost and diversity of supply and we don't see that changing with 400 gig.
In the case of 400 gig CR, which is the long distance optics that one ship in volume until mid 2020 wheel will one doesn't optics module vendors that plan to offer compatible 400 gig modules competing on the basis of price quality and volume availability.
We do believe that when it gets you there will be a very competitive market with competition that will drive unprecedented price performance improvements with one of the key coherent optics.
We work closely with our largest customers to qualify all four of Gigoptix, including 400 gig CR that are relevant to them with the objective to deliver the most cost effective form of Gigoptix solutions to the market.
Thank you Andy So speaking of new products. He also introduce Arista first entry into the cognitive campus edge with our 720 XP power over Ethernet switches and our new Wi Fi six offerings, all of which are supporting cloud vision for the campus flow beef telemetry and security segmentation services.
But this arista establishes an exciting and almost complete cognitive portfolio addressing the transitional changes in the campus security and I O T era.
We already know any field trials now and we expect more results in second half 2019.
So speaking of second half 2019 as you all know we experienced some turbulence in Q2 2019 with a pause of a specific cloud Titan set of orders.
They have now been spending and we expect stabilization in second half 2019 for the overall cloud Titans fan.
Sadly second half will be an improvement over the first half, but we do not expect the cloud momentum to be a repeat of second half 2018.
Naturally these trends are consistent with the annual cloud Capex forecast reported in recent weeks.
Our enterprise segment is healthy with growing interest in our campus and multi cloud migration.
On June six 2019, we celebrated a five year IPO anniversary at the New York Stock exchange with both our premier customers and analysts.
Our deep collaboration with Microsoft was evidenced with CEO , such an Adela joining me at our special event as our chief guest.
Together, the two companies share a synergistic vision and cloud area networking.
We announced Microsoft as your cloud integration, including be then an io to central.
As our customers migrate to a cloud led strategy, bringing holistic client to any cloud experience, we're seeing a compelling conviction in the vista as their strategic partner.
I'm proud to share that for the fifth consecutive year. We have also attained a status as the leader in Gartners Magic quadrant for data center networking with our strongest showing yet in both vision and ability to execute and with that I'd like to turn it over to eat up for more financial specifics.
Thanks, Jayshree and good afternoon.
This analysis of our Q2 results and our guidance for Q3 19 is based on non-GAAP and excludes all non cash stock based compensation impacts certain acquisition related charges and other non recurring items.
A full reconciliation of our select a GAAP to non-GAAP results provided in our earnings release.
Total revenues in Q2 were 608.3 million up 17% year over year and above the midpoint of our guidance of 600 to 610 million.
Service revenues remain strong representing approximately 15.6% of revenue up from 15.1% last quarter, reflecting a healthy level of renewals activity.
International revenue for the quarter came in at 162 million or 27% of total revenue up from 26% in the prior period.
Overall gross margin in Q2 was 64.7% above the midpoint of our guidance of 64% to 65% and up from 64.5% last quarter.
Gross margin in the period benefited from a lower contribution combined with healthy enterprise and services performance.
Operating expenses for the quarter were 158.7 million or 26.1% of revenue down slightly from last quarter at 160.7 million.
R&D spending came in at 101.7 million or 16.7% of revenue down from 106.5 million last quarter.
This reflected lower levels of new product related and Ari and prototype spending and the period.
Sales and marketing expense was $45.1 million or 7.4% of revenue up from last quarter with increased headcount somewhat offset by some reductions and other sales kickoff.
Our DNA costs were 11.9 million or 2% of revenue up slightly from last quarter.
Our operating income for the quarter was 235.1 million or 38.7% of revenue.
Other income and expense for the quarter was a favorable 13.8 million our effective tax rate was lower at approximately 20%.
This resulted in net income for the quarter of 198.6 million or 32.7% of revenue.
Our diluted share number for the quarter was 81.3 million shares resulting in a diluted earnings per share number for the quarter of $2.44 up 26.4% from the prior year.
Now turning to the balance sheet cash cash equivalents and investments ended the quarter at approximately 2.3 billion.
We repurchased $100 million of our common stock during the quarter had a weighted average price of $246 per share.
As a reminder, our board of directors have authorized a three year $1 billion stock repurchase program commencing in Q2 19. The program allows us to repurchase shares of our common stock Opportunistically and will be funded from operating cash flows.
We generated 196 million of cash from operations in the second quarter, reflecting strong net income performance offset by increased working capital requirements and a reduction in deferred revenue.
Dsos came in at 51 days up from 41 days in Q1, reflecting the timing of billings in the period.
Inventory turns were 2.4 times down slightly from 2.5 last quarter inventory decreased to 314.2 million in the quarter down from $347.2 million in the prior period.
Our total deferred revenue balance was 502.2 million down from 536.5 million in Q1.
Our product deferred revenue balance decreased by approximately 38 million in the quarter affecting customer acceptance of new features.
Accounts payable days were 37 days down from 38 days in Q1, reflecting the timing of inventory receipts and payments capital expenditures for the quarter were 3.4 million.
Now turning to our outlook for the third quarter and beyond.
As expected we experienced some softness in demand from our cloud customers in the second quarter.
Well the early indications are for improved demand from these customers in the September period, we believe the second half growth in this business will remain somewhat muted as compared to prior years.
We expect our enterprise and financial verticals to continue to perform well offset by some declines in the service provider business.
On the gross margin front, we would reiterate our overall gross margin outlook of 63% to 65% with customer mix being the key driver.
We will continue to manage investments in the business carefully prioritizing growth in sales headcount and resources as we look to expand our market coverage.
With this as a backdrop our guidance for the third quarter, which is based on non-GAAP results and excludes any noncash stock based compensation impacts.
And other nonrecurring items is as follows.
Revenues of approximately 647 to 657 million gross margins of approximately 63% to 65%.
Operating margin of approximately 36%.
Our effective tax rate is expected to be approximately 20.5% diluted shares of approximately 81.9 million.
I will now turn the call back to Jeff Jeff.
We are now going to move to the Q and a portion of this earnings call.
Due to time constraints I'd like to request.
So.
[noise], we will now begin the Q and 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 youd like to withdraw your question press. The pound key we ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from Jason Ader with William Blair. Your line is open.
Thank you.
Jayshree on the campus side can you provide any.
Metrics customer wins anything that is worth about surgery, and that's what's really knowing about in terms of tracking.
Your progress there.
Oh, Thanks, Jason.
As you know we introduce the products in June at the Analyst day in June 6th and we said.
Most of them would be available in Q3, so it's a little early to be giving customer wins, but I can say with confidence that we are in very many early field trials with customers.
To the tune of tens of them and onshore and the team have been having very very good interactions and I fully expect that we will have more results in Q3, Q4, and certainly much of next year.
And how do you respond to somebody that says Okay. You guys have done well on the enterprise side with data center switching.
What the campus side.
He is a much more complex sale from the standpoint of.
Typically channels are you more channels are involved there's a lot there's wireless theres potentially security issues, a lot more going on where the campus a major campus deployment how are you.
I hope people can't you guys will be able to replicate some of the success you've had on the data center side.
Yeah. So just step back for a moment and ask when did we get our success in the data center with enterprise. It was five years. After we started shipping products. We didn't even report much on the data center, we mostly focused on the nisha financials and the cloud in the early years right. So I'm pretty sure we won't take five years to enter the campus market, but I'm here to say that the traction with enterprise. It will really come in three categories. The early adopters, who already love our U.S. and therefore, that's going to be the fastest place of attraction. The cloud vision don't underestimate that where they're looking for that single point of management and single pane of glass and then to your point. The third one will be new channels, New partners New systems integrators. So if you look at those three segments. We can start playing into out of the three already and so my response would be that the campus technology in many ways is no different than the data center very similar in layer two layer three protocols.
And customers who.
Appreciate that for the last five years in the U.S. and cloud vision now the first points of success for us.
The second point of success, which is new customers and new logos will take longer and.
Campus for Us is a multi year journey and.
As I said, many times before I'd I'd be very.
Happy if we did it was our first deal was hundred million because I think it's those that writes seeds for half a billion and billion in the future but.
None of US should think this is a overnight one quarter journey. This is a three to five year journey.
Thank you.
Thank you Jason.
Your next question comes from James Fish with Piper Jaffray. Your line is open.
Hey, congrats on the quarter just one.
For me is now.
How should we think about the impact of the 25%.
Gross margin.
Obviously, you're reiterating your 63% to 65% for if we were going to get a trade deal Tomorrow, I guess, how much would gross margins be positive.
And have you done and now.
Got it can supply chain perspective. Thanks.
Yes, I mean, I think we've been you know we've been working on improving the supply chain and addressing some of the issues with the supply chain at the same time, obviously, we've had an adder to customers.
Which we've also been.
Managing and as the tariff rates have changed we've been fortunate enough. We've made enough progress that we've been able to kind of hold our margin the increase that customer and I think you know with the new news.
Just before the call I think that's still the case right we believe that.
And we've done enough from a supply chain perspective that we should have minimal impact, but I wouldn't think that there's a big swing gross margin one way or the other if either went away completely tomorrow or we continue to see some changes on it I think we've done enough work, where it's kind of mostly neutral from a gross margin perspective.
James just to add to that the 63% to 65% range. We think the tariff can have impact.
On the gross margin, but it will be within that range of 63 to 65 and as he said the team. The manufacturing team has done a tremendous amount of work we're not immune to the tariff we absolutely are affected by it and but I think the effect will be minimal.
Got it appreciate the color. Thank you.
Thank you.
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Hi, guys. Thanks for the question.
I guess I guess I'd just ask you had said that the large cloud Titan orders had dropped almost zero in the middle of March and you didn't really have good visibility on when those might return to it seems like they've resumed spending per your comments.
When would you expect spending there to be back to normal or is there. Some new level normal can you just give us some kind of an idea of what sort of visibility you have and how you see that progressing over the next few quarters.
Well I think first of all rod that the the new 11 of norm has changed we shouldn't use 2017 and 18 as a frame of reference right.
So first half was a real adjustment for us.
To to the to the norm in 2017, and 18, having said that I think we you've all seen the capex reports and depending on whose capex you're talking about.
They've all gone from double digit growth to single digit and some of them are negative. So you can expect that the new norm.
There is no more double digit growth and is going to hover in the low single digits.
So do you like to add some more to that sure. We reiterated as we mentioned this last time, but I want to reiterate but is there was no design laws.
The cloud Titan has on paused or they're back to.
Normal spending.
They do on the allocations were unchanged.
Which is why it is recall.
You guys had called out.
Hi, sorry can you repeat the question you guys have just to clarify Jayshree you guys had said there was inventory and they were using inventory last quarter I, just wondered where we are in the process of them utilizing that inventories it all done or theres still utilizing out of inventory as well.
I don't think we made an explicit comment that they had extraordinary inventory levels. It's typical to have some the real reason for our Q2 turbulence was.
Very conscious decision on the part of a specific cloud Titan to put orders on pause.
And those have resumed and they've resumed at levels that are improved over the first half, but nowhere close to the second half of 2018.
Oh, Okay. Thank you very much inventory was not the reason.
Right got it. Thank you thanks Rod.
Your next question comes from Kidron with Oppenheimer. Your line is open.
Thanks.
Congrats ladies and Andy and I'm sure I guess I've got great [laughter].
Well, there's a broader definition of ladies no [laughter] that is true.
I guess I did want to kind of drill down again on the on the cloud or just what Uh huh.
Make sure I understand I understand that you claim stabilization I guess I'm kind of wondering has there been a change in the way they communicate with you.
Because it was a surprise last quarter.
I guess, what makes you comfortable that they're not going to surprise, you and I know anything can happen, but has there been a change in the way you communicate with them, especially what gives you confidence that there is a stabilization.
Uh huh.
That's a good question I'm not trying to imply that they couldn't make further changes on their business side right. What I'm trying to say and again onshore can clarify is we're literally taking this one quarter at a time.
And at this point, we see stabilization in Q3.
And anything can change in Q4, but if we had to predict I think what the stabilization in Q3 could carry on to Q4, that's what they're saying.
Who knows what's going to happen in 2020 is your guess is as good as mine mid maybe auction. Those that are you want to add something because I don't know anything about the future [laughter].
The Q2 communication was sudden but it was a really bad event for them.
Otherwise all communication open retinol move back and forth to expect between customer and us.
The incident collaboration as well as planning for the next and designs. So nothing really extraordinary that everything is where anybody.
Normal now.
Very good at it.
Just so you don't feel lonely here a question on Opex.
At the midpoint of your guide there there is a quite a significant increase quarter over quarter and expenses helped me.
I know you probably want to be some conservatism built in there, but nonetheless is there an unusual level of prototype. It does happen every quarter or help me get my hands around how would I explain to about $20 million to $24 million quarter over quarter increase in Opex, which is something that you've never really done.
Yeah, I mean, I think that there's definitely some reserving the right to you have to make some investments. If you want to include it in there and then I think the rest of it as you know we did.
Push hard on R&D, we have talked about on the last call that we would.
Prioritize sales and marketing and maybe push a little bit harder on R&D, just given the quarter that we were heading into.
And obviously the intention is to kind of.
You know not to continue to do that so we will you will see some increase in R&D as we add as we move through this this next quarter.
Hi, I'm Lucky cycle, our R&D cycles, he a ittai with new product right. So we can always time, it and we've got so much new product coming out of our years is one of the things very proud off and and that has a natural impact on prototype expense.
Got it good stuff good luck.
Thank you.
Your next question comes from Alex Kurtz with Keybanc capital markets. Your line is open.
[noise] yeah. Thanks can you guys hear me okay.
Yeah.
Hi, just a clarification and a question. So just for you on your comments about the large cloud Titan and the resumption in in the second half.
Do you see them changing.
How they use their networks and like the capacity.
Utilization and quote unquote, how hard they run their networks because.
That one clock, obviously is chasing and other cloud type for business and I think the underlying investment assumption is they will continue to invest.
You know to compete.
And so I'm just trying to understand do you think given all the understanding of their network that you have.
Are they making a pivot and how they run their.
Their network.
Again, Alex I'll comment then onto its closer to it. So he can give more detail we have not seen any appreciable changes on gosh I'm going to optimize for the for the for the last megabit of bandwidth or anything like that there is a gender there has been a general increase in spend due to the 100 gigabit common denominator across all layers of the least find network, including the data center interconnect that will vary on 400 gig. Some cloud Titans me may stay on 100 gig long ago somebody go to 400 gig faster some actually pick 200 gig. So we do see the sort of the personality performance changes, but we don't see any major bandwidth planning down to the megabit at all one thing on that and onshore can comment to that is one thing. We also see is I've always said, we're in the early innings, but.
That council and the fact that the cloud Titan is going to continue to invest in new regions and new locations for Datacenters.
More than your performance then I expect I will we will see more planning around where they put their data centers and some of them may not open new data centers and some may rely more on a more incremental strategy yeah.
Alex most of the commentary in the industry right now about optimization. So I believe is tied more to compiler compute virtualization optimizations.
As you know the mid quoting spend on switches and routers is in the range of 6% to 7% off the top of the topics. So they're not going to try and squeeze thought and create a bottleneck, which impacts the remaining 93%.
So the netbook has to run at a free and no. One is trying to try and optimize beyond what the hub minus to do by providing a very competitive offering.
And thank you all.
On the on the maintenance and support number it looked like it missed the consensus estimates.
By a pretty wide margin you, obviously did well on product.
Was there something that's good it was.
You know some mix on the balance sheet as far as deferred or that we should understand as far as why there was a disconnect there and anything that we should be aware of contractually around the maintenance and support our execution in the quarter.
No I mean, I think if you look at the percentage of revenue is pretty consistent quarter over quarter, you're talking about the services revenue on the yeah.
Yeah, Yeah, Yeah, I mean, I don't have anything unusual there and we don't guide specifically right.
I mean, it tends to be high in Q1 or Q4.
Very normal yeah. This is very normal Alex sorry.
Revenue it wasn't that different so I'll go back and look at the consensus numbers, but I think it's not a number we guide and I don't think the year of the quarter over quarter trends looked particularly different what we would have expected.
Just checking thank you very much yeah, okay. Thank you.
Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Since I know Eric.
Yes.
Can you hear me.
Yeah now we can you if you were a bit choppy go ahead.
Yeah, I apologize for that so congratulations again on the quarter. My question is actually on the enterprise the target the traditional enterprise market. Another theres clearly been from recent signals of a lot of Choppiness.
One of one of the enterprise system companies Preannounce Tonight, we saw Intel is choppy results et cetera.
I'm curious of how you work.
Being in that market and what gives you confidence that that market will continue to grow.
At what sounds to be a very healthy pace through the back half of the calendar year.
Well I think I think the enterprises.
Small and you know we are new to this market right and we had a recent entrant so were not operating off a large base, where we are a market leader or anything where the new comer. So because we have a large time and because we have highly differentiated products and I think also because there's an awful lot of enterprise fatigue with existing dominance of one vendor and lack of quality and all of that.
We are seeing a unique situation despite the macro.
Not to say, if there's a really bad macro we wouldn't see it but I think despite the macro were enjoying a little oasis in the desert if you will.
Okay. Thank you.
Thank you Ryan.
Your next question comes from Jeff Kvaal with Newmont Instinet. Your line is open.
Yes, a question and a clarification I guess for me please.
On the question I'm wondering if you all have applied the same.
A method methodology to coming up with your guidance as you have in prior quarters. It is sometimes tempting to adopt more conservative assumption on close rates or what have you.
Yeah Josh.
After a guide down.
And then secondly, a clarification is when you say back to sustainable levels in three Hugh Judiciary review meeting over the course of two third quarter. We've got good sustainable levels or were a full run rate August one game on.
[laughter] to both your questions are intriguing I'm still kind of processing them. So the first one is did we guide like we normally do and what are we being conservative I'm just translating your question is that what you asked.
Yes.
Yes, Okay. So I think those weren't conservative in the label. We have is a little bit of a misnomer I think where we're guiding as best as we can and as there's very little sandbagging going on.
The we tracked weve.
It is particularly of course, we have customer concentration, but particularly with the enterprises. So many more customers and so much more to forecast, we do our best and analyzing that forecast and this is our best effort no I wouldn't think there's a lot of buffer in that that would be my question to you Jeff.
And then in terms of the game on August or is it going to happen to the quarter, it's very difficult to ever predict a quarter, especially in its weakest slower summer months in some parts of the world. So I wouldn't say it's game on in August I would say, it's going to be a process through that we will need all three months of the quarter to execute on this one.
Thank you. Thank you.
Thanks, Jeff.
Your next question comes from Ted Just second question, Alright, then Kentish from FBR. Your line is open.
Thank you I Wonder if you could comment on what you expect your largest customer to be as a percentage of sales in 2019, Jayshree I think earlier in the year you'd indicated it would go back to historical levels, which many of us interpret it as 16% of sales instead of the 27% in 2018, but as we get.
Closer to the end of the year, you must have better visibility some.
Good to hear that.
Yeah, and that's a good question I think my prediction of teens mid to high teens is still what I think is our best estimate 27 was wonderful, but a rare event yeah.
Thank you and then a follow up on 400 gig.
Ah I know, you're generally said you expect that in 2020, but early part latter part and then can you parse how you're thinking about 400 gig.
Between cloud routing and switching. Thank you. Okay. Good question, well 40 gig as you can tell from Andy and my talk we're ready with the products no problem with that but we have been off often slow down by the optics and as Andy said I think he is predicting some of the optics to be in 2020, I want to comment on that Andy one of the most important use cases for point of view because actually the foreigner. If you see our data center interconnect and those optics will not be in volume production until mid 2020.
As we do expect customers to qualify these optics way before that so we cannot predict exact timing here, but it's going to be in 2020.
Yeah, I know that's a switching was that's his writing because a large number of these use cases in the big data center interconnect it would be both it'll be hard to parse one versus the other they'll almost always want an option for routing or stock rife with routing in the beginning.
Thank you.
Thanks stages.
Your next question comes from James Faucette with Morgan Stanley . Your line is open.
Thank you I want to follow up on a 400 gig question I'm just.
I understand in terms of the availability of optics, but can you help us understand what the what stage of evaluation of your equipment.
Customers are in or potential customers around and you can make fully evaluate and qualify the products without the availability of those.
Commercial availability of those optics.
Sure.
James the way to look at this as many of the new product for 400 gig up based on Jericho do our normal three youre a other silicon.
On.
The the many form factors with 100 gig ports as well.
So customers saw a busy quantifying them as hundred gig switches and well disclose the youth amend existing design, but with more efficiency with these new products.
I'm going to wait for optics like the VR optics or a deal I don't know if our optics to show up in volume before they can really use them as 400 gig, but the transition has already starting in qualification, but again you can expect hunter good flows and I think from a.
Material impact on revenue in the industry I would think it's second half 2020.
Great and then just as a quick follow up getting Korea, you talked about your your go to market on on enterprise, but I'm wondering how you're thinking about.
Today your needs for sales and support around those new products is that something that you feel like you'll need to ramp up personnel ahead of sales or can you continue to be really efficient, bringing on head count to support those customers kind of after commitments already made.
And that actually that's a very good question I think we will ramp up sales people ahead of sales.
But we can ramp of the systems engineers and some of the support engineers wholesales. After we get the wins, so a little bit of both.
And so were not applying the same discipline and conservatism James that you saw us do in the data center, we are definitely adding head count and you look at our sales and marketing as a percentage of revenue. It has increased maybe not appreciably because we're still holding the ball pretty high and.
And making sure that the caliber and quality is not compromised just because we want to hire a bunch of people. The other big thing I think that's going to play a huge part part in this as partners. We've never been viewed as a partner friendly company, but with a very friendly with partners at the moment and I think the campus as a key.
Key piece of that strategy and the partners see us as a key piece of that so.
The two go hand in hand.
All right. That's good I, you shouldn't have any problem being friendly with people. So good luck.
[laughter]. Thank you [laughter]. Your next question comes from Paul Silverstein with Cowen and company. Your line is open.
Before I ask my questions I'd, just like to ask you to talk faster on the next call.
[laughter] second Duvall [laughter].
Got a handful.
Yes, I was just trying to go from hundred gigabit to 400 gigabit speeds.
She is doing a good job of that most of your questions or clarification is booming firewall for soft or regionally what are youre seeing with respect to the quality of in demand on a regional basis I appreciated. The good chunk. Your revenue comes from cloud so perhaps the regional concept doesnt quite apply but to extent you are two original exposure. It looks like your non U.S. interview US were about the same growth rate in the high teens. What are you seeing regionally when I've got some follow ups.
I the the growth rate is very good and especially in enterprise customers across all regions.
Oh, we're saying that we're seeing better growth rate in terms of new customer acquisition in the international regions.
So the big bet in larger customers tend to be more U.S., driven and the new customer logos tend to be more international driven but all regions are growing nicely.
Great teachers.
And again I appreciate that you guys are sure gain or so you are less economically so less macro sensitive, but thanks to you or some sort of like any other company to a degree to macro trends in terms of the quality of budgets quality has been any thoughts on what you're seeing received from a number of other companies. Most recently, we met up today.
In terms of weakness from a demand perspective any thoughts on that once again I appreciate your share gain or so maybe you don't see it the same way, but any thoughts you can share with us but the.
My experience of macro issues is we certainly won't be immune but the way we will see it is that a lot of the activity. We are seeing may not result in fast decisions. So probably prolonged decision, making is probably would be my biggest worry should a macro setting.
Because usually when a macro sets and customers tend to get conservative and then they don't want to make new decisions.
Have you seen that a long duration yet he said just a concern at this point or you're already seeing it yeah, yeah, I'm I'm addressing your I'm addressing a theoretical concern we have not seen that yet.
All right and then on service revenues as it goes without saying that the growth in your service revenue was going to slow consistent with the moderation growth in your product revenue.
Yeah, I think it is a linear do you associated with that yeah.
You'll get some offsetting just from renewals and stuff, but overall I'm trying to get the product.
All right two more clarifications just on your comment or your reiteration I think from the June analyst event on a 100 million dollar forecast for enterprise campus. My sense is that thats drifted out a little bit from a timing perspective, when you talk about $100 million is that a calendar wanni outlook.
Or is that the departure point September I recognize you're not talking about a ton of time in terms of the exact.
I understand what drew on no one night, what I said at the Analyst day, which is only six weeks ago still holds which is four quarters. Starting from Q3. So Q3, Q second half of 2019 and first half of 2020, unless something changes substantially but we're still bullish on that and optimistic that we have the activity to result in that number.
Got it going going back to your first question was asked earlier I want to follow your answer would have been a simple is.
Pras cost more money one of the beautiful things about cloud not just big concentration spin, but it was relatively inexpensive market to address enterprise. It got a book of your sales force your channel that cost money not that you are projecting a dramatic increase for correctly from on your projected increase from 7.5% to 10% on sales and marketing with operating margin going out of 35%.
Are those still the operative numbers going forward is that what's going on in terms of increasing spend.
Yeah, I mean, I think quarter over quarter.
If there's other things in there like we talked about R&D and stuff just on the quarterly trend I think over the longer term. When you think about the model I think that that's what we described at the analyst day and that that's the right way to think about it but again, we're not going to get to 10%.
Overnight framework, where we're growing and then where we're adding incrementally as a percentage of revenue, but it's not it won't become 10% overnight.
That is my last question.
But well move on how can we do that in the call back.
Absolutely no worse. Thank you. Thank you.
Your next question comes from Alex Henderson with Needham Your line is open.
Hey, I'm sure I'm going to ask the question Bob was going to ask so.
I was hoping you could talk a little bit about.
The market share trajectory.
So.
Theres two or three variables that were always the underpinnings of the company's story one was the cloud growth, obviously that slowed quite a bit.
One was the ability to gain considerable share annually.
Your share is fairly low.
Can you talk about excluding cloud.
What's your.
The expectation for the overall market growth for switching to be and whether you can continue to pick up a point or two or three.
On market share annually.
And a follow up on that question is there any change in that as we go into the 400 gig I think you've been pretty clear that you think you will continue to grow based off of your software advantages.
Good.
Yes, those two together thanks.
Sure Alex it's always difficult to predict market share, but I don't think anything has substantially changed on total available market. Yes. The cloud spend has reduced so we may see something we should see some shifting of Tam between one quarter to another and I think.
Our position both in the cloud and in our rate of enterprise design wins is only getting stronger.
So from a market share gain since you've gone from zero to the teens, rather quickly probably a rate of gain rate of gain will be slower maybe more like one to two rather than two to three.
On an annual basis, but I believe we will continue to be a share gainer both in overall high performance switching and especially in hundred gigabit Ethernet switching.
Great if I could throw one more question.
Nextera Acacia acquisitions over at Cisco.
Andy still around.
Yeah, and if yes.
He did they did that and how that might affect you and as there is there any concerns that as optics need to get closer to the to the switch chips that they may be positioning to have an advantage.
As we get to the 53 Terabit switch chips that require the.
Chips right up against the optics.
Can you give us any thoughts on where we're.
Where they're going with that thanks.
Right. So we obviously don't want to speculate on a on a competitive motivations or actions here.
But what I will say is that the optics field is intensely competitive this plenty of suppliers, both with silicon Photonics technology for the Geek Dsps that you need for the CR that we don't see the competitive environment optics changing at all and the Pluggable full effect in particular has just taken over the market in a little less than 20 years, and we don't see that changing for all kinds of reasons and in particular as your question on 51.2. Our plan is to deliver that product was conventional pluggable optics. We show Villanova student will be the time to market product may be doing us into certain people excited about co packaging.
But there's so many problems fiscal package optics I would you know where to start so leave it at that [laughter].
Okay. Thank you very much for your answers.
Thank you Alex.
Your next question comes from Jim Suva with Citi. Your line is open.
Thank you very much it was great to hear Andy on the call to beginning as was pretty recently.
But you know there's a lot of things very much on purpose, so having and be on the call as well as addressing 400 gig topic.
Can you help us maybe understand a little bit better are you trying to like.
Clarifying some misperceptions or show the Arista is likely to gain more share or there was definitely a temple change to the speaking at the beginning of this call versus previously with Andina Depreciate Im just trying to figure out why and the excitement behind it.
As far as your competitive standpoint or share or figure out that the change in tone. Thank you.
Yes, Tim if you look at the analyst forecasts for 400 gig elected to lower focus in particular.
The mix is shouldn't projections on where we want to keep collection deployed.
And that.
Hi, chip the vast amount of finicky forecast is in cloud, obviously cloud and low slowed in smokeless. So given our strong footprint in that market. We are very Oh, I should say optimistic but confident that we will have a good share of that business going forward.
We want to get to the technology is actually.
Almost overkill for traditional enterprise I don't think you're going to see much 20 gig adoption. The enterprise anytime soon so this is a very much a cloud story and it's really when the cloud customers to local customers are starting to deploy this when you see the big ramp and we do expect that in 2020.
And we have Andy frequently as a guest speaker I you know I don't think there's any deliberate intent to do differently than any other quarterly call, except the investors love hearing from Andy and we love Andy.
And I think sometimes the a 400 gig gets over hyped.
No I think bringing a dose of realism that list are the market leader in high performance switching and especially hundred gig has more products than anyone else and 400 gig and is ready for that transition, but it will take time is a is a pragmatic message.
Great. Thanks, so much for the detail Jay shooting Andy that's all my questions. Thank you.
Thanks, Jim.
Your next question comes from Simon Leopold with Raymond James Your line is open.
Great. Thanks for taking the question maybe to follow up on the 400 gig theme understanding that the cloud will be the primary adopter.
I'd like to hear your thoughts on maybe compare and contrast, the 400 gig cycle.
Versus the 100 gig cycle for for you, if reflecting on time and I guess, where im coming from is you're now the income at 100 gig you are sort of the the one everybody wants to beat so it's it's it's a different position you're not the underdog anymore.
So I want to get that perspective, and just as a clarification within this this context my impression is that right now the 400 gig switches are being deployed is just really really good 100 gig high density 100 gig so not necessarily awaiting the optics I just want to make sure that understanding is correct. Thank you.
I I'm going to kick it off and I love onshore in Andes detail on it as well when I step back and look at 10 gig migration. It took about eight years to happen and why did it take so long as a very long tail because one gig was good enough and the compute and storage wasn't fast enough a large enough to require any better I O and the cloud hadn't happened. The advent of cloud really pushed 25 gig 40 gig 50 gig and especially hundred gig. So the 100 gig cycle instead of taking eight years only to two or three years and this is why we became such a market leader. So quickly it all happened between 2016 and 2019.
When I look at 400 gig I think you have to sort of look at it as you know split it between the 10 gig cycle Anda.
And 100 gig cycle, it will likely take three to four years to happen. It will start first in the club and then it will migrate over time to other other hi, Hi Tech enterprise and cloud specialty providers as well.
So hopefully that gives you a sense of why can get took too long how do you think happened very fast and 400 gig maybe somewhere in the middle if I could add to that so the 100 gig is still ramping as you mean exactly should we expecting very significant growth into next year and maybe even into 2021 on how many ports that we stick with that.
The reason why cloud company would you put 400 gig is because it's more cost effective than hundred geek on a per bit basis right.
And as you know the Fortigate products.
Typically twice double the cost performance with Carnegie.
I want to get the 100 gig.
However, the optics they are not at that level. So because the optics is still too expensive and arguably not just not available in volume.
A cloud company, even if they wanted to could not deploy fortigate today in volume, it's just not possible.
And.
Keep in mind.
100 gig is deploying in the cloud or the rate of call. It 10 million puts a year.
Takes a long time to get to those kind of volumes on the optics. So this is why we have been saying all along that its a 2020 story until you can get to meaningful revenue in front of you.
Kevin and while its launch.
Sorry, I think I would.
Right right and so sorry.
This is Brad this is important for everyone to understand that when we came out with 100 gig products in 2016 with a 7500 or.
Our competition had already announced a 100 gig products.
So it wasn't as if we had some huge advantage and we are the only one with the product and so on the market was very competitive could've been on your own merit on software on partnership with the customer on Socgen go look problems on quality on support and so on.
The exact same thing would be to it and we feel really good about our position and you've seen the kind of collaboration we've done with companies like Microsoft and Facebook recently, and I believe that will continue.
And his competition or the competitiveness the price pressure any different in this cycle because your competitors are saying that they are going to take market share and 400 gig should we do we think this is any different than the 100 gig.
Well, we've always competed against tough competitors tied to the continuity I don't believe thats any different than dynamics I mean, we're not seeing new competition. So it's the same competitors being aggressive.
Great. Thank you for taking my questions.
Thank you Simon.
Your next question comes from ceramic Chatterjee with Jpmorgan. Your line is open.
Hi, Thanks for taking the question I just wanted to us auto.
Hi, 11, Jesse how are you thinking about kind of given the sluggishness in the cloud spend that you're seeing how are you thinking what diversification in the customer mix and particularly if you have any views of strategically where you want the customer to mix to be kind of five years from now is that waterfall at foot to steer the business towards the particular customer mix.
To kind of mitigate some of the water to get on the cloud and just a quick follow up for Ito.
Maybe you addressed this there's some headline today only about incremental data. It's on products that are exempt all you.
Can you just clarify if there any products that you're shipping from China that for example yield.
Thank you.
Yeah, No seismic I think this is a good question I asked sales and go to market strategy is really shaping to be one that was on focused verticals.
To a horizontal enterprise, where we will be much broader from a coverage from a geography and from addressing a broader enterprise perspective, and I think this will provide important diversification campus was an important piece of that diversification.
Two years ago, we asked our customers should be being the campus and they said no and then this year when we asked them. They said you're late so that tells you the thirst and the hunger for Arista technology to go beyond the data center, so addressing a broader time and going out of our normal comfort verticals into a horizontal go to Mike. It's an important piece of this and you know you were going to answer the tax question. Yeah. I think the way to think about it is yes, we will have some impact but between kind of the improvements we're making on the supply chain and other stuff I think from a financial perspective.
It kind of balances out right. So that's a pretty minimal impact from a from a financial perspective, even though we're continuing to charge on the supply chain.
Thanks, Bob.
Great. Thank you.
Thanks.
Your next question comes from Mitch Steves with RBC capital markets. Your line is open.
Just a quick question for me you guys have talked about the annual numbers in terms of like the Street estimates I just wanted some clarity there are you guys comfortable where street estimates are at this point.
Just to get an idea for kind of what seasonality in the back half looks like.
No I think you guys have been more aggressive than we have in our guidance.
Going one quarter at a time, but you know you all started the year at 30% and we we at analyst day as you know either guided to.
A mid to high teens, depending on the cloud spend right. So yeah, I I think Mitch the motto is like we're taking this quarter inside a from our perspective, it's difficult for us to go beyond that at this stage.
Just kind of running the business corner.
Got it and then just to clarify on the Q4 kind of expectation. So I was trying to just understand a half on half commentary is how is it going to be essentially a few points below seasonal trends or do you think that it can be more than that.
Yeah, I mean, I think you know are the Commons were kind of care that we think second half over second half is it's a very different environment right. I mean, if you think about where we were at the second half last year. It was very strong demand we were.
Yeah, we're building deferred et cetera, I think is it significantly different.
When you look at where we are.
In the second half of this year I think that that's what we're trying to communicate to put a specific number on it we're not ready to do that for Q4, yet, but I think you know there has been such a significant changes from the momentum and the the growth in the cloud part of it.
Got it thank you.
Your next question comes from Hendi Susanto with Gabelli Research Your line is open.
Good evening and thank you for taking my one and only questions.
[laughter]. Thank you Hendi [laughter]. Thank you following the rules.
Hi, Jayshree on your comment at this campus will have general availability in Q3 2019, do you have updates and would you be able to share goals timing and milestone in terms of already trials early adopters in terms of vertical integration with Mojo and we'll be building an ecosystem of channel partners.
Yeah, No I think we'll have more updates on results in towards the latter half of the 2019 in terms of activity. It's been very high we've integrated Mojo into the company and that's been a year now we've integrated into our cloud vision. The the combination of our Seventwenty XP PEO you switch in Mojo is really redefining a new cognitive campus layer. The extreme pipelines are being very well received so what you're seeing here is arista is having to position the new architectural shift to the next generation campus in terms of network design and have the products tested a at the same time. So the activity level is very high the results, we'll we'll definitely share more with you in Q3 and Q4.
Thank you Gerry.
Thank you Hendi.
Your last question comes from Brian Young with Deutsche Bank. Your line is open.
Hey, Thanks for squeezing me in I also had a question on the campus opportunity.
So I've been hearing more and more of that new enterprise campus deals are often led by discussions around why find solutions is that what you're seeing as well and if so is your I know you have in the cognitive why portfolio Mojo, but is the wireless portfolio right now a pretty robust or is that an area, where you are thinking about or would need to expand.
It's a good question we are in the smaller enterprise sites, we often see that the conversation is led by five because they want to start with a small configuration of campus and they don't need to think of all the protocols.
We feel we have a very complete portfolio, particularly with the introduction of why fivesix, but in large enterprises is actually the other way around the way you know often the wife I have to integrate with other partners like clear path and we need more with the X three slides. So it depends on the nature of the enterprise customers, but be we've seen a bit of both.
Thank you.
Thank you Brian .
This concludes the Arista Q.
2019 earnings call. Thank you for all the good questions and for the opportunity to highlight our financial results and corporate achievements for you.
I also want to mention that we have posted a presentation, which provides additional information on our fiscal results, which you can access in the investors section of our website.
We look forward to continuing the conversation with you during the quarter.
Thank you for joining ladies and gentlemen. This concludes today's call you may now disconnect.
[noise].