Welcome to the First Quarter 2018 Arista Networks Financial Results Earnings Conference Call. During the call, all participants will be Instructions will be provided at that time. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of the Arista website following this call. I will now turn the call over to Mr. Charles Yeager, Director of Investor Relations.
Sir, you may begin.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Alal, Arista Networks' President and Chief Executive Officer and Eda Brennan, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the release of its fiscal first quarter 2018. If you'd 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 second quarter of 2018 fiscal year industry innovations are market opportunity and the impact of litigation, which are subject the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10 K and which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as 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 that have been adjusted to exclude certain charges, We've 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, Charles. Thank you everyone for joining us this afternoon for our first quarter of 2018 earnings call. I am pleased to report that we had good quarter given the normal seasonality. We demonstrated our predictable profitable growth with non GAAP revenue of $472,500,000 as we grew more than 40% year over year. Non GAAP earnings per contributing 13.7% of overall sales.
From a geographic perspective, our customers in the Americas contributed 67% while the rest of the international theatres progressed steadily in the quarter. We delivered non GAAP gross margins of 64.4% in our highly dynamic and competitive industry. Our top 10 customers included 4 out of the 5 verticals. Cloud titans contributed strongly in Q1 and ranked as our number 1 vertical, followed by enterprises at number 2, service providers and cloud specialized providers pretty much tied at number 3, followed by financials. Our new customer acquisition continues to be healthy, as we exceeded 5000 cumulative customers this quarter and we continue to perform well with FlexRoute, our routing license, and cloud vision software customers as well.
At Arista, we have always embraced open networking trends by designing our platforms with Merchant Silicon Diversity, while using modern software to form differentiated cloud networks. On March 29th, Arista introduced the latest data center fixed leaf models based on Broadcom's Trident III and Tomahawk II Silicon. Arista's 750X3 and 7260X3 platforms run on the single EOS software image and cloud vision for operational consistency. Some of the key innovations include intelligent buffering and automated network load balancing, path and latency monitoring, new protocols such segment routing and a fully featured VXLAN stack, high availability with Hittler software upgrades, low power 25 gig and 100 gig fixed systems, that are double the capacity of the predecessors and cloud scale performance with 12.8 terabit scale and 4,200,000,000 packet 1,000,000,000 packets per second of packet forwarding. On OCP's event in March 2018 in San Jose, Arista demonstrated disaggregated EOS via collaboration with 2 key cloud partners.
Facebook with WedgeOne Hundred and Microsoft with Sonic. As many of you may know, we began our Microsoft journey back in 2015 or 2016, with FAI switched abstraction interface via code contributions to this initiative. This year, Arista and Microsoft expanded the Sonic initiative across the flagship Arista 7500 as the only modular chassis supporting Microsoft management stack. Arista also supports EOS and containerized EOS on Facebook's OpenWedge 100. This allows customization or script for automating network operation flows.
And in both these cases, Arista's advanced EOS SDK is demonstrated in full action. This quarter, we also participated in routing interoperability at the MPLS SDN NFV World Congress event in Paris. We're gratified to be recognized for the first time in the Forrester Wave for hardware platforms in SDN as a leader with a top score in both strategy and current offering in Q1 twenty eighteen. We're also proud to be recognized as one of the top 10 employers in the Bay Area is best places to work in the large employee category ranked number 9 out of 130 eligible companies. As I look at Q1 twenty eighteen and reflect on our start, I am pleased with our performance and the trajectory ahead.
In particular, We are now well beyond the overhead and delays of customer certifications that we had been experiencing during the past three quarters, having successfully completed most of the certifications. And in light of the recent ITC suspensions on the remedial orders of the 668 patent, as well as the expiration of the 5 77 patent on June 30, we pretty much expect to return to normalcy in the second half of twenty eighteen with respect to 945. And so with that, I'd like to turn it over to Ita, Chief Financial Officer for Q1 twenty eighteen financial details. Ita? Thanks, Jayshree, and good afternoon.
This analysis of our Q1 results and
our guidance for Q2 twenty eighteen is based on non GAAP and excludes all non cash stock based compensation impacts and legal costs associated with the ongoing lawsuits. A full reconciliation of our selected GAAP to non GAAP results is provided in our earnings release. Total revenues in Q1 were $472,500,000, up 41% year over year and above our guidance of $450,000,000 to $468,000,000. We were pleased with overall demand in the quarter, with particular strength from our cloud titan vertical. Service revenues represented approximately 13.7 percent of revenue, up slightly from prior quarters.
International revenues for the quarter came in at $157,000,000 or 33 percent of total revenue, consistent with the prior period. While some of this continued strength in international mix was related to deployments by our U. S. Cloud titan customers, we also experienced healthy growth from our in region international businesses in the period. Overall gross margin in Q1 was 64.4% down from 65.9 percent last quarter, but above the midpoint of our guidance of 63% to 65%.
This reflected an anticipated return a more typical customer mix for the first quarter. Operating expenses for the quarter were 137,400,000 down from $139,300,000 last quarter. R and D spending came in at $91,400,000 or 19.3 percent of revenue, down from $96,000,000 last quarter with reduced NRE and prototype spending offset by headcount additions. Sales and marketing expense was $36,200,000 or 7.7 percent of revenue, up from $33,500,000 last quarter, reflecting growth in headcount. Our operating income for the quarter was $166,700,000 or 35.3 percent of revenue.
Other income and expense for the quarter was a favorable $4,200,000 and our effective tax rate was 21.5%. The higher than anticipated tax rate reflects updated guidance in relation to the recently adopted tax act. This resulted in net income for the quarter of $134,100,000 or 28.4 percent. Our diluted share number for the quarter was 80,700,000 shares, resulting in a diluted earnings per share number of $1.66, up 79% from the prior year. Legal expenses associated with the ongoing lawsuits came in at $7,100,000 for the quarter and are excluded from our non GAAP results.
Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately 1,700,000,000. We generated $195,500,000 of cash from operations in the March quarter. This reflects strong net income performance, combined with overall improvements in working capital requirements. DSOs came in at 39 days, down from 49 days in Q4, reflecting the timing of billings and collections in the quarter.
Inventory turns were 2.2 times, up from 1.8 in Q4. Inventory decreased to $268,100,000 in the quarter, down from $306,200,000 in the prior period. This reflects reductions in both raw materials and finished goods as we continue to optimize our supply chain. In addition, we maintained a further $24,000,000 of inventory deposits recorded in other assets compared to $34,000,000 last quarter. Our total deferred revenue balance was $456,100,000, down from $515,300,000 in Q4.
Product deferred revenue declined by approximately $50,000,000 in the quarter, with customers completing many of their 945 related qualifications. In addition, as part of our adoption of ASU 606, reclassified approximately $19,000,000 of software related deferred revenue to other contract liabilities on the balance sheet. As we go forward, you should expect lower levels of product deferred revenue given the relative maturity of the R Series platform, completion of any remaining 945 related certifications and the adoption of ASU 606. As a reminder, any such decline in deferred product revenue is not in and of itself an indication of a change in the underlying demand trends of the business. Accounts payable days were 38 days, up from 30 days in Q4, reflecting the timing of inventory receipts from payments.
Capital expenditures for the quarter were $6,300,000. Now turning to our outlook for the 2nd quarter and beyond. We are pleased with the momentum of the business in the first quarter, with strong demand, particularly from our cloud customers. As we look forward to the remainder of 2018, we believe that we are well positioned to benefit from the continuing growth in cloud networking across our customer base. Given some tough 2017 comparables, we believe that the current consensus for the balance of the year, which calls for year over year growth in the mid-twenty percent range, remains relevant.
Our gross margin guidance for the 2nd quarter of 62% to 64% reflects an anticipated mix towards cloud revenues, in the quarter. We now expect our go forward non GAAP tax rate to be in the range of 21% to 22%, reflecting further guidance on elements of the recently adopted Tax Act. With this as a backdrop, our guidance for the second quarter, which is based on non GAAP results, and exclude any non cash stock based compensation impacts and any legal costs associated with the ongoing lawsuits is as follows. Revenues of approximately $500,000,000 to $514,000,000, gross margin of approximately 62% to 64% operating margin of approximately 32% to 34%. Our effective tax rate is expected to be approximately 21.5%, with diluted shares of approximately $81,000,000.
Please note that based on our current outlook, we expect costs associated with the ongoing lawsuits to be approximately $6,000,000 for the quarter. I will now turn the call back to Charles. Charles?
Thank you, Ida.
We are
now going to move to the Q and A portion of
the U. S. Earnings call.
And to Tom constraints, I'd
like to request that everyone please limit themselves to a single question.
We will now begin the you. Your first question comes from Rod Hall with Goldman Sachs. Your line is open.
I guess I wanted to focus on the the 945 certifications and just ask a couple of questions around that. Number 1, is all the deferred revenue associated with those now released or is there still some deferred revenue balance associated with those certifications I wanted to be clear on that. And then my bigger question is, you guys had called out, some project oriented delays as a result of those certifications. Are those projects back online now, or are you still ramping back to normal spending with some of those customers that were waiting to certify? Thanks.
Thanks, Rod. I'll take the second one first and then hand off to Ida on the deferred piece. So I think we having now completed majority of our certifications. And if you recall, I was explaining how some of the complex use cases took time. We feel pretty good about that.
In 2018, we're pretty much now starting to look at the impact of certifications to be very minimal in Q2. And virtually non existence in the second half. So we're ramping back to new projects now. So the worst is behind us. Peter?
Yeah. And then just
to take your first question, Rod, I think there is still some, 945 certification related to further it's small. And then there's some other unrelated stuff, just normal kind of feature, feature delivery type deferred, that's in the balance sheet. So that number is now going to be smaller and it'll rotate just based on features and value of features as we make commitments in particular contracts going forward.
And I wonder, just to follow-up, I wonder, could you guys comment a little bit on what you're seeing with respect to AI workloads and spending there? And do you think you have the majority of the networking in that market or do you find that there's quite a bit of competition around? Just curious how that's going.
Well, I think the whole AI space is very, very exciting. The you know, it's clearly in very early stages. We have In fact, just 2 weeks ago, we were on a roadshow and with our partners, NVIDIA and our storage partner Pure. And what I would say to that is clearly the importance of AI is to reduce cycle time. And that has a profound impact on the bandwidth performance capacity and latency of networking.
So we derive an indirect benefit as a result of the large amounts of GPU. But still very early stages, I would say, in experimental stages.
Great. Okay. Thank you.
Thanks, Rebecca.
Your next question comes from James Sula with Citi. Your line is open.
Thanks very much. Given a lot of the news about privacy concerns and geopolitical trade wars intentions, such like that, Have you seen any change in behavior to your cloud spending or any of your customers either in a positive or a pausing manner I'm getting at is, are they looking at, you know, putting in, you know, some more of your product because of these concerns or some less or waiting to figure it out and especially with trade wars?
Oh, wow. Thanks, James. That's a heavy duty question. I'm going to start to answer it, but I won't do enough justice. So on to Sedona, our chief customer officer, who's much more intimate with the cloud, will give you more details.
When we look at the whole security and privacy space, I think there's an element of how we work closely with our security vendors and element of isolation and segmentation and a strong element of audit compliance and encryption. And particularly since the cloud vendors are deploying a lot of data centers, the encryption and the ownership of the fiber becomes a big deal. Anshul, you want to say some more?
Absolutely, Jayshree. The, data protection in the cloud is very relevant, not so much with respect to the trade boss. But with things like GDPR or any local laws that exist. So when you look at the cloud companies, the regions they're building out, you'll see that some of the regions are smaller. And localized within Western Europe about one off countries.
That's all the impact that we see. And that's sort of part of the cloud business that we already
Great. Thanks so much for the details. It's appreciated. Thank you.
Thank you, James.
Your next question comes from Sereni Padjuri from Macquarie. Your line is open.
Good question, Zita. You mentioned mid-twenty percent growth is where your affordable for the year. Obviously, you grew 40% in Q1. Does this mean your second half assuming some sort of deceleration from the mid-twenty percent? Or do you expect that to be within that ballpark?
And then just one clarification, you said ASC 606 had like $19,000,000 impact on deferred revenues. Did that help you in terms of revenue in the quarter?
Yes. So on the first one, I think the commentary was that for the balance of the year, so for the remainder of the year, we would say we, we think the mid-20s is a reasonable way to think about the growth Right? So not not incorporating the Q1 growth rate. And then on on the ASC 606, it's really a balance sheet reclass. It's kind of on a technicality where we have some prepaid subscriptions.
And we're required to record it as a contract liability as opposed to deferred revenue. Right? So it's really just a relocation on the balance sheet from deferred to, at 2 other contract liabilities. So not flowing through the P and L.
Great. Thank you.
Your next question comes from Jeff Kvaal with Nomura. Your line is open.
Yes. Thanks very much. We've been hit by a raft of headlines from the cloud spendors over the last week or so talking about big beats in their CapEx. It sounds like that is pretty closely tied to see what is going on in their underlying business. So CapEx for them ought to be growing faster in 2018 than it grew in 2017.
It looks like you all are set to grow a little slower in 2018 versus last year. Can you help us bridge that gap? I understand from quarter to quarter things fluctuate, but over the course of the year, then we would like to think that things would balance out a little bit.
Well, certainly, Jeff, as you know, cloud titans do have seasonal spending and, we have enjoyed a very strong partnership many of them and continue to, our heritage is undoubtedly and our forecast and our past, our present and our future is very much tied to cloud networking. For all types of customers. I think what you should take away from this is while we have a great deal of visibility to the near future, which is 1 or 2 quarters. Their spending for the entire year or subsequent quarters involves a lot of moves and shifts and networking is still a very small piece of their CapEx. So we continue to understand those use cases.
Anshul and the team has very intimately involved and we have no reason to believe that we aren't technically or business wise and strong partnerships, but we will only know more, say, for Q4, around Q2 or Q3. So therefore it's really hard to predict and we try not to. And sometimes they don't know, and therefore, we don't know either. Anshul, do you want to add anything more to that?
Absolutely. I want to remind everyone we've discussed this in the past that for the cloud companies, a data center build out or a regional build out is a 2 to 3 year project. And when the networking components land and we see the product bookings and revenue is not exactly in the same month or the same quarter, the lag could be as much as 18 months for the bigger regions. That's why it's very hard for us to forecast this.
But I would remind you, Jeff, that cloud was strong from a momentum from a demand perspective in Q1. So I think it's typically strong and we saw that again this quarter.
Okay. Thank you. And then maybe to probe on that a little bit, you talked about a
is going to limit it just to one question, if you don't mind.
Oh, you got me, Charles. You got me. Go ahead.
Your next question comes from Alex Kurtz with KeyBanc. Your line is open.
Hi guys, this is Steve Enders on for Alex. I was wondering if you guys had, say, any change in mix of Tupper X switches and spine within your web scale customers over the past few years or how that's trended? And how does that also compare in the service provider segment?
We don't see any appreciable change. Obviously, the spine and routing has given us more use cases in the cloud and service provider, but the leaf gives us a lot of ports. So overall, not much different. Thank
you, Steve.
Your next question comes from Paul Silverstein with Cowen And Company. Your line is open.
Okay. That's simple. A question. So
Paul, you're sounding very muffled.
Yeah. We can't hear you, Paul.
Well, I'm feeling awesome. You're doing awesome. I can't
hear you. Can you skip him in
the morning? Yeah.
Can we come back to you, Paul?
You're giving you a better quality.
Can hear you very muffled. Let's get let's fix that line and we'll come back to you.
Your next question comes from Ittai Kidron with Oppenheimer. Your line is open.
Thanks and good quarter out of the gate guys. I guess ladies and guy, help me think about when you talk about the mid-20s for a reminder of the year, including the second quarter, Can you help me think on a on a on a if I look at that on a vertical standpoint, which verticals you think can outperform that bar versus underperformed that bar?
Yeah. I mean, I don't think we're going to try to do that. I mean, obviously, there are a number of various different scenarios as we move through the year where we'll see strong demand in some cases and others. We've set our guidance based on a number of different potential outcomes, but I'm not going to go and try and lay out a single case here.
Thanks, Ittai. We, you know, we'll try to do our best going forward. But as you know, some of these verticals are very lumpy. Example, we may do really well in 1 quarter with service provider or really well in enterprise if we win a large number of enterprise customers. So in general, all of them are doing well and contributing double digits, in terms of segments.
So We hope they all have the, possibility of growing well north of 30%.
Can you
give a little bit of an update on how enterprise is going for you? Is this that's important, kinda, for
the future? Clearly it was our number 2 vertical in Q1. And we tend to pull out enterprise from financials, but if you added the financials, it would have been pretty close to our number one vertical. I would say we continue to do very, very well in the enterprise. Customers are incredibly frustrated and seeking an alternative, both for quality and innovation reasons.
The size of enterprise opportunities always start small and there is a long testing period, but we're pleased with our performance. And our customer gain in Q1 was very strong just like it was in Q3 and Q4 last year.
Very good. Good luck.
Thank you, John.
Your next question comes from Mark Moskowitz with Barclays. Your line is open.
Yes, thank you. Good afternoon. Just wanted to see if you could touch on where we are in the 100 gig cycle. It seems to be a question we get a lot from investors in terms of the Arista's a primal mover or first mover advantage there. I mean, are we in the third inning, the 4th inning, sorry to baseball analogy, but how should investors think about Arista's momentum there with respect to 100 gig?
Well, if you use the ticket analogy, we're not even in the first inning. But if you use the baseball analogy, I would say we're still between the first and in innings. I think a 100 gig is going to prove to be a very strong, requirement, not only because we were the 1st mover last year. But we'll continue to be the 1st mover for many forms and flavors of it. It's important to understand it's not one product.
It's going to permeate the entire cloud networking And as we start to move more 25 gig 50 gig into the downlinks with storage and compute, the need for 100 gig moves into the spine into the data center interconnect, into the routing flavors. And so, we continue to believe that we will have large share and build upon our first mover advantage. And we also believe that the arrival of 400 gig next year will only make a stronger in 100 gig. So the 2 will go in tandem.
Thank you.
Thanks, Mark.
Your next question comes from Rakers with Wells Fargo. Your line is open.
Yeah, thanks for taking the question. I just want to go on the gross margin line and understand, I think this quarter, looking at the guidance of 62% to 64% that would compare to 63% to 65% guidance ranges over the next or the last couple of quarters. It looks like your product gross margin came down a little bit. So just curious of kind of what's changing there, if there's anything within the mix or assumptions there that resulted a little bit of a lower gross margin assumption?
Yes. I mean, I think the biggest driver still for our gross margin is kind of within that 63 to 65 range, it's going to be customer mix, right. And as we head into Q2, we believe we will have a heavier cloud, so large customer base mix in Q2. And that's causing us to be a little more cautious around the gross margin guide and the gross margin outlook. It's really a customer mix question.
I think that $63,000,000 to $65,000,000 for the year we still feel good about.
Your next question comes from Hendi Susanto with Gabelli. Your line is open.
Good evening and thank you for taking my questions. Congrats on seeing strong sales in Q1 and then enterprise sales. I have heard market commentaries that despite of strength in ARISTA's enterprise sales, ARISTA is still having low penetration among enterprises. So J3, would you be able to share insight into opportunities outlook and the current state of enterprise penetration for both routing and switching?
Okay. Thanks, Sandy. I would have to agree with you that Arista can improve its penetration in the enterprise. It's a huge opportunity for us and even though we're doing well, we could do even better. Our penetration is both in switching and routing.
So we're not seeing low penetration in either. I think our penetration in switching is stronger than routing because routing, especially for the scale of capability we offer tends to be favored by the largest service providers and cloud providers. But I would say in general, I would like to see Arista do better, but we're doing very well.
Your next question comes from Mitch Steves with RBC Capital Markets.
Guys. Thanks for taking my questions. So just on the gross margin guidance, I want to get back to that a little bit. So given that the cloud vertical is supposed to be kind of the fastest growing and largest piece, when we expect the margins to actually increase given the hyperscale guys typically buy to higher end products? Or I guess what what am I missing there in terms of the mix dynamic?
No, I mean, if you, if you look historically, the mix, factor has tended to be, if we have a lot of cloud or large customers, then, obviously, they have better, more competitive pricing and that tends to drive a lower gross margin.
Yes. Just to clarify what Ida said, I couldn't agree more, Mitch. Our cloud gross margins are driven by volume and volumes drive lower prices and therefore lower gross margins to us. So Our cloud titan margin is significantly below the corporate average.
Your next question comes from James Faucette with Morgan Stanley.
Great. Thank you very much.
I want to just ask about efforts to continue to expand the customer base both domestically and internationally, kind of the progress we're making there. One of the things that we've been seeing is that, they continue to be what seem to be at least to us somewhat extended lead times, on delivery, but I'd like to hear kinda how you're thinking about that, what the progress been and how we should think about opportunities going forward? Thanks.
Thanks, James. You may remember, I said, we hired Manuelo and the specific goal here, especially was to help with international expansion and enterprise. I I think we're both investing very well in that and expanding in certain verticals. The M and E vertical is a particularly strong one for us. We just came out of a strong network broadcasting show.
But I think we can do even more in the international theaters. As you can see, our ratios and percentages have changed by 5 to 10 points in the last few quarters, but we can do even more. So there's no denying that, similar to the last answer I gave that Arista's opportunity and execution in enterprise can be even stronger. But as you also know, enterprises are risk averse and only in the last year, I would say they have started to take Arista seriously. So, I would ask you all to be patient in seeing the results just as I'm having to be.
But having said that, I fully agree that especially some of the high performance verticals are going to be strong for us and I expect to see enterprise continue to be a strong vertical for us.
Your next question comes from Erik Suppiger with JMP. Your line is open.
One, just point of clarification you update us on the number of routing customers that you had in the quarter? And then secondly, you talked a little bit about the impact of deferred revenues from the, deals that, that you got from the the that were certified. You talk a little bit about what happened to your backlog? Did you have many deals in backlog that were, that were a function of the, the, the getting qualified. And has the backlog come down now that those deals have been, that now that you are qualified, from the software changes?
Eric, I'll take the last piece for us. I mean, we don't disclose backlog. So we'll probably not go to get into that. I think our commentary did say that we felt good about momentum in the quarter and we felt good about the demand across the business in the quarter. But we're not going to actually disclose the backlog numbers.
Yes. No, I agree with you on that. And to answer your question on to our customers, I think I told you the year end number last year was over $200,000,000. And rather than giving you quarterly numbers, we did do well this quarter. Let me just leave it as I think we're going to double this year.
Your next question comes from Alex Henderson with Needham. Your line is open.
Great. First, I'd like to just clarify, did you say you expected the mid-twenty 5 percent type growth rate in the remainder of the year, or did you say that you expected the mid 25 percent type growth rate for the full year. I'm not sure I followed the exact language there.
Yes, for the remainder of the year.
The remainder of the year. Great. Then the question I had for you is, you've had pretty spectacular growth internationally. It's up in the 80% to 120% range. If I do my math right off of the comments you made about the percentage of 60 7% in U.
S. In the quarter. It implies about 120% growth in the international arenas. Can you talk about what's driving that? Is that enterprise business that's driving that?
Is that service provider? Is it cloud growth from the cloud customers in North America moving to international projects? What's behind that? Please. Thanks.
That's a good question, Alex. Thank you. If you may recall, we started to make a lot of international investments, when was it 2015 to 2016 in that timeframe? And I think we're 18 months to 2 years later, we're starting to see the return on that investment. And not surprisingly, it mirrors our 5 verticals, international in the domestic.
So some of it is cloud. But we're pleased with the traction we're seeing both in Tier 2 service providers as well as enterprises. So and Global Financials is a good good chunk of it too. So, the only vertical that probably there isn't nearly as much of internationally is Tier 2 cloud providers. They exist more in the U.
S. Than, the Tier 2 service providers and cloud providers end up being 1 of the same. For many international customers. So that should give you a flavor. And so I think the increased performance is directly correlated to good execution and good planning 18 months ago.
Your next question comes from Paul Silverstein with Cowen And Company. Your line is open.
Jayshree, can you hear me now?
Yes, so much better. What happened there?
Keep it simple. Any change in the pricing environment and in the competitive landscape, there, in both with respect to commercial merchant vendors like Cisco and Jennifer, etcetera, and with respect to white box solutions introduced by any your customers?
I'll keep my answer simple. No change in pricing.
And no change in competitive landscape?
The normal aggression in competitive landscape, no change. Just continued aggression.
I apologize, but I just want to make sure I'm clear on this, you're not seeing any incremental pressure from Cisco or others, including white boxes?
Yeah. Hold on. I'll separate the white box question. I am not seeing any incremental pressure from my competitors except the normal aggression that I've seen all the last several years and quarters. Specific to white box, this is a customer strategy, not a cost, not a competitive pressure strategy.
As you know, we launched containerized EOS and we're fully committed to working with our customers on consumption models that can be virtual container or physical. So nothing to do with competition.
But Jayshree, I appreciate those as a customer issue, but it translates into the same thing, right, to extend one or more of your customers go to a white box solution that takes revenue away from you that you could have otherwise accessed. And so again, I apologize just want to make sure you're not seeing any incremental uptake of white box solutions by your customers.
Just again, I am I am not seeing any any difference in competitive behavior due to white box. And, white box adoption or rather disaggregated EOS, I'm not seeing any shift or change. It's the same as I told you before. Okay. Thanks, Paul.
Your next question comes from James Fish with Piper Jaffray. Your line is open.
Hey, ladies. Good quarter. Is is Arista winning routing deals as mainly direct replacements today of your competitors, or is it mainly new footprint wins And Jayshree, you talked last quarter about disrupting the campus, and I think we've gotten a ton of questions around how you're going to do that. Any sense, can you elaborate what the plans are there
Okay, James, thank you for the question. So on the routing news question, as I said before, the first sign that the route of market's been going through some tough times is the actual market's been shrinking. And I think part of the reason has been that been shrinking is many of my competitive vendor peers have been talking about an architectural shift. I think it's a shift that's been going on for 3 to 5 years. The last 3 years in switching and now more in the wind, the switching side of lands, we've been incorporating routing for some time to come.
Nothing new there. The new changes in the wide area side where more and more of these ethernet interfaces are moving to ethernet from traditional SANAD or T1 or ATM type of interfaces. In terms of new footprint versus, existing, for us, it's all new. It's net new, right? And what we see in some cases is that customers looking at a specific routing use case for peering or edge or core and still keeping their legacy routers.
And if it's a complete greenfield opportunity, then it's brand new footprint. Both for the use case and ourselves.
And then the campus?
On the campus, I think said this before, and I'll continue to maintain Arista does not plan to participate in the traditional campus. As things evolve in the campus, and they they become more and more akin or aligned with Arista's different value add and differentiable capabilities, we're open to that.
Thank you.
Thanks, James.
Your next question comes from Simon Leopold with Raymond James. Your line is open.
Great. Thanks for taking my question. I I wanted to to talk a little bit about what happened or what's going on in the cloud vertical. I'm wondering if you experienced any sort of, well, I guess we'd call catch up spend in the March quarter or your expectations for the June quarter. Due to the the pause while they were doing the certifications, if that was the case, can you quantify it?
And if it wasn't the case, Can you help us understand why there wouldn't have been some pent up demand? Thank you.
Simon, I wouldn't call it catch up spend. I think we, you know, we we were hurt by the quarters, we were armed in some fashion by slowing down our certifications. And, while that cloud titans waited patiently and completed the certifications, they're always dual vendor, and I'm sure they bought other gear as well during that time. So I'd say we're back to a new normal business now. Where we've completed the certifications and now they can deploy Rsta more, in all of the use cases without having to worry about certifications.
So actually you want to add something there?
Sure. The compute and storage build outs in the cloud are happening at a steady pace. In Q1 for sure. And you can see that as well for our products. In addition to that, nobody's asked so far on the call.
But the good news is, the cloud customers are no longer constrained on these 100 gig optics.
So
it's really not related to our certification just that the rest of the components are also really available.
So I guess if there wasn't some catch up, does this sort of mean that there's opportunities for you to continue registering good sales. Basically, we won't see a pause, in the coming quarters or steady as she goes now.
Yes, Simon. The way I look at it, and I'm sure correct me if I'm wrong, is the pauses in the past.
That's correct.
And the present and the future is bright. Thank you.
Your next question comes from Steve Milunovich with UBS. Your line is open.
Thank you. Angela, I wanted to ask you, how sticky are the cloud titan customers? I think there's a perception that there's really no loyalty on their part. And if somebody comes in with a better product that, you know, they fairly quickly switch or at least in the new build outs, they'd go a completely different direction. Which given that you've got a high share could not favor you.
But you've worked with these guys for a long time. I know you're expecting to stay ahead, but what's your sense of what the loyalty is and how difficult it would be for them to move to a different vendor?
Sure. So, it's a loaded question, but I would say the stickiness is not, in a given hardware configuration. The stickiness is with the software. How they automate, how they integrate and operationally. And I do believe the stickiness with Arista EOS is very, very strong.
And this is not a customer base that is using a product that we ship as a standard product. There's a customer base that customizes it along with us. And for a reason. And this is not a market where someone shows up next day with a product that is somewhat similar, maybe 1 month ahead of someone else saying I'm ready now. That's not what convinces these customers.
What convinces is something that will solve their day to day problem. Automation or integration or routing or data center interconnect. And, I don't believe that, the stickiness The light stickiness you referred to is actually true. It's a very strong stickiness with these customers, but again, tied to the operating system and their automation stack not just the hardware.
Thank you.
Thanks, Achal.
Your next question comes from Samik Chatterjee with JP Morgan. Your line is open.
Hi, thanks for taking my question. Jeshi, in your prepared remarks, you mentioned the innovation you're driving on the desegregated software solutions with the hyperscalers. So just wanted to see if you can help me think about the roadmap of monetization of those and is there integrity of those intersegrated solutions beyond the hyperscalers customers? Thank
you. Yes, sure. Thanks, Sami. The hyperscalers are most advanced in adopting these kind of disaggregated solutions because you really need developers and development engineers. So it's more a code development.
And therefore, it takes, you know, joint work from both sides and joint engineers. In terms of monetization, obviously, we work with them closely to monetize both the work we're doing and also other use cases that tie into that. In terms of use cases outside of the cloud titans, I would say, they're single digit customers. They're very few that have the capability and the investment to do it. But certainly they're very open when they come to that category and work with them.
I would say a select few service providers and the large cloud titans are probably the only ones who've shown both the willingness and the capabilities.
Okay, got it. Thank you.
Thanks, Sumit.
Your next question comes from Mark Kelleher with Davidson. Your line is open.
Great. Thanks for taking the questions. Most have been asked and answered. I just could you tell us how many 10% customers you have had in the quarter? And I know at the beginning, you mentioned something about customer concentration.
So many top customers were so much of a percentage. If you could just reiterate that, that'd be great.
We don't talk about Mark, we don't talk about 10% customer concentration in the quarter, but we certainly let you know at the end of the year. What I did say for the quarter is that there were 5 verticals and 4 of the 5 verticals, contributed to our top 10 customers, which was cloud titans, enterprises, specialty, cloud providers, and service providers. Financials is not an upholstery customer.
So you can't give us anything on customer concentration in the quarter?
That's what I gave you in my opening remarks. Thanks. Thank you, Mark.
Your next question comes from George Notter with Jefferies. Your line is open.
Hi, thanks a lot guys. I guess I was curious about linearity in the quarter, 39 day DSO calculation and I think you guys are a little odd in that, the mix of cloud titans, I understand there's a big driver on that DSO number. They tend to have longer payment terms I remember correctly. And so you had an increased mix of cloud titan revenue, yet the DSO calculation is at all time lows. I'd love to know what's going on with linearity and can you kind of walk us through the moving parts there?
Thanks.
Yeah. I mean, I think if I think about the core, the linearity was reasonably, you know, consistent, right? We didn't see anything particularly different in the quarter. I mean, if the customer mix is a driver, and that'll be kind of vary throughout the quarter depending on the quarter. But in terms of overall linearity, I mean, it it was pretty consistent.
It's not it's a it's it's a linear business, right, generally. On a quarter by quarter basis. Got it.
So did you guys do better than on collections? Was that the motivator for the big drop in DSOs?
Yeah. It's timing of billings. I would say, I think if I think back to Q4, there were some service renewals that happened at the end of the that would have been sitting in AR and worse.
Q1 would have been affected by that.
Yeah. Q1 wouldn't have been affected by that. So there's, you know, you could parse a across this, like, a lot of different reasons as to why it moves around a little bit, right? And obviously, we do that as we drive the collections numbers.
Okay, fair enough. Thank you.
Thanks, George. Your next question comes from Tal Liani with Bank of America. Your line is
open. Hi. Jayshree, I'll ask a question and you'll yell at me like the Tesla call and I'm going to be famous after that.
Thanks, John. I can't wait to hear the question.
I'm going to ask you just I wanna understand what happened last year in 2Q and what happened this year in Q1, and I'll I'll ask it in a in a certain way. If I look at Q2, I don't have a problem with growing 25% Q2, Q3, Q4. So Q3 and Q4, the 25% year over year translates into normal sequential growth rates. So that means you have tough comps. So the year over year goes down, but on a sequential basis, it's normal.
Q2 is too low because it translates into 7% growth. Your guidance is 7% growth sequentially. And that's the lowest growth you've had before. And that means that maybe there was some concentration in Q1, maybe some orders fell in Q1 instead of Q2. I'm trying to understand.
1st, going back to last year, Q2 was giant, right? The 50%, suddenly accelerated to 50%. Let's go back and revisit what happened then that caused it and what's happening now in Q1? And is there any part of it that is related to product launches, meaning the 7500 are And that's why we see the slowdown maybe into Q2. No, not slowdown, but just lower than seasonal sequentials.
Exactly. Think you'll be you're getting, they're all getting a little spoiled, Cal. When we when I have to start defending our growth rates, 7% of a very large base to be too low. I think you are right to point out that we enjoyed a tremendous amount of confluence of 7500, 100 gig and routing. Combined with the law of large numbers, I think, we're showing we're reflecting our best efforts at a very good Q2 guidance and a very good year if we execute on all fronts.
But remember, if you go back to 2015, 2016, we had quarters that were at 7% growth and much lower numbers. So, I'll try to I'll try not to disappoint you, Tal, but you should be pleased and proud of us.
I'm I'm not, by the way. This was just a way to open the question. So by no means, no complaints. But if I could go back, it's not a second question. Just go back to it.
Can you talk about any concentration of the last four quarters of a new product in the 7500 R the routing, does it play a big role in this acceleration of growth and now after four quarters it's slowing down or was there some else that caused this giant growth in the last four quarters?
The giant growth was a combination of routing 100 gigabit and good cloud spend. Got it. And then the enterprise has kicked in. Everything happened perfectly. So if everything happens perfectly, you're right to expect more from us.
Got it. Good.
Thank you.
All right, Charles. Thank you.
Your next question comes from Vijay Bhagavath with Deutsche Bank. Your line is open. Yeah.
Thank you. Yeah. Hey. Good afternoon, Jayshree, Ida. Yeah.
My question, Jayshree, is a bigger picture question, which is, you know, as the growth rate starts trending in line to, investor expectations. Any thoughts on M And A and inorganic strategies, you know, put the balance sheet to work, perhaps lever up and then look to Chase's growth in organically. Thank you.
Yes. No, good question, Vijay. I think we have been I have been personally spending a fair amount of time on strategy and to be thoughtful about this is important. You just go do an M and A and it doesn't integrate well into our EOS, you can actually set yourself back when you're a fast growth company. But if you pick the right adjacencies that work with our DNA, work with our culture and actually add upon our growth, that could be a positive.
So We haven't ruled that out. We continue to look for them. And as you know, 90% of M and A activity sales, we want to be in that 10% that make it. So It's a good feedback and good question.
Thank you, Jaysh.
Thank you. Thank
you, Vijay.
Okay. That was our last question. This concludes the Arista Q1 twenty eighteen earnings call. I also want to mention that we have posted a presentation which provides additional information on our
Thank you for joining ladies and gentlemen. This concludes today's call. You may now disconnect.