Good morning and welcome to NETM's Technology, Media, and Consumer Conference. I'm Ryan Coons. I cover the networking and optical sectors, as well as the space sector here at NETM. Really excited to have Arista Networks with me today for a fireside chat. We've got CFO Chantelle Breithaupt. Welcome, Chantelle. How are you?
I'm good, thank you. Nice to see you, Ryan. Happy Friday.
Yeah, happy Friday. Let's dig right in. Arista just had results. It feels like to me a couple of weeks ago, because it's been so crazy.
Yeah.
That was just a couple of days ago. Let's start with a review of your first quarter and what some of your thoughts were. What were the main takeaways you want investors to highlight from your results?
Yeah, thank you. Jayshree and I were pleased with the Q1 results. We thought it was a very solid print to the quarter, 27.6% revenue growth, solid margin, and I think very robust operating margin. I think pleased with the momentum in the first quarter. I think you could see it through some of the customer wins that Jayshree spoke about, some of the things we are seeing with the AI customers and cloud so s uper excited. That turned into a pretty robust Q2 guide as well.
Yeah. And the margins there, the nice uptick or steady and strong on margins, is that related to customer mix, product mix? What were some of the mix results there?
Yeah. Yeah. No, we entered the year with a 60 to 62% gross margin guide, so coming into 64%. It was customer mix related. Our products generally do not have a mix between them, but the customer mix, we were pleased to see some of the upside coming from enterprise and our cloud specialty providers. Across the board, pleased with the growth that we saw.
For sure. For sure. Relative to your guide, you had a very healthy second quarter guide as well. You're feeling good about that outlook, at least in the next 90 days before the tariff uncertainty hits us?
Yeah. Generally, we see momentum for the year coming through the top line. The second quarter, we chose a point versus a range this time just to be sure that the outside world understood our confidence of that $2.1 billion. That was very intentional by Jayshree and I. Yeah, we're excited. Again, we're excited across the various segments that supports the 63% gross margin guide. Yeah, you saw the reiteration, excuse me, of CapEx from some of our largest customers. Generally, the conversations are going very well.
That's great. Then you've maintained your year, which implies maybe a flattish second half from first half with maybe the uncertainties after the 90-day tariff passes. I mean, what was your thinking on kind of maintaining the year at this point? Investors may be a little disappointed with that outlook, considering all the strength you guys have been delivering for many years?
Yeah, I think there's some context here. We're very aware of what the math says in the second half, but we wanted to give context. We entered the year at 15-17%. We raised it to 17%. We had a very robust Q1, guided a strong Q2. We're not changing the year yet, which isn't that different from Arista's general philosophy on guidance until we have some of the clarity on the cost side. The tariffs to us aren't necessarily a top line conversation. It's how do we bring the whole P&L together for one connected, updated guide. We see momentum continuing through the year. There's no scenario where we see a drop off in the second half.
I think the full year update will come once we get the pause, the fentanyl, the immigration, the reciprocal tariffs sorted out, and then we'll come with one guide. That was a choice. We could change our guide, drop our guide, or hold the guide. We tried to give the wording through our language on the first half. We see the momentum continuing through. We look forward to a very good year with Jayshree.
Yeah, that's great. I mean, in the big scheme of things, that's a real win. I mean, a lot of companies withdrew guidance or really withheld comment and said, we think it's going to be okay, but we really don't know. To maintain the guide, I think certainly is a win there. Relative to the high proposed tariffs, I think that have a lot of the entire tech industry a little bit on edge here. Y ou're not alone. Do you anticipate that you might have to raise price in exchange for that? And that raised price could impact demand volume. I mean, what are the different scenarios that could play out for you here? Walk us through the different options as investors should think about in the second half.
Yeah. Thank you for that question because we put a lot of work to be as clear as we can on how we feel the tariffs will unfold. The first point I'd like to go is we've kind of bookended the impact if all the reciprocal tariffs came into effect, if USMCA held as it was. We said on the year, it's a point to a point and a half of gross margin if we did zero mitigation. That's, if you want to call it, worst case scenario. If you're running at 64, 63, and the guide is 60, that's why we kind of held the guide because it encapsulates that. It does not mean that's where we're going to end. We have three things we're working on. We're working on the fungibility of our operations like everyone else is.
We've had great conversations between Malaysia, Vietnam, and Mexico. The second one is how much can we absorb to have the right commercial conversations with our customers. The third is we will have a tariff increase for prices if we need to, but it's kind of the third on the three of the mitigation strategy.
Yeah.
Yeah.
Work your way down from the top down there.
That's right. That's right. We're pretty clear. We've done a lot of really granular work. I feel confident coming in. We have a handle around it, assuming nothing changes with the Section 232 ones. Those are the only ones we don't have information on.
Gotcha. Any thoughts about accelerating production ahead of July 9th at all in terms of getting product here to kind of ease that transition ahead?
Yeah, absolutely. The other thing you did, our inventory went from $1.8 billion to $2 billion quarter over quarter. Most of that, if a lot of that was to do with buffering, to your point, Ryan, in the sense of bringing components or finished goods in. Yeah.
Yeah. Yeah. Perfect. Exactly. Relative to customer behaviors, what are you broadly hearing from customers about this situation? Are you seeing evidence of customers that want to pull in or might be pulling in a little? What's been kind of the tone relative to that magic in July?
Yeah. I would say generally the statement is not a lot of conversation to try to get things earlier. It's probably less than one hand of customer count, discrete counts where we've had conversations, so very bespoke. Not a lot of customers asking or suggesting or feeling that change in their pattern for this year. A few, but not material. Now, I don't know if that changes as we get closer to July, but I think generally people understand their spending for the next couple of quarters.
Yeah. Great. You mentioned you've got a lot of flexibility in terms of working with your CM partners about location and setting up. Mexico and Southeast Asia seem to be the favorite flavors of this decade. You've got flexibility on both sides there.
Yeah, we absolutely do. A couple of things is we've had great relationships with all of them as we've come up in the 10 years since the IPO. So we've established great relationships. We're also of a size now where those contract manufacturers would like to do business with us. So lots of great capacity exploring scenarios in all three areas. We're close to having most things USMCA certified. That's just a few things we're just working on. Generally, yeah, generally we're aware. Now, no matter what that fungibility is, it still takes six months to reorient a supply chain. We're trying to balance bringing inventory in and not making changes too early that we wish six months from now we hadn't made.
Yeah. What are some activities there? You mentioned the certification for Mexico production. What sort of things are those related to?
There's just a few products that need a couple of subcomponents to make it 100%. It's just around the edges. Yeah.
Content-related stuff?
Yeah, that's right. That's right.
Gotcha. That's great. That's a great update. Glad you guys are feeling good going into this. A lot of companies aren't as lucky as you to have the purchasing power and flexibility and the nimbleness. That's terrific. Maybe shifting gears here and talking about AI, which every investor, I get peppered weekly for the number one topic of what's happening in AI spend and infrastructure. We could probably talk for hours about it. You've talked about your four really important pilots that have the potential to scale to 100,000 GPUs and your $750 million target for backend for this year. Can you update us on those projects and from your perspective how they're progressing and how investors should think about them over the balance of this year?
Yeah, happy to. Let me start with the punchline. We reiterate and are confident in the $750 million backend and the $750 million frontend, so the $1.5 billion combined. Now, talking about those pilots specifically, we have four pilots and then a bunch of different various enterprise CSP kind of AI things going on. I think three out of the four, so two out of the four, very confident 100,000 GPU range to close out in the fiscal year to get to production. The three out of four, it is going to be Q4, Q1, just balancing on the edge, but again, 100,000 GPU. The fourth one is an InfiniBand shop that just started, so they will be more of a 2026 going through the stages. Generally, what I would say is great partnerships.
They're all doing it a different way, trying to get to the same kind of goal. We're learning a lot as partners to them, as vendors, suppliers, extensions of their engineering team. We're very excited about what they're learning, but it takes some time. Once they have these up and running, they themselves will be able to rinse, repeat, and hopefully working with us as they continue to build out their CapEx plans.
That's great. I mean, it sounds like you're really positioned to gain some share in the AI backend here as spending continues to shift. There was a lot of investor skepticism, I'm sure you heard coming in the first quarter about spending and where it was headed. Have we overspent on AI infrastructure? Every company came out, including yourselves, and said, no, demand remains strong. You feel good about the overall market opportunity for you in AI and the budgets out there?
Yeah, we do. I think we do. It's always nice when some of our largest customers go first before us in earnings so we can be sure what we're—but yeah, we do. We feel just as much momentum as we saw last year in the sense of the types of conversations. I think this is a hypothesis, but I think we're starting to realize AI might be secular, not cyclical, because I think there was a little bit of that going on. I think that's not for me to determine, but that's what it seems like. There is this really great kind of outlook by the 650 Group. They talk about we're kind of in year two of three of content creation and models. Then we're going to go into this agentic AI, which is supposed to be just south of a trillion dollars of spend.
Then you get into autonomous. There is almost like an eight-year roadmap of AI-related topics and scenarios and use cases. Very excited on that. I think for the backend, because we have a lot of choice of products for our customers, I think that is when the options best abread, we have a very good chance of winning.
Yeah, for sure. I mean, especially up market with the biggest cloud builders. I'm sure they tend not to take a turnkey NVIDIA Solution. They want to go best abread , and they want to do it their way. They're sophisticated enough to do that. Great presence.
Yeah. Thank you. Yeah, we agree.
That's fantastic. On the front end, you mentioned briefly there the $750 million target. I'm sure it's a little hard to always parse out exactly what is in a front end versus what's in a traditional cloud model. How do you measure that up? What kind of trends are you seeing relative to the front end on these AI-focused programs?
Yeah. It is a bit difficult to parse it out to your point. Generally, I would say the fact we are reiterating $750 million on the front end, we're very excited about that. We see customers realize that it's going to take both to fulfill the needs of the end user case that they have. I'm pleased that on the industry data, Arista shows up as the leading vendor, not just branded, but leading vendor when it comes to front-end Ethernet AI revenue. We very much hope to keep that spot. I think the choice of our products, the learnings we get from some of our customers, we can pass through the industry. We're very excited about that.
At the end, as you kind of move into agentic AI versus the model creation, it might open up this aperture to be, you know how Jayshree talks about 30-200% kind of additional front ends needed for every backend dollar?
Yeah. Yeah.
I think that the one-to-one right now works well, but I think it could get north of the one-to-one.
That's great. Super interesting. Yeah. In terms of your big customers, Oracle's really emerged as a big player, not just from Arista, but a lot of the other players. I was just with our management team talking about how Oracle is doing, and they've really come onto the scene strong here. How have you been successful at Oracle there? Any ingredients to your success at Oracle? I'm sure each of these big customers has different kind of architectures and requirements. How do you align yourselves so tightly with these huge players in the world of cloud?
I appreciate that. The thing I would start with, having been at Arista just over a year now and been at some of the other companies that are much bigger in the world, we're just 100% pure-play networking-focused. You feel it. All 4,500 people wake up every day just to think about networking. If you have that in mind, no matter what we're working on, it's to solve those things for customers like Oracle. That's all we're focused on. If you look at the breadth of product that we have, we have a lot of choice for the backend Ethernet AI. We have a lot of choice for the front end.
I think we have the products, and then it is just how do we adapt it to the use case, Ryan, versus not having that fungibility or flexibility across our product line. That is the first thing, the product. The second is the software, the OS. Customers, if they are familiar, it is easier to grow with knowing what there is. The third thing is, I think we just have really focused engineers in our team that partner with them. They feel it is an extension of what they are trying to do, and they really appreciate it.
Yeah. I mean, I think EOS is every company thinks their technology is the best. But from my own work in this space, I mean, EOS really seems unmatched in the industry in terms of its uptime and modularity and all these super important factors that I think other companies just cannot match it.
We fight hard to keep that spot. Thank you. The fact you can upgrade as you're operating is a big deal for a lot of our customers who do not have a lot of planned end time. All those things, but we continue to not sit on our laurels. We fight every day to make sure we're staying in that engineering kind of mind space with them.
Is Oracle a relatively new large account to you, coinciding with it being added to the Cloud Titans that it just got? We're so successful there that you wanted to move them into that group?
There is a definition for Titan, right? It is the amount of connectivity they have. They get to distinguish that based on how they operate as a customer company. For us, I think that we are thrilled in the sense of the amount of business we have with them, it suits this kind of category. It makes sense to us. Yeah.
Awesome. Yeah. The other big question besides AI I get, and I'm sure you get constantly too, is competition from LightBox. It's always top of mind from investors. Can you kind of walk us through your view of where LightBox sees the most success within the big customers, the big cloud customers, the Titans, and where Arista sees the most success, and you have your barriers to entry that you think are formidable?
Yeah. No, I think it's an important question, I think, right here and right now. Although I'll say the topic ebbs and flows depending on what's kind of going on in the news cycles. I think that LightBox, if anything, I think that our customers are even more certain now, having worked 10, 15 years with Arista, 10, 15 years coinciding with LightBox, we've always coexisted. I would say that the great thing is some of our largest customers are super clear, and we work with them. This makes sense for LightBox. This makes sense for Arista, for a branded vendor. I think we're pretty clear when we're having customer conversations. We're not surprised. They're multi-vendor strategies. There's use cases, and you've heard Jayshree mention on the earnings call. There's use cases for Lightbox, and you can imagine what they are.
It's low margin, high output, not complicated. If you want to do the more complicated things, the more robust things, the higher outcome, premium value in engineering, then it's a branded vendor like Arista. For us, nothing has really changed. This market is growing at such pace. Everyone's going to have room to grow. We do not see it as a share shift. We see LightBox kind of share shifting with each other. That's for them to have. As far as barriers to entry, the barrier to entry to us is we do not want to be a 10% margin business. That's not what we do. We could choose to play there, but we do not, obviously. That's a choice as a business model. I think that to me, it's very clear on the distinction.
That's great. Yeah. In the big picture of AI, kind of going back to kind of where we are in this cycle, and we started the conversation there, there's been some fears that we were maybe at a peak and there was going to be some consumption issues around overbuild of capacity. Where do you feel, based on your demand signals, where do you feel like we are relative to demand and supply of AI infrastructure?
Yeah. If I had to bet, I would say we're nascent. I do not see overbuilding. I see that the pace is quickening in the sense of a lot of these players. It's not just the few we talk about. There's a lot of them between the NeoClouds. There's some of the larger enterprise getting in, some of the providers who provide the AI networks. For me, for us, we don't see it as at the edge and maybe we're ending. We see it as kind of just the beginning of the next few years at a minimum. Now, how the CapEx moves, I don't know because we don't know 2026 CapEx yet. Generally, the conversations on the roadmaps, it feels like the beginning.
Yeah. And the NeoCloud types, the tier two types, it seems like that's been a solid segment for you historically, maybe not quite as fast growing as the Titans. Relative to AI, it feels like very early days. Are you in the early days, you think, of penetrating that emerging segment? Do you have a similar position, you feel like, with the NeoClouds?
I do think that generally this market takes longer. There are a few that stand out, of course. Generally, this is a space that's going to take longer either through their funding, their business model, their talent. I think this is just starting to go. We have great conversations. When the customer is looking for choice of design, we have very good conversations. If they're looking for turnkey or are asked to look at a turnkey kind of bundle solution, sometimes we're not invited to those conversations. We're seeing a lot of them wanting choice across all the parts of their NeoCloud venture. It takes a little longer, but we're very much in the conversations, very excited. I like the fact that these are more international conversations, which is great. It's definitely not just in the Americas, as you can imagine.
Yeah.
Yeah, very excited. Hopefully, they get their teams and their designs and things up together. That is what will dictate, I think, how fast they grow.
Yeah. It feels like the market really is pushing the bounds of how fast it can grow, right? There's only so much talent, so much available equipment, so many leaders in this space that can only install so fast. It feels like we're pushing the boundaries of that growth limit, including availability of power and data centers.
That's what I was going to mention.
Right. Lots of limits, and we're growing at this. Hopefully, that limit is enough to sustain a relatively steady growth rate and not have too big of an oversupply at some point.
Yeah, totally agree. Totally agree. The other thing I would say too is that part of what we're also excited about is that just regular data center spend is happening. Campus is growing for us. We're just getting started in campus. Even with the diversification, hopefully, they all cycle through in a great way. We can keep the growth rates, we hope to.
It's pretty amazing. Up until a couple of years ago, all the folks were focused on was traditional cloud, and that was the shiny object. Everyone forgot about the shiny object.
Yeah. Yeah. Exactly. It's fascinating how quickly we can pivot with recency bias. Yeah.
That old business is pretty solid, and it continues. It's a profit engine for you guys, I'm sure. Just keep cranking. You got customers. You got share. You're not having to prove yourself in that market. Evolve, but not disrupt necessarily.
Yeah. That is absolutely a shared gain conversation, which we do not take for granted. We very much focus on. They are great conversations. We look at all those revenue drivers, Ryan, just so everyone thinks we are not just focused on AI. We are, but not just that.
Totally. Back to the NeoClouds here, it would seem that maybe they're less sophisticated in general. Their early deployments maybe would be more of the turnkey NVIDIA approach because they don't have the expertise to go best of breed, and they kind of would need to make phase one kind of simplify before they go best of breed. Have you seen that behavior somewhere where NVIDIA is effectively competing in some of these early nascent players at the early stages of their evolution?
I would say yes and no. We've seen both. I definitely have seen both. Not surprising. It's basically usually us and NVIDIA in the conversations that we see. It makes sense. There's a bit of both. There are absolutely ones that are looking to diversify away and some that for them, that seems like the best option here and now. We always remind them, you have more choice if you go with Arista in your design. Yes and no, but the market's growing. Like we talked about, it's just starting and should grow pretty well. We will go in and look for our fair share of it.
For sure. That's great. I've taken also a lot of questions about some of your balance sheet items around purchase commitments and deferred. Does the AI business cycle for Arista look differently on that balance sheet compared to your run rate regular cloud business? Can you walk us through that? Maybe changes in deferred, which seems to be growing quite a bit.
Yeah. Deferred is a combination of new products, new use cases, new customers. We have all three. When it comes to new use cases, new product, that is the AI Venn diagram. That is some of the biggest, most complicated things that our customers are doing. Those things take 12 to 18 months. That behaves very differently than new products, existing customer. That is probably more 12 to 14 months. Yeah, bigger acts differently. I have tried to be clear on the earnings that there is going to be some swings because there are larger things that come through, volatility, the amount growing. That makes sense to us in the sense of some of these use cases. All of those things are in there.
I think it just represents a risk of getting to a new kind of step function with a new set of markets. It is the same on the inventory purchase commitment side. That is absolutely, we have a long lead time cycle on our chips. If we are going to be ready for some of these things, we need to be ahead of that. That has always been the case there, but very comfortable with what is happening there.
Got it. It sounds like the composition within deferred may be changing a little bit because there is so much AI going on. That makes sense. That is great. As you think about your 2025 growth here, 17%, you reiterated, how much of that is AI driven? How should we think about the growth rate of traditional cloud and the balance of your business? From a top-down perspective, how would you kind of parse out the growth?
Yeah. So we have not changed the year, but sticking to what we know now, but seeing the momentum in the first half. I would say the AI we have said is at least $1.5 billion. It is a little difficult to know if more of the front end, but at least that $1.5 billion front end, back end AI. So let us call it the $1.5 billion. We are seeing some great growth in campus. We are excited about the data center refreshes. We will see what we come out with as our revised guide. Generally, I think those are all working well. The AI specifically is that $1.5 billion target that we can kind of measure.
Got it. That's great. Thanks for that. In terms of competitors, we haven't talked a whole lot about Cisco or Juniper too much. Do you bump into them much in the new AI opportunities, or are they more competing in traditional cloud?
Yeah, that's more of a that's actually so for Cisco, it's more of the enterprise conversation. Same with the HP Juniper. I would say the only thing that we're seeing, and I think you've heard it mentioned before, is Juniper seems very much to be in a price situation in the sense of where they'll go from a pricing perspective. That behaves a little differently, but not surprising, I suppose. I think that that's nothing really changed there. When it comes to the AI backend, that's the NVIDIA and Arista conversation. Those haven't changed a lot. I feel that we're pretty aware and know what we'd like to do in those scenarios. I think it comes down again to for the backend AI, it's would you like a bunch of choice, best a bread, or would you like one bundled conversation?
The customer needs to decide at that point. We obviously have our view. We continue to introduce great products into the enterprise and the front-end AI. We will continue with that.
Exciting. You mentioned campus there as important. Can we maybe unpack that a little bit in terms of your progress to date? How do you feel like you're doing relative to your share, your aim to gain? How much work still needs to be done either on products or channels to really execute there? It feels like a little heavier of a channel sale model there. What can you tell us about kind of the campus opportunity for you? It feels like it's taking a little bit of a backseat to all the AI excitement.
I will say internally, I spend as much time on Campus as I do AI because I understand the long term of what this means as a foundational revenue diversification. A couple of things on Campus. One is of our $70 billion TAM, it's roughly $16 billion. We're looking at $750 million. I would say Jayshree and I talk about this as kind of the first year where all cylinders are firing for Campus. We kind of introduced it through COVID. Then we had to do some portfolio adjustments. Now we feel the hardware, software, the portfolio. We feel like we understand from who's working on what engineering-wise inside the company. We're clear. We're clear on how we're going to go to market. I was very pleased with the Q1 growth of campus.
We don't disclose that quarterly, but you can just know I was pleased with it. We feel we have all those. The way that's vindicated or validated for me is that we're winning campus first and not small campus deals without even being in the data center. For me, that's a great signal that Arista is in campus now. It's a longer sales cycle, to your point, Ryan. We are working with the channel and partners more intently for this particular segment. We've been putting money there, investing in salespeople. I hope everyone's excited that Arista's declared we're getting into campus because we're ready to.
Yeah. That's great to hear. I mean, Cisco's the gorilla there, and they seem pretty beatable these days.
We're going to definitely do our bit to get that share that we want.
Yeah. Juniper's been doing pretty well too. That's been campus with Mist. Great. In terms of wrapping up, anything you wanted to close out with, message for investors here in finishing our conversation?
Yeah. So just to wrap it up and remind, as you guys exit to your weekend and many other calls today, remember the $70 billion TAM Arista has ahead of us. Recall that Jayshree mentioned on the earnings call, we see $10 billion earlier than she originally thought at the last analyst day. We're excited about AI, traditional data center, and campus. We have clarity on tariffs, so we've tried to be as clear as possible to give you bookends. We're very excited to get to our next earnings call, talk about more innovation, and give you what our new guide is.
Great. Thanks so much for joining. Great conversation, Chantelle. Thank you.
Thank you. Take care. Bye.