My name is Sebastien Naji. I'm the research analyst here at William Blair who covers Arista Networks. I am required to inform you that for a complete list of research disclosure or potential conflicts of interest, please visit our website at williamblair.com. I'm very happy to have Chantelle, the CFO of Arista, as well as Rudy, the VP of Investor Advocacy, with us here today. I think Chantelle will begin with a quick presentation overview of the company, and then we'll jump into some questions.
Sure. Are we good to go? Great. Okay. Hey, good afternoon. Thank you for spending your lunch half-hour with us. We definitely appreciate it. It's very nice to see you. For those who haven't met, Chantelle Breithaupt, CFO at Arista Networks. Just a couple of slides to orient. Many of you know our story, just in case you haven't seen us in a while or are new, just wanted to give you an overview. Here, we're 12 years past IPO, here we are guiding $11.5 billion this year. Incredible journey from a technology perspective. Originally starting with the high-performance compute, getting into hyperscalers, cloud, enterprise data center, and now we're talking all things that are AI. An incredible journey being $200 billion market cap, 12 years post-IPO, we feel we're just getting started. Thanks for being here with us.
Very happy to show different sections in the sense of where we're recognized by Gartner. You can see from left to right, some of the Gartner positioning in the top right quadrant. 2025 for data center switching. 2026, just happy to see this here that we're now there for enterprise wired and wireless. Very happy to see that. Just getting into the campus and enterprise wired and wireless LAN. 2024, with the acquisition of VeloCloud also being in the magic quadrant for SD-WAN. Feel like we're making ground in a lot of different aspects of networking, and very proud to have these positions to show you. Why do over 10,000 customers choose Arista? They can see the robust of our quality in our product and our ability to serve the customer. Extensible performance and platform. We don't like vendor lock-in.
We like best-of-breed choices and are happy to compete in that environment. Just having this really great real-time telemetry and AIOps that we'll get into a little bit through the Q&A, I think, with Sebastien. That really makes us a great total cost of ownership choice when you're thinking about getting the highest utilizations from your XPUs. It's not just how we feel. This is the customer representation, so I think you'll find very few in the industry can say they have an 89% score on NPS. You can read some of the comments on the bottom, how they interact with our company. Very delighted in the response time, very delighted in the technical capability of the team they interact with, and just the approach that we're there till the end until they get to a performance and outcome they're looking for.
Very proud to have that, and congratulations to Ashwin and his team for getting the company to that position. We talked at Analyst Day in September of last year, hopefully some of you were there, about the growth in our TAM. I started in January 2024. Just before that, we were at about a $60 billion TAM, then $70 billion at the New York event we had in June 2024, and then Analyst Day updated that from $70 billion-$105 billion, so some pretty great growth there. You can see at the bottom the different categories. Of course, a lot of it's driven by AI and data center, but also some great aspects that we see now that we have our campus portfolio underway.
We're working on the next revision of this. Stay tuned as we look at even a larger TAM amount in the different categories and the nomenclature that we'll use going forward. We also like to position our incredible platform and portfolio over what we call centers of data. We have the AI center, campus center, data center, and SD-WAN. It's just to show the breadth of optionality that we provide our customers. It's really we have a portfolio of products and what use case are they being used for across the different segments of our customers. Very proud to have this to get to their outcomes and their cost of ownership that they're looking for. Now we have this new nomenclature. We're talking about scale up, scale out, scale across, and I know we'll talk about that, Sebastien.
Just to say we're ready for this. We've been planning for this. We'll be working on it and very well-positioned, I think, with our customers on this kind of co-engineering journey. What are they looking for? From the largest hyperscaler and AI customer down to the enterprise. From a revenue growth perspective, I think it's important to look at the growth that we've seen. We finished Q1 results in the sense of 35% growth. If you look at the combined growth in the P&L, 35%, plus what goes into deferred, which means it's shipped and invoiced and cash collected, you could say basically it was 54% growth. You can see the subsequent quarters beforehand in the sense of where we've seen the growth combined between P&L and deferred revenue growth. Just a reminder of our guidance for this year. We did call up our guidance again.
Looking at 28% growth, $11.5 billion, maintain gross margin, which we're very proud to do in this kind of environment where it's a little tougher from a supply chain perspective. World-class, I would say, operating margin for a company like ours at 46%. We have given ourselves accountability goals when it comes to AI and campus, and you can see the growth in AI and campus goals versus our last year performance. Pretty healthy growth for both of those sectors. If you think about $3.5 billion of AI to $11.5, a high percentage of our revenue is coming from AI. We've raised our CAGR for 2025 to 2028 to be 20%+ growth. Before, that was mid-teens. Hopefully you'll see these kind of signs of the demand we're seeing and how we're showing them through our guidance. I think now we can go to the questions, Sebastien.
Okay.
Thank you.
Great. Thank you, Chantelle. My first question, I want to just start off very broadly. Arista really made its name over the last 10 years filling this need for high-performance networking at the hyperscalers. Today, as we enter the AI era, you really hear from all the networking vendors about how strong their businesses have become. Cisco, NVIDIA, they're all talking about huge amounts of growth. As we enter this AI era, Talk about Arista's maybe right to win, or how it really differentiates itself versus all of these other networking providers that are also talking about really good momentum from AI.
Yeah. Thank you for the question, because I think it is important to look at apples to apples in this conversation. My leading answer in this is, I think Arista is very well positioned for AI. We've been waiting our whole 12 years post-IPO for this moment. I think all of the innovation we've seen up until now and the way we interact with the market leads us to be very well-suited. I'll give you some examples. Rudy Araujo, obviously, if you have anything, you can chime in. Let me start first with networking for AI, and then I'll talk about AI for networking. Networking for AI, if we look at our product portfolio, some of the things I just showed here in the presentation, we announced the 800G EtherLink portfolio in June 2025.
We've had that coming up to a year, and we were very happy to see that AI was a great use case for 800G, and we were ready. I think if you take that 800G Etherlink portfolio combined with EOS, which was an operating system and software which allows great utilization of the XPU and all the performance criteria that we're looking for. You look at the sense and the fact of all the experience we have with some of the largest, most complicated deployments, there's a reason that we're currently the number one brand and vendor for front-end and back-end AI networking. I think as long as we continue to innovate in the ecosystem, so we've been leaders in open standards when it comes to UEC, the Ultra Ethernet Consortium.
We've been working on, you saw Andy announce XPO as a technology, and working on ESEN. We're working with the ecosystem there. I think probably most importantly, combined with those things, is that we offer networking that allows flexibility. We're agnostic when it comes to the NIC, we're agnostic when it comes to the XPU, we're agnostic when it comes to the optics choice. That allows, because every customer wants to do it differently to reach their goal, and we're happy to do things differently with each customer. I think that we'll continue to innovate, and if we keep that pace, we absolutely, I think, have a right to win if we execute with the customer. That's networking for AI.
AI for networking, now we're talking about all the things we're doing to help AI help networking, and we have this great suite of products called AIOps. It includes AVA, which is our virtual assistant. We have agents, and we have insights that we provide that sit on top of NetDL. When you combine all of these things, I think we are the best-positioned AI pure-play networking company when you're talking about the networking data center part of it.
Right. That's helpful. Then I want to maybe ask about what I think a lot of investors are curious to talk about, which is, in your most recent earnings call, you started to talk about more acute supply tightness, having to manage very longer lead times. Could you maybe talk a little bit about how you are managing that supply and whether you see a lack of supply potentially being a headwind to your growth, either near term or even over the next couple of years?
Yeah, I think it's a good question. I think you're starting to see more companies at least speak a bit more openly about the supply chain has some constraints, but it has no constraint in the sense of us reaching our FY 2026 guidance. We'll continue to take quarter- by- quarter what that could mean for future guidance calls as we go through this year and next year. I think from the perspective of looking at the different arrangements we have, so we deal with some of the biggest suppliers and have great arrangements and history with them, along with working with our largest customers. I think we're well positioned in the sense of when it comes to availability. I would consider it more of a when, not an if.
If you think about a lot of our customer conversations are 12 months, excuse me, in design, 12- 18 months into design. The 52-week lead time we have on average, I think will serve that well. You've seen our purchase commitments go up pretty substantially to lean into the next 52 weeks coming into next year. I think we're managing it well. I think where we're talking about the constraint, the constraint could come in if someone's asking to have something not within the lead time that's material. How do we work within the ecosystem to help have that kind of burst demand?
I think that's the part we're just acknowledging it's not as easy as it was. We'll do everything we can with our arrangements to have that. We're seeing incredible demand. We just want to make sure people understand within the lead times, that's okay. Perhaps between a burst of demand, we just need to think a little differently how we can serve that. Yeah.
That supply tightness, is it really broad-based or is it more acute in chips and wafers and memory, other sort of areas?
It's a bit of Whac-A-Mole. I think that memory was the first one, and I think we started talking about November last year. I think we've gotten to a good spot on memory. I think other components come and go. I think that from the perspective of it's not just one vendor, one supplier, one product, it really depends on the time and what's happening with a specific deployment. I think it's not bespoke, but it's not generalized, so I'd hate to generalize too much across one category. It really depends on timing, innovation, and what our customers are looking to deploy from that perspective. Now, on the other hand, we've actually reduced campus lead times, so our campus lead times are now down to six weeks, which I think absolutely gives us an advantage as we start to go after the campus market share.
Got it. I think the other area that investors have a lot of interest is in this product deferred balance that has really continued to grow over the last 12, 18 months. My estimate is that it's around $3.5 billion, $3.6 billion, which way larger than it's historically been. Could you maybe unpack a few things? First, is that mostly driven by some of these AI products, these new SKUs? You've talked in the past about you have to hit an acceptance criteria for that to flow into revenue. What does that acceptance criteria entail? Is it when the networking hardware is plugged in? Is it when the GPU rack has a certain utilization? Maybe just help us understand how we should think about that deferred product starting to flow through into the income statement.
Yeah. Absolutely. The concept and construct of deferred has been with Arista since basically we started doing cloud deliveries. What you're seeing now is it's the same construct, just much bigger market and deals, right? During cloud, and we have some information in our earnings deck if you go to our investor relations website. You see there was like a cloud cycle, and now we're in this AI cycle, and the AI cycle definitely surpasses from just pure dollars, the cloud cycle during that time frame. Same construct, bigger dollars flowing through and more complicated. It is new use cases, it is new products, and sometimes new customers. From that perspective, things are arranged with the customer where we have to meet certain acceptance criteria.
It means it's shipped, it's invoiced, and cash is collected, but it sits in deferred until those milestones are reached. Those milestones can take 12- 18 months, sometimes a little bit longer for the most complicated, largest deployments. It can be a variety of things. It can be by site, it can be certain engineering things that we've promised to co-work with the customer. It could be that from their perspective, a certain design element has been reached, they're different. Again, back to every customer does it differently, but the premise is the same.
Until we're sure that it's up and running the way we have agreed to, that's when we take the revenue. It is mostly AI that's in deferred right now because that's the largest use case we're seeing. It's a great example of demand, but the customers also enjoy that we have skin in the game until they're seeing great performance outcomes.
I think you've started to talk about, historically, you've had two major cloud titan customers, M&M, as you guys like to refer to them, Microsoft and Meta. More recently, you've talked about expanding that to three customers with 10%+ , maybe even four customers over time. What is driving that increased diversification and some of that traction you're seeing with hyperscalers that maybe historically haven't worked as much with Arista?
Yeah. I think that we're absolutely, as we get older as a company or further in our growth cycle as a company, we are looking to diversify. It just takes some time, right? We have customers A and B now that we call them. We're using letters to denote now that we expect more of them to come in. There's a few things that can drive it. One is, AI is a great use case, but generally, anywhere that we're switching to Ethernet networking being an option, that's where we're going to start to see where we can have some more business that we didn't have before. Obviously, to get to this, greater than 10% customer. I'm sorry, I can't see you guys. The range we're talking about, they're not coming in with just one deal and becoming over 10% customers.
They have some existing business, and they're getting to over that 10%. It can be companies that are using Ethernet that didn't use it before. It can be new kinds of customers coming to market in some of these segments you've talked about, maybe in the Neocloud, Sovereign AI, these sorts of new customers that are coming in. We'll wait and see where we report at the end of the year. We're fairly confident a third one will come in. The fourth one, as we mentioned on the call with Jayshree, we'll have to see exactly where that lands.
Got it.
Yeah.
Great. I think I'd be remiss if I didn't ask you a question about white box.
Sure.
I will ask you a question on, what are you seeing in terms of the competitive dynamics there? I think over the last year, Arista has done a good job of laying out your Blue Box strategy and your differentiation there. Given that a lot of these white box vendors are reporting really, really strong results, are you seeing any increased traction at your customers for white box? Are there certain sockets where white box makes sense and others where you have to go with Arista?
I don't think anything has changed in the dynamic in the sense of which use case is a white box use case versus a branded vendor. I don't think that has changed at all. That remains the same, even that's a boring answer to that question. I think that remains the same. I think what you're seeing is potentially when you're talking about these growth vectors, Sebastien, it's okay, at a point in time, you ship, you drop it on a dock, and you're done. Okay, well, that's recognized right away, that feels good in that moment because all that's coming through at that point in time. There's probably a difference in the sense of the time and deployment and how that comes through because you have to also take into account our model, which has the deferred.
We're not seeing anything that changes in the use case. It's the same. We appreciate the dynamic, I think that we understand there's a spot for white box in the deployments. There's a spot for branded vendor, and sometimes that choice for very select customers because you have to be able to have the team to support a NOS on a white box environment or a Blue Box environment. You're not talking smaller companies that can usually do this because then you're talking a CapEx versus OpEx trade-off. It's usually not for free, right?
From that perspective, we find it's very few customers that can even attempt to get into that scenario from just a cost ROI perspective. We don't think anything has changed. We don't think there's anything moving differently. If anything, we would probably double down that it's becoming more complex and the utilization of the XPUs is becoming more important and critical, and that would be in our favor.
Maybe staying on the theme of competition, NVIDIA has really emerged over the last couple of years as a real networking competitor. They talked, I think, on the last earnings call about a tripling of their Ethernet business. How do you go about competing with someone like NVIDIA, particularly given that they have an ability to potentially bundle their networking with their compute and all the other parts of the stack that they're selling? Where do you really see that you differentiate when you're talking to customers versus the NVIDIA Spectrum portfolio?
First, just we are completely thankful to NVIDIA for basically opening up this GPU market, we're very thankful because we participate in connecting those GPUs. It's not all just competitive relationship between us. There is a partnership relationship that way. If you get down just to networking, the type of networking we do, we have to be careful we're looking at apples to apples, and then I'll get to the competitive differentiation. Ethernet growth can also have NICs, it can have NVLink, it can have other parts that aren't part what Arista would compete in. I would encourage everyone to look at the apples to apples comparison growth and see what that growth is. I don't think it's the same growth number-trajectory you were just mentioning. I think that aside, how can we compete?
We can speak to what Arista can do. I think, again, with that phenomenal portfolio optionality, what we can do is compete on the options you have to build best-of-breed, the agnostic capability to bring in other XPs, et cetera. Best-of-breed usually is a good choice for our customers. They want to have the optionality. If they're open to that, we have a good chance of winning. I think that in the sense of if you look at the other factors we talked about, things like EOS and the AI for ops, those are also things that they're delighted to have.
Sometimes we see customers get into a vertical stack and then come back later realizing they want to go best-of-breed. Maybe it's not the first time, but even the second time that we see them. There's lots of options where we can see them and come back to them, but those are some of these scenarios where we absolutely can win for the networking part.
Yeah. That's really helpful. I wanted to ask maybe about a longer-term trend, which is this shift to Co-packaged optics that everyone is starting to talk more and more about. I think relatedly, Arista, right before the optical conference in March, introduced this concept of an XPO pluggable cable. Could you maybe just talk about, across both co-packaged and the XPO cable, what exactly is Arista's opportunity? Is there a way for you to monetize these trends? Is any of this a threat, particularly the CPO aspect?
Rudy, do you want to take this one?
Yeah, sure. In general, optics are not a big part of our revenue, right? We certify and kind of resell optics, but it's not a big part of our revenue. Really, our work in optics has really been about moving the industry forward. If you go back 10 years, we introduced OSFP, which is kind of getting to the end of its usefulness, if you will, right? We were really ready for a next generation. Now, when you get to that next generation, you certainly have one option, which is going down the co-package route. Can you extend pluggables? What XPO allows you to do is extend pluggables and comes with the benefits that when it's pluggable, it's a lot easier for customers to service them in the field.
It also uses the same supply chain that OSFP has used for the last 10+ years, right? There's significant advantages there, and one thing that I think sometimes goes unnoticed with XPO is it shrinks the physical size of the networking stack by reducing that front panel density, or I guess increasing the density and therefore shrinking the size. What that does is it opens up a whole bunch of other options for doing things like scale-up, where you can do things like copper for longer, where you can do things like MicroLEDs or RF. Frankly, solutions that are more efficient from a power perspective, from a dollar perspective, than going down a purely optical front. Now, perhaps we get to a point where co-packaged optics are inevitable. We're absolutely agnostic to it, right? We don't believe that co-packaged optics is a negative for us.
If anything, the engineering involved with co-packaged optics and making it successful is going to be super important. I think what we're hearing from customers is, A, delay co-packaged as long as possible. That's where I think XPO comes in. When you do go down the road of co-package, make it as open as possible. What customers don't want to do is be locked into a single supplier, a single vendor, because today they're not buying their optics from their switching maker. They're not buying their optics from even the chip maker. They're going out to Asia and buying the optics directly from the supplier. That's given them tremendous leverage. They don't want to be stuck in a place where they're having to deal with margin stacking and things of that nature.
There's both tactical reasons and financial reasons why I think we're trying to delay, as an industry, CPO for as long as possible. That's kind of what we hear from customers. When CPO is ready and necessary, we feel very well equipped to be there.
Got it. Is it right to think that a CPO chip just becomes part of your bill of materials that you build around, essentially?
Pretty much, yeah.
Yeah.
Yeah. With, again, I think the bar for failure in a CPO switch is far higher, right? If a switch fails with CPO, essentially the switch has to be taken down. Today with a pluggable, if one optic fails, you take that one optic out of commission, which means whatever workload is plugged into that, not the entire switch. If anything, I think the hardware design, the reliability that we've done so well with over the last 20 years is going to become even more paramount. We feel very well equipped for that, but customers do want us to try and delay that inevitability, if you will, for as long as possible.
Right. Okay. Maybe on the theme of maybe longer-term risks or threats, Google uses a lot of optical switching inside of their TPU racks. Are you concerned at all that you could see more and more hyperscalers move to optical switching? If so, does that present a risk to the packet-level switching that you guys are so good at?
I'll take that one as well. I think what we've seen is optical switching has a very specific niche use case, right? Google, as you pointed out, has been the biggest proponent of it. If you've seen some of the recent announcements from Google, I think even they're admitting that once you go beyond a certain scale, really go beyond a scale-up domain where you're dealing with fairly uniform kind of workloads, you have to go Ethernet. That per-packet switching capability, the ability to decide, okay, where does this packet go as you look at each packet and look at the header, is tremendously useful. With optical switching, what happens is you're literally pointing the mirror in a different direction as you want to move stuff around. It doesn't really work well for any kind of real-time decision-making on, okay.
This packet should go there. As workloads get more heterogeneous, as workloads have higher entropy, really over time, Ethernet's always won, right? We don't feel like that's a threat. Like I said, the recent Virgo announcements are, if anything, a testament that while OCS has a space in the network, it's more confined to these narrower use cases. Once you want to go beyond a certain scale and beyond certain types of workloads, really, I think Ethernet's won that battle time and time again over the last 50 years.
Right. Sort of simple optical path, simple connections.
Correct
that makes more sense.
Like point to point, where you're not expecting to change things dynamically on the fly.
Yeah. Okay. Maybe here in the last few minutes, I could turn the questions a little bit to the enterprise business.
Sure.
You guys closed this acquisition of VeloCloud, which is an SD-WAN technology, about a year ago. Could you maybe just give us an update on where you are with that integration and if you've started to see any success in cross-selling, either the VeloCloud customers to more Arista products or vice versa?
Yeah. I am personally very happy on how VeloCloud has come along. I think that it was the largest acquisition we had done as a company, a lot of great work went into making that happen. The integration has gone well, that we are functionally integrated, so everyone's kind of gone and joined the teams that they recognize functionally. Most importantly, we've had great conversations with the customers. I think the customers are very excited that now it's part of the Arista family. It's part of, in the sense of the care and attention we can give it, given we're 5,000 people who focus on the portfolio and networking. I think the customers have received it well. They've given us great feedback and the things they'd love us to focus on, and we have a team dedicated to working through those.
I think it's gone as well as expected, and very happy to have the team there. Very talented team, and they've stayed with us, so I think that's a testament that they're enjoying their time and happy to be part of what we do as a company, our culture. For cross-selling, I think that given it's just coming up to a year, I think it's pretty good progress. We've gone through all the functional integration of everything from quote to cash and getting all the renewals and licenses sorted out. That was a lot of just transactional work. Now the real customers with the cross-selling are happening.
We're seeing it in a few of the enterprise segment, and it's both ways. It's VeloCloud into existing Arista customers and Arista into customers we did not have before. It's good customer acquisition. It's still early days, but definitely a pipeline is building. I would say that's on track with what our expectations were from a deal perspective.
Got it. Yeah. Great.
Two things I would maybe add there as well. One is, it has opened up a new route to market through the service providers because they had a pretty robust service provider business, as well. The other thing is, from a campus RFP perspective, often SD-WAN is becoming a checkbox requirement. Having that whole portfolio allows us to bid on campus. Even if it's not a direct upsell, cross-sell, it allows us to bid on a project that maybe a year back, we would've been disqualified because we didn't have an SD-WAN solution.
Right. Yeah. That's great. Okay. Maybe just last question, again, on the enterprise space. I think last year you had talked about the pending Juniper HPE acquisition as potentially driving more leads, more interest from customers. That acquisition closed about a year ago. Frankly, sounds like it's going quite smoothly for the company. I'm wondering, is that still an opportunity for Arista to take share from that customer base, or has that maybe become less of an opportunity?
Yeah, I think that from our position, we're starting at 3% market share in campus, so we're super excited to the upside. We're also excited that there's a great refresh cycle coming up in the next few years, and perhaps there's a pull into the refresh cycle as campuses get ready for AI and their AI story. There's a lot of goodness there, and we have the portfolio to serve. I think at 3% market share and the overall market's growing maybe high single digits, our growth is going to be share taking
I won't comment on specific who we're taking it from, but I can say that if our roadmap is clear and we're winning campus-first deals, and I think the more we can rinse and repeat that and have them as references, I think our share taking from whoever the incumbent is is what we'll be looking to do.
Right. Okay.
Yeah.
Got it.
Thank you.
I see we only have a few seconds left, so maybe just if you could give us your updated view on capital allocation.
Yeah
That's one of the benefits of Arista, is you guys have great margins and very high free cash flows, and they're only going up. You've made some acquisitions but not huge ones historically. Could you maybe just talk about how you think about M&A versus potentially a dividend, potentially more share buybacks?
Yeah, sure. Our capital allocation, just in a nutshell, remains the same. Organic investment, marketable securities, because we're still getting very strong interest income in this environment. Then it would be share repurchases and then M&A. When it comes to M&A, to answer your question, nothing obvious. We don't want to break the culture, and we don't want to go into something at new adjacency. If we see something more maybe in the AI space, either talent or tech, that's probably where we'd be looking.
Okay.
Yeah.
Great. Thank you very much.
Thank you for your time.
Thank you.
Thank you all for coming. We're going to have a breakout in Anna, where is it? In Maher.