Arista Networks Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 18, 2025

There are 14 speakers on the call.

Operator

Welcome to the Fourth Quarter twenty twenty four Arista Networks Financial Results Earnings Conference Call. During the call, all participants will be in a listen only mode. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section on the Arista website following this call.

Operator

Mr. Rudolf Arajjo, Arista's Head of Investor Advocacy, you may begin.

Speaker 1

Thank you, Regina. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Yulal, Arista Networks' Chairperson and Chief Executive Officer and Chantal Brightup, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal fourth quarter ending 12/31/2024. If you want a copy of the release, you can access it online on our website.

Speaker 1

During the course of this conference call, Arista Networks management will make forward looking statements, including those relating to our financial outlook for the first quarter of the twenty twenty five fiscal year, longer term business model and financial outlook for 2025 and beyond. Our total addressable market and strategy for addressing these market opportunities, including AI, customer demand trends, supply chain constraints, component costs, manufacturing output, inventory management and inflationary pressures on our business, lead times, product innovation, working capital optimization and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10 Q and Form 10 K, and which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non GAAP basis and have been adjusted to exclude certain charges.

Speaker 1

We have provided reconciliations of these non GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to Jayshree.

Speaker 2

Thank you, everyone, for joining us this afternoon for our fourth quarter twenty twenty four earnings call. First, I'd like to warmly welcome our new IR leadership duo of Rudolf Araujo, our Director of IR Advocacy, supported by Rod Hall that many of you may know as our leader for IR strategy. Special thanks to Liz Stein for her Kenya both as a systems engineer and IR lead at Arista. Well, I think you'll all agree that 2024 has been a memorable and defining year for Arista. We started with an initial guidance of 10% to 12% annual revenue growth.

Speaker 2

With the momentum of generative AI, we have achieved well beyond that at almost 20% growth, achieving a record revenue of $7,000,000,000 coupled with a non GAAP operating margin of 47.5%. Before I dwell on that more, let me get back to Q4 twenty twenty four specifics. We delivered revenues of $1,930,000,000 for the quarter with a non GAAP earnings per share of 0.65 adjusted for the recent four to one stock split. Our non GAAP gross margins of 64.2% was influenced by efficient supply chain and manufacturing as well as a good mix of enterprise and software in the quarter. International contribution for the quarter registered at 16% with The Americas super strong at 84%.

Speaker 2

Now shifting to annual sector revenue for 2024. Our cloud and AI titans contributed significantly at approximately 48%, keeping in mind that Oracle is a new member of this category. Enterprise and financials were strong at approximately 35%, while the providers, which now includes Apple, was at 17% approximately. Both Microsoft and Meta are greater than 10% concentration customers at approximately 2014.6% respectively. As you know, we cherish our privileged partnerships with both of them very much.

Speaker 2

It has spanned over fourteen years as we collaborate deeply with joint engineering and innovative AI and cloud products. In terms of annual twenty twenty four product lines, our core cloud AI and data center products are built off a highly differentiated extensible OS stack and is successfully deployed across ten, two thousand five hundred, two hundred, four hundred and eight hundred gigabit Ethernet speeds. It delivers power efficiency, high availability, automation and agility as the data centers demand insatiable bandwidth capacity and network speeds for both front end and back end storage, compute and AI zones. This core product line drove approximately 65% of our revenue. We continue to gain market share in the highest performance of the switching category of 100, two hundred and four hundred gig ports to attain the number one position at greater than 40% market share according to industry analysts in ports.

Speaker 2

We have increased our 400 gig customer base to approximately 1,000 customers last year in 2024. We expect 800 gigabit Ethernet to emerge as an AI backend cluster in 2025. We remain optimistic about achieving our AI revenue goals of $1,500,000,000 in AI centers, which includes the $750,000,000 in AI backend clusters in 2025. Our network adjacencies market comprised of routing, replacing routers, and the cognitive AI driven campus is going well. Our investments in cognitive wired wireless zero touch provisioning and network identity as well as sensors for threat mitigation is being received extremely well by our campus customers.

Speaker 2

Our recent modern stacking introduction of SWAG, Switched Aggregation Group, is a fitting example of our compelling innovation for open and efficient networking, conserving IP addresses without proprietary methods. The post pandemic campus is very different and our customers are seeking alternatives to legacy incumbents with deep zero trust security, high availability and observability embedded in the network across our software stack with cloud vision management. We are committed to the $750,000,000 goal in 2025 and much more ahead. We are successfully also deployed in routing edge and peering use cases. Just in 2024 alone, we introduced six EOS software releases with greater than 600 new features across our core and adjacent offerings.

Speaker 2

The campus and routing adjacencies together contribute approximately 18% of revenue. Our third category is network software and services based on subscription models such as Avista ACare, Cloud Vision, DMF observability and advanced security sensors for network detection and response. We added over three fifty Cloud Vision customers translating to literally one new customer a day. Cloud Vision is pivotal to building our network as a service and deploying Arista validated designs in the enterprise. Arista subscription based network services and software contributed approximately 17% of total revenue.

Speaker 2

Note that perpetual licenses do not count here and go into the core or adjacent sections. While the 2024 headline has clearly been about generative AI, Arista continues to diversify its business globally with multiple use cases and verticals. We are viewed as the modern network innovator of choice for client to campus to cloud and AI networking, ideally positioned with our differentiated foundation. We celebrated two milestones in 2024, our tenth anniversary of going public at the New York Stock Exchange and our twentieth anniversary of founding. In the past decade, we have exceeded 10,000 customers with a cumulative of 100,000,000 ports of installed base as Arista drives the epicenter of mission critical network transactions.

Speaker 2

Arista two point zero strategy is resonating exceptionally well with our customers. Customers are not only looking to connect, but unify and consolidate their data across silos for optimal networking outcomes. Our modern networking platforms are foundational for transformation from incongruent silos to centers of data. And it places us in a very unique position as the best of breed innovator for data driven networking. These centers of data, as we call it, can reside in the campus as a campus center or data centers or WAN centers or AI centers regardless of their locations.

Speaker 2

Networking for AI is also gaining traction as we move into 2025, building some of the world's greatest Arista AI centers at production scale. These are constructed with both back end clusters and front end networks. And as I've shared with you often, the fidelity of the AI traffic differs greatly from Cloud workloads in terms of diversity, duration, and size of flow. Just one slow flow can slow the entire job completion time for a training workload. Therefore, Arista AI centers seamlessly connect to the front end of compute storage WAN and classic cloud networks with our back end Arista Etherlink portfolio.

Speaker 2

This AI accelerated networking portfolio consists of three families and over 20 Etherlink switches, not just one point switch. Our AI for networking strategy is also doing well and it's about curating the data for higher level network functions. We instrument our customers' networks with our public subscribed state foundation with our software called Network Data Lake to deliver proactive, predictive and prescriptive platforms that have superior AI ops with ACARE support and product functions. We are pleased to surpass for the first time the $1,000,000,000 revenue mark in 2024 for the software and subscription service category. In 2024, we conducted three very large customer events in London, New York and Santa Clara, California.

Speaker 2

Our differentiated strategy and superior products are resonating deeply as we touched over 1,000 strategic customers and partners in these exclusive events. Simply put, we outpaced the industry in quality and support with the highest Net Promoter Score of 87, which translates to 93% of customer respondent satisfaction. Of course, we do that with the lowest security and vulnerabilities and steadfast network innovation. In summary, 2024 has been a pivotal turning point for Vista. It has been a key breakaway year as we continue to aim for $10,000,000,000 annual revenue with a CAGR of double digits that we set way back in November 2022 Analyst Day.

Speaker 2

While I do appreciate the exuberant support from our analyst community on our momentum, I would encourage you to pay attention to our stated guidance. We live in a dynamic world of changes, most of which have resulted in positive outcomes for Vista. We reiterate at the upper range of our 2025 guidance of our double digit growth at 17% now aiming for approximately $8,200,000,000 in 2025 in revenue. The Arista leadership team has driven outstanding progress across multiple dimensions. In 2024, we are at approximately 4,465 employees rooted in engineering and customer investments.

Speaker 2

I'm incredibly proud of how we've executed and navigated the year based on our core principles and culture. While customers are struggling with customer fatigue from our legacy incumbents, Arista is redefining the future of data driven networking intimately with our strategic customers. With that, I'd like to turn it over to Shantel, who has transitioned to become our core Aristan and Chief Financial Officer in record time, less than a year. Over to you, Shantel, and welcome again, and happy one year anniversary.

Operator

Thank you, Jayshree, and congratulations on a great 2024. My first full year as CFO has been more than I could have hoped for, and I am excited about Arista's journey ahead. Now on to the numbers. As a reminder, this analysis of our Q4, our full year 2024 results and our guidance for Q1 twenty twenty five is based on non GAAP and excludes all non cash stock based compensation impacts, certain acquisition related charges and other non recurring items. In addition, all share related numbers are provided on a post split basis to reflect the four:one stock split in December 2024.

Operator

A full reconciliation of our selected GAAP to non GAAP results is provided in our earnings release. Total revenues in Q4 were $1,930,000,000 up 25.3% year over year and above the upper end of our guidance of $1,850,000,000 to $1,900,000,000 For fiscal year twenty twenty four, we are pleased to have delivered 19.5% in revenue growth driven by achievements in all three of our product sectors. Services and subscription software contributed approximately 18.3% of revenue in the fourth quarter, up from 17.6% in Q3. International revenues for the quarter came in at $311,100,000 or 16% of total revenue, down from 17.6% last quarter. This quarter over quarter decrease was driven by the relative increased mix of domestic revenue from our large global customers.

Operator

The overall gross margin in Q4 was 64.2%, slightly above the guidance of 63% to 64% and down from 65.4% in the prior year. As a recap for the year, we delivered a gross margin result of 64.6% compared with 62.6% for the prior year. This increase is largely due to a combination of improved supply chain and inventory management. Operating expenses for the quarter were $332,400,000 or 17.2% of revenue, up from the last quarter at $279,900,000 R and D spending came in at $226,100,000 or 11.7% of revenue, up from 9.8 last quarter. This matches the expectations discussed in our Q3 earnings call regarding the timing of engineering costs and other costs associated with the development of our next gen products moving from Q3 to Q4.

Operator

This finishes the year of R and D at 11.2% of revenue, demonstrating a continued focus on product innovation. Sales and marketing expense was $86,300,000 or 4.5% of revenue, up from $83,400,000 last quarter. This was driven by continued investment in both headcount and channel programs. Our G and A costs came in at $19,900,000 or 1% of revenue, up from $19,100,000 last quarter, reflecting continued investment in scaling the company. Our operating income for the quarter was $907,100,000 or 47 percent of revenue.

Operator

This strong Q4 finish contributed to an operating income result for fiscal year twenty twenty four of $3,300,000,000 or 47.5% of revenue. Congratulations to the Arista team on this impressive achievement. Other income and expense for the quarter was a favorable $89,300,000 and our effective tax rate was 16.7%. This lower than normal quarterly tax rate reflected the release of tax reserves due to the expiration of the statute of limitations and favorable changes in state taxes. This resulted in net income for the quarter of $830,100,000 or 43% of revenue.

Operator

Our diluted share number was 1,283,000,000.000 shares resulting in a diluted earnings per share for the quarter of $0.65 up 25 from the prior year. For FY '24, we are pleased to have delivered a diluted earnings per share of $2.27 a 31.2% increase year over year. Now turning to the balance sheet. Cash, cash equivalents and marketable securities ended the quarter at approximately $8,300,000,000 In the quarter, we repurchased $123,800,000 of common stock at an average price of $94.8 per share. Within fiscal 'twenty four, we repurchased $423,600,000 of our common stock at an average price of $77.13 per share.

Operator

Of the $1,200,000,000 repurchase program approved in May 2024, dollars '9 '20 '1 million remains available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price and other factors. Now turning to operating cash performance for the fourth quarter, we generated approximately $1,000,000,000 of cash from operations in the period, reflecting strong earnings performance combined with an increase in deferred revenue offset by an increase in income tax payments. DSOs came in at fifty four days down from fifty seven days in Q3, reflecting the timing of shipments and a strong collections performance by the team. Inventory turns were 1.4 times, up from 1.3 last quarter.

Operator

Inventory increased marginally to $1,830,000,000 reflecting diligent inventory management across raw and finished goods. Our purchase commitments at the end of the quarter were $3,100,000,000 up from $2,400,000,000 at the end of Q3. As mentioned in prior quarters, this expected activity represents purchases for chips related to new products and AI deployments. We will continue to rationalize our overall purchase commitment number. However, we expect to maintain the healthy position related to key components and continue to have some variability in those number to meet customer demand and improve lead times in future quarters.

Operator

Our total deferred revenue balance was $2,790,000,000 up from $2,510,000,000 in the prior quarter. The majority of the deferred revenue balance is services related and directly linked to the timing and term of service contracts, which can vary on a quarter by quarter basis. Our product deferred revenue balance increased by approximately $150,000,000 over the last quarter. Fiscal twenty twenty four was a year of new product introductions, new customers and expanded use cases. These trends have resulted in increased customer trials and contracts with customer specific acceptance clauses that have and will continue to have increased the variability in magnitude of preferred deferred revenue balances.

Operator

We expect this to continue into fiscal twenty twenty five. Accounts payable days were fifty one days, up from forty two days in Q3, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $12,500,000 In October, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $100,000,000 in CapEx during fiscal 'twenty five for this project. Now turning to our outlook for the first quarter of twenty twenty five and the remainder of the fiscal twenty twenty five year. We continue to gain confidence in our view for fiscal year twenty twenty five and now place our revenue growth outlook at approximately 17% or $8,200,000,000 This is up from our initial FY twenty twenty five guidance of 15% to 17%.

Operator

This reflects our combined outlook for cloud, AI enterprise and cloud specialty providers along with the recognition of the volatility that we have seen in the market since the beginning of the year. For gross margin, we reiterate the range of the fiscal year of 60% to 62% with Q1 twenty twenty five expected to be above the range due to the anticipated mix of business in the quarter. Similar to others in the industry, we will continue to monitor the fluid tariff situation and be thoughtful for both the short and long term outcomes to both our company and our customers. In terms of spending, we expect to invest in innovation, sales and scaling the company, resulting in a continued operating margin outlook of 43% to 44% in 2025. On the cash front, we will continue to work to optimize our working capital investments with some expected variability in inventory due to the timing of the component receipts on purchase commitments.

Operator

Our structural tax rate is expected to remain at 21.5% back to the usual historical rate, up from the unusually low one time rate of 16.7% experienced last quarter Q4 FY '20 '20 '4. With all this as a backdrop, our guidance for the first quarter is as follows: revenues of approximately $1,930,000,000 to $1,970,000,000 a slightly stronger seasonality in Q1 than prior year trends and outcome of the timing of our customers' priorities gross margin of approximately 63% and operating margin at approximately 44%. Our effective tax rate is expected to be approximately 21.5% with approximately 1,285,000,000.000 diluted shares. In summary, we at ARIST are enthusiastic about 2025 and the general networking outlook ahead. We have an impressive portfolio and are ready to solve our customers' needs across all the centers of data.

Operator

Combined with our Arista team spirit, we are ready to realize our fair share of the $70,000,000,000 market temp. With that, I too would like to welcome Rudy and Rod to the Arista IR team. Back over to you, Rudy, for Q and A.

Speaker 1

Thank you, Chantal. We will now move to the Q and A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Operator, take it away.

Operator

We will now begin the Q and A portion of the Arista earnings call. Our first question will come from the line of Michael Ng at Goldman Sachs. Please go ahead.

Speaker 3

Hi, good afternoon. Thank you for the question.

Speaker 1

I was just wondering if

Speaker 3

you could talk about the timing of how the year might look like and you know, the how you expect the rest of the switches, in the AI back end to be rolled out into production. You know, are the sale of these switches tied to deployment of next generation NVIDIA chips or hyperscale custom ASICs on the compute side? And, you know, is that a gating factor that you're watching out for? Thank you.

Speaker 2

Yeah. Thank you, Michael. First, I want to say Arista is still committed to four out of our five AI clusters that I mentioned in prior calls. The fifth one is a little bit stalled. It is not a fault titan.

Speaker 2

They are awaiting new GPUs and some funding too, I think. So, I hope they'll come back next year. But for this year, we won't talk about them. But the remaining four, let me spend some, clear some color. Three out of the four customers are expected to this year roll out a cumulative of 100,000 GPUs.

Speaker 2

So we're going to do very well with three of them on the back end. And you can imagine, they're all pretty much one major NVIDIA class of GPU. It's, they will be waiting for the next generation of GPUs. But independent of that, we'll be rolling out fairly large numbers. On the fourth one, we are migrating right now from InfiniBand to proving that Ethernet's a viable solution.

Speaker 2

So we're still, they've historically been InfiniBand. And so we're still in pilots. And we expect to go into production next year. So doing very well in four out of four, the fifth one installed and three out of the four are expected to be 100,000 GPUs this year.

Operator

Our next question comes from the line of Amit Darianni with Evercore. Please go ahead.

Speaker 4

Good afternoon. Thanks so much for taking my question. I guess, Jeffrey, there's always this concern around the impact of white box vendors to your revenue growth and clearly over the last decade, I don't think it's been an impediment for the company. Can you maybe share your perspective that when it comes to AI networks, especially the back end networks, how do you see the mix evolving white box versus OEM solutions? And maybe just help us understand the differentiator that helped Arista be successful on the front end.

Speaker 4

Do they extend to the back end networks as well? Or is that something different we should be aware about? Thank you.

Speaker 2

Yes. Sure, Amit. Raj, this seems like a deja vu question, but thank you for asking it. I'm sure it's on a lot of minds. We've been going through this for at least ten years on the cloud.

Speaker 2

And the first thing I just want to say is this can is so huge and so large. We will always coexist with white boxes and operating systems that are non EUF, much like Apple co exists on the iPhones with other phones of different types. When you look at the back end of an AI cluster, there are typically two components, the AI lead and the AI spine. The AI V connects to the GPUs and therefore is the first, if you will, point of connection. And the AI Spine aggregates all of these AIVs.

Speaker 2

Almost in all the backend examples we've seen, the AI spine is generally 100% Arista branded EOS. You've got to do an awful lot of routing, scale, features, capabilities that are very rich that would be difficult to do in any other environment. The AI lease can vary. So for example, let's take the example of the five customers I mentioned a lot. Three on the side are all EOS in the lead time span.

Speaker 2

Two out of the five are kind of hybrid. Some of them have you know, some form of sonic or fBot. And as you know, we co develop with them and, you know, coexist in a number of use cases where it's a real hybrid combination of EOS and an open OS. So for most part, I just like to say that Whitebox and Arista will coexist and will provide different strokes for different folks. Now in terms of differentiator, a lot of our deployments right now is, 408 gig.

Speaker 2

And you see a tremendous amount of differentiation, not only like I explained to you in scale and routing features, but, cost and load balancing. AI visibility and analytics at real time. Personal viewing, suggestion control, visibility and most importantly, smart system upgrade because you sure don't want your GPUs to come down because you don't have the right software to accelerate. So that the network provides the ideal foundation that if the GPU is in trouble, we can automatically give it a different connection and an alternate connection. So tremendous amount of differentiation there and even more valid in a GPU which costs typically five times as much as a CPU.

Operator

Our next question comes from the line of Tim Long at Barclays. Please go ahead.

Speaker 5

Thank you. Wanted to touch on the Cloud Titan numbers a few part of there. Obviously, one of them, Meta, looks like, based on the numbers you gave, if I heard it write it down, year over year, if you could touch on that and then the other if we do the math for the other cloud titans looks like it went up a lot. I don't know I think Oracle was kind of in that already. Was there anything else going on other than the Oracle shift with the rest of the cloud titans where it looked extremely strong in 2024?

Speaker 5

Thank you.

Speaker 2

Yeah. So speaking specifically to Meta, we're obviously in a number of use cases in Meta. Keep in mind that our 2024 Meta numbers is influenced by more of that 2023 CapEx. And that was Meta's year of efficiency where the CapEx was down 50% to 20%. So you're probably seeing some correlation between their CapEx being down and our revenue numbers being slightly lower in '24.

Speaker 2

In general, I would just say all our positive titans are performing well in demand. And we shouldn't confuse that with timing of our shipments. And I fully expect Microsoft and Meta to be greater than 10% customers in a strong manner in 2025 as well. Specific to the others we added in, they're not 10% customers, but they're doing very well. And we're happy with their cloud and AI use cases.

Operator

Our next question comes from the line of Ben Reitzes with Melius. Please go ahead.

Speaker 6

Yes. Darn, Tim Long took my question. So I'm going to ask about gross margins. Yes. Darn that guy.

Speaker 6

So about gross margin, so obviously, they go between to 61 at the midpoint after being much higher in the first quarter. I would think that implies significant cloud titan mix though going throughout the rest of the year. Do you mind just giving some color on what is pushing down the gross margin a little more? And does that mean that cloud titans do accelerate throughout the year because the gross margin gets pushed down vis a vis in your guidance? Thank you.

Operator

Yes. Sorry, Jayshree. No, absolutely. I think you got it right, Ben, from that perspective. As we entered Q4 last year, talking about 25 guidance.

Operator

And as we enter into this quarter it is and still remains a mix. Jayshree kind of gave some thoughts on to the timing to the first question. So it is mix driven. There were some questions last quarter if it was price driven. This is just a mix driven conversation.

Operator

I would say we have absorbed a little bit of the specific tariffs on China in that number. So we are absorbing that on behalf of our customers. But otherwise, it's mix driven and we'll continue to update as we do the quarterly guidance through the year. John, you have a question.

Speaker 2

Sorry, I was just going to add that John's done a fantastic job on the planning for China ahead of time. So while we're absorbing the costs, most of it is related to the mix and some of it is related to the China tariffs. Would you say that?

Speaker 7

That's right. Absolutely. We've been working on China mitigation for some time and happy to report we've made good progress.

Operator

Our next question comes from the line of Meta Marshall at Morgan Stanley. Please go ahead.

Speaker 8

Great. Thanks. Maybe another topical question from investors, just over the past month has been, DeepSeek and just as you think about kind of this one to one ratio you've talked about on back end versus front end, how you kind of see that changing as we've seen some of the changes to kind of thoughts around training investments? Thanks.

Speaker 2

Yes. Thank you, Meera. Well, Deep six certainly Deep six many stocks. But I actually see this as a positive because I think you're now going to see a new class of CPUs, GPUs, AI accelerators and where you can have substantial efficiency gains that go beyond training. So that could be some sort of inference or mixture of experts or reasoning, and which lowers the token count and therefore the cost.

Speaker 2

So what I like about all these different options is a risk that can scale out network for all kinds of XPUs and accelerators. And I think the eye opening thing here for all of our experts who are building all these engineering models is there are many different types and training isn't the only one. So I think this is a nice evolution of how AI will not just be a backend training only limited to five customer fact phenomena, but will become more and more distributed across the range of CPUs and GPUs.

Speaker 8

Great. Thanks.

Speaker 2

Thank you, Meta.

Operator

Our next question comes from the line of Aaron Reaghers at Wells Fargo. Please go ahead.

Speaker 9

Yeah. Thanks for taking the question. Jayshree, I'm curious just kind of thinking about some of the questions we've gotten recently is, when you see announcements like Stargate and obviously Stargate has the involvement of one of your newer cloud Titan customers, how do you conceptualize the opportunity set for Arista vis a vis both back end and front end networking in deployments like that? And then do you have any thoughts on just the broader context of what you're seeing on Sovereign AI opportunities in your business? Thank you.

Speaker 2

Yes. Thank you, Aaron. Stargate and Sovereign AI are not quite related. So let me take the first one, Stargate first. If you look at how we have classically, approach GPUs and collective libraries, we've largely looked at it as two separate building blocks.

Speaker 2

There's the vendor who provides the GPU, and then there's us who provides the scale out networking. But when you look at Stargate and projects like this, I think you'll start to see more of a vertical rack integration, where the processor, the scale out, the scale out, and all of the software to provide a single point of control and visibility starts to come more and more together. This is not a 2025 phenomena, but definitely in '26 and '27, you're going to see a new class of AI accelerators for, and a new class of training and inference, which is extremely different than the current more plausible Lego type of version. So we're very optimistic about it. And Everto Schein is personally involved in the design of a number of these next generation projects.

Speaker 2

And the need for this type of, shall we say pushing Moore's law of improvements in density and performance that we saw in the 2000s is coming back. And you can boost more and more performance per XPU, which means you have to boost the network scale from 800 gig to 1.16. There are other things to consider, like liquid cooling and co packaging of copper and optics. So lots going on there that Arista is in the middle of best of breed hardware that John McCool's team is working on as well as Andy's team is.

Operator

Our next question comes from the line of Atif Malik at Citi. Please go ahead.

Speaker 1

Hi, thank you for taking my question. Desh, I appreciate you calling out to pay attention to the guidance. Now you are retracing $750,000,000 AI backend sales this year despite the stalled or the fixed customer. Can you talk about where is the upside coming from this year? Is it broad based or one or two customers?

Speaker 1

And also, if you can talk to the 70,000,000,000 SAM number for 2028, how much is AI?

Speaker 2

Okay. So I'll take your second question first, Atif. On the 70,000,000,000, TAM in 2028, I would roughly say, a third is AI, a third is data center and cloud, and a third is campus and enterprise. And obviously, absorbed into that is routing and security and observability. I'm not calling them out separately for the purpose of this discussion.

Speaker 2

So roughly 20 to 25 on each to get to that 70,000,000,000. So coming back to your original question, which was help me out again.

Speaker 1

The $750,000,000 in back and forth?

Speaker 2

Yeah. Yeah. So we're as I said, we're well on our way. And so three customers deploying a cumulative 100,000 GPUs is going to help us with that number this year. And as we increased our guidance to $8,200,000,000 I think we're going to see momentum both in AI, cloud and enterprises.

Speaker 2

I'm not ready to break it down and tell you which where. I think we'll see we'll know that much better in the second half. But, Chantal and I feel confident that we can definitely do the $8,200,000,000 that we historically don't call out so early in the year. So having visibility of that helps.

Speaker 3

Thank

Speaker 2

you. Thank you.

Operator

Our next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Speaker 10

Hi. Thanks for taking the question. Jayshree, maybe I can sort of bring up one more topic that's come up a lot in the last few days, which is the value of the EOS software layer to the back end of the network. And particularly in the discussion in terms of rate of competition to like a white box player, How do you sort of emphasize the value of U. S.

Speaker 10

To your customers? Can you sort of outline some of the sort of what are the key drivers we should keep in mind and again in that competitive landscape between white box and Orissa? Thank you.

Speaker 2

Yeah. Sure, Samek. First of all, when you're buying these expensive GPUs that cost $25,000 they're like diamonds, right? You're not going to string a diamond on a piece of thread. So first thing I want to say is you need a mission critical network.

Speaker 2

Whether it's called, whatever you wanna call it, white box, blue box, EOS or some other software, you've gotta have mission critical functions, analytics, visibility, high availability, etcetera. As I mentioned and I wanna reiterate, they're also typically a least fine network. And, I have yet to see an AI spine deployment that is not EOS based. I'm not saying it can happen or won't happen. But in all five major installations, the benefit of our EOS features for high availability, for routing, for VXLAN, for telemetry, our customers really see that.

Speaker 2

And the 7,800 is the flagship AI spine product that we have been deploying last year, this year and in the future. Coming soon, of course, is also the, the product we jointly engineered with Meta, which is the distributed Ether Link switch. And that is also an example of a product that provides that kind of lease fine combination, both with F BOSS and EOS Auctions in it. So in my view, it's difficult to imagine a highly resilient system without Arista EOS in AI or non AI use cases. On the leaf, you can cut corners.

Speaker 2

You can go with smaller buffers. You may have a smaller installation. So I can imagine that some people will want to experiment and do experiment in smaller configurations with non EUS. But again, to do that, you have to have a fairly large staff to build the operations for it. So that's also a critical element.

Speaker 2

So unless you're a large cloud cloud type of customer, this will you're less likely to take that chance because you don't have the staff. So all in all, EOS is alive and well in AI and cloud use cases, except in certain specific use cases where the customer may have their own operations staff to do so.

Speaker 4

Got it. Thank you.

Operator

Our next question comes from the line of Ben Bolen with Cleveland Research. Please go ahead.

Speaker 7

Good afternoon, everyone. Thanks for taking the question. Jayshree, I'm interested in your thoughts on your enterprise strategy within G2000 and how that may be evolving as, it looks like refresh opportunities are intensifying. Thank you.

Operator

Yeah, no,

Speaker 2

listen, we're always looking at three major threats, our classic cloud business, our AI and the enterprise led by Ashwin and Chris is a very significant area of investment for us. From a product point of view, we have a natural trickle down effect from our high end data center products to the cloud. And so whether it's the enterprise data center or the campus, I've never seen our portfolio be as strong as it is today. So a lot of our challenges and our execution is really in the go to market, right. And that just takes time.

Speaker 2

As you know, we've been slowly but steadily investing there. And our customer count, the number of projects we get invited to, especially as you pointed out in the Global two thousand, has never been stronger. One area I'd like to see more strength and Krishmit and the team are working on it as you can tell from our numbers is international. We're bringing in some new leadership there and hope to see some significant contributions in the next year or so.

Operator

Our next question comes from the line of Ryan Coons with Needham and Company. Please go ahead.

Speaker 6

Great. Thanks. Jayshree, can you comment about a little chatter lately about co package optics? Can you maybe speak about its place in your roadmap and how investors should think about that, the effect on your TAM and your opportunities to sell?

Speaker 2

Well, first of all, Andy has reminded me that co packaged optics is not a new idea. It's been around ten to twenty years. So the fundamental reason, let's go through why co packaged optics has had a relatively weak adoption so far, is because of field failures and most of it is still in proof of concept today. So going back to networking, the most important attribute of a network switch is reliability and troubleshooting. And once you solder a co packaged optics on a PCB, you lose some of that flexibility and you don't get the serviceability in manufacturing.

Speaker 2

That's been the problem. Now a number of alternatives are emerging and we're a big fan of co packaged copper as well as pluggable optics that can complement this like linear drive or LPO as we call it. Now we also see that if co packaged optics improves some of the metrics it has right now. For example, it has a higher channel count than the industry standard of eight channel pluggable optics. But we can do higher channel pluggable optics as well.

Speaker 2

So some of these things improve. We can see that both CPC and CPO will be important technologies at two twenty four gig or even four forty eight gig. But so far, our customers have preferred a label approach that they can mix and match pluggable switches and pluggable optics and haven't committed to soldering them on the PCB. And we feel that will change only if CPO gets better and more reliable. And I think CPC can be a nice alternative to that.

Speaker 6

Appreciate your thoughts. Thank you.

Operator

Our next question comes from the line of Simon Leopold with Raymond James. Please go ahead.

Speaker 7

Thank you very much

Speaker 5

for taking the question. I was hoping you could maybe double click on the cognitive adjacencies. It's been a meaningful part of revenue. I think you said 18%. If you could offer a little bit more color about how the elements of that are trending and your expectations for how that part of the business is growing in your 2025 expectations?

Speaker 5

Thank you.

Speaker 2

Yeah. No, as you can imagine that's an important both the routing and the campus and we've already signed up to $750,000,000 So we clearly out of our $8,200,000,000 expect that to be over a billion this year, right? Now we don't, in the routing use case, which is particularly enterprise and service provider related, you know, it's, as I've often said, it's difficult to measure it in isolation. So we're very strict about the definition being it has to be a combination of the software running with a dedicated routing hardware. So for example, if their hardware is shared across switching and routing, we don't count it there.

Speaker 2

So I think sometimes we shortchange the numbers a little bit and more of it goes in the core.

Operator

But I just want you to

Speaker 2

be aware that's a very strategic piece. You add that to the fact that the SD WAN market is now evolving. It's not just about how do you do encryption and tunnels and migrate from MPLS, but you really need a routed backbone. So the combination of SD WAN in the Edge and a routed backbone really falls into the sweet spot for a risk up, both of the enterprise and service providers. I don't need to tell you about our campus initiatives.

Speaker 2

We are very, very keen there. We see a parting of those fees, if you will, where there's a lot of fatigue with subscription models on the campus from one competitor and another set of competitors who are trying to do a merger or acquisition. So Arista is the only pure play campus innovator who can provide that best of breed. And we're particularly getting traction there where our data center customers are already familiar with us and they're using a data center spine and they can extend that same universal spine to wired and wireless leads. So using cloud vision as a management domain, we're seeing much much more traction, be it for automation, zero plus security or observability with our campus products.

Speaker 2

So I think both of those are meaningful and we expect them to exceed a billion dollars. Chantal, you wanna say a few words?

Operator

Yeah. The only other things I'd add, Jayshree, to your points which are completely showing the intent. The other things for campus are a couple fold. First is, John, who's here with us, has spent a lot of time getting us better lead times coming into this year. So we have a great lead times conversation.

Operator

We're very excited about that. And the customers seem to pretty excited as well. We also have a curated preferred partner program, particularly international to your point earlier, Jayshree, on growing the international revenue. And we're excited because we've seen some campus first wins where not only is the DC bringing us in, but are actually bringing the DC through a campus win. So just add a couple more points to this enthusiasm for 2025.

Speaker 2

Thank you. Great reminders.

Operator

Our next question will come from the line of Tal Liani at Bank of America. Please go ahead.

Speaker 6

Hi, guys.

Speaker 11

Two questions, one on routing and one on enterprise. Enterprise grew 16% this year. What drives it? Is it just regular growth of data centers or do you start to see enterprises investing because of AI and applications for AI? The second thing is about routing.

Speaker 11

Routing used to be a small opportunity when it was just a license. Can you elaborate on routing? What is your differentiation versus the others that are bundling it with optics? How do you sell it? And then how big is the opportunity?

Speaker 11

Not in terms of numbers, but is it now a hardware with software or is it just software license like it used to be? Thanks.

Operator

Well, Jayshree, I can start with enterprise. And then do you want to go ahead? Sure. Sure. Yes.

Operator

So I think for enterprise, there are a few ways I would describe kind of our growth vectors in 2024 and continuing into 2025 and into the following years. One is coverage. You've seen we've invested in sales and marketing headcount in 2324 and going into 2524, we had double digit increase in sales and marketing headcount. So we're just getting more coverage. We're also using that preferred partner program I mentioned to get into the enterprise.

Operator

We do have international kind of campaigns that we're working on. We do have a new logo focus. And so I think that all those land and expand motions are the growth vectors. I would say for the AI perspective, speaking with the customers, it's great to move from kind of a theory to more specific conversation and you're seeing that in the banks and some of the higher tier Global 2,000 Fortune 500 companies. And so they're moving from theory to actual use cases they're speaking to.

Operator

And the way they describe it is it takes a bit of time to, you know, they're working mostly with cloud service providers at the beginning, kind of doing some training and then they're deciding whether they bring that on prem and inference. So they're making those decisions. So I think those are early days, but we're having really great conversations for the AI part of that. Jayshree, did you want to cover that?

Speaker 2

Yeah. So Tom, on routing, routing has always been a critical part of our offerings for the cloud and data center where as you rightly described, there was more of a software enhancement. But as we are getting more meaningful and important to the service providers as well as to the large enterprises, I was just with a very large bank in New York last week, It was snowing there, so it was super cold, so I stayed indoors most of the time. And the use case there is not data center. It's not campus.

Speaker 2

It's all a WAN routed fabric. It's pretty amazing. And then they're looking for us to not just build that core routing as a hub, but also take it into the spoke. And you mentioned features. I think what happened with Arista is we were largely building features for the cloud and data center, which is 20% of the features.

Speaker 2

But today our routing portfolio is much more complete. VxLANsec, Tunnelsec, MACsec encryption, MPLS, segment routing, OSPF, BGC, we got it all. So we're no more apologizing for what we don't have in routing and we obviously have the best software stack in terms of quality and support in the industry. So while we are selling a lot of software SKUs, we are now finding ourselves in a lot of dedicated hardware SKUs, particularly with the 07/1980 platform that has been a real workhorse for us and very successful.

Speaker 11

Great. Thank you.

Speaker 2

Thank you, Tal.

Operator

Our next question comes from the line of Antwan Sh Gabin with New Street Research. Please go ahead.

Speaker 12

Hi. Thank you for taking my question. I'd love to get your latest perspective on what you're hearing from service providers in AI. One of your competitors mentioned that they were seeing AI driving demand for service providers because they're building out their network in anticipation of an increase in traffic driven by AI. So just wondering if you could comment

Speaker 4

on that as well. Thank you.

Speaker 2

Ajman, do you mean the classic service providers or generally the NeoCloud?

Speaker 12

The classic service providers.

Speaker 2

Okay. So we haven't seen a huge uptick there yet. I think, maybe some experimental, but we have to answer a question you didn't ask, we have seen much more activity and somebody earlier that I didn't answer, the Sovereign Cloud, the Neo Cloud, we are seeing a new class of Tier two specialty cloud providers emerge that want to provide AI as a service and want to be differentiated then. There's a whole lot of funding, grant money, real money going in there. So service providers too early to call, but neo clouds and specialty providers, yeah, we're seeing lots of examples of that.

Speaker 4

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Matt Niknam with Deutsche Bank. Please go ahead.

Speaker 7

Hey, thanks so much for taking the question. Maybe for Chantal, I mean, you're sitting now on $8,000,000,000 worth of cash and equivalents on the balance sheet. So maybe just an update on how you'd prioritize uses of cash heading into 2025? Thank you.

Operator

Yes. No, it's great. Thank you for the question. We're very pleased with the performance and our capital allocation strategy has not changed coming into FY 2025. Just to kind of reiterate and remind and I appreciate the opportunity to do First of all, in the sense of investing that cash where we can still get a very reasonable and respectable return continues to be a priority.

Operator

Repurchasing, you saw the way we did through 2024 and willing to do what we can through 2025. Organic investment, so you saw that in the sense we're still looking to scale the company in R and D, sales, back office. And probably the one that's the least on the scale is sizable inorganic activity. So I would focus on the first four. And that's how we'll remain in '25.

Operator

Our next question comes from the line of David Vogt with UBS. Please go ahead.

Speaker 13

Great. Thanks guys for taking my question. So, Jayshree, I have a question about sort of the evolution of speed deployment at some of your M and M customers. Obviously, you mentioned 400 and 800Gs have been obviously a principal driver. How are you thinking about how that plays out in 2025 and beyond?

Speaker 13

There's some wins out there. I know different parts of the network at 1.6, but trying to get a sense for how you think about 400 into 800 into ultimately 1.6, not just in 2025, but in 2026 and beyond? Thanks.

Speaker 2

Yeah. No, I think that's a very good question. The speed transitions because of AI are certainly getting faster. It used to take, when we went from 200 gig for example at Meta or 100 gig in some of our cloud titans to 400, that speed transition typically took three to four, maybe even five years, right? In AI, we see that cycle being almost every two years.

Speaker 2

So I'd say 2024 was the year of real 400 gig. '25 and '26 I would say is more 800 gig. And I really see 1.6 coming into the picture because we don't have chips yet. Maybe in, what do you say John, late twenty six? And real production maybe in '27?

Speaker 7

That's right.

Speaker 2

So there's a lot of talk and hype on it just like I remember talk and hype on 400 gig five years ago. But I think realistically, you're gonna see a long runway for 408 gig. Now as we get into 1.16, part of the reason I think it's going to be measured and thoughtful is, many of our customers are still awaiting their own AI accelerators or NVIDIA GPUs, which, with liquid cooling that would actually push that kind of bandwidth. So, new GPUs will require new bandwidth and that's going to push it out a year or two.

Speaker 13

Great. Thank you very much.

Speaker 2

Thank you. David?

Operator

Our next question comes from the line of Karl Ackerman with BNP Paribas. Please go ahead.

Speaker 7

Yes. Thank you.

Speaker 1

Could you discuss the

Speaker 7

outlook for services relative to

Speaker 5

your outlook for March and

Speaker 7

the full year? I ask because services grew 40% year over year and your deferred revenue balance is up another $250,000,000 or so sequentially, nearly $2,800,000,000 So the outlook for that would be very helpful. Thank you.

Operator

Yeah. We don't usually guide the piece parts of that. So all I would say is that the thing to keep in mind with services is a little bit of timing in the sense of catching up to product, especially kind of post COVID. So I would kind of take the trend that you see over the last few years and that's probably your best guide looking forward. We don't guide the piece parts.

Speaker 2

Thank you. Thanks, Kyle.

Operator

Our next question will come from the line of Sebastian Naggi with William Blair. Please go ahead.

Speaker 7

Yeah. Thanks for taking the question. And we've talked about this a little bit, but there's been a lot of discussion over the last few months between, you know, the general purpose GPU clusters from NVIDIA and then the custom ASIC solutions from some of your popular customers. I guess, just in your view over the longer term, does Arista's opportunity differ across these two chip types? And is there one approach that would maybe pull in more Arista versus the other?

Speaker 2

Yeah, no, absolutely. I think, I've always said this, you know, you guys often spoke about NVIDIA as a competitor. And I don't see it that way. I see that thank you NVIDIA, thank you Jensen for the GPUs because that gives us an opportunity to connect to them. And that's been a predominant market for us.

Speaker 2

As we move forward, we see not only that we connect to them that we can connect to AMD GPUs and built in in house AI accelerators. So a lot of them are in active development or in early stages. Nvidia is the dominant market share holder with probably 80%, ninety %. But if you ask me to guess what it would look like two, three years from now,

Operator

I

Speaker 2

think it could be fiftyfifty. So Arista could be the scale out network for all types of accelerators. We'll be GPU agnostic. And I think there'll be less opportunity to bundle by specific vendors and more opportunity for customers to choose best degree.

Speaker 1

This concludes Arista Networks fourth quarter twenty twenty four earnings call. We have posted a presentation that provides additional information on our results, which you can access on the Investors section of our website. Thank you for joining us today and for your interest in Arista.

Operator

Thank you for joining ladies and gentlemen. This concludes today's call and you may now disconnect.

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