Arista Networks, Inc.

Welcome to the second quarter 2023 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. If at any time during the conference you need to reach an operator, please press star followed by zero. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call. Ms. Liz Stein, Arista's Director of Investor Relations, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jay Sriwal, Arista Network's President and Chief Executive Officer, and Ida Brennan, Arista's Chief Financial Officer. This afternoon, Arista Network issued a press release announcing the results for its fiscal second quarter ending June 30th, 2023. If you would like a copy of the release, you can access it online at our website. During the course of this conference call, ERISA Networks Management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2023 fiscal year, longer-term financial outlooks for 2023 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 time, 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 10Q and Form 10K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to Jayshree.

Thank you, Liz, and happy last day in July, everyone. We delivered revenues of $1.46 billion for the quarter with a non-GAAP earnings per share of $1.58. Services and software support renewals contributed approximately 15.2% of revenue. Our non-GAAP gross margins of 61.3% was influenced by improving supply chain overheads and higher enterprise contributions. We do expect gross margins to consistently improve every quarter this year and stabilize in 2024. International contribution registered at 21%, with the Americas at 79%. As we surpass 75 million cumulative cloud networking ports, we are experiencing three refresh cycles with our customers. 100 gigabit migration in the enterprises, 200 and 400 gigabit migration in the cloud, and 400 going to 800 gigabits for AI workloads. During the past couple of years, we have enjoyed significant increase in Cloud CapEx to support our Cloud Titan customers for their ever-growing needs, tech refresh, and expanded offerings. Each customer brings a different business and mix of AI networking and classic cloud networking for their compute and storage clusters. One specific Cloud Titan customer has signals of slowdown in capex from previously elevated levels. Therefore, we expect near-term Cloud Titan demand to moderate, with spend favoring their AI investments. We do project, however, that we will grow in excess of 30% annually versus our prior analyst day forecast of 25% in 2023. The AI opportunity is exciting. As our largest cloud customers review their classic cloud and AI networking plans, Arista is adapting to these changes, thereby doubling down on our investments in AI. Arista is a proud founding member of the Ultra Ethernet Consortium that is on a mission to build open multi-vendor AI networking at scale based on proven Ethernet and IP. There are a lot of software and EOS considerations for AI. AI traffic and performance demands are different as it comprises of a small number of synchronized high-banded flows, making them prone to collisions that slow down the job completion time of AI clusters. As we connect thousands of GPUs, generating billions of parameters for periscale clusters, Arista's EOS capabilities must also scale along with our AI spine and leaf platforms to achieve that consistent performance and throughput. Arista has been developing EOS features such as intelligent load balancing and advanced analyzers to report and rebalance flows that can achieve predictable performance. Customers can now pick and choose programmable packet header fields for better entropy and efficient load balancing of their AI workloads. Network visibility is also important in the training phase for large datasets to improve the accuracy of large language models. Arista's new AI analyzer monitors and reports traffic counters at microsecond-level windows to detect and address microbursts. Our AI strategy and platforms are resonating well with our early customers. Presently, in 2023, we are in the middle of trials for backend AI networks, leading to pilots in 2024. We expect larger clusters and production deployments in 2025 and beyond. In the decade ahead, AI networking will become an extension of cloud networking to form a cohesive and seamless front-end and back-end network. In the non-cloud enterprise category, we continue to experience good momentum in both data center and campus. Let me illustrate with a few customer wins. The first is an international new transportation win where the customer was seeking to modernize their legacy campus. Their endpoints included large and small campus locations, internal communication devices, various IOTs, CCTV, display boards, and much more. The customer mandated a fully automated workflow. Arista presented a highly optimized, best of class cognitive campus. With Arista's single binary EOS image across all campus platforms, complete with a universal API and built-in automation features, the customer was set on a path to continued campus modernization. The next enterprise win involves both data center and campus with advanced EVPN L3 VPN over VXLAN routing architectures instead of the traditional Layer 2 extension. Distributed AVA sensors were strategically positioned within the network to capture and analyze traffic at critical points. This zero trust approach emphasizes threat mitigation throughout the network as opposed to relying solely on silo security. The integration of real-time streaming telemetry and visibility capabilities proved to be paramount in obtaining this operational acceptance. The final win was in a large public sector, connecting redundant data centers to hundreds of campus locations with a large routing environment. They were challenged with complex MPLS routing that was hard to operate across the WAN and campus network. An upgrade of any magnitude implied several million dollars impacting change controls to touch on all their sites. Arista demonstrated that the customer could use a single sign for both LAN and WAN to dramatically simplify and automate the whole environment within 30 days. This 80% reduction in total cost of ownership was made possible with Arista's modern cloud operating model. You can see a recurring theme here across all these customer wins, which is the power of our platform innovation, quality, and support with a low TCO and a single cloud vision and EOS software stack. Arista is diversifying its business to transform the enterprise to a modern network operating model. Before I hand to Ida, I would like to share with you that Ida is planning to retire sometime next year in 2024. She has had a stellar career at Arista as our chief financial officer. Ira has been our business partner and friend for the past eight years. She has displayed the Arista way, always prioritizing our customers, employees, and shareholders. Ira has demonstrated and delivered both growth and profitability with a very, very small G&A investment, often only 1.5% of revenues. These type of pristine financials are so rare in a fast-growing tech company and only possible with a shared vision between the CFO and CEO. Ida, thank you for your steady leadership and contribution. Undoubtedly, we will miss you next year when you retire. Over to you for financial metrics.