Arista Networks, Inc.

Good afternoon, everyone, and thank you for joining us. With me on today's call are Jay Shriulal, Arista Network's chairperson and chief executive officer, and Chantel Brightup, Arista's chief financial officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal third quarter ending September 30th, 2024. If you would like a copy of this 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 fourth quarter of the 2024 fiscal year, longer-term business model and financial outlooks 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 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 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. 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 thank you everyone for joining us this afternoon for our third quarter 2024 earnings call. We delivered revenues of 1.81 billion for the quarter with a record non-GAAP earnings per share of $2.40. Services and software support renewals contributed strongly at approximately 17.6% of revenue. Our non-GAAP gross margin of 64.6% was influenced by both pressure from CloudSight and customer pricing, offset by favorable enterprise margin and supply chain hygiene. International contributions for the quarter registered at approximately 18%, with the Americas very strong at 82%. Clearly, Q3 2024 had a lot of bright spots in the quarter, and we are encouraged by the strength and momentum of the company. At the recent 10th anniversary in June in 2024 celebration and vision event, we covered a lot of ground and what we would have otherwise said in an analyst's day. So today I'd like to briefly expand on our Arista 2.0 plans for 2025. We believe that networks are emerging at the epicenter of mission critical transactions and our Arista 2.0 strategy is resonating well with customers. We are, we believe, the only pure play network innovator for the next decade. Our modern networking platforms are foundational for transformation from silos to centers of data. This can be a data center, a campus center, a WAN center, or an AI center. At the heart of this is our state-oriented, publish, subscribe, network data lake, EOS software stack for multimodal data sets. One simply cannot learn without having access to all this data. So it is all about the data. We provide customers the state foundation for data for AI and machine learning, without which AI and ML would just be buzzwords. Arista is well-positioned with the right network architecture for client-to-campus data center, cloud, and AI networking. Three principles guide us and differentiate us in bringing this data-driven networking. Number one, best-in-class, highly available, proactive products with resilience and hitless upgrades built in at multiple levels. Two, zero-touch automation and telemetry with predictive client-to-cloud one-click operations with that granular visibility that relies less on human staff. Number three, prescriptive insights for deeper AI for networking, delivering AIOps and AVA algorithms for security, observability, and root cause analysis. Networking for AI is gaining a lot of traction as we move from trials in 2023 to more pilots in 2024, connecting to thousands of GPUs. and we expect more production in 2025 and 2026. In our vernacular, Arista AI centers are made up of both the backend clusters and frontend networks. AI traffic differs greatly from cloud workloads in terms of diversity, duration, and size of flow. The fidelity of AI traffic flows where the slowest flow matters, and one slow flow can slow down the entire job completion time is a crucial factor in networking. Our AI centers connect seamlessly from the back end to the front end of compute, storage, WAN, and classic cloud networks. Arista is emerging as a pioneer in scale-out Ethernet accelerated networking for large-scale training and AI workloads. Our new EtherLink portfolio with wire speed 800 gig throughput and non-blocking performance scales from single-tier to efficient two-tier networks For over 100,000 GPUs, potentially even a million AI accelerators with multiple tiers. Our accelerated AI networking portfolio consists of three families with over 20 switching products and not just one point switch. At the recent OCP in mid-October 2024, we officially launched a very unique platform, the distributed EtherLink 7700, to build two-tier networks for up to 10,000 GPU clusters. the 77R4 DES platform was developed in close collaboration with Meta. And while it may physically look like and be cabled like a two-tier leaf spine network, DES provides a single-stage forwarding with highly efficient spine fabric, eliminating the need for tuning and encouraging fast failover for large AI accelerator-based clusters. It complements our Arista flagship 7800 AI spine for the ultimate scale with differentiated fare, and fully scheduled cell spraying architecture with a virtual output queuing fabric, saving valuable AI processor resources and improving job completion time. I would like to now invite John McCool, our Chief Platform Officer, to describe our 2024 platform and supply chain innovations after a challenging couple of years.

John, over to you. Thank you, Jayshree. I'm pleased to report The 7800R4 spine, along with the 7060X6 AI leaf that we announced in June have entered into production, providing our customers the broadest set of 800 gigabit per second Ethernet products for their AI networks. Together with 800 gigabit per second parallel optics, our customers are able to connect two 400 gigabit per second GPUs to each port, increasing the deployment density over current switching solutions. This broad range of Ethernet platforms allows our customers to optimize density and minimize tiers to best match the requirements of their AI workload. As our customers continue with AI deployments, they're also preparing their front-end networks. New AI clusters require new high-speed port connections into the existing backbone. These new clusters also increase bandwidth on the backbone to access training data, capture snapshots, and deliver results generated by the cluster. This trend is providing increased demand for our 7800R3 400 gigabit solution. While the post-pandemic supply chain has returned to predictability, lead times for advanced semiconductors remain extended from pre-pandemic levels. To assure availability of high-performance switching silicon, we've increased our purchase commitments for these key components. In addition, we will increase our on-hand inventory to respond to the rapid deployment of new AI networks and reduce overall lead times as we move into next year. Our supply chain team continues to work closely with planning to best align receipt of these purchases with expected customer delivery. Next-generation data centers integrating AI will contend with significant increases in power consumption while looking to double network performance. Our tightly coupled electrical and mechanical design flow allows us to make system-level design tradeoffs across domains to optimize our solutions. Our experience in co-design with the leading cloud companies provides insight into the variety of switch configurations required for these tightly coupled data center environments. Finally, our development operating software with SDK integration, device diagnostics, and data analysis supports a fast time to design and production with a focus on first-time results. These attributes give us confidence that we will continue to execute on our roadmap in this rapidly evolving AI networking segment. Back to you, Jayshree.

Thank you, John. And congrats on a very high performance here to you and your new executives, Alex Rose, Mike Kappes, Luke Calero, and the entire team. You guys have really done a phenomenal job. Critical to the rapid adoption of AI networking is the Ultra Ethernet Consortium specification expected imminently, with Avista's key contributions as a founding member. The UEC ecosystem for AI has evolved to over 97 members. In our view, Ethernet is the only long-term viable direction for open standard space AI networking. Arista is building holistic AI centers powered by our unparalleled superiority of EOS and the depth of automation and visibility software provided by Cloud Vision. Arista EOS delivers dynamic methods using cluster load balancing for congestion control, and smart system upgrades where the traffic for AI continues to flow in the midst of an upgrade. Arista continues to work with AI accelerators of all types, and we're agnostic to Nix to bring advanced EOS visibility all the way down to the host. Shifting to 2025 goals. As we discussed in our New York Stock Exchange event in June, our time has expanded to 70 billion in 2028. And you know, we've experienced some pretty amazing growth years with 33.8% growth in 23 and 2024 appears to be heading at least to 18% exceeding our prior predictions of 10 to 12%. This is quite a jump in 2024 influenced by faster AI pilots. We are now projecting an annual growth of 15 to 17% next year, translating to approximately 8 billion in 2025 revenue with our healthy expectation of operating margin. Within that $8 billion revenue target, we're quite confident in achieving our campus and AI backend networking targets of $750 million each in 2025 that we set way back one or two years ago. It's important to recognize, though, that the backend of AI will influence the frontend AI network and its ratios. This ratio can be anywhere from 30% to 100%, and sometimes we've seen it as high as 200% of the backend network. depending on the training requirements. Our comprehensive AI center networking number is therefore likely to be double of our backend target of 750 million, now aiming for approximately 1.5 billion in 2025. We will continue to aim for double digit annual growth and a three-year CAGR forecast of teens in the foreseeable future of 2024 to 2026. More details forthcoming from none other than our chief financial officer, So over to you, Chantelle.

Thank you, Jayshree. Turning now to more detail on the financials. This analysis of our Q3 results and our guidance for Q4 fiscal year 24 is based on non-GAAP. It excludes all non-cash stock-based compensation impacts, intangible asset amortization, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues reached $1.81 billion, marking a 20% year-over-year increase. This strong performance exceeded our guidance range of 1.72 to 1.75 billion. Services and subscription software contributed approximately 17.6% of revenues in the third quarter. International revenues for the quarter came in at $330.9 million or 18.3% of total revenue down from 18.7% last quarter. This quarter over quarter decrease reflects an increased contribution from domestic shipments to our cloud and enterprise customers. Overall, gross margin in Q3 was 64.6%, above the upper range of our guidance of approximately 64%, down from 65.4% last quarter and up from 63.1% in Q3 prior year. This year-over-year improvement is driven by stronger enterprise margins and supply chain discipline in the current quarter. Operating expenses in the quarter were $279.9 million, or 15.5% of revenue, down from last quarter at $319.8 million. R&D spending came in at $177.5 million, or 9.8% of revenue, down from $216.7 million last quarter. An item of note is that there were additional R&D related expenses originally expected in Q3 that are now expected to materialize in the Q4 quarter. R&D headcount has increased low double digit percentage versus Q3 in the prior year. Sales and marketing expense was $83.4 million, or 4.6% of revenue, down slightly from last quarter. Our G&A cost came in at $19.1 million, or 1.1%, similar to last quarter. Our operating income for the quarter was $890.1 million, or 49.1% of revenue. This was favorably impacted by the shift of R&D-related expenses from Q3, now anticipated in Q4 of this year. Other income and expense for the quarter was a favorable $85.3 million, and our effective tax rate was 21.1%. This resulted in net income for the quarter of $769.1 million, or 42.5% of revenue. Our diluted share number was 320.5 million shares, resulting in a diluted earnings per share number for the quarter of $2.40, up 31.1% from the prior year. This too was variably impacted by the shift in R&D related expenses from Q3 to Q4. Now, turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $7.4 billion. In the quarter, we repurchased $65.2 million of our common stock at an average price of $318.14 per share. Of the $1.2 billion repurchase program approved in May 2024, $1 billion remains available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent upon market and business conditions, stock price, and other factors. Turning to operating cash performance for the third quarter, we generated approximately $1.2 billion of cash from operations in the period, reflecting strong earnings performance combined with favorable working capital results. DSOs came in at 57 days, down from 66 days in Q2, reflecting a strong collections quarter combined with contributions from the linearity of billing. Inventory turns were 1.3 times, up from 1.1 last quarter. Inventory decreased to $1.8 billion in the quarter, down from $1.9 billion in the prior period, reflecting a reduction in our raw materials inventory. Our purchase commitments and inventory at the end of the quarter totaled $4.1 billion. up from $4 billion at the end of Q2. We expect this number to continue to have some variability in future quarters as a reflection of demand for our new product introductions. Our total deferred revenue balance was $2.5 billion, up from $2.1 billion in Q2. 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 increased approximately 320 million dollars versus last quarter. Fiscal 2024 continues to be 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 and has and will continue to increase the variability and magnitude of our product deferred revenue balances. Accounts payable days were 42 days down from 46 days in Q2. reflecting the timing of inventory receipt payments. Capital expenditures for the quarter were $7 million. In October, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $15 million during Q4 for this project. Now turning to the fourth quarter. Our guidance for the fourth quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts, intangible asset amortization, and other non-recurring items is as follows. Revenues of approximately $1.85 to $1.9 billion. Gross margin of approximately 63% to 64%. Operating margin of approximately 44%. Our effective tax rate is expected to be approximately 21.5%, with diluted shares of approximately 321 million shares on a pre-split basis. On the cash front, while we have experienced significant increases in operating cash over the last couple of quarters, We anticipate an increase in working capital requirements in Q4. This is primarily driven by increased inventory in order to respond to the rapid deployment of AI networks and to reduce overall lead times as we move into 2025, mentioned in John's prepared remarks. We will continue our spending investment in R&D, go-to-market activities and scaling the company. Additionally, in Q4, as part of our ongoing commitment to creating long-term value for our shareholders and enhancing the accessibility of our stock, We are pleased to announce that Arista's Board of Directors has approved a 4 for 1 stock split. This decision reflects our confidence in the continued growth and prospects of the company. It's important to note that while the stock split increases the number of shares outstanding, it does not change the intrinsic value of the company, nor does it impact our financial performance or strategy. The split is designed to make our stock more accessible and attractive to a wider range of investors, particularly retail investors. which we believe will ultimately support broader ownership and improve trading dynamics. Transitioning now to fiscal year 2025, as Jayshree mentioned, we are projecting revenue growth of 15 to 17%. The expected revenue mix is forecasted to have an increased weighting of cloud and AI customers, placing the gross margin outlook at 60 to 62%, an operating margin at approximately 43 to 44%. Our commitment remains to continue to invest in R&D, go-to-market, and the scaling of the company as we forecast to reach approximately $8 billion in revenue in 2025. We reiterate our double-digit growth forecast in the foreseeable future and a three-year revenue CAGR goal of mid-teens for fiscal years 24 through 26. We are excited by the current and future opportunities to serve our customers as the pure play networking innovation company and to deliver strong returns to our shareholders. I will now turn the call back to Liz. Liz?

Thank you, Chantel. We will now move to the Q&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.

We will now begin the Q&A portion of the Arista earnings call. In order to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press star and the number one again. We ask that you pick up your handset before asking questions in order to ensure optimal sound quality. Your first question comes from the line of the Sonic Chatterjee with JPMorgan. Please go ahead.

Hi. Thanks for taking my question and strong set of results, but if I can ask one on the guidance, if you don't mind. Jayashri, you're guiding here to the 750 million of AI target that you had issued previously and you're also guiding to sort of meet your campus revenue target. So if I take those two into account, it does imply that the X sort of AI and X campus business is only growing single digits next year. This is on the sort of heels of coming through a double-digit year in 2024, where you comped backlog digestion in 2023. So just maybe help us parse through that as to why there's a significant desperation in the non-AI, sort of non-campus business implied in the numbers and what maybe is driving that sort of, in your expectations, what's driving that outlook? Thank you.

Thank you, Sameek. As you know, our visibility only extends to roughly about six months, right? So we don't want to get ahead of ourselves on how much better we can do in 2025. And that's kind of how we started 2024 either. And we were pleasantly surprised with the faster acceleration of AI pilots in 2024. So we definitely see that our large cloud customers are continuing to refresh on the cloud, but are pivoting very aggressively to AI. So it wouldn't surprise me if we grow faster in AI and faster in campus in the new center markets and slower in our classic markets called that data center and cloud. And this is the best we can see right now. Doesn't mean we couldn't do better, or worse, but as far as our visibility goes, I think this represents a nice combination of all our different customer segments and all our different product sectors.

Okay. Thank you.

Thanks. Our next question comes from the line of Antoine Schaben with Newstreet Research. Please go ahead.

Hi. Thank you very much for taking my question. Can you maybe provide an update on the four major AI trials that you gave in the past? things progressing versus your expectations as of 90 days ago? And when do you expect the move to production to happen and what kind of scale are we talking about?

Yeah, no, thank you, Antoine. That's a good question. Arista now believes we're actually five out of five, not four out of five. We are progressing very well in four out of the five clusters. Three of the customers are moving from trials to pilots this year, and we're expecting those three to become, you know, 50 to 100,000 GPU clusters in 2025. We're also pleased with a new Ethernet trial in 2024 with our fifth customer. This customer was historically very, very InfiniBand driven, and we are now moving in that particular fifth customer. We are largely in a trial mode in 2024, and we hope to go to pilots and production in 2025. There is one customer who the three are going well. One is starting. The fifth customer is moving slower than we expected. They may get back on their feet in 2025. They're awaiting new GPUs, and they've got some challenges on power, cooling, et cetera. So three, I would give an A. The fourth one, we're really glad we won, and we're getting started. And the fifth one, I'd say steady state, not quite as great as we would have expected them to be.

Thanks for the call.

Our next question comes from the line of Tal Liani with Bank of America. Please go ahead.

Hi, guys. NVIDIA in the last quarter, because of the launch of the Spectrum X, it shows that in data center switching, their market share went up from like 4% to 15%. Does it mean that you're seeing increased competition from NVIDIA? And is it competing with you on the same spots, or is it more competing with white boxes? And the second question is about white boxes. What is the outlook for white box participation in GenAI? Is it going to be higher or lower than in front-end data centers?

Okay. Hi. Thanks, Charles. Which question do you want me to answer?

Let's go with NVIDIA.

Okay, all right. Give me the gift of... Somebody else may ask that question anyway, so you'll get your answer. But just to answer your question on NVIDIA, first of all, we view NVIDIA as a good partner. If we didn't have the ability to connect to their GPUs, we wouldn't have all this AI networking demand. So thank you, NVIDIA. Thank you, Jensen, for the partnership. Now, as you know, NVIDIA sells the full stack, and most of the time it's with InfiniBand. And with the Mellanox acquisition, they do have some Ethernet capability. We personally do not run into their Ethernet capability very much. We run into it maybe in one or two customers. And so generally speaking, Arista is looked upon as the expert there. We have a full portfolio. We have full software. And whether it's the large scale-out Ethernetworking customers like the Titans or even the smaller enterprises, we're seeing a lot of smaller GPU clusters of the enterprise. Arista is looked upon as the expert there. But that's not to say we're going to win 100%. We certainly welcome NVIDIA as a partner on the GPU side and a fierce competitor, and we look to compete with them on the Ethernet switching.

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

Thanks. I'll tag team with Tal, so we're partners once again here. So I do want to sort of look at this competition or competitive landscape broadly in that what I'm trying to understand is how it may be changing with the advent of AI. So not just hearing from you about Whitebox, but also competitors like Cisco and Juniper and Nokia. So really an update on the competitive landscape would be helpful. Thank you.

Yeah, thank you, Simon. That's a nice broad question. So since you asked me specifically about AI as opposed to cloud, let me parse this problem into two halves, the back end and the front end, right? At the back end, we're natively connecting to GPUs. And there can be many times we just don't see it because somebody just bundles it in the GPU, in particular, in NVIDIA. And you may remember a year ago, I was saying we're outside looking in because most of the bundling is happening within Citibank. I would expect on the back end, Any share Arista gets, including that $750 million, is incremental. It's brand new to us. We were never there before. So we'll take all we can get, but we are not claiming to be a market leader there. We're in fact claiming that there are many incumbents there with InfiniBand and smaller versions of Ethernet that Arista is looking to gain more credibility and experience and become the gold standard for the back end. On the front end, in many ways, we are viewed as the gold standard. So competitively, it's a much more complex network. You have to build a leaf-fine architecture. John alluded to this. There's a tremendous amount of scale with L2, L3, VPNs, VXLAN, visibility, telemetry, automation, routing at scale, encryption at scale. And this is what I would call accelerated networking portfolio complements NVIDIA's accelerated compute portfolio. And compared to all the peers you mentioned, we have the absolute best portfolio of 20 switches and three families and the capability and the competitive differentiation is bar none. In fact, I am specifically aware of a couple of situations where the applications aren't even running on some of the industry peers you talked about, and they want to swap theirs for ours. So feeling extremely bullish with the 7800 flagship product, the newly introduced 7700 that we worked closely with Meta, the 7060, this product line running today mostly at 400 gig because a lot of the make and the ecosystem isn't there for 800. But moving forward into 800, this is why John and the team are building the supply chain to get ready for it. So competitively, I would say we're doing extremely well in the front end and it's incremental on the back end. And overall, I would classify our performance in AI coming from being a no one two years ago to where we are today in AI.

Thank you.

Thank you, Simon. Our next question comes from the line of Ben Reitzis with Milius Research. Please go ahead.

Hey, Jayshree and team. Thanks for the question. I wanted to ask a little bit more about the $750 million in AI for next year. Has your visibility on that improved over the last few months? I wanted to reconcile your comment around the fifth customer not going slower than expected, and it sounds like you're now in five of five, but wondering if that fifth customer going slower, you know, is limiting upside or limiting your visibility there. or has it actually improved and it's gotten more conservative over the last few months?

Thanks a lot. Somebody has to bring up conservative, Ben, but I think we're being realistic. So I think you said it right. I think on three out of the five, we have good visibility, at least for the next six months, maybe even 12, John. What do you think? Yeah. On the fourth one, we're in early trials. We got some proving to do. So let's see. But we're not looking for 2025 to be the bang up year on the fourth one. It's probably 2026. And on the fifth one, we're a little bit stalled, which may be why we're being careful about predicting how they'll do. They may step in nicely in the second half of 25, in which case we'll let you know. But if they don't, we're still feeling good about our guide for 25. Is that right?

I would totally agree. It's a good question, Ben. But I think out of the five, the way Jayshree categorized them, I would completely agree.

Okay. Thanks a lot, guys. Our next question comes from the line of Carl Ackerman with BNP Paribas. Please go ahead.

Yes, thank you. J3, could you discuss whether the AI programs you're engaged with on hyperscalers will be deploying your new EtherLink switches and AI spine products on 800 gig ports? In other words, have these pilots or trials been on 400 gig and production could be on 800 gig? And I guess if so, what's the right way to think about the hardware mix of sales on 800 gig in 25? Yeah, yeah.

Good question. I mean, just going back to his again, it was always hard to tell between 100 and 400 because somebody can take their 400 and break it into, you know, breakouts of four 100s. So I would say today, if you ask John and I, majority of the trials and pilots are on 400 because people are still waiting for the ecosystem at 800, including the NICs and the UEC and, you know, the packet spraying capabilities, et cetera. So while we're in some early trials on 800, majority of 400, majority of 2024 is 400 gig. I expect as we go into 2025, we will see a better split between 400 and 800. Thank you. Thank you, Carl.

Your next question comes from the line of Ryan Koontz with Needleman Company. Please go ahead.

Great, thanks for the question. I was hoping we could touch base on your campus opportunities a bit. Where are you seeing the most traction in terms of your applications? Is this primarily from your strength and kind of core, you know, moving big bits around the campus core? Or are you seeing Wi-Fi? Can you maybe just update us on the campus applications and which verticals you're seeing the most traction in? Thank you.

Yeah, yeah. Ryan, let me try and step back and tell you that our enterprise opportunity has never been stronger. As a pure play innovator, we are getting invited more and more into enterprise deals, even though sometimes we don't often have the sales coverage for it. And what I mean by that is, I think Arista is being sought for a network design that doesn't have five operating systems and seven different silos and a bunch of spaghetti code. And there's an awful lot of competitive fatigue. And add to the fact that there's an awful lot of consolidation going on and A lot of our peers in the industry are looking at other things, whether it's observability or bringing other products together. So our enterprise opportunity now, we don't just characterize as data center. There's data center, there's campus center, there's WAN center, and of course, there's a little bit of AI in there too. So now let me address your campus question more specifically. Clearly, one of the first places everybody went on our campus is the universal spine. They go, oh, okay, I can have the same spine for my data center and campus. This is so cool. So that activity has already started, and a big part of our 750 million projection comes from the confidence that they've already put in a platform and a foundation to get ready for more spine. Then if Kumar Srikanta and our VP GM for campus were here, he'd say, but RJ Sri, you need to measure the edge ports, which is the power of the Ethernet, the wired and the Wi-Fi. And this is super important John McCool where you're smiling or laughing sounds like Kumar cool sounds like Kumar yeah um and so he would say you got to get that right and so number one we're in the spine two we're making stronger progress on the wired our weakest piece partly because we're data center folks and we're still learning how to sell radio is the wi-fi but we plan to fix that and this is where the extra coverage will come in so I would say more of our strength is coming in the wired and spine We are doing very well in pockets of Wi-Fi, but we need to do better.

Super helpful. Thank you.

Chantel, you want to add something? Just to take the second part, I think you were asking about some of the verticals in your question. I just wanted to add some of the verticals. Sure, sure. You know, I think that, you know, where we're seeing some strength data center and campus, I would say financials, healthcare, media, retail, Fed, and SLED.

Yeah, Fed and SLED, that's a good one. You know, this is historically an area we have not paid attention to. The federal market we're getting very serious about, including setting up its own subsidiary. So, Chantel, you've been a huge part of pushing us there, so thank you for that.

Thank you. Thanks so much.

Thank you, Brian. Our next question will come from the line of Amit Daryanani with Evercore. Please go ahead.

Good afternoon. Thanks for taking my question. I guess I'm hoping you could spend some time on the sizable acceleration we're seeing both on your total deferred number, but also the product deferred number is going up pretty dramatically. Jeffrey, historically, when product deferred goes up in such a dramatic manner, you actually end up with really good revenue acceleration in the out years, and you're guiding for revenues that decelerate in 25. Can you just help me connect, like, what's the delta? Why product deferred one makes the acceleration the way it historically has?

I'm going to let Chantelle, the expert, answer the question, but I will say one line. Remember, in the case of those examples you're quoting, the trials were typically, I don't know, six to 12 months. This can be multiple years and can take a lot longer to manifest. It may not all happen in 2025. Over to you, Chantelle.

I think, yes. So thank you, Jayshree. So part of it is the type of use case, the type of customers, the mix of product that goes in there. They all have bespoke timeframes, J.C. referred to. You know, you're starting to see those lengthen. And the other thing, too, is that this is what we know now. As you move through every quarter, there are deferreds in and out. So this is what we know at this time. And it's a mix of the variables that we told you before. And then as we move through 25, we'll continue to update.

Any comments?

Our next question will come from the line of Amita Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Jayshree, just wanted to get a sense of, you know, clearly you have these four main trials and have added a fifth, but just how are you thinking about kind of adding other either tier two opportunities or sovereigns or just kind of some of these other customers that are investing heavily in AI and kind of how do you see those opportunities developing for Rista?

Yeah, Mita, this is a good question. So we're not saying these five are the be-all, end-all. But these are the five we predict can go to 100,000 GPUs and more. That's the way to look at this. So they are the largest AI titans, if you will. And they can be in the cloud hyperscaler titan group. They could be in the tier two as well, by the way. Very rarely would they be in a classic enterprise. By the way, we do have at least 10 to 15 trials going on in the classic enterprise too, but they're much smaller GPU counts, so we don't talk about it. We're focusing on the big five to make a point that they really skew our numbers, and they're very important to establish our beachhead, our innovation, and our market share in AI. But there's definitely more going on. In terms of specifically your question on Tier 2 and will there be more, there will be more, but these are the five we see in that category, and they're spread across both the Tier 1 Titan Cloud as well as the Tier 2.

Great. Thanks so much.

Thank you, Meena.

Our next question comes from the line of Sebastian Nagy with William Blair. Please go ahead.

Yeah, good evening. Thanks for taking the question. Just specifically on the EtherLink portfolio, could you maybe rank order or comment on what you see as the opportunity across each of the three families, so single tier, LeafSpine, and then the EtherLink switch as we're going into 2025 and beyond?

I'll take a crack at it, but John, help me out here because this is purely a guesstimate. It's probably one we should say no comment, but we'll try to give you color. On the EtherLink, I would say the fixed 7060 switches in terms of units are very popular because it's a single switch. It's one our customers are familiar with. It's based on our intense partnership with Broadcom. So we've done Tomahawk 1, 2, 3, 4, and here we are on 5, right? So I would say volume-wise, that's the big one. Going into the other extreme, the 7800, you know, in volume may be smaller, but in dollars is extremely strategic. And this is where we feel competitively, again, working with our partners in Broadcom with the Jericho and Qumran family. This is just, what would you say, John? A real flagship, right? That's right. In dollars, that's the stealer, if you will. And then the 7700 is kind of the best of both worlds. It gives you all the capabilities of the 7800 in a mini configuration up to 10,000 GPUs. It's brand new. So, but I think it's going to, and competitively, there's no peer for this. Nobody else does this but us with a scheduled fabric and a single stage. We did this in very close collaboration, John, with Meta, right?

That's right.

So, you guys have been working together, John, for 18 months, two years, I would say. So, I think we know less about how to qualify that, but it could be very promising, and it could be a fast accelerator in the next couple of years.

Yeah, I can just go ahead and answer this, right?

Just to add to that, John, go ahead.

Yeah, 7700, you know, people are interested in the very large scale is attractive for the 7700. Between the 7060 and the 7800, we do see people that are optimizing a mix of both of those products in the same deployment so they can get the minimum number of tiers but have the maximum amount of GPUs that fit their use case. So we do see a lot of tailoring now. around the size of the deployments based on how many GPUs they want to deploy in their data center.

Yeah, that's a really good point. And then suddenly they'll go, okay, I want to go from a four-way radix to an eight-way, and then suddenly we have to add more line cards in your 7800 and come running to you for more supply chain.

That's right.

Great. Thank you both.

Our next question comes from the line of Aaron Rakers with Wells Fargo. Please go ahead.

Yeah, thanks for taking the question. I wanted to kind of segue off the competitive landscape and just ask you about, you know, when I look at your 2025 outlook as well as the midterm model that you provided, you know, it looks like you're making some assumptions of some margin declines. I'm curious of what's underlying those expectations of gross margin declines. Is it, you know, mix of customers? Do you expect, you know, multiple 10% plus customers in 2025 just Any help on what's factored into that, you know, those margin expectations? Thank you.

Yeah, thanks, Aaron, for your question. I would say absolutely in the outlook that you referred to, it is customer mix. You know, we're expecting John to continue the great supply chain discipline that he's been doing with his team. So it is a mix, comment only. And as for the 10% customers, I would say the one dynamic, maybe it's a bit cheeky to say it, but as the denominator gets bigger, that gets a bit tougher. We'll see as we go in the out years, but right now we'll just keep to the ones that we currently talk about, and we'll see how that goes in 25 and 26.

It's going to get harder and harder to have 10 customers, so I believe M&M will still be that in 2025, but I don't anticipate there's any others at the moment.

Thank you. Thanks, Erin. Operator, we have time for one last question.

Our final question will come from the line of Adith Malik with Citigroup. Please go ahead.

Hi, thank you for taking my question. Jayshree, at some of the recent conferences, you've talked about every dollar spent on back end is at least 2x on the front end. What signs are you looking for to see the lift from AI on the front end or classic cloud from the pressure on the bandwidth?

Yeah, now listen, I think it all depends on at least their approach to AI. If they just want to build a back end cluster and prove something out, then they just look for the highest job training completion and intense training models, and it's a very narrow use case. But what we're starting to see more and more, especially with the top five, like I said, is for every dollar spent in the back end, you could spend 30% more, 100% more, and we've even seen a 200% more scenario, which is why our $750 million will carry over to, we believe, next year, another $750 million on front-end traffic that will include AI, but it'll include other things as well. It won't be unique to AI. So I wouldn't be surprised if that number is anywhere between 30% and 100%. So the average is 100%, which is 2X our back-end number. So feeling pretty good about that. Don't know how to exactly count that as pure AI, which is why I qualify it by saying increasingly, if you start having inference, training, front-end, storage, WAN, classic cloud all come together, the pure AI number becomes difficult to track.

Thanks so much, Arash. This concludes the Arista Network's third quarter 2024 earnings call. We have posted a presentation which provides additional information on our results, which you can access on the investor section of our website. Thank you for joining us today, and thank you for your interest in Arista.

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