Arista Networks, Inc.

at any time during the conference, please press the star key followed by zero. 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. Mr. Rudolf Baragio, Arista's head of investor advocacy, you may begin.

Thank you, Regina. Good afternoon, everyone, and thank you for joining us. With me in today's call are Jai Sree Gulal, Arista Network's chairperson and chief executive officer, and Chantel Brideup, Arista's chief financial officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal fourth quarter ending December 31st, 2024. If you want a copy of the release, you can access it online on our website. 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 2025 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 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 10Q and Form 10K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements applies up 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 Jaishree.

Thank you, everyone, for joining us this afternoon for our fourth quarter 2024 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 tenure, 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. With the momentum of generative AI, we have achieved well beyond that at almost 20% growth, achieving a record revenue of 7 billion, coupled with a non-GAAP operating margin of 47.5%. Before I dwell on that more, let me get back to Q4 2024 specifics. We delivered revenues of 1.93 billion for the quarter with a non-GAAP earnings per share of 65 cents, adjusted for the recent 41 stock split. Our non-GAAP gross margins of .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%. 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 20% and .6% respectively. As you know, we cherish our privileged partnerships with both of them very much. It has spanned over 14 years as we collaborate deeply with joint engineering and innovative AI and cloud products. In terms of annual 2024 product lines, our core cloud AI and data center products are built off a highly differentiated extensible OS stack and is successfully deployed across 10, 25, 100, 200, 400, and 800 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 grows approximately 65% of our revenue. We continue to gain market share in the highest performance of the switching category of 100, 200 and 400 gig ports to attain the number one position at greater than 40% market share according to industry analysts in ports. We have increased our 400 gig customer base to approximately thousand 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 1.5 billion in AI centers, which includes the 750 million 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. 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 million 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 offering. 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 Arista Acare, Cloud Vision, DMF, observability and advanced security sensors for network detection and response. We added over 350 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. 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 10th anniversary of going public at the New York Stock Exchange and our 20th anniversary of founding. In the past decade, we have exceeded 10,000 customers with a cumulative of 100 million ports of installed base as Arista drives the epicenter of mission critical network transactions. Arista 2.0 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 location. 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 backend 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 backend, Arista Etherlink portfolio. 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 a care support and product function. We are pleased to surpass for the first time the $1 billion 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. Our differentiated strategy and superior products are resonating deeply as we touched over a thousand 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 respondents satisfaction. Of course, we do that with the lowest security and vulnerabilities and step fast 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 billion annual revenue with a CAGR of double digits that we set way back in November, 2022 analyst day. 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 8.2 billion in 2025 in revenue. The VISTA leadership team has driven outstanding progress across multiple dimensions. In 2024, we are at approximately 4,465 employees rooted in engineering and customer investments. 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, our VISTAs redefining the future of data-driven networking intimately with our strategic customers. With that, I'd like to turn it over to Chantel who has transitioned to become our core Arista and Chief Financial Officer in record time, less than a year. Over to you, Chantel, and welcome again, and happy one-year anniversary.

Thank you, J.Sri, 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 onto the numbers. As a reminder, this analysis of our Q4, our full year 2024 results and our guidance for Q1 2025 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 -to-one stock split in December 2024. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q4 were $1.93 billion, up .3% year over year, and above the upper end of our guidance of 1.85 to 1.9 billion. For fiscal year 2024, we are pleased to have delivered .5% in revenue growth, driven by achievements in all three of our product sectors. Services and subscription software contributed approximately .3% of revenue in the fourth quarter, up from .6% in Q3. International revenues for the quarter came in at $311.1 million, or 16% of total revenue, down from .6% last quarter. This -over-quarter decrease was driven by the relative increased mix of domestic revenue from our large global customers. The overall gross margin in Q4 was 64.2%, slightly above the guidance of 63 to 64%, and down from .4% in the prior year. As a recap for the year, we delivered a gross margin result of .6% compared with .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 $332.4 million, or .2% of revenue, up from the last quarter at $279.9 million. R&D spending came in at $226.1 million, or .7% of revenue, up from .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. This finishes the year of R&D at .2% of revenue, demonstrating a continued focus on product innovation. Sales and marketing expense was $86.3 million, or .5% of revenue, up from $83.4 million last quarter. This was driven by continued investment in both headcount and channel programs. Our G&A costs came in at $19.9 million, or 1% of revenue, up from $19.1 million last quarter, reflecting continued investment in scaling the company. Our operating income for the quarter was $907.1 million, or 47% of revenue. This strong Q4 finish contributed to an operating income result for fiscal year 24 of $3.3 billion, or .5% of revenue. Congratulations to the Arista team on this impressive achievement. Other income and expense for the quarter was a favorable $89.3 million, and our effective tax rate was 16.7%. This -than-normal quarterly tax rate reflected the release of tax reserves due to the expiration of the statute of limitations as bearable changes in state taxes. This resulted in net income for the quarter of $830.1 million, or 43% of revenue. Our diluted share number was 1.283 billion shares, resulting in a diluted earnings per share for the quarter of 65 cents, up 25% from the prior year. For FY24, we are pleased to have delivered a diluted earnings per share of $2.27, a .2% increase year over year. Now turning to the balance sheet. Cash, cash equivalents, and marketable securities ended the quarter at approximately $8.3 billion. In the quarter, we repurchased $123.8 million of our common stock at an average price of $94.80 per share. Within fiscal 24, we repurchased $423.6 million of our common stock at an average price of $77.13 per share. Of the $1.2 billion repurchase program approved in May 2024, $921 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 billion 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 54 days down from 57 days in Q3, reflecting the timing of shipments and the strong collections performance by the team. Inventory turns were 1.4 times, up from 1.3 last quarter. Inventory increased marginally to $1.83 billion reflecting diligent inventory management across raw and finished goods. Our purchase commitments at the end of the quarter were $3.1 billion, up from $2.4 billion 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 a healthy position related to key components and continue to have some variability in this number to meet customer demand and improve lead times in future quarters. Our total deferred revenue balance was $2.79 billion, up from $2.51 billion 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 million over the last quarter. Fiscal 2024 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 and magnitude of our preferred deferred revenue balances. We expect this to continue into fiscal 2025. Accounts payable days were 51 days, up from 42 days in Q3, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $12.5 million. In October, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $100 million in capex during fiscal 2025 for this project. Now turning to our outlook for the first quarter of 2025 and the remainder of the fiscal 25 year. We continue to gain confidence in our view for fiscal year 25 and now place our revenue growth outlook at approximately 17% or $8.2 billion. This is up from our initial FY25 guidance of 15 to 17%. 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 Q125 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 the 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 component receipts on purchase commitments. 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 .7% experienced last quarter, Q4 FY24. With all this as a backdrop, our guidance for the first quarter is as follows. Revenues of approximately 1.93 to 1.97 billion, 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 .5% with approximately 1.285 billion diluted shares. In summary, we at Arista 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. Combined with our Arista team spirit, we are ready to realize our fair share of the $70 billion 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&A.

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. Our first question will come from the line of Michael Ng at Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you for the question. I was just wondering if you could talk about the timing of how the year might look like and how you expect the Arista switches in the AI backend to be rolled out into production. Are the sale of these switches tied to deployment of next generation Nvidia chips or high per scale custom HVICs on the compute side? And is that a gating factor that you're watching out for? Thank you.

Yeah, thank you, Michael. First, I wanna say Arista is still committed to four out of our five AI clusters that I mentioned in prior polls. The fifth one is a little bit stalled. It is not a fault-titan. 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 clear some color. Three out of the four customers that expected to this year roll out a cumulative of 100,000 GPUs. So we're gonna do very well with three of them on the backend. And you can imagine they're all pretty much one major Nvidia class of GPUs. 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. So we're still, you know, 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.

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

Good afternoon, thanks for taking my question. You know, I guess, Jersey, 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, but can you maybe just share your perspective that when it comes to AI networks, especially the backend networks, you know, how do you see the mix evolving, white box versus OEM solutions, and maybe just help us understand the differentiators that helped Arista be successful on the front end. Do they extend to the backend networks as well, or is there something different we should be aware about? Thank you.

Yeah, sure, Amit. Gosh, this feels 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 10 years on the cloud, and the first thing I just wanna say is, this pan is so huge and so large, we will always coexist with white boxes and operating systems that are non-EOS, much like Apple coexists on their iPhone with other phones of different types. When you look at the backend of an AI cluster, there are typically two components, the AI leak and the AI spines. The AI leak connects to the GPUs, and therefore is the first, if you will, point of connection, and the AI spine aggregates all of these AI leaks. Almost in all the backend examples we've seen, the AI spine is generally 100% Arista-branded EOS. You've gotta 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 leak can vary. So, for example, let's take the example of the five customers I mentioned a lot. Three out of the five are all EOS in the leaf and spine. Two out of the five are kind of hybrid. Some of them have some form of Sonic or S-Boss, and as you know, we co-develop with them and coexist in a number of use cases where it's a real hybrid combination of EOS and an OpenOS. So, for most part, I just like to say that white box and Arista will coexist and will provide different strokes for different folks. Now, in terms of differentiators, a lot of our deployments right now is 400 and 800 gig, 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, congestion 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 a 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.

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

Thank you. I 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 right, it's 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. Is there anything else going on other than the Oracle shift with the rest of the Cloud Titans where it looked extremely strong in 2024? Thank you.

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 their 2023 capex, and that was meta's year of efficiency where their capex was down 15 to 20%. So you're probably seeing some correlation between their capex being down and our revenue numbers being slightly lower in 2024. In general, I would just say all of Cloud 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.

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

Yeah, darn Tim Long took my question, so I'm gonna ask about gross margins. Okay. Yeah, darn that guy. So about gross margins, so obviously to 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, and 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 in your guidance? Thank you.

Yeah, sorry. Go ahead. Sorry, Dishree. No, absolutely, I think you got it right, Ben, from that perspective, as we entered Q4 last year talking about 25 guidance, and as we enter into this quarter, it is and still remains a mix. Jishree 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. 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 had a fantastic...

Sorry, I'm just gonna add that John's done a fantastic job on the planning for China ahead of time, so while they'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?

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

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

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

Yeah, thank you Mita. Well, DeepSeek certainly deep-fix many stocks, but I actually see this as a positive, because I think you're now gonna 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. So what I like about all these different options is Arista can scale up that for all kinds of CPUs 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 customers by phenomena, but will become more and more distributed across a range of CPUs and GPUs. Great, thanks. Thank you, Mita. Okay.

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

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 step for Arista -a-vis both backend 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.

Yeah, thank you, Aaron. Stargate and sovereign AI are not quite related, so let me take the first one, Stargate first. You know, if you look at how we practically approach GPUs and collective libraries, we've largely looked at it as two separate building blocks. 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 phenomenon, but definitely in 26 and 27, you're going to see a new class of AI accelerators for a new class of training and inference, which is extremely different than the current, more pluggable, Lego type of version. So we're very optimistic about it, and in vector design, it's personally involved in the design of a number of these next-generation projects, and the need for this type of, as 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 are in the middle of the best of breed hardware that John McCool's team is working on as well as Andy's team is.

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

Hi, thank you for taking my question. We appreciate you calling out to pay attention to the guidance. Now you are retracing 750 million AI back-end 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? And also, if you can talk to the 70 billion SAM number for 2028, how much is AI?

OK, so I'll take your second question first, Atif. On the 70 billion SAM 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. So roughly 20 to 25 on each to get to that 70 billion. So coming back to your original question, which was? Help me out again.

The 750 million in back-end sales?

Yeah, yeah. So as I said, we're well on our way. And three customers deploying a cumulative of 100,000 GPUs is going to help us with that number this year. And as we increase our guidance to 8.2 billion, I think we're going to see momentum both in AI, cloud, and enterprises. I'm not ready to break it down and tell you which where. I think we'll know that much better in the second half. But Shantel and I feel confident that we can definitely do the 8.2 billion that we historically don't call out so early in the year. So having visibility of that helps.

Thank

you. Thank you.

Our next question comes from the line of Somic Chatterjee with JP Morgan. Please go ahead.

Hi, thanks for taking the question. Just 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 that discussion in terms of rate of competition to a white box player, how do you emphasize the value of EOS to your customers? Can you outline some of the what are the key drivers we should keep in mind and again, in that competitive landscape between white box and Orista? Thank you.

Yeah, sure, Somic. First of all, when you're buying these expensive GPUs that cost $25,000, they're like diamonds. 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, whether it's called, what do you want to call it, white box, blue box, EOS, or some other software, you've got to have mission critical functions, analytics, visibility, high availability, et cetera. As I mentioned, and I want to 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't 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. And the 7800 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 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 least fine combination, both with FBOSS and EOS options 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. 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-EOS. 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. So unless you're a large CloudTitan customer, you're less likely to take that chance because you don't have the staff. So all in all, the US 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.

Thank you.

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

Good afternoon, everyone. Thanks for taking the question. J.Sri, 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.

Yeah, no, 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. 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 2000, has never been stronger. One area I'd like to see more strength and Prishmita 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.

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

Great, thanks. Jayshree, can you comment, we've been a lot of 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?

Well, first of all, Andy has reminded me that co-package optics is not a new idea. It's been around 10 to 20 years. So the fundamental reason, let's go through why co-package 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-package optics on a PCB, you lose some of that flexibility and you don't get the serviceability in manufacturing. That's been the problem. Now, a number of alternatives are emerging and we're a big fan of co-package copper, as well as pluggable optics that can complement this, like linear drive or LPO as we call it. Now we also see that the co-package optics improve 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. So some of these things improve. We can see that both CPC and CPO will be important technologies at 224 gig or even 448 gig. But so far, our customers have preferred a Lego 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.

Appreciate your thoughts. Thank you.

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

Thank you very much for taking the question. I was hoping you could maybe double click on the cognitive adjacency. 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. Thank you.

Yeah, no, as you can imagine, that's an important, both the routing and the campus, and we've already signed up to 750 million. So we clearly out of our 8.2 billion, 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, 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 the hardware is shared for our switching and routing, we don't count it there. So I think sometimes we shortchange the numbers a little bit and more of it goes in the core, but I just want you to 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 seek spot for Arista, both in the enterprise and service providers. I don't need to tell you about our campus initiatives. 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 PO play campus innovator who can provide that best of three. 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 trust security, or observability with our campus products. So I think both of those are meaningful and we expect them to exceed a billion dollars. Shantel, do you want to say a few words?

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 of 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. We're very excited about that. And the customers seemed 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 we're actually bringing the DC through a campus win. So just add a couple more points to the enthusiasm for 2025.

Thank you, great reminders.

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

Hi guys. 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. 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? Others are bundling it with optics. How do you sell it? And then how big is the opportunity? 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.

Well, Jashree, I can start with enterprise and then you wanna take routing. Yeah, so I think for enterprise, there are a few ways I would describe kind of our growth vectors in 24 and continuing into 25 and into the following years. One is coverage. You've seen we've invested in sales and marketing headcount in 23, 24, and going into 25, 24, 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. 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 2000, fortune 500 companies. And so they're moving from theory to actual use cases they're speaking to. And the way they describe it is it takes a bit of time. 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. Jashree, did you wanna cover that?

So, going on routing, routing has always been a critical part of our offerings for the cloud and data center, where as you rightly described, it 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's super cold, so I stayed indoors most of the time. And the use case there is not data center, it's not campus, 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. But today our routing portfolio is much more complete. VXLandSec, TunnelSec, MapSec encryption, MPLS, segment routing, OSPF, BGP, 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 7280 platform, that has been a real workhorse for us and very successful.

Great, thank you. Thank you, Tal. Our next question comes from the line of Antoine Chabon with New Street Research. Please go ahead.

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 on that as well. Thank you.

Antoine, do you mean the classic service providers or generally the Neo clouds?

The classic service providers.

Ah, 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're 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, we're seeing lots of examples of that.

Thank you.

Thank you.

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

Hey, thanks so much for taking the question. Maybe for Chantel, I mean, you're sitting now on 8 billion 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.

Yeah, no, it's great. Thank you for the question. Very pleased with the performance in our capital allocation strategy has not changed coming into FY25. Just to kind of reiterate and remind, and I appreciate the opportunity to do so. 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. Repurchasing, you saw that we did through 24 and willing to do what we can through 25. Organic investment. So you saw that in the sense we're still looking to scale the company in R&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.

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

Great, thanks guys for taking my question. So, Chasery, I have a question about sort of the evolution of speed deployment that some of your M&M customers, so obviously you mentioned 400 and 800 Gs have been obviously a principal driver. How are you thinking about how that plays out in 25 and beyond? There's some winds 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 25, but in 26 and beyond, thanks.

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 METO 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. So I would say 2024 was the year of real 400 gig. 25 and 26, I would say is more 800 gig. And I really see 1.6T coming into the picture because we don't have chips yet. What do you say, John, late 26? And real production maybe in 27. So there's a lot of talk and hype on it, just like I remember talking hype on 400 gig five years ago. But I think realistically, you're gonna see a long runway for 400 and 800 gig. Now, as you get into 1.6T, 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 gonna push it out a year or two.

Great, thank you very much.

Thank you, David. Our next question comes from the line of Carl Ackerman with BNP Perrybaugh, please go ahead.

Yes, thank you. Could you discuss the outlook for services relative to your outlook for March in the full year? I asked because services grew 40% year over year and your deferred revenue balance is up another 250 million or so sequentially, nearly 2.8 billion. So the outlook for that would be very helpful, thank you.

Yeah, we don't usually guide the peace parts of that. So all I would say is that the thing to keep in mind with services is a little bit of timing and 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 peace parts. Thank

you. Thanks Carl. Our next question will come from the line of Sebastian Naji with William Blair, please go ahead.

Yeah, thanks for taking the question and you talked about this a little bit, but there's been a lot of discussion over the last few months between 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?

Yeah, no, absolutely. I think I've always said this, you guys often talk 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. 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 shareholder with probably 80, 90%. But if you ask me to guess what it would look like two, three years from now, I think it could be 50, 50. So Arista could be the stale 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 of breed.

This concludes Arista Networks fourth quarter 2024 earnings call. We have posted a presentation that provides additional information on our results which you can access on the investor section of our website. Thank you for joining us today and for your interest in Arista.

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