Arista Networks, Inc.

Thank you, Regina. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks Chairperson and Chief Executive Officer, and Chantelle Rideup, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal first quarter ending March 31st, 2025. If you want a copy of this release, you can access it online at 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 second quarter of the 2025 fiscal year, longer-term business model, and financial outlook for the 2025 and beyond. our total addressable market and strategy for addressing these market opportunities, including AI, customer demand trends, tariffs and trade restrictions, supply chain constraints, component costs, manufacturing output, inventory management, and inflationary pressures on our business, lead times, product innovation, working capital optimization, and the benefits of acquisitions, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K. and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. This analysis of our Q1 results and our guidance for Q2 2025 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition required charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. With that, I will turn the call over to Jayshree.

Thank you, Rudy, and thanks, everyone, for joining us this afternoon for our first quarter 2025 earnings call. I'm sorry, I have a bit of a cold, so if I sound nasal, please excuse me. Wow, what a year it's already been with all the seesawing of tariffs. We had a good start in Q1 2025 with the momentum of generative AI, data center, cloud, and campus enterprises, where we achieved our first $2 billion quarter, doubling just 11 quarters after our first billion-dollar quarter. Software and service renewals contributed approximately 17.1% of revenue. Our non-GAAP gross margin of 64.1% was influenced by efficient supply chain without tariffs, yet, I might add, and a nice mix of enterprise and cloud customers in the quarter. International contribution for the quarter registered at 20%, with the Americas super strong at 80%. Clearly, Arisa is redefining the future of data-driven networking, working intimately with our top customers as we march on in the evolution of data centers, campus centers, branch centers, and AI centers. Our cloud and AI momentum continues as we remain confident of our 750 million front-end AI goal in 2025. We are progressing well in all four customers and continue to add smaller ones as well. At the GTC event in March of 2025, we heard all about NVIDIA's planned GPU roadmap every 12 to 18 months, and Arista intends to be the premier and preferred scale-out network for all of those GPUs and AI accelerators. Traditional GPUs have their collective communication libraries, or CCL as they're known, that try to discover the underlying network topology using localization techniques. With this accelerated compute approach, the discrepancies between the discovered topology and the one that actually happens can impact AI job completion times. Arista's eBuilding portfolio highlights the accelerated networking approach, bringing that single point of network control and visibility as a differentiation. This makes it extremely crisp to identify and localize performance issues especially as the size of the AI cluster grows to 50,000 and 100,000 XPUs with the Arista AI spine and least network designs. Moving to campus and branch center trends, in today's AI wave, customers can no longer tolerate LAN and WAN silos. The concept of what comprises a user or a device or a site fundamentally changes the building of a branch or campus in 2025. Agentic AI makes us question the very definition of what we might even consider a user. Future campus and branch centers could be centralized or distributed, or they could be dispersed across laptops, smartphones, a house, an airplane, or any other location on the move. Data and applications can be located anywhere and add more dimensions, whether it's a data center or a public cloud or campus. Therefore, Arista's cognitive campus portfolio features our advanced find with power over Ethernet wired lease capabilities, along with a wide range of cost-effective wireless six or seven indoor and outdoor access points for the newer IoT and agentic applications. Our enterprise momentum continues. These initiatives are contributing greatly to customer momentum, and so let me highlight a few customer wins we have achieved. Our first customer win is in the federal sector, which is new to Arista. where Arista secured a strategic net new campus switching deployment with a major civilian agency, displacing a longstanding incumbent. Arista delivered the digital transformation for their return to work, return to office policy with resilient campus designs featuring Wi-Fi readiness and deep integration of Cloud Vision for real-time telemetry, automation, and compliance. This mission-critical high-performance deployment positions us for a broader entry in the federal market. Our next win comes from a high-tech sector where Arista expanded its partnership with one of our business development partners following years of engagement. The customer made a strategic decision to transition key parts of its data center and campus networks to Arista, marking our first wins with them in both areas. Arista's consistent architecture across platforms based on our single and superior extensible operating system was a key differentiator. The rollout spans key platforms all managed through Cloud Vision for automation, compliance, and visibility. With successful Wi-Fi evaluations underway, Arista is poised to complete and deliver client to cloud experience. And our final win comes from a Web 3.0 infrastructure space where Arista was selected to support the build out of a decentralized global backbone for distributed systems and blockchain networks. As the project shifted from metro expansion to upgrading core network capacity, Arista's 7280R3 routing at scale, paired with our 7130 series for ultra-low latency edge, formed the new 100 gigabit WAN spine. With edge processing, this delivers advanced security, programmable traffic filtering, all at scale. It marks a strategic pivot towards high performance and reliable routing where legacy routers fall short. You can see that all these three wins across three sectors underscore Arista's growing momentum as customers modernize their networks in response to legacy complexity, vendor consolidation, and mission-critical demands. As I wrap up, I want to share our conscious focus in cultivating our next generation of leaders. We have been fortunate and blessed to have a cohesive team for the past 15 years, but sometimes we must accept changes. Financial success gives people choices, especially our Arista executives. Some may retire, while others may elect to pursue new ventures. In the next phase of Arista 2.0 leadership, it's important to know that some things remain unchanged and steadfast. Our engineering brains and bench strength, for example, with Andy, Ken, Hugh, as well as new Vice President of Software, Siva Narayanan, and new Vice President of Hardware Engineering, Alex Rose, continue to be stronger than ever. You know Arista's reputation for A-plus engineering team, and this is a renowned hallmark in the Valley. With the summer leave of absence of John McCool, Mike Kappas has been appointed as our new VP of Manufacturing. Mike has been with us over 12 years and is doing just a fantastic job navigating the supply chain and uncertainties of tariffs. On the enterprise sales side, our dynamic duo, Chief Customer Officer Ashwin and Chief Sales Officer Chris, are driving success globally, expanding campus, data center, and AI footprints with increasing market share. Chris and Ashwin have brought changes in the sales and SE leadership team internationally, both in Asia and in Europe. For the America sales, we have promoted a 16-year Arista veteran, Chris Bellmer, to Senior Vice President. Chris embodies the combination of customer empathy, product expertise, and always doing the right thing. You can see common traits across all these executives with incredible and tenured talent, strong cultural synergies, and a mission to delight customers. We are executing very well, and we aim for $10 billion revenue and beyond sooner than we previously expected. Speaking of Arista 2.0 executives, over to you, our CFO, Chantel. who epitomizes our core values at Arista and recently expanded her responsibilities to include legal, IT, and CISO functions.

Thank you, Jayshree. I am excited to extend my scope to cover these key functions. With that, there are a few organizational announcements to make regarding these teams. Our newly named leaders include Sandra Yuen, promoted to be our VP of Information Technology, Jason Bevis, promoted to be our cybersecurity leader in CISO, and Shawn Christopherson, who tomorrow becomes our general counsel, replacing Mark Taxe, who has decided after many dedicated and successful years at Arista to try a new adventure. Congratulations to all of you. By promoting proven leaders from within, we are reinforcing our culture of excellence and positioning ourselves for continued success. With that organizational momentum, let's review our financial results. Total revenues in Q1 were $2.005 billion, up 27.6% year over year, and above the upper end of our guidance of 1.93 to 1.97 billion. This year-over-year growth was led by strength in the cloud-tightened vertical and non-cloud performing better than expected. International revenues for the quarter came in at $406 million, or 20.3% of total revenue, up from 16% in the last quarter. This quarter-over-quarter increase reflects normal quarterly volatility and includes the impact of an unusually high contribution from our America's customers in the prior quarter. Gross margin in Q1 was 64.1% above our guidance of approximately 63%. This is down slightly from 64.2% both last quarter and Q1 FY24. The Q1 result above our guidance was driven by a stronger than expected mix of non-cloud revenue and includes a minimal impact from the absorption of applicable tariffs. Operating expenses for the quarter were $327.4 million or 16.3% of revenue down slightly from last quarter at $332.4 million. R&D spending came in at $209.4 million, or 10.4% of revenue, down from $226.1 million last quarter. This reflects a low double-digit year-over-year headcount increase offset by lower new product introduction costs in the period due to timing of prototypes and other costs associated with our next-generation products. Sales and marketing expense was $94.3 million, or 4.7% of revenue, compared to $86.3 million last quarter, with a mid-single-digit growth in headcount versus last year. Our G&A cost came in at $23.7 million, or 1.2% of revenue, up from 1% of revenue in the prior quarter. Income from operations for the quarter was $957.4 million, or 47.8% of revenue. Other income for the quarter was $90.7 million, and our effective tax rate was 21.2%. This resulted in net income for the quarter of $826.2 million, or 41.2% of revenue. Our diluted share number was 1.279 billion shares, resulting in a diluted earnings per share for the quarter of 65 cents, up 30% from the prior year. Note that this reflects our four-to-one stock split in December 2024. Now turning to the balance sheet. Cash equivalents and investments ended the quarter at approximately $8.15 billion. During the quarter, we repurchased $787.1 million of our common stock, our largest repurchase quarterly or annually in Arista's history. In April, we repurchased an additional $100 million for a total of $887.1 million at an average price of $88.97 per share. To date, we have repurchased 13.3M shares at an average price of $87.55 with $34M remaining in the existing $1.2B board authorization. In May 2025, our board of directors authorized a new $1.5B stock repurchase program, which commences after we have completed repurchases under our existing $1.2B authorization. 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 first quarter, we generated approximately $641.7 million of cash from operations in the period, reflecting a growth of 24.9% compared to Q1 fiscal year 24. DSOs came in at 64 days, up from 54 days in Q4, driven by billing linearity. Inventory turns were 1.4 flat to last quarter. Inventory increased to approximately $2 billion in the quarter, up from 1.8 billion in the prior period, reflecting an increase in finished goods. This is an intentional action regarding both tariffs and in the support of ramping new products. Our purchase commitments at the end of the quarter were $3.5 billion, up from 3.1 billion at the end of Q4. This was driven by a continued investment in chips, as well as an increase in buffers due to the tariff uncertainty. From a cash flow perspective, we will continue to optimize our working capital investments with some expected variability in inventory due to the timing of receipts on purchase commitments. Our total deferred revenue balance was $3.1 billion, up from $2.8 billion in Q4 fiscal year 24. 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 $219 million versus last quarter. We remain in a period of ramping our new products, winning new customers, and expanding new use cases. These trends have resulted in increased customer specific acceptance clauses and an increase in the volatility of our product deferred revenue balances. As mentioned in prior quarters, the deferred balance can move significantly on a quarterly basis, independent of underlying business drivers. This may be further amplified in 2025 due to the uncertainty around tariffs throughout the fiscal year and the resulting buying patterns of our customers. Accounts payable days were 49 days down from 51 days in Q4, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $32 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 year 25 for this project. Now turning to our outlook. Given the nature of the current macroeconomic environment, we will start with the second quarter and then move to fiscal year 25. As is demonstrated by our Q1 results, we have seen good momentum at the beginning of fiscal year 25. As Jayshree highlighted, there are opportunities across all three customer sectors, inclusive of GenAI, data center, cloud, and campus enterprises. that combined with favorable mix has allowed for better than expected margin outcomes building on this momentum our guidance for the second quarter is as follows revenues of approximately 2.1 billion dollars this reflects stronger seasonality in q2 than prior year trends and anticipate the outcome of the tariff uncertainty gross margin of approximately 63 percent including the absorption of known tariffs for the q2 period and operating margin at approximately 46 percent Our effective tax rate is expected to be approximately 21.5%, with approximately 1.272 billion diluted shares. Now turning to the full fiscal year 25. Despite the macro uncertainty, we remain confident in the demand from our cloud enterprise and providers' customers. As is in the case of many other companies, the second half holds significant ambiguity related to the tariff scenarios. Given these unknowns, our guidance for FY25 currently remains unchanged, despite the strong results and guidance we are reporting today. We believe we can deliver results in the gross margin range of 60 to 62%, even as we anticipate known possible tariff scenarios within Q3 and Q4. This is possible through a mix of supply chain optimization, tariff absorption, and potential price increases, if required. As we move through the quarters, we will continue to revisit the annual guide, hopefully in an environment unconstrained by tariff uncertainty. Energized by the current momentum, we continue to focus on operational discipline and innovation, ensuring we deliver strong outcomes for customers and shareholders. Now back over to you, Rudy, for Q&A.