Economy Processed transcript of the conference call or presentation on...

Processed transcript of the conference call or presentation on ANET results 2/13/20 9:30 p.m. GMT

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Santa Clara, February 14, 2020 (Thomson StreetEvents) – Minutes of the conference call or presentation of Arista Networks Inc results released Thursday, February 13, 2020, 9:30 p.m. GMT

Arista Networks, Inc. – Senior VP & COO

Arista Networks, Inc. – Head of Corporate & Investor Development

* Ita M. Brennan

Arista Networks, Inc. – CFO, Senior VP and Principal Accounting Officer

* Jayshree V. Ullal

Arista Networks, Inc. – President, CEO and Director

Wells Fargo Securities, LLC, Research Department – General Manager for IT Hardware and Network Devices and Senior Analyst

Oppenheimer & Co. Inc., Research Department – MD

William Blair & Company L.L.C., Research Department – Partner & Co-Group Head of Technology, Media and Communication

Nomura Securities Co. Ltd., Research Department – MD of Communications

Stifel, Nicolaus & Company, Incorporated, Research Department – MD & Senior Analyst

* Meta A. Marshall

* Pierre C. Ferragu

New Street Research LLP – Managing Partner and global team leader for technology infrastructure

* Roderick B. Hall

Barclays Bank PLC, Research Department – MD and Senior Technology Hardware & Networking Analyst

Welcome to the Arista Networks fourth quarter 2019 financial results conference call. (Instruction Manual) This conference is also recorded and can be viewed after this call in the Investor Relations section of the Arista website.

I will now forward the call to Mr. Curtis Mckee, director of corporate and investor development. Sir, you can start.

Curtis McKee, Arista Networks, Inc. – Head of Corporate and Investor Development [2]

Thank you very much, operator. Hello everyone and thank you for coming to us. With me on today’s call are Jayshree Ullal, President and Chief Executive Officer of Arista Networks; Ita Brennan, CFO of Arista. This afternoon, Arista Networks released a press release announcing the results for the fourth quarter ended December 31, 2019. If you would like a copy of this press release, you can access it online on the company’s website.

During this conference call, the management of Arista Networks will make forward-looking statements, including those related to our financial prospects for the first quarter of fiscal year 2020, longer-term financial prospects, industry innovation, our market opportunity and the forecast, benefits of the recent acquisitions and the impact litigation that is subject to the risks and uncertainties that we discuss in detail in our filings with the SEC. Especially in our latest Form 10-Q and Form 10-K, which can cause actual results to differ materially from those expected in these statements. These forward-looking statements are effective as of today, and you should not rely on them to reflect our views in the future. We accept no obligation to update these statements after this call.

Please also note that certain financial measures that we use for this request are not GAAP-compliant and have been adjusted to exclude certain fees. In our press release on earnings, we reported a reconciliation of these non-GAAP financial measures with the GAAP financial measures.

And with that, I hand it over to Jayshree.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO and Director [3]

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Thank you, Curtis, and welcome to your first call to Arista. Thank you to everyone who came to our fourth quarter 2019 earnings call this afternoon.

We generated $ 552.5 million in non-GAAP sales with $ 2.29 in non-GAAP earnings per share. Services contributed approximately 19% of sales, which was consistent with the normally higher renewals at year end. Our gross non-GAAP margin was 65.2%, driven by strong performance from corporate verticals and related software products. Overall, our gross margin was 64.7% in 2019.

As a direct result of our company’s momentum, we had a record million dollar customers in the fourth quarter. By the end of 2019, we had won over 6,300 customers, with Microsoft accounting for 23% of total sales and Facebook 16.6%.

In the fourth quarter of 2019, and indeed throughout the year, cloud titans were the largest industry. The corporate segment is now consistently the second largest and strongest segment, followed by financial data in third place, Tier 2 cloud specialty providers in fourth and service providers in fifth place. Both service providers and tier 2 cloud providers were slow for us.

As you know, Arista’s international contribution was 24% in 2019 and 76% in America.

As for new products in 2019, Arista, as you know, delivered a banner year with disruptive products and redefined networking with a highly differentiated software stack, management and flagship platforms. The 7280 and 7500 series in particular have become the gold standard for the networking of 100 gigabit spines. With 10 new platforms, we have also introduced extensive 400 Gigabit innovations. We have launched a new portfolio of cognitive campus edge products for wired, Power over Ethernet switches, and wireless devices, including Wi-Fi 6, distinguishing features.

We have continued our systematic innovations in the functions of Cloud EOS and CloudVision. In particular, we doubled our CloudVision customers who provide real-time availability, scaling, automation with change control, and interoperability with third-party providers for streaming telemetry. We are pleased with the increasing acceptance of all software bookings, for both subscription and perpetual licenses, which are now approaching 5% of total sales per year.

We started the first quarter of 2020 with the completion of our third acquisition, Big Switch Networks, an SDN pioneer founded almost a decade ago. This is a strategic step for us to achieve a strong combination of technical know-how, a deeper entry into the market for network package brokers and an improved visibility of software in multiple clouds. As you know, we at Arista have always focused on software-controlled networking as a mission. With Big Switch, we are expanding this mission to a deeper analysis trend that complements our switch-based DANZ or data analyzer platforms with the deeper monitoring structure of Big Switch in public, private and hybrid clouds. Both companies also share a unique visionary status with the networking of data centers in the Gartner Magic Quadrant.

We welcome the BCN team – BSN team in the Arista family and look forward to an enhanced partnership, not only with them, but also with Dell Technologies and the approximately 300 customers we get to know better. Although the acquisition of Big Switch is not material, we expect this to add to our software strength and booking, and our goal is to see an increase in the 2021 calendar.

As we close 2019, I really believe Arista is at the forefront when it comes to making cloud area networks more mainstream. We see that in the future networking will not be silos or boxes with multiple operating systems and spaghetti operating systems, but a new, uniform, software-controlled space in the cloud architecture. We are proud of our market leadership with first place in 100 Gigabit Ethernet switching and ready for the upcoming 400 Gigabit migration. We are experiencing trials that are going well with several customers. We are ready to meet our first $ 100 million goal for the first four quarters of campus sales.

Our market launch strength continues to be an important investment area for us as we have doubled our sales and systems engineering capacity in the past 2 years. With the promotion of Chris Schmidt to Senior Vice President Worldwide Sales; and Ashwin Kohli, Senior Vice President Customer Engineering, told Anshul Sadana that the transition to their new roles following Manny Rivelo’s departure from a PE company was seamless for us in connection with this advisory role. Both Chris and Ashwin have a long term with us and embody the Arista ways.

As I have traveled the world, including hundreds of customers we touch, I realize that we are gaining strategic corporate franchises in high-tech, media, banking, healthcare, insurance and retail, to name a few , Larger companies are becoming increasingly frustrated and anxious for better quality and architectural leverage for cloud-based principles. Our programmability with software and quality with the lowest critical vulnerabilities in the networking industry is a refreshing and welcome change. Arista is gaining strategic relevance and has almost doubled our million dollar customers in the past 3 years. I assume that this dynamic will continue in all industries that are not cloudless.

I hand it over to Ita for further financial details.

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Ita M. Brennan, Arista Networks, Inc. – CFO, senior vice president and chief accountant [4]

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Thank you, Jayshree, and good afternoon. This analysis of our fourth quarter and full year 2019 results, as well as our guidance for the first quarter of 2020, is based on non-GAAP and excludes all non-cash share-based payment effects, certain acquisition-related charges and other one-time items. A complete reconciliation of selected GAAP to non-GAAP results can be found in our results publication.

Fourth quarter total sales were $ 552.5 million, a decrease of 7% year over year and above the midpoint of our forecast of $ 540 million to $ 560 million. Service revenues accounted for approximately 19% of total sales, compared to 15.2% in the last quarter. This reflects the typical season extension season for the fourth quarter combined with the lower product sales.

International sales for the quarter were $ 137.7 million, or 25% of total sales, after 19% in the third quarter. Looking at the year, international sales accounted for 24% of total sales, compared to 28% in the previous year. This shift in geographic mix for the year was primarily due to the stronger US deployments of our Cloud Titan customers.

Overall, the gross margin in the fourth quarter of 65.2% was above the upper end of our forecast of 63% to 65%, compared to 64.4% in the last quarter. This reflected an easier contribution from cloud titans during the period, combined with a good performance from our corporate and financial industries.

Operating expenses for the quarter were $ 154.3 million, or 27.9% of sales, compared to $ 163 million last quarter. R&D spending was $ 96.2 million, or 17.4% of sales, after $ 105.3 million in the previous quarter. This decrease was mainly due to lower engineering and prototype costs in the reporting period. Selling and marketing expenses were $ 46.4 million, or 8.4% of sales, with the number of employees increasing, which was somewhat offset by the reduction in other selling expenses. Our G&A costs were approximately $ 12 million, or 2.1% of sales, in line with the previous quarter.

Our quarterly operating income was $ 205.8 million, or 37.3% of sales. Other quarterly income and expenses were $ 11.2 million and our effective tax rate was approximately 15.5%. This lower tax rate reflected the release of some uncertain tax provisions after final agreement with the relevant tax authorities. Please note, however, that we expect some upward pressure on the effective tax rate over time as various tax areas continue to change their tax regulations.

This resulted in net income for the quarter of $ 183.4 million, or 33.2% of sales. Our diluted share count for the quarter was 80.26 million shares, resulting in diluted earnings per share for the quarter of $ 2.29, an increase of 1.8% over the previous year.

Let us now turn to the balance sheet. Cash, cash equivalents and investments were approximately $ 2.7 billion at the end of the quarter. We bought back $ 51.5 million of our common stock in the quarter at a weighted average price of $ 189 per share. This brings our total buybacks for the year to $ 266 million in three quarters. As a reminder, our board of directors has approved a $ 1 billion 3-year share buyback program that begins in the second quarter of 19. The program enables us to buy back ordinary shares in an opportunistic way and is financed from operating cash flow.

We generated $ 327 million in cash from operations in the fourth quarter, reflecting strong net income and a $ 115.4 million decrease in working capital requirements. DSOs were received after 65 days, compared to 63 days in the third quarter, reflecting the time of billing in the reporting period. The inventory turnover rate was 2.9x compared to 3.1 in the last quarter. Inventories increased to $ 244 million in the quarter from $ 240 million in the previous period.

Our prepaid expenses totaled $ 575 million, compared to $ 529 million in the third quarter. As a reminder, our prepaid expenses now consist almost entirely of services related to significant deferred income that were recognized in the income statement in the first half of the year. As Jayshree mentioned, we had two customers a year with more than 10%, Microsoft with 23% and Facebook with 16.6%. If you excluded the above-mentioned capture of accrued product sales, Facebook would have made up about 12% of annual sales.

Accounts payable days were 44 days versus 31 days in the third quarter, reflecting the timing of the receipts and payments. Investments for the quarter were $ 2.4 million.

Let us now turn to our outlook for the first quarter and beyond. Although we are currently unable to provide a full year forecast, we wanted to repeat the various puts and takes discussed in our last call. 2019 was a challenging year for our cloud business with significant volatility and an overall subdued demand picture. Looking ahead to 2020, we believe that this trend will continue and that demand from this part of the business will remain unchanged year on year. This trend, combined with tough year-on-year revenue comparisons due to $ 118 million in deferred income in the first half of 2019, is likely to result in a significant drop in cloud revenue for 2020. Businesses and finances are expected to grow healthily, but are not yet large enough to fully offset the expected drop in sales from the cloud. Service providers and the Specialty Cloud are likely to remain sluggish for the year.

In terms of gross margin, we would repeat our overall outlook for the gross margin from 63% to 65%, with the customer mix being the main driver. If we focus specifically on the first quarter, we expect a lower trend in this area given the lower sales and a typical weighting of the first quarter towards the cloud. We will continue to carefully manage investments in the business, targeting sales and R&D personnel to meet the need to expand our market coverage through prudent financial management.

We announced the acquisition of Big Switch Networks earlier today. This is an intangible transaction that brings us some additional software features and a strong pool of technical talent. From a financial perspective, this is a software subscription business with revenue recognition in advance and a reasonable amount of income from prepaid expenses. We are now starting to integrate business and accounting, and the acquisition will be recorded in our financial data for the first quarter. We have included a small revenue contribution and 2 months of Big Switch spending in our first quarter forecast. Once we have completed the purchase invoice analysis, we will provide additional clarity on the future impact of the income statement.

Finally, our first quarter guidance does not reflect the effects of the ongoing coronavirus outbreak in China. While we don’t have a significant direct manufacturing base in China, there can be some indirect impacts on the supply chain. We will try to monitor and mitigate these as the situation develops.

Against this backdrop, our first quarter forecast, based on non-GAAP results and excluding non-cash compensation and other one-time items, is as follows: Gross sales of approximately $ 522 million to $ 532 million, approximately 63%, operating margin of approximately 34%. Our effective tax rate on diluted stocks of approximately 80.5 million shares is expected to be approximately 21%.

I will now return the call to Curtis. Curtis?

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Curtis McKee, Arista Networks, Inc. – Head of Corporate and Investor Development [5]

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Thank you, Ita. We will now move on to the Q&A portion of the Arista Call for Profits. For reasons of time, I would like to ask everyone to limit themselves to one question. Thank you for your comprehension.

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questions and answers

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operator [1]

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(Owner’s Manual) Your first question comes from Pierre Ferragu of New Street Research.

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Pierre C. Ferragu, New Street Research LLP – managing partner and leader of the global technological infrastructure team [2]

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I was amazed at the prospects for your Cloud Titan customers, so we understand that they are flat to slightly declining year-on-year, which means we will recover a little over the course of the year, and I find it surprising that there are contrasts – it is in stark contrast to what we have heard from other providers on the computer side and on the storage side. We heard a lot – we saw much better numbers and much more positive comments on the first half of this year in the second half of last year. So you don’t seem to be in a similar cycle, things seem to be coming back slower for you. However you can help us understand this would be very helpful.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO and Director [3]

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Yes. Sure, Pierre. I will take the question and Anshul can elaborate on it. Cloud CapEx spending never correlated 1: 1 with Arista’s network numbers. And the reason is varied because, as you know, this is only a very small part of the total investment costs. It is almost negligible, the network piece. And often they make the computing and storage decisions first and the network comes later. So there is a delay.

As I have often told you, our visibility is currently 1 to 2 quarters. And we can’t say much about the whole year, let alone the second quarter or the second half. So as we make predictions based on our 2019 year, both the absorption of accrued income and the current understanding of their plans, things could change. We reflect what we currently know best, especially when you look at our annual remuneration for 2018 and ’19. Anshul says I did it well enough so he has nothing more to add.

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operator [4]

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Your next question comes from Meta Marshall with Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Department – VP [5]

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I just wanted to know if you could tell a little bit about the traction of the campus business. And just whether you saw a pause in shopping activity due to macros?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO and Director [6]

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Well, thank you, meta, and thank you. I think it’s the first call for you with Arista. So welcome. As you know, our campus business is still at a very early stage. We only started shipping in the third quarter of 2019. We now had two full quarters on campus. And I am very encouraged by the enthusiastic response from both our existing customers and the acquisition of new customers.

When I look at the million dollar customers I’ve talked about and the record number we’ve reached, many of them were campuses as well. And so we see – I see that at least from our little oasis or island we are not really a macro. We’re more of a technology pioneer, and the technology on both our PoE and Wi-Fi has been very well received with customers and CloudVision. And Q4 was a very good indication of that.

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operator [7]

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Your next question comes from Erik Suppiger of JMP Securities.

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Erik Loren Suppiger, JMP Securities LLC, Research Department – MD & Senior Research Analyst [8]

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First, what are the priorities for your integration with Big Switch? What will you be – what products will you focus on? Second, is there anything we should worry about with China? Have you seen any evidence of the effects of the virus problems occurring there?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO and Director [9]

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So I’ll take the first question and Anshul, maybe with your COO title you know more about what’s going on there. So on – what are the priorities for the Big Switch? Well, as I said, first of all, we were incredibly impressed by the engineering team. So we picked the best of the best, and they’re an integral part of it – the acquisition is complete, and I would like to thank Marc Taxay and Ita for the hard work involved. It is a 10 year old company, there are many details.

At the end of the acquisition, we hired around 75 employees, most of whom work in engineering. And there are two product lines that Big Switch carries, the BMS, the monitoring product, which, as I explained, is a perfect addition to DANZ. DANZ is Arista’s integrated inline switching product, and BMS is just the icing on the cake. It offers deeper visibility, service nodes, recorder nodes and monitoring structure, etc. And then BCF, which is more for a converged substance. And we assume that this will be a very important element, especially with our converged infrastructure partners like Dell Technologies. This means that both products are fully supported and implemented, but with different channels.

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Anshul Sadana, Arista Networks, Inc. – Senior Vice President and COO [10]

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When asked about China and the supply chain related to corona viruses, as Ita mentioned, we are not directly manufacturing in China. So it really comes down to the second-degree effects of our manufacturers, suppliers or their sub-suppliers and the raw material from China. So far we haven’t seen any big impact as it was only a few weeks after – really a few days after the end of the Chinese New Year. And our manufacturers say that maybe that’s okay in the short term.

However, if the situation persists over a long period of time and there are very few raw materials and – over a longer period of time – this can have an impact on the future. But it is too early to say anything. And we expect more responses from Chinese suppliers to the factories by the end of the month and even in March. So it’s too early again, but we’re fine at the moment.

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operator [11]

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Your next question comes from Rod Hall with Goldman Sachs.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Department – MD [12]

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And girls, I wanted – I think I wanted – or girls and boys is probably the right order for that. I wanted to ask a couple of vertical questions. If you’ve commented on this cloud, you can expect a significant drop. And I don’t know if you could give us a feel for what you mean by that? We thought of a low double-digit decline this year. But I don’t know if that sounds more.

And then the other – on the positive side of this equation, the service provider’s comment, you said lazily, we thought that this would go down this year, but it’s almost – I just want to make it clear, think that – – Expect You have some growth or stabilization there, some kind of flat income?

And then a bigger question, Jayshree, have you considered revealing these verticals or a subset of them? Is that something we might be looking forward to at some point in the future, at least on an annual basis, so that we can all follow what’s going on under the covers?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO and Director [13]

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OK. Rod, I’ll try to answer everyone – so many of your questions. The last one first. So the answer is: we try to do our best by evaluating them. And I think you’re looking for more granularity. So we’re definitely going to take it into consultation as we do everything you suggest, and maybe that’s a data point for Analyst Day.

And if you return to your cloud demise and service provider, it definitely means flat to double digits. We don’t know exactly how much now because we’re in the first quarter. I think Anshul and the team may become a lot more visible on Analyst Day or in the second half, because then we really get a good feeling. But Q1 is such a seasonal quarter. We don’t have enough data. It is more of an extension of Q4. So ask us this question again in May or June. And I think we have a lot more to say.

Service provider, yes, I think when Ita actually explained the definition of lazily to me, it’s not that bad. And I think the worst was last year. Es ist also auf dem Boden und es kann nur geringfügig besser werden, ist unser Gefühl, aber wir sind nicht wie das Halten von Breite oder irgendetwas, aber wir glauben, dass es nicht schlimmer werden kann.

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Roderick B. Hall, Goldman Sachs Group Inc., Forschungsabteilung – MD [14]

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Aber träge, wäre es ein Bereich um 0, den Jayshree nicht mag [declining further and that would be] eine negative Zahl.

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Jayshree V. Ullal, Arista Networks, Inc. – Präsident, CEO und Direktor [15]

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0 plus oder minus, ja. Nicht minus. Nicht minus.

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Ita M. Brennan, Arista Networks, Inc. – CFO, leitender Vizepräsident und Hauptbuchhalter [16]

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Nicht weiter abnehmen. Rod, ich denke …

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Jayshree V. Ullal, Arista Networks, Inc. – Präsident, CEO und Direktor [17]

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Yes. Über 0.

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Ita M. Brennan, Arista Networks, Inc. – CFO, leitender Vizepräsident und Hauptbuchhalter [18]

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Es ist unsere Hoffnung, richtig? Ich meine, es ist 2019 ein gutes Stück zurückgegangen. Und wir würden gerne glauben, dass es sich von dort ein wenig erholt, aber träge langsam impliziert.

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Roderick B. Hall, Goldman Sachs Group Inc., Forschungsabteilung – MD [19]

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Okay. Aber das ist besser als ich dachte. Das weiß ich zu schätzen.

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Operator [20]

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Ihre nächste Frage kommt von John Marchetti mit Stifel.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Forschungsabteilung – MD & Senior Analyst [21]

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Nur Jayshree, ich gerade – als wir uns dem nähern und das Ende dieser ersten 100 Millionen Dollar auf der Campus-Seite erreichen, haben Sie dort ein paar Stücke hinzugefügt. Ich bin nur neugierig, wie wir in den nächsten Jahren darüber nachdenken sollten, ob dieses Geschäft eher zu einem bedeutenden Beitrag zur Gesamtwachstumsrate tendiert.

Und dann ist es ganz schnell mit dem Steuersatz. Ich wollte nur sicherstellen, dass ich es richtig gehört habe, dass wir zumindest ab ’20 damit rechnen sollten, dass dieser niedrigere Steuersatz anhält und dass er im Laufe der Zeit wieder ansteigt, aber dass wir zumindest diesen niedrigeren Steuersatz erwarten kurzfristig weitermachen?

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Ita M. Brennan, Arista Networks, Inc. – CFO, leitender Vizepräsident und Hauptbuchhalter [22]

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Yes. Lassen Sie mich vielleicht zuerst die Steuer nehmen. Der Steuersatz für das vierte Quartal bei 15% ist also einmalig, oder? Es sind einige sehr spezifische Reserven, die in diesem Zeitraum freigegeben wurden. Im weiteren Verlauf haben wir über den strukturellen Steuersatz von etwa 21% nachgedacht. Das haben wir für das erste Quartal geleitet. Mit der Zeit gibt es wahrscheinlich mehr Aufwärtsdruck als Abwärtsdruck. Ich denke also, 21%, 21,5%, es liegt irgendwo in diesem Bereich, aber ich denke, Sie befinden sich vorerst im Bereich von 21% für das erste Quartal. Und dann sehen Sie vielleicht ein paar Basispunkte – Dutzende Basispunkte nehmen mit der Zeit zu, aber es ist – es wird einige Zeit dauern. Das war eher eine längerfristige Strukturzinsangabe. Das Plus oder Minus von 21% hat sich im aktuellen Zeitrahmen nicht wirklich geändert.

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Jayshree V. Ullal, Arista Networks, Inc. – Präsident, CEO und Direktor [23]

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Und John, um Ihre Frage auf dem Campus zu beantworten, wir denken, ein neues Kind im Block zu sein, wenn es einen ziemlich ausgereiften Markt und einen TAM von 10 Milliarden US-Dollar gibt, hauptsächlich Cisco und vielleicht HP, Aruba, nur damit wir eintreten und ernst genommen werden können die erste Aufgabe. Und ich muss sagen, die Begeisterung für Arista, die Software, die kognitive CloudVision wurde sehr gut aufgenommen. Ich denke also, dass die Bereitstellung der ersten vier Quartale von 100 Millionen US-Dollar wirklich eine Grundlage für mehr Wachstum schaffen wird.

Wie ich beim letzten Analystentreffen sagte, wäre ich sehr enttäuscht, wenn nicht mehr Wachstum zu einer Verdoppelung und erneuten Verdoppelung führen würde. Also bin ich – mein Team würde versuchen, diese 100 bis 200 Millionen Dollar und dann 400 Millionen Dollar und noch einige mehr zu verdienen. Aber mehr am Analystentag, vielleicht genau darüber, wie wir das machen und die Details.

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Operator [24]

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Ihre nächste Frage kommt von Jason Ader mit William Blair.

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Jason Noah Ader, William Blair & Company L.L.C., Forschungsabteilung – Partner & Co-Group Leiter Technologie, Medien und Kommunikation [25]

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Jayshree, ihr seid vom ersten Tag an stolz auf ein einziges Betriebssystem. Mit Big Switch haben Sie jetzt ein zweites Betriebssystem. Ich frage mich also nur, wie wir über die Zukunft des Betriebssystems von Big Switch nachdenken sollen.

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Jayshree V. Ullal, Arista Networks, Inc. – Präsident, CEO und Direktor [26]

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Yes. Nein, das ist eine wirklich gute Frage, ja. Und wir haben tatsächlich 3 Akquisitionen durchgeführt und mussten uns zuvor zweimal mit dem Betriebssystem befassen. Bevor ich Ihre Big Switch-Frage beantworte, nehmen wir die anderen 2. MetaMako sehr FPGA-zentriert, es war wirklich für den Hochfrequenz-Handelsmarkt, niedrige Latenz. Das Betriebssystem spielte keine große Rolle. Und wenn doch, wird es EOS sein, oder? Mojo, wirklich ein Funkmanagement, Wi-Fi. Wir haben uns sofort in CloudVision integriert, und auch hier war das Betriebssystem weniger wichtig als die CloudVision-Integration, um Kabel und WLAN zusammenzubringen.

Big Switch, wir erwarten die gleiche CloudVision-Integration mit DANZ und BMS, der Überwachungsstruktur. Das Betriebssystem wird also etwas transparent sein und die Vereinheitlichung von Inline-DANZ und eine Überwachungsstruktur werden viel wichtiger sein. Der Big Cloud Fabric ist das einzigartige Produkt. Und wir glauben, dass es auf dem Markteinführungskanal nicht unbedingt einen typischen Arista-Kunden gibt, der nach EOS und CloudVision sucht, sondern einen Technologiepartner wie Dell Technologies oder Nutanix, der dies in seine Server und Speicher integrieren möchte. Ähnlich wie SONiC oder FBOSS ist dies eine konvergierte Infrastrukturlösung.

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Jason Noah Ader, William Blair & Company L.L.C., Forschungsabteilung – Partner & Co-Group Leiter Technologie, Medien und Kommunikation [27]

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Ist es also richtig, darüber nachzudenken, einen Teil des Marktes zu bedienen, den Sie wahrscheinlich nie bedient hätten, und Sie können ihn daher mit der Gesamtstrategie in Einklang bringen?

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Jayshree V. Ullal, Arista Networks, Inc. – Präsident, CEO und Direktor [28]

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Das ist richtig. Es ist wieder früh und wir lernen noch. Und sowohl Doug Murray als auch Kyle, der Mitbegründer, unterrichten uns, während wir sprechen. Betrachtet man jedoch die über 300 Kunden, so beträgt die Überschneidung mit unseren Kunden nur 1/3. 60%, 65% der Kunden sind für uns neu.

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Operator [29]

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Ihre nächste Frage kommt von Brian Yun von der Deutschen Bank.

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Brian Yun, Deutsche Bank AG, Forschungsabteilung – Data Networking Analyst [30]

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Ich wollte nach Ihrer 400-Gig-Gelegenheit fragen. Can you talk about expected market share for 400 gigs maybe just at a high level, especially versus your peers? I think it’s fair to say that you’re dominant in 100-gig at hyperscale clouds. But is the expectation to win the majority of 400-gig deals? Or are you taking a more conservative view where your peers might see sizable wins as well?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [31]

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Well, I think our peers should have seen sizable wins on 100-gig too, I don’t know why they missed the boat. But it’s very unnatural for an incumbent to lose a speed transition. So the fact that Arista became #1 is just — never been done in the networking industry before. Now what we see with 400-gig overall time line is we have been consistent on that. We are seeing early trials, we expect mainstream deployments this year, particularly in the second half, and obviously, the cloud will play a big role, but it’ll also be some of the high-end enterprises and service providers as well.

And so given the trials we’re seeing, we don’t expect material revenue of 400-gig until the second half of this year and really 2021. And the other thing I’d point out is nobody just builds 400-gig in isolation. It always happens in conjunction and there are always mixing and matching 100-gig and 400-gig. So Anshul, do you want to add to that?

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [32]

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So Jayshree, 2 comments here. Brian, I know everyone’s focused on 400-gig. I do want to remind you and everyone else, 100-gig is actually growing in 2020. It’s not going to replace just (expletive). And there are many other equations coming soon as well, whether it’s 8×50 going to 4×100 or 8×100 as well. It’s not just a single transition that our customers are planning or working with us on the multiple 3 years generational road map as has been discussed.

Lastly, there is some dependency on the DCI or backbone networks on availability of the other optics scale and that’s still expected to be second half, maybe even end of the year. And hence, any material deployments in that space will be in 2021.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [33]

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And Anshul, just to reiterate your point, the TAM for 100-gig is $4.5 billion. I don’t know the TAM for 400-gig will even hit a few hundred million this year?

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [34]

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Pilot is not a TAM.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [35]

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Yes. Pilot is not a TAM, it’s a pilot. Okay. Good one liner.

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Operator [36]

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Our your next question comes from Ittai Kidron with Oppenheimer.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division – MD [37]

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Two questions for me. I know Curtis tries to limit me to one, but I’ll try to sneak one in. Yes. Regarding the acquisition of Big Switch, I do want to understand the relationship with Dell, and also if there’s a revenue concentration for Big Switch? If I remember correctly, Microsoft is a big customer for them. So if we could discuss that.

And then on Dell, they also have other companies they work with in this space, Cumulus, if I remember correctly. Help me understand how do you think the nature of that relationship is going to look like going forward?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [38]

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That’s a good question. First of all, we didn’t see any significant revenue concentration and certainly not Microsoft, that could have been a past statistic, but not true now. So there’s obviously some big customers, and they have some top 10, but not specifically one that is a 10% concentration.

So coming back to your question on how do we see this, we do see the partnership with Dell getting stronger. How Big Switch was selling was really software-only disaggregated from hardware and a lot of the hardware was Dell switches. We continue to plan to offer that model and strengthen our partnership with Dell and make that stronger. So we are not changing the sales motion, and it complements what Arista is doing in the high-end enterprise and cloud titans very, very well. So no change.

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Operator [39]

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Your next question comes from Amit Daryanani with Evercore.

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Jyhhaw Liu, Evercore ISI Institutional Equities, Research Division – Research Analyst [40]

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This is Irvin dialing in for Amit. I also had a question about your campus switching business, it continues to do very well for you. But can you perhaps help us understand what the margin profile for this business looks like versus your broader portfolio?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [41]

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Okay. I would generally say the margin is about the same. But if you say versus our router portfolio as opposed to versus our switching portfolio.

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Jyhhaw Liu, Evercore ISI Institutional Equities, Research Division – Research Analyst [42]

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The broader portfolio. Sorry, not router, but just broader.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [43]

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Okay. The broader. Okay, yes. Not the same. More pricing pressure in the campus always because the market is defined that way, but the margins aren’t significantly different.

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Operator [44]

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Your next question comes from Ben Bollin with Cleveland Research.

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Benjamin James Bollin, Cleveland Research Company – Senior Research Analyst [45]

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I wanted to go back to 400-gig. I was hoping you could talk a little bit about how you think the builds for 400-gig differ from what you saw in 100? And specifically, I’m interested in any thoughts you have on how your partners approach their own OS development efforts, any switch standardization efforts? Just any high-level thoughts there? And then how do you think the margin opportunity for 400? How does that compare to what you saw with 100?

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [46]

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For sure. Ben, in terms of the 400-gig architecture and how our largest customers are leading the way there, the entire architecture needs to contemplate a server flow, let’s say, at 100-gig being able to go through the network. So you have to upgrade it end-to-end. You cannot just upgrade in silos and be done with it. So for large-scale architectures, upgrading the backbone and the DCI networks is almost a necessary step one before you can do 400-gig in the broader leaf spine design. And that depend on ZR, other optics and so on, and — but that’s where the testing is going on already in the last trials that we are involved in today.

For AI, which are closed clusters, 400-gig is already starting to see a little bit of deployment, but these are still very small scale, simply a 32×400 gig type of design in our mini-leaf spine. And there, we are working with our customers very well. With core development, it may not be just the OS. That problem, I think we’ve already addressed with our best customers and partners, but it’s actually core development with the NIC and the FPGA and the GPU and so on, that is also happening already.

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Operator [47]

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Your next question comes from Sami Badri with Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division – Senior Analyst [48]

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I had a question for you regarding Big Switch, and just the operating margin drag that the Big Switch acquisition is going to create in 2020? And maybe I was hoping for some specifics on 2021 accretion that you mentioned. Is this a 1Q, 2Q 2021 accretion? Or is this a back half of 2021 accretion that you are anticipating?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [49]

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I’ll answer the second question, and then Ita, if you could. I wouldn’t call it too much of a drag, but maybe. But in terms of when it will be accretive, the forecast we have challenged the team with is to be accretive by the end of 2021. Obviously, I’d like to see it sooner.

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [50]

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Yes. I mean I think once we get out of Q1, Q1 was always going to be a quarter that was tight from a operating margin perspective just because where the revenue came in at and the mix of business that we have with cloud being heavier. So you are seeing a lower kind of operating margin in Q1. I think once we get out of Q1, we had talked on the last call about a 35% operating margin being kind of the target. And I think we can absorb Big Switch within that, right? As we move through the year, and then we’ll have more to say kind of on the top line on the next call once we sort out some of the purchase accounting and other stuff that we need to work through.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division – Senior Analyst [51]

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Got it. And just actually a clarification. Is the $100 million run rate for campus, does that include any Big Switch contribution? Or is that just the stuff ex Big Switch?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [52]

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No. Big switch was not there in December 2019, right? So I was talking about Q3 and Q4, we’re well on our way to $100 million. And I just want to clarify, it’s not run rate, it’s revenue. So it’s real revenue.

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Operator [53]

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Your next question comes from Tejas Venkatesh from UBS.

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Thejeswi Banavathi Venkatesh, UBS Investment Bank, Research Division – Associate Director and Analyst [54]

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It looks like Microsoft was only down 5% in 2019, a bit better than what you were expecting. Given that in the past, you provided early color on what Microsoft could be as a percentage of revenue. I was hoping, Jayshree, you could do that for 2020. And then secondly…

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [55]

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Tejas, I’d be a fool…

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [56]

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Nice try.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [57]

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Nice try, Tejas. But I’d be a fool to do that right now or wouldn’t you say after the surprises we had last year. I’m teasing you.

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Thejeswi Banavathi Venkatesh, UBS Investment Bank, Research Division – Associate Director and Analyst [58]

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Well, this one went better. But the second thing I wanted to ask about was, is Tier 2 cloud now less than 10% of revenue? And is the visibility sort of improving, given that it was such a drag in 2019?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [59]

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So that’s a good question, Tejas. None of our 5 verticals that I report are less than 10% revenue.

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Operator [60]

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Your next question comes from Aaron Rakers with Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division – MD of IT Hardware & Networking Equipment and Senior Analyst [61]

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I kind of want to build on that last kind of question is, as you look forward, I think last quarter, you alluded to that one of your large cloud titan customers were actually just flat out pausing with regard to their spending dynamic as it relates to maybe a server cycle, a variable kind of consideration. As you think about your outlook today, how would you characterize if whether or not that’s changed at all? Has the slowdown become more pervasive across your cloud titan customers? Just any kind of update on how you kind of roll up that cloud titan forecast this year relative to what you thought coming out of last quarter?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [62]

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Yes. That’s a good question, Aaron. So first of all, just to reiterate, all the surprises we received from that specific cloud titan remain and are being factored into the 2020 forecast. So those numbers will be lower this year, right? As for the other cloud titans, each one is unique. So it’s not necessarily feeding into the others. So that is specific to that one. And each one has their architecture, their time lines, their migrations, their specific CapEx plans. So I wouldn’t roll one into the other.

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Operator [63]

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Your next question comes from Paul Silverstein with Cowen.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [64]

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Jayshree, I’ve got a similar question but from a different angle with respect to cloud. So if we went back several quarters ago, you spoke about the dramatic pause. And I think you also mentioned the fact that it wasn’t just a question of when they would return but to what magnitude when it did. So the question I now have for you is, I assume, by definition, your visibility for Microsoft and Facebook is not what it was at its peak or from it. But what visibility — how would you characterize that visibility today and looking downstream not just the next quarter or 2, but further out, do you have any visibility as to what those customers will look like a year from now, and not speaking about a quarterly period, but obviously, speaking from an annual standpoint, what the contributions of it?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [65]

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Paul, so if you go back consistently to our last 3 years, I think we’ve always said, we don’t have more than a 1 to 2 quarter visibility on any of our cloud titans, and that hasn’t changed. So I wouldn’t be able to give you annual visibility of what their spend this year versus next year would be. I do think we get greater visibility in the second half of this year on how their next year will look like, but — in terms of broad trends, but that answer hasn’t changed despite the pause and puts and takes.

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [66]

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If I can add to that, we don’t have visibility into their surprises.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [67]

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Fair enough. Guys, on the enterprise, just very quickly, Jayshree, you kept referencing the million dollar plus deals. You said it’s almost doubled over the past 3 years. Can you tell us how many million-dollar deals you have in enterprise?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [68]

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100, many hundreds.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [69]

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Well, no, it can’t be many hundreds because you’d be beyond your $100 million target. I’m talking about campus specifically.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [70]

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Oh, you’re only talking about campus. Oh, I see. I don’t have that answer, but I was talking about overall enterprise, including campus.

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Operator [71]

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Your next question comes from Jeff Kvaal with Nomura Instinet.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division – MD of Communications [72]

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We have been hearing from some of the larger OEMs that the server chipset availability is a little tighter than they might have hoped. I wouldn’t have necessarily sound that there would be an implication for Arista a year ago. But given sort of the tenor or the conversation we had last quarter, I’m wondering if that is something that we should be monitoring just in case some of your other web scale customers can’t get all the servers they want or some of the Tier 2 players can’t get the servers they want, and that may then impinge upon your switch sales to them.

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [73]

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So just, it doesn’t really impact us as much on a short-term variation over there, especially the cloud companies, they decouple supply chain planning for these issues and have 1 or 2 months of gaps anyway. If it’s a fluctuation of 1 or 2 months, it doesn’t really impact us.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division – MD of Communications [74]

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Okay. Then as a clarification, I think in the past, you’ve talked about the likelihood of coming back to year-over-year revenue growth in the fourth quarter of 2020. Is that still sort of a reasonable place for us to stick a yard mark?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [75]

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Yes. Jeff, that’s our hope. We hope for that.

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Operator [76]

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Your next question comes from Alex Kurtz of KeyBanc Capital Markets.

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Alexander Kurtz, KeyBanc Capital Markets Inc., Research Division – Senior Research Analyst [77]

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I just want to clarify the comment about the sluggishness for cloud service provider and service provider. That sluggish comment, Jayshree, that was for both verticals?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [78]

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Yes.

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [79]

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Combined.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [80]

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Yes. Combined, yes.

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Alexander Kurtz, KeyBanc Capital Markets Inc., Research Division – Senior Research Analyst [81]

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Okay. Combined. Okay. Jayshree, last quarter, you outlined changes in how you thought the cloud service provider segment was considering on-prem versus on-prem infrastructure spend and maybe some of them moving back to cloud. Can you just give us an update on how you see that vertical? I know you outlined it here in the growth projection, but that was a change from prior views. So I was just wondering if there’s any…

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [82]

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That’s correct.

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Alexander Kurtz, KeyBanc Capital Markets Inc., Research Division – Senior Research Analyst [83]

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Update on that segment specifically?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [84]

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Nothing’s changed significantly. Although some of the Tier 2 cloud providers have resumed some small spend and some of them are still valuating. So…

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Alexander Kurtz, KeyBanc Capital Markets Inc., Research Division – Senior Research Analyst [85]

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Gut. Okay. So no longer — you don’t see it as a near-term secular opportunity right now from what you can see.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [86]

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No. Not in the first half.

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [87]

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No. I think it’s less of a — not a drag. I mean it was…

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [88]

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Not a drag, but not an amazing upside either.

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Operator [89]

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Your next question comes from Tal Liani with Bank of America.

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Tal Liani, BofA Merrill Lynch, Research Division – MD and Head of Technology Supersector [90]

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I have 2 questions. First, if I remove Facebook, which I have — sorry, Amazon — sorry, Microsoft, which I have perfect numbers.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [91]

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Which one? I’m confused. Try it again.

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Tal Liani, BofA Merrill Lynch, Research Division – MD and Head of Technology Supersector [92]

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Eventually, I’m going to get to the right answer. Yes. So if I remove Microsoft, which I have perfect numbers for both years, and then I assume Facebook at 9% last year because that’s the highest number below 10% versus what’s this year, the growth is only 6%. If I assume for Facebook 5%, which again, it wasn’t a 10% customer, so it has to be below that. So if I assume anything below, the growth is even lower than 6%.

So the question is, why aren’t you growing faster with everyone else? Forget, Facebook and Microsoft, why don’t we see faster growth like we used to do because we have always been doing this exercise without Microsoft, and growth was always very strong. And the second question, not related…

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [93]

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Oh, hold on. Can you — Tal…

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Curtis McKee, Arista Networks, Inc. – Head of Corporate & Investor Development [94]

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Hold on, Tal.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [95]

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We’re still processing your first question because we’re still trying to understand how you computed this. Did you compute deferred revenue in your question?

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Tal Liani, BofA Merrill Lynch, Research Division – MD and Head of Technology Supersector [96]

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No. I did not. I just…

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [97]

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I mean part of the issue…

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [98]

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Okay.

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [99]

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Yes. Part of the issue going from 2019 to 2020, is that you have this deferred revenue, $118 million, which is like 5% of revenue effectively, right, both, right, that you have to backfill effectively in ’20, right? So that kind of — that’s a drag on the growth rate before you start, right? So you have to adjust for that. But even with that, what we’re saying is that, that cloud vertical will be kind of flat to down from a demand perspective, right?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [100]

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Yes.

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Tal Liani, BofA Merrill Lynch, Research Division – MD and Head of Technology Supersector [101]

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But the deferred related to Microsoft or Facebook or the deferred related to everyone else?

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [102]

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If you trace back in time, it was non-Microsoft, and obviously, it’s a large number. So I think you can figure out that it’s a Facebook impact, right? And we talked about that as a 16.6% with the deferred, probably 12% revenue without the deferred, right?

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Operator [103]

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Your next question comes from Simon Leopold with Raymond James.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division – Research Analyst [104]

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I got confused not only from Tal’s question there. Anyway, I wanted to ask you about the commentary several of the hyperscale providers made about extending the useful lives of their servers. Wondering how that translates into your business for intra-data center switching? And if this was an aspect that you were aware of when you had provided your forecast last quarter or whether the commentary we heard during this earnings season was also new to you.

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [105]

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No. Simon, when we did our earnings call last quarter, we very much stated what we had seen from at least one of the cloud titans where they were delaying the refresh, and now you’ve seen in market that some of the other cloud customers are doing this as well. But we’re not seeing this with the other Arista customers so far, even in the cloud space. So for us, it’s limited to one customer. We don’t deal with the other larger company you’re referring to as much, so we’re not as exposed there. But it’s not a market-wide trend. It’s very specific to their architecture, the next-generation thereon and the sort of type of offloads. They’re looking for to decide generation to select.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division – Research Analyst [106]

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And is there a way some math to figure out how to translate if, say, they extend the life by 1 year. So instead of 3-year replacement, they get a 4-year. Is there some arithmetic or rule of thumb to help us think about how to quantify the impact for you?

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [107]

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We don’t have it. I’m quite sure someone on this call has a models around that. But no, that’s not something we try to forecast.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [108]

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Mostly a delay of a year in the spend.

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Operator [109]

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Your next question comes from Jim Suva with Citi Investment Research.

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Jim Suva, Citigroup Inc, Research Division – Director [110]

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I sincerely just have 1 question because I’m just a very simple guy and not as smart as others. But whether it be Jayshree or Ita or Curtis, a quarter or 2 ago, you had talked about a cloud titan skipping a refresh cycle or elongating their purchasing. Some of the commentary after that was, well, maybe they’re using white box or maybe they found a better compute standard or a way to fit more through compression or duplexing or some other standard. Now that we’ve had several months behind us, can you give us any visibility of — do you feel more confident that it truly is just a delay? Or are they looking at other solutions? Or just kind of revisit that topic?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [111]

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Yes. So Jim, I think all the theories of those answers are not true. I think the customer has been pretty straightforward with us, that they have always been using Arista as well as some internal development, and we’ve been working with them on the internal development. So we feel very comfortable that their forecast has changed, and they continue to be an important partner with us.

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Operator [112]

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Your next question comes from Samik Chatterjee from JPMorgan

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Samik Chatterjee, JP Morgan Chase & Co, Research Division – Analyst [113]

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I just wanted to kind of — given kind of your commentary on the slower spending you’re seeing from your customers, you obviously have a Q1 seasonality that’s weaker than what you’ve seen historically. As we look through the rest of the year, is it kind of fair to assume, given the visibility you have right now, that the seasonality through the remainder of the year will be weaker than what we saw in kind of normal years like 2018, for example? And are you still kind of comfortable reiterating the full year, I think, guide that you gave last time, which was for a modest decline in revenues?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [114]

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Okay. So Samik, I’m a little confused by your question. We did not give — are you talking about cloud customers or customers at large? What’s your question?

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Samik Chatterjee, JP Morgan Chase & Co, Research Division – Analyst [115]

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For cloud customers. Cloud customers.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [116]

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Cloud customers. Okay okay. Now that makes sense. Yes, yes. So look, we feel the same way as we did last time, which is we had a lot of weakness in the spending, and it’s reflected in our Q1. I think we will know better about the rest of the year when we get to the second half more. But as it stands, nothing’s changed. The CapEx that they will spend Arista fields in a very strong position to compete, differentiate and get the business. So we’re not losing market share. We’re winning the sockets but the rate of spend and adoption, we do believe will be a flat to down year this year.

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Operator [117]

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Your next question comes from James Fish with Piper Sandler.

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James Edward Fish, Piper Sandler & Co., Research Division – VP & Senior Research Analyst [118]

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Happy almost Valentine’s Day. Can you guys go over the linearity of the mix for customers over the course of the year and if it was back-half loaded at all? And I just want to be clear, is cloud titan going to be flat to down double digits on top of the $118 million deferred headwind? Or is the flat to down double digits, inclusive of the headwind?

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [119]

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Richtig. So the meaningful revenue decline and the double-digit are all referencing revenue, right? So saying basically the revenue numbers will decline meaningfully, right? That includes $118 million, right? When we talked about demand, and we said, that we expect it to be flat to down, that’s not referencing that double-digit number, right? That’s a commentary that obviously will play out as we see where it goes, but it’s not trying to say that it’s a double-digit number.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [120]

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And then to answer your question on Q4 linearity. I’m just looking at the chart Mark Foss is giving me. It was pretty linear across the 3 months. We had a record million dollars of customers in Q4, and good spend across our top 50 customers. So nothing unusual except more campus.

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Operator [121]

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Your next question comes from Tim Long with Barclays.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [122]

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Tim, are you there?

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Curtis McKee, Arista Networks, Inc. – Head of Corporate & Investor Development [123]

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Tim?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [124]

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Let’s go to the next one.

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Operator [125]

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Your next question comes from Ryan Koontz with Rosenblatt Securities.

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Ryan Boyer Koontz, Rosenblatt Securities Inc., Research Division – MD & Senior Research Analyst [126]

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I was hoping if you could speak to your outlook for international. Obviously, hyperscale has been a big piece of that, shipping to their international destinations. But if you could speak to — kind of is there any updates on strategy or channel development there that’s going to supercharge that business for you?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [127]

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Anshul and the team have invested pretty significantly in international, especially, of course, the developed countries in Europe and Asia Pac. We had a strong quarter. And we’re starting to see some important customer wins in the enterprise and even some small service providers. We — obviously, a much more channel led in international. That’s always been the case. So that’s been a strong area of experience for us. And I actually want to add to that. I think that’s a strong area of growth.

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Anshul Sadana, Arista Networks, Inc. – Senior VP & COO [128]

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Really, both in head count growth, we actually have a significant amount of heads added to international. And on the channel side, the channel development plan we have is a separate one for U.S., separate one for EMEA and APAC as well with a different ecosystem, different set of partners and so on, and that’s coming along reasonably well. As Jayshree mentioned, the international locations are mostly fulfilled by channel, but now we are working with them to make it channel led as well. So if you remove clouds and so on, the rest of the organic international business is doing well.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [129]

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And one other — just one quick add to what Anshul said. Generally, our customer logos are higher internationally than in the U.S. lower purchase of sale. But out of the 6,300 cumulative customers have come internationally.

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Operator [130]

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Your next question comes from Tim Long with Barclays.

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Timothy Patrick Long, Barclays Bank PLC, Research Division – MD and Senior Technology Hardware & Networking Analyst [131]

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Okay. Sorry about that. Yes, just wanted to ask — I just wanted to ask kind of 2 related questions. First, could you talk a little bit — there’s been a lot of chatter about silicon diversification in the switching area. So could you give us your views, obviously, with a big customer making an announcement and starting to talk about some traction there. So what do you think the impact is there? And related, what are you seeing just overall on white box these days? Are you seeing any change to who’s using it or how they’re using it?

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [132]

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Okay. Look, as you know, Arista has always been a big component of merchant silicon and ASICs, notwithstanding this new announcement have been around 30 years. It’s not — ASICs by themselves are not new. We do see 3 dimensions. First of all, is, from a best-of-breed silicon standpoint, we couldn’t be more pleased with our — the silicon we receive from Broadcom, both on the Trident and Tomahawk side, and Jericho, we have very high confidence. It’s a case where you can’t just build one point product, you have to have a full road map, and we’ve always been ahead of vendor specific at ASICs, and we believe that will continue.

In terms of software, silicon by itself is not so interesting if you can’t build a system. So obviously, EOS, we feel is the most competitive software differentiated across many merchant silicon devices. I think it’s — we supported over 18 silicon families, maybe more than that. And so in general, we feel like that leaves only one other thing, which is Cisco selling chips. And obviously, that’s not our business. They’re going to be competing with Intel and Broadcom on that one.

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Operator [133]

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Your last question comes from Tal Liani with Bank of America.

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Tal Liani, BofA Merrill Lynch, Research Division – MD and Head of Technology Supersector [134]

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By the way, I just want to comment something. We’ll take it offline, but we shouldn’t remove the deferred, and I can explain later why. The number is the number you could remove both sides. But in any case, I wanted to ask about the gross margin. Why is it declining sequentially next quarter? I don’t think anyone asked this question.

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Jayshree V. Ullal, Arista Networks, Inc. – President, CEO & Director [135]

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No. They didn’t.

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Ita M. Brennan, Arista Networks, Inc. – CFO , Senior VP & Principal Accounting Officer [136]

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Large customer mix, right? We were heavy enterprise and financials in Q4, and we’ll be — we’re heavier cloud mix in Q1. Q1 always has a heavier cloud mix because enterprise just takes time to ramp in the first quarter.

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Curtis McKee, Arista Networks, Inc. – Head of Corporate & Investor Development [137]

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Okay. Well, this concludes the Arista Q4 2019 earnings call. Thank you for joining us today. Please note that moving forward, our earnings calls will move to Tuesday, starting with the Q1 2020 call, which will take place on Tuesday, May 5. Lastly, we have posted a presentation, which provides additional information on our fiscal results, which you can access on our Investors section of our website.

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Operator [138]

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Thank you for joining. Ladies and gentlemen, this concludes today’s call. You may now disconnect.

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