2023-08-07 16:05:19 ET
Arista Networks, Inc. (ANET)
KeyBanc Technology Leadership Forum
August 8, 2023 01:00 p.m. ET
Company Participants
John McCool - EVP of Engineering and Operations, Chief Platform Officer
Liz Stine - Investor Relations
Conference Call Participants
Tom Blakey - Keybanc Capital Markets
Presentation
Tom Blakey
Well, thank you everybody for joining us. My name is Tom Blakey, Infrastructure, Technology, and Software Analyst here at KeyBanc. And we're grateful to have John McCool here from Arista. He is the EVP of Engineering and Operations, and also the Chief Platform Officer, with Liz Stine from Investor Relations who is going to monitor here in the front row.
So, thank you very much for joining us, John and Liz. I just wanted to start off, because I think you know from Chief Platform Officer, maybe just a minute. What does that entail?
John McCool
Sure. I’m going to have to stand Tom, because you're standing, right.
Tom Blakey
I have a list of all your responsibilities.
John McCool
So Chief Platform Officer, I have really two domains. One is hardware development, so all our new products, and then manufacturing and supply chain. So effectively, I get to see products from inception and concept, and then all the way through production and build out.
Question-and-Answer Session
Q - Tom Blakey
Excellent. Well, I just want to jump in. We're asking all of our companies at the conference here to try to get some sort of semblance of the macro. With how things ended at the end of last year, macro softness and things kind of – spending has gotten a little softer. We are speaking specifically, I guess the enterprise, related to your cloud business, but as we go into the second half here, just generally speaking, what does the business kind of update in terms of from the beginning of this year to the second half of this year?
John McCool
Sure. In terms of Arista, I'm not sure we would be typically a bell-weather in enterprise. We've got a lot of share that we have to gain an opportunity I think that's a little independent from the macro. We did talk about it in our last call, the success in the enterprise. That's momentum that we've built out through the last couple of years in two dimensions.
One of this is new use cases and new products coming out from just data center, moving into routing and campus. And then we also talked about, cloud was big news for us. Early in the supply chain and challenges, I think cloud recognized that there would be impact and really prepared for the big build-out. It took enterprise a little bit longer and now you're starting to see enterprise catch up in terms of our shipments and deliveries.
Tom Blakey
It's a good segue to my next point of questions here about Enterprise. Arista has been very successful in the high performance data center, as meaningful share there was some new garnered data for example. That’s 45% market share at the high end. You mentioned the new products that you've launched in the Enterprise. Now, companies have this ability to standardize on Arista. You had an experience in Cisco. What are the dynamics that are kind of different throughout the rest of the stack that maybe Arista could you know – with the ups and downs, the risks and the benefits of how the risk is going to try to emulate their success in the data center and throughout the rest of that, the enterprise… [Cross Talk]
John McCool
Enterprise, the whole picture. Yes, so for folks not familiar with Arista, we started out with a data center play. We actually started out in the financial vertical with a low latency switch. We got a strong footing in certain verticals, financial and media entertainment around the data center solution. Then we started to build out new technologies or use cases around the solution, specifically routing. So we went from connecting your servers and building out a distribution network to being able to interconnect site-to-site and redundancy.
Then we made an acquisition or Wi-Fi and built organically our own campus switching products, which would connect end users into the network. And with Awake, we started to get into network security and detection. And then the last piece that we've built out, I think is pretty important, is WAN Transit, so being able to connect remote branches back into the network.
So we feel pretty good today that we have all the essential building blocks for building an enterprise network end-to-end. And if you're looking at an alternate to your incumbent, you really want to see somebody that can challenge across all those use cases, and I think we're in a good position today.
Tom Blakey
Is there any – additionally along the lines of you finally having this end-to-end solution technologically? Walk us through like not so much to go-to-market, but this is a market where you're taking share – taking dollars away from something that's already installed. It's not like a software company that's starting a new hand if you will. How do you – what are the technological advantages of Arista to kind of basically rip and replace some of the infrastructure that's in place with the incumbent?
John McCool
Yes, I think our approach is very different. We get this question a lot and people want to point to a differentiation in all those roles. Like okay, your Campus Solution, how's that better? Your WAN Transit Solution. We take the approach that we build a better enterprise network. Our operating system fundamentals are stronger from a software approach, which leads to better quality.
Our sales teams will go out and say to operators, don't waist – you want to spend your weekends with your kids and your partners? Because they spend a lot of time just reacting to as-moves and changes or upgrades to the software that lead to instability. So all they care about is just running the network and making sure it doesn't go down.
There's a lot of issues with vulnerabilities in like the Linux Stack that forces upgrades. Upgrades are ripe for missteps, either manual configuration errors or you get a software regression. So in other words, something that used to work in your network was broken through that upgrade and it was not uncommon in networking before Arista.
So we're selling peace of mind, ability to sleep, take your weekends off and just run a better network. And the campus comes along with that or the routing piece. From an investment in your people, you just have to learn Arista EOS and Cloud Vision, and then you can deploy in all these use cases rather than learning a different management stack for each piece.
Tom Blakey
So it's about the cloud management.
John McCool
Yes, it's around kind of the integration of the whole stack across all those use cases.
Tom Blakey
And that's all integrating today?
John McCool
Yes.
Tom Blakey
So we have pieces, but everything's integrated.
John McCool
Everything's integrated today, right.
Tom Blakey
You mentioned part of the – the Chief Platform Officer is responsible for supply chain. The campus piece that you've been breaking out, I think since ‘21, had some supply chain issues in ‘22. Can you maybe just update us there?
John McCool
Yes, so it wasn't unique to enterprise. I mean, it was kind of a generic, all the supply chain challenges, but campus being the new piece in terms of just kind of hitting some of the revenue targets. The interest was there, but our ability to deliver was impacted by some of the supply chain shooters, and you're starting to see some of that catch up now.
Tom Blakey
So from that hierarchical view of building backlog, we've seen, and we'll get to it in terms of cloud titans, maybe down taking one of your large M&M customers. You took up guidance for ‘23 in terms of 30% growth, implying through the modeling that enterprise would – well, depending on where you were in terms of your models inflect into ‘23 and second half maybe, well is some of that backlog related in just satisfying that backlog or is there some other element to the strength or even increased strength in enterprise here in ’23.
John McCool
A combination. I mean, we've kind of built up that strength going forward. We've seen larger deals, both in – in terms of customers that were really Arista customers’ just building out more, as well as acquisition of new customers.
Tom Blakey
Let me just pause there for a second. Is there any questions in the audience or we switch over to cloud.
Unidentified Analyst
So, what you're saying is the impact of the supply chain issues that cause, well comparison with [inaudible] a little bit.
John McCool
We are starting to see availability of components but the lead times of components are still very long. The predictability of delivery has been there the last two quarters. So when we order something. It comes in when it's supposed to. We're not seeing push outs in terms of – the lead times on semiconductors are still very long, I mean, close to a year. So the capacities improve, predictability has improved, but we're still probably seeing 2x, the lead time at the component level than we saw pre-COVID.
Tom Blakey
So switching to cloud titans and then maybe just exploring. Not necessarily specific, obviously numbers in terms of the slowdown that was talked about on most recent call for one of the – one of your large cloud type customers. That was really increment, that was really important for growth in ’22, it was driving growth. Walk us through like the, whether it’ll be wallet share dynamics, like why are they slowing and I'm trying to get to the, will this spend come back? And I'd like to just maybe, before we get to that answer, what drove, because I think it would help answer that question. What drove that big uptake in spend at this customer in 2020?
John McCool
Sure. I mean, if we look back in 2019 at our business, we actually talk about customer waiting for next generation in server upgrades and kind of reporting a pause. So going into 2020 with COVID, there was a little bit of reaction to that pause, as well as increased demand of these networks that really turned on the cloud business for us. So there's some smoothing effect there and we saw a tremendous growth in 2022 in the cloud business. I think we're kind of getting back to a more – probably a little normal cadence.
Tom Blakey
And again, just using that as a backdrop going forward into ‘23 and beyond trying to understand, you know, that sounds a little bit more cyclical. I'm trying to figure it out. Is there – was there a technological need at that particular customer that was looking to shift more dollars to say in Arista as they are building out whatever they are building out.
John McCool
Yes, I mean, we have good relations with all these cloud customers who have been multi-generational. There's a lot of integration and engineering work that we do with the cloud titans. And kind of looking forward, just in the cloud space, I think there was, kind of some decision making around what's going to happen with AI as a next generation use case, that people are starting to understand and digest when they start to look at 2024 and 2025 and beyond.
Tom Blakey
So, just trying to wrap up and conclude, digesting certain things that they brought up prior, and then shifting focus to a different area.
John McCool
Trying to understand that area, so it's pretty emerging, right? And I think a lot of focus is really how can AI help my business? How will the applications integrate? What's the value proposition around to my end customers? And so that's kind of going on at the top of the stack or maybe even at the business level.
And then you have teams working on infrastructure, thinking about, ‘okay, if this really comes to fruition, how many GPUs do I need? How do I deploy them? How do I deploy it at networking scale?’ And thinking about how that can be more consistent to what they've typically done in the data center.
So you know I would say in the last six months, this dynamic and discussion around how AI evolves has really taken front and center.
Unidentified Analyst
And so, you talked about how the cloud, the AI condition, what's going on in the cloud as a general, how that's affecting the demand for higher speed?
John McCool
Yes.
Unidentified Analyst
We have 400 now gigs and 800. Where were we at in that? [Inaudible].
John McCool
Right. So just to kind of repeat the question for folks that are on the call, how does AI affect the speeds and the speed transitions? And maybe how does it map in, if you will?
So, AI is definitely a bandwidth consumer and really wants to see low latency. You're spending a lot of money on GPUs and the endpoints and to sit there idle, like a factory sitting idle, you don't want to waste that. So there definitely is a propensity to the higher speed grades and a strong interest in 800 gig to move forward.
So people are using 400 gig today in trial activity. There's also an interest in making the network better for AI and how you might enhance Ethernet moving forward to either get better load balancing or better visibility into what's happening through the AI piece.
So there's not a binary, it has to be 400 to 800, but it's definitely the people who are doing AI today are definitely wanting to use the highest performance available and definitely pushing towards 800 gig.
Unidentified Analyst
[Inaudible]
John McCool
Yes, so the question is, is the industry ready on speed at lengths?
I think people would like 800 gigs sooner, but you know 800 gig is in development today, and that's going to probably be the primary use case and driver to 800 gig.
Unidentified Analyst
[Inaudible]
John McCool
It's just work. I mean, it's the whole ecosystem, it's the semiconductor chips, it's the optics. And I think a lot of that work was done for 400 gig. There were some new breakthroughs in coding schemes, etc. So, I think that'll follow its natural path, but it's just not, it's just not there today.
Unidentified Analyst
[Inaudible]
John McCool
So, maybe I'll back up. Is it okay if I talk about InfiniBand and Ethernet? I think it's on your list. So, this sounds like a good segue into the whole thing.
Tom Blakey
[Inaudible]
John McCool
Yes, so maybe I'll start with just some perspective on Ethernet versus InfiniBand. So InfiniBand was also developed by a consortium, and the use case was high performance computing. And InfiniBand has had some really good things.
At the time Ethernet was one gig. InfiniBand drove the technology for 10 gig that was later adopted by Ethernet. It also pushed 40 gig, which was adopted by Ethernet. At some point these became more lockstep, because the industry investment, the underlying technology is the same. So you now see 200 gig, 400 gig, 800 gig on both the InfiniBand and the Ethernet roadmap.
The second thing that InfiniBand drove was a technology called RDMA to allow the applications to basically communicate without copying data. It's very efficient. Well, Ethernet co-opted RDMA with a technology called RDMA over converged Ethernet, RoCE. So, you see this kind of development of both, and actually Ethernet today can be implemented in a lossless fashion with flow control similar to InfiniBand, but there are still differences, right, because of how they grew up.
Ethernet, I think has an opportunity, as well as InfiniBand to improve for this AI workload. Neither was purpose-built for AI. So the consortium will look at things as actually improving the flow control mechanisms to make it more granular, to add visibility, and to do some things around load balancing and other ideas that the consortium might bring to bear.
I think it's – the trajectory of Ethernet has been more of potentially competitors getting together to develop an open standard that can be adopted by many, and people have liked that. It actually leads to competition and more investment with InfiniBand at this point being more captive with NVIDIA.
So, that's kind of the dynamic. It’s a little bit around the consumption model today, right? I don't think this is something unusual that Ethernet is doing just in reaction to InfiniBand. It's really the AI workload, and we see interest from the largest customers moving to Ethernet, because of that multi-vendor component. They are interested in other GPUs. They might be developing their own. So, they're interested in the open ecosystem.
Tom Blakey
[Inaudible]
John McCool
I think pieces of technology can be adopted in a pre-standards mode, and I think typically the Ethernet consortiums have gone to the standards committee for ratification. So, it'll be a combination of both, and I think a lot of people have the perception that Ethernet can't do AI today. That's not exactly true. It just can't do it as well as it will next year or the year after that.
Tom Blakey
I’d like to go back to this wallet share notion that maybe I'm not flushing out well, but there was a reason why these providers, like you said, might have paused spending in 2019 for myriad reasons and then there was COVID. But there was a reason why architecturally, when we build these roadmaps that are five, 10 years long, they picked Arista, and there was a certain percentage of their spend that they were reporting to you, and then this changes as we go forward.
Collectively, the hyperscalers, especially even your customers, are spending more in the ‘24. So, I want to know, when you look at that roadmap, what does that look like for Arista relative to what you're discussing with them? Is it a notion of not asking for numbers, but I would love the technological reasons for why. More wallet share spend from these guys? Like, when you sit down strategically with them or if you know what they're working on? I mean, not everything can go to GPUs.
John McCool
Right. I mean, I think Arista was fortunate to enter the hyperscale market before they were hyper. It was an underserved, classic underserved market, and they were buying products designed for enterprise or service providers and redeploying them.
A couple of them weren't happy with that and went out and built their own technologies. And when Arista kind of emerged to focus on that market segment, Microsoft and Meta, in particular, were kind of poised to grow at the same time, and we've been able to develop that over multi-generations.
They were very concerned about operating networks with not this many people as users; millions and billions of users with a very small team relative. And that's still very much of a focus is simplicity of deployment, stability of the operating system, real block and tackle type of things.
Now, they've all diversified into more use cases. Edge use cases, data center interconnect was something that was not on the original roadmap that we deployed, and AI is probably the next new use case that we see coming to these data centers. And we'll have to adapt. We're going to have to execute on those, each one of these transitions or additional use cases. It is a little bit of an inflection, but I think we're well ahead of it.
Tom Blakey
Any other questions from the audience?
Unidentified Analyst
I don't know where this fits in terms of your responsibilities at the firm, but Arista's been -- there's a good percentage of share in their revenue tied to service, software and services, and a good portion of that in software. I was just wondering if maybe you could comment in terms of that increased functionality and increased asks around this highly programmable, open cloud-based system that's Arista. You could translate itself longer term. This is probably more enterprise than cloud in terms of ancillary software services.
John McCool
Definitely. No, a great question. I mean, I think that we've seen in the cloud, you have customers that have the wherewithal to build their own management stacks and how they operate. Also how they do network visibility, being able to collect a lot of data from the network and analyze it.
Enterprise customers don't have the software teams to actually build that in-house. So we're filling that gap with cloud vision and implementing many of that capability that was typical in the cloud and cloud vision, and we've extended that cloud vision into other SaaS-based technologies.
Our Wi-Fi deployment is a cloud-based operating system that's a routable revenue model. We have now cloud vision as a service, which we host rather than have the customers have to deploy on-prem. So you start to see these kind of elements come into our enterprise mix, and I think you can expect that to continue.
Unidentified Analyst
And especially with the mix shift to enterprise going forward.
John McCool
Absolutely.
Unidentified Analyst
Just if I may, I noticed we don't have Ita with us, who is retiring soon, but from a go-to-market perspective, just I think investors are always interested in terms of what's needed. And we can just even maybe start with what's the go-to-market kind of motion for Arista to attack this gigantic TAM where they have relatively very low share in many aspects of enterprise network deployment and how it could impact the model.
John McCool
Yes, I think a couple of things that we've done differently. As folks have moved into the enterprise and challenged the incumbent, they typically come from a mid-market setting and then have a value proposition that it's good enough.
You don't need all the features and functionality. This is cheaper. It's 80% of the cost and actually all that complexity is something that you don't need. Our approach has been to actually go after the most sophisticated customers first and build downwards.
So financial vertical first, a very challenging vertical, and then build out from there and bring all the architectural pieces that you have to build at enterprise network. So the account teams get very focused on the Fortune 2000, how we can grow our wallet share in existing accounts, how we can penetrate some new accounts that have a high network spend.
Then we have partners and resellers that come in to deploy those networks. Oftentimes they are able to find other opportunities in adjacent regions that we probably wouldn't have gone after ourselves and that's how we build out the go-to-market model.
So there's always an opportunity to expand in a region. If we find a new opportunity and an anchor to start deploying a sales engineer and an SE to go after that and start to build out a region. So you'll see us do those kinds of things to build out the go-to-market.
Tom Blakey
But in the near term, just focusing on…
John McCool
Focusing on that model. I think we get a lot of questions about the channel and at some point in the future, as we start to get satisfied with our share in sort of that Fortune 2000. I think that is an opportunity that would require more investment in the channel, but that's not here today.
Tom Blakey
Well thanks. One more time in the audience, one more question?
Well, thank you John very much for your time.
John McCool
Thanks, Tom. I appreciate it. Thank you.
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Arista Networks, Inc. (ANET) Presents at the KeyBanc Technology Leadership Brokers Forum (Transcript)