Arista Networks Inc (ANET) — Q2 2015 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks President and Chief Executive Officer; and Ita Brennan, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal second quarter ended June 30, 2015. If you would like a copy of the release, you can access it online at the company's website. During the course of this conference call, Arista Networks' management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2015 fiscal year, industry innovation, our market opportunity and the impact of litigation, subject to the risks and uncertainties that we discussed in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We've provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I will turn the call over to Jayshree.

Thank you, Chuck. Thank you everyone for joining us this afternoon for our Q2 2015 earnings call. I'm pleased to report our fifth consecutive beat as a public company. Consistent with prior quarters, customer demand for our 7000 Series EOS-based platform drove results that exceeded the consensus. From a geographic perspective, our customers in the Americas generated 77% of our sales and 23% was generated internationally from EMEA and Asia Pacific. We are witnessing continued traction with financials, modern enterprises, and significant contribution from many of our cloud titans and service providers. Revenue grew 42% year-over-year to a record $195.6 million. Service contributed more than 10% of overall revenue. We delivered non-GAAP gross margins of 65.8%, resulting in a non-GAAP earnings per share of $0.54, growing 50% year-over-year in our competitive and dynamic industry. We now have over 3,390 customers and continue the acquisition trend of 1 to 2 new customers per day. This quarter, we had many key highlights. We announced a transformational network-wide state-based management platform called CloudVision. CloudVision is a very meaningful entry into software-based subscription services offering a network-wide operational control. It dramatically improves network change control for many of our customers. CloudVision offers a unique array of capabilities differentiated by a single point of workload integration, network-wide rollback, and workflow automation and visibility. We do expect the results of CloudVision to be a multiyear journey and much more measurable in 2016 and 2017. CloudVision has been endorsed by many of our new and existing partners, including VMware, NSX, Microsoft, Hyper-V and Windows Server, HP, Dell, F5, Infinera, Palo Alto Networks, Nuage, Rackspace, and Supermicro. Speaking of partnership, we formalized our converged infrastructure solution with HP for Cloud-Class Networking with HP's compute and OneView integration. We believe this is an important step not only for us but the industry in moving towards a converged solution for mainstream enterprises. We have now surpassed 5 million cloud networking ports in cumulative overall shipments. Our first million ports, to put this in perspective, took about 4 years. Our fifth million port was achieved in approximately 1/10 that time. We are therefore forecasting a cumulative revenue that will exceed in excess of $2 billion by the end of this year as we continue to feel good about gaining market share and customer relevance in our 10, 40, and 100 gigabit Ethernet data center market. Now I would like to turn the call over to our new CFO, Ita Brennan, for further financial details. Welcome, Ita, to your first earnings call with Arista Networks.

Thanks, Jayshree, and good afternoon. I'm pleased to announce the results for the second quarter of 2015, my first quarter with Arista. This analysis of our Q2 results and our guidance for Q3 '15 is based on non-GAAP and excludes all noncash stock-based compensation expenses and legal costs associated with the ongoing lawsuit. A reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total GAAP revenues in Q2 were $195.6 million, up 42% year-over-year and comfortably above our guidance range of $183 million to $191 million. We experienced good momentum across all key verticals in the quarter, and we're pleased to see our service revenue continued as a model percentage of revenue. International revenues totaled $45 million, or 25% of total revenue. While we are focused on expanding our international footprint, you should expect our geographical revenue mix to fluctuate on a quarter-over-quarter basis depending on the timing of U.S. and international deployment. Although not impacting our financials at this point, CloudVision has demonstrated some good early market acceptance in the short time since our product launch, and we expect to see good traction into 2016 and beyond. Overall gross margin in Q2 was 65.8%, down slightly from Q1 at 66.1% and just above the upper end of our guidance range for the quarter. As a reminder, the biggest driver of volatility in our gross margin number is customer mix and, to a lesser degree, product mix with large customers earning a higher discount level. While our 4 verticals were well represented in our revenues for the quarter, we also experienced good traction with several of our cloud titan customers. Operating expenses for the quarter came in at $74.7 million, or 38% of revenue, up 33% from the prior year and 11% from the prior quarter. Our spending increases were largely focused on additional personnel in sales and marketing and R&D, higher prototype expenses and additional consulting costs as we complete our first year of SOX compliance. Our operating income for the quarter was $54 million, or 27.6% of revenue. Other expenses for the quarter were $0.4 million, and our effective tax rate was 27.6%, resulting in net income for the quarter of $38.8 million, or 19.8%. Our diluted share number for the quarter was $71.2 million, resulting in a diluted earnings per share number of $0.54, up from $0.50 from the prior quarter and up over 50% from the prior year. Legal expenses associated with the ongoing lawsuits came in at $9.9 million for the quarter, in line with our outlook from the last earnings call. As a reminder, these expenses are excluded from the non-GAAP results discussed above. Now turning to the balance sheet. Cash, cash equivalents, and investments ended the quarter at $552 million. We generated $52.6 million of cash from operations in the June quarter, up from $20.8 million in the prior period. DSOs came in at 57 days, flat to last quarter. Inventory turns were 2.7x, down from 2.8x in Q1. At the end of Q2, we held approximately $100 million in inventory, including $28 million of raw materials. Our inventory planning strategy is to leverage inventory when needed to ensure that we can flexibly respond to our customers' needs. That said, this will be an area of increased focus in coming quarters as we look to improve our inventory metrics. Our deferred revenue balance was $164 million, up from $133 million in Q1. This balance is largely made of short and long-term service contracts with some product deferrals related to acceptance terms and future deliverables. Accounts payable days was 59 days, up from 43 days in Q1. Capital expenditures for the quarter were $3.6 million. Now turning to our outlook for the third quarter and beyond. We are pleased with our financial performance in the first half of 2015 with revenues up 47% and earnings per share up 75% on a year-over-year basis. We continue to increase our market share and gain traction across key verticals and customers. The market remains competitive from a pricing perspective, and as mentioned above, our gross margins will fluctuate depending on our customer mix. We will continue to invest in the growth of the business, both in terms of increased headcount and the build-out of infrastructure as we expand our worldwide presence. We will do this in a judicious and powerful manner and within the parameters of our business model, which calls for operating expenses of approximately 40% of revenue. With this as a backdrop, our guidance for the third quarter, which is based on non-GAAP results and excludes any noncash stock-based compensation expenses and any legal expenses associated with the ongoing lawsuits, is as follows: revenues of approximately $208 million to $212 million, gross margin of approximately 53% to 65%, and operating income of approximately 25%. Our effective tax rate is expected to be 28% to 30%, with diluted shares of approximately 71.7 million. Please note that based on our current understanding, we expect that the costs associated with the ongoing lawsuits to be approximately $15 million for this quarter, with this quarter representing a peak expenditure quarter as we engage directly in trial activities.

Thank you, Ita. We're now going to move to the Q&A portion of the Arista earnings call. We're expecting a lot of great questions. Thanks, all.

Jayshree, if you can talk a little bit about customer mix and product mix. You mentioned all 4 verticals were strong. Were there any particular standouts between the segments and similarly between modular and fixed form factors? And then the other question I had was on carrier. Can you talk about carrier opportunities? How they're playing out this year with Tier 1 telcos and what the applications there may be?

Right. Thanks, Subu. First of all, on the vertical mix, we were very pleased with the balance of all 4. The cloud titans were the top performer, followed closely by the service providers and Tier 2 cloud hosting providers. But I would say, the financials and high-tech enterprise are holding and growing very nicely as well, so all 4 verticals performed in a balanced fashion. Our top 10 customers included customers from all 4 verticals. Specifically, in terms of carrier, as you well understand, carrier cycles are extremely long. It's a process we expect to be multiyear. We're getting early acceptance in the Tier 2 carriers. We're starting to make small inroads in the Tier 1 carriers as well, but nothing we would comment on or describe immediately since they're multiyear journeys. In general, I would say, the mix between modular and fixed remains similar. We've always said that leaf or fixed is, in terms of product mix, about half and then the modular and the optics and associated accessories is the other half. And we continue to see the most well-accepted sign in the industry, and the reception has been very good and continues to be good.

And if I can briefly follow, Jayshree, on the carrier side. The initial traction, is that for applications within the data center? Or are you starting to see inter-data center applications as well?

That's a good question, Subu. As you know, our focus, our market share, our relevance is all in the data center. The carriers have a lot more expenditure outside the data center, but Arista's focus today, right now, is in the data center.

There has been some concern in the marketplace about the pace of data center spending heading into the second half of the year. I'm wondering if you could share with us what you are seeing from your customers about the pace of their purchasing behaviors in aggregate. Any reasons why you think there might be a slowdown either in the second half of next year or this year or heading into next year?

Thank you, Jeff. As far as we can tell, our total addressable market is still extremely large, and we're less affected by macroeconomic situations and paces. Specific to the data center, in the 4 verticals I referred to, we're seeing good pace in all 4 of them. I would highlight that cloud titan as particularly high pace for 2015 in general for the first half, and we continue to remain positive about the second half as well.

Okay. So your visibility, Jayshree, then is as good as it's been, if not better?

Jeff, I've always said our visibility is short term with especially the cloud provider, so we never know beyond a quarter or two. So I can't say about next year, but I feel good about this year.

Jayshree, can you just remind us about how you think about longer-term gross margin targets relative to the cloud titan mix as that grows as a percentage of overall revenue? You guys have continued to execute pretty well in the margin line here, and the cloud titan there is obviously the #1 vertical. So is there a magic mix level where they get 40% to 50% of revenue, and you would really expect to see the margins get impacted by that? Or maybe the pricing isn't so bad with that group of customers?

Right. So Alex, welcome to your first call. I believe this is your first one since you started covering us, correct?

Yes, glad to be here.

Yes, it's great to have you here. In the past, we have mentioned that there is a significant difference in gross margin between our cloud titans and other customers, mainly driven by volume. Our cloud titans generate substantial volume and pricing for our customers, which significantly influences gross margin. As a result, there's at least a double-digit point difference between the gross margin we report and what could be achieved with the cloud titans. So, it’s important to note that our margins are actually lower than you might think. This situation continues as we also aim for increased footprint and market share amidst various transitions and competitive dynamics. These transitions include moving from 1 to 10 gig in the leaf layer and from 10 to 40 and 100 gig in the spine. Next year, we anticipate further transitions for 25 and 50 gig. Speed transitions require us to offer higher speeds at lower prices, which can impact gross margins as we strive for better price performance. As we pursue a larger footprint, our focus will be on gaining market share, even if it means not perfectly prioritizing our margins. Currently, our gross margins are around 65%, down from 67% last year, and we expect our long-term gross margins to align more closely with industry standards of 60% to 65%. Throughout this process, we also aim to gain market share and work towards becoming a billion-dollar and ultimately a multibillion-dollar company.

Jayshree, I have questions. Interested in hearing more about the transitions toward 25 and 50 gigabits. So in terms of timing, what is your expectation and outlook for the transition?

Yes, Hendi, that's a good question. First of all, the transition to 25 and 50 gigabit speeds will take time. The specifications were only finalized this year, and the chips will effectively start entering the marketplace in 2016. Arista has managed seven product transitions in the last seven years, so we are confident that the 25 and 50 gig speeds represent another transition, similar to our previous transitions in the 10 gig and 40 gig spaces. We do not view this as a dramatic change but rather a natural progression in terms of price, performance, and speed. We believe the 25 and 50 gig capabilities will particularly impact storage applications. General-purpose computing will likely remain at 1 and 10 gig speeds in many cases, while high-performance storage will have a strong interest in 25 and 50 gig speeds. For the spine, we expect the primary components to be 40 and 100 gig speeds. Therefore, there is room for every application and every speed, which is why we are pursuing so many of them.

Just a quick follow-up on the margin question. You've made it clear, Jayshree, that you intend and expect that the gross margin will come down to be more like industry averages. On the other hand, you've historically looked at being close to or below the 25% operating margin level, but this quarter, you're guiding for that level. Do you think the 25% should be the new long-term benchmark? Or is there something unusual about this quarter that makes you more confident? Additionally, from a business development perspective, has the HP partnership and the go-to-market efforts started to have an impact? How are you thinking about that and its potential to increase your addressable market going forward?

Thank you, James. I'll take the second question first, and then, Ita, if you don't mind, I'm going to pass the first one, especially the 25% operating margin and gross margin to you. I couldn't be more pleased with the HP partnership. It's one we've been working on for several months before it came to fruition. And HP, as you know, is not a company that would do this without thought. The converged infrastructure in this market is changing rapidly. It's changing for compute, storage, and networking. Quite frankly, it's a market that Arista has not played in. We could not have played in it without a major market partner like HP. HP is a leader in compute and storage. This is an acknowledgment of a best-of-breed network partner by HP. We're working very nicely in the converged infrastructure and really providing solutions of scale and high availability. We announced this partnership in HP Discover, I think it was in June, right? So we've had about 4 to 6 weeks here now, and the pipeline and traction has been exciting. We've already had single-digit customer wins, and so I'd say it's a good start, but a long way to go.

And James, just to come back on the gross margin question. I think if you think about our long-term model in that 60% to 65% range, but as you'll see, our kind of near-term guidance, we're still sticking to the 63% to 65%. I think that's because we think that lower end of that range probably happens over multiple years. And obviously, in that time frame, we're also adding some capabilities, stuff like CloudVision, services growth. We'll see how all that plays out, but clearly, there's some puts and takes in both directions over time. So I think that's probably the way to think about it. In the near term, we're sticking to that 63% to 65%. In terms of operating margin, I think, the business model at 40% of revenues is still a good, solid way to think about that piece of it.

This is John-Michael for Sanjiv. I was wondering if you could provide us an update with the lawsuit against Cisco?

Okay. Hey, Marc, do you want to take that one as my General Counsel?

Sure, I'd be happy to. With respect to the ITC investigation, the schedule is as follows: the hearing for the 944 is going to begin on September 9 and continues through September 17. The hearing for the 945, the second investigation, will start on November 9 and continues through November 20. Our team has developed a good defensive strategy for the cases and were in the midst of preparing for trial today. We've also filed 7 IPR petitions, and we're currently awaiting the decision on those matters as well. With respect to the copyright case, that trial date is set for August of 2016 next year. We're also currently engaged in discovery for that case. As you recall, we also have the OptumSoft litigation right now. That has been bifurcated into 2 trials. The first will consist of a trial starting on September 14 of this year, where the court is going to determine ownership of the specific disputed software packages, and again, we developed a good defense for that case. And we're currently preparing for trial.

Thank you, Marc. That was good.

So Jayshree, my question is around the Merchant Silicon strategy. Clearly, on the one hand, it gives you a significant time-to-market advantage. But on the other hand, the work we've done suggests that there could be some potential delays with the Broadcom Jericho chipset. So the question really is, one, is it true? And two, does it matter? And how would it impact your ability to move deeper into the routing opportunity that you've alluded to over the last several quarters as we look to 2016?

Thank you, Ryan. Our strategy heavily relies on exceptional software operating on various types of Merchant Silicon. All players have access to the same Merchant Silicon, but Arista stands out in our capacity to leverage it uniquely through our drivers, firmware, customizations, and deep knowledge of silicon. Currently, we utilize three types of silicon, including Arad, which will transition to Jericho, the Trident chipset that has evolved to Trident+, Trident II, and also the Intel Alta chipset. We typically explore one or two additional options as well. The lifecycle and execution of these products and vendors are crucial, but we do not rely on a single architecture as we already have three and are assessing two others. Having been in the silicon industry for many years, I can affirm that delays with chips are common, and every piece of software has bugs. These are regular occurrences in engineering. Although I can't speak to the specifics of why certain chips may face delays, we generally adjust for these issues, so they seldom disrupt our schedules, deliveries, or market strategies. As we've discussed, our total addressable market for the data center is $6 billion, set to grow to $12 billion. This remains our primary focus, and any additional opportunities will emerge in the coming years, but we are not reliant on them for our current chip execution or market engagement.

First for Jayshree on the international mix. Can you share with us if the 23% of revenue from overseas customers included business with U.S. customers building out overseas, and if you're starting to see incremental success with international accounts? And then for Ita, it looks like you saw a fairly large sequential and year-over-year increase in deferred revenues. So I was hoping to better understand some of the dynamics there. To what extent this reflects some short-term business that may have pushed out from Q2 to Q3? Or if it's all services, any additional input there would be helpful.

Thank you, Jeff, for the good wishes. We're pleased with the international progress this quarter. To clarify, the numbers I provided are entirely based on organic growth, excluding any contributions from the major cloud providers. The international figures reflect organic growth, which is encouraging. In Q1, we saw a significant contribution from the cloud titans, while in Q2, new customer acquisitions particularly in Asia-Pacific and Europe boosted our results, especially in Asia-Pacific. We aim for even better execution internationally, but we are happy with our hiring and the advancements we've made, considering we've only been focused on this for the past 6 to 12 months. We've set up subsidiaries in all the major countries and have begun active hiring across these regions. We anticipate seeing promising wins internationally in the same four verticals that are performing well in the U.S. Ita, would you like to address the second part?

Yes, so in terms of the deferred revenue, the vast majority of our deferred revenue is really services-related. I think if you look at the trends in deferred revenue over the last number of quarters, it has been ticking up nicely just based on the services growth. The growth in services has also been beneficial. There is a smaller amount of product related to deferred revenue that's there, just related to some time-out type acceptance terms in some contracts. But again, the vast majority of it is in the services side.

And is the growth end that we're seeing in services, the deferred growth, is that driven by some specific large projects? Is that how we should think about that?

I think the way to think about it, Jeff, is tied to the 5 million ports I just told you. We're now experiencing more service contracts, service renewals, and realization from that, that we didn't have. Yes, exactly, right.

Your renewals are coming in as expected, and with our growth rate, they are occurring throughout the year, rather than being concentrated at the end as you might see in a more stable business. We are experiencing consistent growth in both renewals and revenue.

I joined the call late, but my question is basically around revenue drivers. Jayshree, do you think all 4 verticals will be roughly equivalent again this year? Or will the cloud be much bigger than the others? If you have any, how many above 10% customers did you have? Maybe you answered that one, but I just wanted to clear it up.

Kulbinder, thank you. I was having trouble following about every other word, so I'm going to rephrase your question. Are you asking about the diversity in verticals this quarter? Or our forecast for next quarter?

How do you expect the year to end?

Expect the year to end on a positive note. We've had a well-balanced first half, and I want to emphasize that our involvement with cloud providers is not overly reliant on any single customer. We are engaged with six of the seven leading cloud providers, and we are encouraged by their acceptance and spending trends. While we are significantly engaged with Microsoft, it’s reassuring to see overall growth among the cloud providers. Their substantial growth positively impacts our numbers as well. Additionally, this quarter has shown strong wins in the financial and high-tech enterprise sectors. The high-tech enterprise sector includes various sub-verticals, including web services, software firms, and silicon manufacturers, making it quite broad. I anticipate that all four verticals will perform well and maintain diversity throughout the year. While there may be some fluctuations from quarter to quarter, we have not observed any significant variations in the last two quarters.

Jayshree, just a couple of questions. The first one is can you just give us an update on your EOS as a subscription product? And how that's going, what the early feedback has been? And then, as you know, Juniper recently announced its entry into the data center spine segments with 40 gig products. Can you just talk about how you view them as a competitor there?

Right. On the EOS subscription product, I would say we have received small acceptance still, and it is mostly in entry-level smaller customers. They're not your typical big, large data centers. More trials, I would say, than large-scale production deployment. I think customers are still getting used to the model. Their old 20-year-old habit of just buying everything together, so it's only the SMB customers who want to try and buy or feel their way or have smaller budgets that are going in that direction for EOS. Specific to Juniper, I am not seeing anything different. We have a great deal of respect for our competition. We see Juniper in the core. We haven't seen them much in the data center.

Jayshree, if we look at the growth opportunities ahead, is there a way you could rank order how we should see the TAM opportunities, expansion opportunities? Would it be international? Would it be new market segments? Or how are you prioritizing your resources? That would be helpful.

Mark, I might make some guesses here, so I may not have the exact answer. I believe we have a four-part growth strategy as we aim for our first billion. The first aspect is to deepen our presence in the four verticals. Many people think we are already established and seeing significant success, which is true to some extent, but I believe we have only scratched the surface in many areas. There are numerous customers, substantial spending, and growing awareness and appreciation of Arista, particularly regarding our operating system and programmability. Enhancing our position in these verticals is likely to yield the fastest and largest growth. The second aspect is the expansion into international markets. We started this process rather late and have been slow to progress, officially commencing this year. I believe that any international expansion aimed at replicating our U.S. success can lead to significant growth opportunities in the next three to five years. Furthermore, our partnership with HP, along with our technology partners like VMware, should also facilitate our international expansion, thus providing a growth strategy. The third component is software subscription. While I don’t expect our software subscription revenue to be significant in the short term, it is a crucial part of our growth strategy. Our management team values this highly, as do our customers. With fewer resources available to implement and optimize technology, it becomes essential for operational expenditure management. Lastly, I've consistently assured you that our main focus is on the data center, though we are not excluding adjacent markets. We see the data center as our core market, but we also believe that we will naturally attract many adjacent markets in the long run.

Great. I might be imagining things, but I feel like there’s some contradiction in the discussions about verticals. You mentioned balanced verticals regarding all four, yet you seem more optimistic about web scale. You stressed several major players instead of focusing on just one. I'd like to understand if there are any changes among the web giants. One thing I'm curious about is the indication that there might be a shift from using white box switches for all applications, possibly moving towards solutions like yours for higher-end applications. I'm particularly interested in the web scale companies, except for Microsoft, which has already adopted Arista.

Okay, Simon. So first of all, no contradiction intended. The first quarter and the second quarter have shown good balance on our 4 verticals. If I had to cite the verticals that contributed the most, it would be the cloud titans and the service and cloud providers, but I don't want to underestimate how well the financials and enterprises have done. Their total addressable market and their spending is lower, but the acceptance of Arista in these general-purpose clouds as they build general-purpose data centers and private clouds, I'm very pleased with. So I don't mean that to be a contradiction. I think they're actually quite consistent. And are you seeing them embracing your solutions rather than white box alternatives to a greater degree than they might have 6 months ago? Let me address that. First, regarding your question about whether we had balance, I can confirm that we did. I discussed the top two verticals. As for white box, we do not see it present in any of the four verticals. To clarify, out of our 3,390 customers, we have only observed the white box phenomenon in a handful of single-digit customers. When we do encounter it, which we are mindful of, organizations with engineering capabilities are always allowed to experiment with single-use cases to explore cost and determine what is essential to them. As I mentioned earlier with the Facebook example, we collaborate with their internal implementations to provide value on Wedge and Xbox through our EOS. The presence of white box does not exclude Arista from the equation. To answer your question more directly, over the last six months, we have not detected an increase in interest in white box; it has remained consistent. Interest tends to come from single-digit customers and is primarily focused on experiments rather than robust applications, with very few instances of white box being implemented in a captive, production environment.

Jayshree, while you partially addressed the question, I’d like to ask a broader question about the competitive landscape. Specifically, have you noticed any significant changes? I know you mentioned the white box aspect, but there are also competitors like Cisco. Is there any shift in that area? Additionally, I want to stress the importance of providing a vertical breakout for the benefit of investors and sell-side analysts. I recognize your hesitation, but I believe that offering detailed disclosures would not only assist us but also be beneficial for you. Now, returning to the question about the competitive landscape.

Thanks, Paul. Feedback taken, appreciate it. We'll definitely look into it. Regarding the competitive landscape, we have not seen significant change. We have had to compete in the last 6 quarters, I would say, more with paper tigers than with reality. In the last recent quarters, as the products come to market, it has actually strengthened the conviction of our customers even more that we have the best platform and product. And what I mean by that is not just speeds and buffering and latency and power and all of that good stuff that we derive from our chip, but really, the programmability of our software stack and the 10-year endeavor we put into that. No one is coming close. A lot of people use the words scripting, programmability, DevOps, NetOps. No one has come close to actually implementing the level of depth. And it's reflected, Paul, as you well know, in our R&D investment, which is top and most significant investment. So while it can look on paper like people have caught up, when people actually evaluate our product, we technically win 9 out of 10x, maybe 10x out of 10x, technically. Beyond the technical details, has there been any change in your win rate, for better or worse? No, I believe our win rate has remained consistent or improved. It's important to note that we might not see everything due to our coverage, so I can only comment on what we observe. However, based on what we see, our win rate is the same or better. One final related question. In terms of the pricing environment, any meaningful change? No, I was just looking at the ASP trends. So no, they haven't changed much in the last 2, 3 quarters.

So first off, for Marc on the legal proceedings. I think you're going to court twice in September. How quick do you expect the courts to come back with their decisions on the patents and the infringement? And then secondly, you're halfway through the year now. In the past, you've talked about Microsoft as a customer that would come down as a percentage of revenue but continue to grow in terms of dollars. I'm just checking, is that still your expectation for 2015? Would you expect the dollar sales to Microsoft to continue growing year-on-year?

Marc, you want to take the legal question? Or do you want me to do the Microsoft one first?

You can take Microsoft.

I will address the second question first while it's fresh in my mind. Eric, Microsoft remains a very significant top customer for Arista, and it's a strategic relationship for us. We have generally indicated that we expect this trend to be flat or slightly down, or flat or slightly up. Currently, I feel more optimistic about it being flat to slightly up.

Are you talking about in terms of dollars when you say that?

Yes, I'm referring specifically to dollars. Clearly, these will continue to decrease as a percentage of our total revenue because our revenue is growing. However, in terms of actual spending, we are confident about this investment, and we believe that their commitment to the cloud is directly linked to their investment in Arista.

Sure. With respect to the timing, so with the ITC, as you know, the first case is in the 944. That's going to happen through September. The administrative law judge determination for that, the initial determination occurs January 27, 2016. Then it goes to the commission, and the commission makes a decision on May 27. Then that goes to a presidential review of 60 days. That gets to July 27. The 945 case in November, that initial determination by the administrative law judge doesn't occur until April 26 of next year. The final determination by the commission is August 26, and then the presidential review of that isn't until October 26, 2016.

Yes, so a long ways here. Another year or 1.5 years ahead of us, right? So Marc, despite all of the overheated rhetoric we've been hearing from Cisco's blog about Arista's brazen copying, we think the only thing brazen about this case is the extreme length Cisco has gone to. Our customers have shown unwavering support.

Yes, I think that's right, Jayshree. Ironically, one of the things that we find interesting about this case is that it appears to us, anyway, that Cisco's behaving very much like a patent troll, which is pretty much what they've spent the last decade condemning. They're choosing to observe patents against widely-implemented, industry-standard feature functionality that exists in all network switches today, and they're twisting the language of some of the patents to attack features that the patents were never intended to cover. So we find this an ironic strategy.

When you talk about those decisions, though, for the Markman hearings, when would they be coming back to determine which patents are applicable for the case?

So, regarding the Markman, are you asking about the Markman itself, or are you inquiring about the judge's decisions related to the trial?

The Markman.

They're different.

Yes, regarding the Markman case, the trial was for the 945, which involves two investigations. We are still awaiting the Markman order, which will pertain to the six patents involved in the 945 case. We anticipate receiving those decisions within the next couple of weeks, and they will be relevant for the 945 hearing scheduled for November.

I was curious about the 5 million port milestone. I think if I have this correct, you passed both the 4 million and 5 million port milestones this quarter. Is that correct?

That's correct. Good observation, George. You're the only one who caught it, so we should give you an award. We announced reaching 3 million, but we never mentioned 4 million, and we went straight to 5 million. Perhaps next time, we should aim directly for 7 million or 10 million. This highlights the speed and acceptance of our ports and the transition to high speed. It's happening in our...

Got it. Okay. And then I guess the real question behind this is, again, I think if I have it correct, it took you 3 quarters to pass, effectively, the 4 million port mark because then 3 quarters...

It took us four years, 48 months, to reach our first 4 million ports. From the end of 2008 to now, those first 4 million ports took us 48 months, while the last million ports were achieved in less than 4.8 months.

Thank you, Ita. We will now transition to the Q&A segment of the Arista earnings call. We anticipate receiving many insightful questions. Thank you, everyone.

Thank you, Ita. We're now going to move to the Q&A portion of the Arista earnings call. We're expecting a lot of great questions. Thanks, all.