Arista Networks Inc (ANET) — Q3 2019 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 third quarter ended September 30, 2019. 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 fourth quarter of the 2019 fiscal year, longer term financial outlooks, industry innovation, our market opportunity, the benefits of recent acquisitions, and the impact of litigations, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Also, please note certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release. With that, I'll turn the call over to Jayshree.

Thank you, Charles. Thank you, everyone, for joining us this afternoon for our third quarter 2019 earnings call. Our profitability growth combination was once again demonstrated with a non-GAAP revenue of $654.4 million with a non-GAAP earnings per share that grew to a record $2.69. Services contributed approximately 15% of revenue. We delivered non-GAAP gross margins of 64.4%, influenced by a solid performance from our cloud titan and enterprise verticals. In terms of customer trends, we registered a record number of new customers in Q3 and continue to drive this new customer logo expansion at the rate of one to two per day throughout the quarter. For calendar 2019, we do expect to have two customers that will be greater than 10% of our revenue, Microsoft and Facebook. In Q3, the cloud titan vertical segment remained our largest one. The modern enterprise segment is now consistently becoming our second largest with financials in third place and service provider and tier 2 specialty cloud providers coming in at fourth and fifth place. In terms of geography, in Q3, the international contribution was 19% with the Americas at 81%. In terms of new products, we introduced important enhancements to our CloudVision platform, the CloudVision 2019. Arista’s CloudVision is bringing cloud principles to network operators across places in the cloud or PICs, as we call it. The largest cloud providers in the world have driven advancements in telemetry and automated network operations that improve many of the same network operations tasks for the enterprise. CloudVision ups the ante to deliver these analytic and telemetry capabilities to organizations in the enterprise of many sizes. Key highlights of CloudVision 2019 include dynamic scale, elastic agility, deep visibility, and open integration, where we can provide visibility metrics from SDK and SNMP-capable platforms including managing third-party devices to bring multi-vendor capabilities across the entire enterprise. I would like to offer some further color on Q4 2019 guidance, given our significant drop. After we experienced the pause of a specific cloud titan’s orders in Q2 2019, we were expecting a recovery in the second half of 2019 for cloud titan spend. In fact, Q3 2019 is good evidence of that. However, we were recently informed of a shift in procurement strategy with a material reduction in demand from a second cloud titan, reducing their forecasts dramatically from original projections for both Q4 2019 and for calendar 2020. Naturally, this type of volatility brings a sudden and severe impact to our Q4 guidance. Given this tepid forecast and volatility of this cloud segment, we believe the cloud titan forecast should be modeled as flat to down in calendar 2020. I do want to take an opportunity to reiterate that our market share for both 100-gig and overall high-performance switching remains solid and strong. We are proud of our strength in the enterprise and financial segments with growing success in our very first quarter of shipping Cognitive Campus portfolio products, which are now on track for $100 million in the first full year of shipments. With that, I'd like to turn it over to Ita for more specific financial metrics.

Thanks, Jayshree, and good afternoon. This analysis of our Q3 results and our guidance for Q4 2019 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q3 were $654.4 million, up 16% year-over-year and above the midpoint of our guidance of $647 million to $657 million. Service revenues remained strong, representing approximately 15.2% of revenue, down from 15.6% last quarter, reflecting typical seasonality of service renewals. International revenues for the quarter came in at $122.1 million or 19% of total revenue, down from 27% in the prior period. This volatility in geographical mix is largely driven by shifts towards U.S. deployments, in our cloud titan business. Overall gross margin in Q3 was 64.4%, above the midpoint of our guidance of 62% to 65%, and down slightly from 64.7% last quarter. This reflects the healthy cloud titan contribution combined with good performance from our enterprise and financial verticals. Operating expenses for the quarter were $163 million or 24.9% of revenue, up slightly from last quarter at $158.7 million. R&D spending came in at $101.3 million or 16.1% of revenue, up from $101.7 million last quarter. This reflected headcount growth and slightly higher levels of product-related NRE and prototype spending in the period. Sales and marketing expense was $46.8 million or 7.1% of revenue, up from last quarter, with increased headcount somewhat offset by reductions in other sales costs. Our G&A costs were consistent with last quarter at approximately $11 million, or 1.7% of revenue. Our operating income for the quarter was $258.2 million, or 39.4% of revenue. Other income and expense for the quarter was favorable at $14.9 million, and our effective tax rate was approximately 20.5%. This resulted in net income for the quarter of $217.1 million or 33.2% of revenue. Our diluted share number for the quarter was 80.75 million shares, resulting in a diluted earnings per share number for the quarter of $2.69, up 27.5% from the prior year. Now, turning to the balance sheet. Cash, cash equivalents, and investments ended the quarter at approximately $2.4 billion. We repurchased $115 million of our common stock during the quarter, at a weighted average price of $224 per share. As a reminder, our Board of Directors has authorized a three-year $1 billion stock repurchase program commencing in Q2 ‘19. This program allows us to repurchase shares of our common stock opportunistically and will be funded with operating cash flows. We generated $269 million of cash from operations in the third quarter, reflecting strong net income performance and a decrease from working capital requirements of approximately $25 million. DSOs came in at 63 days, up from 51 days in Q2, reflecting the timing of billings in the period. Inventory turns were 3.1 times, up from 2.4 last quarter. Inventory decreased to $239.8 million in the quarter, down from $314.2 million in the prior period. Our total deferred revenue balance was $529 million, up from $502.2 million in Q2. As a reminder, our deferred revenue balance is now almost exclusively services related with any significant product deferred revenue amounts having been recognized through the income statement in the first half of the year. Accounts payable days were 31 days, down from 37 days in Q2, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $4.7 million. Now, turning to our outlook for the fourth quarter and beyond. We continue to experience significant volatility of demand from our cloud business. We saw strong recovery from the customer who had paused activity in the second quarter, only to be surprised by a dramatic reduction in forecast for Q4 and 2020 from another key titan. All indications are these actions do not indicate a change in our market share for Arista at these customers but will likely result in demand from this part of the business being flat to down on a year-over-year basis for the remainder of 2019 and into 2020. While we're not at this point in a position to provide overall guidance for 2020, we did want to make the following points. Firstly, a recap on deferred revenue and its impact on 2019 results. As outlined in prior calls, we recognized $80 million and $38 million of non-Microsoft product deferred revenue in Q1 and Q2 ‘19, respectively. These amounts represented product sales, ships and bills in the prior year for which revenue was deferred, pending customer acceptance of legal redesigns and features. While not impacting our 2020 cash metrics, this does set up some tough comps for year-over-year revenue growth, particularly in the first quarter of 2020. At this point, we believe this trend combined with typical Q1 seasonality and the recent update to cloud forecast described above, may result in revenues for the first quarter of 2020 at approximately 5% of Q4 ‘19 level. On the gross margin front, we would reiterate our overall gross margin outlook of 63% to 65% with customer mix being the key driver. We will continue to manage investments in the business carefully with targeted growth in sales and R&D headcounts balancing the need to expand our market coverage with prudent financial management. Finally, you should expect to see us continue executing against the stock repurchase mandate in an opportunistic manner. With all of this as a backdrop, our guidance for the fourth quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts and other non-recurring items, is as follows: Revenues of approximately $540 million to $560 million; gross margin of approximately 63% to 65%; operating margin of approximately 36%. Our effective tax rate is expected to be approximately 20.5% with diluted shares of approximately 80.3 million. I will now turn the call back to Charles.

Thank you, Ita. We’re now going to move to the Q&A portion of the Arista conference call. Due to time constraints, I'd like to request that everyone please limit themselves to a single question.

Thank you very much for taking the question. I appreciate the added disclosures and details you've given us on this call. So, thanks for that. I wanted to maybe get a better understanding of the 2020 commentary, given that at least looking at CapEx as an indicator, or revenue for business lines like Azure and AWS seem to be encouraging, suggesting 2020 could be a better year in terms of the CapEx forecast going back double digits for the web scale guys. Just wondering how you think we should square your more cautious tone on the cloud relative to what looks like better capital spending trends and healthy revenue trends from the web titans? Thank you.

Thank you, Simon. Well, as I was trying to explain, our Q4 forecast is actually quite consistent with many of the cloud CapEx reported in recent calls, which is overall flat to down. There's a lot of volatility going on. The overall trend for Q4 is down, and we're projecting that same flat to down trend for CapEx next year for the overall cloud titan spend. Now, one of the things, as you know, you may have remembered this, we were not tracking from a networking point of view in prior years. So, there's not a one to one correlation. In some cases, what we're seeing in the cloud CapEx is that redistribution to infrastructure, not to networking. So, if you look at the two reasons why we believe it will slow down also in 2020, it’s because many of the cloud titan customers are extending their use of server assets and delaying the network purchase longer and buying other infrastructure or investing in other aspects. The second is the 400-gig adoption. We had predicted initially that deployments could start as early as the second half of this year. We are shipping 400-gig products for initial trials this year. However, the initial deployments have shifted by more than a year to the second half of 2020. We think mainstream production will be in 2021. So, the change in customers extending their investments and the deployment of 400-gig is causing us to be more muted about 2020.

Thank you very much for that.

If I could follow up on the cloud giants, I have a two-part question. First, can you discuss the customer that experienced a sudden change recently? It appears to have lasting impacts as well. Do you have any insight into why this is happening, whether it's due to their changing business or simply shifts in spending? Secondly, do you believe this trend indicates a greater risk of stagnation or decline for some of the other large customers? Thank you.

Okay. So, specific to the cloud titan whose forecast reduced dramatically, I think there were two main reasons, and I'm going to ask Anshul, our cloud expert and COO to elaborate. First is, they are managing the CapEx for networking and modulating the inventory and shifting to more of a just-in-time type forecast. Typically, they gave us two-quarter visibility, sometimes even three and four, and now they're moving much more to a real-time forecast at quarterly intervals. The second is, this particular cloud titan is extending their server assets by more than a year. Once the server assets get extended, that is significantly delaying the network spend too. Anshul, do you want to add to that?

Jayshree, that’s absolutely right. The server request delay is a specific decision for this one cloud titan; they didn’t see enough ROI in doing the request just right now, they might be awaiting a new generation, and the impact we’re seeing as well, because they want to upgrade the network but they are not upgrading the servers.

To answer the other part of your question, Tim, on other cloud titans, we think some will be stronger, some will be flat, some will be weaker. But, the average all of that we see flat to down.

Hi. I guess, I want to follow up then on your recent explanation here, Jayshree. I mean, the CapEx moving to just-in-time, that shouldn’t affect your business, you might not have visibility, but that still means business needs to come in, as long as you keep building. I guess, moving to the server refresh cycle, is that where the bulk of your business with that cloud titan was, and just kind of refresh upgrade of existing platforms, there was no new build with this customer?

The majority of it involves multiple levels of connectivity. The first level requires us to build servers to establish a network. The second level typically involves regional signage and data center connectivity.

Did you hear the answer, Ittai?

Yes. If you could repeat it? I think, everybody got disconnected. I hope it wasn't something I said.

No. But, now I have to remember your question to repeat the answer.

The question is, again, we are reiterating the question regarding the nature of your business with them, is it just tied to server refresh, is there no new build, new greenfield build with them?

Yes. No. If you don't have servers and storage, we can't connect with the network. The nature of our use cases starts with server spend correlated to network spend, which in turn creates layers of additional titans which can be the aggregation or the regional titans as well. But, that's the symptom, and the cause is more networking spend. Now, that doesn't mean they don't spend on new data centers. I think the CapEx serves many of the cloud titans, including the one we're discussing, reflects that they will spend in a healthy fashion on the infrastructure for new data centers. But to correlate that back to networking will take time. Because first they have to buy the new servers and then they have to buy the network, which could go well into late 2020 or 2021, most likely.

Maybe as a follow-up, Microsoft just won the JEDI contract, what does that mean to you, how do you look at that and what it could do for your business?

We’re very pleased with that. And as you can imagine, Anshul and the team worked very hard on federal certifications and partnerships with our cloud titan vendors. Having said that, the first thing that happens with these large contracts is they get contested. So, while the award may be given, we think it will be time before we see material benefit, it may take 6 to 12 months.

Just moving beyond your commentary about the volatility and spending from the cloud titans, I just wanted to ask about the tier 2 cloud providers. It sounds like you have more visibility or more stability in terms of what you’re seeing in terms of spending patterns from them. Is that fair, or if you can elaborate on what you see on that side? And does this kind drive you to focus more on that segment going forward?

Yes. Samik, thank you. While the majority of our guidance was due to the specific cloud titan, you might have noticed in my commentary that both the service providers and the specialty tier 2 cloud providers came in at fourth and fifth place. I think this is the first time the specialty tier 2 cloud providers have been deadlocked. In my view, the segment is weak and the results have been mixed. I think, the new tier 2 companies that started growing very well for us in 2017 and 2018 are now having to review their investments and decide, from a matter of economics, which ones make more sense, do they rely on their own cloud or go to the public cloud titan. Some of the tier 2 companies are finding it difficult to compete, some are continuing with this strategy. So, it is a mixed bag for us. Especially in Q4, we don’t expect much success from this category.

I was hoping you could spend a little bit of time relative to this cloud issue. To what extent are you confident that there is no competitive incursion here that’s causing it, and in fact you have sustained share at that customer? How can we judge that, how do you get your arms around clarity around that point?

Alex, that’s a very good question. From our perspective, the competitive dynamics have not changed in the cloud or in general. We always have aggressive competition and we will continue to see aggression there. But, what gives us confidence, the cloud titans are delaying their spend or distributing their CapEx differently is as you know, we always pride ourselves in close partnership and relationship with cloud titans. Generally, especially in the case of Facebook and Microsoft, they’ve not only a vendor-customer relationship but really a co-development that requires the kind of partnership which is engineering to engineering, not just business. So, when you look at that, there is no evidence that competitively or with alternative solutions, there has been any change. There has been process change. There is better inventory management, better procurement optimization, etc. And you can always expect these cloud customers want to be multi-sourced but it isn’t any different than we’ve seen in the past in behavior, relationship, and innovation. We have 10 400-gig products and a lot of them are in trials. So, the relationship and the technology partnership couldn’t be better. Anshul, do you want to add to that?

Alex, we work very closely with these customers to the point that we’re working on the 2021 roadmap along with these customers right now. We’re quite aware of the changes they are making to their architecture as well, and have very direct feedback from customers as well that there is no alternative that's displacing us. It’s simply that demand has gone down. We are very confident of our share when that demand comes back as well, since we collaborate with these customers. So, we're not worried about it; the customers are pretty direct as well. This is not our share going to someone else, their demand reduced.

Thank you very much. I would like to follow up on the previous questions. Regarding the changes in architecture and strategy related to their servers, is this connected to how they are implementing servers and networking? Are we seeing a lasting extension of replacement cycles, or is this only tied to the current cycle? I'm looking to understand what the opportunity is as customers return and how we should consider the frequency with which they will need to come back and add capacity or upgrade networking equipment.

Yes, good question, James. You may know that several cycles tend to go in 18 months to three years, and generally, they get upgraded in that type of timeframe. In this particular case, because of the server vendor, there is no change in server architecture, and I have to emphasize that. They are choosing to delay this new server deployment by at least a year. So, there’s no change in architecture, but really a delay of servicing, which is causing a delay in network spend.

Great. And then, that has some short-term impact on the IO need from these servers. If there’s no new server, they may not need as much IO as they were planning. But in the long run, these things do balance out; this is a near-term estimate, so one year type of cycle until they do start their refresh.

Thanks for taking the question. Maybe I'll shift gears a little bit. As you think about the model and the growth rates that you've outlined looking into next year, I'm just kind of curious, do you take a more active stance and kind of project protecting the margin profile of the Company? And how do I think about just the investments that the Company’s previously kind of alluded to that would be required to really position yourself for campus ramp as we move into next year? And just any kind of commentary on how you've seen campus thus far?

Yes. I'll take the model question and then, Jayshree can take the campus question. As we think about the business as we go forward, I think we believe we can operate hopefully in the plus or minus 35% operating margin model that we talked about for some time. We are guiding 36% for Q4, even with the kind of reductions in revenue. So, we do have some flexibility there. I think you have to probably expect that you won’t see the 39% and 40% type operating margin numbers that we've been putting up more recently. We will continue to make targeted investments that will be balanced between R&D and sales and marketing side because we think that's important as we go forward. But we think we can still do it within that envelope.

Regarding campus, as I said in my opening remarks, we are marching well to the $100 million in shipments for the first four quarters. Q3 was our first quarter. What surprised me pleasantly about campus acceptance is half our customers are existing, but half are new. If you were to ask me to forecast that, I wouldn't have embedded that. I would have thought 80% would be existing. So, we're really getting a lot of interest in our campus. In fact, I would say, one of the strong reasons our enterprise segment is number two is not only because of the data center but small numbers in the campus in Q3, but I believe the two will influence each other. We will become more relevant in the enterprise because of both campus and enterprise and the architectural shift that we can guide to public workloads versus private. I think when I look at why, we're very differentiated. The cognitive to us is really architectural, both on our Wi-Fi and POE switches and displaying the CloudVision. So, customers are really appreciating our differentiation on flow analysis, on security, and on bringing an integrated cognitive, secure, software driven integration together much like we did with the data center. So, we like our early progress and execution there.

Yes. Thanks. I have more of clarifications than a question. I just wanted to make sure we all understand that the account that's driving this downside here is not historically the largest customer. And then, the second part of that is, given the disruption that you saw from Microsoft earlier in the year, I guess what's the context of their spend level as they go into Q4 and into the 2020?

Yes, to clarify, Alex, the second cloud titan is not the one we mentioned last time that paused in Q2. For Microsoft, we expect their customer concentration to exceed 10% for 2019. Additionally, we anticipate acquiring a new cloud titan customer, which will be Facebook.

Given the disruption we experienced this year, Jayshree, do you have any early insights into what a return to more normalized spending with Microsoft might look like in 2020?

Sure. Alex, so far, we don't have long-term guidance for Microsoft, but there is no, nothing different then they are on a usual spend pattern. We have not given any other than…

No blip, no pause, not yet.

Thank you. As you consider the key technological factors driving bandwidth growth in the cloud that have led to significant growth over the years, has anything fundamentally shifted? I'm asking because this year two different cloud vendors experienced some issues. One was likely a public cloud vendor, and the other a content cloud vendor. They have completely different influences, yet there's been a noticeable slowdown. Is there any fundamental change in technology?

Tejas, I don't see any fundamental change. I think our strategy is valid and their strategy that they want to invest has been very strong for the last four or five years. Perhaps the only change I would allude to is they are adding more process, more optimization, more care and feed into their forecasting, more discipline, more hygiene. But, I don’t see any other change. I think they continue to invest with scale and as you know, they are all doing very well. But, that doesn’t mean they will spend equally well.

Tejas, the pause, as I mentioned, in Q2 was very tied to some internal financial planning for the customers and inventory planning. It was nothing to do with architecture or bandwidth in general. The second instance you’re seeing right now is with their server refresh. But when you model these out long-term, there is no change in their growth expectations of traffic and networking need, both from a bandwidth standpoint as well as from backbones and traffic engineering needs. And with video storage and now AI workloads growing, there will always be more and more need for networking. So, we're not seeing that trend change. But obviously we have to wait for this customer to come back and do the refresh.

Thank you. And a quick follow-up, any change in enterprise spending? I realize your share of that market is lower, but are you seeing any deal elongation and so forth at all?

Too early. As you say, we are not the bellwether on enterprise. So, I think we understand the cloud much better. Because we are a new entrant and we have new products, we're probably not the best indicator of change.

I have just one question. The change in the picture, strategy of this cloud titan, why won't it spread to both other cloud titans and maybe even the second-tier type cloud titans? Is there the risk of that or any visibility of why this challenge won’t spread? Thank you, Jim.

Thank you, Jim. I will comment and I will have Anshul elaborate. I think the short answer is, no, we don’t see a lot of risk of that because anyway, visibility was two quarters. With this particular titan, they’ve optimized it to one quarter. If you were always relying on one and two-year forecasts that would be a bigger dramatic change to our belief system and how we plan with them. But since it’s always been one or two quarters and a further refinement on this particular cloud titan customer to one quarter only, we don’t see a big change or big shift.

This is their own internal process and planning on how they plan networking purchases with respect to data center facilities going live. They are optimizing their processing and their organization and fixing issues they might have had in the past. This does not apply to any of our other cloud titans, so it's a very specific organization issue in a company, not an industry trend or a technology trend.

I wanted to just check what you’re thinking on growth in 2020. I’m just playing around with the verticals here and thinking about what maybe you're implying with this. So, I wonder if you could put us in some sort of a ballpark for overall revenue growth. And then talk to us about why the down eight or so that you are implying in the guidance doesn't materialize through a better part of next year, so you end up with even lower revenue growth or maybe that’s what you’re already thinking. So, that’s one thing. If you could just put us in some kind of a revenue growth ballpark for next year? And then, the other thing I wanted to ask is enterprise spending is clearly very weak. And a lot of the rest of this growth depends on enterprise. And so, I wonder if you could just update us on what you're seeing there. How much risk do you think there is in your enterprise numbers as we look into 2020, or at least the early part of it with the slowdown that we're observing? Thanks.

Yes. I'll take the first part of that, and then maybe hand it off to Jayshree on the last part. I think from a model perspective, we're not yet trying to call a 2020 growth rate for the overall business. I think we've tried to put some points out there and make sure everybody is aligned on some of the impacts from deferred, etc. But, as we enter the year, we will have a tough comp for the first quarter, particularly in the second quarter as well to some extent because of the deferred. We talked about the cloud vertical being flat to down. What we’ve seen pretty consistently is that the enterprise part of the business and financial verticals have been growing well and have been offsetting that, although not entirely. We hope that that will continue, and that we continue to see that. So, that's kind of an offset to the part of the business that is really the cloud and service provider pieces that have seen challenges as we’ve gone through this year. I think Q1, we pretty much guided to Q1 number only because we want to ensure we reflect the deferred correctly and the seasonality of Q1 correctly.

Yes. On enterprise, I do believe from a demand and TAM perspective, we have a lot of opportunity for execution. We could do very well in both enterprise and financials. If we get affected by macro situations, that affects everyone, not just us, so we would be influenced by that. Barring any macro situation, we feel very good about our execution to date and going into 2020. That will hopefully offset some of the flatness in the cloud.

Just coming back on the numbers. I mean, it looks to me like it could easily be mid-single-digit growth next year. And I don't know if that's a crazy number from your point of view or if that’s a plausible scenario?

I don’t think it’s an unrealistic number. We’d need to see significant double-digit growth in enterprise. At this stage, we’re not very optimistic about the mid-teens growth we anticipated during the analyst day, especially given the current performance of cloud. Other sectors, including enterprise and financials, are doing well. However, as we look ahead to Q4 and Q1, we don’t have clarity.

Thanks a lot for taking my question, guys. I guess a question of clarification. Just to ensure, the entire $130 million revenue miss versus the guidance, was that all attributed to this cloud titan customer shifting patterns or was that something else? That's one part. And then, secondly, maybe we could just touch on what you saw on the enterprise side and do you think most of that is a meaningful driver for revenue growth as you get into calendar 2020?

Yes. So quickly to answer your question, Amit. The specific titan was the absolute largest part of the gap and guidance. But, there were declines. As you know we've had deteriorating declining performance in service providers, and new to the mix was a deteriorating and declining performance in tier 2 specialty clouds too. It was a combination of all three with the majority being one specific cloud titan. Now, specific to Mojo, Mojo is very much factored into our campus numbers, and we think the whole wired, wireless, cognitive, edge is really getting ignited with the Mojo product. We have completed our integration of CloudVision and Wi-Fi. Our distributed cloud-managed Mojo is better than many of the standard controller offerings and legacy offerings in the marketplace. So, we believe our campus is doing well and a good contribution from that is Mojo.

Hi. Can you talk about what's changed on the 400-gig side? It sounds like the anticipated deployment for 400-gig have been pushed out one year from your initial estimate. So, kind of interested to get your view on what you think is causing those delayed deployments.

I think when we first began our 400-gig foray, you may have remembered, Andy Bechtolsheim spoke about it. We were always concerned, not whether we would have products and differentiated ones, which we do. We’re shipping 10 types of products now. But whether the optics were ready and the ecosystem was ready. We thought the ecosystem would be ready by now and the optics have pretty much moved a year. Correct me, if I'm wrong, Anshul. By virtue of you cannot build 400-gig products and anything more than trials, if you don't have good optics to connect to it. So, by virtue of the 400-gig optics moving, we believe most of the initial deployments will move from the second half of this year, which is what we thought before, to the second half of 2020. This means production installations from thousands of ports to millions of ports will really be in 2021. But I want to be clear that we are shipping 400-gig products. We're very proud of them. And as always, we are ahead of the industry.

Two related questions, if I may. One, I just wanted to make sure I’ve heard you correctly, first before the question, which is, you said, two 10% cloud titan customers, Microsoft and Facebook for 2019, is that the same in terms of the time period?

Yes. That's correct.

Okay. And you also said that the particular cloud titan question is the problem is shifted to one quarter from a two-quarter forecast, correct?

Well, the forecasts were anywhere from two to four quarters, and they’ve now shifted specifically to one quarter.

Here are the two questions. First, regarding the softness in 2020, excluding Q4 2019, you indicated earlier that with Microsoft, when they went public, the key question is not whether they will return, but to what extent. Therefore, when you mention the softness and notable decline in 2020, I assume they are providing you with that insight, despite the transition to a one-quarter forecast from the previous two to four-quarter forecast. It appears they have given you a view into next year.

That's correct. This particular cloud titan has not only given us a dramatic reduction for Q4 2019 but has given us a dramatic reduction for much of 2020. So, unless the other cloud titans, there is a pause and they come back and it’s more consistent, we fully expect this particular cloud titan to reduce next year significantly.

Hi, thank you. I'm trying to clarify some of the comments made. To provide context before my next question, some third-party multi-tenant colocation providers have reported their strongest backlog quarters for data center capacity starting in Europe in 2020. Many of those substantial bookings are driven by cloud giants. As these cloud giants expand internationally, is there a change in topology or architecture occurring due to their building and connecting methods? Does this imply that alternative vendors may be favored, or are we observing something entirely different than we have experienced before?

Sami, typically, the cloud giants deploy us globally. We have numerous international data centers that they have constructed with us. As they expand to more data centers, the only difference is not in architecture but in the size of the data center. Depending on whether they are entering densely populated areas or smaller regions, they will replicate the same architecture, but the scale and size may differ. This indicates that they prefer a uniform architecture, ideally with consistent software and a single vendor. It is quite rare to see them use a different vendor. Therefore, I do not see any uniqueness in the international data centers apart from their size.

Thank you, Andrew. That concludes the Arista Q3 2019 earnings call. Please note that we have posted a presentation which provides additional information on our fiscal results, which you can access in the Investors section of our website.