Arista Networks Inc (ANET) — Q1 2025 Earnings Call Transcript

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

Thank you, Rudy, and thank you everyone for joining us this afternoon for our first quarter 2025 earnings call. I apologize for my nasal voice, as I have a bit of a cold. It has already been quite a year with fluctuating tariffs. We had a strong start in Q1 2025, benefiting from the momentum of generative AI, data center cloud, and campus enterprises, achieving our first $2 billion quarter, just 11 quarters after our first billion-dollar quarter. Software and service renewals made up about 17.1% of our revenue. Our non-GAAP gross margin of 64.1% was supported by an efficient supply chain free from tariffs and a favorable mix of enterprise and cloud customers this quarter. Our international contribution was 20%, with the Americas showing remarkable strength at 80%. Clearly, Arista is redefining the future of data-driven networking, closely collaborating with our top customers in the evolution of data centers, campus centers, branch centers, and AI centers. Our momentum in cloud and AI persists, and we remain confident in achieving our $750 million front-end AI goal in 2025. We are making good progress with all four customers and continue to add smaller ones as well. At the GTC event in March 2025, we discussed NVIDIA's planned GPU roadmap, and Arista aims to be the leading and preferred scale-out network for all those GPUs and AI accelerators. Traditional GPUs utilize collective communication libraries that attempt to identify the underlying network topology using localization techniques. This accelerated compute method can cause discrepancies between the discovered topology and the actual one, affecting AI job completion times. Arista's Etherlink portfolio emphasizes an accelerated networking approach, offering a singular point of network control and visibility, which is crucial for identifying and addressing performance issues, especially as AI clusters expand to 50,000 and 100,000 XPUs with the Arista AI Spine and Leaf network designs. In terms of campus and branch center trends, in today's AI landscape, customers can no longer afford to have LAN and WAN silos. The definition of what constitutes a user, device, or site is fundamentally evolving the construction of a branch or campus in 2025. Agentic AI raises questions about how we define a user; future campus and branch centers could be centralized, distributed, or spread across laptops, smartphones, homes, planes, or various other mobile locations. Data and applications can exist anywhere, leading to more dimensions, whether in a data center, public cloud, or campus. Consequently, Arista's cognitive campus portfolio includes our advanced spine with power-over-ethernet capabilities and a variety of cost-effective wireless access points for IoT and agentic applications. Our enterprise momentum is steady, and these initiatives are significantly fueling customer growth. Let me highlight a few customer successes we’ve had. Our first win is in the federal sector, new for Arista, where we secured a strategic deployment of campus switching with a major civilian agency, displacing a long-standing incumbent. We enabled their digital transformation for the return-to-office policy with resilient campus designs, featuring Wi-Fi readiness and deep integration of CloudVision for real-time telemetry, automation, and compliance. This mission-critical deployment sets us up for broader entry into the federal market. Our next success comes from the high-tech sector, where Arista expanded its partnership with one of our business development partners after years of engagement. The customer decided to transition key aspects of its data center and campus networks to Arista, marking our first wins in both areas. Our consistent architecture, based on our superior extensible operating system, was a key differentiator. The rollout includes essential platforms all managed through CloudVision for automation, compliance, and visibility. With successful Wi-Fi evaluations in progress, Arista is ready to deliver a comprehensive client-to-cloud experience. Our final win is in the Web 3.0 infrastructure space, where Arista was chosen to help build a decentralized global backbone for distributed systems and blockchain networks. As the focus shifted from metro expansion to enhancing core network capacity, Arista’s 7280R3 routing at scale combined with our 7130 Series for ultra-low latency edge formed a new 100 gigabit WAN spine. With edge processing, this solution provides advanced security and programmable traffic filtering at scale, marking a strategic shift toward high-performance and reliable routing where legacy routers fail. These three wins across three sectors highlight Arista's growing momentum as customers modernize their networks in response to legacy complexities, vendor consolidations, and mission-critical needs. As I conclude, I want to emphasize our careful approach to nurturing our next generation of leaders. We have been fortunate to have a strong team for the past 15 years, but sometimes we must embrace change. Financial success allows our team, especially our executives, to make choices; some may retire while others may seek new opportunities. In the next phase of Arista 2.0 leadership, some elements remain unchanged and steadfast, such as our engineering talent, including Andy, Ken, and Hugh, as well as our new Vice President of Software, Siva Narayanan, and our new Vice President of Hardware Engineering, Alex Rose, who solidify our strength. Arista is known for its exceptional engineering team, a hallmark of our value. With John McCool on summer leave, Mike Kappus has stepped in as our new VP of Manufacturing. Mike has been with us for over 12 years and has done an excellent job navigating the supply chain and tariff uncertainties. On the enterprise sales front, our Chief Customer Officer, Ashwin, and Chief Sales Officer, Chris, are successfully expanding our campus, data center, and AI footprint, increasing our market share. They have brought about changes in the sales and SE leadership teams internationally, particularly in Asia and Europe. For the Americas sales, we have promoted Chris Belmer, a 16-year Arista veteran, to Senior Vice President. Chris exemplifies customer empathy, product expertise, and integrity. These executives share common qualities, including impressive experience, strong cultural alignment, and a commitment to customer satisfaction. We are executing very well and aim for $10 billion in revenue and beyond sooner than we previously anticipated. Now, I’ll turn it over to our CFO, Chantelle, who embodies our core values at Arista and has recently taken on additional responsibilities, including legal, IT, and CECL functions.

Thank you, Jayshree. I am excited to extend my scope to cover these key functions. With that, there are a few organizational announcements to make regarding these teams. Our newly named leaders include Sandra Yuen promoted to be our VP of Information Technology. Jason Bevis promoted to be our cybersecurity leader in CISO; and Sean Christofferson, who tomorrow becomes our General Counsel, replacing Marc Taxay, who has decided after many dedicated and successful years at Arista to try a new adventure, congratulations to all of you. By promoting proven leaders from within, we are reinforcing our culture of excellence and positioning ourselves for continued success. With that organizational momentum, let's review our financial results. Total revenues in Q1 were $2.005 billion, up 27.6% year-over-year and above the upper end of our guidance of $1.93 billion to $1.97 billion. This year-over-year growth was led by strength in the cloud titan vertical and non-cloud performing better than expected. International revenues for the quarter came in at $406 million or 20.3% of total revenue, up from 16% in the last quarter. This quarter-over-quarter increase reflects normal quarterly volatility and includes the impact of an unusually high contribution from our Americas customers in the prior quarter. Gross margin in Q1 was 64.1%, above our guidance of approximately 63%. This is down slightly from 64.2% both last quarter and Q1 FY '24. The Q1 results above our guidance was driven by a stronger than expected mix of non-cloud revenue and includes a minimal impact from the absorption of applicable tariffs. Operating expenses for the quarter were $327.4 million or 16.3% of revenue, down slightly from last quarter at $332.4 million. R&D spending came in at $209.4 million or 10.4% of revenue, down from $226.1 million last quarter. This reflects a low double-digit year-over-year headcount increase, offset by lower new product introduction costs in the period due to timing of prototypes and other costs associated with our next-generation products. Sales and marketing expense was $94.3 million or 4.7% of revenue compared to $86.3 million last quarter with a mid-single-digit growth in headcount versus last year. Our G&A costs came in at $23.7 million or 1.2% of revenue, up from 1% of revenue in the prior quarter. Income from operations for the quarter was $957.4 million or 47.8% of revenue. Other income for the quarter was $90.7 million, and our effective tax rate was 21.2%. This resulted in net income for the quarter of $826.2 million or 41.2% of revenue. Our diluted share number was 1.279 billion shares, resulting in a diluted earnings per share for the quarter of $0.65, up 30% from the prior year. Note that this reflects our 4:1 stock split in December 2024. Now turning to the balance sheet. Cash, cash equivalents, and investments ended the quarter at approximately $8.15 billion. During the quarter, we repurchased $787.1 million of our common stock, our largest repurchase quarterly or annually in Arista's history. In April, we repurchased an additional $100 million for a total of $887.1 million at an average price of $88.97 per share. To date, we have repurchased 13.3 million shares at an average price of $87.55 with $34 million remaining in the existing $1.2 billion Board authorization. In May 2025, our Board of Directors authorized a new $1.5 billion stock repurchase program, which commences after we have completed repurchases under our existing $1.2 billion authorization. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price and other factors. Now turning to operating cash performance for the first quarter. We generated approximately $641.7 million of cash from operations in the period, reflecting a growth of 24.9% compared to Q1 fiscal year '24. DSOs came in at 64 days, up from 54 days in Q4, driven by billing linearity. Inventory turns were 1.4 flat to last quarter. Inventory increased to approximately $2 billion in the quarter, up from $1.8 billion in the prior period, reflecting an increase in finished goods. This is an intentional action regarding both tariffs and in the support of ramping new products. Our purchase commitments at the end of the quarter were $3.5 billion, up from $3.1 billion at the end of Q4. This was driven by a continued investment in chips, as well as an increase in buffers due to the tariff uncertainty. From a cash flow perspective, we will continue to optimize our working capital investments with some expected variability in inventory due to the timing of receipts on purchase commitments. Our total deferred revenue balance was $3.1 billion, up from $2.8 billion in Q4 fiscal year '24. The majority of the deferred revenue balance services related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis. Our product deferred revenue balance increased by approximately $219 million versus last quarter. We remain in a period of ramping our new products, winning new customers and expanding new use cases. These trends have resulted in increased customer-specific acceptance clauses and an increase in the volatility of our product deferred revenue balances. As mentioned in prior quarters, the deferred balance can move significantly on a quarterly basis, independent of underlying business drivers. This may be further amplified in 2025 due to the uncertainty around tariffs throughout the fiscal year and the resulting buying patterns of our customers. Accounts payable days were 49 days, down from 51 days in Q4, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $32 million. In October, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $100 million in CapEx during fiscal year '25 for this project. Now turning to our outlook. Given the nature of the current macroeconomic environment, we will start with the second quarter and then move to fiscal year '25. As is demonstrated by our Q1 results, we have seen good momentum at the beginning of fiscal year '25. As Jayshree highlighted, there are opportunities across all three customer sectors, inclusive of Gen AI, data center, cloud and campus enterprises. That, combined with favorable mix has allowed for better than expected margin outcomes. Building on this momentum, our guidance for the second quarter is as follows: revenues of approximately $2.1 billion. This reflects stronger seasonality in Q2 than prior year trends and anticipated outcome of the tariff uncertainty. Gross margin of approximately 63%, including the absorption of known tariffs for the Q2 period and operating margin at approximately 46%. Our effective tax rate is expected to be approximately 21.5% with approximately 1.272 billion diluted shares. Now turning to the full fiscal year '25. Despite the macro uncertainty, we remain confident in the demand from our cloud enterprise and providers' customers. As is in the case of many other companies, the second half holds significant ambiguity related to the tariff scenarios. Given these unknowns, our guidance for FY '25 currently remains unchanged despite the strong results and guidance we are reporting today. We believe we can deliver results in the gross margin range of 60% to 62% even as we anticipate known possible tariff scenarios within Q3 and Q4. This is possible through a mix of supply chain optimization, tariff absorption and potential price increases if required. As we move through the quarters, we will continue to revisit the annual guide, hopefully in an environment unconstrained by tariff uncertainty. Energized by the current momentum, we continue to focus on operational discipline and innovation, ensuring we deliver strong outcomes for customers and shareholders. Now back over to you, Rudy, for Q&A.

Thanks, Chantelle. Just a quick clarification before we go into Q&A. Jayshree meant we were reiterating our back-end goal of $715 million, not front-end AI. With that, we will now move to the Q&A portion of the Arista earnings call. Thank you for your understanding. Regina, please take it away.

Good morning, thanks guys for taking my question. So maybe Jayshree and Chantelle, can you maybe just dive a little bit deeper on how you're thinking about the impact of tariffs. Obviously, product deferred revenue is up sequentially. We recognize that it's uncertain going into the second half of the year. So maybe from a top-line perspective, how are you thinking about what your customers are telling you? What can you share with us? And just give us a sense for how you thought about it relative to where tariffs are today versus what maybe is proposed by the administration. So I assume that it's kind of the status quo of where we are today is kind of underpinning your outlook, but any clarity would be helpful. Thank you.

Sure, David. I'll start and maybe Chantelle can clarify. When we began this adventure on tariffs, we were actually trying to get out of Mexico as fast as we could because the expectation was Mexico would have a tariff in Q1. As the news came about, we literally find ourselves in the middle of an ocean trying to figure out which country to go to because the tariffs, as you know, the reciprocal tariffs are much higher in some of the Asia countries. So we are grateful for the measured approach that we do not have to deal mostly with any of these tariffs until July 9. We are absorbing whatever tariffs we do have to deal with from China and other things. But should that change, we expect it to have some effect that Chantelle alluded to in our gross margins that we have taken into consideration for the year and some we will absorb and some we may potentially have to pass to our customers. But we don't know what we don't know. So we can just go at this one quarter at a time.

Yes. I think the only thing I would add. So I think in regard to the top-line, Jayshree completely, we saw the momentum in Q1, you saw our guide in Q2, which is I think, linearity-wise a stronger Q2 than usual. We are holding the year that's not because of our demand outlook. It is because of the fact we just want to have any surprises after the pause. So that's why we'll take it quarter-by-quarter. On the tariff side, in regard to gross margin, if you were to take those commentaries, that puts the range of gross tariff impact to be 1 to 1.5 points at the top layer with no mitigation. So that kind of bookends the impact we expect worst-case scenario without any mitigation to Jayshree point, there may be a point where we have to have the price increases, but we're looking to mitigate through absorption and tariffs and supply chain fungibility. And so from that perspective, we tried to bookend the impact, we see momentum on the top-line, and we'll update quarter-by-quarter.

Thanks, Jayshree. Thanks, Chantelle.

Thanks for taking my question. Jayshree, I think there's been a fair amount of noise and speculation intra-quarter on the 4, 5 back-end AI customers that you have and sort of the different things are exploring. Just from your perspective, can you just talk about how are these customers in aggregate progressing for the back-half ramps? And is that 1:1 ratio for the front-end and back-end still intact in your perspective?

Yes. So first, let me start with the four customers. All of them are progressing well. One of them is still new to us. They've been in Infiniband for a long time, so they'll be small. I would say 2 of them are heading towards 50,000 GPU deployments by end of the year, maybe they'll be at 100%, but I can be most certainly sure of 50,000 heading to 100,000. And then the other one is also in production. So I had talked about all 4 going into production, 3 are already in production. The fourth one is well underway. So I think our back end number of $750 million, I'm feeling good and feeling confident. And if you knew more or less about tariffs, maybe I feel more confident. On the front-end ratio, yes, we've said it's generally 1:1. It is getting harder and harder to measure front end and back end, maybe we look at the full AI cluster differently next year. But I think 1:1 is still a good ratio. It varies. Some of them just build a cluster and don't worry about the front end and others worry about it entirely holistically. So it does vary, but I think the 1:1 is still a good ratio.

Thank you.

Thanks Amit.

Hi, thank you for taking my question. Chantelle, you talked about 2Q being seasonally stronger. Can you give us a bit more color – are you seeing any pull forward because of the concern on tariffs?

Yes, I think that I wouldn't call it significant or material, but not in the sense that we wanted to be pretty clear on that top-end guide. So yes, some, but I wouldn't say significant.

Yeah, thanks for taking the question. And congrats on the results. The product deferred revenue balance from $990 million up to like $1.2 billion, I can appreciate the timing of that and kind of given the tariff factor of somewhat difficult. But I'm curious of how we should think about that from a forward perspective. And in particular, is it tied to kind of the distributed Etherlink platforms or the 51.2T silicon? Are we still kind of early innings and seeing those actually materialize from a production deployment perspective and that might be tied to that product deferred? Or any kind of color around that would be great. Thank you.

Right Aaron. If you recall, we experienced a similar situation back in 2016 with the 100 gig deployments in the cloud. I believe we are seeing something comparable now with all our Etherlink platforms, including the distributed Etherlink, the 7800 Spine, and the Etherlink 51.2 stand-alone switches. There is significant interest in these products, but many are new to AI and unsure about designing a network for four or eight rails, how to connect to GPUs, and what NIC attachments are needed, as well as the necessary cables and optics. The shift from trials to production is prompting us to assemble an entire ecosystem for the first time, which is affecting our deferred revenue. This transition period can easily take 12 to 18 months, whereas in the cloud era, it was typically around 6 months because it was less unfamiliar.

Thank you.

Hi, thank you for the question. Regarding the second half of the year, to stay within a 15% to 17% range, you need to achieve some single-digit growth. I'm curious about the cloud providers you serve; when they receive products from NVIDIA, I understood those orders are non-cancelable. There seems to be good visibility into their plans for either XPUs or GPUs since these orders have a long lead time and have already been placed. I'm a bit perplexed as to why there's uncertainty about the second half, at least concerning revenue, given that many of the hyperscalers are locked into these non-cancelable orders. Thank you.

Thank you for the question. I’ll start and then maybe Jayshree will have some comments. We prefer to update the guidance once we have clarity on the pause rather than constantly adjusting it for every change. It’s not that we lack insight; we just want to provide a comprehensive update when we have all significant variables accounted for. Jayshree, do you have anything to add?

Yes. No, listen, I think you are right to be confused. We are also confused about the tariffs. So there were no tariffs we'd be even more optimistic about the second half. So we're being careful, measured because we don't know what the tariffs we do. We don't know if the country will go into a recession, but specific to your comment on visibility and enthusiasm and momentum. I think you've heard it from us. We are seeing it on the cloud. We're seeing it in AI, we're seeing it on campus enterprises. So if there were no other variables, we'd be even more bullish.

Thanks Jayshree.

Sure Ben.

Hi, thanks for taking my question. Jayshree, could you provide an update on the four Tier 1 customers you're working with regarding the AI back end? Are these customers offering you more insight given the tariff situation and the need to build inventory for some finished goods? How are they managing this situation? Additionally, considering that investors are focusing on the potential changes in the CapEx landscape for 2026, are you receiving any early indications or visibility from them regarding this? Thank you.

Right. Right, Samik, yes. So we definitely have all the visibility in the world for this year, and we're feeling good. We're getting unofficial visibility because they all know our lead times are tied to some fairly long lead times from our partners and suppliers. So I would say 2026 is looking good. And based on our execution of 2025, and plans we’re putting together, we should have a great year in 2026 as well for AI clusters typically.

Yes, thank you, Jayshree. How do you see the general cadence of hyperscalers deploying 800 gig switch ports this year? I ask because I believe your Etherlink family of switches became generally available in late 2024. And I'm wondering if these switches relate to your growth of deferred revenue the last couple of quarters. Thank you.

Yes, no, that's a good question. You may remember, Karl, that I alluded to this earlier in 2024, the majority of our AI trials were on 400 gig at that time. So you are right to observe that with our Etherlink portfolio really getting introduced in the second half of '24 that a lot of our 800-gig activity has picked up in 2025, some of which will be reflected in shipments and some of it which will be part of our deferred. So it's a good observation and an accurate one that this is the year of $800 million; like last year it was the year of $400 million.

Hi, good afternoon. Thank you for the question. Jayshree, I was wondering if you could just expand upon your comments about your confidence in achieving the $10 billion midterm revenue target a little bit sooner than previously expected. And how do you kind of balance that longer-term midterm optimism with some of the choppiness that we see now? Thank you.

Michael, I expected someone would ask that question, and I'm surprised it took this long. As you may recall from our Analyst Day in November 2023, I mentioned that it took us nine years to reach our first $5 billion.

Seem to want to go away, which is really looking for the update on white box. I know you've talked about this quite a bit in the past. It seems as if it's maybe come back and if you could help us understand how you split your business with white box competitors and how you see that shifting, if at all? Thank you.

Sure. First, I want to emphasize that white box is not a new concept; it has been around since the beginning. When Arista was founded, several of our customers had already started implementing various white box solutions internally. There is a segment of customers willing to invest in engineering and operations to develop and manage their own networks, which represents a different business model that typically operates at lower gross margins. I believe it's not in Arista's best interest to pursue that direction. This model is heavily focused on hardware and does not leverage the robust software foundation and investments we've made. We will always coexist with white box solutions. It's evident that because Arista produces superior hardware, some customers prefer our hardware even without using our EOS. They appreciate our hardware, which is better engineered than competitors, alongside more open operating systems like SONiC or FBOSS, or at least has the capabilities of running both U.S. and an open-source networking system. We see this as a natural choice among our customer base: for simple use cases, they may opt for cost-effective solutions. However, for complex applications, such as AI spine roles that require mission-critical features, Arista plays a significantly larger role with our premium, scalable software and hardware integrations than with standalone white box solutions. Thus, we will focus on coexisting peacefully and are not threatened by it. In fact, we collaborate with our customers to ensure that, as they build white box solutions, we can complement those efforts with our Etherlink portfolio.

Hi, good afternoon. Thank you for letting me ask a question. I'd love to get your latest views around co-packaged optics. NVIDIA introduced its first CPO switches, JTC for scale-out. And I was wondering whether that had any impact on your views regarding CPO adoption in back-end AI networks in coming years.

No, it has had no impact. It is very early days. Arista does not manufacture optics, but we facilitate their use and have been leaders in this area, particularly with Andy Bechtolsheim and his talented team. This includes developments like pluggable optics with LPO and the definition of the OSFP connector for MSAs or 100 gig, 400 gig, which we take seriously. Our perspective on CPOs is not a new concept; it has been shown in prototypes for about 10 to 20 years. The main reasons for the slow adoption of CPOs have been relatively high failure rates and limited lab demonstrations. The advantages of CTO include a linear interface, lower power consumption compared to DSP for long-haul optics, and a higher channel count. If pluggable optics can achieve the benefits of both worlds, we can overcome challenges with pluggable optics or even co-packaged copper. Arista is flexible; we will engage in co-packaged copper, co-packaged optics, or pluggable optics. However, it is too early to deem this a fully ready product, as it remains in the experimental and trial stages.

Great. Thank you Jayshree.

Great. Thanks for your time. I wanted to ask about the $750 million back-end target you reiterated, but I'm curious about the $1.5 billion AI target for 2025. Is the ability to reach that figure more reliant on the tariffs related to some of the front-end spending? How are you approaching the $1.5 billion number? Thanks.

Sure. We are targeting $750 million because it's easier to measure. The $1.5 billion is an ambitious goal, but it's difficult to determine if it's from AI traffic or cloud traffic. As for tariffs, I don't believe they will significantly impact either the $750 million or the $1.5 billion figures. We have the demand, so unless we encounter major issues or customers change their minds, I believe we are on track to meet both targets for the year.

Great. Thank you.

Hi, thanks so much for taking the question. Can you talk a little bit about what you're seeing on the macro front? And I guess more specifically, how that's affecting spending plans and sales cycles across the different customer sets, whether it's Cloud, Titans, enterprise or even Tier 2 cloud and some of the service provider customers. Thank you.

Sure. Chantelle, I would love to hear your perspective on this as well. I have never been great at predicting macro trends. From my experience at Cisco, recessions happen without warning. Currently, we do not see any signs of a recession. In fact, we are experiencing strong demand, whether it’s driven by tariffs or the general enthusiasm for Arista's products. Unless there’s a major change related to tariffs that could lead to a recession, Arista is currently seeing good momentum. Therefore, it’s quite challenging for me to foresee a recession unless there’s a significant external macro factor at play.

Yes. I would like to add that regarding the enterprise campus providers, I am very pleased with our outlook for campus in Q1. Campus has demonstrated strong momentum, with longer sales cycles but continued growth. In the enterprise segment, we are successfully acquiring new clients and having productive discussions about expanding with existing customers. The Neocloud providers are showing significant interest, and we have had many positive conversations in that area. Overall, we have not encountered any indications of a recession in our discussions.

We read the doom and gloom in the news that we're not feeling it here.

Hi everyone. Can you hear me?

Yes, we can. Yes, we can hear you.

If you look back a few years, we've observed that customers have been proactive, purchasing ahead of their needs. For instance, remember when Microsoft reacted to the legal issues it had with Cisco by acquiring about six quarters' worth of equipment in just four quarters. That was notable. Now, the question arises whether the entire market is acting similarly, considering we know tariffs are on the way later this year. Is the demand you're experiencing driven by customers making early purchases to save money before the tariffs hit? So, there are two parts to this question. First, if this is indeed happening, will you be able to identify it? Do you have sufficient insight into deployment schedules to determine if they are buying in advance of demand? Secondly, what are your thoughts on whether there is early ordering of equipment? Thank you.

Yes, Tal, those are very insightful questions, and thank you for bringing them up. Previously, we were operating at a quarterly business scale of $300 million to $500 million, and we have significantly grown since then. Even if our customers attempt to pull in their orders to complete them by July, we wouldn't be able to meet that demand. That's the first point. I'm not seeing any significant pull-ins. A few customers are trying to save a bit here and there by shipping before the tariff deadline, but it's not substantial. As for pull-ins over the next 4 to 6 quarters, our strongest visibility is in the near term. If there were a notable increase in such behavior, we would see a lot of inventory with our customers, but that's not the case. In fact, we're equipped to ship faster and in greater quantities. Thank you.

Thank you for the question. While there's a significant focus on AI demand, some major cloud players are experiencing strong growth in their non-AI segments. Could you share your insights on the demand for traditional cloud services and whether it's exceeding your expectations for the year?

That's a really good question, Sebastien. I don't know if you remember, again, two years ago, I was very nervous because the entire cloud titans pivoted to AI and slowed down their cloud. Now we see a more balanced spend and while we can't measure how much of this cloud and how much of it is AI, if they're kind of cobbled together, we are seeing less of a pivot more of a surgical focus on AI and then a continued upgrade of the cloud networks as well. So compared to '23, I would say the environment is much more balanced between AI and cloud.

Hi, thank you for the question. This is a follow-up to Simon's earlier point. What features of the Blue Box make it defensible against what hyperscalers can develop themselves? Chantelle, regarding inventory, you often advise us to look at inventory and purchase commitments. What are your thoughts on expected inventory turns throughout the year and in the long-term, especially considering the recent developments in the supply chain?

Sure. Do you want to go first, Jayshree?

Yes. Let me give you a few attributes of what I call the blue box, and I'm not saying others don't have it, but Arista has built this as a mission, although we're known for our software. We're just as well known for our hardware. When you look at everything from a form factor of a one RU that we build to a chassis. We've got a tremendous focus on signal integrity, for example, all the way from layer 1, multi-layer PCB boards a focus on quality, a focus on driving distances, a focus on integrating optics for longer distances, a focus on driving MACsec, et cetera. So that's a big focus. The second is hardware diagnostics. Internal to the company, we call it Arista booth. We've got a dedicated team focused on not just the hardware but the firmware to make it all possible in terms of troubleshooting because when these boards get super complex, you know where the failure is and you're running at high-speed 200 GIG 30s. So things are very complex. So the ability to pinpoint and troubleshoot is a big part of what we do. And then there is additional focus on the mechanical, the power supplies, the cooling, all of which translate to better power characteristics, along with our partners and chip vendors there's a menial focus on not just high performance but low power. So some of the best attributes come from our blue boxes, not only for 48 ports, but all the way up to 576 ports of an AI spine or double that if you are looking for dual capabilities. So well-designed, high-quality hardware is a thing of beauty, but also think of complexity that not everyone can do.

Yes. And I think in regards to the inventory turns, I think I am pleased in the progress we've made. We've kind of gone from the range of 1 turn to 1.4 turns this quarter even with some of the buffer we've put in for the tariff uncertainty. I think generally, your question is forward-looking, what turns are we looking for? We are always looking to make improvements. The only wrinkle we have is this length of duration on the tariff cycle. So we work every month, Mike Capes and I and his team to look at the inventory turns and forecasting, we aim to go higher. The only thing I would say is the caveat is what we need to do in the second half depending on the tariff scenarios.

Yeah, good afternoon everyone. Thank you for taking the question. There were some comments you made, Chantelle, in the prepared remarks regarding variability in customer acceptance of the product deferred, especially around tariffs. Could you share a little more detail what does that look like? Does this relate to the absolute size of their deployments, uncertainty in the BOM, just any other considerations we should be aware of? Thanks.

Yes, that's an excellent question. I brought up the tariff uncertainty in my previous comments to provide more transparency. There could be quarters where our customers choose to hold back, and if we can adapt to new use cases or acceptance clauses, it might affect the deferred revenue. This is just another factor to keep in mind, and we will continue to address it, but it adds an element of uncertainty to the situation.

Yes. To add to that Ben, obviously, tariffs are unknown, but I want to go back to that white box blue box question. We had a customer, again, not material. We said, I can't get these boxes. I can't make them run. I cannot get an AI network. And one of my most technical sales leaders said, hey, we got a chance to build an AI cluster here for a few hundred GPUs. We jumped on it. Obviously, that customer is small and have been largely using white boxes and is now about to install an AI leaf and an AI spine, and we had to get it to him before the tariff deadline. So as an example of not material, but how quickly these decisions get made when you have the right product, right performance, right quality, right, mission-critical nature and you can deal with that traffic pattern better than anyone else can. So it happens. It's not big because we've got so much commitment in a given quarter from a customer, but when it is, it's we ask with great deal of nimbleness and agility to do that.

Regina, we have time for one last question.

Thanks for fitting me in. I wanted to ask about the emerging opportunities in Neo AI. There's a perception that many are purchasing NVIDIA-defined clusters and networking, so I’d like your thoughts on those trends and their interest in moving beyond InfiniBand. Additionally, are there opportunities with these companies to source AI connectivity from multiple providers? Thank you.

Yes, that's a good question, Ryan. We are indeed noticing a more adventurous approach from NeoCloud customers as they explore alternatives. Some are definitely experimenting with other AI accelerators like Lisa and MD. Others are considering Ethernet instead of InfiniBand for scaling. This shift has gained significant momentum over the past year with the Ultra Ethernet consortium and the specifications released in May. I want to acknowledge the team and all of our collective efforts. It seems clear that Ethernet is becoming more prevalent, and the longstanding use of InfiniBand will eventually resolve itself. We're also witnessing a new wave of AI accelerators, with more niche players and internal developments from major cloud providers, all of which is driving increased interest in Ethernet. In response to your questions, I would say that the transition from InfiniBand to Ethernet is happening rapidly, while the move from established high-performance GPUs like those from NVIDIA to other alternatives is still taking longer.

This concludes Arista Networks first quarter 2025 earnings call. We have posted a presentation that provides additional information on our results, which you can access on the Investors section of our website. Thank you for joining us today and for your interest in Arista.