Arista Networks Inc at JPMorgan Global Technology, Media and Communications Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : And I'll really just start off with more sort of a macro question and a few questions we've been asking most of our companies to comment on. Just the remainder of the year, obviously, the macro backdrop remains a bit more challenging. But as you think about macro risk, what are the biggest risks that you perceive to your business?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Just to follow up on that. I mean one of the things, as you mentioned, like you haven't seen maybe the macro impact as much, but we've seen with a lot of other hardware categories. And I think even during sessions I've hosted today, it's come up that there was a pull forward of capacity by the hyperscalers in terms of their own investments towards capacity. How much of the slowdown you're expecting is largely a function of maybe a pull forward of demand from their side to add capacity and when you sort of look forward, it's more sort of just waiting for them to digest that capacity and move forward? Or is there a change structurally in how they think about their growth rates on public cloud revenues and that's changing their outlook for how they spend? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2023 / 5:55PM, ANET.N - Arista Networks Inc at JPMorgan Global Technology, Media and Communications Conference

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Obviously, one of the questions that I'm sure you answered all morning is the impact of AI on your business. Largely, I think, obviously, sort of the infrastructure spend is what everyone's focused on, but maybe flesh it out a bit more in terms of where you see the opportunities? Is there any sort of offset to think of in terms of where the business gets disrupted at the same time? Just help us think through that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Since we're on the topic of AI, any way of sort of that you've quantified how big the opportunity for Ethernet switching is? How do you think about the risk from InfiniBand remaining a core part of that market or dominant in that market and Ethernet not being able to displace InfiniBand as a technology?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : You mentioned moving to sort of next-generation speeds or higher speeds and being critical in that. And obviously, there's sort of latency, et cetera, that comes into the equation here. Does it change how fast these upgrade cycles are? Because you've been in the midst of a 400-gig upgrade cycle, does that 400-gig sort of naturally then bleed into the next upgrade cycle, muting some of the cyclicality that you've seen with your customers?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. You mentioned on the last earnings call that you're already qualifying or sort of sampling some products with your customers. Maybe help us think through what that time line looks like? Where you are today? How much sort of -- how much of a time line does it look like when you're at that spot to sort of get something commercially into the market? Just trying to think about lead time to revenue here.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. When you say you track the use cases that this might be going into and it's difficult. I think there has been some confusion on the investor side, just given some of the other companies, including semiconductor companies mentioning more sort of exact revenue numbers that they're doing in terms of AI chips. I mean, is it really that easy to discern at this point? What's going into AI use case for you, what's not? And how are you classifying it? Are you looking at like -- do you have visibility into what the customer is using it for, or is it more of like triangulate based on what chips are in those systems?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. I think one of the things that's come up is, obviously, Arista has gained a lot of share over the years and use the 100-gig and then the 400-gig as a key driver of share gains. As we think about AI, does it create an opportunity for further market share shifts, either in favor, or does it open up more ecosystem to more suppliers, new suppliers to come in? How do you ensure you stay on top of sort of continuing that progress on market share?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Just going back to your last Analyst Day, you talked about a 5-year revenue CAGR of 20%. As we look to future periods, and I think this is again sort of asking you to think about what the AI sort of in relation to magnitude could be, but is it sort of natural to expect that when you think about longer-term revenue CAGR, AI is sort of additive to it overall?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Staying on the topic, I think you said there is some modest amount of revenues that you're seeing on the AI use cases. I think one of the questions that keeps coming up is how much of the -- like your key customers like Meta have already been doing some level of AI investments? How much have you been able to leverage of that already, particularly any insights on sort of which technologies each of your customers are trying to favor relative to Ethernet versus InfiniBand. And Meta did have a recent announcement in terms of just sort of setting their priorities in relation to how they want to invest in AI versus the non-AI sort of infrastructure, or how do you think about implications on your switching business from that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Ita, you keep referring to that the ecosystem needs to build out further like on the Ethernet side, particularly to compete with InfiniBand. Traditionally or historically, you've sort of taken the approach of more partnering on that side to really help out. But as you think about where you stand today, is then the sort of a more active evaluation of whether you can sort of wait to partner with companies, or do you want to sort of take a more active approach in vertical integrating and helping the ecosystem build out quicker?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Let me open it up and see if there any questions the audience has. Unidentified Analyst Just on the AI revenue opportunity, is there any sort of conceptual framework you'd be comfortable providing in terms of how to think about that specifically with respect to maybe as an attach rate to GPU sales. I mean the concept being for every $100 you spend on GPUs, maybe you need making up a number of $10 of networking equipment to prevent any bottlenecks developing in the data transfer network. I mean anything similar to that, that you could frame for us to help us quantify or think about that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Any question -- other questions? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2023 / 5:55PM, ANET.N - Arista Networks Inc at JPMorgan Global Technology, Media and Communications Conference Unidentified Analyst You mentioned optics being one of the things that you guys are thinking about or working with. Can you just describe that ecosystem? When do you think that it could be really adopted in scale. I know that there's a lot happening in innovation. But if you could just elaborate a bit more on your optics comment.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Let me take this question that came in and see if you have a comment on this. It says, could you comment on Ethernet versus InfiniBand debate, how that is evolving with AI? How could open source AI models change the dependence on vendor-specific GPUs and InfiniBand for AI?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Just the reliance on GPU and InfiniBand as a technology. So the same -- pretty much the same question. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2023 / 5:55PM, ANET.N - Arista Networks Inc at JPMorgan Global Technology, Media and Communications Conference

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Let me switch gears here. You've talked about engagement with Google as a customer sort of starting to build up a bit, and Anshul talked about it. Any sort of update on that? Where's progress? I think one of the questions we keep getting is then sort of how to think about the insertion opportunity there? When is the right time? Is it really related to AI? Is it more related to sort of think about the next speed, 800-gig? How should we think about it?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay, okay. Coming back to the core business. If we talk about the 200-gig, 400-gig, upgrade cycle, where are you in terms of those upgrade cycles with your 2 key customers there? And sort of how should we think about the length of that upgrade cycle? What are you seeing in terms of growth rates on those?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. And then sort of if I put that in context of what you just outlined at the start of the discussion in terms of a slowdown in the growth with the cloud companies because they go through a digestion, so what you're really sort of indicating is the slowdown on account of some of the CapEx cuts that they've announced. I mean, help us think through sort of when you think about drivers of that slowdown, how much of that is just not as many new data centers coming in versus a slowdown in the upgrade cycle because you've gone through the peak of that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2023 / 5:55PM, ANET.N - Arista Networks Inc at JPMorgan Global Technology, Media and Communications Conference

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Okay. Pulling back a bit to the aggregate company level, not just cloud. I think most -- you don't disclose backlog or what's happening with orders, but most of the other networking companies have this dynamic of backlog moderation, orders being down double digit. How can we think about and sort of any ballpark way of thinking about your -- what you're seeing, which are the customer verticals you're seeing sort of the most slowdown in terms of momentum. And in terms of when you think about backlog and sort of winding down that elevated backlog, when do you expect to have that sort of back to a normal level?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : And comment about enterprise remaining resilient that's (inaudible), not just a revenue.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Let me just open it up again and see if there any questions or I can move on to other parts of the business. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 23, 2023 / 5:55PM, ANET.N - Arista Networks Inc at JPMorgan Global Technology, Media and Communications Conference Unidentified Analyst This is a follow-up to my question before, talking about having the best product being key. Is that the best product for the industry? Or is there any differentiation in terms of the best product for an individual customer? And if you've worked with that customer over time, does that put you in a better position to keep producing the best products for them.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : I'll take this one that came in. How would you describe the relationship with Broadcom and the establishment of a long-term supply agreement? Do you think the relationship could change in the future or any chances of having a second supplier?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. What is Arista lacking to gain higher traction in the service provider segment?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : I did want to go back to the long-term supply agreements. And I think the biggest thing that stood out from the last earnings report was really the inventory increase on the balance sheet. I mean you sort of explained some of it as the sort of the product that's coming in on account of the supply agreements that you have and the purchase commitments that you've already done. How should we think about when does the inventory on the balance sheet peak on account of that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Switching to margins on this question. It says you've consistently outperformed on the operating margin. Do you think you could envision the possibility to have a higher optimal gross and operating margin framework in the next 3 years?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Last quick one, capital allocation priorities. You've been building cash, and I think everyone is sort of scratching their head, what you do with it?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : But how do you think about the uses of it longer term if you continue to sort of partner with companies rather than go the buy route on them?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Great. I'll wrap it up there. Thank you. Thanks for the time. Thank you, everyone.