The operator welcomes participants to the Third Quarter 2023 Arista Networks Financial Results Earnings Conference Call. Liz Stine, Arista's Director of Investor Relations, introduces the CEO and CFO and mentions the press release announcing the results for the fiscal third quarter. The management will make forward-looking statements regarding financial outlook, market opportunities, supply chain constraints, and other factors that could affect the company's performance. These statements are subject to risks and uncertainties and should not be relied upon as representing the company's views in the future.

Arista reported a revenue of $1.51 billion for the quarter and non-GAAP earnings per share of $1.83. They do not plan to update statements after the call and certain financial measures will be expressed on a non-GAAP basis. Services and software support renewals contributed 16.8% of revenue and non-GAAP gross margins were 63.1%. International contribution was 21.5% and the Americas at 78.5%. Arista's supply chain and lead times are improving and they expect 33% annual growth in 2023. They will now combine cloud and AI customer spend into one category called cloud and AI titan sector, which is projected to represent over 40% of their total revenue mix.

Arista continues to focus on multi-domain modern software with their single EOS and CloudVision stack, which sets them apart from their competitors. They have had success with international customers using their Ethernet modular switch and real-time telemetry. They have also expanded into the public sector with a grant-funded project utilizing CloudVision for AI workloads. Lastly, a customer was able to refresh their aging campus network by leveraging Arista Validated Design models.

In the fourth paragraph of the article, Arista's CFO Ita Brennan discusses the company's Q3 results and guidance for Q4 '23. Total revenues were $1.51 billion, up 28.3% year-over-year and above the upper end of their guidance. Services and subscription software contributed to 16.8% of revenues, and international revenues increased to 21.5% of total revenue. Gross margin was 63.1%, exceeding guidance and last quarter's numbers.

The company has seen improvements in gross margin quarter-over-quarter due to higher enterprise shipments and better supply chain costs, but this was somewhat offset by the need for additional inventory reserves. Operating expenses decreased from the previous quarter, with R&D spending and sales and marketing expenses both down. The company's operating income was $696.2 million, with a net income of $581.4 million. Cash and investments totaled approximately $4.5 billion at the end of the quarter. The company did not repurchase any shares in the quarter but has repurchased $855.5 million under their current $1 billion Board authorization. Operating cash performance for the quarter was strong.

The company generated $699 million in cash from operations, with a DSO of 51 days and inventory turns of 1.1 times. Purchase commitments decreased to $2 billion and deferred revenue increased to $1.195 billion. The company expects to continue optimizing supply positions and maintaining a healthy position for key components. Accounts payable days decreased to 44 days and capital expenditures were $11.2 million. The company expects to see improvements in their 2023 outlook with a year-over-year revenue growth of approximately 33%.

The company expects a gross margin of 63% in the fourth quarter and plans to monitor spending and investments carefully. They also anticipate deferred tax payments to impact cash in the fourth quarter. Their guidance for the quarter includes expected revenues of $1.5 billion to $1.55 billion, a gross margin of 63%, and an operating margin of 42%. The call then moves on to the Q&A portion. The first question is from Samik Chatterjee of JPMorgan, who congratulates the company on its results.

The speaker, Jayshree Ullal, is asked about the momentum of orders and demand for the last 90 days in the cloud titans and enterprise verticals. She reiterates the company's goal of at least double-digit growth for next year and shares that there has been no significant change in the last 90 days. She also mentions the expected push for a combination of cloud and AI. The next question is about the sustainability of accelerated AI cluster deployment and whether there will be a rebound in traditional infrastructure spend next year. Jayshree shares her thoughts and then hands it over to Anshul for further input.

The company has always viewed the cloud network as having a front-end and a back-end. Customers have been prioritizing spending on the back-end, specifically on AI. However, the company expects to see more investments in the front-end in the future. There was a 13% sequential improvement in services in the quarter, but this does not change the overall expected growth rate for services.

Liz Stine thanks Karl Ackerman for his question about the company's recent performance. She explains that the company does not disclose specific numbers for backlogs, but they are seeing a reduction in visibility as lead times improve and customer planning horizons shorten. The next question comes from Amit Daryanani, who congratulates the company on its strong numbers and asks about the strength in the enterprise sector. Liz Stine explains that they are seeing good strength in both campus and data center segments, and the company is not experiencing the severe drop in growth rates that some of their peers are facing due to the offset from other factors.

Jayshree Ullal and Anshul Sadana discuss Arista's investment in the enterprise market and its success in attracting a diverse range of customers from various industries. They highlight the company's uniform architecture, which connects different components of the enterprise, and its modern operating model based on CloudVision. They also mention the success of their team led by Chris Schmidt and Ashwin Kohli in selling to customers globally. The company's automation, quality, and visibility are appealing to CIOs, and Arista is no longer seen as a risky choice in the market.

Jayshree and Anshul discuss the progress made in the backend network around GPU cluster opportunity. They mention that the market was dominated by InfiniBand but is now shifting towards a dual strategy of Ethernet and InfiniBand. They also mention the Ultra Ethernet Consortium and the work they are doing to define a spec, which will lead to more products based on UEC. They are confident that by 2025, there will be a lot of production rollout of back-end and front-end based on Ethernet. They also mention the strong partnerships and co-development happening in this space with their cloud titan and specialty provider customers.

The company is working on fine-tuning back-end networks for maximum utilization of GPUs in their AI products. They are scaling these clusters quickly to help customers run their jobs faster. The team is focused on end-to-end latency, and the CEO will provide more information at the upcoming Analyst Day. The CEO reaffirms their previous view of pilot deployments in 2024 and meaningful volume in 2025. The question about network spend intensity will be addressed at the Analyst Day.

Jayshree Ullal and Ita Brennan discuss the trends in networking spending and the impact of higher speeds such as 100 gig, 400 gig, and 800 gig on the overall budget. They mention that the percentage of spending on high-speed networking has remained consistent at 10-15%, but there may be some moderation in growth in the cloud side of the business next year. They are confident in their plans and execution.

In paragraph 15, the speaker, Jayshree Ullal, discusses the company's performance and the inclusion of OCI in the new cloud titan and AI segment. She clarifies that the change in revenue breakdown is not based on Arista's wallet share at Oracle, but rather on classification and definition. She also mentions that OCI has become a significant top-tier cloud customer and that they are also a good customer of Arista. In response to a question, she explains that the change was warranted due to OCI's investments in AI. The next question asks for commentary on other companies building AI clusters, to which the speaker responds that they are seeing growth among tier-two and specialty providers.

The speaker is asking about the decline in OpEx in the previous quarter and mentions that it was due to lower product introduction costs. They ask for more information on this and how it will affect future OpEx.

In the paragraph, Ita Brennan and Jayshree Ullal discuss the timing and volatility of spending on R&D projects at Arista. They also mention the company's confidence in the adoption of Ethernet at hyperscalers and the dynamics between custom chip and merchant switch chip providers. Arista has a history of using merchant silicon and looks for the best chips for their products.

The speaker, Jayshree, is discussing the company's partnership with Broadcom and how they have built a portfolio of silicon for cloud networking, campus, and AI. They also mention the importance of software and drivers in enabling the use of merchant silicon. The speaker also mentions that they will share more about this in the future. In response to a question about gross margin, they mention that it may moderate next year due to lead times, but do not provide specific details on the extent of the degradation or other potential factors.

Ita Brennan and Ben Reitzes discuss the improvement of the cloud titan vertical and how it is expected to stabilize in the upcoming year. They also mention their intention to balance supply towards enterprise and the potential for other cloud titans to become larger customers. Anshul Sadana adds that it will be a good year for cloud in 2023 and mentions some mix shift towards enterprise.

The engagement with other cloud titans who are customers is still positive, and the company will discuss the build versus buy topic in the next week. They recently launched a 25 gig ultra-low latency switch and are aiming for at least double-digit growth in 2024 and beyond.

Ittai Kidron asks about the company's gross margin and potential pricing pressures. Jayshree Ullal and Anshul Sadana explain that prices are always coming down due to technological advancements, but the company's value lies in its low operational costs and high quality. They also mention that the market is competitive and the gross margin is a result of the company's execution.

During a recent earnings call, an analyst asked about the company's customer concentration for the year. The CEO commented that they are proud of their customers, even if they are concentrated, and mentioned that last year, Meta and Microsoft were their top customers. They expect these customers to continue being important contributors to their results, even as their overall customer base grows. Another analyst followed up with a question about the company's market sector trend update, specifically asking about the shift to 40-45% cloud and AI titans. The CEO explained that this reflects the inclusion of new AI use cases and a shift away from Oracle, as well as a possible normalization at Meta and Microsoft.

The speaker is responding to a question about the impact of AI on the company's financials and enterprise markets. They clarify that AI is currently a small part of their business but will become more important in the future. They also mention that they will not be discussing backlog or book to bill ratios.

Jayshree Ullal and Anshul Sadana discussed the improved lead times and progress being made in the business. Ullal expressed pride in the team's progress and mentioned past difficulties with component shortages and forecasting. The lead times are expected to be normalized by 2024. There was also a mention of a merchant silicon partner moving up the stack towards a surface provider routing, and Sadana confirmed that they are referring to the latest announcement from Broadcom on their 25.6T Jericho chip.

Arista has been a long-time partner of Broadcom and will continue to innovate and build products, with a recent increase in bandwidth to 25.6T. The company has invested heavily in its routing stack and is confident in its ability to power the internet, cloud, and AI. The upcoming Cloud and AI Innovators Analyst Day will provide more information on Arista's progress.

This summary was generated with AI and may contain some inaccuracies.