Earnings Call Transcript - ANET Q2 2025

Rudolph Araujo, Head of Investor Advocacy

Welcome to the Second Quarter 2025 Arista Networks Financial Results Earnings Conference Call. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section on the Arista website following this call. I will turn the call over to Jayshree.

Jayshree V. Ullal, Chairperson and CEO

Thank you, Rudy, and thank you, everyone, for joining us this afternoon for our second quarter 2025 earnings call. Arista is experiencing momentum in our business as demonstrated in our record Q2 2025 results. We achieved $2.2 billion this quarter, surpassing our plan by $100 million. Software and service renewals contributed approximately 16.3% of revenue. Our non-GAAP gross margins of 65.6% were influenced by an efficient supply chain and inventory benefits with a non-material tariff impact in the quarter. International contributions for the quarter registered strongly at 21.8%, with the Americas at 78.2%. Reviewing our mid-year inflection point, our conviction with AI, Cloud Titans, and enterprise customers has only strengthened. We began the year with a pragmatic guide of 17% or $8.2 billion in annual revenue. But as the year has progressed, we recognize the potential to build a truly transformational networking company, addressing a massive total available market. This feels to us like a unique once-in-a-lifetime opportunity. We, therefore, raised our 2025 annual growth to 25%, now targeting $8.75 billion in revenue, which is an incremental $550 million more due to our increased momentum that we are experiencing across AI, cloud, and enterprise sectors. It is important to appreciate that Arista's AI center strategy is complementing our data center focus to drive some of this increase. AI centers consist of both scale-out front-end and scale-up, scale-out combinations for back-end networks. Scale-up back-end networks consist of high-bandwidth, low-latency interconnects that tightly link multiple accelerators within a single rack as a unified compute system with workload parallelism. Our stated goal of $750 million back-end AI networking is well on track and gaining from nearly 0 revenue three years ago in 2022 to production deployments this year in 2025. As large language models continue to expand into distributed training and inference use cases, we expect to see the back-end and the front-end converge more closely. This will make it increasingly difficult to parse the back-end and the front-end precisely in the future, but we do expect aggregate AI networking revenue to be ahead of the $1.5 billion in 2025 and growing in many years to come.

Todd Nightingale, President and COO

It's amazing. It's only been a month, but I can't tell you how impressed I am with the passion and focus of the team, the trust that Arista customers have in the technology and the enormous opportunity we have ahead of us in the data center, AI, and in the campus. Personally, I'm incredibly excited to be back in networking and I'm truly, truly honored to be here. Thank you so much, Jayshree.

Jayshree V. Ullal, Chairperson and CEO

Thank you, Todd. It's going to be a fun journey here with us. It's really an unprecedented time in networking, where Arista is so uniquely positioned to enable the modern network transformation. And with that, my dear friend, Chantelle, over to you, our CFO, for the financial specifics.

Chantelle Breithaupt, CFO

Thank you, Jayshree. With that as the backdrop of our strong business outlook, let me now take us through the metrics that underscore our momentum. Total revenues in Q2 were $2.2 billion, up 30.4% year-over-year, above our guidance of $2.1 billion. This was supported by strong growth across all of our product sectors. International revenues for the quarter came in at $481 million or 21.8% of total revenue, up from 20.3% in the prior quarter. The overall gross margin in Q2 was 65.6%, above our guidance of 63%, up from 64.1% last quarter and up from 65.4% in the prior year quarter. Our operating income for the quarter was $1.08 billion, crossing $1 billion for the first time in Arista's history, landing at 48.8% of revenue. Other income and expenses for the quarter was a favorable $88.6 million, and our effective tax rate was 20.7%. This resulted in net income for the quarter of $923.5 million or 41.9% of revenue. Our diluted share number was 1.271 billion shares, resulting in a diluted earnings per share number for the quarter of $0.73, up 37.7% from the prior year. Cash, cash equivalents, and investments ended the quarter at $8.8 billion. In the quarter, we repurchased $196 million of our common stock. This has resulted in strong business model performance with approximately $1.2 billion in cash generated from operations, the highest in Arista's history.

Rudolph Araujo, Head of Investor Advocacy

Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. Regina, please take it away.

George Charles Notter, Analyst

I appreciate that. The results are impressive, but I'm interested in your thoughts on the competitive environment. Many investors have been examining the growth at Celestica and NVIDIA's networking business recently and are somewhat concerned that this strength could negatively impact Arista. I would like to hear your perspective on this issue.

Jayshree V. Ullal, Chairperson and CEO

Sure, George, and welcome to Wolfe. Thank you for the wishes. Look, we've always lived in a very competitive industry, whether it was Cisco or specific networking vendors. And we acknowledge the participation of NVIDIA both with InfiniBand and bundling with the GPUs. We've always acknowledged the coexistence with white box. So from our perspective, the competitive landscape has not changed. It's more of the same, but I recognize that the chatter was louder. And we understand that given the volatility of some of our customers, some years and some quarters are better. But from our perspective, our innovation and differentiation has never been stronger at a platform performance level and at a feature level. They are appreciative of the support, quality, and the way we approach solving their problems. So no change in our environment on innovation.

Meta A. Marshall, Analyst

I guess just on some of the strength that you're seeing in terms of cloud. But do you attribute some of the upside that you're seeing this year towards starting to see front-end upgrades maybe quicker than expected? Or is this just kind of back-end demand being stronger than expected?

Jayshree V. Ullal, Chairperson and CEO

Thanks, Meta. No, I recall two or three years ago, I was actually very worried that cloud spending had frozen, and all of the excitement and enthusiasm was going toward GPU. We now see it coming back and the pendulum swinging into a more balanced deployment of both cloud and AI. So to the question you were asking, our increased $550 million had a little bit of Velo, not material, as Chantelle reminds me, but a lot of cloud and AI as well as enterprise campus.

Ryan Boyer Koontz, Analyst

I want to ask maybe a question for Todd, Jayshree. Just about the fit for Velo with your traditional go-to-market motion, which has been heavily direct and you expect Velo to really beef up your channel efforts and working with these MSPs. Can you expand that a little bit?

Todd Nightingale, President and COO

Yes. I think it's incredibly complementary on two fronts. One is it fills an enormous hole in the enterprise campus portfolio for the distributed branch. And being able to bring Velo technology through our traditional Arista channel gives us an opportunity to cross-sell SD-WAN into many existing campus accounts with the existing Arista go-to-market.

Jayshree V. Ullal, Chairperson and CEO

Well said, Todd. Sometimes with the engine and sometimes with the caboose. In the case of the MSP, we're definitely going to leverage the strength of Velo.

Antoine Chkaiban, Analyst

Can you please remind us what's required for scale-up technologies and how that differs from scale-outs? Are traffic patterns more predictable, easier to manage?

Jayshree V. Ullal, Chairperson and CEO

Yes. So first, scale-up is a unique requirement, and it will particularly come in as people start building more AI racks. When you're building an AI rack and want to boost performance, you often need a simple interconnect. This interconnect has been PCIe Express and now NVIDIA NVLink. For Arista, scale-up networks will be an incremental new market as we pursue it. However, we believe Ethernet as a transport protocol will favor Arista, and any bit of incremental share we secure will be better than our current position.

Amit Daryanani, Analyst

Congrats on a nice set of numbers here. Can you just talk about what you are seeing that is enabling you to raise your guide from 17% to 25%?

Jayshree V. Ullal, Chairperson and CEO

Thank you for the wishes, Amit. I think when we guided the year back in February, we saw activity but not a lot of confirmation. Sitting here now, that activity has translated in all sectors into a lot of confirmation. Enterprise campus demand has been the strongest we've felt. On AI, despite losing one of our key anchor customers, we were still able to achieve and exceed measures. And thirdly, in cloud, we see pressures driving performance upgrades.

Michael Ng, Analyst

I was wondering if you could comment a little bit more on the deferred revenue or the billings growth. What was the primary driver there? And was that a contributor to the magnitude of the guidance increase that we saw?

Chantelle Breithaupt, CFO

From the deferred balance between products and services, this is indicative of new product, new use case, AI, and is across those categories. The deferred revenue balance can move significantly on a quarterly basis independent of underlying business drivers.

Jayshree V. Ullal, Chairperson and CEO

In terms of 2026, I would be remiss if I didn't tell you, I am proud of the team and we're looking to achieve $10 billion in revenue in 2026, 2 years ahead of schedule.

Simon Leopold, Analyst

I know you don't like to give specifics on customer contributions. Can you help us understand how that might be shifting given the broadening with Neoclouds, sovereigns, and enterprise?

Jayshree V. Ullal, Chairperson and CEO

Yes, I will try my best. Definitely, AI is going to create large investments that will translate into some investments into us as well. But we're equally excited about the enterprise growth.

Tal Liani, Analyst

I want to talk about the sustainability of growth. Tomahawk 6 was delayed. I want to understand if there is a correlation between delays and your growth?

Jayshree V. Ullal, Chairperson and CEO

It's going to be competitive. We're coexisting with a set of throwaway white boxes where not all customers will pay the premium price for our solutions. But the 49% operating margin is not just about value; it’s about efficiency. Arista knows how to do more with less.

James Fish, Analyst

Jayshree, we've talked about blue box and white box. What are you seeing on the blue box side versus full systems with your main customers?

Todd Nightingale, President and COO

We're looking very carefully at how we support customers from a fully integrated SASE solution. Delivering that secure WAN that matters with great assurance is top of mind for us.

Jayshree V. Ullal, Chairperson and CEO

We see the bifurcation of SD-WAN. There’s a fork in the road in terms of security and branch solutions. We will absolutely work with best-of-breed partners.

Samik Chatterjee, Analyst

Congrats on the strong results. I'm curious about the back-end revenue this year primarily driven by two large customers. Is that significantly coming from bigger cluster size deployments?

Jayshree V. Ullal, Chairperson and CEO

Two of our customers have reached close to 100,000 GPUs. The composition shows that two are strong and contributing while the other two are a work in progress.

Aaron Rakers, Analyst

As we think about the sovereign AI opportunity, how should we look at customer engagements?

Jayshree V. Ullal, Chairperson and CEO

We're cautiously optimistic about the sovereign AI segment. We'll look forward to expanded build-outs, but we haven't lost faith.

Atif Malik, Analyst

You mentioned Scale-Up Ethernet being incremental to your TAM. How big do you see this TAM in three years?

Jayshree V. Ullal, Chairperson and CEO

I don't have a clear sense yet on the dollar value. We expect to discuss this further in September.

Karl Ackerman, Analyst

Would you expect that all four cloud providers would adopt Arista switches for back-end deployments in 2026?

Jayshree V. Ullal, Chairperson and CEO

Yes, we believe all four cloud providers will adopt Arista switches for back-end deployments. The Neoclouds also have a back-end component and opportunities.

David Vogt, Analyst

Can you talk about the competitive or technical opportunities with scale-out with Jericho 4 announced recently?

Jayshree V. Ullal, Chairperson and CEO

Arista is the premier scale-out spine platform. We are looking forward to continued innovation and believe our platform is capable of supporting both AI and WAN applications effectively.

Rudolph Araujo, Head of Investor Advocacy

This concludes Arista Networks Second 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.

Operator, Operator

Thank you for joining, ladies and gentlemen. This concludes today's call. You may now disconnect.