Arista Networks, Inc. (NYSE:ANET) Q1 2025 Earnings Call Transcript

Arista Networks, Inc. (NYSE:ANET) Q1 2025 Earnings Call Transcript May 6, 2025

Arista Networks, Inc. beats earnings expectations. Reported EPS is $0.65, expectations were $0.59.

Operator: Welcome to the First Quarter 2025 Arista Networks Financial Results Earnings Conference Call. During the call all participants will be in a listen-only mode. [Operator Instructions] 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. Mr. Rudolph Araujo, Arista’s Head of Investor Advocacy, you may begin.

Rudolph Araujo: 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 the 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.

Jayshree Ullal: Thank you, Rudy, and thanks everyone, for joining us this afternoon for our first quarter 2025 earnings call. I’m sorry, I have a bit of a cold, so if I sound nasal, please excuse me. Well, what a year it’s already been with all the seesawing of tariffs. We had a good start in Q1 2025 with the momentum of generative AI, data center cloud and campus enterprises, where we achieved our first $2 billion quarter, doubling just 11 quarters after our first billion-dollar quarter. Software and service renewals contributed approximately 17.1% of revenue. Our non-GAAP gross margin of 64.1% was influenced by efficient supply chain without tariffs, yet I might add, and a nice mix of enterprise and cloud customers in the quarter.

International contribution for the quarter registered at 20% with the Americas super strong at 80%. Clearly, Arista’s redefining the future of data-driven networking, working intimately with our top customers have been matched on in the evolution of data centers, campus centers, branch centers and AI centers. Our cloud and AI momentum continues as we remain confident of our $750 million front-end AI goal in 2025. We are progressing well in all four customers and continue to add smaller ones as well. At the GTC event in March of 2025, we heard all about NVIDIA’s planned GPU road map every 12 to 18 months, and Arista intends to be the premier and preferred scale-out network for all of those GPUs and AI accelerators. Traditional GPUs have a collective communication libraries or CCL, as they are own, that try to discover the underlying network topology using localization techniques.

With this accelerated compute approach, the discrepancies between the discovered topology and the one that actually happens can impact AI job completion times. Arista’s Etherlink portfolio highlights the accelerated networking approach, bringing that single point of network control and visibility as a differentiation. This makes it extremely crisp to identify and localize performance issues especially as the size of the AI cluster grows to 50,000 and 100,000 XPUs with the Arista AI Spine and Leaf network designs. Moving to campus and [branch center] (ph) trends. In today’s AI wave, customers can no longer tolerate LAN and WAN silos. The concept of what comprises a user or a device or a site fundamentally changes the building of a branch or campus in 2025.

Agentic AI makes us question the very definition of what we might even consider a user, future campus and branch centers could be centralized or distributed or they could be dispersed across laptops, smartphones a house, an airplane or any other location on the move. Data and applications can be located anywhere and add more dimensions, whether it’s a data center or a public cloud or campus. Therefore, Arista’s cognitive campus portfolio features our advanced spine with power-over-ethernet wired lease capabilities, along with a wide range of cost-effective wireless 6 or 7 indoor and outdoor access points for the newer IoT and agentic applications. Our enterprise momentum continues. These initiatives are contributing greatly to customer momentum.

And so let me highlight a few customer wins we have achieved. Our first customer win is in the federal sector, which is new to Arista, where Arista secured a strategic net new campus switching deployment with a major civilian agency displacing a long-standing incumbent, Arista delivered the digital transformation for their 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 high-performance deployment positions us for a broader entry in the federal market. Our next win comes from a high-tech sector where Arista expanded its partnership with one of our business development partners following years of engagement.

The customer made a strategic decision to transition key parts of its data center and campus networks through Arista, marking our first wins with them in both areas. Arista’s consistent architecture across platforms based on our single and superior extensible operating system was a key differentiator — the rollout spans key platforms, all managed through CloudVision for automation, compliance and visibility. With successful WiFi evaluations underway, Arista is poised to complete and deliver client to cloud experience. And our final win comes from a Web 3.0 infrastructure space, where Arista was selected to support the build-out of a decentralized global backbone for distributed systems, and blockchain networks. As the project shifted from metro expansion to upgrading core network capacity, Arista’s 7280R3 routing at scale, paired with our 7130 Series for ultra-low latency edge formed the new 100 gigabit WAN spine.

With edge processing, this delivers advanced security, programmable traffic filtering all at scale. It marks a strategic pivot towards high performance and reliable routing where legacy routers fall short. You can see that all these 3 wins across 3 sectors underscore Arista’s growing momentum as customers modernize their networks in response to legacy complexity, vendor consolidation and mission-critical demands. As I wrap up, I want to share our cautious focus in cultivating our next generation of leaders. We have been fortunate and blessed to have a cohesive team for the past 15 years, but sometimes we must accept changes. Financial success gives people choices to our — especially our Arista executives, some may retire while others may elect to pursue new ventures.

In the next phase of Arista 2.0 leadership, it’s important to note that some things remain unchanged and step fast. Our engineering brains and bench strength, for example, with Andy, Ken, Hugh as well as new Vice President of Software, Siva Narayanan, and new Vice President of Hardware Engineering, Alex Rose continue to be stronger than ever. You know Arista’s reputation for A+ engineering team, and this is a renowned Hallmark in the value. With the summer leave of absence of John McCool, Mike Kappus has been appointed as our new VP of Manufacturing. Mike has been with us over 12 years and is doing just a fantastic job navigating the supply chain and uncertainties of tariffs. On the enterprise sales side, our [dynamic duo] (ph), Chief Customer Officer, Ashwin, and Chief Sales Officer, Chris, are driving success globally expanding campus, data center and AI footprint with increasing market share.

Chris and Ashwin have brought changes in the sales and SE leadership team internationally, both in Asia and in Europe. For the Americas sales, we have promoted a 16-year Arista veteran, [Chris Belmer] (ph), Senior Vice President. Chris embodies, the combination of customer empathy, product expertise and always doing the right thing. You can see common traits across all these executives with incredible and tenured talent, strong cultural synergies and a mission to delight customers. We are executing very well, and we aim for $10 billion revenue and beyond sooner than we previously expected. Speaking of Arista 2.0 executives, over to you, our CFO, Chantelle, who epitomizes our core values at Arista and recently responsibilities to include legal, IT and CECL functions.

Chantelle Breithaupt: 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.

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

Operator: [Operator Instructions]. Our first question comes from the line of David Vogt with UBS. Please go ahead.

David Vogt : 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.

Q&A Session

Jayshree Ullal : 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.

Chantelle Breithaupt : 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 book and the impact, we see momentum on the top-line, and we’ll update quarter-by-quarter.

David Vogt: Thanks, Jayshree . Thanks Chantelle.

Operator: Our next question comes from the line of Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani : 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?

Jayshree Ullal : 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.

Amit Daryanani : Thank you.

Jayshree Ullal : Thanks Amit.

Operator: Our next question comes from the line of Atif Malik with Citi. Please go ahead.

Atif Malik : 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?

Chantelle Breithaupt : 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.

Operator: Our next question comes from the line of Aaron Rakers with Wells Fargo. Please go ahead.

Aaron Rakers: 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.

Jayshree Ullal : Right Aaron. If you remember, we had a similar phenomenon way back in 2016 when we had 100 gig deployments in the cloud and may be testing everybody’s memory. But I think there’s a similar phenomenon going on here with all our Etherlink platforms, you mentioned the distributed Etherlink, but it also includes the 7800 Spine and the Etherlink [51.2] (ph) stand-alone switches, we’re experiencing a lot of interest in these products. But everybody is new to AI, they’ve never really put together a network design for four rail or eight rail or how does it connect into the GPUs and what is the NIC attachment? What is the accessories in terms of cables or optics that connect — so this movement from trials to production causes us to bring a whole ecosystem together for the first time.

So you can see that’s why it’s impacting our deferred revenue some. And this kind of time frame can easily be 12 months to 18 months. In the cloud days, it used to be more like 6 months because it wasn’t as new.

Aaron Rakers: Thank you.

Operator: Our next question comes from the line of Ben Reitzes with Melius Research. Please go ahead.

Ben Reitzes: Hi, guys. Thank you so much for the question. I wanted to — just on the second half, in order to be in 15% range or 15% to 17%, you have to kind of get into the single digits there. So just wondering with the cloud providers that you serve, when they get the stuff from NVIDIA, I thought it was noncancelable, et cetera. And there is pretty good visibility on what they’re going to do with either XPUs and GPU because this stuff has kind of a long lead time and the orders are already made. So I’m just a little confused as to why you really don’t know so much about the second half, at least on the top-line, given these orders are noncancelable for so many of the hyperscalers that you deal with? Thank you.

Chantelle Breithaupt : Yes. I think thank you for the question. I’ll start and then maybe Jayshree might have commentary. I think it’s more from the perspective of not having to update the guide for every permutation and combination. I think we prefer to update the guide once we have an answer on the pause, then. So it is not that we don’t have a view — it’s more we just want the guide once with all the known variables changed with some significance. Jayshree, anything you want to add?

Jayshree Ullal : 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.

Ben Reitzes: Thanks Jayshree.

Jayshree Ullal : Sure Ben.

Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Samik Chatterji: Hi, thanks for taking my question. Jayshree maybe if I can go back to the 4 Tier 1s that you’re working with on the AI back end and the progress that you updated on that front. Are these customers now giving you more visibility just given the tariff landscape and that you would need to sort of build inventory for some of the finished goods? And can you just update us how they’re handling the situation on that front? And particularly then, as you think about — I think the investor focus is a lot about sort of 2026 and potential sort of changes in the CapEx landscape from these customers at that point. Are you getting any forward visibility from them? Any sort of early signs for 2026 on these customers? Thank you.

Jayshree Ullal : 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.

Operator: Our next question comes from the line of Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: 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.

Jayshree Ullal : 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.

Operator: Our next question comes from the line of Michael Ng with Goldman Sachs. Please go ahead.

Michael Ng: 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.

Jayshree Ullal : Michael, I knew somebody would ask that question. I’m surprised it took so long. So if those of you will remember the Analyst Day in November 2023, I had said it took nine years to get our first $5 billion, and I [Technical Difficulty].

Unidentified Analyst: Seem to want 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.

Jayshree Ullal : Sure. First, I want to say, which I’ve always said that white box is not new. It’s been with us since the beginning of time. In fact, when Arista got started, a couple of our customers had already implemented internally various implementations of white box. So there is a class of customers who will make the investments in engineering and operations to build their own network and manage it. And it is a very different business model. It operates typically at 10% gross margins. I don’t think you want Arista to go there. And it’s very hardware-centric and doesn’t require the rich software foundation and investments that we’ve made. So first, I’ll start by saying we will always and we’ll continue to coexist with white box.

There are times that you’ve noticed this, too, that because Arista builds some very superior hardware, that even if they don’t use our EOS they like to have our blue box, as I often call it the Arista hardware that is engineered much better than any others with a more open OS like SONiC or FBOSS or at least the attributes of running both U.S. and an open source networking system. So I think we view this as a natural part of selection in a customer base where if it’s a simple use case, they are going to use something cost-effective — but if it’s a really complex use case, like the AI spine or roles that require and demand more mission-critical features, Arista always plays a far bigger role in premium, highly scalable, highly valued software and hardware combinations than we do in a stand-alone white box.

So we’ll remain coexistent peacefully. And we’re not in any way threatened by it. In fact, I would say we work with our customers to make sure as they are building commutations and combinations of the white box that we can work with that and build the right complement to that with our Etherlink portfolio.

Operator: Our next question comes from the line of Antoine Chkaiban with New Street Research. Please go ahead.

Antoine Chkaiban: Hi, good afternoon. Thank you for letting me ask 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.

Jayshree Ullal : No, it’s had no impact. It is very early days. I think you’ve seen Arista doesn’t build optics. But Arista enables optics, and we’ve always been at the forefront, especially with Andy Bechtolsheim and his team of talented tech individuals that whether it is pluggable optics with LPO or how we define the OSFP connector for MSAs or 100 gig, 400 gig — it’s something we take seriously. And our views on CPOs, it is not a new idea. It’s been demonstrated in prototype for, I don’t know, 10 to 20 years. The fundamental lack of adoption to date on CPO, it’s relatively high failure rates, and it’s mostly been in the labs. So what are some of the advantages of CTO? Well, it has a linear interface. It has lower power than DSP for long haul optics.

It has a higher channel count. And I think if pluggable optics can achieve some of that in the best of both worlds, then you can overcome that with pluggable optics or even co-packaged copper. So Arista has no religion. We will do co-package copper, we do co-package optics, we will do pluggable optics, but it is too early to call this a real production-ready product that’s still in very early experiments and trials.

Antoine Chkaiban: Great. Thank you Jayshree.

Operator: Our next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall: Great. Thanks. I wanted to kind of ask about — you reiterated the $750 million back-end target, but you’ve kind of had this $1.5 billion kind of AI target for 2025. And just wondering, is the capability of that more dependent on kind of the tariffs given kind of some of the front-end spend? Or just how are you thinking about that $1.5 billion number? Thanks.

Jayshree Ullal : Sure. I think we are aiming for the $750 million because it’s more measurable. The $1.5 billion is a nice goal, but sometimes we can’t tell whether it’s AI traffic or cloud tariff — traffic, sorry, you got tariff on my brain. Regarding tariffs, I don’t think it will have a material difference on the $750 million number or the $1.5 billion. We got the demand. So unless we have some real troubleshooting it or customers change their mind. I think we’re good with both those targets for the year.

Meta Marshall: Great. Thank you.

Operator: Our next question comes from the line of Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam: 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.

Jayshree Ullal : Sure. Chantelle, you may also have a view on this. I love to hear that. I’ve never been a good soothsayer or forecaster of macro trends. Going back to my years at Cisco and now, recessions don’t give you a warning. They just happen. And at the moment, we do not see any warning of a recession. In fact, we are seeing the opposite. We’re seeing a lot of demand, whether it’s people pulling it in for tariffs or just the general excitement of Arista’s products. So if — unless things dramatically change with tariffs, which force a recession, Arista is really experiencing good momentum. And therefore, it is very difficult for me to predict a recession unless something outside from a macro happens.

Chantelle Breithaupt : Yes. And I would add to that, if you think about the providers, enterprise campus specifically, very pleased with our campus Q1 outlook that we — results that we had. Campus has shown some strong momentum, longer sales cycles, but continued strong momentum. Enterprise, we continue to win new logos and have great land and expand conversations with our enterprise customers. The providers, the Neoclouds are demonstrated interest and lots of great conversations there. So I think across the spectrum, we haven’t seen anything that indicates a recessionary kind of tangent in the conversations.

Jayshree Ullal : We read the doom and gloom in the news that we’re not feeling it here.

Operator: Our next question will come from the line of Tal Liani with Bank of America. Please go ahead.

Tal Liani: Hi guys. If you go back — can you hear me?

Chantelle Breithaupt : Yes, we can. Yes, we can hear you.

Tal Liani: If you go back a few years, we’ve seen your customers being nimble and buying ahead of development. For example, you remember when Microsoft responded to the litigation you had with Cisco in both kind of six quarters worth of equipment in 4 quarters. I remember it happened. And the question is whether the entire market behaves this way now, meaning — we know tariffs are coming later in the year, whether the strength you’re seeing is the result of early purchases of customers ahead of tariffs in order to save some dollars. So — the question is twofold. Number one, if it happens, will you ever know about it? Meaning, do you have enough visibility over the deployment schedules to know that they’re buying ahead of the demand and number 2 is just the answer of what do you think about kind of the question and whether there is early ordering of equipment? Thanks.

Jayshree Ullal: Yes. No, Tal, these are very thoughtful questions. And — thank you for reminding us. Back then, we were like $300 million to $500 million a quarter business. We’re a lot bigger now. And even if our customers try to pull it in and get it all by July, we would be unable to supply it. So that would be the first thing. So I’m not seeing the pull-ins that are really material in any fashion. I am seeing a few customers trying to save $1 here above there, to try and ship it before the tariff date but nothing material. Regarding pull-ins for 4 to 6 quarters. Again, our best visibility is near term. And if we saw that kind of behavior, we would see a lot of inventory sitting in our customers, which we don’t. In fact, that’s called enough to ship faster and ship more.

Tal Liani: Got it. Thank you.

Jayshree Ullal: Thank you.

Operator: Our next question comes from the line of Sebastien Naji with William Blair. Please go ahead.

Sebastian Naji: Yeah, thank you for taking the question. I mean I think there’s a lot of focus on AI demand, but some of the cloud titans have also been reporting really robust growth in the non-AI parts of their cloud businesses. So — could you maybe comment on what you’re seeing on more of that traditional cloud titan demand and whether that’s trending ahead of expectations for the year?

Jayshree Ullal : 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.

Operator: Our next question comes from the line of James Fish with Piper Sandler. Please go ahead.

James Fish: Hi, thanks for the question here. Really a follow-up on Simon’s one before. What functionality about the Blue Box actually makes it defensible versus what hyperscalers can kind of self-develop and then Chantelle — on the inventory side, I know you always tell to look at inventory and purchase commitments. But how are you feeling about where we should expect inventory turns sort of throughout the year and long-term, just given the latest wrinkle here on the supply chain.

Chantelle Breithaupt : Sure. Do you want to go first, Jayshree?

Jayshree Ullal : 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] (ph).

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.

Chantelle Breithaupt : 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.

Operator: Our next question comes from the line of Ben Bollin with Cleveland Research. Please go ahead.

Ben Bollin: 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.

Chantelle Breithaupt : Yes. No, it’s a great question because I added that last comment, this go around in the sense of the new unknown of the tariff uncertainty. And there I was just mentioning or trying to give transparency, that there may be quarters as we progress through these tariff scenarios where our customers decide to pull in and where we can accommodate and if it’s a new use case or a new acceptance clause that would impact the deferred revenue. So it’s just another item to consider and we’ll continue to discuss, but that’s the general — just in the sense of adding uncertainty around that.

Jayshree Ullal : 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.

Rudolph Araujo: Regina, we have time for one last question.

Operator: Our final question comes from the line of Ryan Koontz with Needham & Company. Please go ahead.

Ryan Koontz: Great. Thanks. Thanks for squeezing me in. I wanted to ask about the kind of emerging Neo AI opportunities out there. I think there’s a general perception that most of them are buying NVIDIA defined clusters and networking — so I wonder if you could comment on those trends, their interest in moving past InfiniBand? And also are there opportunities developing with some of these folks to kind of multi-source their AI connectivity to different providers? Thanks.

Jayshree Ullal : Yes. That’s a good question, Ryan. So in fact, we are seeing more adventurous spirit in the NeoCloud customers because they want to try alternatives. So — some of them are absolutely trying other AI accelerators like Lisa and MD and my friends there. Some of them are absolutely looking at Ethernet, not InfiniBand as a scale out. And that momentum has really shifted in the last year with the Ultra Ethernet consortium and the spec coming out in May. I just want to give a shout out to that team and what we’ve all worked has done. So I think Ethernet is a given that there’s an awful lot of legacy of InfiniBand that will obviously sort itself out. And a new class of AI accelerators we are seeing more niche players, more internal developments from the cloud titans all of which is mandating more Ethernet.

So I think between your two questions, I would say the progress from InfiniBand to Ethernet is faster, the progress from renowned the ones they know and the high-performance GPU from NVIDIA versus the other is still taking time.

Ryan Koontz: Helpful, Jayshree. Thank you.

Rudolph Araujo: 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.

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