Arista Networks, Inc (NYSE:ANET) Goldman Sachs TMT Conference Call September 13, 2022 1:45 PM ET
Company Participants
Jayshree Ullal – Chief Executive Officer
Conference Call Participants
Rod Hall – Goldman Sachs
Daniel Fu – Wafra
Rod Hall
Alright. I think we are going to get started. Welcome, everybody. Great to have you here at the conference. Hope everybody is having a good time, fully caffeinated. My name is Rod Hall. I am the communications technology, infrastructure technology analyst, among other things at Goldman Sachs. And I have got the great pleasure of having Jayshree Ullal here with me, the CEO of Arista Networks. So Jayshree, welcome.
Jayshree Ullal
Thank you, Rod.
Rod Hall
Great to have you here.
Jayshree Ullal
Great to be here.
Rod Hall
I remember the days when you were at the booth at trade shows before Arista was public talking about the switches and the technology, so…
Jayshree Ullal
I’d love to do that again, but the pandemic has changed that. We have more virtual booths now.
Question-and-Answer Session
Q – Rod Hall
Things have changed a little bit. That’s true. I thought maybe before we jump into questions on supply and a lot of the things that we have been talking about with lots of different companies. I thought maybe you could give us a little bit of an overview from your perspective on where Arista is today, where you are taking the company and just kind of how you see the world from the perspective of the CEO seat at Arista?
Jayshree Ullal
Yes, absolutely. Like many startups, I think Arista is still considered itself at the heart and core of who we are a highly innovative company. Of course, you are not going to hear any CEO come here and say, we are not innovative. But when you look at our innovation, I would classify us as sort of migrating from Arista 1.0 to 2.0. 1.0 where we were much more of a data center company and 2.0, where we are moving to more of centers of data and excellence and networking where the data may reside anyway, anywhere in anyway in the sense it can be in a data center, it can be in the campus or branch or you have to deal with observability and security of that data. So very much still networking driven but more data-driven networking. So I think Arista 2.0 allows us to participate in a lot larger TAM and also makes us more relevant to our customers.
Rod Hall
That’s great. Thank you. So I am going to try to get the boring things out of the way first and then we will get to the more exciting things later, if that’s okay. So let’s talk about supply. We have talked to everybody at the conference at least that I have interviewed about supplies and where things stand, how it’s affecting Arista in this case. I am wondering if you could just catch us up on where do you see the supply constraints and maybe when things start to ease or are they already starting to ease from your point of view?
Jayshree Ullal
Yes. Well, if you all step back and look, we have been in a supply chain crisis for at least the last 18 months. And while you hear rumors of things easing up at least from an Arista perspective, one of the advantages of having a supply chain crisis. If I can look at the glass as half full for a minute is we get greater visibility to the demand. So that’s been helpful. One of the downsides is, of course, we are unable to fulfill the demand. And we don’t see the supply chain easing for at least another year. So we see this going into 2023. And the reason is simple, although my team – our CFO, Ita, who is with me here today and COO, Anshul, have been very good about planning ahead and planning multiple years. The reality is we need all components to build a system and we are just short of a few components, but the few components are kind of like the golden screw problem if you don’t have the whole hardware, then you can’t ship the whole system. So we are waiting for these last few components and it’s been a long wait, and oddly enough, these are the most simpler components with simpler processes, but are very, very scarce and there is a huge shortage in them. So once we improve the lead times on those components, which again, I think will take us into next year, we hope there will be some more relief in the supply chain. The cost of the supply chain is also exorbitant nowadays. We find ourselves paying an order of magnitude move for some of these simple components that 100x to 500x in prices. There is the price, the cost of logistics, freight, the rising inflation, everything is costing us more. So we are dealing with both the lack of supply and as well as the cost of supply being much higher. So pretty tough. But again, I couldn’t think of a better team at Arista that’s navigating through these different issues extremely well, but it’s not been easy. It’s pretty challenging.
Rod Hall
Well, given that – we have seen some of the consumer electronics stuff like PCs are very weak now. So you would think that, that would free up some capacity at some point. Are you feeling like if anything, this expectation that goes for the next year is too conservative or do you see other things out there, maybe we don’t see that cause you to think, well, no, it’s going to be going on through the end of ‘23 or at least to the late part?
Jayshree Ullal
Yes. On one hand, you are definitely right. We see the slowing down of the consumer and PC sector. On the other hand, we have not seen a recession in the data center and cloud sector. And the other thing to keep in mind is in the last decade or so, you hardly saw any chips in the automotive industry. And today, a single car can have 8,000 chips. So, you are dealing with additional high-tech sectors, including the automotive that are competing many times for the same type of chips, industrial, automotive, data center are all in high demand and are more than making up for the weaknesses in other sectors.
Rod Hall
Right. Alright. Let’s get a little bit more exciting, not all the way there, but let’s talk about hyperscale a little bit and your Cloud Titan customers. They slowed down a little bit in terms of growth in ‘19 from 2019 to 2021. Things seem to be picking up again now. Can you talk a little bit about the dynamics of that market and how you see their capital spending patterns maybe evolving over the next couple of years?
Jayshree Ullal
Yes. So I think, first of all, the Cloud Titans is one of Arista’s most exciting set of customers. Of course, we are diversifying to others like Tier 2 cloud service providers and enterprise, but Arista’s cloud networking and all of the pioneering missions and our success and the reason for us going public with some of these extremely high-profile customers chose Arista and chose to center their Cloud Titan investments and infrastructure on us. As you know, we have stated publicly that Microsoft and Meta are likely to be 10% concentration customers. So those are two very good examples among many others. Now the thing to remember about these type of customers is the CapEx investments of these customers is significant. They can be measured, as you know, not just in millions, but in billions of dollars. The networking is a small piece of it, but an extremely relevant piece of it. And while it’s volatile, you have to connect your storage, your compute, your AI workloads, your metaverse, your virtual reality, your gaming, your simple client server and you are building the kind of scale that you simply don’t see in other industries where you can measure the capacity and petabits, you can measure the servers in hundreds of thousands, you measure the storage in ways that you just don’t see that kind of scale in a typical enterprise environment. So Arista has benefited from that. From 2014 to ‘18, we had significant growth often in the 30s and 40s percentile. And then we slowed down a little bit in ‘19. And now we – as you know, we had said we will grow at 30% and all indications in 2022 are we will grow north of 30%, maybe even 35% – north of 35%. So we are having a banner year. We had a really great year last year as well and we expect to have good years going forward, but it is a volatile sector and some years will be extremely good and others less so. But if you average it out, I believe we can still experience double-digit growth in this sector for many years to come.
Rod Hall
Yes, I remember going into that 30% indication that you gave, we all thought ‘15 would be great. So, that was a positively shocking there. I – it reminds me of I have got a – you gave me a plaque that says the greatest turnaround of an analyst as a joke a little bit. But that reminds me of when I – we had seen commoditization of switching and hyperscalers at the top of rack. And I thought all this is going to move up into the aggregation layer. And you said not so fast, Rod, I don’t think it is. And you turned out to be right, which is why you are the CEO of Arista, and I’m still an analyst.
Jayshree Ullal
Many times, I am wrong too, but the number of rights, have to be greater. That’s all.
Rod Hall
It seems like that theme continues to play out. We are now starting to see proprietary storage companies like Pure selling into these hyperscalers. And I wonder if that – I wonder what you think about that theme? In other words, did the hyperscalers start to realize that really spending this R&D on this technology, they are not getting the most bang for their buck and it’s much better to let experts like you deal with that. How do you feel that trend is going in with hyperscalers?
Jayshree Ullal
I think you summarized it very well, Rod, which is every company, including Arista, has to decide what’s core in context, right. For example, in Arista, we have made a very conscious decision to invest in our software and that’s core to us. And what’s context is we make sure we work with the Broadcoms and Intels of the world with their merchant silicon. And so you can have lots of money, but you still have to figure out how to use it and how to prioritize it and make the best of it. And I think that’s exactly true for the hyperscalers or Cloud Titans, as we call them themselves. No matter how much money they have, their mission is to build some of the greatest world class cloud data centers, right. And that requires power, cooling, investment and scale of compute storage. And at the same time, they can’t do it all themselves. They have to spend their money on CapEx and leverage us for some of the OpEx, maybe savings they can get exactly the same for storage. But it’s never that binary of either/or. One of the greatest successes of our large customers is that we don’t just supply to them, but the word partnership really comes to mind because a lot of our activities are co-development. It’s engineers talking to engineers. And so as they want to put SONiC or FBOSS on their platforms, in some ancillary use cases, we are right there with them doing that on our platform.
Rod Hall
Right, right. And a lot of those attempts to put their own operating systems have ended up in deciding to just go with your operating systems…
Jayshree Ullal
It can go one way or the other, but the important thing is the co-development to give them choices, because remember, these guys have to have multiple sources, multiple vendors and multiple options. And we maybe the preferred option, but we are never the only option.
Rod Hall
So one of the things I know it’s a big opportunity for you is this RSC installation at Meta, huge AI installation that seems to be growing by the minute. But I am curious what you think about AI workloads, generally, they require much higher speed ports. How big a driver is that going to be for hyperscale demand as we look forward the next couple of years?
Jayshree Ullal
I know it’s fashionable to talk about AI and artificial intelligence. But for the longest time, actually, we couldn’t figure out what AI was useful for and we thought it was more of a lab exercise. But I think we finally figured out two very important use cases. One is in security and root cause analysis for some of our AVA, Autonomous Virtual Assist, which is separate than the question you asked. And the other is how to enable these AI workloads on our network as a use case. So what is AI? It’s probably not exactly all the things I am used to generationally like AR, VR, gaming, virtual reality, real reality whatever it is. However, there is a suite of applications that are non-enterprise applications that is going to feed the next generation of network and put tremendous pressure on them. So, a typical AI workload, if you look at it, it goes through a very intense computation matrix, where you are constantly computing at cycles of computation across hundreds of thousands of CPUs, GPUs, DPUs, CPUs, whatever you want to call these processes, right. And this cycle continues. And then once you get to the local data, you start again. And so the intensity of this is not only is it compute-intensive, it’s extremely network intensive. Now when you look at what Arista has done, we haven’t been here before. We have largely built the front end of the network for this. The back end of all this compute intensive has historically been PCI Express or InfiniBand. And now with these kind of AI workloads, we are really putting pressure on the network, not just with scale and bandwidth, but to have the right storage and buffer depth capacity to have the efficient spring, to have predictable latency, to have the ability to handle small packets, large flows, elephant flows as we call them. All of this just translating it back into engineering is a tremendous amount of innovation required on traditional Ethernet to make it run as a back-end network. And that’s what’s exciting about our work with the Cloud Titans and we believe this will have use cases much like we pioneered cloud networking in our first innings back at IPO. We really hit our first innings on the AI spine. And I think we have got another decade ahead here to figure out all the apps and all the different types of networks we have to build for.
Rod Hall
What I found interesting is RSC at Meta off as an AI platform really allowed for that. And it seems like has evolved into also doing computation for VR, AR environments now. So do you think – is that – do you think that will be unique to Meta or do you think others will also be computing these kinds of environments on similar infrastructure?
Jayshree Ullal
I think everyone will have their specialized applications, but there will be a huge set of horizontal compute-intensive applications. They may not all be AR or VR, some may be gaming, so maybe we distribute it a computational for crypto. So there may be different applications, but the use case will really be horizontal for the network.
Rod Hall
Right. We hear other competitors, Cisco, etcetera, talking about gaining market share at hyperscale. It’s hard to pin down exactly where that share is. Are we talking about campus switches, we talking about data center switches, how do you feel about your share position now and how do you measure it when you look at market share, how do you think about it?
Jayshree Ullal
Look, I think Cisco is a great company, I was there 15 years, and they are certainly the dominant market share leader on campus. I think specific to the data center, the stats are proving that when you have one dominant company like that with 80% share, which they did have 10 years ago, it’s almost unnatural, and the customers seek alternatives. So Arista’s share has grown from zero to – we’ve been in the teams for a long time in high-performance switching. And just on Friday, we received data that we’ve gone from being a teenager to an adult and we’re now in our 20s. So we still got room to grow. But as our competition has come down from the 80s to the 30s and 40s, we’ve gone to the zero to 20s, and we’ve got a lot of upside to do better. In addition to that, we’re doing particularly well in the high perform – the highest performance, the 100 gig, 200 gig, 400 gig, where historically an incumbent to get share in switching always gets share in high speed switching too, but Arista has been the number one market leader now for 3 years in a row in 100 gig, 200 and 400 gig and the reports last year show that we are almost doubled the share of our peers in the industry. So, I feel pretty good about our share. And the TAM is growing, and I think we can continue to gain share and independent of our peers.
Rod Hall
Let’s talk about 400 gig a little bit because that comes up a lot with investors. How big of a cycle is 400 gig in your opinion, 100 gig was a big cycle. A lot of people, I think, mistakenly thought 400 gig would be similar, but it’s a different type of cycle, so…
Jayshree Ullal
It’s different, yes. Well, there are similarities to the 10 gig cycle when that upgrade happened, the 100 gig cycle and the 400. So I’ll go back a little bit in history to sort of come back and answer your question on 400. If you look at the 10 gig cycle, back then the servers were barely running at 10 – 1 gig. So 10 gig actually took a long time. It was a very long tail of 10 years before you actually got 10 gig at a cost-effective price point, to be a server attached. It started initially as a backbone in the 2000 era. And I would say as a server attached, it really happened in 2012, right? The 100 gig happened faster because of economics, the dollar per gigabit was much, much cheaper. And then the optics and the connections to the server were much cheaper. So I would say that 10, 12-year cycle that took the 10 gig phenomena actually compressed to more like 7 years, especially with the hyperscalers, right? Now obviously, there is a long tail that continues into the Tier 2 cloud providers and enterprises so the 100 gig cycle is very much still alive and well and continuing with both the cloud titans and our customers. And it started back in 2018. So we still got a nice 10-year headroom for that.
In addition, now you’ve seen the interleaving of 200 gig and 400 gig happening and some of the optics vendors are coming out with 800 gig as well. So what you see is a very nice inner leaving of 100, 200 and 400 where the 200 and 400 are happening more as an aggregation to the spine and the 100 is happening more as a server attach. And so you’re seeing them really the best possible era in that 100, 200 and 400 are all interleaving to give us a large opportunity for high performance as a category.
Rod Hall
Yes, I’m always amazed. We talk about these geeky things we’ve both been around networking for so long, but they are powering these unbelievably powerful amazing computing infrastructure that allowing everyone to sit out there with their laptops and their phones and so on and…
Jayshree Ullal
It is pretty amazing. The number of devices, users, applications that are putting pressure on the network, I – 20 years ago, we as to say there is no note on the network, not the case now.
Rod Hall
Right. So one of the things that we’ve seen, Google has just written a white paper published it using direct detect optical switching in the aggregation layer of some of their data centers. How big a threat? Do you think optical is for Arista? Does it come in and begin to displace some of the router switch routers that you’re selling? Or is it – is it something that works alongside them? Can you just talk a little bit about that sort of an architecture and how you think about that strategically?
Jayshree Ullal
Yes. When you mentioned the paper, I didn’t get a chance to read it before the call we have here. But look, optical has always been a companion to routing and switching for so many years, right? So we don’t view optical as a threat. We sell optics with our switches. We sell integrated optics at the data center interconnect layer with encryption capabilities. And we also partner with optical vendors. The reality is, depending on the customer and how much access you have to fiber you can get very creative on how you combine L1, which is what a lot of the optics is with L2 and L3 and build a really nice IP and optical network. And that interleaving of landers with L2, MAC addresses and L3 routing addresses is fundamental. But I would say it’s going to be an IP plus optical era for a long, long time to come. not only L1 or not only an L2, L3 switching, anytime we do switching or routing. We’ve got to connect to something. And generally, we are connecting through optics, whether it’s long haul or metro or short-haul. And maybe only in the intra data center do we see more of the copper, but almost everywhere else at some form of optics, particularly as the optics and the SerDes technology gets more and more advanced, like 800 gig and terabit. I think the importance of bringing them closer together, getting the right power capabilities, getting the right distance is going to be super important. So I think you’ll continue to see them work in tandem and integrate as much as we can as reliably as we can. And sometimes, it will be through us and other times it will be through pure optics.
Rod Hall
Yes. I’ve seen a lot of times these arguments made that some new technologies coming along opticals, a classic example. But it turns out that the automation layer technology, the software, all those integrations are the thing that really is the value in the product and…
Jayshree Ullal
Exactly. I mean in optical, you can move packets really fast – at the optical layer. But then eventually, you need to convert it into electrical layers and then like you rightly point out, do the right automation, availability, agility, analytics, AI-driven workloads, and those all have to be intelligent software on that.
Rod Hall
So there is been a lot of talk about silicon diversity, one of my pet theories for why Cisco has made some headways so they have their own silicon. A lot of people maybe liking the idea of diversifying away from Broadcom, which is dominant. What do you think about that? How is the risk to think about the silicon situation that’s out there? And do you think this is something that – I know there is a demand for it. Is it really going to play out where we have silicon diversity in these data centers, do you think?
Jayshree Ullal
So I’ll let you in on a little secret. When Arista started the company, we tried to say we’re just going to build software and not worry about the merchants silicon. And we went to all our customers and said, what do you do with your software? You said, we put it on your merchant silicon of choice and run it. And they go, we don’t know how to do that. just like we – all of you with laptops here, you don’t build your own PC. There is some advantage to getting a fully made PC and loading your applications. It’s really difficult to go to a customer and say, here’s your software running on what silicon you want. They don’t – the network is too mission-critical to do that. So Arista took on the responsibility of working with open merchant silicon vendors. And certainly, we have our share of vendors. We’ve worked with Marvell with Intel, with Broadcom. Broadcom has executed – or executed, I would say everybody in having the best portfolio of switch silicon. If somebody else were to come with better with silicon, we would be open to using that. And if Cisco would ever build an open merchant silicon, we would be open to looking and reviewing that, too, has to be competitive, has to be customer-driven. But it’s really hard to do open merchant silicon. And I think the reason Broadcom dominates is because they have executed flawlessly, not just with one family of chips, but a generation of families of chips both for Tomahawk, trident and Jericho. So keep doing a good job and please keep flying more chips as well.
Rod Hall
More chips made would be handy. So your prediction or at least your view is that there is some probability for this to occur, but it’s a fairly low probability that we’d see a lot more diversity in chips maybe in 5 years’ time and…
Jayshree Ullal
At the time I look for one, for example, we’ve invested in the Barefoot silicon Tofino as it’s called, and now Intel has acquired it. So we do use the Intel Barefoot and it’s very, very programmable. We can do really nice things with P4. And so it’s advantages programmability, it’s a disadvantage is fabric capacity. So what we find is, as we augment we really build the portfolio, but they are not all the same chips. They really are different drugs for different folks.
Rod Hall
So let’s talk about enterprise a little bit, just kind of how Arista has been making a lot of headway there. My perception, I think its reality is that, that has always mostly started with the data center and then you’ve become more interested in campus switching as you succeeded in the data center. What’s driving your share gain there? You’re clearly gaining share. You’ve been growing very rapidly in enterprise? What’s driving that? Who are you displacing? What kind of trends do you see in the next couple of years in enterprise?
Jayshree Ullal
Yes. No, that’s a very good question because, as you know, first of all, let me just step back and say, the enterprise is not in one customer, right? I categorize them in at least three types. There is the early adopters, there is the fast followers and then there is Arista verse. So it would be hard to do really well with Arista verse for a company like Arista that has bleeding edge, forward-looking innovative technology. We have – but what’s drawing people to Arista is we do have an unbelievable quality. We have an EOS, Extensible Operating System stack that doesn’t do what anyone else does, right, meaning it is truly differentiated. It’s the power of one OS that’s data-driven, has a published stradstate model and can store all of their information and give them a level of availability, automation and analytics.
And so what happened was a lot of our customers started – enterprise customers started using our Arista U.S. in the data center. And as they started using it and they were buying campus products or routing products from other vendors. And they said, we want that in our campus and routing too. So we said, well, you’ve got other vendors, why do you want us. And so one of our customer events, I asked them, how many of you want us to do campus. And 70% of them said, we don’t want you to do campus. We said, why, I mean, said because you’re doing such a great job for us in the data center don’t change.
The next year, they said to us, 70% said, we want you to do campus. And the third year, they told us we’re too late, hurry-up and to campus. So there is been massive shift in the frustration that’s felt with their incumbents and the desire to use an Arista high-quality, predictive, prescriptive, proactive software experience all now managed with CloudVision that gives them much more workflow and template-based approach that really, this has been a customer-driven exercise. Obviously, we’re succeeding more in the data center, but we’re also having good success in the campus. And they tend to be more of the early adopters and fast followers than they are the Arista verse today.
Rod Hall
Do you feel like you’re gaining – usually, these things reach a critical mass point where adoption just accelerates word-of-mouth and so on really starts to – are you there yet you think or you still…
Jayshree Ullal
I think I very much say in the data center. I still think we’ve got work to do in the campus. And we’ve got especially what to do on the campus with the supply chain because we’re getting the demand, but we’re unable to fulfill all of that.
Rod Hall
Do you see campus as a nice to have that follows on the data center, you’re happy to provide it. Like you said, a lot of people said they didn’t want to. You’re happy to provide it people want it. You have some good products. And it’s nice to be able to manage data center and campus products at the same time with the same staff.
Jayshree Ullal
Absolutely. It’s a little more than nice to have. I think the pandemic has changed it’s from a nice to have to an imperative. And the reason I say that is because I mean how many of you are in your offices all the time. You’re very untethered, good for you. And how many of you are not, the rest of you, right? So what’s happening now in the new pandemic post-pandemic world is we have to keep track on the campus of all their attributes their identities, their address, their location, their mobility. And yet we have to build a network that has the security, the network data lake, the data capabilities, the availability. So we’re under pressure to do both where we had the same lease spine architecture we built in the data center. Now we have to disaggregate and make sure the leaf can be a wired leaf, for wireless leaf, an IoT leaf, an NDR leaf an observability leaf and untether their location, an IoT device. And so all of that’s really changing the way the campus is built. In fact, it’s built like a data center. You use the same spine, except you have different types of endpoints now. And then you need the same analytics and telemetry. Take a healthcare when I went to my doctors, they didn’t know or didn’t have access to tools. Today, my appointments are video appointments. Today, my devices and how I connect to my healthcare is much more mainstream. So, even environments that were not dependent on high-tech and data now need mission-critical network. And so I would say the campus now is resembling the data center and becoming a center of data and a center of repository for all connectivity and the mobility of that connectivity is very crucial.
Rod Hall
Great. Okay. We are down to 10 minutes. I want to see if anybody in the audience has any questions. So, anybody out there have a question for Jayshree. If you can’t think of one now and you have one in – just raise your hand in a few minutes, and we will get a mic to you. Oh, there is here one at upfront. Let’s wait for the mic. Maybe say who you are and what company you are with.
Daniel Fu
Hi, Daniel Fu, Wafra. You mentioned on the supply chain, there is only a few parts that you are still lacking in there actually smaller price points. There are certain categories that you see common to these kind of small price point things that you are missing?
Jayshree Ullal
I guess question, you mentioned there was only a few set of components. Is there any category to it? Is that the question?
Daniel Fu
Yes. Is there any commonality or category two…?
Jayshree Ullal
Yes, the one commonality is they all run on older processes, so they are not your 7 nanometer to 10 nanometer, but typically 100 nanometer or bigger. Simpler processes, I would say. So, technically, the fab capacity and the availability of that should be easier. But right now, there is a shortage even there. And there are also very simple logic components like power controllers, ICs, ADD converters [ph], logic devices that are not mainstream connectivity, but then you still need them to run – to build your entire system. So, it’s down to 10 to 20 components that are very simple, that are causing us the greatest shortages.
Rod Hall
Okay. Any other questions out there? Alright. Let’s continue with enterprise a little bit. So, we have a proprietary indicator for enterprise demand that it points to considerable weakness, things weakening further enterprise capital spending. You have got a good amount of exposure there now, however, a low market share position. So, I wonder, a, are you hearing anything from the people you talk to an enterprise that would suggest that they are reducing budgets or thinking about reducing budgets next year? And then, b, how would you expect Arista to perform in that kind of an environment if we do get into it?
Jayshree Ullal
Before I answer the question, is your indicator for a year or 2 years or how long…
Rod Hall
It’s been about four months in advance. And so we have two indicators of real-time spending indicator that started falling off in May and dropped in May and June and then another indicator that predicts that by three months or four months. So, usually, it’s about four to six months out from.
Jayshree Ullal
It looks like you are an early indicator, maybe I will be a lagging indicator. Right now, we are not seeing any of that at the moment. And again, to the point you make, we don’t claim to be a macro indicator in general. Exactly for the reason you said, we have got a $35 billion TAM. Arista will be $3.8 billion, $3.9 billion company this year or thereabout. So, we have got a lot of headroom to execute and a lot of frustration and fatigue built into the system that wants an alternative. So, if these indicators change in the right direction, maybe we will completely skip it and not see it. But if it gets worse for a prolonged amount of time, I am sure we will also be a victim of that. But at the moment, things are looking fine. And we are definitely being vigilant and keeping an eye on that.
Rod Hall
So, you and I have talked privately about networking as a service, as a technology trend. And I wonder, there are some elements that Arista is pursuing some things that you are pursuing that are sort of similar to that, but these new networking as a service companies, all private, they are emerging are pure software layer companies. What do you think about that trend? Is it something Arista would be interested in? Any thoughts on that?
Jayshree Ullal
Absolutely. I think the innovation to do networking as a service is very much a software-driven activity. Of course, software has to run on something. And so somebody has to supply the hardware and Arista certainly built that hardware system business relevance and experience. But if you step back and look at what customers are asking from networking as a service. Whether you run the network on the cloud or they punted to a cloud or they run it on the premise. What they are really asking is the ability to enable things as a service on an as-needed basis. Right. That’s really it. So, forget a moment whether it’s sitting on the cloud or premise. What do they need on an as-needed purpose. So, first, they need to run some fundamental networking capabilities. So, they may move some of their e-commerce workloads to the cloud. They may keep their mission-critical applications on a premise, and they want to make sure the network can toggle between a multi-cloud experience and the premise. So, that’s one. The second thing they need to know is that they can make the network highly available that you as a CIO criticized for the workload failing on the cloud or the workload failing here. So, you have to make sure if anything like that happens, that you have a dual path, you have active actors, you have redundancy. And these are all risk attributes we have been doing for quite some time. Once you build that and then you have to have a data-driven foundation where you not only keep track of connectivity, but you may want to prioritize certain applications and workloads and give them the right prescriptive quality of experience. Now once you build that then particularly as you look at this across a multi-cloud, you need some other things. You need Network-as-a-Service to mean automation. How do you automate and how do you do a point and click so that everything isn’t a manual configuration. How do you provide streaming telemetry so that you can get visibility for all your workloads on the premise around the cloud. These are all things Arista has been doing, and we would be – with CloudVision, we would naturally be able to do this network wide and do that today because we have that visibility. So, Network-as-a-Service to us as an evolution of our management platform, CloudVision, where we can provide data-driven workloads. We can automate them. We can make them available. We can create the right telemetry experience. And then on top of that, you can add the right security, observability and identity to it. So, to me, Network-as-a-Service is no more a box-based approach, but a service-based approach to really provide the service changing of all of the software on different boxes or on the cloud itself.
Rod Hall
Yes. Because what some of these people – one scenario that I think is interesting is you have got campus or worker locations wherever those might be, and you are tunneling traffic into a cloud service and you end up with cloud services that are three tier applications and cloud services, and they are talking to each other. And all of a sudden, you are an AWS, you have got a database, you have got a couple of apps using the database. You can’t troubleshoot that network because it’s a very weird cloud network that have tools…
Jayshree Ullal
That’s a great use case. And in fact, we do that a lot with our cloud titans. That’s why MACsec, which is encryption and keying at the layer two level data center to data center, IPsec, which is the tunnel sec you are bringing up, where you can go across AWS, Azure and connect the VPCs and VNets together with IPsec because no more is a traffic going branch to headquarters. It’s going branch to multi-cloud. They are completely skipping the concept of a headquarters, right. So, the IPsec becomes important. And then in our own vernacular, we are developing something called VXLAN, right. You will actually see a big launch of Arista introducing this tomorrow. I will give you a little preview. My guys might be a little nervous in my doing so, but this is a great way to describe Network-as-a-Service because whether you are a mobile edge or a metro or a multi-cloud, you should be able to provide any sec and tunnel any of these secs, whether it’s IPsec, MACsec or VXLAN sec or GRE tunneling and make that completely transparent to the user, and this is a great example of Network-as-a-Service.
Rod Hall
So, you reach out from the hyper-scale data center, but you can also start to maybe provide some services out to the enterprises who want to reach back into those things and some visibility and so on.
Jayshree Ullal
Exactly. So, you go branch to multi-cloud, and you make sure you secure all of those tunnels. And between the class, if you are between multiple clouds or between the cloud and the present.
Rod Hall
So, we have got a couple of minutes left. There is two things I have never asked you on stage in any one of these things. I am going to throw these at you. We talked about…
Jayshree Ullal
Ready to jump in.
Rod Hall
You get ready. One is you have run Arista with an uncommon amount of frugality. You have a culture that is extremely frugal and that’s different from most people in Silicon Valley. Most of the companies I talk to – I will quote somebody I won’t name who said to me, I said, “Well, why don’t you make money? Why don’t you keep spending all of the gross margin you are making on sales and marketing and so on.” And this person said to me, well, as long as money is free, I will just keep spending it. And it turned out – it didn’t end well that story. But I am curious about that subject and whatever you have got to say about it. And I also – the other thing I have never asked you about is being such a successful woman in Silicon Valley. And your experience is there…
Jayshree Ullal
A few more out there.
Rod Hall
A few more here. So, comment on any of that you would like. We have got a couple of minutes here.
Jayshree Ullal
Yes, exactly. I think right from the beginning, and it starts with the founders, CEO, our Chairman, our CFO. We all treat the Arista money like it’s our money, and we spend it as a function of the priorities, right. Our commitment to the priority has always been engineering. We have never ever compromised on our R&D budget because the innovation engine is alive and well and Arista customers appreciate us deeply for it. And we have been anywhere from 15% to north of 20% as a function of revenue. But I think the other big piece of Arista, and you call it frugality, I just call it common sense is achieve profitable growth. If you just achieve growth and spend money, then you really haven’t provided all of you as shareholders, the value, right. And then you really haven’t done the right thing in terms of making long-term R&D investments. So, we are very much a company built by engineers, for engineers, and you will see us put in that kind of R&D support capability. Specifically speaking on sales and marketing, I think you can – we are not the company who you will see doing big brand advertising. But I also think we are selling to intelligent customers who are not looking for brand marketing, but are looking for very tailored customer support, systems engineering, network design. So, they want our sales team to be consultants. In fact, my best sales leaders are the ones who I can’t tell if they work for me or work for the customer, right. So, that kind of prioritized focus on verticals and tailored sales and marketing doesn’t require the broad brush that maybe if we went into the mid-market or SMB market or consumer market, you would require. So, I think by being tailored, by being prioritized and then also by philosophically prioritizing growth and profitability, we have grown to be the company we are. It’s not going to be the same in every market. Some of the new markets, we will invest more, right, as they require the early incubation and investment. So, it’s not the same thing for every market, but I think philosophically, we are very much there, like you described.
Rod Hall
It’s come into fashion now.
Jayshree Ullal
Right. And as far as being women in this industry, it’s great to see more of them and for all the guys out there. I love the guys too. We work with both of them. Having two daughters, I can just say that encouraging women and tech starts from a young age, like middle school, definitely encourage them to be exposed to as much math and science. And they may reject it, mine certainly did initially. But then the biggest thing that my parents did was continue to instill the confidence in pursuing the sciences and pursuing tech. And in my case, I was particularly bad at non-tech. So, it was a little easier decision.
End of Q&A
Rod Hall
Great. Alright. Well, great, Jayshree. We are out of time. So, thank you very much. Great to have you.
Jayshree Ullal
Thank you. Thank you, Rod. Appreciate it.
Be the first to comment