Arista Addresses White Box Threat
Arista's software will give it the competitive edge over the emerging generation of white box switches, Jayshree Ullal, company president and CEO, said on its earnings call Thursday.
"The heart of a white box is software," Ullal said. "Anybody can build a box, but not everyone can build software."
Arista Networks Inc. 's software is ready for the demands of cloud computing. Network operators who implement white box equipment will need to build their own networking software, something that they're not prepared to do, Ullal said.
And Arista will consider porting its software to other platforms. The company has stated that before, and Ullal repeated it Thursday. "That's a software strategy we don't preclude."
Ullal says there is little interest in white boxes from customers. Most of it comes from journalists. "Our customers are not looking to be switch developers. They want a high-quality switch that can reduce capex and opex," she said. (See Think Outside the White Box.)
The threat from white box switches came up on Cisco's earnings call Wednesday. That company said it will compete by focusing on "outcomes" -- a combination of networking, security, services and collaboration tools to help customers transform and get results. (See How Cisco Will Compete Against White Box Switches.)
Arista generated $179 million in revenue in the first quarter ending March 31, up 52.8% year-over-year and 3.2% sequentially. Non-GAAP net income was $35.5 million, or $0.50 per diluted share, up from $16.4 million or $0.25 per diluted share in the year-ago quarter. Analysts expected $169.7 million and 37 cents per share. (See Arista Reports $179M Quarterly Revenue .)
For the second-quarter financial outlook, Arista expects revenue of between $183 and $191 million, non-GAAP gross margin of 63-65% and non-GAAP operating margin of 23-25%. That excludes legal expenses from OptumSoft and Cisco Systems Inc. (Nasdaq: CSCO) litigation, stock-based compensation and other recurring expenses.
Arista has budgeted $10-$12 million for the OptumSoft and Cisco litigation.
Cisco sued Arista late last year, charging that Arista's command line interface and documentation violated Cisco intellectual property. (See Arista CEO: Cisco Lawsuit Is 'Smear Campaign' and Cisco Slams Arista With Massive Patent & Copyright Suit.)
OptumSoft, which is also suing Arista over intellectual property, is owned by Arista founder David Cheriton. (See Arista Faces Legal Challenge as It Files for $200M IPO .)
The Cisco lawsuit, at least, isn't having much effect on customers, Ullal said. "We do have to explain it, and there is no doubt that we are spending a lot of time and money on the litigation process itself, but our customers have been very understanding," she said.
Ullal took shots at rival Cisco, which noted strong demand for its APIC SDN architecture in its own earnings call Wednesday. Ullal says Arista is just not seeing it.
"I almost feel we're on two different planets. I haven't seen any APIC customers," she said, noting that APIC is specific to the Cisco Nexus 900, which an analyst estimates accounts for about 3% of Cisco's business.
"We have to make a distinction between APICs being bundled to customers and what's really in production. According to leading analysts there's very little in production," she said.
One analyst on the call said that APIC is for pure Cisco shops, so Arista naturally wouldn't see those customers, because those customers wouldn't even be looking at vendors other than Cisco.
Ullal said that's true, but Arista does see the Nexus 9000 "so that's why I'm a little surprised we don't see APIC."
The company now has more than 3,200 customers, adding one or two new customers daily, Ullal said.
Cloud titans, such as Microsoft Corp. (Nasdaq: MSFT), are the most important customer segment, contributing more than 25% to the company. Service providers and Tier 2 operators are second, hi-tech enterprises third, and financial fourth, Ullal said. Those four markets account for more than 90% of Arista's business.
Tier 1 service providers are the "most difficult to engage with and penetrate," Ullal said, and Arista is working with them in large trials. They represent a big opportunity for Arista, but it's very early days.
Tier 2 and Internet hosting and content providers are "where Arista has actually shined," she said. Media, streaming, content generation and metro junctions resemble the distributed aspect of the cloud market.
The company expects gross margins to shrink due to cloud titans and enterprise customers buying in greater volume, she said.
Arista now supports three architectures, primarily Broadcom Corp. (Nasdaq: BRCM) and Intel Corp. (Nasdaq: INTC), and will look to branch out as new silicon emerges, not just in 40 and 100Gbit/s options but also 25 and 50Gbit/s. Arista expects to support Broadcom's Tomahawk chip, which will affect the company's bottom line next year, after customers have had a chance to test and qualify the technology.
The company is looking to add additional routing capabilities. "To us, switching includes routing," Ullal said. "'Router' the noun will turn into 'routing' the adjective, and Arista is already in the middle of that."