Arista bets on Ethernet performance exceeding expectations, posing a strong challenge to Nvidia

Author: Zhang Yifan

Editor: Shen Siqi

Source: Hard AI

New Changes in AI Data Centers ?!

Last night, Ethernet switch giant Arista released its second-quarter financial report for 2024, showing significant development of Ethernet networks in the field of AI. The company expects that AI business will account for a single-digit percentage of the company's total revenue in 2024, and will grow substantially in 2025, reaching at least $750 million.

First, let's understand Arista's business. Arista is a network solutions provider, offering network hardware (product sales) and related software services.

Previously, Hard AI mentioned in "Up 6.45%! Switch Leader Challenges NVIDIA, Who Says Ethernet Isn't Viable?" that there are two main camps in the network field: Ethernet and Infiniband. Due to performance differences, most AI data centers adopt Infiniband (acquired by NVIDIA in 2019), leading the market to believe that Ethernet would gradually lose market share to Infiniband under the AI wave.

However, during the first quarter financial report season in 2024, Ethernet switch giant Arista revealed that the company is developing and optimizing its Ethernet switch products to make them suitable for AI data center networks. The company stated that it has successfully connected 24,000 H100 GPUs, with performance comparable to Infiniband, and expects to connect between 10,000 to 100,000 GPUs by 2025.

So, how has Arista progressed after one quarter?

In the financial report last night, Arista reported that in the second quarter, the company expanded its procurement scale (purchase commitments and total inventory increased by $500 million compared to the previous quarter), is currently conducting multiple AI pilot projects, and expects significant growth in AI business next year, reaching at least $750 million by 2025. This financial report once again proves the rapid development of Ethernet networks in AI data centers.

Specifically, in the second quarter of 2024, Arista's operating income and profits exceeded expectations and guidance. The company attributed this mainly to the demand for AI, as many cloud customers need to upgrade their network products from 100G to 200G or from 200G to 400G. In terms of profits, the company stated that the optimization of the supply chain and inventory management, as well as the increase in the proportion of high-margin AI products, led to a 33% year-on-year profit growth this quarter.

It is worth noting that the year-on-year growth rates of revenue and profit in this quarter have declined compared to the previous quarter, but the company remains very optimistic about future growth potential. The company expanded its procurement plan this quarter and expects significant growth in AI business next year Based on this data, it can be seen that the application of the Ethereum network in AI data centers is gradually maturing, and Arista has also made significant progress in this field.

Specifically, in 2024Q2, Arista —

1. Revenue higher than expected and guided, but down year-on-year compared to the previous quarter: Revenue was $1.69 billion, a year-on-year increase of 15.9% (compared to a 16.28% increase in the previous quarter), slightly exceeding the company's guidance ($1.62 billion to $1.65 billion) and consensus expectations ($1.65 billion). The revenue growth was mainly driven by: 1) AI initiatives, with Arista securing multiple AI customer orders this quarter, including a large Tier 2 cloud provider; 2) Product upgrades, with customers upgrading from 100G to 200G or from 200G to 400G. However, revenue growth decreased by 0.41% year-on-year compared to the previous quarter.

2. Profit increased by 34.2% year-on-year, but declined compared to the previous quarter: Net profit in the second quarter was $672.6 million, a 34.2% year-on-year increase, but a decrease of 11.8% compared to the previous quarter (46% in the previous quarter). The main reasons for the profit growth this quarter were: 1) The company implemented a series of cost reduction measures, including reducing inventory-related reserves, optimizing manufacturing processes, and lowering raw material costs; 2) AI products and services have higher profit margins, and their rapid growth boosted profits; 3) The proportion of high-margin software and services revenue in total revenue continued to increase. However, profit growth decreased by 11% year-on-year compared to the previous quarter.

3. Inventory reduction and improved inventory turnover: Through inventory management, the company further optimized operating costs. Inventory this quarter was $1.9 billion, a decrease of $100 million from the previous quarter. The inventory turnover rate also increased from 1 time in the previous quarter to 1.1 times. By optimizing inventory, reducing inventory-related reserves, the company improved operating margins.

4. Multiple AI orders received this quarter: The company secured multiple AI customer orders this quarter and is conducting several AI pilot projects. The company expects AI revenue to account for a single-digit percentage of total revenue in 2024, with a target of at least $750 million in 2025.

5. Significant growth in deferred revenue, approximately $253 million: The increase is mainly due to: 1) The company is releasing new products that may require customer testing and validation, leading to an increase in product-related deferred revenue; 2) The company is acquiring new customers and expanding into new application scenarios, with trial periods, acceptance testing, etc., leading to an increase in product-related deferred revenue; 3) Overall business growth, resulting in an increase in new orders.

6. 2024Q3 guidance: Total revenue is expected to be $1.72-1.75 billion, a 14.9% year-on-year increase (taking the median); gross margin is expected to be 63%-64%, a 1% decrease from this quarter.

7. Dividends and repurchases: The company repurchased $172 million worth of shares in the second quarter, at an average price of $292.2 per share.

1. Financial Situation of Arista in 2024Q2

1. Revenue Situation: Total revenue was $1.69 billion, a year-on-year increase of 15.9% (compared to a 16.28% increase in the previous quarter), slightly exceeding the company's guidance ($1.62 billion to $1.65 billion) and consensus expectations ($1.65 billion);

2. Gross Margin Situation: Gross margin was 65.4%, higher than the guidance range (64%), higher than the 64.2% in the previous quarter and 61.3% in the same period last year, mainly due to the reduction of inventory-related reserves;

3. Net Profit Situation: Net profit for the second quarter was $672.6 million, a year-on-year increase of 34.2%, compared to a 46% increase in the first quarter.

Overall, both revenue and net profit exceeded consensus expectations, but the growth rate declined compared to the previous quarter. However, the company expressed optimism about the growth of the AI business and expects significant growth in the AI business next year.

2024 Q3 Guidance: Total revenue is expected to be $1.72 billion to $1.75 billion, a year-on-year increase of 14.9% (taking the median); gross margin is expected to be 63%-64%, a 1 percentage point decrease from this quarter.

Regarding dividends and repurchases, the company repurchased stocks worth $172 million in the second quarter, at an average price of $292.2 per share.

II. 2024 Q2 Arista Business Segment Revenue

Both the product business and service business achieved growth this quarter, with gross margin improving after supply chain and inventory optimization compared to the previous quarter.

1) Product Business: Revenue for this quarter was $1.423 billion, a year-on-year increase of 12.82%, slightly lower than the 13.37% increase in the previous quarter. The increase in gross margin for the product business is mainly attributed to the company's optimized management of the supply chain and inventory, as well as the continuous growth of high-margin AI business. Arista is conducting multiple AI pilot projects and expects significant growth in the AI business next year.

2) Service Business: Revenue for this quarter was $267 million, a year-on-year increase of 35.33%, maintaining high growth for nearly four months. The proportion of service business revenue to total revenue also increased to 17.6% (from 16.9% in the previous quarter). The increased proportion of high-margin service business contributed to the overall gross margin increasing to 64.91% (from 63.73% in the previous quarter).

III. 2024 Q2 Arista Conference Call

1) The Americas contributed 81% of revenue this quarter, with international business accounting for approximately 19%: Major AI operators in the United States include Microsoft, Google, Amazon, etc.;

2) Multiple AI orders received: The company secured multiple AI customer orders this quarter and is conducting multiple AI pilot projects. The company expects AI revenue to account for a single-digit percentage of total revenue in 2024, with a target of at least $750 million in 2025; 3. This quarter launched the Etherlink AI product: Supporting 800G, while also supporting users to migrate from InfiniBand to Ethernet, this product helps Arista enter the AI network market;

4. Inventory reduction, inventory turnover rate improvement: The company optimized operating costs further through inventory management. This quarter's inventory was $1.9 billion, a decrease of $100 million from the previous quarter. The inventory turnover rate also increased from 1 time in the previous quarter to 1.1 times. By optimizing inventory, the company reduced inventory-related reserves, thereby improving operating margins;

5. Deferred revenue significantly increased, about $253 million: The increase is mainly due to: 1) the company is releasing new products, which may require customer acceptance testing and validation, leading to an increase in product-related deferred revenue; 2) the company is expanding into new customers and new application scenarios, with trial periods, acceptance testing, etc., leading to an increase in product-related deferred revenue; 3) overall business growth of the company, leading to an increase in new orders;

6. 24Q3 guidance: Total revenue is $1.72-1.75 billion, a year-on-year increase of 14.9% (taking the median); gross margin is 63%-64%, a decrease of 1 percentage point from this quarter;

7. Regarding dividends and repurchases, the company repurchased stocks worth $172 million in the second quarter, at an average price of $292.2 per share;

IV. 2024Q2 Arista Performance Analysis

1. Operating income and net profit: Benefiting from the demand driven by AI and product upgrades, the company's revenue continues to grow; in addition, benefiting from supply chain and inventory optimization, as well as the increase in the proportion of high-margin products, the company's profit has also increased.

- Revenue situation: Total revenue was $1.69 billion, a year-on-year increase of 15.9% (compared to a 16.28% year-on-year increase in the previous quarter), slightly exceeding the company's guidance ($1.62 billion to $1.65 billion) and consensus expectations ($1.65 billion);

- Net profit situation: Net profit in the second quarter was $672.6 million, a year-on-year increase of 34.2%, compared to a 46% year-on-year increase in the first quarter;

2. Operating costs and operating profit margin: Overall, the company's operating costs continue to decrease, and the operating profit margin is on the rise. This is mainly because the company has reduced operating costs through supply chain and inventory optimization.

3. Inventory and purchase commitments: This quarter, the company's purchase commitments and total inventory increased by $500 million from the previous quarter, indicating that the company has expanded its purchasing scale, showing confidence in future business growth. Currently, the company has stated that it is conducting multiple AI pilot projects and expects significant growth in AI business next year The company expects AI revenue to account for a single-digit percentage of total revenue in 2024, with a target of at least $750 million in 2025.