ANET – Arista Networks – April 28, 2022

Digital transformation is fundamentally changing the way IT infrastructure is built and how applications are delivered to users from a cloud environment. In cloud computing, applications are distributed across thousands of servers that are connected with high-speed network switches allowing applications to be rapidly deployed and cost-effectively updated.

This technology enables ubiquitous and on-demand network access to these applications from computers, tablets, smartphones, and internet-connected devices. And while nearly all consumer applications today are already delivered as cloud services, enterprise applications are rapidly moving to the cloud as their services are easier and more cost-effective to deploy, scale, and operate than traditional technologies.

While internet leaders like Amazon, Meta, Google, and Microsoft established the development of large-scale cloud data centers to meet the growing demands of its users, Arista Networks have pioneered data-driven, cognitive cloud networking solutions for large-scale data centers and enterprise workspace environments. The company’s cloud products consist of extensible operating systems, a set of network applications, as well as gigabit Ethernet switching and routing platforms. It also provides post-contract customer support services, such as technical support, hardware repair and parts replacement beyond standard warranty, bug fix, patch, and upgrade services.

Arista serves a range of industries comprising internet companies, service providers, financial services organizations, government agencies, media and entertainment companies, and many others. It markets and sells its products through distributors, system integrators, and original equipment manufacturers, as well as through its direct sales force.

Looking ahead, Arista is focused on building upon its cloud network heritage to bring the next generation of proactive, predictive, and prescriptive technology to unify data sets from multiple sources. By joining forces with industry leaders to build collaborative ecosystems, it hopes to bring cloud-first principles to every aspect of enterprise data networks that overcome the common frustrations its customers have with discontinuity in products and the low support and quality of its competitors.

Arista was founded by industry luminaries Andy Bechtolsheim, Ken Duda, and David Cheriton. In 1982, Bechtolsheim co-founded Sun Microsystems, then in 1995, he co-founded Granite Systems with Cheriton, a company that developed gigabit ethernet products, which was acquired by Cisco Systems in 1996. For several years the duo occupied executive positions at Cisco, leading the development of the company’s line of network switches, wireless controllers, and access points, along with Duda who had been Granite Systems’ first employee.

In 2004, Google put out a request for information. It was looking for a switch design that could tie together 100,000 servers at 1-gigabit per second ethernet speeds at a cost of $100 per server. At the time, no such product existed, so Bechtolsheim, Duda, and Cheriton formed a team to deliver on Google’s request. In 2008, Arista’s first product was created, and the business was ready to go to market. The three co-founders appointed Jayshree Ullal, a former Cisco executive, as president and CEO.

Arista’s products offered throughput higher than anything else on the market, so the company first supplied its switches to high-frequency trading firms to showcase their speed and low latency. Arista’s success with the Wall Street trading firms proved that the technology was next-generation and highly capable, and collaboration with Microsoft soon followed. Together, the two companies created the blueprint for hyperscale cloud networking, and other cloud titans soon became customers. Arista first helped build Microsoft’s cloud infrastructure platform, Azure, on 40-gigabit switches and then further innovated to 100-gigabit technology.

In June 2014, Arista Networks went public and has since gone on to transform into a data-driven cognitive cloud networking company via various acquisitions to bolster its capabilities. The acquisition of Mojo Networks in 2018 provided the company with Wi-Fi solutions for campus and enterprise networks, while Metamako, also in 2018, augmented Arista’s low-latency platforms. While in 2020, the company acquired Big Switch Networks and Awake Security, adding deep and real-time monitoring and visibility capabilities, along with a network detection and response platform to autonomously hunt and respond to network threats.

Arista’s seasoned leadership team is globally recognized as respected leaders and visionaries with a rich and extensive history in networking and innovation. President and CEO for over a decade, Jayshree Ullal is responsible for Arista’s business and thought leadership in cloud networking. She led the company from a zero to a multibillion-dollar business and on to its successful IPO. Formerly a Senior VP at Cisco and with more than 30 years of networking experience, she is the recipient of numerous awards including E&Y’s “Entrepreneur of the Year”, Barron’s “World’s Best CEOs”, and one of Fortune’s “Top 20 Business persons”. Ullal is still joined by co-founders Bechtolsheim and Duda who maintain roles as chairmen, as well as chief development officer and chief technology officer respectively.

Arista develops, markets, and sells its cloud networking solutions across the globe to a leading set of customers, including Fortune 500 global companies across a range of markets. Its products cover the infrastructure for both data centers, which manage applications and servers, and “campus”, where users connect to the network, along with all associated devices including desktops, laptops, IP and mobile phones, video conferencing, printers, among others. An overview of Arista’s cloud networking solutions is shown below:

Within these solutions, Arista’s portfolio of products consists of its core data center and cloud switching products, adjacent campus and routing products, and network software and services including:
• Extensible Operating System – the core cloud networking platform
• EOS Attributes – the modular and programmable architecture of EOS that enables a distinct set of attributes, capabilities, and features
• Core Datacenter/Cloud – one of the broadest product lines of datacenter Gigabit Ethernet switches in the industry
• Adjacent Campus and Routing – a further line of switching products, fixed and modular routers, and access point solutions tailored for wireless networks
• Networking Software and Services
– CloudVision – a network management solution for workload orchestration and workflow automation
– DANZ Monitoring Fabric – provides a one-stop network observability solution for production data centers, enterprise campuses/branches and 4G/5G mobile networks.
– Arista Network Detection and Response – an AI-driven security platform that hunts for both insider and external attackers, while providing triage, digital forensics, and incident response across networks
– CloudEOS – a cloud-native solution enabling segmentation, telemetry, provisioning and troubleshooting for enterprises
– A-Care Services – a global team of support engineers along with access to bug fixes, new-feature-releases, case management, and community forums

Cloud computing has presented a fundamental shift from traditional legacy network architectures. As organizations of all sizes have moved workloads to the cloud, spending on cloud and next-generation data centers has increased rapidly.

The core of Arista’s platform is an advanced network operating system known as Extensible Operating System (EOS), which was designed to be fully programmable, modular, and reliable. The programmability of EOS has allowed the company to expand its software applications to address the ever-increasing demands of cloud networking, including data-driven workflow automation, network visibility, analytics, and detection and response functions. Furthermore, it has allowed Arista to integrate rapidly with a wide range of third-party applications for virtualization, management, and automation.

Arista’s major growth drivers are addressing a $35 billion market as adjacencies, switching, and cognitive networks push market expansion.

While Arista competes primarily in the data center market for 10-gigabit and above ethernet, and it continues to add advanced capabilities to its portfolio, pioneering solutions like 400-gigabit equipment that addresses the intensive workloads of next-generation networks. These technologies need to accommodate not only the impacts of the covid pandemic increasing demands on campus networks, but also new and burgeoning industries like artificial intelligence, which requires high bandwidth and low latency. As a result, the company has expanded its product portfolio for both enterprise and cloud customers as they transition to 400-gigabit technology.

Its recent acquisitions of Big Switch Networks and Awake Security have also enhanced the company’s ability to address a portion of the monitoring and security markets, as Arista sees the integration of these capabilities as critical to delivering the next standard of operationally efficient solutions. Furthermore, Arista recently announced it has joined the Microsoft Intelligent Security Association, an ecosystem of independent software vendors and managed security service providers that have integrated solutions to better defend against a world of increasing threats.

After delivering milestones in innovation, diversifying customers, and earnings, Arista achieved solid growth and its first billion-dollar cash flow year in 2021, despite industry-wide challenges. Full-year revenue continued a solid multi-year trend, hitting $2.95 billion, an increase of 27.2% compared to 2020, whilst also maintaining margins at 65%. As a result, net income of $915.0 million also grew 27% on 2020’s result of $718.4 million.

Looking ahead to 2022, the company expects to achieve revenue between $840 million to $860 million for the first quarter, while consensus estimates have full year-on-year revenue growing a further 31% to $3.85 billion. Key initiatives are targeting the year-on-year growth across core data center, campus, routing, software, and services segments, whilst also looking to expand to major verticals and emerging enterprises across media and entertainment, government, healthcare, education, and retail segments. Additionally, consensus EPS growth of 27% would see earnings per share come in at $3.64, up from $2.87 in 2021.

The markets in which Arista competes are highly competitive and characterized by rapidly changing technology, end-customer needs, evolving industry standards, frequent introductions of new products and services, and industry consolidation.

The data center and campus networking markets have been historically dominated by Cisco, with competition also coming from other large network equipment and system vendors, including Extreme Networks, Dell/EMC, Hewlett Packard Enterprise, and Juniper Networks. While some of these competitors offer more comprehensive product lines and have greater name recognition, resources, and economies of scale, Arista’s compelling advantage is that its solutions offer high reliability, integrate with existing network protocols, and are open and programmable, providing customers with unparalleled flexibility.

In the current industry-wide supply-constrained environment, a potential risk for all participants is the ability to source components and provide customers with products in a timely manner. While Arista has extended demand planning horizons and increased component purchase commitments, there is no guarantee that suppliers will meet their commitments or that ultimate customer demand will remain aligned.

Arista Networks continues to exhibit strength in executing revenue growth, gradually expanding into larger and more software-defined addressable markets which should boost profitability. In addition, the company’s solid cash generation is giving them plenty of flexibility to reinvest back into the business for future revenue growth, repurchase shares, or make accretive acquisitions.