Arista Sees Ethernet and AI in the Future

Shares of Arista Networks (NYSE: ANET) soared today on last night’s earnings report that beat Wall Street estimates on nearly every front, thanks in part to loosening supply constraints and growing sales from enterprise customers. And the vendor predicts that Ethernet and artificial intelligence (AI) will play a key role in future success.

The routing and switch supplier posted quarterly sales of $1.51 billion, up 28.3% year-over-year (y/y) and 3.5% sequentially. Adjusted net income was $581.4 million, or $1.83 per diluted share, up from $391.9 million or $1.25 per share y/y. Gross margin was 63.1% compared to 61.2% in last year’s quarter.

Arista earns roughly 40% of its revenue from the major cloud hyperscalers. Last year, Meta (Nasdaq: META) accounted for 26% of revenues, while Microsoft (Nasdaq: MSFT) claimed roughly 16% or 17%. But Arista's been growing its enterprise business, which execs say contributed to the gross margin growth this past quarter. Enterprise sales in the EMEA and Asia-Pacific regions also balanced out some deceleration in orders from North American cloud hyperscalers.

“Look, if you look back three years ago, we started seriously investing in the enterprise,” said CEO Jayshree Ullal on the earnings call. “[W]e have made an investment and seen a significant uptake in enterprise customers wanting to do business with Arista.”

Adding AI to Cloud Players

Notably, as a result of the massive push into AI by cloud hyperscalers, Arista has regrouped the way it categorizes its cloud customers. Now, instead of cloud titans it counts “cloud and AI titans” as a major vertical. As a result, Oracle (NYSE: ORCL) has become a key customer in this category. This is no surprise, given Oracle’s stunning growth, which comes in no small part from its generative AI service that trains large language models (LLMs) on processors from NVIDIA (Nasdaq: NVDA).

While CEO Ullal warned investors on the earnings call not to “read too much into” the new classification, she acknowledged that “AI is going to become such an important component of all our cloud types that it's now a combined vertical.”

Ethernet on the Horizon

When it comes to networking in the age of AI, Arista is throwing its weight and support behind Ethernet. It is a founding member, along with archrival Cisco (Nasdaq: CSCO) of the Ultra Ethernet Consortium (UEC), which aims to deliver a new version of Ethernet for AI workloads in HPC environments. This is in direct opposition to InfiniBand, the current preferred network technology for HPC, which is supported by NVIDIA. Said CEO Ullal on the earnings call:

“So I think AI networking is going to become more and more favorable to Ethernet, particularly with the Ultra Ethernet Consortium and the work they're doing to define a spec, you're going to see more products based on UEC. You're going to see more of a connection between the back end and the front end using IP as a singular protocol. And so, we're feeling very encouraged that especially in 2025, there will be a lot of production rollout of back end and, of course, front end based on Ethernet.”

Arista's support of high-speed Ethernet over InfiniBand could be a bellwether to future earnings. “[W]e believe the timing of a shift from InfiniBand in favor of Ethernet solutions is meaningful for Arista’s prospects,” wrote Simon Leopold and partners with financial firm Raymond James in a recent investor note.

Arista Pulling Ahead

Arista’s financials contrast with a recent preliminary earnings report from rival Juniper Networks (NYSE: JNPR), which posted revenues of $1,397.8 million for the latest quarter, down 1% y/y and 2% sequentially. Adjusted net income was $193.9 million, up 2% y/y and 3% sequentially. EPS was $.60.

Juniper blamed slower sales on cloud and service provider customers, which are digesting previous buys. And though its enterprise segment – the segment that Arista sees growing -- accounts for 50% of sales, that doesn’t appear to have helped matters for Juniper.

Meanwhile, Cisco’s most recent quarter, which ended July 29, showed solid results though it drew mixed reviews from analysts because its revenue guidance was below the Wall Street consensus and EPS guidance was flat.

For its part, Arista is predicting next quarter's revenue to fall between $1.500 billion and $1.550 billion, with non-GAAP gross margin of about 63% and non-GAAP operating margin of about 42%.

As of this writing, Arista shares were trading at $198.11, up 22.39 (+12.74%); Cisco shares were $51.98, up .41 (+0.79%); Juniper shares were $27.05, up 0.62 (+2.37%).