Arista Networks reported a milestone last night: its first ever quarter above three billion dollars.
What was reported
| Quarter | Year ago | Change | |
|---|---|---|---|
| Revenue | 3.036 | 2.205 | +37.7% |
| GAAP operating margin | 45.4% | 44.7% | +0.7pt |
| Adjusted operating margin | 49.9% | 48.8% | +1.1pt |
| EPS | $0.95 | $0.70 | +35.7% |
| Adjusted EPS | $1.02 | $0.73 | +39.7% |
Revenue in billions of dollars. The year-ago revenue is derived from the growth rate the company reported.
And revenue rose 12.1% from the prior quarter - so the growth is not only annual but sequential.
What deserves attention: the profitability
An adjusted operating margin of 49.9% is an unusual figure for an equipment maker.
Almost half of every dollar coming in stays as operating profit. For comparison, Caterpillar
- which also reported a record quarter this week - posted an operating margin of 20.9%.
And why that is possible
The explanation lies in what Arista actually sells.
It does not only sell switches. It sells a single operating system - EOS - running across all of its products, from the data center to the campus edge.
In the release, quoting Jayshree Ullal: "Customers see networking as the central nervous system for infrastructure from the client to campus to data and AI centers."
When the value sits in software rather than only in metal, the margin looks like a software company's.
Where this meets AI
Arista launched the 7060XE7 Series in the quarter - an Etherlink platform running at 1.6 Tbps, with up to 100 Tbps of system bandwidth.
And here is a figure worth quoting precisely: per the company, support for Linear Pluggable Optics cuts interconnect power consumption by roughly 60% versus traditional pluggable optics.
That connects directly to the thesis we have covered since July. In an AI data center, electricity is the constraint. A component saving 60% of a connection's power is not a technical improvement - it lets you build a denser rack inside the same power envelope.
The company also detailed techniques for scale-up, scale-out and scale-across AI fabrics - including multi-planar leaf-spine designs, the open MRC protocol, and segment routing over IPv6.
The guidance
For the third quarter Arista guides to:
- Revenue of approximately $3.3 billion - continued sequential growth of roughly 9%
- An adjusted operating margin of 48% to 49%
- Adjusted EPS of $1.06 to $1.08
Worth noting that the guided margin is slightly below what was achieved in the quarter - 48-49% against 49.9%. Not a dramatic retreat, but guidance for a mild decline rather than continued expansion.
And the place in the chain
Arista is the link connecting the accelerators.
AMD makes the accelerator. Tower makes the optical component. And Arista sells the fabric that turns thousands of accelerators into one machine.
Without the network, an AI cluster is a pile of chips that do not talk.
My Angle
A personal opinion of Ilan Abramov - not advice, not a recommendation
What catches me about Arista is not the growth but the profitability.
37.7% growth is fine, but in this season it is not exceptional - we have seen similar numbers and higher this week. What is exceptional is an adjusted operating margin of almost 50% at a company selling hardware.
And that tells you something about its position in the chain. A company selling metal competes on price. A company selling an operating system that runs on its own metal sells something more. That is the explanation for the gap.
What I note in the guidance is actually the margin. Guiding to 48-49% is below the 49.9% achieved. It is small, but it is a direction - and when a margin is this high, every point of decline is worth a lot of money.
And the figure I take from this report into the wider thesis is the 60% optics power saving. Over recent months we have written repeatedly that electricity is the constraint on the AI build-out. Any technology lowering the power required for the same work expands what can be built inside the same infrastructure - and that is exactly what is being sold here.
