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Edited Transcript of ANET earnings conference call or presentation 14-Feb-19 9:30pm GMT

Q4 2018 Arista Networks Inc Earnings Call

Santa Clara Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Arista Networks Inc earnings conference call or presentation Thursday, February 14, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anshul Sadana

Arista Networks, Inc. - Senior VP & COO

* Charles Yager

Arista Networks, Inc. - Director of Product & Investor Advocacy

* Chuck Elliott

Arista Networks, Inc. - Director of Business & Investor Development

* Ita M. Brennan

Arista Networks, Inc. - CFO & Senior VP

* Jayshree V. Ullal

Arista Networks, Inc. - President, CEO & Director

* Manuel F. Rivelo

Arista Networks, Inc. - Senior VP & Chief Customer Officer

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Conference Call Participants

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* Aaron Christopher Rakers

Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst

* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Alexander Henderson

Needham & Company, LLC, Research Division - Senior Analyst

* Alexander Kurtz

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Hendi Susanto

G. Research, LLC - Research Analyst

* Ittai Kidron

Oppenheimer & Co. Inc., Research Division - MD

* James Edward Fish

Piper Jaffray Companies, Research Division - Research Analyst

* James Eugene Faucette

Morgan Stanley, Research Division - Executive Director

* Jason Noah Ader

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Jeffrey Thomas Kvaal

Nomura Securities Co. Ltd., Research Division - MD of Communications

* Jim Suva

Citigroup Inc, Research Division - Director

* John Warren Marchetti

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Michael H. Berg

JMP Securities LLC, Research Division - Research Analyst

* Paul Jonas Silverstein

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Roderick B. Hall

Goldman Sachs Group Inc., Research Division - MD

* Samik Chatterjee

JP Morgan Chase & Co, Research Division - Analyst

* Simon Matthew Leopold

Raymond James & Associates, Inc., Research Division - Research Analyst

* Srinivas Reddy Pajjuri

Macquarie Research - Senior Analyst

* Steven Mark Milunovich

Wolfe Research, LLC - MD of Equity Research

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Presentation

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Operator [1]

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Welcome to the Fourth Quarter 2018 Arista Networks Financial Results Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call.

I will now turn the call over to Mr. Chuck Elliott, Director of Business and Investor Development. Sir, you may begin.

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Chuck Elliott, Arista Networks, Inc. - Director of Business & Investor Development [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks President and Chief Executive Officer; and Ita Brennan, Arista's Chief Financial Officer.

This afternoon, Arista Networks issued a press release announcing the results for its fiscal fourth quarter and year ended December 31, 2018. If you would like a copy of the release, you can access it online at the company's website.

During the course of this conference call, Arista Networks management will make forward-looking statements, including those relating to our financial outlook [for the fourth quarter of] 2018 fiscal year; industry innovation; our market opportunity; the benefits of recent acquisitions; and the impact of litigation, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K and which could cause actual results to differ materially from those anticipated by these statements.

These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.

With that, I will turn the call over to Jayshree.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [3]

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Thank you, Chuck. Happy Valentine's Day, everyone, and welcome to our fourth quarter 2018 earnings call. In terms of Q4 specifics, our profitability growth combination was once again demonstrated with our non-GAAP revenue of $595.7 million, while our non-GAAP earnings per share grew to a record $2.25.

Services contributed approximately 15.5% of revenue, consistent with it being typically higher as a percentage of overall revenue towards the Q4 end of the year. Our margins in a non-GAAP basis was 64.1%, influenced strongly by our performance from our cloud titan vertical. Overall, 2018 gross margins came in at 64.4%. In terms of customer trends, we registered a record number of million-dollar customers in Q4, symptomatic of our enterprise vertical momentum. By the end of 2018, we had acquired a cumulative of approximately 5,600 customers, with Microsoft at 27% of total revenue.

The combination of an unprecedented year with multiple design wins coupled with the release of deferred revenue due to legal certifications made 2018 a unique one-of-a-kind year at Microsoft. Our use cases are very diverse there. They transcend classical data center use cases to regional [spine] routing and DCI networking. So this often makes it difficult to directly correlate network spend to CapEx of server and storage spend. Without these collective onetime factors, Microsoft would have likely been more in the normal band of teens of revenue like they have been in prior years.

In terms of verticals, Q4 2018 and in fact throughout 2018, cloud titans represented our largest and strongest vertical. They were represented by our top five cloud titan customers. The modern high-tech enterprise segment is now our second-fastest growing and our second-largest segment followed by the Tier 2 specialized cloud provider in third place and the financials and service providers tied for fourth place. Consistent with industry's trends, service providers have been somewhat of a low point for us, with negative annual growth after a very strong 2017. That said, we are pleased with our increased acceptance of our FlexRoute software licenses, growing 50% from 200 customers in 2017, to 300 customers in 2018.

Looking at the 2018 year in entirety, the 2018 international contribution was 28%, with the Americas coming in at 72%, not too different from prior years. In terms of new products, Arista delivered a banner year of disruptive products, redefining networking with highly differentiated EOS stack, CloudVision management software and flagship platforms. The 7280 and 7500 series have become the gold standard in 100-gigabit Ethernet cloud networking.

In 2018, we also introduced substantial software innovations. These included containerization, tracers and analyzers. In particular, we have doubled our CloudVision management customers and our Any Cloud segmentation security software with APIs for AWS, Azure and GCP have indeed been transformational. Undoubtedly, 2018 has been a significant year for Arista, with revenue of $2.15 billion and an annual growth of over 30%, with substantial contribution from our cloud vertical.

At this time, I'd like to invite Anshul Sadana to recap our cloud titan strategy and really highlight our success here. Anshul?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [4]

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Thank you, Jayshree. While we pioneered our cloud networking mission with 2 tier leaf/spine designs, our customers are now using Arista products in a multitude of roles, both within and outside the traditional data center boundaries, which we term as PICs or places in the cloud. We are now successfully deployed in many PIC roles: leaf, spine, bare metals, cluster interconnect, regional spine, DCI, metro interconnect, peering spine, private backbone and extended long-haul use cases. Wire speed 256-bit MACsec encryption have secured all traffic that leaves the data center facility of our customers.

In addition to [present] speeds, Arista U.S. is strongly preferred for the cloud's mission -- for the cloud mission-critical use cases due to superior quality, programmability via robust APIs and our [U.S.] SDK. Our estate-phased real-time telemetry delivers world-class analytics, monitoring and traffic engineering of these networks. All of these compelling advantages have created a collaborative partnership with our cloud customers as a build for next-generation architectures with ever increasing workloads. Back to you, Jayshree.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [5]

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Thank you, Anshul. Effective March 2019, I'm really pleased to announce the promotion of Anshul Sadana to Chief Operating Officer. In this expanded role, Anshul augments his present worldwide product management and customer-facing functions with platform engineering, manufacturing and operations. Anshul, as many of you may know, has been a key pillar and contributor at Arista for over 11 years, demonstrating that keen and unique sense of product depth, driving our consistent differentiation in a typical Arista way. Please do join me in congratulating Anshul on his very well-deserved promotion.

Arista continues to drive cloud area networking where the future of networking is not siloed to a switch or router box alone but in fact, [as] software-driven places in the cloud. As we exit 2018, we believe we hold the #1 market spot in 100-gigabit Ethernet switching share imports for the high-speed data center segment. As I have mentioned last year, scaling the company and the team with a stated goal. We accomplished this many ways, including the addition of two senior officers to our executive leadership team, John McCool, our Chief Platform Officer; and Manny Rivelo, our newly appointed Chief Customer Officer.

We also successfully integrated our first two M&A transactions this year -- last year, Mojo Networks for cognitive Wi-Fi in the campus and MetaMako for ultralow latency networking. Our employee bench strength increased to 2,300 in 2018 from 1,700 in 2017, while maintaining our very high bar for top-notch talent. What is increasingly clear to me is that Arista is gaining strategic relevance and has exceeded the table with enterprises seeking next-generation cloud area networking as a compelling alternative.

And with that, I'd like to turn it over to Ita for more financial specifics.

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [6]

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Thanks, Jayshree, and good afternoon. This analysis of our Q4 and full year 2018 results and our guidance for Q1 '19 is based on non-GAAP and excludes our noncash stock-based compensation impacts; losses related to our private company investments; charges associated with our recent acquisitions; and other nonrecurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.

Total revenues in Q4 was $595.7 million, up 27% year-over-year and above our guidance of $582 million to $594 million. We experienced good overall demand in the quarter, with ongoing strength across the business. Service revenues represented approximately 15.5% of revenue, up from 13.8% last quarter, reflecting a seasonally higher level of renewals in the period. International revenues for the quarter came in at $144.9 million or 24% of total revenue, down from 28% in the prior quarter.

Looking at the year, international mix remained consistent on a year-over-year basis at approximately 28% of total revenue. This reflected strong growth in our international and region businesses, offset by a higher mix of U.S. deployments from our cloud titan vertical. Overall, gross margin in Q4 was 64.1%, just above the midpoint of our guidance of 63% to 65% and down from 64.6% last quarter. This reflected a healthy mix of cloud titan revenues in the period, and as expected, some incremental costs related to the previously announced trade tariffs.

While the operations team are making good progress toward mitigating these tariff-related costs, we expect to see some continued impact through the remainder of 2019.

In the interim, we will continue to pass a portion of these cost to our customers pending completion of the required supply chain changes. Operating expenses for the quarter were $160.1 million, up from $155.1 million last quarter. R&D spending came in at $104.9 million or 17.6% of revenue, mostly flat to last quarter on an absolute dollar basis. This reflected heavier NRE and prototype spending in the third quarter, offset by ongoing headcount growth in Q4.

Sales and marketing expense was $43.8 million or 7.4% of revenue, up from $41 million last quarter, with increased headcount and related sales costs. Our G&A costs remained consistent at approximately 1.9% of revenue. Our operating income for the quarter was $222.1 million or 37.3% of revenue. Other income expense for the quarter was a favorable $9.5 million, and our effective tax rate was consistent at 21.4%. This resulted in net income for the quarter of $182.2 million or 30.6%.

Our diluted share number for the quarter was 80.93 million shares, resulting in a diluted earnings per share number for the quarter of $2.25, up 31.5% from last year.

Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $2 billion. We generated $296 million of cash from operations in the quarter, reflecting strong net income performance combined with improvements in supply chain-related working capital and increased deferred revenue amounts. Overall, we generated $503 million of cash from operations for the year, which included the payment of the Cisco settlement of $400 million in the third quarter. DSOs came in at 51 days, down from 53 days in Q3, reflecting the timing of billings in the quarter.

Inventory turns were 3.3x, up slightly from 3.2 last quarter. Inventory increased to $264.6 million in the quarter, up from $216.3 million in the prior period. This primarily reflects increases in raw materials and finished goods as we ramp the supply chain for new products.

In addition, consistent with last quarter, we maintained a further $14.6 million of inventory deposits, [recording] other assets at the end of the quarter. Our total deferred revenue balance was $587.2 million, up from $529.9 million in Q3. Our product deferred revenue balance increased by approximately $18 million in the quarter, reflecting customer acceptance requirements on new products. The 2018 closing product deferred revenue balance was, again, essentially flat to the prior year and not a meaningful contributor to revenues for the year.

The well-calibered shift in the customer make-up of the product deferred was Microsoft redesigned qualifications representing a significant portion of the 2017 balance as compared to a negligible amount of Microsoft product deferred at the end of 2018. Accounts payable were 40 days, up 39 days in Q3, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $6.2 million.

Now turning to our outlook for the first quarter and beyond. We are pleased with our strong 2018 financial performance, with 31% revenue growth and 42% growth in earnings per share on a year-over-year basis. As we look forward, we believe we are well positioned with our key cloud customers and remain focused on expanding our presence across all other verticals.

Our revenue guidance for the first quarter of $588 million to $598 million represents 25% year-over-year growth at the midpoint. On the gross margin front, we would reiterate our gross margin outlook of 63% to 65%, with customer mix being the key driver of where we operate within this range. While we remain cautious in relation to our spending ramp, we should expect to see us make the investments necessary to support the expansion of the business. We believe, given some reasonable top line growth, this can be accomplished while maintaining operating margin in the previously discussed approximately 35% range. While this as a backdrop, our guidance for the first quarter, which is based on non-GAAP results and excludes any noncash stock-based compensation impacts and other nonrecurring items is as follows: revenues of approximately $588 million to $598 million; gross margin of approximately 63% to 65%; and operating margin of approximately 35%. Our effective tax rate is expected to be approximately 21.5%, with diluted shares of approximately 81.4 million.

I will now turn the call back to Chuck. Chuck?

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Charles Yager, Arista Networks, Inc. - Director of Product & Investor Advocacy [7]

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Thank you, Ita. We're now going to move to the Q&A portion of the Arista earnings. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jason Ader with William Blair.

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Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [2]

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Jayshree, I don't know if you guys -- I'm sure you debated this, but have you thought at all about providing some full year guidance for 2019 in terms of revenue?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [3]

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Yes, Jason. You can well imagine, not only have we debated it, I think you all have debated it. If you look back at our 5-year short history since IPO, we have never provided annual guidance. I think we made an exception once when we felt the consensus was significantly different than our guidance. And therefore, we took exception to that and wanted to course correct and let you know that it was way off our guidance. So I think you can safely assume that since we're not doing that, that we want to go back to our normal mode of quarterly guidance, and we're comfortable with the occurrent consensus estimates.

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Operator [4]

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Your next question comes from Alex Kurtz with KeyBanc Capital Markets.

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Alexander Kurtz, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [5]

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Just to Jayshree, need to hear on this Microsoft contribution for 2018. Obviously, that's well above what a lot of us were thinking might happen. And maybe you could frame for us how cloud titans finished out for '18? Seems like maybe it was pushing 40% of revenue. I would like to have you comment on that. And how should we think about cloud titan growth and contribution for the year? I know you're not giving guidance but just help us frame that because that's a significant upside for Microsoft and sort of our modeling of that?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [6]

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Yes. So thanks, Alex. And what I would say in general is, this is truly an unprecedented one of -- once-in-a-lifetime or one-of-a-kind year with Microsoft. We don't expect that to repeat. We'd love for that to repeat, but we don't expect that. And we believe they will continue to be a 10% concentration customer in 2019, but we'll go back to a more normal percentage of our revenue. I think cloud titan as a category did extremely well for us, all 5 major cloud titans that typically contribute to Arista as part of the top 10 customers continued to make important contributions in 2018. We expect there to always to be some shift in balance between the 5, and 2019 will likely be different in the contribution off the cloud titan. But I think you're right in assuming that as a category, we still expect them to be about 1/3 of our revenue in 2019. And they were higher due to the Microsoft concentration in 2018.

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Operator [7]

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Your next question comes from Samik Chatterjee with JP Morgan.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [8]

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I just had a question primarily on kind of the prepared remarks that Anshul had about you're seeing additional users of Arista's product in parts of the data center and outside the data center with cloud customers that obviously has driven some of the strength here. How broad based is that? Do you see more room with some of the cloud titans as well as the Tier 2 cloud providers to see that expand more and probably you -- that helps you outperform the overall spend on networking, even in 2019? Can you help us think about that?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [9]

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Certainly. Samik, you're right. There are many of the expanded use cases that we've been growing into. But as a result of us doing routing, encryption, some of the DWDM products that we have just for emitting color of wavelength, we are now able to participate in an increasing TAM. And in the past, you always considered it just as a switch, but we are now able to take on these [high alert]. But in addition to that, it's not just the one-for-one displacement, these are new architectures that are significantly more resilient. The goal of many of the cloud titans have and even the smaller cloud companies just at a smaller scale, they did not focus on one network that is this mythical [site 9] but the networks that are parallel architectures that are highly resilient and be able to do that with our lead spine architectures and some of the new use cases whether it's appearing or DCI or regional [projects, regional spine]. And same of the same approach but expanding to much wider area within a metro 100-kilometer plus.

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Operator [10]

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Your next question comes from Jim Suva with Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [11]

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On the tariffs that you made comments on during your prepared comments and your outlook, did you mean to say that you're building in the tariffs for your revenue outlook? And was it the 10% rate or the potential 25% rate? And is that across all products or just those coming for China because I'm sure a lot of products that may be assembled in Guadalajara or Florida could actually contains China parts? So can you just help us understand how you're navigating through the tariff situation?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [12]

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Yes. Let me clarify, and I'll pass it over to Ita, Jim. What we said in Q3, and we continue to reiterate in Q4 is the impact of tariffs is still very much there in our cost because many of these components come from China. So even as you move to different contract manufacturers, you can have second derivative effects if you will. Arista's response to that was to absorb some of the cost but also have a 3.3% tariff fee assuming that 10% tariffs increase. We have made no assumptions on the 25% increase since there's still a lot of speculation there. Ita, you want to add to that on the impact of that?

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [13]

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Yes. I think it applies to products that have components that are actually tariffed, right? It doesn't apply to software and optics and some other stuff. And again, we're making plans. We have plans for how we start to remediate this with the supply chain. It just takes time to execute on those plans. You don't move. It takes time to affect the supply chain movements, but we're working on that. We'll share more...

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Jim Suva, Citigroup Inc, Research Division - Director [14]

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So 25% would be the same methodology as what you did in 10%, I would assume?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [15]

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Yes. We haven't really thought it through or formulated a plan. We're hoping it never happens, but yes, we would apply something similar.

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Operator [16]

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Your next question comes from Ittai Kidron with Oppenheimer.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [17]

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I guess I want to go back to where we started again, which is the cloud. I just want to make sure I understand your comments because with Microsoft being 27% on the year, I think you made a comment to the effect that the more normal run rate was the percentage of Microsoft was last year, which was 16%. And so that implies at about 10% is through product [deferrals] and delayed certifications and all of that. And since Microsoft is little to no presence in your product deferred right here, right now, stripping that out, your core growth in '18 was only 20%, really, outside with the deferred. And I guess I'm trying to think -- help me think about the Titan vertical in general. Is that a vertical that grows below corporate average, do you think, for the year? Are there big parts in your footprint that you feel would be more competitive on the year? And how do you feel about your ability to protect them when, clearly -- when 400 comes along, there are a lot of -- vendors are making a lot of claims. And you seem to be at the top of the hill. So clearly, you're right at the -- right on the target.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [18]

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Well, that was a loaded question. Ita, you want to start by...

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [19]

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Yes. I tried to put 3 in there. Yes.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [20]

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Yes. You have succeeded. Thank you for the good wishes. Let me have Ita clarify some of the...

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [21]

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Yes. Maybe let's just talk about the deferred piece just to make sure we're thinking about that the same way. And at the end of the day, deferred revenue -- product deferred revenue did not contribute to revenue for the year, right? So if Microsoft -- the mix of Microsoft changed and obviously that resulted in Microsoft having a higher percentage of revenue, right but also the deferred was backfilled with some other activities. So when I think about on an activity basis, Microsoft activity in the period was significantly below the 27%, not back to the teens because we had some good use cases, et cetera but significantly below that 27%, just to be clear. So when you think about transactional activity in the period, the deferred kind of comes out of that. And we did backfill that deferred amount with some other customers, right.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [22]

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And to answer your question on growth, we obviously don't expect Microsoft to have the same amazing growth in 2018 and 2019 that we had in 2018. But we fully accept -- expect the cloud titan category to grow well, if that makes sense. So I think there will be puts and takes and other contributors and other customers, be it cloud titans or even some of the Tier 2 cloud providers are going to greatly contribute to our cloud growth.

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Operator [23]

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Your next question comes from Jeff Kvaal with Nomura.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division - MD of Communications [24]

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I'm hoping perhaps to get -- ask the question that may be on many of our minds about web-scale CapEx, and I know you've touched on it a little bit today and certainly in the past. But look, the numbers do seem to be decelerating a decent amount, and I'm wondering if you could help us explain why there is a decent disparity between what the spenders are up to and your revenues?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [25]

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Sure, Jeff. I'll take a part of the question, and I'd like my expert here, our new COO, to take the other half. As we tried to explain, we're not able to directly correlate service spend with Arista or networking CapEx spend. And the reason is, obviously, a service spend connects to the first point of a network attach, which is typically a leaf switch. But what they're finding is many tiers of leafs and many tiers of spines. And Anshul gave you some examples of regional spine, a core routing spine, a WAN spine, a data center interconnect spine, all of those examples and especially the MACsec security, none of them -- and peering. None of them have a direct correlation to the first use case we just talked about, which is the server and first top of rack switch spend. So the one-to-one correlation is difficult. However, I think you can make a correlation if the overall spend is declining, then obviously we'll also feel the impact of that. But it's hard to pinpoint and say, if server spend is declining, network spend is declining. It's not one-to-one. Anshul?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [26]

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Just a lot of few things here. #1, last year or the last few quarters, there's been significant volatility in memory prices for servers. And that resulted in increased CapEx for many of the cloud titans and also result in a reduction in cloud CapEx for many of the titans. That has no impact on networking. So as a result, they're not correlated there. And second, when you look at very last build-outs of regions, data centers, facilities, all of that often gets counted as CapEx, but obviously, we are just focused on how much networking interconnection made at different layers, different architectures. And hence, you will see less correlation the short term, as Jayshree mentioned. A very long [run these things can tie back]. But they are not even associated within that one year and hence the data. But otherwise, we've done well technically with the cloud titans, and we are happy to compete going forward as well.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division - MD of Communications [27]

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Anshul, do you think that networking is gaining share inside of the overall web-scale CapEx?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [28]

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I would say networking, from our standpoint, not so. I think it's very, very similar to some previous years. However, optics is a different ballgame. And as you very well know, 400-gig optics are slightly more expensive on a per gigabit basis compared to 100-gig but not where they purport. And I think that will change some of the equation what [if it is being allocated] networking. But I don't think our correlations get to change that way.

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Operator [29]

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Your next question comes from James Faucette with Morgan Stanley.

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [30]

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I wanted to follow up on your mention of 400-gig and that coming to market and implementation later this year and through 2020 and beyond. And as you're looking at that, what do you think the appetite is from your customers to mix and match 400-gig with existing 100-gig plan? And I guess I'm wondering how much opportunity do you see for footprint share, shift among in your customers for that? And secondly, maybe as you're talking about that, maybe you can also talk through kind of what the use cases are for 400-gig that you think will at least start things going?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [31]

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James, I'm going to kick it off and then Anshul will get into detail. I think one of the things we have said consistently is that 100- and 400-gig mix and match is going to happen frequently. And in fact, with the exception of the cloud titans that are going to push us more on 400-gig, the mainstream use cases we see in 2019 are still heavily favored by 100-gig. And even as we go into 2020, when the optics become more available, I think you're going to see much more of a combination. And that's going to favor Arista because of our incumbency and leadership position in 100-gig. Anshul?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [32]

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Absolutely. Thanks, Jayshree. So just adding on to what you just heard, in networking, you do not introduce a new speed that's not backwards compatible with the existing install base. Otherwise, you will just never get it to work, which is how IPV5 died.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [33]

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What is IPV5?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [34]

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But if you look at 400-gig in the cloud data centers and the way the architectures are going on, the hyperscalers are hyperactive with the next-gen design. And they all have their own problems to solve for different use cases, whether it's public cloud or storage or video or caching and so on. You can't just touch one intermediate layer and say, "I'm done with my 400-gig upgrade." You have to upgrade end-to-end. So there's slow transition and [hence, interop] is important. I would say, interop of a 400-gig optic back into a DR1 QSFP28 is going to be very important, even for cloud customers. That's the only way you can [effectively] install base. But because now you're [able to] touch multiple layers, it takes a long time, several quarters to several years to actually get that upgrade done.

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Operator [35]

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Your next question comes from Rod Hall with Goldman Sachs.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [36]

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I wanted to start off, I guess and just since we've talked a lot about data center, just ask about campus and see if there's any update on that, if you guys have any milestones that you might be able to give us in terms of trials, things like that, how it's going? And then secondly, Ita, I just wanted to clarify your comments on seasonality around services, that was quite a higher than we anticipated. And I'm wondering are you saying that that's more of a normal seasonal progression of services looking forward? Or is that an abnormal quarter that we're looking at here?

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [37]

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Yes. Let me take that one first. I mean, I think the 15.5 is probably high, right. It's a -- Q4 tends to be a strong renewal quarter, and there's some recognition of revenue that comes along with that. So I think back in the 14%, maybe 14 and change is kind of probably a better average for the year, is how you should be think about it.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [38]

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And Rod, to answer your campus question, it's too early for revenue. I think it will be more material in the second half. But we've seen an extremely strong desire to have a viable alternative to the incumbents, in quality, in simplicity, in cognitive capabilities and automation. And I'm going to let our new Chief Customer Officer, Manuel Rivelo, speak to it some. Manny?

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Manuel F. Rivelo, Arista Networks, Inc. - Senior VP & Chief Customer Officer [39]

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Thanks, Jayshree. Rod, good to talk to you. So Jayshree classified it correctly. It is early days, and we see this being material in the second half of 2019. But the initial acceptance has been really well received by the customers. And I think there's two categories you could put customers in. The first is our existing installed base. And that installed base is looking to extend EOS across their infrastructure into the campus, driving one management plane, cognitive management plane, one set of telemetry, one EOS. And they're really looking to -- for simplicity, they're looking for agility, they're looking for scale, and they're looking for quality. The second type of customer we're running into are customers you haven't done business with that know we're approaching the campus space. And those customers are really looking at us as an alternative because of fatigue. They're seeing in the market segment, basically, 30 years of lack of innovation, 30 years of stagnant architectures and more and more boxes being pushed out instead of unified architecture, so we're seeing great traction with those customers early days. But like I said, it's early days, we got around with the portfolio and bring that to the customer base, but there's a lot of excitement there also. And then just to give you examples of wins, I mean, we had various wins throughout the quarter in the campus. One was a million dollar account, which is a multinational beverage company where we basically were driving our campus solutions into that and drove great success into that, and we expect to see expansion going on there. And we've also had lots of wins where we began to integrate our Spline architecture inside those use cases and again, for the same reasons, scale, quality, fatigue, et cetera.

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Operator [40]

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Your next question comes from Paul Silverstein with Cowen and Company.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [41]

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So for the first quarter and the 25% or thereabout year-over-year guidance that you gave, how do you get there? Could you help break it down by customer -- I'm not asking by individual customers, but in terms of customer verticals, what drives that growth? And then I have a follow-up question. I appreciate it.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [42]

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I think -- I expect to see a more normal concentration of customer verticals. I think all 5 will be represented in double digits. Cloud titans will, I think, continue to be one. If I had to guess, I would say enterprise will continue to be 2 again. And then it's hard to forecast between 3, 4 and 5.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [43]

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I guess...

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [44]

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Does that make you happy?

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [45]

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No, not exactly. What I'm trying to get at is, I trust it goes without saying or maybe it doesn't, that the customer verticals 2 through 5, your cloud specialist, especially your enterprise service [buyers], et cetera, that collectively you're expecting the growth rate from that group of customers, i.e. the customers other than cloud titans, to increase, and you're expecting growth from cloud titans to moderate. Is that a fair assumption?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [46]

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Yes and no. I'm expecting growth from Microsoft to moderate, but I haven't said I'm expecting growth from the cloud titan vertical to moderate.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [47]

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So you're not expecting growth from your other cloud titans to moderate and from the cloud titan verticals collectively...

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [48]

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I didn't say that, no. But I think it's fair to say, it will moderate with Microsoft, given the once-in-a-lifetime unique year we had here in 2018.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [49]

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All right. My follow-up question -- Go ahead...

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [50]

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With the exception of Microsoft, we feel very comfortable of our growth in all five verticals. I think that's why. And Paul, we can chat about this more, but we should probably allow the next question.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [51]

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Can I just quickly ask you as a follow-up, is there anything unique about the first quarter relative to the rest of the year?

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [52]

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No more than the normal seasonality, right? I think it's always a quarter that tends to be flattish off of Q4. I don't know if there's anything else particularly unique about Q1.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [53]

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I think there's most -- I think there's more similarities to Q1 with prior Q1 than uniqueness.

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Operator [54]

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Your next question comes from Sami Badri with Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [55]

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Could we just take a few moments maybe just to discuss what you're seeing with service provider because the one thing the entire sector seems to be very hyped up about is 5G. And you're seeing it on the RAM side, but there seems to be a big disconnect when we get into the equipment side of the spectrum. Could you just walk us through when you think SP spending towards equipment will start to ramp back up? And is this a back-half '19 event? Or is this a 2020 event based on your purview at this juncture?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [56]

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Okay. Sami, I'll take a crack at it, and I think Manny and Anshul may help me as well. Look, I think given our very small presence in service provider, we don't believe we're affected by macro trends. And in our view, at least the influence of Arista gear is not 5G-dependent, because we're really a backhaul for IP routing and ring switching and routing together and providing the scale of routes and IP tables and ACLs that no one does. That said, I don't think we think 5G is really a mover. If 400 gig is 2020, I think we think 5G is 2021. So from our perspective, we've got upside in service provider because we had a very strong 2017. We're disappointed with 2018, and that gives us a chance to grow faster in 2019. We're seeing tremendous activity both in the U.S., and we have put more emphasis in international theaters. Manny, maybe you want to speak to that?

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Manuel F. Rivelo, Arista Networks, Inc. - Senior VP & Chief Customer Officer [57]

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Yes, no, I think -- just to add to that. In the use cases that we play in service provider, whether it'd be Telco cloud, NFVI or peering, we're doing quite well in executing across the globe in various Tier 1 and Tier 2 operators. In other use cases, the portfolio continues to run itself out. It's additional features to cover those use cases. But as Jayshree pointed out, we've also made investments in 2018 for better coverage, both on the account manager side and on the SE side to represent those Tier 1 operators who are getting more at that as it pertains to our pieceand proof of concept. So we think that, that will go well, as we enter 2019 and beyond.

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Operator [58]

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Your next question comes from Alex Henderson with Needham & Company.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [59]

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I wanted to ask a question relative to two dynamics and see if you could play them off against each other. So we're definitely hearing a lot of conversations about slowdown in server investments based off of product cycles at Intel as well as some of the other cycles that are going on. That suggest a slowdown in cloud in the first half of the year and a reacceleration in the back half of the year. So part of the question is, are you seeing that kind of dynamic as well? And then the other side of it, there's a countervailing force, which we're hearing that spending on 100-gig is expected to double year-over-year in terms of port sales. So to the extent that we're seeing a doubling of 100-gig, are you gaining enough share in 100-gig as a result of your dominance in that space, which I think is 2x the share of the overall -- your overall market share? And does that offset the [divot] in demand in the first half in Web 2.0 due to those product cycles?

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [60]

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Sure. Absolutely. Alex, great questions. And in terms of CapEx for the large cloud titans, we certainly don't have visibility yet into second half. We would love them to forecast accurately as you very well know. On the first half because we're in so many diverse use cases, we are getting a little bit decoupled in the short term from their exact server spend. They might be buying fewer racks now, but they're still doing DCI but also [other things and so on]. But the same time, obviously, if they spend more in the long run, we could benefit. Now to your point on 100-gig spending or 100-gig ports are doubling, and I would emphasize, actually, 100-gig ports that are doubling, not just spend, is because some of the next-generation technology is now starting to show up in the market, including some of our products which are really being used not as 400-gig, but more cost-effective, 4 by 100-gig, and that allows customers to get many more ports than what they used to get in the past, but that doesn't change the revenue dynamic significantly. It just lowers the ASP and increase the port count.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [61]

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But does it change share, is the question.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [62]

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That will depend on our execution, Alex. We've held on to the #1 position for 2 years in a row. Hopefully, this year will be our third.

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Operator [63]

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Your next question comes from Aaron Rakers with Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [64]

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I want to go back to the router market. You mentioned in the prepared remarks you've gone from 200 to 300 FlexRoute customers. It sounds like one of your major silicon providers does a major release, starting to ship in volume in Jericho2, looking towards the mid-part of the year, which is very focused on the service provider market. So I'm curious as we look out over the next 12-plus months, is there a natural expansion story in the router functionality that expands your opportunity set in that incremental growth driver going forward?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [65]

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Thanks, Aaron. I think it's a really good question. I believe we have a natural expansion even before Jericho2, which has had to do with a lot of our FlexRoute features and the 50% growth of our customers from 200 to 300. So at least in 2019, I see that more immediate success will be not necessarily waiting for the next generation of silicon but really going into these 200 to 300 customers and enabling greater success, many of who are service providers. Now add to that the Jericho2 cycle, which really hits in the second half of the year, Anshul is confirming, I think we can have a multiyear success in routing in 2020 and beyond with Jericho2.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [66]

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And I'm just kind of curious, how much -- how big do you view that total addressable router market today? And how much do you think is that going to expand?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [67]

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It's a tough one to answer. The total market is $8 billion. But I think our TAM is more like 2 to 3. It's a good guess. But some of them end up being very specific, traditional, legacy MPLS traffic engineering boxes. Arista doesn't play in that. But as they look to come in, as Manny was describing, into the spine peering and interconnect and NFV and Telco cloud, Arista is a national player to combine the Universal Spine's switching and routing.

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Operator [68]

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Your next question comes from Simon Leopold with Raymond James.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division - Research Analyst [69]

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I wanted to see if we could maybe take a look at getting some thoughts on 2020 in particular. If I characterize your base business as put to side and thinking about three growth engines, campus switching, routing and 400-gig switching as the incremental parts, how do you see those three in terms of rank-order contributors in 2020?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [70]

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Wow. You get the prize for the tough question so far, right up there with Paul. So Simon...

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division - Research Analyst [71]

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I'm honored.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [72]

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We'll give it our best, but this is purely a forecast. I think if you look at TAM, the largest TAM of these three, campus, routing and 400-gig, is campus. And it's also the most underserved by any alternative competitor because it's so deeply embedded by incumbency. So we believe our largest strength and opportunity is campus, and our largest pressure to execute is also campus, if I put that in that way. And then I think if I had to split the 2, I would say, routing second and 400-gig third because I think routing really doesn't come in -- 400-gig doesn't really come into play in a huge way until 2020.

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Operator [73]

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Your next question comes from Erik Suppiger with JMP Securities.

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Michael H. Berg, JMP Securities LLC, Research Division - Research Analyst [74]

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This is Michael Berg on for Erik Suppiger. I just wanted to do a quick question on international. Could you provide any color around what may have caused the weakness there? I mean, was it around international cloud spending or enterprise spending? What do you think around international in the quarter?

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [75]

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Yes. I mean, the mix between international and U.S. in any given quarter is going to be pretty volatile, right? And the -- if you look at it for the year, which I think is kind of more interesting, and you peel it back, you've got good growth in the in-region businesses and then just a heavier deployment of cloud in the U.S. than what we saw last year, right? We've seen some pretty heavy international cloud activity last year. This year, it's been more U.S-focused, right? So I think that's probably the biggest driver. If I strip all that out and look at the growth in the region, those businesses are growing faster than the corporate average. I think, Manny, if you want to chime in as well...

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Manuel F. Rivelo, Arista Networks, Inc. - Senior VP & Chief Customer Officer [76]

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Yes, I think what I'll add on top of that, and I think Jayshree said -- and Ita said as well, is we are actually seeing great -- and we're making a significant investment in our international markets from a headcount perspective. So we're balancing that out fairly nicely, approximately 40% is going to international headcount, that's a little higher than what you're seeing from a percentage of business. But what's more interesting is the net new logos, where we are seeing a lot of new wins there, approximately half of our net new logos are coming out of the international market. So we're having great traction there, great acceptance of technology. You could argue in some of the international markets, they're a little behind in the adoption of spine-leaf architectures, but they're coming along quite nicely, and we think that's a growth engine also for the future.

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Michael H. Berg, JMP Securities LLC, Research Division - Research Analyst [77]

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Okay, great. And then a quick follow-up on the Microsoft piece. I know you mentioned that if you normalize it, it's closer to the 16%. But if I'm thinking about the deferred revenue piece being a big contributor, wouldn't that needed to be closer to 18%, 20%? Or how can I think about how deferred contributed to Microsoft in the year?

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [78]

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Yes, I mean, I don't know they're going to put specific numbers on it, but I think it was a good strong Microsoft year just from an organic business perspective, and it would have been ahead of the 16% in any case. But again, a chunk of what the 27% came from the deferred.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [79]

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And I think the other way to think of this is that in many ways, we did get 6 quarters of business in 4 quarters, right because of the deferred and because of the legal certifications. So it was unusual in every manner, right, not just the deferred but the legal certifications, the new roles and the time at which you could recognize it, even though the activity began much before.

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Michael H. Berg, JMP Securities LLC, Research Division - Research Analyst [80]

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Okay. And then I think someone asked this before, but is it fair to assume that the cloud titans vertical was closer to 40 or even higher percentage of total revenue for the year, given the high Microsoft contribution?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [81]

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I think around there is a fair guess.

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Operator [82]

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Your next question comes from Steve Milunovich with Wolfe Research.

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Steven Mark Milunovich, Wolfe Research, LLC - MD of Equity Research [83]

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Could you comment a bit about expenses going forward? You had a year-over-year acceleration in marketing, a deceleration in R&D, which you talked about a little bit. What sorts of growth rates or percentages of revenue can we look forward to? And your longer-term target of 32% operating margin, what's the time frame for that? Is it going to be within my lifetime?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [84]

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It depends how long you live. Yes.

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [85]

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Yes. Surely, it's been a while since we updated the long-term model, and we'll take the opportunity to do that at some point here. I mean, I think what we're seeing is in the near-term time frame, the plus or minus 35% operating margin is a good way to think about it, and that allows us to see some movement of gross margin quarter-over-quarter and does itmake the investments that we want to make, right. I mean, if we're -- yes, we're still in a situation where we're growing the top line at the rate that we're growing the top line at. It's letting us do -- make the investments that we need to make. It's letting Manny do what he needs to do in the sales and marketing side. And I think you will see that kind of be maybe more of a percentage of revenue than it has been. And maybe we get a little bit of leverage on the R&D, but that's not going to be the same every quarter, that's not significant, right. I think -- think about the 35% plus or minus.

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Operator [86]

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Your next question comes from Srini Pajjuri with Macquarie Securities.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [87]

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Just one clarification maybe for Ita. Would it be possible to give us what Microsoft was in Q4 or even second half versus first half as a percent of sales?

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Ita M. Brennan, Arista Networks, Inc. - CFO & Senior VP [88]

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Yes. I don't think we're going to do that, right. I mean, it's -- it moved around. It's -- Yes, it's not really helpful to start to try and do that on a quarterly basis. I think the annual number is really the way to think about it and then take some off the top for the deferred, for the release of the legal-related clarification stuff at the beginning of last year. And so think about 16% was our norm over the last couple of years. And it was a good strong year for Microsoft on top of that just from a transactional business perspective.

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Srinivas Reddy Pajjuri, Macquarie Research - Senior Analyst [89]

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Okay. Then maybe a follow-up, I guess, on 400-gig, Jayshree, I think Cisco yesterday said they're expecting volume deployment sometime middle of this year. And you seem to think it's more likely in 2020. I just want to understand why you think it's little later than Cisco? I know Juniper said it's also 2020. But I'm wondering why there will be a difference between their timing and your timing?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [90]

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Well, I think we actually, Srini, sell to some of the world's leading early adopters of 400-gig. And where Anshul and the team are seeing traction is in the cloud titan vertical. We work with a multitude of optics vendors, and we see that as the longest pole in the tent. So while we absolutely expect to see early trials in second half, we would be responsible to tell you we're going to see large market in the second half. So I guess you could chalk it down to our responsibility.

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [91]

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Maybe if I can add something here. We should not confuse product availability versus high-volume deployment. These are 2 different things.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [92]

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Very good point. And our products have been available since the beginning of the year.

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Operator [93]

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Your next question comes from James Fish with Piper Jaffray.

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James Edward Fish, Piper Jaffray Companies, Research Division - Research Analyst [94]

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I guess a lot of questions have been asked already but maybe asking it in a different way, what are you hearing from hyperscalers on the 400G optics and potential mix between the OSFP and the QSFP? And secondly, on 400G, competitively, do you fear kind of the white box offering more? Or do you fear like the Ciscos and Junipers of the world?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [95]

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Wow. That is 2 unique questions.

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [96]

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So James, in terms of first optics on 400-gig OSFP versus DD, in the cloud titans, there is a lot of interest in moving the world forward. And planning it out many, many years in advance, so that you can actually move to the next generation. So in fact, it's the hyperscalers where there's a lot of interest in OSFP. At the same time, we're cognizant that some other customers need DD-based products, so we'll build those as well. But as you may recognize, DD has a short life cycle because after the 50, 30 cycle, it can't really work. So then the world has to move forward. So we'll do both. We believe there will be a very healthy mix and a good attach rate of OSFP here. With respect to the white boxes, we've touched on this many, many times. We are very competitive in this market. And as we mentioned before, we're not really -- customers are not looking to just buy a cheap white box and then do something cool with it. They want to solve real-world problems. So they are co-developing with us and partnering with us to solve these problems, taking parts or all of EOS and building on top of that. And as you can see, our business is very healthy with them. And despite all the noise, we feel good about our position there.

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [97]

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And I think the noise, in general, has reduced a lot. We haven't -- we don't hear white box from our customers very much anymore. So to answer your question more directly, it's usually a competitive position against the specific vendor like Cisco rather than the description or discussion of a white box.

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Operator [98]

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Your next question comes from Hendi Susanto with Gabelli.

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Hendi Susanto, G. Research, LLC - Research Analyst [99]

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Jayshree and Anshul, how should we think about market opportunity and dynamics in 2019, like first specifically about macroeconomic uncertainties? Cisco stated there was no change in demand and no impact from macro uncertainties in their last quarter. I'm wondering like how similar your experience was in Q4? And then second, how do you characterize market opportunity in 2019 versus 2018? Are there more similarities? Or are there more new opportunities versus 2018 that investor and analyst should think about?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [100]

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Okay. Thanks, Hendi. Well, I would say Arista has not seen any macroeconomic uncertainty either in Q4. I think, obviously, we're not a bellwether here. But as far as our customers -- have been signaling to us, our enterprise momentum hasn't been stronger. And we continue to see strength there in Q4, and we look forward to that strength continuing in 2019. I'm going to let Anshul answer the 2019 trends.

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Anshul Sadana, Arista Networks, Inc. - Senior VP & COO [101]

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Sure. Absolutely. Thanks, Hendi. We haven't seen much of a big change in terms of perception. I think people are certainly worried that if there's a slowdown, there will be a correction. Our customers do talk about it, but nothing material has happened so far. I think everyone's watching these trends very carefully. Beyond that, the actual opportunity hasn't changed for us. It's a very large TAM we are catering to. And when you look at enterprises, there's still a very, very healthy opportunity ahead of us. The same is true in the Tier 2 and the speciality cloud providers as well as financials and even more expansion possible for us in the future in ASPs. So we still feel very good about the opportunity. We believe the market has multiple players, but we are a very, very strong competitor in this space and hence, the opportunity to grow.

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Operator [102]

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Your next question comes from John Marchetti with Stifel.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [103]

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Jayshree, I was wondering if you could just spend a little bit of time here on the enterprise market. We spend a lot of time on where the cloud titans are in terms of their 100-gig adoption and maybe their shift to four. I was wondering if maybe you could spend just a minute or 2 discussing sort of how you're expecting that enterprise market to kind of follow sooner and where you think that market is kind of overall with its adoption of 100-gig?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [104]

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Well, thanks, John. I'm actually glad you asked this question because, yes, we tend to focus on cloud titans a lot. But one of the things we're seeing, it is one of our second largest and fastest-growing vertical. And there's a very strong interest in bringing those same cloud principles into the data center in the enterprise. And it really comes in three flavors: first, how to build a private cloud with leaf-spine architectures and scale out the same way, albeit in smaller scale; the second is to bring -- to mimic some of the cloud management principles with CloudVision, bringing change control, automation, network-wide analytics, et cetera; and the third is the hybrid cloud. No company is a better position than Arista as we have deployed in both the public and the enterprise in bringing those 2 together from a workload point of view. So the combination of our vEOS Router with the right APIs to multiple public cloud vendors has been very transformational and well received. And finally, of course, the fourth, which I don't want to overtalk, but will really come to play in the second half of this year is the campus. So when you look at our whole PINs to PICs transformation, there' at least four different use cases in the enterprise that are exciting.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [105]

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So maybe just as a quick follow-up there. Given that they're looking at a lot of these different applications or use cases for the first time, does that lend itself to maybe some additional service sales or almost from a consulting type of standpoint as you look to help them migrate to these types of solutions?

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Jayshree V. Ullal, Arista Networks, Inc. - President, CEO & Director [106]

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I think we -- definitely, Arista has looked at a -- in a -- to be more of a consultative approach, provide the right training. And the professional services varies, we often partner with someone, or they look for us to come in. And Manny, I don't know if you have more to add to that. We don't see a pattern here.

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Manuel F. Rivelo, Arista Networks, Inc. - Senior VP & Chief Customer Officer [107]

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No. I mean, in general, it's an education for the customer base, as they transform their infrastructures into a much more digital framework, they're going to need these modern data centers, no different than the cloud providers. So those solutions are proven and tested, and we can deliver those. Then the delivery of that solution to the customer either comes through development effort, education, training that we can provide and/or through our professional services and/or our partner network that could offer those services. So we have a lot of flexibility there. And we're seeing that being pretty well accepted across all three of those spectrums.

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Chuck Elliott, Arista Networks, Inc. - Director of Business & Investor Development [108]

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This concludes the Arista Q4 2018 Earnings Call. Thank you for all the good questions and for the opportunity to highlight our financial results and corporate achievements for you. I also want to mention that we have posted a presentation which provides additional information on our fiscal results, which you can access on the Investors section of our website. We look forward to continuing the conversation with you during the quarter.

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Operator [109]

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Thank you for joining, ladies and gentlemen. This concludes today's call. You may now disconnect.