Arista Networks, Inc. (ANET) Earnings

Management highlights

- Company Milestones * Achieved the first $3 billion revenue quarter in company history; for comparison, full-year 2021 total revenue was $2.9 billion * Joined the Fortune 500 and the Russell 50 index * Cumulative AI EtherLink switch customers exceeded 100, up from the initial 4-5 customers reported in 2024 - Product and AI Innovation * Launched the new 7060XE7 switch, with 100 terabit capacity, 1.6 terabit throughput, and Arista's first liquid cooling option * Flagship 7800 AI spine platform enables high-scale AI networking without adding extra network tiers, addressing constraints of compute capacity, physical space, and power consumption * Key EOS (Extensible Operating System) innovations for AI workloads include: Smart System Upgrade (SSU) for non-disruptive software updates, Multipath Reliable Connection (MRC) to eliminate performance loss from fabric hash collisions, and SRV6 segment routing for dynamic congestion-aware load balancing across AI fabrics * Arista's single unified EOS architecture supports AI functionality from on-prem scale-out fabrics to long-distance inter-region scale-across networks * The 2030 total addressable market for scale across switching and routing is forecast at $15 to $20 billion, with Arista well positioned to capture share in this segment - Supply Chain Progress * Hired a new senior global operations executive with 35+ years of industry expertise to lead expanded leadership teams for product engineering, contract manufacturing, and end-to-end supply chain * Multi-year purchase commitments increased to $9.7 billion at the end of Q2 2026, nearly tripling from the $3.6 billion level one year prior * Secured full memory supply for all variants for 2026, with extended visibility into 2027 * Qualified new vendors for key components, built geographic supply chain diversity with three contract manufacturers and three distribution facilities across the US, Asia, and Mexico * Established a full liquid cooling supply chain (including cold plates, quick disconnects, and tubing) with capacity agreements for next-generation AI infrastructure * Improved component lead times, inventory management, and subcomponent pipelining across thousands of SKUs, increasing flexibility while reducing inventory risk

Guidance

- Full-year 2026 guidance was raised for the third time in 2026, to $12.6 billion in total revenue, representing 40% year-over-year growth. This is a $1.1 billion increase from the prior guidance of $11.5 billion issued in May 2026, and a $2.1 billion increase from the previous analyst day target of $10.5 billion. - Full-year 2026 targets: gross margin maintained at 62% to 64%, operating margin raised to 48% to 49%, and expected effective tax rate maintained at 21.5%. The 2026 AI Fabrics target is set at a minimum of $3.5 billion, and the 2026 campus revenue target is set at a minimum of $1.25 billion. - Q3 2026 guidance: total revenue of approximately $3.3 billion, gross margin of approximately 63%, operating margin between 48% and 49%, diluted EPS between $1.06 and $1.08, based on 1.279 billion diluted shares, and an expected effective tax rate of 21.5%. - Management noted that there is upside potential to full-year 2026 revenue if additional supply becomes available beyond what is currently baked into guidance.

Segment performance

Total Q2 2026 revenue was $3.0 billion, representing 37.7% year-over-year growth. International revenue contributed $697.8 million, equal to 23% of total revenue, up from 15.5% in the prior quarter. Non-GAAP gross margin was 63.4%, down 220 bps year-over-year but up 100 bps sequentially. Non-GAAP operating expenses totaled $411 million (13.5% of revenue): R&D was $278.1 million (9.2% of revenue), sales and marketing was $109.8 million (3.6% of revenue), and G&A was $23.1 million (0.8% of revenue). Non-GAAP operating income was $1.5 billion (49.9% of revenue), with non-GAAP net income of $1.3 billion (42.9% of revenue) and diluted EPS of $1.02 (39.7% year-over-year growth). For full-year 2026, the company targets at least $1.25 billion in campus segment revenue and at least $3.5 billion in AI Fabrics segment revenue. AI Fabrics scale across use cases are expected to represent approximately 30% of Arista's 2026 AI revenue target.

Risks & headwinds

- Industry-wide component supply tightness and rising component costs are expected to persist as a multi-year industry issue, with management noting the overall supply chain problem is not expected to fully resolve until 2028. - Inventory levels are expected to continue fluctuating quarter-to-quarter as the company balances component timing and availability, which may result in elevated inventory balances and impact the timing of operating cash flow ahead of customer deployments. - Deferred revenue balances may see significant quarterly volatility independent of underlying business performance, driven by increased customer-specific acceptance clauses for new AI products and ramping new customer deployments. - Proprietary implementations of co-packaged optics (CPO) are a near-term industry development that create market fragmentation, with broad adoption of open CPO not expected until 2028-2029.

Analyst Q&A

• Q: As AI networking grows more complex across denser clusters and multi-site/multi-data center deployments, does this increase the value of Arista's integrated platform versus white box alternatives, and are customers rethinking build vs buy decisions for AI infrastructure?

  A: White boxes are typically only used for simple, low-software-requirement use cases. As AI networks become more geographically distributed and require consistent performance, security, and traffic engineering across locations, an integrated hardware-software system approach is far more valuable. Arista's full EtherLink portfolio with reliability features like MRC and SRV6 delivers the low latency and consistent performance required for large-scale AI training and inference, positioning the company well to capture growing demand for integrated solutions.

• Q: You raised full-year 2026 revenue guidance substantially but kept the explicit AI revenue target unchanged. Where is the incremental revenue coming from?

  A: Management expects all business segments, including AI and campus, to grow above prior targets, but has chosen to keep explicit segment targets unchanged to retain flexibility to ship as much product as supply allows across all segments. The incremental $1.1 billion in revenue will be divided across AI, campus, core front-end data center, and routing adjacencies based on actual supply and customer demand through the second half of the year.

• Q: How has Arista improved its supply chain this quarter, and what progress has been made on adding vendor optionality and securing capacity?

  A: Industry-wide supply issues will persist through 2028, but Arista has made significant individual progress. Relationships with strategic silicon vendors remain strong, with improved delivery timelines and ongoing productive technical collaboration for new platforms. The company has added significant vendor optionality for memory, PCBs, and optics, with secured memory supply for all of 2026 and extended visibility into 2027.

• Q: How do emerging optical technologies like CPO and NPO impact Arista's position, and what is Arista's approach to these new technologies?

  A: Arista supports open, standardized co-packaged/nearby optics (OpenCPO/NPO2) with open multi-vendor interfaces, and opposes fragmented proprietary CPO implementations. These technologies are still in early stages, with trials expected next year and meaningful adoption not arriving until 2028-2029. For the foreseeable future, the vast majority of the market will remain pluggable optics and copper, so these new technologies will not meaningfully impact Arista's near-term business.