Arista Networks (ANET) Q4 2024 Earnings Call Transcript

Image source: The Motley Fool.

Arista Networks (NYSE: ANET)
Q4 2024 Earnings Call
Feb 18, 2025, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the fourth quarter 2024 Arista Networks financial results earnings conference call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

[Operator instructions] As a reminder, this conference is being recorded and will be available for replay from the investor relations section on the Arista website following this call. Mr. Rudolph Araujo, Arista's head of investor advocacy, you may begin.

Rudolph Araujo -- Vice President, Security Product Strategy and Marketing

Thank you, Regina. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks' chairperson and chief executive officer; and Chantelle Breithaupt, Arista's chief financial officer. This afternoon, Arista Networks issued a press release announcing the results for its fiscal fourth quarter ending December 31st, 2024.

If you want a copy of the release, you can access it online on our 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 first quarter of the 2025 fiscal year, longer-term business model, and financial outlook for 2025 and beyond. Our total addressable market and strategy for addressing these market opportunities, including AI, customer demand trends, supply chain constraints, component costs, manufacturing output, inventory management, and inflationary pressures on our business, lead times, product innovation, working capital optimization, and the benefits of acquisitions, 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.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $360,040!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $46,374!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $570,894!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

Learn more »

*Stock Advisor returns as of February 3, 2025

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.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you, everyone, for joining us this afternoon for our fourth quarter 2024 earnings call. First, I'd like to warmly welcome our new IR leadership duo of Rudolph Araujo, our director of IR advocacy, supported by Rod Hall that many of you may know as our leader for IR strategy. Special thanks to Liz Stine for her tenure both as assistant engineer and IR lead at Arista. Well, I think you'll all agree that 2024 has been a memorable and defining year for Arista.

We started with an initial guidance of 10% to 12% annual revenue growth. With the momentum of generative AI, we have achieved well beyond that at almost 20% growth, achieving a record revenue of 7 billion, coupled with a non-GAAP operating margin of 47.5%. Before I dwell on that more, let me get back to Q4 2024 specifics. We delivered revenues of 1.93 billion for the quarter with a non-GAAP earnings per share of $0.65, adjusted for the recent 4-to-1 stock split.

Our non-GAAP gross margins of 64.2% was influenced by efficient supply chain and manufacturing, as well as a good mix of enterprise and software in the quarter. International contribution for the quarter registered at 16% with the Americas super strong at 84%. Now shifting to annual sector revenue for 2024. Our cloud and AI titans contributed significantly at approximately 48%, keeping in mind that Oracle is a new member of this category.

Enterprise and financials were strong at approximately 35%, while the providers, which now includes Apple, was at 17% approximately. Both Microsoft and Meta are greater than 10% concentration customers at approximately 20% and 14.6%, respectively. As you know, we cherish our privileged partnerships with both of them very much. It has spanned over 14 years as we collaborate deeply with joint engineering and innovative AI and cloud products.

In terms of annual 2024 product lines, our core cloud AI and data center products are built on a highly differentiated extensible OS stack and is successfully deployed across 10-, 25-, 100-, 200-, 400-, and 800-gigabit Ethernet speeds. It delivers power efficiency, high availability, automation, and agility as the data centers demand insatiable bandwidth capacity and network speeds for both front-end and back-end storage compute and AI zones. This core product line drove approximately 65% of our revenue. We continue to gain market share in the highest performance of the switching category of 100-, 200-, and 400-gig ports to attain the No.

1 position at greater than 40% market share according to industry analysts in ports. We have increased our 400-gig customer base to approximately 1,000 customers last year. In 2024, we expect 800-gigabit Ethernet to emerge as an AI back-end cluster in 2025. We remain optimistic about achieving our AI revenue goals of 1.5 billion in AI centers, which includes the $750 million in AI back-end clusters in 2025.

Our network adjacencies market comprised of routing, replacing routers, and the cognitive AI-driven campus is going well. Our investments in cognitive, wired, wireless, zero-touch provisioning, and network identity, as well as sensors for threat mitigation, is being received extremely well by our campus customers. Our recent modern stacking introduction of SWAG, Switched Aggregation Group, is a fitting example of our compelling innovation for open and efficient networking, conserving IP addresses without proprietary methods. The post-pandemic campus is very different, and our customers are seeking alternatives to legacy incumbents with deep zero trust security, high availability, and observability embedded in the network across our software stack with CloudVision management.

We are committed to the $750 million goal in 2025 and much more ahead. We are successfully also deployed in routing edge and peering use cases. Just in 2024 alone, we introduced six EOS software releases with greater than 600 new features across our core and adjacent offerings. The campus and routing adjacencies together contribute approximately 18% of revenue.

Our third category is network software and services based on subscription models, such as Arista A-Care, CloudVision, DMF observability, and advanced security sensors for network detection and response. We added over 350 CloudVision customers translating to literally one new customer a day. CloudVision is pivotal to building our network as a service and deploying Arista-validated designs in the enterprise. Arista's subscription-based network services and software contributed approximately 17% of total revenue.

Note that perpetual licenses do not count here and go into the core or adjacent sections. While the 2024 headline has clearly been about generative AI, Arista continues to diversify its business globally with multiple use cases and verticals. We are viewed as the modern network innovator of choice for client to campus, to cloud, and AI networking, ideally positioned with our differentiated foundation. We celebrated two milestones in 2024: our 10th anniversary of going public at the New York Stock Exchange, and our 20th anniversary of founding.

In the past decade, we have exceeded 10,000 customers with a cumulative of 100 million ports of installed base as Arista drives the epicenter of mission-critical network transactions. Arista 2.0 strategy is resonating exceptionally well with our customers. Customers are not only looking to connect but unify and consolidate that data across silos for optimal networking outcomes. Our modern networking platforms are foundational for transformation, from incongruent silos to centers of data, and it places us in a very unique position as the best-of-breed innovator for data-driven networking.

These centers of data, as we call it, can reside in the campus, as a campus center or data center or WAN centers or AI centers, regardless of their locations. Networking for AI is also gaining traction as we move into 2025, building some of the world's greatest Arista AI centers at production scale. These are constructed with both back-end clusters and front-end networks. And as I've shared with you often, the fidelity of the AI traffic differs greatly from cloud workloads in terms of diversity, duration, and size of flow.

Just one slow flow can slow the entire job completion time for a training workload. Therefore, Arista AI centers seamlessly connect to the front end of compute, storage, WAN, and classic cloud networks with our back-end Arista Etherlink portfolio. This AI-accelerated networking portfolio consists of three families and over 20 Etherlink switches, not just one point switch. Our AI for networking strategy is also doing well, and it's about curating the data for higher-level network functions.

We instrument our customers networks with our publish/subscribe state foundation with our software called Network Data Lake to deliver proactive, predictive, and prescriptive platforms that have superior AIOps with A-Care support and product function. We are pleased to surpass for the first time the $1 billion revenue mark in 2024 for the software and subscription service category. In 2024, we conducted three very large customer events in London, New York, and Santa Clara, California. Our differentiated strategy and superior products are resonating deeply as we touched over 1,000 strategic customers and partners in these exclusive events.

Simply put, we outpaced the industry in quality and support with the highest net promoter score of 87, which translates to 93% of customer respondent satisfaction. Of course, we do that with the lowest security and vulnerabilities and steadfast network innovation. In summary, 2024 has been a pivotal turning point for Arista. It has been a key breakaway year as we continue to aim for 10 billion annual revenue with a CAGR of double digits that we set way back in November 2022 analyst day.

While I do appreciate the exuberant support from our analyst community on our momentum, I would encourage you to pay attention to our stated guidance. We live in a dynamic world of changes, most of which have resulted in positive outcomes for Arista. We reiterate at the upper end of upper range of our 2025 guidance of our double-digit growth at 17%, now aiming for approximately 8.2 billion in 2025 in revenue. The Arista leadership team has driven outstanding progress across multiple dimensions.

In 2024, we are at approximately 4,465 employees, rooted in engineering and customer investments. I'm incredibly proud of how we've executed and navigated the year based on our core principles and culture. While customers are struggling with customer fatigue from our legacy incumbents, Arista is redefining the future of data driven networking intimately with our strategic customers. With that, I'd like to turn it over to Chantelle, who has transitioned to our -- to become our core Arista and chief financial officer in record time, less than a year.

Over to you, Chantelle, and welcome again, and happy one-year anniversary.

Chantelle Breithaupt -- Chief Financial Officer

Thank you, Jayshree, and congratulations on a great 2024. My first full year as CFO has been more than I could have hoped for, and I am excited about Arista's journey ahead. Now, on to the numbers. As a reminder, this analysis of our Q4, our full year 2024 results and our guidance for Q1 2025 is based on non-GAAP and excludes all noncash stock-based compensation impacts, certain acquisition-related charges, and other nonrecurring items.

In addition, all share related numbers are provided on a post-split basis to reflect the 4-to-1 stock split in December 2024. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q4 were $1.93 billion, up 25.3% year over year and above the upper end of our guidance of 1.85 billion to 1.9 billion. For fiscal year 2024, we are pleased to have delivered 19.5% in revenue growth, driven by achievements in all three of our product sectors.

Services and subscription software contributed approximately 18.3% of revenue in the fourth quarter, up from 17.6% in Q3. International revenues for the quarter came in at $311.1 million or 16% of total revenue, down from 17.6% last quarter. This quarter-over-quarter decrease was driven by the relative increased mix of domestic revenue from our large global customers. The overall gross margin in Q4 was 64.2%, slightly above the guidance of 63% to 64% and down from 65.4% in the prior year.

As a recap for the year, we delivered a gross margin result of 64.6% compared with 62.6% for the prior year. This increase is largely due to a combination of improved supply chain and inventory management. Operating expenses for the quarter were $332.4 million or 17.2% of revenue, up from the last quarter at $279.9 million. R&D spending came in at $226.1 million or 11.7% of revenue, up from 9.8% last quarter.

This matches the expectations discussed in our Q3 earnings call regarding the timing of engineering costs and other costs associated with the development of our next-gen products moving from Q3 to Q4. This finishes the year of R&D at 11.2% of revenue, demonstrating a continued focus on product innovation. Sales and marketing expense was $86.3 million or 4.5% of revenue, up from $83.4 million last quarter. This was driven by continued investment in both headcount and channel programs.

Our G&A costs came in at $19.9 million or 1% of revenue, up from $19.1 million last quarter, reflecting continued investment in scaling the company. Our operating income for the quarter was $907.1 million or 47% of revenue. This strong Q4 finish contributed to contributed to an operating income result for fiscal year '24 of $3.3 billion or 47.5% of revenue. Congratulations to the Arista team on this impressive achievement.

Other income and expense for the quarter was a favorable $89.3 million, and our effective tax rate was 16.7%. This lower-than-normal quarterly tax rate reflected the release of tax reserves due to the expiration of the statute of limitations and favorable changes in state taxes. This resulted in net income for the quarter of $830.1 million or 43% of revenue. Our diluted share number was 1.283 billion shares, resulting in a diluted earnings per share for the quarter of $0.65, up 25% from the prior year.

For FY '24, we are pleased to have delivered a diluted earnings per share of $2.27, a 31.2% increase year over year. Now, turning to the balance sheet. Cash, cash equivalents, and marketable securities ended the quarter at approximately $8.3 billion. In the quarter, we repurchased $123.8 million of our common stock at an average price of $94.80 per share.

Within fiscal '24, we repurchased $423.6 million of our common stock at an average price of $77.13 per share. Of the $1.2 billion repurchase program approved in May 2024, $921 million remains available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price, and other factors. Now, turning to operating cash performance.

For the fourth quarter, we generated approximately $1 billion of cash from operations in the period, reflecting strong earnings performance, combined with an increase in deferred revenue, offset by an increase in income tax payments. DSOs came in at 54 days, down from 57 days in Q3, reflecting the timing of shipments and the strong collections performance by the team. Inventory turns were 1.4 times, up from 1.3 last quarter. Inventory increased marginally to $1.83 billion, reflecting diligent inventory management across raw and finished goods.

Our purchase commitments at the end of the quarter were $3.1 billion, up from $2.4 billion at the end of Q3. As mentioned in prior quarters, this expected activity represents purchases for chips related to new products and AI deployments. We will continue to rationalize our overall purchase commitment number. However, we expect to maintain a healthy position related to key components and continue to have some variability in this number to meet customer demand and improve lead times in future quarters.

Our total deferred revenue balance was $2.79 billion, up from $2.51 billion in the prior quarter. The majority of the deferred revenue balance is services-related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis. Our product deferred revenue balance increased by approximately $150 million over the last quarter. Fiscal 2024 was a year of new product introductions, new customers, and expanded use cases.

These trends have resulted in increased customer trials and contracts with customer specific acceptance clauses that have and will continue to have increased the variability and magnitude of our preferred deferred revenue balances. We expect this to continue into fiscal 2025. Accounts payable days were 51 days, up from 42 days in Q3, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $12.5 million.

In October, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $100 million in capex during fiscal '25 for this project. Now, turning to our outlook for the first quarter of 2025 and the remainder of the fiscal '25 year. We continue to gain confidence in our view for fiscal year '25 and now place our revenue growth outlook at approximately 17% or $8.2 billion. This is up from our initial FY '25 guidance of 15% to 17%.

This reflects our combined outlook for cloud, AI, enterprise, and cloud specialty providers, along with a recognition of the volatility that we have seen in the market since the beginning of the year. For gross margin, we reiterate the range of the fiscal year of 60% to 62% with Q1 '25 expected to be above the range due to the anticipated mix of business in the quarter. Similar to others in the industry, we will continue to monitor the fluid tariff situation and be thoughtful for both the short- and long-term outcomes to both our company and our customers. In terms of spending, we expect to invest in innovation, sales, and scaling the company, resulting in a continued operating margin outlook of 43% to 44% in 2025.

On the cash front, we will continue to work to optimize our working capital investments with some expected variability in inventory due to the timing of component receipts on purchase commitments. Our structural tax rate is expected to remain at 21.5%, back to the usual historical rate, up from the unusually low one-time rate of 16.7% experienced last quarter Q4 FY '24. With all this as a backdrop, our guidance for the first quarter is as follows: revenues of approximately 1.93 billion to 1.97 billion, a slightly stronger seasonality in Q1 than prior-year trends, an outcome of the timing of our customers priorities; gross margin of approximately 63%; and operating margin at approximately 44%. Our effective tax rate is expected to be approximately 21.5% with approximately 1.285 billion diluted shares.

In summary, we, at Arista, are enthusiastic about 2025 and the general networking outlook ahead. We have an impressive portfolio and are ready to solve our customers needs across all the centers of data. Combined with our Arista team spirit, we are ready to realize our fair share of the $70 billion market TAM. With that, I, too, would like to welcome Rudy and Rod to the Arista IR team.

Back over to you, Rudy, for Q&A.

Rudolph Araujo -- Vice President, Security Product Strategy and Marketing

Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding.

Operator, take it away.

Questions & Answers:

Operator

[Operator instructions] Our first question will come from the line of Michael Ng at Goldman Sachs. Please go ahead.

Mike Ng -- Goldman Sachs -- Analyst

Hi. Good afternoon. Thank you for the question. I was just wondering if you could talk about the timing of how the year might look like.

And, you know, how do you expect the risk of switches in the AI back end to be rolled out into production? You know, are the sale of these switches tied to the deployment of next-generation Nvidia chips or hyperscale custom ASICs on the compute side? And, you know, is that a gating factor that you're watching out for? Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah. Thank you, Michael. first, I want to say Arista is still committed to four out of our five AI clusters that I mentioned in prior calls. The fifth one is a little bit stalled.

It is not a cloud titan. They are awaiting new GPUs and some funding, too, I think. So, we -- I hope they'll come back next year. But for this year, we won't talk about them.

But the remaining four, let me spend some -- give you some color. Three out of the four customers are expected to, this year, roll out a cumulative of 100,000 GPUs. So, we're going to do very well with three of them on the back end. And you can imagine, they're all pretty much one major Nvidia class of GPU.

It's -- they will be waiting for the next generation of GPUs. And independent of that, we'll be rolling out fairly large numbers. On the fourth one, we are migrating right now from InfiniBand to proving that Ethernet is a viable solution. So, we're still -- you know, they've historically been InfiniBand.

And so, we're still in pilots and we expect to go into production next year. So, doing very well in four out of four. The fifth one is stalled, and three out of the four are expected to be 100,000 GPUs this year.

Operator

Our next question comes from the line of Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani -- Analyst

Good afternoon. Thanks for taking my question. You know, I guess, Jayshree, there's always this concern around the impact of white box vendors to your revenue growth and, you know, clearly, over the last decade, I don't think it's been an impediment for the company. But can you maybe just share your perspective that when it comes to AI networks, especially the back-end networks, you know, how do you see the mix evolving white box versus OEM solutions? And maybe just help us understand the differentiators that helped Arista be successful on the front end.

Do they extend the back-end networks as well? Or is there something different we should be aware about? Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, sure, Amit. Gosh, this feels like a deja vu question, but thank you for asking it. I'm sure it's on a lot of minds. We've been going through this for at least 10 years on the cloud.

And the first thing I just want to say is, this time, it's so huge and so large. We will always coexist with white boxes and operating systems that are non-EOS, much like Apple coexist on the iPhone with other phones of different types. When you look at the back end of an AI cluster, there are typically two components, the AI leaf and the AI spine. The AI leaf connects to the GPUs and, therefore, is the first, if you will, point of connection.

And the AI spine aggregates all of these AI leafs. Almost in all the back-end examples we've seen, the AI spine is generally 100% Arista-branded EOS. You've got to do an awful lot of routing, scale, features, capabilities that are very rich. That would be difficult to do in any other environment.

The AI leaf can vary. So, for example, let's take the example of the five customers I mentioned a lot. Three out of the five are all EOS in the leaf spine. Two out of the five are kind of hybrid.

Some of them have, you know, some form of SONiC or FBOSS. And as you know, we co-develop with them and, you know, coexist in a number of use cases, where it's a real hybrid combination of EOS and an open OS. So, for most part, I just like to say that white box and Arista will coexist and will provide different strokes for different folks. Now, in terms of differentiators, a lot of our deployments right now is 400 and 800 gig.

And we see a tremendous amount of differentiation not only, like I explained to you, in scale and routing features, but cluster load balancing, you know, AI visibility and analytics at real time, personnel queuing, congestion control, visibility, and most importantly, smart system upgrades because you sure don't want your GPUs to come down because you don't have the right software to accelerate so that the network provides the ideal foundation that if a GPU is in trouble, we can automatically give it a different connection and an alternate connection. So, tremendous amount of differentiation there and even more valid in a GPU, which costs typically five times as much as a CPU.

Operator

Our next question comes from the line of Tim Long at Barclays. Please go ahead.

Tim Long -- Analyst

Thank you. I wanted to touch on the cloud titan numbers, a few parter there. Obviously, one of them, Meta, looks like, based on the numbers you gave, if I heard it right, it's down year over year. If you could touch on that.

And then, the other, you know, if we do the math for the other cloud titan, looks like it went up a lot. I don't know, I think Oracle was kind of in that already. Was there anything else going on other than the Oracle shift with the rest of the cloud titans where it looked extremely strong in 2024? Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah. So, speaking specifically to Meta, we're obviously in a number of use cases in Meta. Keep in mind that our 2024 Meta numbers is influenced by more of their 2023 capex, and that was Meta's year of efficiency where their capex was down 15% to 20%. So, you're probably seeing some correlation between their capex being down and our revenue numbers being slightly lower in '24.

In general, I would just say, all our cloud titans are performing well in demand, and we shouldn't confuse that with timing of our shipments. And I fully expect Microsoft and Meta to be greater than 10% customers in a strong manner in 2025 as well. Specific to the others we added in, they're not 10% customers, but they're doing very well, and we're happy with their cloud and AI use cases.

Operator

Our next question comes from the line of Ben Reitzes with Melius. Please go ahead.

Ben Reitzes -- Analyst

Yeah, darn, Tim Long took my question, so I'm going to ask about gross margins, you know --

Jayshree V. Ullal -- Chair and Chief Executive Officer

OK.

Ben Reitzes -- Analyst

Darn that guy. So, about gross margins. So, you know, obviously, the go-between to 61 at the midpoint, you know, after being much higher in the first quarter, I would think that implies significant cloud titan mix, though, you know, going throughout the rest of the year. Do you mind just giving some color on, you know, what is pushing down the gross margin a little more? And does that mean that cloud titans do accelerate throughout the year because the gross margin gets pushed down vis a vis -- you know, in your guidance? Thank you.

Chantelle Breithaupt -- Chief Financial Officer

Yeah, for --

Jayshree V. Ullal -- Chair and Chief Executive Officer

Go ahead, Chantelle.

Chantelle Breithaupt -- Chief Financial Officer

Yes. Sorry, Jayshree. No, absolutely. I think you got it right, Ben, from that perspective.

As we entered Q4 last year talking about '25 guidance and as we enter into this quarter, it is and still remains a mix. You know, Jayshree kind of gave some thoughts onto the timing to the first question. So, it is mix-driven. You know, there were some questions last quarter if it was price-driven.

This is just a mix-driven conversation. I would say we have absorbed a little bit of the specific tariffs on China in that number, so we are absorbing that on behalf of our customers. But otherwise, it's mix-driven. And we'll continue to update as we do the quarterly guidance through the year.

Jayshree V. Ullal -- Chair and Chief Executive Officer

John, your --

Operator

Our next question --

Jayshree V. Ullal -- Chair and Chief Executive Officer

Sorry, I was just going to add that John's done a fantastic job on the planning for China ahead of time. So, while we're absorbing the costs, most of it is related to the mix, and some of it is related to the China tariffs. Would you say that?

John McCool -- Senior Vice President, Chief Platform Officer

That's right. Absolutely. We've been working on China mitigation for some time, and happy to report, we've made good progress.

Operator

Our next question comes from the line of Meta Marshall at Morgan Stanley. Please go ahead.

Meta Marshall -- Analyst

Great, thanks. Maybe another topical question from investors just over the past month has been DeepSeek and just as you think about kind of this 1-1 ratio you've talked about on back end versus front end, you know, how you kind of see that changing as we've seen some of kind of the changes to kind of thoughts around training investments. Thanks.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, thank you, Meta. Well, DeepSeek is -- certainly, DeepSeek is many stuff. But I actually see this as a positive because, you know, I think you're now going to see a new class of CPUs, GPUs, AI accelerators, and -- where you can have substantial efficiency gains that go beyond training. So, that could be some sort of inference or mixture of experts or reasoning and -- which lowers the token count and, therefore, the cost.

So, what -- what I'm -- what I like about all these different options is Arista can scale out network for all kinds of XPUs and accelerators. And I think the eye-opening thing here for all of our experts who are building all these engineering models is there are many different types, and training isn't the only one. So, I think this is a nice evolution of how AI will not just be a back-end training only limited to five customers type phenomena, but will become more and more distributed across the range of CPUs and GPUs.

Meta Marshall -- Analyst

Great. Thanks.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you, Meta.

Operator

Our next question comes from the line of Aaron Rakers at Wells Fargo. Please go ahead.

Aaron Rakers -- Analyst

Yeah. Thanks for taking the question. Jayshree, I'm curious just kind of thinking about some of the questions we've gotten recently. You know, when you see announcements like Stargate, and obviously Stargate has the involvement of one of your neo cloud titan customers, how do you conceptualize the opportunity set for Arista vis-a-vis both back-end and front-end networking in deployments like that? And then, do you have any thoughts on just the broader context of what you're seeing on sovereign AI opportunities in your business? Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yes. Thank you, Aaron. Stargate and sovereign AI are not quite related. So, let me take the first one first.

You know, if you look at how we have classically approached GPUs and collective libraries, you know, we've largely looked at it as two separate building blocks. There's the vendor who provides the GPU, and then there's us who provides the scale-out networking. But when you look at Stargate and projects like this, I think you'll start to see more of a vertical rack integration, where the processor, the scale-up, the scale-out, and all of the software to provide a single point of control and visibility starts to come more and more together. This is not a 2025 phenomenon.

But definitely, in '26 and '27, you're going to see a new class of AI accelerators for a new class of training and inference, which is extremely different than the current, more pluggable Lego type of version. So, we're very optimistic about it. Andy Bechtolsheim is personally involved in the design of a number of these next-generation projects. And the need for this type of, shall we say, pushing Moore's law of improvements in density and performance that we saw in the 2000 is coming back.

And you can boost more and more performance per XPU, which means you have to boost the network scale from 800 gig to 1.60. There are other things to consider like liquid cooling and co-packaging of copper and optics, so lots going on there that Arista is in the middle of. We're best of breed hardware that John McCool's team is working on, as well as Andy's team is.

Operator

Our next question comes from the line of Atif Malik at Citi. Please go ahead.

Atif Malik -- Analyst

Hi. Thank you for taking my question. I appreciate you calling out to pay attention to the guidance. Now, you are reiterating 750 million AI back-end sales this year despite the stalled or the fifth customer.

Can you talk about where is the upside coming from this year? Is it broad-based or one or two customers? And also, if you can talk to the 70 billion TAM number for 2028, how much is AI?

Jayshree V. Ullal -- Chair and Chief Executive Officer

OK, so I'll take your second question first, Atif. On the 70 billion TAM in 2028, I would roughly say a third is AI, a third is data center and cloud, and a third is campus and enterprise. And obviously, absorbed into that is routing and security and observability. I'm not calling them out separately for the purpose of this discussion.

So, roughly 20 to 25 on each to get to that 70 billion. So, coming back to your original question, which was -- help me out again.

Atif Malik -- Analyst

The 750 million in back end --

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, yeah. So, as I said, we're well on our way, and three customers deploying a cumulative of 100,000 GPUs is going to help us with that number this year. And as we increased our guidance to 8.2 billion, I think we're going to see momentum, both in AI cloud and enterprises. I'm not ready to break it down and tell you which, where.

I think we'll see -- we'll know that much better in the second half. But, Chantelle, and I feel confident that we can definitely do the 8.2 billion that we historically don't call out so early in the year. So, having visibility of that helps.

Atif Malik -- Analyst

Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Samik Chatterjee -- Analyst

Hi. Thanks for taking the question. Jayshree, maybe I can sort of bring up one more topic that's come up a lot in the last few days, which is the value of the EOS software layer to the back end of the network. And particularly, in that discussion in terms of relative competition to like a white box player, how do you sort of emphasize the value of EOS to your customers? Can you sort of outline some of the -- sort of what are the key drivers we should keep in mind and, again, in that competitive landscape between white box and Arista? Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah. Sure, Samik. So, first of all, when you're buying these expensive GPUs that cost $25,000, they're like diamonds, right? You're not going to string a diamond on a piece of thread. So, first thing I want to say is you need a mission- critical network.

Whether it's called -- whether you want to call it white box, blue box, EOS, or some other software, you've got to have mission-critical functions, analytics, visibility, high availability, etc. As I mentioned and I want to reiterate, they're also typically a leased line network. And I have yet to see an AI spine deployment that is not EOS based. I'm not saying it can't happen or won't happen.

But in all five installed major installations, the benefit of our EOS features for high availability, for routing, for VXLAN, for telemetry, our customers really see that. And the 7800 is the AI spine flagship product that we have been deploying last year, this year, and in the future. Coming soon, of course, there's also the product we jointly engineered with Meta, which is the distributed Etherlink switch. And that is also an example of a product that provides that kind of leaf/spine combination, both with FBOSS and EOS options in it.

So, in my view, it's difficult to imagine a highly resilient system without Arista EOS in AI or non-AI use cases. On the leaf, you can cut corners. You can go with smaller buffers, you may have a smaller installation. So, I can imagine that some people will want to experiment and do experiment in smaller configurations with non-EOS.

But again, to do that, you have to have a fairly large staff to build the operations for it. So, that's also a critical element. So, unless you're a large cloud titan customer, you're less likely to take that chance because you don't have the staff. So, all in all, EOS is alive and well in AI and cloud use cases, except in certain specific use cases where the customer may have their own operations staff to do so.

Samik Chatterjee -- Analyst

Thank you. Thanks.

Operator

Our next question comes from the line of Ben Bollin with Cleveland Research. Please go ahead.

Benjamin Bollin -- Analyst

Good afternoon, everyone. Thanks for taking the question. Jayshree, I'm interested in your thoughts on your enterprise strategy within G2000 and how that may be evolving as it looks like refresh opportunities are intensifying. Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, no, listen we're always looking at three major threats: our classic cloud business, our AI, and the enterprise, you know, led by Ashwin and Chris is a very significant area of investment for us. From a product point of view, you know, we have a natural trickle-down effect from our high end data center products to the cloud. And so, whether it's the enterprise data center or the campus, I've never seen our portfolio be as strong as it is today. So, a lot of our challenges and our execution is really in the go-to-market, right? And that just takes time.

As you know, we've been slowly but steadily investing there. And our customer count, the number of projects we get invited to, especially as you pointed out in the Global 2000, has never been stronger. One area I'd like to see more strength, and Chris Schmidt and the team are working on it, as you can tell from our numbers, is international. We're bringing in some new leadership there and hope to see some significant contributions in the next year or so.

Operator

Our next question comes from the line of Ryan Koontz with Needham and Company. Please go ahead.

Ryan Koontz -- Analyst

Great, thanks. Jayshree, can you comment on -- we've heard a lot of chatter lately about co-packaged optics? Can you maybe speak about its place in your roadmap and how investors should think about that, the effect on your TAM and your opportunities to sell?

Jayshree V. Ullal -- Chair and Chief Executive Officer

Well, first of all, you know, Andy has reminded me that co-packaged optics is not a new idea. It's been around 10 to 20 years. So, the fundamental reason -- let's go through why co-packaged optics has had a relatively weak adoption so far is because of field failures. And most of it is still in proof of concept today.

So, going back to networking, the most important attribute of a network switch is reliability and troubleshooting. And once you solder a co-packaged optics on a PCB, you lose some of that flexibility and you don't get the serviceability and manufacturing. That's been the problem. Now, a number of alternatives are emerging, and we're a big fan of co-packaged copper, as well as pluggable optics that can complement this like linear drive or LPO as we call it.

Now, we also see that if co-packaged optics improves some of the metrics it has right now, for example, it has a higher channel count than the industry standard of eight-channel pluggable optics, but we can do higher channel pluggable optics as well. So, some of these things improve. We can see that both CPC and CPO will be important technologies at 224 gig or even 448 gig. But so far, our customers have preferred a Lego approach that they can mix and match pluggable switches and pluggable optics and haven't committed to soldering them on the PCB.

And we feel that will change only if CPO gets better and more reliable. And I think CPC can be a nice alternative to that.

Ryan Koontz -- Analyst

I appreciate your thoughts. Thank you.

Operator

Our next question comes from the line of Simon Leopold with Raymond James. Please go ahead.

Simon Leopold -- Analyst

Thank you very much for taking the question. I was hoping you could maybe double click on the cognitive adjacencies? It's been a meaningful part of revenue, I think you said 18%. If you could offer a little bit more color about how the elements of that are trending and your expectations for how that part of the business is growing in your 2025 expectations. Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, no, as you can imagine, that's an important both the routing and the campus, and we've already signed up to 750 million, so we're clearly -- out of our 8.2 billion, expect that to be over a billion this year, right? Now, we don't -- in the routing use case, which is particularly enterprise and service provider related, you know, it's -- as I've often said, it's difficult to measure it in isolation, so we're very strict about the definition being it has to be a combination of the software running with a dedicated routing hardware. So, for example, if the hardware is shared across switching and routing, we don't count it there. So, I think sometimes we shortchange the numbers a little bit and more of it goes in the core. But I just want you to be aware that it's a very strategic piece.

You add that to the fact that, you know, the SD-WAN market is now evolving. It's not just about how do you do encryption and tunnels and migrate from MPLS, but you really need a routed backbone. So, the combination of SD-WAN in the edge and a router backbone really falls into the sweet spot for Arista, both in the enterprise and service providers. I don't need to tell you about our campus initiatives.

We are very, very keen that we see a parting of the seas, if you will, where there's a lot of fatigue with subscription models on the campus from one competitor and another set of competitors who are trying to do a merger or acquisition. So, Arista is the only pure-play campus innovator who can provide that best of breed. And we're particularly getting traction there where our data center customers are already familiar with us. And they're using a data center spine, and they can extend that same universal spine to wired and wireless leaf.

So, using CloudVision as a management domain, we're seeing much, much more traction, be it for automation, zero trust security, or observability with our campus products. So, I think both of those are meaningful, and we expect them to exceed $1 billion. Chantelle, you want to say a few words?

Chantelle Breithaupt -- Chief Financial Officer

Yeah, the only other thing I'd add, Jayshree, to your points which are completely showing the intent, the other things for campus are a couple fold. First is, you know, John, who's here with us, has spent a lot of time getting us better lead times coming into this year. So, we have a great lead times conversation. We're very excited about that, and the customers seem pretty excited as well.

We also have a curated preferred partner program, particularly international, to your point earlier, Jayshree, on growing the international revenue. And we're excited because we've seen some campus first wins where not only is the DC bringing us in, but we're actually bringing the DC through our campus win. So, just add a couple more points to the enthusiasm for 2025.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you. Great reminders.

Operator

Our next question will come from the line of Tal Liani at Bank of America. Please go ahead.

Tal Liani -- Analyst

Hi, guys. Two questions, one on routing and one on enterprise. Enterprise grew 16% this year. What drives it? Is it just regular growth of data centers? Or do you start to see enterprises investing because of AI and applications for AI? The second thing is about routing.

Routing used to be a small opportunity when it was just a license. Can you elaborate on routing? What is your differentiation versus the others? Others are bundling it with optics. How do you sell it? And then, how big is the opportunity -- not in terms of numbers, but is it now a hardware with software, or is it just software license like it used to be? Thanks.

Chantelle Breithaupt -- Chief Financial Officer

Well, Jayshree, I can start with enterprise and then do you want to take routing?

Jayshree V. Ullal -- Chair and Chief Executive Officer

Sure, please go ahead.

Chantelle Breithaupt -- Chief Financial Officer

Yeah. So, I think for enterprise, there are a few ways I would describe, you know, kind of our growth vectors in '24 and continuing into '25 and into the following years. One is coverage. You've seen we've invested in sales and marketing headcount in '23, '24, and going into '25.

'24, we had double digit increase in sales and marketing headcount so we're just getting more coverage. We're also using that preferred partner program I mentioned to get into the enterprise. We do have international kind of campaigns that we're working on. We do have a new logo focus.

And so, I think that all those land-and-expand motion are the growth vectors. I would say for the AI perspective, you know, speaking with the customers, it's great. It's moved from kind of a theory to more specific conversation, and you're seeing that in the banks and some of the higher-tier, you know, Global 2000 Fortune 500 companies. And so, they're moving from theory to actual use cases they're speaking to.

And the way they describe it is it takes a bit of time. You know, they're working mostly with cloud service providers at the beginning kind of doing some training, and then they're deciding whether they bring that on-prem and inference, so they're making those decisions. So, I think those are early days, but we're having really great conversations for the AI part of that. Jayshree, did you want to cover that?

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah. So, Tal, on routing, routing has always been a critical part of our offerings for the cloud and data center where, as you rightly described, it was more of a software enhancement. But as we are getting more meaningful and important to the service providers, as well as to the large enterprises -- I was just with a very large bank in New York last week. It was snowing there, so super cold, so I stayed indoors most of the time.

And the use case there is not data center, it's not campus, it's all a WAN-routed fabric. It's pretty amazing. And then, they're looking for us to not just build that core routing, but as a hub, but also take it into the spoke. And you mentioned features.

I think what happened with Arista is we were largely building features for the cloud and data center, which is 20% of the features. But today, our routing portfolio is much more complete. VXLANsec, TunnelSec, MacSec encryption, MPLS, segment routing, OSPF, BGP, we got it all. So, we're no more apologizing for what we don't have in routing, and we obviously have the best software stack in terms of quality and support in the industry.

So, while we are selling a lot of software SKUs, we are now finding ourselves in a lot of dedicated hardware SKUs, particularly with the 7280 platform. That has been a real workhorse for us and very successful.

Tal Liani -- Analyst

Great. Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you, Tal.

Operator

Our next question comes from the line of Antoine Chkaiban with New Street Research. Please go ahead.

Antoine Chkaiban -- Analyst

Hi. Thank you for taking my question. I'd love to get your latest perspective on what you're hearing from service providers in AI. One of your competitors mentioned that they were seeing AI driving demand for service providers because they're building out their network in anticipation of an increase in traffic driven by AI.

So, just wondering if you could comment on that as well. Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Antoine, do you mean the classic service providers or generally the neo clouds?

Antoine Chkaiban -- Analyst

The classic service providers.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Oh, OK. So, we haven't seen a huge uptick there yet. I think, you know, maybe some experimental. But we have -- you know, to answer a question you didn't ask, we have seen much more activity and somebody earlier that I didn't answer the sovereign cloud, the neo clouds.

We are seeing a new class of Tier 2 specialty cloud providers emerge that want to provide AI as a service and want to be differentiated there. And there's a whole lot of funding, grant money, real money going in there. So, service providers, too early to call. But neo clouds and specialty providers, yeah, we're seeing lots of examples of that.

Antoine Chkaiban -- Analyst

Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Matt Niknam with Deutsche Bank. Please go ahead.

Matthew Niknam -- Analyst

Hey, thanks so much for taking the question. Maybe for Chantelle. I mean, you're sitting now on 8 billion worth of cash and equivalents on the balance sheet. So, maybe just an update on how you prioritize uses of cash heading into 2025.

Thank you.

Chantelle Breithaupt -- Chief Financial Officer

Yeah, no, it's great. Thank you for the question. You know, we're very pleased with the performance, and our capital allocation strategy has not changed coming into FY '25. You know, just to kind of reiterate and remind, and I appreciate the opportunity to do so, you know, first of all, in the sense of investing that cash, where we can still get a very reasonable and respectable return, continues to be a priority.

Repurchasing, you know, you saw that what we did through '24, and we'll aim to do what we can through '25. Organic investment, so you saw that in the sense, we're still looking to scale the company in R&D, sales, back office. And probably, the one that's the -- probably, the one that's the least on the scale is, you know, sizable inorganic activity. So, I would focus on the first four, and that's how we'll remain in '25.

Operator

Our next question comes from the line of David Vogt with UBS. Please go ahead.

David Vogt -- Analyst

Great. Thanks guys for taking my questions. So, Jayshree, I have a question about sort of the evolution of speed deployment at some of your M&M customers. So, obviously you mentioned 400 and 800 Gs have been, obviously, a principal driver.

How are you thinking about how that plays out in '25 and beyond? You know, there's some wins out there. I know different parts of the network at 1.6. But trying to get a sense for how you think about, you know, 400 into 800 into ultimately 1.6, not just in '25 but in '26 and beyond? Thanks.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, no, I think that's a very good question. The state transitions because of AI are certainly getting faster. It used to take --you know, when we went from 200 gig, for example, at Meta, or 100 gig in some of our cloud titans to 400, that speed transition typically took three to four, maybe even five years, right? In AI, we see that cycle being almost every two years. So, I would say 2024 was the year of real 400 gig.

'25 and '26, I would say, is more 800 gig. And I really see 1.60 coming into the picture because we don't have chips yet. Maybe in, what do you say, John, late '26?

John McCool -- Senior Vice President, Chief Platform Officer

Yeah.

Jayshree V. Ullal -- Chair and Chief Executive Officer

And real production maybe in '27?

John McCool -- Senior Vice President, Chief Platform Officer

Yeah.

Jayshree V. Ullal -- Chair and Chief Executive Officer

So, there's a lot of talk and hype on it, just like I remember talking hype on 400 gig five years ago. But I think, realistically, you're going to see a long runway for 408 and 800 gig. Now, as you get into 1.60, part of the reason, I think, it's going to be measured and thoughtful is many of our customers are still awaiting their own AI accelerators or Nvidia GPUs, which -- with liquid cooling that would actually push that kind of bandwidth. So, new GPUs will require new bandwidth, and that's going to push it out a year or two.

David Vogt -- Analyst

Great. Thank you very much.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thank you, David.

Operator

Our next question comes from the line of Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman -- Analyst

Yes. Thank you. Could you discuss the outlook for services relative to your outlook for March in the full year. I ask because services grew 40% year over year, and your deferred revenue balance is up another 250 million or so sequentially and nearly 2.8 billion.

So, the outlook for that would be very helpful. Thank you.

Chantelle Breithaupt -- Chief Financial Officer

Yeah, we don't usually guide the peace parts of that. So, all I would say is that the thing to keep in mind with services is a little bit of timing in the sense of catching up to product, especially kind of post-COVID. So, I would kind of take the trend you see over the last few years, and that's probably your best guide looking forward. We don't guide the piece parts.

Thank you.

Jayshree V. Ullal -- Chair and Chief Executive Officer

Thanks, Karl.

Operator

Our next question will come from the line of Sebastien Naji with William Blair. Please go ahead.

Sebastien Naji -- William Blair and Company -- Analyst

Yeah. Thanks for taking the question. And you talked about this a little bit, but there's been a lot of discussion over the last few months between, you know, the general purpose GPU clusters from Nvidia and then the custom ASIC solutions from some of your popular customers. I guess just in your view over the longer term, does Arista's opportunity differ across these two chip types? And is there one approach that would maybe pull in more Arista versus the other?

Jayshree V. Ullal -- Chair and Chief Executive Officer

Yeah, no, absolutely. I think I've always said this, you know, you guys often spoke about Nvidia as a competitor. And I don't see it that way. I see that -- thank you, Nvidia.

Thank you, Jensen, for the GPUs because that gives us an opportunity to connect to them. And that's been a predominant market for us. As we move forward, we see not only that we connect to them, that we can connect to AMD GPUs and built-in in-house AI accelerators. So, a lot of them are in active development or in early stages, and Nvidia is the dominant market share holder with probably 80%, 90%.

But if you ask me to guess what it would look like two or three years from now, I think, you know, it could be 50-50. So, Arista could be the scale-out network for all types of accelerators. We'll be GPU agnostic. And I think there'll be less opportunity to bundle by specific vendors and more opportunity for customers to choose best of breed.

Rudolph Araujo -- Vice President, Security Product Strategy and Marketing

This concludes Arista Networks' fourth quarter 2024 earnings call. We have posted a presentation that provides additional information on our results, which you can access on the investor section of our website. Thank you for joining us today and for your interest in Arista.

Operator

Thank you for joining, ladies and gentlemen. [Operator signoff]

Duration: 0 minutes

Call participants:

Rudolph Araujo -- Vice President, Security Product Strategy and Marketing

Jayshree V. Ullal -- Chair and Chief Executive Officer

Chantelle Breithaupt -- Chief Financial Officer

Mike Ng -- Goldman Sachs -- Analyst

Jayshree Ullal -- Chair and Chief Executive Officer

Amit Daryanani -- Analyst

Tim Long -- Analyst

Ben Reitzes -- Analyst

John McCool -- Senior Vice President, Chief Platform Officer

Meta Marshall -- Analyst

Aaron Rakers -- Analyst

Atif Malik -- Analyst

Samik Chatterjee -- Analyst

Benjamin Bollin -- Analyst

Ryan Koontz -- Analyst

Simon Leopold -- Analyst

Tal Liani -- Analyst

Antoine Chkaiban -- Analyst

Matthew Niknam -- Analyst

David Vogt -- Analyst

Karl Ackerman -- Analyst

Sebastien Naji -- William Blair and Company -- Analyst

More ANET analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Arista Networks. The Motley Fool has a disclosure policy.