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Author: Zhang Yifan

Editor: Shen Siqi

Source: Hard AI

What’s new in AI data centers?!

Last night, Ethernet switch giant Arista released its second quarter 2024 financial report, showing that Ethernet has made considerable progress in the field of AI. The company expects that AI business will account for a single-digit percentage of the company's total revenue in 2024 and will grow significantly in 2025, reaching at least US$750 million.

First, let's take a look at Arista's business. Arista is a network solution provider whose business includes network hardware (product sales) and supporting software services.

Previously, Hard AI mentioned in "A 6.45% surge! The switch leader slaps Nvidia in the face, who says Ethernet is not good?" that there are two major camps in the network field: Ethernet and Infiniband. Due to performance differences, most AI data centers use Infiniband (acquired by Nvidia in 2019), so the market once believed that Ethernet would gradually lose market share to Infiniband under the wave of AI.

However, in the first quarter of 2024, Ethernet switch giant Arista revealed that the company is developing and optimizing its Ethernet switch products to make them suitable for AI data center networks. The company said that it has completed the connection of 24,000 H100 GPUs, and the performance is not inferior to Infiniband at all, and it is expected to connect 10,000 to 100,000 GPUs by 2025.

So, one quarter later, how is Arista progressing?

At last night's earnings conference, Arista reported that the company expanded its procurement in the second quarter (total procurement commitments and inventory increased by $500 million from the previous quarter), is currently conducting multiple AI pilot projects, and expects AI business to grow significantly next year, reaching at least $750 million by 2025. This financial report once again proves the rapid development of Ethernet in AI data centers.

Specifically, Arista's operating income and profit in the second quarter of 2024 were higher than expected and guided. The company said that this was mainly due to the demand for AI, and many cloud customers needed to upgrade from 100G to 200G or from 200G to 400G network products. In terms of profit, the company said that on the one hand, the optimization of supply chain and inventory management, and on the other hand, the increase in the proportion of high-gross-margin AI products, led to a 33% year-on-year increase in the company's profit this quarter.

It is worth noting that the year-on-year growth rate of revenue and profit this quarter has declined compared with the previous quarter, but the company is still very optimistic about the future growth potential. This quarter, the company expanded its procurement plan and expects that the AI ​​business will achieve substantial growth next year.

From these data, we can see that the application of Ethernet networks in AI data centers is gradually maturing, and Arista has also made significant progress in this field.

Specifically, in 2024Q2 Arista——

1. Business was higher than expected and guided, but declined compared to the previous quarter:Revenue was $1.69 billion, up 15.9% year-on-year (up 16.28% year-on-year in the previous quarter), slightly exceeding the company's guidance ($1.62 billion to $1.65 billion) and consensus expectations ($1.65 billion). The revenue growth was mainly due to: 1) AI-driven, Arista obtained multiple AI customer orders this quarter, including a large Tier 2 cloud provider; 2) product upgrades, customers upgraded from 100G to 200G or from 200G to 400G. However, the year-on-year revenue growth declined by 0.41% from the previous quarter.

2. Profits increased by 34.2% year-on-year, but declined compared with the previous quarter:Net profit in the second quarter was US$672.6 million, up 34.2% year-on-year and down 11.8% from the previous quarter (46% in the previous quarter). The main reasons for the profit growth this quarter are: 1) The company has taken a series of cost reduction measures, including reducing inventory-related reserves, optimizing manufacturing processes, and reducing raw material costs; 2) AI products and services have higher profit margins, and their rapid growth has increased profits; 3) The proportion of high-gross-margin software and service business revenue in total revenue has continued to increase; but the year-on-year profit growth has declined by 11% from the previous quarter.

3. Inventory reduction and improved inventory turnover:The company further optimized operating costs through inventory management. Inventory was $1.9 billion this quarter, down $100 million from the previous quarter. Inventory turnover also increased from 1 times in the previous quarter to 1.1 times. Through inventory optimization, inventory-related reserves were reduced, thereby improving operating rates.

4. We received multiple AI orders this quarter:This quarter, we have obtained multiple AI customer orders and are currently conducting multiple AI pilot projects. The company expects AI revenue to account for a single-digit percentage of total revenue in 2024, and the goal is to reach at least US$750 million in 2025.

5. Deferred revenue increased significantly, approximately US$253 million:The increase is mainly due to the following reasons: 1) the company is launching new products, which may require customers to test and verify, resulting in an increase in product-related deferred revenue; 2) the company is developing new customers and expanding new application scenarios. The trial period, acceptance testing, etc. in the process will lead to an increase in product-related deferred revenue; 3) the growth of the company's overall business has led to an increase in new orders.

6. 24Q3 Guidance:Total revenue was US$1.72-1.75 billion, a year-on-year increase of 14.9% (median); gross profit margin was 63%-64%, a decrease of 1pct from this quarter.

7. Dividends and repurchases:Share repurchases in the second quarter totaled $172 million at an average price of $292.20 per share.

1. Arista’s financial situation in Q2 2024

1) Revenue: Total revenue was US$1.69 billion, a year-on-year increase of 15.9% (a year-on-year increase of 16.28% in the previous quarter), slightly exceeding the company's guidance (US$1.62 billion to US$1.65 billion) and consensus expectations (US$1.65 billion);
2) Gross profit margin: The gross profit margin was 65.4%, higher than the guidance range (64%), higher than 64.2% in the previous quarter and 61.3% in the same period last year, mainly due to the reduction of inventory-related reserves;
3) Net profit: Net profit in the second quarter was US$672.6 million, a year-on-year increase of 34.2% and a year-on-year increase of 46% in the first quarter.

Overall, both revenue and net profit exceeded consensus expectations, but the growth rate declined compared with the previous quarter. However, the company said it is optimistic about the growth of its AI business and expects it to achieve substantial growth next year.

24Q3 Guidance: Total revenue is US$1.72-1.75 billion, a year-on-year increase of 14.9% (median); gross profit margin is 63%-64%, a decrease of 1pct from this quarter.

In terms of dividends and repurchases, the company repurchased $172 million of shares in the second quarter at an average price of $292.2 per share.

2. Arista's revenue by business in Q2 2024

Both product business and service business achieved growth this quarter, and gross profit margin also increased compared with the previous quarter after supply chain and inventory optimization.

1) Product business:Revenue for the quarter was $1.423 billion, up 12.82% year-on-year, a slight decline from the 13.37% year-on-year growth in the previous quarter. The increase in product business gross margin was mainly due to the company's optimized management of supply chain and inventory, as well as the continuous increase in high-gross-margin AI business. The company said that Arista is conducting multiple AI pilot projects and expects AI business to achieve substantial growth next year.

2) Service business:Revenue for the quarter was $267 million, up 35.33% year-on-year, maintaining the high growth rate for nearly four months, and the proportion of service business in total revenue also increased to 17.6% (16.9% in the previous quarter). The increase in the proportion of high-gross-profit service business has increased the company's overall gross profit margin to 64.91% (63.73% in the previous quarter).

3. 2024Q2 Arista Conference Call

1. The Americas contributed 81% of revenue this quarter, and international business accounted for about 19%:The main AI operators are in the United States (Microsoft, Google, Amazon, etc.);

2. AI business received multiple orders:This quarter, we have obtained multiple AI customer orders and are currently conducting multiple AI pilot projects. The company expects AI revenue to account for a single-digit percentage of total revenue in 2024, and the goal is to reach at least US$750 million in 2025;

3. Etherlink AI products were launched this quarter:Supporting 800G and enabling users to migrate from InfiniBand to Ethernet, this product helps Arista enter the AI ​​network market;

4. Inventory reduction and improved inventory turnover:The company further optimized operating costs through inventory management. Inventory was $1.9 billion this quarter, down $100 million from the previous quarter. Inventory turnover also increased from 1 time in the previous quarter to 1.1 times. Through inventory optimization, inventory-related reserves were reduced, thereby improving operating rates;

5. Deferred revenue increased significantly, approximately US$253 million:The increase is mainly due to: 1) the company is launching new products, which may require customers to accept testing and verification, resulting in an increase in product-related deferred revenue; 2) the company is developing new customers and expanding new application scenarios, and the trial period, acceptance testing, etc. in the process will lead to an increase in product-related deferred revenue; 3) the growth of the company's overall business has led to an increase in new orders;

6. 24Q3 Guidance:Total revenue was US$1.72-1.75 billion, a year-on-year increase of 14.9% (median); gross profit margin was 63%-64%, a decrease of 1 percentage point from this quarter;

7. Dividends and repurchases:In the second quarter, we repurchased $172 million of our stock at an average price of $292.20 per share.

4. 2024Q2 Arista Performance Analysis

1. Operating income and net profit:Benefiting from the demand for AI-driven and product upgrades, the company's revenue continued to grow; in addition, benefiting from the optimization of supply chain and inventory, as well as the increase in the proportion of high-gross-profit products, the company's profits also increased.

- Revenue: Total revenue was US$1.69 billion, up 15.9% year-on-year (up 16.28% year-on-year in the previous quarter), slightly exceeding the company's guidance ($1.62 billion to $1.65 billion) and consensus expectations ($1.65 billion);
- Net profit: Net profit in the second quarter was US$672.6 million, a year-on-year increase of 34.2% and a year-on-year increase of 46% in the first quarter;

2. Operating costs and operating profit margin:In general, the company's operating costs have continued to decline, and its operating profit margin has been on an upward trend, mainly because the company has reduced operating costs through supply chain and inventory optimization.

3. Inventory and purchase commitments:The company's total purchase commitments and inventory increased by $500 million this quarter compared to the previous quarter, which means that the company has expanded its purchase scale, indicating that the company is confident in the future growth of its business. Currently, the company said that it is carrying out a number of AI pilot projects and expects its AI business to grow significantly next year. The company expects AI revenue to account for a single-digit percentage of total revenue in 2024, and the goal for 2025 is to reach at least $750 million.