Arista Networks, Inc. (ANET) Management Presents at 2020 Jefferies Software Virtual Conference (Transcript)

Sep. 14, 2020 8:39 PM ETArista Networks, Inc. (ANET)
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Arista Networks, Inc. (NYSE:ANET) 2020 Jefferies Software Virtual Conference September 14, 2020 5:30 PM ET

Company Participants

Doug Gourlay - VP, General Manager, Cloud Networking Software

Conference Call Participants

John Metz - Jefferies

John Metz

Hello. It's my privilege to introduce the Vice President and General Manager of Cloud Networking Software for Arista, Doug Gourlay. Doug will give us a quick background of his responsibilities. And we'll jump right into some questions about Arista’s software strategy.

Doug Gourlay

Thanks, John. So basically I look after building a software line of business at Arista, product lines like our cloud EOS offering, what we're doing in monitoring, management observability looked after the Big Switch acquisition we executed during the last year and so on, areas like that. And yes, I'm happy to chat with you about where we're going in software and how that really defines who we are as a business and really defines a lot of our success criteria in the market.

Question-and-Answer Session

Q - John Metz

So as we get into this, anyone in the audience, if you have a question, just type it up and we will collate them and ask at the end of the presentation, but any time during the presentation, just go under the video to the question box and type in your question and we'll give it to Doug at the end.

So I guess the first question I have for Doug is, I worked on the IPO for Arista and covered that for many years before that. And clearly, the EOS, Extensible Operating System was always the crown jewel and the differentiation -- the competitive differentiator for the business. Maybe, if you could speak to, since the IPO in 2014, how has that evolved? How has the competitive advantage of Arista evolved? Is that still the key to your success?

Doug Gourlay

Sure, John. Comically, I worked on the IPO of Arista too, just on the other side of the table. So I joined Arista in 2009. I took a small break and I came back at the end of 2018, early 2019. And from the beginning and really going back to 2004 when Ken Duda was founding the company, the entire thesis was our industry could do better, right? I mean like we just felt that the networking industry has let down the networking operators, the consumers, the engineers, the people who use and depend on that network reliability. It was just a foundational belief that our industry needed to do better. And that started with a better operating system.

And if you look at the type of software models that the Google has developed using a large monorepo where there's tremendous code reuse within that environment. Yet, it all composites into a very consistent end user experience, we took principles like that. We took principles from incredibly large scale software development organizations have operated and brought that into the networking context. And some of them -- it sounds boring but it’s agile principles like in enterprise resource planning systems and financial management systems, we use a database, right. We use a database to handle payroll, to handle supply chain management, to handle losing money and that's because they work and they work incredibly well. So we applied really well known principles. We applied the latest and cutting edge distributed development technologies and said, let's build a different architecture for network operating system, one that allows us to achieve incredibly high levels of reliability, but also incredibly high levels of code reuse, not wasting people's time, not boring our engineers, so that people might enjoy what they're doing in their careers, their jobs. Let's automate testing, because nobody likes touching the button 100,000 times, if it breaks the 100,000 in first, better left to a robot, better left to an AI or automated system to do that. So we built that infrastructure. And yes, you're right. That was the core principle of our announcements in our IPO in 2014.

And what we’ve seen since then, we've added CloudVision as a network management platform that works very hand-in-hand with our core EOS product, but developed to the same standard. We've taken that CloudVision product line, and expanded it to being delivered as a service because the ongoing day-to-day operational management of those types of resource computational storage analytic intensive systems is complicated. And we can make that easier and more consumable by a larger number of customers in a SaaS delivery vehicle. And as you've seen, really in last two years, we've started expanding the aperture of capabilities we're delivering through strategic mergers and acquisitions, expanding us into the wireless markets, recently the observability fabrics with the Big Switch acquisition and enhancing our portfolio in the low latency trading world which has been a core market for Arista for over a decade now.

Yes. What's changed? Some things. But so many things have stayed the same and sticking to that strategy is really core to our success executing on that strategy for the long-term.

John Metz

Well, one of the things that's changed significantly on the customer side obviously is cloud computing, whether it's public or private cloud computing and how that's changed in enterprise IT usage, how has that presented opportunities or challenges for you and your competitors, as obviously there's a one way path to significant utilization of cloud as infrastructure IT?

Doug Gourlay

I think as anybody probably on this call knows, the cloud market as a customer base has been an exceptional set of customers for Arista. And we've done a lot to build and empower the architectures deployed in some of the major clouds. That being said, it has created a spot on a fundamental shift in the consumption model of IT resources and from the enterprise perspective. And we look at that enterprise customers and we need to take these architectures that have worked for the cloud providers, because we're seeing cloud providers that are building networks larger than the largest carriers in the world, but 1,000 times more efficient from the number of operators necessary to manage them. And what is it that works there? Well, there's consistent design patterns, consistent architectures that enables automation.

How do we take that and bring that to the enterprise? So we started doing that with our Universal Cloud Network architectures. We did realize that it's not just the physical, how we interconnect the boxes. It's not just what routing protocol I use, which matters, matters greatly. But it's also, how do I operate it? How do we give features and capabilities to that enterprise class operator that lets them run their network, like those large cloud operators do? And then fundamentally, how do we change and embrace the unit of consumption of the network in the cloud, which is a virtual private I buy a VPC in Amazon, I buy a VPC in Azure, I buy a VNet in Azure, buy a VPC in Google. How do I do that in my enterprise network? How do we enable consistent units of consumption so that the enterprise networking teams, buyers, right, the app team, the platform team, the systems, they can consume that network in a common model. One of the key capabilities we brought out was in the last year or two, it’s what we call cloud EOS.

So we took that same core network operating system and enabled it to be purchased through the public cloud providers. And it pays you go on demand model to normalize that networking connectivity abstraction, again consistent cloud architecture, consistent cloud operating model, and then enabling a consistent unit of consumption, a consistent cloud experience for connecting up these virtual private clouds that have large multi cloud networks, multi region networks with a consistent operating model. So, the customer can keep that same benefit of same EOS software, same troubleshooting model, same operating model across their entire distributed environment, whether in the public cloud or on-premises.

John Metz

Well, that might have a lot to do with the next question, which is the obvious question …

Doug Gourlay

Let us all key up. I mean it’s what we’re doing.

John Metz

Without mentioning your largest competitor and all of their multitude of products, why are you guys winning today and how has that momentum changed, positive or negative?

Doug Gourlay

Sure. John, and I'll tell you that, when I'm talking to customers about new product offers and areas, should we go in and I'll give a classic example three years, four years ago Jayshree was asking our customers, should we go into the campus, and they're like, no, just nail the data center, get the data center nailed and will be great. Two years later, they're looking at and go like, you're late, we need you in the campus now. And she's like, you told me no. And what we realized is the software quality, the quality of experience we deliver for our customers has given us the charter to support the enterprise network, right? And it’s -- our customers are asking us, please support as many locations in our network as possible.

And when I go back to them, and we have that conversation now, and I ask them why, and I'm the guy who likes to invent a new feature. And that's been the hallmark of my career for 20-years. I got an idea. I go, what do you want us to do? I got these ideas. They look at me and go -- and I go, why would you buy this from us? They go, because you're Arista. If we buy from you, we know it's going to work. I’m like, so it's not the cool idea? No. It’s the quality. And there's -- I think that's created this charter to expand the footprint because it makes it easier for our customers to operate.

Probably the simplest example I can give you John, every time there's a vulnerability in our software or our competitors’ software, somebody files what's called a CVE, a Common Vulnerability or Exposure with the U.S. Federal Government, the National Vulnerability Database maintained by NIST and the Department of Homeland Security. Last year, we had two, that was two times we released the software defect that caused our customers to have to do a software upgrade. We're really sorry about that. Next year, we're going to do some more. It's going to happen every year, it happens to everybody. Our job is to own those, support them, give our customers choices on patch upgrades and make it easy and streamlined. By contrast, just in one operating system, some of our competitors had 78 last year.

So, we forced upgrades two times because of the software quality defects that we picked the hard way out, and we wish we'd never do again, and they did at 35 times more. And that meant more outages, more upgrades, more software qualification, more downtime and include more operating costs. I think when customers see that and monetize it, they see not only the combination of risk and true enterprise risk, but also that, this risk that affect critical infrastructure that literally every single security control in their enterprise has built on the integrity of that network. And if that integrity is compromised, their entire enterprise risk management is compromised. So, when our customers look at that, yes, I think there’s really significant quantifiable reasons when it comes to managing enterprise risk that causes customers to explore multi-vendor options as a necessary financial control, as a necessary risk mitigation technique. And then, when they do a fair evaluation across the vendor landscape, we end up looking really, really good as a safe choice, and frankly, the best alternative to the incumbents they probably have.

John Metz

Well, we're getting actually a couple of questions, interestingly that are the same as some of the questions I have. So I'm going to intersperse some questions.

Doug Gourlay

I mean you are actually on the right track with the softball questions. Okay.

John Metz

One obvious question that I was asking but an audience member too. It was, how is work from home and COVID impacting you guys, good, bad, ugly, what's been the impact the last few months?

Doug Gourlay

Personally, John, I'm having my best summer ever. I got to tell you. I spend more time with my dog and running around the neighborhood and I've lost 30 pounds. I think right now, we're in a period of symmetry and customer engagement, right? I did five customer meetings last week in a day, where I started off covering customers in Europe, then to the East Coast, then the West Coast and then financial meetings. And these were the type of meetings that a year ago I would have had to be in person on a whiteboard to have with the customer. These were those types of interactive design sessions, whiteboarding that you just wouldn't do over a Zoom call a year ago, and now I touched five of those in a day. That's awesome, right? So, we're in a period of symmetry.

I think if it goes asymmetric though, all of our industries are going to be challenged, when the CEO is telling the sales guys, go get in front of the clients and the clients are going, no, no we're working from home or somebody wants to go to a client, the client wants somebody there and somebody is like, I am on the compromise, I can't travel right now. And I think there's a broader industry. We're all going to have to work through those asymmetric relationship issues as they develop. But for right now, the environment I think especially in the space, the type of customers we work with, we've all really quickly normalized to this exact type of engagement we're having now, and it's working pretty darn well.

I think with senior experienced employees, which tends to be our hiring profile, it's worked out really well for us. I do worry. Again, as an industry, how do I on-board new hires, when I'm doing a cohort of college, new hires for their first job in this market? I think there's some challenges we're going to have to overcome there. To acculturate and train up 20, 30 people into a new organization, those are all going to be significant management challenges. I think individual productivity has gone up. But I bet, you ask almost any manager who has a broad, diverse organization, it's changing the way we have to manage people. It's changing the expectations. It’s changing where our employees want to live and I think we are all learning a lot of lessons from that. I think we're getting kind of stronger.

John Metz

Another question we got related to that is, are you seeing specific differentiation that customers are looking for post COVID, anything, features or functions or use cases that you weren't seeing before COVID? How has that changed what the customers are looking for now, if it has at all?

Doug Gourlay

Oh, yes. I saw a project where a large enterprise customer deprioritized a bunch of stuff so they could prioritize putting 100 gig links in for Zoom calls. Literally, we need 100 gig Ethernet to support 10s of thousands of concurrent Zoom calls happening across all of our employees. And I think that rapid shift to large scale VPN aggregation from -- that’s challenged the growth in a lot of these IT environments, I think that's been great for our business. I think companies that have established a strong reputation for quality and build great customer relationships over the past decade are flourishing, where I'm certain it's a tough time to be entering a market as an unknown right now. And I really feel for anybody trying to do that. That's a tough, tough challenge in this environment.

I do think we're going to see consolidation of a number of vendors that IT organizations have the time to deal with right now. I think we're going to see that. And in certain markets, I think we're going to see significant growth, right? When people would classify certain businesses as essential, right, like I talk to healthcare providers right now, and it's not soft to them, The growth, the investment that they have to do just to keep up with the expectations of service delivery and patient care, unfettered growth right now.

But you look at other businesses where folks like you and I, I can do my job just as well for my home office as I did in the office, I miss some of the interaction. And it's changed what I've had to do day-to-day to stay in touch with my team, with the people I work with around the world. And I think that creates new business opportunities. It creates new management challenges and opportunities. But we have seen some companies say, I'm not going to invest in new branch office infrastructure right now. And others say this is a perfect time to upgrade to campus when nobody is there. But we know in certain businesses, they have to go back to work, because it's a assembly line building vehicles or something like that.

John Metz

You talked about inevitable consolidation amongst the IT providers. So within your business, obviously, the cloud network platform, you guys have built a lot of your own secret sauce, but some partnerships as well, in fact even pretty aggressively partnering. Most recently, being a little more aggressive acquiring, what can we think about down the line about you wanting to own additional areas and where you would partner in additional areas?

Doug Gourlay

You have to be very careful around that topic, John -- or Charles, who is on the call is literally going to reach to the screen poltergeist style and spin my head around, exorcist style, I actually see it’s happening. What I’d certainly say is, strategically I think we've demonstrated an openness to M&A, and we've demonstrated an incredible openness to partnering. When your leading competitor aspires so and everything, one of the best things you can do is partner openly and freely with all of the companies that provide high value alternatives because that aggregates that ecosystem, that openness of networking is what's critical.

And I even go back to -- we wrote this slide years ago, it was Arista’s first principles of network and systems design. And one of them is multivendor, we tell our largest customers, you need to be multivendor. Please don't buy 100% from us, right? Because keep us honest, the network needs to be open and interoperable, because that is a necessary control. And that means we need to be open to partnering in areas and sometimes being open to interoperating with competitors, because that's what our customers need.

So I think you're going to continue to see strong partnerships, because that's the best way to compete with a company that aspires to be everywhere, to be in everything. But when it comes to moving packets, and transport, we want to be the best at that.

John Metz

So talking about moving packets, we have a question about your perspective on the timing of the transition to 400-gig. What do you see -- what's the timing you see? Why do you think that it’s mainstream and why do we even need 400 at this point?

Doug Gourlay

Probably a little out of my scope as a software guy. So -- but I’d certainly say is, Arista has taken a strong leadership position in 400-gig. As we look at the early adopters, it does start with the highest throughput, biggest networks of the world, which has been our hallmark customer base. So we are seeing that growth. Why would you need 400-gig? Well, if you need a 100-gig to aggregated Zoom calls out of a large enterprise, imagine you're the carrier, you're the cloud provider who is handling that ingestion. It gets multiplicative.

One thing, I guess, I've noticed in 25 years in this industry, there's a voracious appetite for bandwidth. I've installed 10-gig in my wiring closet at home, right? Because I have a photo library with 24 terabytes of online storage and I just want to use my Adobe Lightroom and see them all and edit and adjust them. And so I've got 10-gig at home, because I did need it, it really sucked before that. So I think that voracious appetite for bandwidth is real. There's always an application that will consume more, whether it was database replication or building more cloud native applications today that put distributed systems of engagement up in the cloud provider while keeping systems of record running on the on-premises environment and using high performance Redis and Couchbase caching on those database architectures to accelerate the performance, all of that drives in increasing consumption.

As storage gets faster, as GPUs gets faster, the CPUs get faster, the network has to move in balance. And if it does, it does and we see one or the other area creating inflexibility and intractability that causes IT architectures to become brittle.

John Metz

So, I'm personally waiting for holographic work from home. That'll be pretty bandwidth intensive.

Doug Gourlay

Like Tupac at Coachella, right?

John Metz

We have time for just one or two more questions. One is, how do you see the networking industry evolving over the next few years? And how is that impacting you? Whether it's Cisco becoming even bigger and trying to do everything to everybody? VMware, obviously getting into the virtual aspects of networking, public cloud doing some of their own stuff? And lastly, and most interestingly, chip companies moving up the stack, like Nvidia when they acquired Cumulus. So what do you see as far as the competitive landscape?

Doug Gourlay

Sure. I probably won't go in any specific competitive analysis of what we know, one versus the other John. But I'll say this, our industry has let our customers down. I mean for 25 years, I think we've just -- we've accepted a really, really weak status quo. We as network operators, we as people manage and consume these devices, when you buy a pencil from Amazon, you get better telemetry about where it's arriving. And when you buy a $0.5 million router from someone, that's scary. When -- I assume the systems are well advanced, the identity and access management are well advanced, the roles of privileged account management are advanced to protect enterprise infrastructures. Get networking, sitting there saying use this 1970s Ares CLI and then write regular expressions that you command authorization. I'm like, I'm sorry, the world has evolved, why haven't we evolved with it? I think we owe our clients more John, we own them better than we've done before. And it's time for us to advance the state-of-the-art and see engagement in interoperation of the network with the systems world, with the platform world and looking at architectures that enable true platform system of record whether it's a VMware, whether it's a Nutanix, whether it's a Kubernetes, whether it's a cloud provider, to integrate with the network natively. So that changes, like true authoritative source of truth changes in one of the side becomes dynamically reflected across the network, so the network becomes adaptive to that environment and interactive with it as opposed to, I have to sit on a swivel chair with a keyboard chasing the cloud by around. No. We need networking that operates at the speed of cloud from an operations perspective and from a throughput perspective. And we’ve built the right software platforms to enable that in CloudVision and in EOS.

John Metz

So I think the person -- the footing in Arista has certainly proven to being in a position to deliver better, as you say the industry's owed better. So I want to thank you Doug for joining us today and giving us your perspective. I'll remind the audience that this is being recorded, so you'll have access to it after the fact. But thank you, Doug. And thank you everybody for attending and appreciate the time.

Doug Gourlay

Thank you, John. Appreciate it. Thank you all.

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