Ride waves of ethernet bandwidth, dodging rocks


Any company making any kind of enclosure — a server, a switch, a storage array — has three battles to fight here in 2022, one of which it didn’t have to worry about much before the coronavirus pandemic. and that is first-rate important these days.

There is always the technical battle of designing a cutting-edge product and the economic battle of selling and maintaining it at a good price. But locking down the supply chain – which has parts backlogs in the range of 52 weeks to 70 weeks at the moment – ​​while securing commitments from customers a year or more in advance is the determinant of who will be a winner and who will make him a loser in any competitive battle.

Mastery of its supply chain and ability to shell out $2.8 billion in spare parts commitments is a differentiator that allows Arista Networks to aggressively expand from the core data center switching market Ethernet to campus switching, data center routing, edge routing and switching, and data center interconnect. Commitments from key partners and key vendors are so good that by mid-February, Arista Networks says it will achieve $3.85 billion in sales in 2022, representing a growth rate of 30.6 % for the year – and in a network market that is likely to grow at around 5% per year.

This projection, which we’ll dive into in a second, comes after Arista Networks had a very strong year, with product revenue up 28.9% to $668 million, and service revenue up 156.5 million, up 20.2%. Add it up and total revenue for the quarter was $824.5 million, up 27.1%, and $293.3 million fell to net income, an increase of 30.8%. Part of this revenue increase is due to price increases being passed on, and despite rising component prices, Arista Networks was able to maintain earnings growth ahead of revenue growth for all of 2021 (Some might say because of price increases. . . . )

For the full year, Arista Networks had revenue of $2.95 billion, up 27.2%, and net income of $841 million, up 32.5 %, essentially matching fourth quarter product and service growth rates for the full year, and leaving the company. with a cash stack that amounts to nearly $3.5 billion — yes, that’s nearly a year’s worth of forward-looking income — sitting in the bank and in investments made on Wall Street.

As you can see in the charts above, the switch and router equipment sales slump that hit in 2019 and early 2020, which had nothing to do with the coronavirus pandemic but due a decline in spending by hyperscalers such as Facebook (now Meta Platforms), which has decided to sideline the generation of 200 Gb/sec products in its networks, and to some extent Microsoft, which we believe does not has not so much reduced switching expenses as benefited from the steady rate of performance doubling in Broadcom’s switch and router ASIC.

In fact, although Arista Networks does not discuss it, we believe that a large portion of the network’s revenue is affected by this doubling of the ASIC capacity of switches and routers.

Each time this happens, it takes one-sixth the number of ASICs to implement a certain number of high-speed ports. (Inside each switch is a hierarchy of interconnected ASICs that provide a non-blocking interconnect for 32, 64, or 128 ports. When a new chip comes out, what previously took six chips in a high-density line card now takes a single chip, and if data center operators keep port speeds constant, say at 100Gb/s, they can eliminate many layers of their networks to connect 50,000 or 100,000 endpoints to the data center scale.

Ditto for single-chip fixed-port switches, as shown in this graphic:

With the ASICs on the far right, you can use cable splitters to create a 128-port 200 Gb/s switch or a 256-port 100 Gb/s switch, all on a single ASIC. Even though the resulting switch costs twice as much, it has four times the ports of a 64-port switch four years ago, and that eliminates a whole bunch of switches in a Clos network – plus a few network hops between leaf and rotational switches, too, which reduces latency.

So hyperscalers and cloud builders were able to drive down the price of a port inside a switch and also flatten their networks with fewer devices – but the network budget doesn’t completely compress because the Data center operators are building larger and larger networks and spending on data center interconnects and routing as well. And they are building more and more data centers and adding regions. Port costs go down and the cost per bit shifted also goes down, but switches have more ports and the cost of the switch goes up a bit more. And to grow like Arista Networks does, you need to increase volume with existing customers as they build more data centers and add more customers as well.

And it happened, as you can see in this table:

The move to campus networks and routing has added new customers — about half of companies investing in these products are new to Arista Networks, according to the company’s CEO Jayshree Ullal, speaking to Wall Street analysts at subject of the fourth trimester. Numbers.

On the call, Ullal provided a bit of color on some of the financial data to give Wall Street a better idea of ​​who and what they’re buying from Arista Networks. The characterization for the fourth quarter wasn’t very helpful, but for the full year results it was, and when paired with Ullal’s comments from a year ago, we can actually start to build a pretty good revenue-per-type model for Arista. In the call, she said cloud titans – what we call hyperscalers and the cloud – accounted for about 30% of revenue in 2021, with the combined enterprise and financial sectors accounting for about 40% and other vendors of services around 40%.

Microsoft accounted for 15% of revenue in 2021 — SEC rules say any customer over 10% of revenue must be disclosed — and according to Ullal, Meta Platforms (primarily Facebook) didn’t make that cut but the would do in 2022. Facebook co-designed Arista Networks’ 7388X5 modular switch, which we told you about last November. Facebook has abandoned the 200 Gb/sec Ethernet generation, but is eager to start rolling out 400 Gb/sec Ethernet, as we detailed at the time. This ramp, as well as a similar ramp at Microsoft, is just beginning. We estimated that meta-platforms were probably 2% of revenue in 2021, and we have no idea what that might be until 2019, but there have been sales to Facebook. (We saw some of the Arista iron with our own eyes in the North Carolina data center in 2014.)

This chart above depicts the past broadly, but based on what Arista Networks has said in past calls and shown in past presentations, we’ve estimated revenue by customer group and product line. This is a first pass pattern, with a few wide error bars here and there. It would be better if companies just provided this information and didn’t force us to resort to spreadsheets, but that keeps us off the streets at night. This table is all the more interesting as we project it in 2022:

The cloud titans put Arista Networks on the map, and now the trickle down of technologies that The next platform chronicles is at work as enterprise technologies permeate the enterprise, penetrate deeper into finance, and spread to more service providers. The number of customers at Arista Networks is also accelerating, and is now around 8,100 and we believe it could grow another 1,000 this year to reach that $3.85 billion revenue target.

Look at this shift in campus switching, which we largely don’t care about, except it’s almost certainly a more profitable business than switch sales to hyperscalers and cloud builders — and is derived of the work that Arista Networks was already doing. This business doubles every year, as does the routing business, which we calculate is about the same size based on what Ullal and Ita Brennan, the company’s chief financial officer, said on current and previous calls.

Arista Networks has had its ups and downs, and its trials and tribulations with rival Cisco Systems, over the past decade and more. But it stuck with its fabric knitting network, gradually expanded its product lines and addressable market, and continues to eat its share. Cisco is fighting back with its Silicon One ASICs, and it will be interesting to see if Arista Networks could ever adopt Cisco’s network ASICs for routers and switches and use them against Cisco in its own gear. Meta Platforms already pits local switches using Silicon One against co-engineered Arista Networks gear based on Broadcom ASICs, and it’s just one small step to having two key ASIC vendors within Arista Networks. Stranger things have happened, but that would be really ironic.

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