|Arista Takes Aim at Cisco|
By Tiernan Ray
May 12, 2018
Arista CEO Jayshree Ullal is going after a new market worth as much as $4 billion annually.
The popular conception of Silicon Valley is that it’s inhabited by 20-somethings who play Ping-Pong, eat free snacks, and code apps late into the night.
But there is another Silicon Valley, occupied by adults with families, adults who work relatively normal hours at their third or fourth start-up, putting hard-won experience and skills to good use. In some cases, they’re doing the best work of their professional lives.
Among the latter is the leadership at Arista Networks (ticker: ANET), a 14-year-old developer of computer-networking technology. Arista in some ways feels like a start-up, but one with a little more gray hair, a mature $19.4 billion market valuation, and a grown-up $5.61 in earnings per share. Piloted by CEO Jayshree Ullal, 57, the company boasts a remarkable collection of tech veterans, a number of whom know each other from prior jobs at industry behemoth Cisco Systems (CSCO).
“I think everyone is very aware of who they are, of what their strengths are,” Ullal told Barron’s of her colleagues. “I think going through the growth phase in prior companies gives you a lot of experience in what to do and what not to do.”
The Cisco connection is significant, because last week, Arista announced it will enter that company’s most dominant franchise: switches that connect computers on typical corporate networks, known collectively as “campus” networks. Arista’s success or failure could determine whether its pricey shares can continue to rise.
Arista made its mark selling the most sophisticated type of switches—the ones that direct the flow of data packets inside cloud-computing data centers, the massive warehouses of computers built by tech giants like Amazon.com (AMZN). Switches for the campus have traditionally been simpler. “A commodity, like selling toilet paper,” is how Ullal describes them. But as companies connect more employees to cloud computing, or build their own cloud-data centers Arista sees an opportunity.
That toilet paper is worth $6.8 billion to Cisco annually, according to research firm Dell’Oro, and is its largest single product segment, accounting for over 10% of its $48 billion in revenue last year. Companies have tried and failed to take share from Cisco. The only one to make much of a dent is China’s privately held Huawei.
Ullal ran Cisco’s campus business for several years before heading to Arista in 2008, leaving a legacy of a $50-billion installed base of Cisco campus switches.
To invade Cisco’s turf, Ullal has the help of Cisco veterans. There is Andy Bechtolsheim, a Silicon Valley entrepreneur and co-founder of Arista. He’s best known as the first backer of Alphabet’s (GOOGL) Google. Alongside him is longtime colleague Ken Duda, Arista’s chief technology officer. He built the EOS operating-system software that runs Arista’s switches.
Bechtolsheim, who’s adept at foreseeing technology shifts, says the campus network is stuck in the slow lane: “Cisco is essentially selling the same product [in campus] that we designed 20 years ago.” Cisco’s software code in its campus switches is a mess, Duda argues, with three different network operating systems existing in more than 50 different versions. EOS has just one, across all of Arista’s devices.
Scott Harrell, general manager of Cisco’s enterprise networking business, counters that his company is alone in allowing clients to “holistically manage their networks so they can move at digital speed.” Its new campus switches, he says “were the fastest ramping product in Cisco’s history.”
Ullal brings technical acumen to this fight and is a top-notch customer schmoozer. She’s able to bridge the vision of Bechtolsheim and Duda with market knowledge. Duda recalls that when Ullal first joined him for client meetings, “it was like a little reunion. She knew all of these people, and she knew who they knew.”
Mostly, Ullal seems like a realist. To take on Cisco, Arista will rely on a partnership with Hewlett Packard Enterprise (HPE). She admits their existing partnership to sell data-center switches hasn’t met expectations. “I think we’re both going in with wide-open eyes…recognizing that we both have more work to do,” says Ullal.
Arista has reason for hope. Not only did it survive multiple lawsuits, but Cisco’s efforts to demolish Arista with product didn’t work. Since 2013, Arista’s share of data-center switches has gone from 3.8% to 11.5%, while Cisco’s has fallen from 64.8% to 48.3%.
Wall Street is enthused about Arista’s campus push. But analysts want to know how much it can win of the $3 billion to $4 billion of the campus market that Ullal is targeting, and how soon. Growth is key for a stock that trades at 37 times this year’s projected $7.13 per share in net income.
At a meeting in San Jose last week, Ullal and CFO Ita Brennan tempered analysts’ enthusiasm. Revenue won’t be material until 2020, they said. Ullal knows from experience that overzealous predictions are often withdrawn later. “As I often say, hope isn’t a strategy, executing is,” she says. “So we’d rather look in the rearview mirror and tell you how well we’ve done rather than give you some hope.”