Wall Street forsees Arista Networks capturing up to 40% of Cisco's data center switching market share

"We do not see any obstacles that would impede Arista from reaching 20%-40% market share in its target market."

New York City:   Wed, 3/18/15 - 11:59pm    View comments
 

Earlier this month data center networking analysis firm, Crehan Research Inc., released the following report:
 

Another Year of Robust Growth and Record Shipments for Branded Data Center Switches
 

"40 gigabit Ethernet (GbE) data center switch shipments more than tripled, while revenues more than doubled.

"Branded Ethernet switch shipments in the high-speed top-of-rack, or fixed, segment — where white box switch offerings are most prevalent — increased by almost 40% in 2014 (see accompanying chart)."
 

Not surprisingly last month during Cisco's Q2'FY15 earnings call, CEO John Chambers bragged:

"We saw very strong switching growth of 11% with strong performance in both the data center switching and our campus switching business."

Then this month Arista Founder and Chairman Andy Bechtolsheim appeared to contradict Chambers in his blog:
 

Arista's Cloud Network Solutions Validated by Market Share Gains
 

"Arista's port market share in 2014 rose to 9.3%, up from 6.7% in 2013. Our revenue market share for 2014 rose to 7.7% from 5.4% in 2013.

"Cisco's port market share fell from 70.8% in 2013 to 66.1% in 2014, a loss of 4.7%. Cisco's revenue market share declined from 74.2% in 2013 to 69.3% in 2014, a loss of 4.9% YoY."
 

As most readers know, I've never been considered the sharpest tool in the tool shed. So this month I've been in "bewilderment" trying to make sense of what in my opinion, are totally contradictory messages coming from both Arista and Cisco. I mean, what's the "accurate current state" of their respective data center switching businesses?
 

Fortunately, I was rescued this week from "my bewilderment" by none other than Wall Street, specifically, Needham & Company Managing Director Alex Henderson and his research report:

Arista Shines - Strongly Reiterating Buy
 

"We strongly believe Arista Networks is going to be a major company reaching multiple billions in Revenues with Operating Margins rivaling Cisco in the mid-20's and a business model that is building exceptionally strong scale and defensibility."
 

Henderson continued:

"Arista is poised to become the first company ever to pierce the 10% market share threshold against Cisco's incumbency — we think they can ultimately drive to the 20%-40% vicinity.

"We do not see any obstacles that would impede Arista from reaching 20%-40% market share in its target market. They are currently just a hair under 10%. We believe this is one of the rare 'buy and hold' names in the Networking space.

"The overall switching market which is Cisco's target market is growing slowly, but Arista's target market 10/40/100 gig switches are growing fast. Arista currently has a ≈9% market share and is increasing its share quickly.

"We think the shift to higher speeds could drive even higher SAM market growth and we think Arista could drive growth 2X the target market through share gains."
 

Henderson added:

"Interestingly, excluding Microsoft which is their only 10% customer, Arista grew 76% in the most recent period. How did they do this? By gaining substantial share within their customer base primarily.

"With 76% growth outside of Microsoft, this implies its existing customers are currently increasing demand for Arista products by a remarkable 50% pace.

"Arista points out that if the customers in the top four segments alone buy $1 million each, Arista would achieve more than $1 billion in revenues — in addition, the next 9 verticals are sharply accelerating adoption."
 

Henderson further added:

"If Arista gets a foothold, the technology is driving huge share gains inside the customer footprint. The post purchase share gains can be seen clearly in the customer repurchase chart below — Arista typically sees 12X the initial purchases from customers over time."
 

Curiously during Cisco's Q2'FY15 earnings call, Chambers made the following statement:

"I think the data center switching cycle is a very, very long one."

So why do I find the above statement by Chambers so curious?

Well, because Henderson states this week in his Arista research report:

"Arista's success is translating into shortening sell cycles/shortening lead times."

Henderson then added "further color" to his above statement with regard to Arista's shortening sell cycles that I find most fascinating:

"Arista's time to market advantage should manifest in CY152H as new merchant silicon hits:

• "Arista's virtualized interface between Arista's EOS software operating environment and iterations of merchant silicon should enable Arista to deliver product 6 months ahead of competition.
• "As the Tomahawk chips are launched by Broadcom in 2H15, this should allow Arista to leap ahead of competitors and accelerate market share gains.
• "The advantage that allows Arista to achieve this time to market agility is the abstraction virtualization layer built into the EOS operating system interface between EOS and the merchant silicon. This is unique to Arista's design.
• "Arista uses this abstraction layer between its software kernel to allow the same core software to easily be integrated across any merchant silicon product. Moreover, since this was the exclusive design strategy from the get-go when Arista started the company, it is uniformly utilized on all Arista products.
• "This results in the ability of Arista to easily port to any new chip in exceptionally rapid deployment time. All other vendors in the switch market marry the software directly to the chip and as such there is a considerable reengineering effort for every port.

  "We think this is one of the least understood advantages of the Arista product design.

  "We also think it will become clearly evident as new chips are introduced and vendors scramble to take advantage of them. A six month time to market advantage can be crucial."

Cisco replaces UCS server head; software leaders also depart
 

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