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Arista shares fall on concerns Microsoft may be moving some business elsewhere

Arista shares have fallen 9 percent on concerns that Microsoft may be moving some business elsewhere

The risk that smaller companies face when selling technology to the biggest providers of cloud services has come to the fore as shares of one company – Arista, have slumped 9 per cent on concern that big tech companies (currently Microsoft) may be moving some business elsewhere.

Arista shares fell more than 9 percent on Friday after an industry research firm issued a report suggesting that big customers like Microsoft could be moving some business to lesser-known companies. Cleveland Research’s Ben Bolin downgraded Arista to “neutral” from “buy” and said there’s been “some shift” from Arista to so-called white-box switches at companies operating large data centers. Arista’s CEO Jayshree Ullal said in February that the company counted on Microsoft for 16 percent of its revenue last year. Despite the latest development, she expects Microsoft will still account for 10 percent of revenue in 2018.

Although shunning big switch makers in favour of custom designs is not new, Microsoft has not been engaged in this. In a December note, analysts at Stifel estimated that 90 percent of the white-box market comes from Amazon and Google – Microsoft’s top two competitors in public cloud.

The data centers powering Microsoft’s Azure public cloud and Office 365 services are becoming a more important part of the business, especially following a recent reorganisation. Azure revenue increased 98 percent last quarter. In a note last month, Nomura Instinet analysts wrote that Microsoft’s roughly 20 percent growth in capital expenditures, and a “near doubling” at Facebook, should help Arista this year.

There are also speculations that Microsoft will build its own data center systems, and Arista’s has dealt with that possibility for years.

In a development that raised concerns of a bigger change, Microsoft donated a switch operating system to Facebook’s Open Compute Project in 2016. It contained data center hardware designs that is free for lesser-known hardware makers.

But Arista contributed some of its own code to the operating system.

Ullal said at an event in 2016 that Microsoft came to it and told that they’re not planning on building their own hardware. They’re not planning on using white boxes and are very happy with the way Arista operates.

She has maintained her optimism about Arista’s business with Microsoft. On the company’s most recent earnings call, she said she hadn’t seen any changes in terms of customers moving to white-box switches.

Arista fell $24.82 to $244.07 on Friday, knocking about $1.8 billion off its market value.


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