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Arista Networks, Inc. Reports Second Quarter 2017 Financial Results
[August 03, 2017]

Arista Networks, Inc. Reports Second Quarter 2017 Financial Results


Arista Networks, Inc. (NYSE: ANET), an industry leader in software-driven cloud networking solutions for large datacenter and computing environments, today announced financial results for its second quarter ended June 30, 2017.

Second Quarter Financial Highlights

  • Revenue of $405.2 million, an increase of 20.8% compared to the first quarter of 2017, and an increase of 50.8% from the second quarter of 2016.
  • GAAP gross margin of 64.1%, compared to GAAP gross margin of 63.9% in the first quarter of 2017 and 63.8% in the second quarter of 2016.
  • Non-GAAP gross margin of 64.4%, compared to non-GAAP gross margin of 64.2% in the first quarter of 2017 and 64.1% in the second quarter of 2016.
  • GAAP net income of $102.7 million, or $1.30 per diluted share, compared to GAAP net income of $38.9 million, or $0.53 per diluted share, in the second quarter of 2016.
  • Non-GAAP net income of $105.5 million, or $1.34 per diluted share, compared to non-GAAP net income of $53.7 million, or $0.74 per diluted share, in the second quarter of 2016.

"As we complete our third anniversary of becoming a public company, I am pleased with our record results in Q2 2017," stated Jayshree Ullal, Arista President and CEO. "Our substantial financial performance, customer success and industry recognition has accelerated the migration to mainstream cloud networking."

Commenting on the company's financial results, Ita Brennan, Arista's CFO, said, "We are pleased with our exceptional performance in the quarter across all key financial metrics."

Company Highlights

  • Introduced the next generation R2 Series platforms based on merchant silicon that is twice the density and half the power of custom router silicon, delivering more than 150 Tbps of capacity for switching and routing powered by Arista's software-driven EOS cloud technology.
  • This is the third consecutive year Arista has been recognized as a leader and positioned the furthest for Completeness of Vision in the Leaders Quadrant of the July 2017 Gartner Magic Quadrant for Data Center Networking.
  • Arista was awarded a 2017 Top Workplaces honor by the Bay Area News Group.

Financial Outlook

For the third quarter of 2017, we expect:

  • Revenue between $405 and $420 million.
  • Non-GAAP gross margin between 61% to 64%, and
  • Non-GAAP operating margin of approximately 30%.

Guidance for non-GAAP financial measures excludes legal expenses of approximately $12 million associated with the OptumSoft and Cisco litigation, including bond costs related to the importation and sale of affected products and components during the presidential review period of the 945 investigation, stock-based compensation expense, including excess tax benefits on stock-based awards, and other non-recurring expenses. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis (see further explanation below).

Prepared Materials and Conference Call Information

Arista executives will discuss second quarter 2017 financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial 1-877-201-0168 in the United States or 1-647-788-4901 from outside the US. The Conference ID is 51037994.

The financial results conference call will also be available via live webcast on our investor relations website at investors.arista.com. Shortly after the conclusion of the conference call, a replay of the audio webcast will be available on Arista's Investor Relations website.

Forward-Looking Statements

This press release contains "forward-looking statements" regarding our future performance, including statements in the section entitled "Financial Outlook," such as estimates regarding revenue, non-GAAP gross margin and non-GAAP operating margin for the third quarter of fiscal 2017, and statements regarding the benefits from the introduction of new products. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause actual results, performance or achievements to differ materially from those anticipated in or implied by the forward-looking statements including risks associated with: Arista Networks' dispute with Cisco Systems, Inc. including the ITC remedial orders which prohibit the importation of Arista products (or components thereof) into the U.S., or the sale of previously imported products, that are covered by those remedial orders, Arista Networks' ability to redesign its products in a manner not covered by such remedial orders and obtain appropriate governmental approvals for those redesigned products, any penalties assessed by the ITC if Arista does not obtain such governmental approvals and Arista Networks' ability to manage our manufacturing and supply chain including the sourcing of components on commercially reasonable terms;Arista Networks' limited operating history; Arista Networks' rapid growth; Arista Networks' customer concentration; our customer's adoption of our redesigned products and services; requests for more favorable terms and conditions from our large end customers; declines in the sales prices of our products and services; changes in customer order patterns or customer mix; increased competition in our products and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; the evolution of the cloud networking market and the adoption by end customers of Arista Networks' cloud networking solutions; Arista Networks' dispute with OptumSoft; and general market, political, economic and business conditions. Additional risks and uncertainties that could affect Arista Networks can be found in Arista's most recent Quarterly Report on Form 10-Q filed with the SEC on May 8, 2017, and other filings that the company makes to the SEC from time to time. You can locate these reports through our website at http://investors.arista.com/ and on the SEC's website at http://www.sec.gov/. All forward-looking statements in this press release are based on information available to the company as of the date hereof and Arista Networks disclaims any obligation to publicly update or revise any forward-looking statement to reflect events that occur or circumstances that exist after the date on which they were made.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

Non-GAAP Financial Measures

The company reports certain non-GAAP financial measures that exclude stock-based compensation expense and related excess tax benefits, expenses associated with the OptumSoft and Cisco litigation, other non-recurring charges or benefits, and the income tax effect of these non-GAAP exclusions. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that the use of these non-GAAP financial measures is useful to investors as an additional tool to evaluate ongoing operating results and trends. In addition, these measures are the primary indicators management uses as a basis for its planning and forecasting for future periods.

Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP net income, net income per diluted share, gross margin, or operating margin. Non-GAAP financial measures are subject to limitations, and should be read only in conjunction with the company's consolidated financial statements prepared in accordance with GAAP. A description of these non-GAAP financial measures and a reconciliation of the company's non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.

The Company's guidance for non-GAAP financial measures excludes stock-based compensation expense and related excess tax benefits, expenses associated with the OptumSoft and Cisco litigation, and other non-recurring items. The Company has not reconciled its non-GAAP gross margin or its non-GAAP operating margin guidance to GAAP gross margin or GAAP operating margin, because we do not provide guidance on GAAP gross margin or GAAP operating margin or the various reconciling items between GAAP gross margin and GAAP operating margin and non-GAAP gross margin and non-GAAP operating margin. Stock-based compensation expense is impacted by the Company's future hiring and retention needs and the future fair market value of the Company's common stock. In addition, excess tax benefits on stock-based awards will fluctuate based on these same factors, as well as the timing of exercise or vesting of such awards, all of which are difficult to predict and subject to constant change. The actual amount of stock-based compensation expense and excess tax benefits will have a significant impact on the Company's GAAP gross margin and GAAP operating margin. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.

About Arista Networks

Arista Networks was founded to pioneer and deliver software-driven cloud networking solutions for large datacenter storage and computing environments. Arista's award-winning platforms, ranging in Ethernet speeds from 10 to 100 gigabits per second, redefine scalability, agility and resilience. Arista has shipped more than ten million cloud networking ports worldwide with CloudVision and EOS, an advanced network operating system. Committed to open standards, Arista is a founding member of the 25/50GbE consortium. Arista Networks products are available worldwide directly and through partners.

ARISTA, EOS, CloudVision, and AlgoMatch are among the registered and unregistered trademarks of Arista Networks, Inc. in jurisdictions around the world. Other company names or product names may be trademarks of their respective owners.

Additional information and resources can be found at: http://www.arista.com.



 
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Income
(Unaudited in thousands, except per share amounts)
 
  Three Months Ended   Six Months Ended
June 30, June 30,
2017   2016 2017   2016
Revenue:
Product $ 353,904 $ 235,616 $ 645,271 $ 448,091
Service 51,307   33,125   95,415   62,846  
Total revenue 405,211 268,741 740,686 510,937
Cost of revenue:
Product 134,406 88,021 244,242 166,934
Service 11,028   9,269   22,457   17,462  
Total cost of revenue 145,434   97,290   266,699   184,396  
Total gross profit 259,777 171,451 473,987 326,541
Operating expenses:
Research and development 81,194 69,020 162,804 131,535
Sales and marketing 38,630 31,744 75,657 59,350
General and administrative 23,319   17,529   45,474   32,763  

Total operating expenses

143,143 118,293 283,935 223,648
Income from operations 116,634 53,158 190,052 102,893
Other income (expense), net:
Interest expense (623 ) (732 ) (1,338 ) (1,483 )
Other income (expense), net 1,119   416   2,144   753  
Total other income (expense), net 496   (316 ) 806   (730 )
Income before provision for income taxes 117,130 52,842 190,858 102,163
Provision for income taxes 14,445   13,938   5,212   28,014  
Net income $ 102,685   $ 38,904   $ 185,646   $ 74,149  
Net income attributable to common stockholders:
Basic $ 102,454   $ 38,617   $ 185,139   $ 73,535  
Diluted $ 102,474   $ 38,635   $ 185,182   $ 73,573  
Net income per share attributable to common stockholders:
Basic $ 1.42   $ 0.57   $ 2.59   $ 1.08  
Diluted $ 1.30   $ 0.53   $ 2.37   $ 1.01  
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 71,992   68,275   71,555   68,006  
Diluted 78,756   72,817   78,166   72,523  

 
ARISTA NETWORKS, INC.
Reconciliation of Selected GAAP to Non-GAAP Financial Measures
(Unaudited in thousands, except percentages and per share amounts)
 
  Three Months Ended   Six Months Ended
June 30, June 30,
2017   2016 2017   2016
GAAP gross profit $ 259,777 $ 171,451 $ 473,987 $ 326,541
GAAP gross margin 64.1 % 63.8 % 64.0 % 63.9 %
Stock-based compensation expense 1,087   868   2,111   1,661  
Non-GAAP gross profit $ 260,864   $ 172,319   $ 476,098   $ 328,202  
Non-GAAP gross margin 64.4 % 64.1 % 64.3 % 64.2 %
 
GAAP income from operations $ 116,634 $ 53,158 $ 190,052 $ 102,893
Stock-based compensation expense 18,400 14,232 34,839 27,592
Litigation expense(1) 11,957   7,594   23,423   14,599  
Non-GAAP income from operations $ 146,991   $ 74,984   $ 248,314   $ 145,084  
Non-GAAP operating margin 36.3 % 27.9 % 33.5 % 28.4 %
 
GAAP net income $ 102,685 $ 38,904 $ 185,646 $ 74,149
Stock-based compensation expense 18,400 14,232 34,839 27,592
Litigation expense(1) 11,957 7,594 23,423 14,599
Excess tax benefit on stock-based awards (19,079 ) - (47,869 ) -
Income tax effect on non-GAAP exclusions (8,493 ) (7,056 ) (18,762 ) (13,580 )
Non-GAAP net income $ 105,470   $ 53,674   $ 177,277   $ 102,760  
 
GAAP diluted net income per share attributable to common stockholders $ 1.30 $ 0.53 $ 2.37 $ 1.01
Non-GAAP adjustments to net income 0.04   0.21   (0.10 ) 0.41  
Non-GAAP diluted net income per share $ 1.34   $ 0.74   $ 2.27   $ 1.42  
 
Weighted-average shares used in computing diluted net income per share attributable to common stockholders 78,756   72,817   78,166   72,523  
 
Summary of stock-based compensation
Cost of revenue $ 1,087 $ 868 $ 2,111 $ 1,661
Research and development 10,342 7,595 19,929 15,052
Sales and marketing 4,080 3,780 7,536 7,427
General and administrative 2,891   1,989   5,263   3,452  
Total $ 18,400   $ 14,232   $ 34,839   $ 27,592  
      (1)

Amounts have been excluded from non-GAAP results as they represent non-recurring OptumSoft and Cisco litigation expenses, including bond costs related to the importation and sale of affected products and components during the presidential review period of the 945 investigation.

 
ARISTA NETWORKS, INC.
Condensed Consolidated Balance Sheets

(Unaudited in thousands)

 
  June 30,   December 31,
2017 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 823,475 $ 567,923
Marketable securities 301,364 299,910
Accounts receivable 269,624 253,119
Inventories 363,803 236,490
Prepaid expenses and other current assets 190,923   168,684  
Total current assets 1,949,189 1,526,126
Property and equipment, net 75,840 76,961
Investments 36,136 36,136
Deferred tax assets 81,469 70,960
Other assets 20,306   18,824  
TOTAL ASSETS $ 2,162,940   $ 1,729,007  
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 80,418 $ 79,457
Accrued liabilities 84,413 90,951
Deferred revenue 426,750 273,350
Other current liabilities 19,216   15,795  
Total current liabilities 610,797 459,553
Income taxes payable 19,970 14,498
Lease financing obligations, non-current 38,672 39,593
Deferred revenue, non-current 127,760 99,585
Other long-term liabilities 7,992   7,958  
TOTAL LIABILITIES 805,191   621,187  
STOCKHOLDERS' EQUITY:
Common stock 7 7
Additional paid-in capital 737,436 674,183
Retained earnings 621,559 435,105
Accumulated other comprehensive loss (1,253 ) (1,475 )
TOTAL STOCKHOLDERS' EQUITY 1,357,749   1,107,820  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,162,940   $ 1,729,007  
 
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
 
  Six Months Ended
June 30,
2017   2016
Cash flows from operating activities
Net income $ 185,646

$

74,149

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,033 9,662
Stock-based compensation 34,839 27,592
Deferred income taxes (8,515 ) (6,876 )
Amortization of investment premiums 753 385
Changes in operating assets and liabilities:
Accounts receivable, net (16,505 ) (2,396 )
Inventories (127,313 ) (26,001 )
Prepaid expenses and other current assets (22,239 ) (2,838 )
Other assets (470 ) 1,866
Accounts payable 1,299 18,501
Accrued liabilities (5,981 ) (5,196 )
Deferred revenue 181,575 33,516
Income taxes payable 5,380 17,853
Other liabilities   3,593     1,779  
Net cash provided by operating activities   242,095     141,996  
Cash flows from investing activities
Proceeds from marketable securities 112,053 -
Purchases of marketable securities (114,195 ) (292,938 )
Purchases of property and equipment (9,534 ) (12,739 )
Investment in privately-held companies - (2,500 )
Change in restricted cash   (1,254 )   -  
Net cash used in investing activities   (12,930 )   (308,177 )
Cash flows from financing activities
Principal payments of lease financing obligations (773 ) (634 )
Proceeds from issuance of common stock under equity plans 28,105 11,205
Minimum tax withholding paid on behalf of employees for net share settlement   (1,356 )   (599 )
Net cash provided by financing activities   25,976     9,972  
Effect of exchange rate changes   411     (59 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

255,552 (156,268 )
CASH AND CASH EQUIVALENTS-Beginning of period   567,923     687,326  
CASH AND CASH EQUIVALENTS-End of period $ 823,475   $ 531,058  


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