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Arista Networks, Inc. Reports Third Quarter 2019 Financial Results
[November 02, 2019]

Arista Networks, Inc. Reports Third Quarter 2019 Financial Results


Arista Networks, Inc. (NYSE: ANET), an industry leader in software-driven cloud networking solutions for large datacenter and campus environments, today announced financial results for its third quarter ended September 30, 2019.

Third Quarter Financial Highlights

  • Revenue of $654.4 million, an increase of 7.6% compared to the second quarter of 2019, and an increase of 16.2% from the third quarter of 2018.
  • GAAP gross margin of 63.8%, compared to GAAP gross margin of 64.1% in the second quarter of 2019 and 64.2% in the third quarter of 2018.
  • Non-GAAP gross margin of 64.4%, compared to non-GAAP gross margin of 64.7% in the second quarter of 2019 and 64.6% in the third quarter of 2018.
  • GAAP net income of $208.9 million, or $2.59 per diluted share, compared to GAAP net income of $168.5 million, or $2.08 per diluted share in the third quarter of 2018.
  • Non-GAAP net income of $217.1 million, or $2.69 per diluted share, compared to non-GAAP net income of $171.3 million, or $2.11 per diluted share in the third quarter of 2018.

"In Q3 2019 we continued to see the adoption of our cloud networking technology in more diverse environments. While we expect a sudden softening in Q4 with a specific cloud titan customer, we are committed to a sustainable and strong foundation of long-term growth, innovation and profitability," stated Jayshree Ullal, Arista President and CEO.

Commenting on the company's financial results, Ita Brennan, Arista's CFO, said, "We saw continued solid business execution in the quarter with strong earnings and cash flow generation."

Third Quarter Company Highlights

Financial Outlook

For the fourth quarter of 2019, we expect:

  • Revenue between $540 million and $560 million;
  • Non-GAAP gross margin between 63% to 65%, and
  • Non-GAAP operating margin of approximately 36%

Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and other non-recurring items. 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 the third quarter 2019 financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial (833) 287-7905 in the United States or (647) 689-4469 from outside the US. The Conference ID is 7979217.

The financial results conference call will also be available via live webcast on our investor relations website at https://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 fourth quarter of fiscal 2019, and statements regarding the benefits from the introduction of new products and our leadership in cloud area networking. 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: the evolution and growth of the cloud networking market and the adoption by end customers of Arista Networks' cloud networking solutions; rapid technological and market change; Arista's customer concentration; changes in Arista's customers' demand for our products and services; general market, political, economic and business conditions; Arista's rapid growth and our revenue growth rate; Arista's limited operating history; dependence on the introduction and market acceptance of new product offerings and standards including our 400G products as well as our campus and WiFi products; declines in the sales prices of our products and services; our ability to attract new large end customers or sell additional products and services to existing customers; competition in our products and service markets; requests for more favorable terms and conditions from our large end customers; customer order patterns or customer mix; the timing of orders and manufacturing and customer lead times; the benefits and impact of acquisitions; and Arista Networks' dispute with OptumSoft. 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 August 2, 2019, and other filings that the company makes to the SEC from time to time. You can locate these reports through our website at https://investors.arista.com/ and on the SEC's website at https://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

This press release and accompanying table contain certain non-GAAP financial measures including non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margins, non-GAAP net income and non-GAAP diluted net income per share. These non-GAAP financial measures exclude stock-based compensation expense, litigation-related expenses, amortization of acquisition-related intangible assets, other non-recurring charges or benefits, and the income tax effect of these non-GAAP exclusions. In addition, non-GAAP financial measures exclude net tax benefits associated with stock-based awards, which include excess tax benefits, and other discrete indirect effects of such awards. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that these non-GAAP financial measures are 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 the comparable GAAP financial measures. 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. Non-GAAP financial measures do not have any standardized meaning and are therefore unlikely to be comparable to similarly titled measures presented by other companies. 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, amortization of acquisition-related intangible assets, and other non-recurring items. The company does 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. A reconciliation of the non-GAAP financial measures guidance to the corresponding GAAP measures on a forward-looking basis is not available because 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, all of which are difficult to predict and subject to constant change. The actual amount of stock-based compensation expense will have a significant impact on the company's GAAP gross margin and GAAP operating margin.

About Arista Networks

Arista Networks pioneered software-driven, cognitive cloud networking for large-scale datacenter and campus environments. Arista's award-winning platforms redefine and deliver availability, agility, automation, analytics, and security. Arista has shipped more than twenty million cloud networking ports worldwide with CloudVision and EOS, an advanced network operating system. Committed to open standards across private, public and hybrid cloud solutions, Arista products are supported worldwide directly and through partners.

ARISTA, EOS, CloudVision, Cognitive WiFi 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: https://www.arista.com/



ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Operations

(Unaudited in thousands, except per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2019

 

2018

 

2019

 

2018

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

555,066

 

 

$

485,481

 

 

$

1,573,652

 

 

$

1,337,865

 

Service

 

99,349

 

 

77,828

 

 

284,508

 

 

217,778

 

Total revenue

 

654,415

 

 

563,309

 

 

1,858,160

 

 

1,555,643

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

218,220

 

 

187,764

 

 

616,906

 

 

516,077

 

Service

 

18,921

 

 

13,962

 

 

53,219

 

 

41,181

 

Total cost of revenue

 

237,141

 

 

201,726

 

 

670,125

 

 

557,258

 

Total gross profit

 

417,274

 

 

361,583

 

 

1,188,035

 

 

998,385

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

118,732

 

 

117,589

 

 

352,696

 

 

324,029

 

Sales and marketing

 

55,279

 

 

47,903

 

 

159,372

 

 

136,231

 

General and administrative

 

14,657

 

 

15,321

 

 

46,182

 

 

53,420

 

Legal settlement

 

-

 

 

-

 

 

-

 

 

405,000

 

Total operating expenses

 

188,668

 

 

180,813

 

 

558,250

 

 

918,680

 

Income from operations

 

228,606

 

 

180,770

 

 

629,785

 

 

79,705

 

Other income (expense), net

 

19,169

 

 

8,619

 

 

45,313

 

 

10,606

 

Income before income taxes

 

247,775

 

 

189,389

 

 

675,098

 

 

90,311

 

Provision for (benefit from) income taxes

 

38,880

 

 

20,865

 

 

75,923

 

 

(67,482

)

Net income

 

$

208,895

 

 

$

168,524

 

 

$

599,175

 

 

$

157,793

 

Net income attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

208,799

 

 

$

168,439

 

 

$

598,861

 

 

$

157,706

 

Diluted

 

$

208,804

 

 

$

168,445

 

 

$

598,880

 

 

$

157,713

 

Net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

2.73

 

 

$

2.25

 

 

$

7.85

 

 

$

2.12

 

Diluted

 

$

2.59

 

 

$

2.08

 

 

$

7.38

 

 

$

1.95

 

Weighted-average shares used in computing net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

76,426

 

 

75,011

 

 

76,301

 

 

74,506

 

Diluted

 

80,753

 

 

81,018

 

 

81,104

 

 

80,844

 

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(Unaudited, in thousands, except percentages and per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2019

 

2018

 

2019

 

2018

GAAP gross profit

 

$

417,274

 

 

$

361,583

 

 

$

1,188,035

 

 

$

998,385

 

GAAP gross margin

 

63.8

%

 

64.2

%

 

63.9

%

 

64.2

%

Stock-based compensation expense

 

1,258

 

 

1,268

 

 

3,384

 

 

3,706

 

Intangible asset amortization

 

2,626

 

 

1,198

 

 

7,877

 

 

1,198

 

Non-GAAP gross profit

 

$

421,158

 

 

$

364,049

 

 

$

1,199,296

 

 

$

1,003,289

 

Non-GAAP gross margin

 

64.4

%

 

64.6

%

 

64.5

%

 

64.5

%

 

 

 

 

 

 

 

 

 

GAAP income from operations

 

$

228,606

 

 

$

180,770

 

 

$

629,785

 

 

$

79,705

 

Stock-based compensation expense

 

26,257

 

 

23,254

 

 

74,845

 

 

66,583

 

Litigation expense (benefit)

 

-

 

 

(100

)

 

1,962

 

 

10,554

 

Legal settlement (1)

 

-

 

 

-

 

 

-

 

 

405,000

 

Intangible asset amortization

 

3,293

 

 

1,610

 

 

10,291

 

 

1,610

 

Acquisition-related costs

 

-

 

 

3,432

 

 

-

 

 

3,432

 

Non-GAAP income from operations

 

$

258,156

 

 

$

208,966

 

 

$

716,883

 

 

$

566,884

 

Non-GAAP operating margin

 

39.4

%

 

37.1

%

 

38.6

%

 

36.4

%

 

 

 

 

 

 

 

 

 

GAAP net income

 

$

208,895

 

 

$

168,524

 

 

$

599,175

 

 

$

157,793

 

Stock-based compensation expense

 

26,257

 

 

23,254

 

 

74,845

 

 

66,583

 

Litigation expense (benefit)

 

-

 

 

(100

)

 

1,962

 

 

10,554

 

Legal settlement (1)

 

-

 

 

-

 

 

-

 

 

405,000

 

Intangible asset amortization

 

3,293

 

 

1,610

 

 

10,291

 

 

1,610

 

Acquisition-related costs

 

-

 

 

3,432

 

 

-

 

 

3,432

 

Altera stock-based tax charge (2)

 

-

 

 

-

 

 

9,781

 

 

-

 

(Gain) loss on investment in privately-held companies

 

(4,277

)

 

-

 

 

(5,427

)

 

9,100

 

Acquisition-related tax expense

 

-

 

 

5,853

 

 

-

 

 

5,853

 

Tax benefit on stock-based awards

 

(12,674

)

 

(26,130

)

 

(73,183

)

 

(84,448

)

Income tax effect on non-GAAP exclusions

 

(4,391

)

 

(5,149

)

 

(14,048

)

 

(114,340

)

Non-GAAP net income

 

$

217,103

 

 

$

171,294

 

 

$

603,396

 

 

$

461,137

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income per share attributable to common stockholders

 

$

2.59

 

 

$

2.08

 

 

$

7.38

 

 

$

1.95

 

Non-GAAP adjustments to net income

 

0.10

 

 

0.03

 

 

0.06

 

 

3.75

 

Non-GAAP diluted net income per share

 

$

2.69

 

 

$

2.11

 

 

$

7.44

 

 

$

5.70

 

Weighted-average shares used in computing GAAP and Non-GAAP diluted net income per share attributable to common stockholders

 

80,753

 

 

81,018

 

 

81,104

 

 

80,844

 

Summary of Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

1,258

 

 

$

1,268

 

 

$

3,384

 

 

$

3,706

 

Research and development

 

13,472

 

 

12,010

 

 

39,171

 

 

34,700

 

Sales and marketing

 

7,832

 

 

6,537

 

 

21,463

 

 

18,771

 

General and administrative

 

3,695

 

 

3,439

 

 

10,827

 

 

9,406

 

Total

 

$

26,257

 

 

$

23,254

 

 

$

74,845

 

 

$

66,583

 

___________________

(1)

Represents one-time charges associated with the settlement of our lawsuit with Cisco on August 6, 2018.

(2)

Represents a discrete income tax expense related to stock based compensation as a result of an opinion on Altera Corporation and Subsidiaries vs. Commissioner on Internal Revenue issued by the Court of Appeals for the Ninth Circuit on June 7, 2019.

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

 

 

September 30,
2019

 

December 31,
2018

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

1,095,265

 

 

$

649,950

 

Marketable securities

 

1,351,775

 

 

1,306,197

 

Accounts receivable

 

447,252

 

 

331,777

 

Inventories

 

239,802

 

 

264,557

 

Prepaid expenses and other current assets

 

106,326

 

 

162,321

 

Total current assets

 

3,240,420

 

 

2,714,802

 

Property and equipment, net

 

40,188

 

 

75,355

 

Acquisition-related intangible assets, net

 

48,319

 

 

58,610

 

Goodwill

 

54,855

 

 

53,684

 

Investments

 

4,150

 

 

30,336

 

Operating lease right-of-use assets

 

91,903

 

 

-

 

Deferred tax assets

 

110,630

 

 

126,492

 

Other assets

 

29,360

 

 

22,704

 

TOTAL ASSETS

 

$

3,619,825

 

 

$

3,081,983

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

78,600

 

 

$

93,757

 

Accrued liabilities

 

128,930

 

 

123,254

 

Deferred revenue

 

291,384

 

 

358,586

 

Other current liabilities

 

49,275

 

 

30,907

 

Total current liabilities

 

548,189

 

 

606,504

 

Income taxes payable

 

60,278

 

 

36,167

 

Operating lease liabilities, non-current

 

87,099

 

 

-

 

Finance lease liabilities, non-current

 

-

 

 

35,431

 

Deferred revenue, non-current

 

237,628

 

 

228,641

 

Other long-term liabilities

 

30,627

 

 

31,851

 

TOTAL LIABILITIES

 

963,821

 

 

938,594

 

STOCKHOLDERS' EQUITY:

 

 

 

 

Common stock

 

8

 

 

8

 

Additional paid-in capital

 

1,076,732

 

 

956,572

 

Retained earnings (1)

 

1,579,063

 

 

1,190,803

 

Accumulated other comprehensive income (loss)

 

201

 

 

(3,994

)

TOTAL STOCKHOLDERS' EQUITY

 

2,656,004

 

 

2,143,389

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

3,619,825

 

 

$

3,081,983

 

______________________

(1)

We adopted new lease accounting guidance under ASC 842, which resulted in a cumulative-effect adjustment of $3.7 million to retained earnings as of January 1, 2019.

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Nine Months Ended September 30,

 

 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

$

599,175

 

 

$

157,793

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation, amortization and other

 

24,948

 

 

18,440

 

Stock-based compensation

 

74,845

 

 

66,583

 

Noncash lease expense

 

12,007

 

 

-

 

Deferred income taxes

 

10,945

 

 

(49,615

)

(Gain) loss on investment in privately-held companies

 

(5,427

)

 

9,100

 

Accretion of investment discounts

 

(6,032

)

 

(1,863

)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

(115,475

)

 

(68,192

)

Inventories

 

24,951

 

 

98,284

 

Prepaid expenses and other current assets

 

59,388

 

 

(50,507

)

Other assets

 

(7,009

)

 

(767

)

Accounts payable

 

(14,361

)

 

30,515

 

Accrued liabilities

 

5,731

 

 

(35,917

)

Deferred revenue

 

(58,216

)

 

13,161

 

Income taxes payable

 

29,808

 

 

10,311

 

Other liabilities

 

595

 

 

9,974

 

Net cash provided by operating activities

 

635,873

 

 

207,300

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from maturities of marketable securities

 

806,519

 

 

366,999

 

Purchases of marketable securities

 

(840,098

)

 

(827,198

)

Business acquisitions, net of cash acquired

 

(1,365

)

 

(95,640

)

Purchases of property and equipment

 

(13,319

)

 

(17,613

)

Proceeds from (purchases of) investments in privately-held companies

 

28,220

 

 

(8,000

)

Other investing activities

 

-

 

 

(2,000

)

Net cash used in investing activities

 

(20,043

)

 

(583,452

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments of lease financing obligations

 

-

 

 

(1,392

)

Proceeds from issuance of common stock under equity plans

 

52,177

 

 

49,642

 

Tax withholding paid on behalf of employees for net share settlement

 

(7,069

)

 

(6,914

)

Repurchase of common stock

 

(214,617

)

 

-

 

Net cash provided by (used in) financing activities

 

(169,509

)

 

41,336

 

Effect of exchange rate changes

 

(994

)

 

(984

)

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

445,327

 

 

(335,800

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH -Beginning of period

 

654,164

 

 

864,697

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH -End of period

 

$

1,099,491

 

 

$

528,897

 


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