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Arista Networks, Inc. Reports Second Quarter 2018 Financial Results, with Record Earnings

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Acquires Mojo Networks for Cloud Networking Expansion

Arista Networks, Inc. (NYSE:ANET), an industry leader in
software-driven, cognitive cloud networking for large-scale datacenter
and campus environments, today announced financial results for its
second quarter ended June 30, 2018.

Second Quarter Financial Highlights

  • Revenue of $519.8 million, an increase of 10.0% compared to the first
    quarter of 2018, and an increase of 28.3% from the second quarter of
    2017.
  • GAAP gross margin of 64.2%, compared to GAAP gross margin of 64.1% in
    the first quarter of 2018 and 64.1% in the second quarter of 2017.
  • Non-GAAP gross margin of 64.5%, compared to non-GAAP gross margin of
    64.4% in the first quarter of 2018 and 64.4% in the second quarter of
    2017.
  • GAAP net income of $150.7 million, or $1.86 per diluted share,
    compared to GAAP net income of $102.7 million, or $1.30 per diluted
    share, in the second quarter of 2017.
  • Non-GAAP net income of $155.7 million, or $1.93 per diluted share,
    compared to non-GAAP net income of $105.5 million, or $1.34 per
    diluted share, in the second quarter of 2017.

"Arista is one of the fastest networking companies to achieve a $2
billion annual revenue rate, driven by its industry leadership in
software-defined networking," stated Jayshree Ullal, Arista President
and CEO. "In Q2 2018 we comfortably surpassed the $500 million revenue
mark with record profitability."

Commenting on the company's financial results, Ita Brennan, Arista's
CFO, said, "The team continues to demonstrate consistent execution,
driving healthy revenue growth and earnings expansion."

Arista Extends the Campus to Cognitive WiFi™ Networking

Arista today also announced
that it will acquire Mojo
Networks
, the inventor of Cognitive WiFi and a leader in
cloud-managed wireless networking. The parties expect to close the
transaction in Q3 2018. "We are excited about Arista's first acquisition
transaction and its significance to Arista's cognitive campus vision.
We welcome the Mojo Networks employees to the Arista family," stated Ms.
Ullal.

Company Highlights

Financial Outlook

For the third quarter of 2018, we expect:

  • Revenue between $540 and $552 million
  • Non-GAAP gross margin between 63% to 65%, and
  • Non-GAAP operating margin of approximately 32% to 34%

Guidance for non-GAAP financial measures excludes estimated legal
expenses of approximately $6 million associated with the OptumSoft and
Cisco litigation, stock-based compensation expense, 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 second quarter 2018 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 8687498.

The financial results conference call will also be available via live
webcast on our investor relations website at http://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
2018, 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's redesigned products are covered by such
remedial orders 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 demand for our products and services, customer order patterns
or customer mix; the timing of orders and manufacturing and customer
lead times; increased competition in our products and service markets;
dependence on the introduction and market acceptance of new product
offerings and standards; the benefits and impact of acquisitions; 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 Annual Report on Form 10-K filed with the SEC on
February 20, 2018, 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.

Non-GAAP Financial Measures

The company reports certain non-GAAP financial measures that exclude
stock-based compensation expense, expenses associated with the OptumSoft
and Cisco litigation, 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
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, expenses associated with the OptumSoft
and Cisco litigation, 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. 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. 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 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 fifteen
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, FlexRoute 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 www.arista.com.

 

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Income

(Unaudited in thousands, except per share amounts)

   
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Revenue:
Product $ 444,767 $ 353,904 $ 852,384 $ 645,271
Service 75,078   51,307   139,950   95,415  
Total revenue 519,845 405,211 992,334 740,686
Cost of revenue:
Product 171,622 134,406 328,313 244,242
Service 14,340   11,028   27,219   22,457  
Total cost of revenue 185,962 145,434 355,532 266,699
Total gross profit 333,883 259,777 636,802 473,987
Operating expenses:
Research and development 104,078 81,194 206,440 162,804
Sales and marketing 46,188 38,630 88,328 75,657
General and administrative 18,420   23,319   38,099   45,474  
Total operating expenses 168,686 143,143 332,867 283,935
Income from operations 165,197 116,634 303,935 190,052
Other income (expense), net:
Interest expense (680 ) (623 ) (1,367 ) (1,338 )
Other income (expense), net (1,489 ) 1,119   3,354   2,144  
Total other income (expense), net (2,169 ) 496 1,987 806
Income before provision for income taxes 163,028 117,130 305,922 190,858
Provision for income taxes 12,320   14,445   10,676   5,212  
Net income $ 150,708   $ 102,685   $ 295,246   $ 185,646  
Net income attributable to common stockholders:
Basic $ 150,629   $ 102,454   $ 295,078   $ 185,139  
Diluted $ 150,635   $ 102,474   $ 295,091   $ 185,182  
Net income per share attributable to common stockholders:
Basic $ 2.02   $ 1.42   $ 3.97   $ 2.59  
Diluted $ 1.86   $ 1.30   $ 3.65   $ 2.37  
Weighted-average shares used in computing net income per share
attributable to common stockholders:
Basic 74,503   71,992   74,250   71,555  
Diluted 80,826   78,756   80,774   78,166  
 

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

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

   
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
GAAP gross profit $ 333,883 $ 259,777 $ 636,802 $ 473,987
GAAP gross margin 64.2 % 64.1 % 64.2 % 64.0 %
Stock-based compensation expense 1,236   1,087   2,438   2,111  
Non-GAAP gross profit $ 335,119   $ 260,864   $ 639,240   $ 476,098  
Non-GAAP gross margin 64.5 % 64.4 % 64.4 % 64.3 %
 
GAAP income from operations $ 165,197 $ 116,634 $ 303,935 $ 190,052
Stock-based compensation expense 22,478 18,400 43,329 34,839
Litigation expense 3,569   11,957   10,654   23,423  
Non-GAAP income from operations $ 191,244   $ 146,991   $ 357,918   $ 248,314  
Non-GAAP operating margin 36.8 % 36.3 % 36.1 % 33.5 %
 
GAAP net income $ 150,708 $ 102,685 $ 295,246 $ 185,646
Stock-based compensation expense 22,478 18,400 43,329 34,839
Litigation expense 3,569 11,957 10,654 23,423
Unrealized loss on investments in privately-held companies, net 9,100 9,100
Tax benefit on stock-based awards (25,472 ) (18,070 ) (58,318 ) (48,693 )
Income tax effect on non-GAAP exclusions (4,663 ) (9,502 ) (10,168 ) (17,938 )
Non-GAAP net income $ 155,720   $ 105,470   $ 289,843   $ 177,277  
 
GAAP diluted net income per share attributable to common stockholders $ 1.86 $ 1.30 $ 3.65 $ 2.37
Non-GAAP adjustments to net income 0.07   0.04   (0.06 ) (0.10 )
Non-GAAP diluted net income per share $ 1.93   $ 1.34   $ 3.59   $ 2.27  
 
Weighted-average shares used in computing diluted net income per
share attributable to common stockholders
80,826   78,756   80,774   78,166  
 
Summary of Stock-Based Compensation Expense:
Cost of revenue $ 1,236 $ 1,087 $ 2,438 $ 2,111
Research and development 11,745 10,342 22,690 19,929
Sales and marketing 6,274 4,080 12,234 7,536
General and administrative 3,223   2,891   5,967   5,263  
Total $ 22,478   $ 18,400   $ 43,329   $ 34,839  
 

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

   
June 30, 2018 December 31, 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 711,157 $ 859,192
Marketable securities 1,149,247 676,363
Accounts receivable 260,917 247,346
Inventories 245,439 306,198
Prepaid expenses and other current assets 168,779   177,330  
Total current assets 2,535,539 2,266,429
Property and equipment, net 73,736 74,279
Investments 35,036 36,136
Deferred tax assets 68,761 65,125
Other assets 20,019   18,891  
TOTAL ASSETS $ 2,733,091   $ 2,460,860  
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 53,182 $ 52,200
Accrued liabilities 86,693 133,827
Deferred revenue 262,345 327,706
Other current liabilities 19,543   16,172  
Total current liabilities 421,763 529,905
Income taxes payable 40,369 34,067
Lease financing obligations, non-current 36,594 37,673
Deferred revenue, non-current 186,299 187,556
Other long-term liabilities 22,116   9,745  
TOTAL LIABILITIES 707,141 798,946
STOCKHOLDERS' EQUITY:
Common stock 8 7
Additional paid-in capital 872,559 804,731
Retained earnings (1) 1,157,934 859,114
Accumulated other comprehensive loss (4,551 ) (1,938 )
TOTAL STOCKHOLDERS' EQUITY 2,025,950   1,661,914  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,733,091   $ 2,460,860  
____________________________

(1) The adoption of ASU 2014-09, Revenue from Contracts with
Customers (Topic 606)
, and ASU 2016-16, Income Taxes (Topic 740):
Intra-Entity Transfers of Assets Other Than Inventory,
in the first
quarter of 2018 resulted in an adjustment to increase the retained
earnings balance by $3.6 million as of January 1, 2018.

 

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 
Six Months Ended June 30,
2018  

2017
As Adjusted (1)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 295,246 $ 185,646
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other 11,328 10,033
Stock-based compensation 43,329 34,839
Deferred income taxes (4,281 ) (8,515 )
Unrealized loss on investments in privately-held companies, net 9,100
Amortization (accretion) of investment premiums (discounts) (783 ) 753
Changes in operating assets and liabilities:
Accounts receivable, net (13,571 ) (16,505 )
Inventories 60,759 (127,313 )
Prepaid expenses and other current assets 12,605 (22,239 )
Other assets 629 (470 )
Accounts payable 3,597 1,299
Accrued liabilities (47,153 ) (5,981 )
Deferred revenue (50,096 ) 181,575
Income taxes payable 6,653 5,380
Other liabilities (1,237 ) 3,593  
Net cash provided by operating activities 326,125   242,095  
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 222,764 112,053
Purchases of marketable securities (696,665 ) (114,195 )
Purchases of property and equipment (13,071 ) (9,534 )
Investments in privately-held companies (8,000 )
Other investing activities (2,000 )  
Net cash used in investing activities (1) (496,972 ) (11,676 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of lease financing obligations (921 ) (773 )
Proceeds from issuance of common stock under equity plans 28,810 28,105
Tax withholding paid on behalf of employees for net share settlement (4,463 ) (1,356 )
Net cash provided by financing activities 23,426   25,976  
Effect of exchange rate changes (607 ) 411
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (148,028 ) 256,806
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period (1) 864,697   572,168  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period (1) $ 716,669   $ 828,974  
____________________________________

(1) The adoption of ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash
("ASU 2016-18"), in the first half of 2018 requires
the Company to include restricted cash together with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period
amounts presented on the statements of cash flows. As a result, for the
six months ended June 30, 2017, the beginning-of-period and
end-of-period amounts increased by $4.2 million and $5.5 million,
respectively, and net cash used in investing activities decreased by
$1.3 million.

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