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Arista Networks, Inc. Reports Second Quarter 2019 Financial Results

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Places in the Cloud Networking Growth Continues with Record Earnings and Revenue

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 second quarter ended June 30, 2019.

Second Quarter Financial Highlights

  • Revenue of $608.3 million, an increase of 2.2% compared to the first quarter of 2019, and an increase of 17.0% from the second quarter of 2018.
  • GAAP gross margin of 64.1%, compared to GAAP gross margin of 63.9% in the first quarter of 2019 and 64.2% in the second quarter of 2018.
  • Non-GAAP gross margin of 64.7%, compared to non-GAAP gross margin of 64.5% in the first quarter of 2019 and 64.5% in the second quarter of 2018.
  • GAAP net income of $189.3 million, or $2.33 per diluted share, compared to GAAP net loss of $155.3 million, or $2.08 per diluted share in the second quarter of 2018.
  • Non-GAAP net income of $198.6 million, or $2.44 per diluted share, compared to non-GAAP net income of $155.7 million, or $1.93 per diluted share in the second quarter of 2018.

"In Q2 2019, Arista raised the ante with innovative products in both 400G and Cognitive Campus. Our leadership in cloud area networking is now widely recognized by industry analysts, partners and customers," stated Jayshree Ullal, Arista President and CEO.

Commenting on the company's financial results, Ita Brennan, Arista's CFO, said, "The business continued to demonstrate solid earnings and cash flow generation for the quarter."

Second Quarter Company Highlights

Financial Outlook

For the third quarter of 2019, we expect:

  • Revenue between $647 million and $657 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 second 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 5568407.

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 third 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: Arista Networks' limited operating history; Arista Networks' rapid growth; Arista Networks' customer concentration; the evolution and growth of the cloud networking market and the adoption by end customers of Arista Networks' cloud networking solutions; changes in our customers' demand for our 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; 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 including our 400G products as well as our campus and WiFi products; the benefits and impact of acquisitions; rapid technological and market change; Arista Networks' dispute with OptumSoft; our revenue growth rate; 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 6, 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 tables 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 June 30,

 

Six Months Ended June 30,

 

 

2019

 

2018

 

2019

 

2018

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

513,171

 

 

$

444,767

 

 

$

1,018,586

 

 

$

852,384

 

Service

 

95,150

 

 

75,078

 

 

185,159

 

 

139,950

 

Total revenue

 

608,321

 

 

519,845

 

 

1,203,745

 

 

992,334

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

200,534

 

 

171,622

 

 

398,686

 

 

328,313

 

Service

 

17,596

 

 

14,340

 

 

34,298

 

 

27,219

 

Total cost of revenue

 

218,130

 

 

185,962

 

 

432,984

 

 

355,532

 

Total gross profit

 

390,191

 

 

333,883

 

 

770,761

 

 

636,802

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

114,295

 

 

104,078

 

 

233,964

 

 

206,440

 

Sales and marketing

 

53,040

 

 

46,188

 

 

104,093

 

 

88,328

 

General and administrative

 

16,019

 

 

18,420

 

 

31,525

 

 

38,099

 

Legal settlement

 

 

 

405,000

 

 

 

 

405,000

 

Total operating expenses

 

183,354

 

 

573,686

 

 

369,582

 

 

737,867

 

Income (loss) from operations

 

206,837

 

 

(239,803

)

 

401,179

 

 

(101,065

)

Other income (expense), net

 

13,811

 

 

(2,169

)

 

26,144

 

 

1,987

 

Income (loss) before income taxes

 

220,648

 

 

(241,972

)

 

427,323

 

 

(99,078

)

Provision for (benefit from) income taxes

 

31,397

 

 

(86,703

)

 

37,043

 

 

(88,347

)

Net income (loss)

 

$

189,251

 

 

$

(155,269

)

 

$

390,280

 

 

$

(10,731

)

Net income (loss) attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

189,152

 

 

$

(155,187

)

 

$

390,063

 

 

$

(10,725

)

Diluted

 

$

189,158

 

 

$

(155,187

)

 

$

390,076

 

 

$

(10,725

)

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

2.47

 

 

$

(2.08

)

 

$

5.12

 

 

$

(0.14

)

Diluted

 

$

2.33

 

 

$

(2.08

)

 

$

4.80

 

 

$

(0.14

)

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

 

 

 

 

 

 

 

 

Basic

 

76,552

 

 

74,503

 

 

76,238

 

 

74,250

 

Diluted

 

81,335

 

 

74,503

 

 

81,271

 

 

74,250

 

 

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,

 

 

2019

 

2018

 

2019

 

2018

GAAP gross profit

 

$

390,191

 

 

$

333,883

 

 

$

770,761

 

 

$

636,802

 

GAAP gross margin

 

64.1

%

 

64.2

%

 

64.0

%

 

64.2

%

Stock-based compensation expense

 

1,028

 

 

1,236

 

 

2,126

 

 

2,438

 

Intangible asset amortization

 

2,626

 

 

 

 

5,251

 

 

 

Non-GAAP gross profit

 

$

393,845

 

 

$

335,119

 

 

$

778,138

 

 

$

639,240

 

Non-GAAP gross margin

 

64.7

%

 

64.5

%

 

64.6

%

 

64.4

%

 

 

 

 

 

 

 

 

 

GAAP income (loss) from operations

 

$

206,837

 

 

$

(239,803

)

 

$

401,179

 

 

$

(101,065

)

Stock-based compensation expense

 

24,297

 

 

22,478

 

 

48,588

 

 

43,329

 

Litigation expense

 

514

 

 

3,569

 

 

1,962

 

 

10,654

 

Legal settlement (1)

 

 

 

405,000

 

 

 

 

405,000

 

Intangible asset amortization

 

3,499

 

 

 

 

6,998

 

 

 

Non-GAAP income from operations

 

$

235,147

 

 

$

191,244

 

 

$

458,727

 

 

$

357,918

 

Non-GAAP operating margin

 

38.7

%

 

36.8

%

 

38.1

%

 

36.1

%

 

 

 

 

 

 

 

 

 

GAAP net income (loss)

 

$

189,251

 

 

$

(155,269

)

 

$

390,280

 

 

$

(10,731

)

Stock-based compensation expense

 

24,297

 

 

22,478

 

 

48,588

 

 

43,329

 

Litigation expense

 

514

 

 

3,569

 

 

1,962

 

 

10,654

 

Legal settlement (1)

 

 

 

405,000

 

 

 

 

405,000

 

Intangible asset amortization

 

3,499

 

 

 

 

6,998

 

 

 

Altera stock-based tax charge (2)

 

9,781

 

 

 

 

9,781

 

 

 

(Gain) loss on investment in privately-held companies

 

 

 

9,100

 

 

(1,150

)

 

9,100

 

Tax benefit on stock-based awards

 

(23,455

)

 

(25,472

)

 

(60,509

)

 

(58,318

)

Income tax effect on non-GAAP exclusions

 

(5,324

)

 

(103,686

)

 

(9,657

)

 

(109,191

)

Non-GAAP net income

 

$

198,563

 

 

$

155,720

 

 

$

386,293

 

 

$

289,843

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income (loss) per share attributable to common stockholders

 

$

2.33

 

 

$

(2.08

)

 

$

4.80

 

 

$

(0.14

)

Non-GAAP adjustments to net income (loss)

 

0.11

 

 

4.01

 

 

(0.05

)

 

3.73

 

Non-GAAP diluted net income per share

 

$

2.44

 

 

$

1.93

 

 

$

4.75

 

 

$

3.59

 

Weighted-average shares used in computing GAAP diluted net income (loss) per share attributable to common stockholders

 

81,335

 

 

74,503

 

 

81,271

 

 

74,250

 

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

 

81,335

 

 

80,826

 

 

81,271

 

 

80,774

 

Summary of Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

1,028

 

 

$

1,236

 

 

$

2,126

 

 

$

2,438

 

Research and development

 

12,568

 

 

11,745

 

 

25,699

 

 

22,690

 

Sales and marketing

 

7,097

 

 

6,274

 

 

13,631

 

 

12,234

 

General and administrative

 

3,604

 

 

3,223

 

 

7,132

 

 

5,967

 

Total

 

$

24,297

 

 

$

22,478

 

 

$

48,588

 

 

$

43,329

 

________________

(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)

 

 

 

 

 

 

 

June 30, 2019

 

December 31, 2018

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

944,414

 

 

$

649,950

 

Marketable securities

 

1,313,389

 

 

1,306,197

 

Accounts receivable

 

343,080

 

 

331,777

 

Inventories

 

314,177

 

 

264,557

 

Prepaid expenses and other current assets

 

113,458

 

 

162,321

 

Total current assets

 

3,028,518

 

 

2,714,802

 

Property and equipment, net

 

41,023

 

 

75,355

 

Acquisition-related intangible assets, net

 

51,612

 

 

58,610

 

Goodwill

 

53,684

 

 

53,684

 

Investments

 

31,486

 

 

30,336

 

Operating lease right-of-use assets

 

94,203

 

 

 

Deferred tax assets

 

113,660

 

 

126,492

 

Other assets

 

27,106

 

 

22,704

 

TOTAL ASSETS

 

$

3,441,292

 

 

$

3,081,983

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

86,134

 

 

$

93,757

 

Accrued liabilities

 

113,898

 

 

123,254

 

Deferred revenue

 

272,366

 

 

358,586

 

Other current liabilities

 

52,622

 

 

30,907

 

Total current liabilities

 

525,020

 

 

606,504

 

Income taxes payable

 

45,804

 

 

36,167

 

Operating lease liabilities, non-current

 

89,705

 

 

 

Finance lease liabilities, non-current

 

 

 

35,431

 

Deferred revenue, non-current

 

229,852

 

 

228,641

 

Other long-term liabilities

 

25,351

 

 

31,851

 

TOTAL LIABILITIES

 

915,732

 

 

938,594

 

STOCKHOLDERS' EQUITY:

 

 

 

 

Common stock

 

8

 

 

8

 

Additional paid-in capital

 

1,038,740

 

 

956,572

 

Retained earnings (1)

 

1,484,777

 

 

1,190,803

 

Accumulated other comprehensive income (loss)

 

2,035

 

 

(3,994

)

TOTAL STOCKHOLDERS' EQUITY

 

2,525,560

 

 

2,143,389

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

3,441,292

 

 

$

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)

 

 

 

 

 

Six Months Ended June 30,

 

 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income (loss)

 

$

390,280

 

 

$

(10,731

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

Depreciation, amortization and other

 

16,757

 

 

11,328

 

Stock-based compensation

 

48,588

 

 

43,329

 

Noncash lease expense

 

7,955

 

 

 

Deferred income taxes

 

7,914

 

 

(18,281

)

(Gain) loss on investment in privately-held companies

 

(1,150

)

 

9,100

 

Accretion of investment discounts

 

(4,260

)

 

(783

)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

(11,303

)

 

(13,571

)

Inventories

 

(49,620

)

 

60,759

 

Prepaid expenses and other current assets

 

48,864

 

 

(72,418

)

Other assets

 

(4,635

)

 

629

 

Accounts payable

 

(6,783

)

 

3,597

 

Accrued liabilities

 

(9,476

)

 

(47,153

)

Accrued legal settlement

 

 

 

405,000

 

Deferred revenue

 

(85,009

)

 

(50,096

)

Income taxes payable

 

14,399

 

 

6,653

 

Other liabilities

 

3,955

 

 

(1,237

)

Net cash provided by operating activities

 

366,476

 

 

326,125

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from maturities of marketable securities

 

552,512

 

 

222,764

 

Purchases of marketable securities

 

(549,383

)

 

(696,665

)

Purchases of property and equipment

 

(8,639

)

 

(13,071

)

Investments in privately-held companies

 

 

 

(8,000

)

Other investing activities

 

 

 

(2,000

)

Net cash used in investing activities

 

(5,510

)

 

(496,972

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments of lease financing obligations

 

 

 

(921

)

Proceeds from issuance of common stock under equity plans

 

38,104

 

 

28,810

 

Tax withholding paid on behalf of employees for net share settlement

 

(4,662

)

 

(4,463

)

Repurchase of common stock

 

(100,008

)

 

 

Net cash provided by (used in) financing activities

 

(66,566

)

 

23,426

 

Effect of exchange rate changes

 

72

 

 

(607

)

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

 

294,472

 

 

(148,028

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period

 

654,164

 

 

864,697

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period

 

$

948,636

 

 

$

716,669

 

 

 

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