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Arista Networks, Inc. Reports Second Quarter 2020 Financial Results

SANTA CLARA, Calif.--(BUSINESS WIRE)--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, 2020.


Second Quarter Financial Highlights

  • Revenue of $540.6 million, an increase of 3.4% compared to the first quarter of 2020, and a decrease of 11.1% from the second quarter of 2019.
  • GAAP gross margin of 63.7%, compared to GAAP gross margin of 64.7% in the first quarter of 2020 and 64.1% in the second quarter of 2019.
  • Non-GAAP gross margin of 64.7%, compared to non-GAAP gross margin of 65.6% in the first quarter of 2020 and 64.7% in the second quarter of 2019.
  • GAAP net income of $144.8 million, or $1.83 per diluted share, compared to GAAP net income of $189.3 million, or $2.33 per diluted share in the second quarter of 2019.
  • Non-GAAP net income of $167.0 million, or $2.11 per diluted share, compared to non-GAAP net income of $198.6 million, or $2.44 per diluted share in the second quarter of 2019.

"I am definitely pleased with our quarterly performance and proud of the tenacity shown by the Arista team in the face of the challenging pandemic era we live in," stated Jayshree Ullal, President & CEO of Arista Networks. "Arista's market position has been reinforced as we were placed in the leader’s category by two renowned market analyst firms."

Commenting on the company's financial results, Ita Brennan, Arista’s CFO, said, “We are pleased with our overall business execution in the quarter, with the team continuing to work closely with customers, supply chain and other partners as we collectively navigate the COVID-19 operating environment.”

Second Quarter Company Highlights

  • Arista Extends Open Cloud Networking Software Leadership and continued partnership with Microsoft for open networking for SONIC. The Arista switches powered by SONIC offer customers the combination of benefits of open source software with Arista EOS to deliver open, high performance, highly available networks.
  • Arista Networks announced a new release of its Cognitive WiFi software that seamlessly delivers intelligent application identification, performance optimization, automated troubleshooting and location services, and that also supports video conferencing applications such as Google Hangouts, Microsoft Teams and Zoom.
  • This is the sixth consecutive year Arista Networks has been recognized in the Leaders Quadrant of the 2020 Gartner Magic Quadrant for Data Center Networking published on 30 June 2020.

Financial Outlook

For the third quarter of 2020, we expect:

  • Revenue between $570 million to $590 million;
  • Non-GAAP gross margin of 63% to 65%; and
  • Non-GAAP operating margin of approximately 37%

Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and certain 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 under “Non-GAAP Financial Measures”).

Prepared Materials and Conference Call Information

Arista executives will discuss the second quarter financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial (833) 968-2211 in the United States or +1 (778) 560-2896 from international locations. The Conference ID is 5545177.

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 quotations from management, 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 year 2020, and statements regarding the benefits of the introduction of new products and our leadership in cloud 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 impact of the COVID-19 pandemic on our business, including as a result of continued volatility in the financial markets and global economy or disruption in our supply chain, the evolution and growth of the cloud networking market and the adoption by end customers of Arista’s cloud networking solutions; rapid technological and market change; Arista’s customer concentration; our ability to attract new large end customers or sell additional products and services to existing customers; competition in our products and services markets; changes in Arista’s customers’ demand for our products and services; changes in customer order patterns or customer mix; requests by large end customers for more favorable terms and conditions; general market, political, economic and business conditions such as the recent U.S. trade wars with China and the impact of public health pandemics like the COVID-19 pandemic; 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; the timing of orders and manufacturing and customer lead times; the benefits and impact of acquisitions; and other future events. Additional risks and uncertainties that could affect Arista can be found in our most recent Quarterly Report on Form 10-Q filed with the SEC on May 6, 2020, 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 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 “Magic Quadrant for Data Center and Cloud Networking,” Andrew Lerner, et al, 30 June 2020. 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. The Gartner content described herein, (the "Gartner content") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Gartner Content speaks as of its original publication date (and not as of the date of this Form 8-K) and the opinions expressed in the Gartner Content are subject to change without notice.

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, amortization of acquisition-related intangible assets, certain 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 certain 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 is an industry leader in software-driven cloud networking solutions for large data center and campus environments. Arista’s award-winning platforms deliver availability, agility, automation analytics and security through CloudVision® and Arista EOS®, an advanced network operating system. For more information visit 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,

 

 

2020

 

2019

 

2020

 

2019

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

421,413

 

 

$

513,171

 

 

$

832,319

 

 

$

1,018,586

 

Service

 

119,157

 

 

95,150

 

 

231,280

 

 

185,159

 

Total revenue

 

540,570

 

 

608,321

 

 

1,063,599

 

 

1,203,745

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

176,432

 

 

200,534

 

 

340,061

 

 

398,686

 

Service

 

20,049

 

 

17,596

 

 

41,198

 

 

34,298

 

Total cost of revenue

 

196,481

 

 

218,130

 

 

381,259

 

 

432,984

 

Gross profit

 

344,089

 

 

390,191

 

 

682,340

 

 

770,761

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

111,544

 

 

114,295

 

 

224,698

 

 

233,964

 

Sales and marketing

 

51,237

 

 

53,040

 

 

108,323

 

 

104,093

 

General and administrative

 

14,319

 

 

16,019

 

 

32,668

 

 

31,525

 

Total operating expenses

 

177,100

 

 

183,354

 

 

365,689

 

 

369,582

 

Income from operations

 

166,989

 

 

206,837

 

 

316,651

 

 

401,179

 

Other income, net

 

8,256

 

 

13,811

 

 

20,413

 

 

26,144

 

Income before income taxes

 

175,245

 

 

220,648

 

 

337,064

 

 

427,323

 

Provision for income taxes

 

30,452

 

 

31,397

 

 

53,840

 

 

37,043

 

Net income

 

$

144,793

 

 

$

189,251

 

 

$

283,224

 

 

$

390,280

 

Net income attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

144,793

 

 

$

189,152

 

 

$

283,224

 

 

$

390,063

 

Diluted

 

$

144,793

 

 

$

189,158

 

 

$

283,224

 

 

$

390,076

 

Net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

1.91

 

 

$

2.47

 

 

$

3.72

 

 

$

5.12

 

Diluted

 

$

1.83

 

 

$

2.33

 

 

$

3.56

 

 

$

4.80

 

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

 

 

 

 

 

 

 

 

Basic

 

75,808

 

 

76,552

 

 

76,036

 

 

76,238

 

Diluted

 

79,298

 

 

81,335

 

 

79,620

 

 

81,271

 

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,

 

 

2020

 

2019

 

2020

 

2019

GAAP gross profit

 

$

344,089

 

 

$

390,191

 

 

$

682,340

 

 

$

770,761

 

GAAP gross margin

 

63.7

%

 

64.1

%

 

64.2

%

 

64.0

%

Stock-based compensation expense

 

1,585

 

 

1,028

 

 

2,912

 

 

2,126

 

Intangible asset amortization

 

4,178

 

 

2,626

 

 

7,838

 

 

5,251

 

Non-GAAP gross profit

 

$

349,852

 

 

$

393,845

 

 

$

693,090

 

 

$

778,138

 

Non-GAAP gross margin

 

64.7

%

 

64.7

%

 

65.2

%

 

64.6

%

 

 

 

 

 

 

 

 

 

GAAP income from operations

 

$

166,989

 

 

$

206,837

 

 

$

316,651

 

 

$

401,179

 

Stock-based compensation expense

 

32,922

 

 

24,297

 

 

60,478

 

 

48,588

 

Litigation expense

 

 

 

514

 

 

 

 

1,962

 

Intangible asset amortization

 

5,811

 

 

3,499

 

 

10,713

 

 

6,998

 

Acquisition-related costs

 

 

 

 

 

11,860

 

 

 

Non-GAAP income from operations

 

$

205,722

 

 

$

235,147

 

 

$

399,702

 

 

$

458,727

 

Non-GAAP operating margin

 

38.1

%

 

38.7

%

 

37.6

%

 

38.1

%

 

 

 

 

 

 

 

 

 

GAAP net income

 

$

144,793

 

 

$

189,251

 

 

$

283,224

 

 

$

390,280

 

Stock-based compensation expense

 

32,922

 

 

24,297

 

 

60,478

 

 

48,588

 

Litigation expense

 

 

 

514

 

 

 

 

1,962

 

Intangible asset amortization

 

5,811

 

 

3,499

 

 

10,713

 

 

6,998

 

Acquisition-related costs (1)

 

 

 

 

 

11,860

 

 

 

Altera stock-based tax charge (2)

 

 

 

9,781

 

 

 

 

9,781

 

Gain on investment in privately-held companies

 

 

 

 

 

 

 

(1,150

)

Tax benefit on stock-based awards

 

(11,682

)

 

(23,455

)

 

(26,184

)

 

(60,509

)

Income tax effect on non-GAAP exclusions

 

(4,796

)

 

(5,324

)

 

(11,351

)

 

(9,657

)

Non-GAAP net income

 

$

167,048

 

 

$

198,563

 

 

$

328,740

 

 

$

386,293

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income per share attributable to common stockholders

 

$

1.83

 

 

$

2.33

 

 

$

3.56

 

 

$

4.80

 

Non-GAAP adjustments to net income

 

0.28

 

 

0.11

 

 

0.57

 

 

(0.05

)

Non-GAAP diluted net income per share

 

$

2.11

 

 

$

2.44

 

 

$

4.13

 

 

$

4.75

 

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

 

79,298

 

 

81,335

 

 

79,620

 

 

81,271

 

Summary of Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

1,585

 

 

$

1,028

 

 

$

2,912

 

 

$

2,126

 

Research and development

 

19,378

 

 

12,568

 

 

35,306

 

 

25,699

 

Sales and marketing

 

8,277

 

 

7,097

 

 

14,673

 

 

13,631

 

General and administrative

 

3,682

 

 

3,604

 

 

7,587

 

 

7,132

 

Total

 

$

32,922

 

 

$

24,297

 

 

$

60,478

 

 

$

48,588

 

___________________

(1)

Represents non-recurring costs associated with our acquisition of Big Switch, and primarily include severance, retention bonuses, professional and consulting fees, and facilities restructuring costs.

(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, 2020

 

December 31, 2019

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

800,182

 

 

$

1,111,286

 

Marketable securities

 

1,981,589

 

 

1,613,082

 

Accounts receivable

 

383,225

 

 

391,987

 

Inventories

 

326,997

 

 

243,825

 

Prepaid expenses and other current assets

 

84,885

 

 

111,456

 

Total current assets

 

3,576,878

 

 

3,471,636

 

Property and equipment, net

 

35,263

 

 

39,273

 

Acquisition-related intangible assets, net

 

83,562

 

 

45,235

 

Goodwill

 

84,968

 

 

54,855

 

Investments

 

4,150

 

 

4,150

 

Operating lease right-of-use assets

 

79,283

 

 

87,770

 

Deferred tax assets

 

446,254

 

 

452,025

 

Other assets

 

25,493

 

 

30,346

 

TOTAL ASSETS

 

$

4,335,851

 

 

$

4,185,290

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

122,872

 

 

$

92,105

 

Accrued liabilities

 

100,070

 

 

140,249

 

Deferred revenue

 

328,525

 

 

312,668

 

Other current liabilities

 

88,714

 

 

52,052

 

Total current liabilities

 

640,181

 

 

597,074

 

Income taxes payable

 

45,971

 

 

55,485

 

Operating lease liabilities, non-current

 

74,259

 

 

83,022

 

Deferred revenue, non-current

 

248,986

 

 

262,620

 

Deferred tax liabilities, non-current

 

251,292

 

 

254,710

 

Other long-term liabilities

 

38,679

 

 

37,693

 

TOTAL LIABILITIES

 

1,299,368

 

 

1,290,604

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock

 

8

 

 

8

 

Additional paid-in capital

 

1,185,093

 

 

1,106,305

 

Retained earnings

 

1,843,559

 

 

1,788,230

 

Accumulated other comprehensive income

 

7,823

 

 

143

 

TOTAL STOCKHOLDERS’ EQUITY

 

3,036,483

 

 

2,894,686

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

4,335,851

 

 

$

4,185,290

 

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

Six Months Ended June 30,

 

 

2020

 

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

$

283,224

 

 

$

390,280

 

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

 

 

 

 

Depreciation, amortization and other

 

21,170

 

 

16,757

 

Stock-based compensation

 

60,478

 

 

48,588

 

Noncash lease expense

 

8,223

 

 

7,955

 

Deferred income taxes

 

2,668

 

 

7,914

 

Gain on investment in privately-held companies

 

 

 

(1,150

)

Amortization (accretion) of investment premiums (discounts)

 

2,938

 

 

(4,260

)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

15,263

 

 

(11,303

)

Inventories

 

(82,891

)

 

(49,620

)

Prepaid expenses and other current assets

 

26,815

 

 

48,864

 

Other assets

 

5,360

 

 

(4,635

)

Accounts payable

 

31,473

 

 

(6,783

)

Accrued liabilities

 

(39,882

)

 

(9,476

)

Deferred revenue

 

(19,242

)

 

(85,009

)

Income taxes payable

 

16,820

 

 

14,399

 

Other liabilities

 

646

 

 

3,955

 

Net cash provided by operating activities

 

333,063

 

 

366,476

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from maturities of marketable securities

 

875,213

 

 

552,512

 

Purchases of marketable securities

 

(1,236,477

)

 

(549,383

)

Business acquisitions, net of cash acquired

 

(66,317

)

 

 

Purchases of property and equipment

 

(5,178

)

 

(8,639

)

Net cash used in investing activities

 

(432,759

)

 

(5,510

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from issuance of common stock under equity plans

 

22,228

 

 

38,104

 

Tax withholding paid on behalf of employees for net share settlement

 

(4,000

)

 

(4,662

)

Repurchase of common stock

 

(227,895

)

 

(100,008

)

Net cash used in financing activities

 

(209,667

)

 

(66,566

)

Effect of exchange rate changes

 

(1,663

)

 

72

 

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

 

(311,026

)

 

294,472

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period

 

1,115,515

 

 

654,164

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period

 

$

804,489

 

 

$

948,636

 

 


Contacts

Arista Networks, Inc.
Charles Yager, 408-547-5892
Product and Investor Advocacy
cyager@arista.com

or

Curtis McKee, 408-547-5549
Corporate and Investor Development
curtism@arista.com