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Arista Networks, Inc. Reports Third Quarter 2020 Financial Results

SANTA CLARA, Calif.–(BUSINESS WIRE)–Arista Networks, Inc. (NYSE: ANET), an industry leader in cognitive cloud networking for large datacenter and campus environments, today announced financial results for its third quarter ended September 30, 2020.

Third Quarter Financial Highlights

  • Revenue of $605.4 million, an increase of 12.0% compared to the second quarter of 2020, and a decrease of 7.5% from the third quarter of 2019.
  • GAAP gross margin of 63.6%, compared to GAAP gross margin of 63.7% in the second quarter of 2020 and 63.8% in the third quarter of 2019.
  • Non-GAAP gross margin of 64.6%, compared to non-GAAP gross margin of 64.7% in the second quarter of 2020 and 64.4% in the third quarter of 2019.
  • GAAP net income of $168.4 million, or $2.12 per diluted share, compared to GAAP net income of $208.9 million, or $2.59 per diluted share in the third quarter of 2019.
  • Non-GAAP net income of $192.0 million, or $2.42 per diluted share, compared to non-GAAP net income of $217.1 million, or $2.69 per diluted share in the third quarter of 2019.

“Our customers are validating our traction as we migrate from legacy to cognitive client to cloud deployments with a cumulative of 40 million cloud networking ports shipped by Q3 2020. Despite some COVID-19 turbulence, we believe Arista will only emerge stronger,” stated Jayshree Ullal, President and CEO of Arista Networks.

Commenting on the company’s financial results, Ita Brennan, Arista’s CFO said, “We saw continued improvement in underlying business trends in the quarter, with the Arista team working diligently with customers, supply chain and other partners to navigate the new COVID-19 operating environment.”

Third Quarter Company Highlights

  • Arista Networks acquired Awake Security, a Network Detection and Response (NDR) platform provider that combines artificial intelligence (AI) with human expertise to autonomously hunt and respond to insider and external threats. The acquisition closed in October, 2020.
  • Arista expanded its cognitive campus portfolio with new platforms, including the 750 Series modular chassis (the first 100G ready, high density modular PoE switches), and the 720 Series 96 port fixed switch.
  • Arista announced unified edge innovations across wired and wireless networks for its Cognitive Campus Edge portfolio for Enterprise Workspaces.
  • Arista introduced a new enterprise-grade Software-as-a-Service (SaaS) offering for the flagship CloudVision® platform. Arista’s new CloudVision as-a-Service product is now available as a fully managed software.
  • Arista announced several additions to its multi-cloud and cloud-native software product family with CloudEOSEdge which is designed to integrate with native cloud networking services like Amazon Web Services Transit Gateway, with native interoperability using provisioning tools like Hashicorp Terraform and Red Hat’s Ansible.

Financial Outlook

For the fourth quarter of 2020, we expect:

  • Revenue between $615 million to $635 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 third 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 1469655.

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 fourth quarter of fiscal year 2020, statements regarding the benefits of the introduction of new products and our leadership in cloud networking and statements regarding our recent acquisition of Awake Security. 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 other markets in which we compete and the adoption by end customers of our solutions; adverse economic conditions or reduced information technology and network infrastructure spending; 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; our ability to pursue and manage, and our dependence on, the introduction and market acceptance of new product offerings and standards including our 400G products as well as our campus, WiFi and security 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 us can be found in our most recent Quarterly Report on Form 10-Q filed with the SEC on August 5, 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 we disclaim 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

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 September 30,

 

Nine Months Ended September 30,

 

 

2020

 

2019

 

2020

 

2019

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

480,242

 

 

$

555,066

 

 

$

1,312,561

 

 

$

1,573,652

 

Service

 

125,189

 

 

99,349

 

 

356,469

 

 

284,508

 

Total revenue

 

605,431

 

 

654,415

 

 

1,669,030

 

 

1,858,160

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

199,465

 

 

218,220

 

 

539,526

 

 

616,906

 

Service

 

21,004

 

 

18,921

 

 

62,202

 

 

53,219

 

Total cost of revenue

 

220,469

 

 

237,141

 

 

601,728

 

 

670,125

 

Gross profit

 

384,962

 

 

417,274

 

 

1,067,302

 

 

1,188,035

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

128,049

 

 

118,732

 

 

352,747

 

 

352,696

 

Sales and marketing

 

53,372

 

 

55,279

 

 

161,695

 

 

159,372

 

General and administrative

 

15,146

 

 

14,657

 

 

47,814

 

 

46,182

 

Total operating expenses

 

196,567

 

 

188,668

 

 

562,256

 

 

558,250

 

Income from operations

 

188,395

 

 

228,606

 

 

505,046

 

 

629,785

 

Other income, net

 

13,224

 

 

19,169

 

 

33,637

 

 

45,313

 

Income before income taxes

 

201,619

 

 

247,775

 

 

538,683

 

 

675,098

 

Provision for income taxes

 

33,244

 

 

38,880

 

 

87,084

 

 

75,923

 

Net income

 

$

168,375

 

 

$

208,895

 

 

$

451,599

 

 

$

599,175

 

Net income attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

168,375

 

 

$

208,799

 

 

$

451,599

 

 

$

598,861

 

Diluted

 

$

168,375

 

 

$

208,804

 

 

$

451,599

 

 

$

598,880

 

Net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

2.22

 

 

$

2.73

 

 

$

5.94

 

 

$

7.85

 

Diluted

 

$

2.12

 

 

$

2.59

 

 

$

5.68

 

 

$

7.38

 

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

 

 

 

 

 

 

 

 

Basic

 

75,999

 

 

76,426

 

 

76,024

 

 

76,301

 

Diluted

 

79,313

 

 

80,753

 

 

79,519

 

 

81,104

 

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,

 

 

2020

 

2019

 

2020

 

2019

GAAP gross profit

 

$

384,962

 

 

$

417,274

 

 

$

1,067,302

 

 

$

1,188,035

 

GAAP gross margin

 

63.6

%

 

63.8

%

 

63.9

%

 

63.9

%

Stock-based compensation expense

 

1,806

 

 

1,258

 

 

4,718

 

 

3,384

 

Intangible asset amortization

 

4,178

 

 

2,626

 

 

12,016

 

 

7,877

 

Non-GAAP gross profit

 

$

390,946

 

 

$

421,158

 

 

$

1,084,036

 

 

$

1,199,296

 

Non-GAAP gross margin

 

64.6

%

 

64.4

%

 

65.0

%

 

64.5

%

 

 

 

 

 

 

 

 

 

GAAP income from operations

 

$

188,395

 

 

$

228,606

 

 

$

505,046

 

 

$

629,785

 

Stock-based compensation expense

 

36,469

 

 

26,257

 

 

96,947

 

 

74,845

 

Litigation expense

 

 

 

 

 

 

 

1,962

 

Intangible asset amortization

 

5,811

 

 

3,293

 

 

16,524

 

 

10,291

 

Acquisition-related costs

 

858

 

 

 

 

12,718

 

 

 

Non-GAAP income from operations

 

$

231,533

 

 

$

258,156

 

 

$

631,235

 

 

$

716,883

 

Non-GAAP operating margin

 

38.2

%

 

39.4

%

 

37.8

%

 

38.6

%

 

 

 

 

 

 

 

 

 

GAAP net income

 

$

168,375

 

 

$

208,895

 

 

$

451,599

 

 

$

599,175

 

Stock-based compensation expense

 

36,469

 

 

26,257

 

 

96,947

 

 

74,845

 

Litigation expense

 

 

 

 

 

 

 

1,962

 

Intangible asset amortization

 

5,811

 

 

3,293

 

 

16,524

 

 

10,291

 

Acquisition-related costs (1)

 

858

 

 

 

 

12,718

 

 

 

Altera stock-based tax charge (2)

 

 

 

 

 

 

 

9,781

 

Gain on investment in privately-held companies

 

 

 

(4,277)

 

 

 

 

(5,427)

 

Tax benefit on stock-based awards

 

(14,894)

 

 

(12,674)

 

 

(41,078)

 

 

(73,183)

 

Income tax effect on non-GAAP exclusions

 

(4,624)

 

 

(4,391)

 

 

(15,975)

 

 

(14,048)

 

Non-GAAP net income

 

$

191,995

 

 

$

217,103

 

 

$

520,735

 

 

$

603,396

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income per share attributable to common stockholders

 

$

2.12

 

 

$

2.59

 

 

$

5.68

 

 

$

7.38

 

Non-GAAP adjustments to net income

 

0.30

 

 

0.10

 

 

0.87

 

 

0.06

 

Non-GAAP diluted net income per share

 

$

2.42

 

 

$

2.69

 

 

$

6.55

 

 

$

7.44

 

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

 

79,313

 

 

80,753

 

 

79,519

 

 

81,104

 

Summary of Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

1,806

 

 

$

1,258

 

 

$

4,718

 

 

$

3,384

 

Research and development

 

21,423

 

 

13,472

 

 

56,729

 

 

39,171

 

Sales and marketing

 

9,083

 

 

7,832

 

 

23,756

 

 

21,463

 

General and administrative

 

4,157

 

 

3,695

 

 

11,744

 

 

10,827

 

Total

 

$

36,469

 

 

$

26,257

 

 

$

96,947

 

 

$

74,845

 

___________________

(1)

Represents non-recurring costs associated with our acquisitions, which primarily include retention bonuses, professional and consulting fees, and 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)

 

 

 

September 30,

2020

 

December 31,

2019

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

970,349

 

 

$

1,111,286

 

Marketable securities

 

1,875,552

 

 

1,613,082

 

Accounts receivable

 

300,217

 

 

391,987

 

Inventories

 

438,102

 

 

243,825

 

Prepaid expenses and other current assets

 

69,647

 

 

111,456

 

Total current assets

 

3,653,867

 

 

3,471,636

 

Property and equipment, net

 

32,670

 

 

39,273

 

Acquisition-related intangible assets, net

 

77,752

 

 

45,235

 

Goodwill

 

84,968

 

 

54,855

 

Investments

 

4,150

 

 

4,150

 

Operating lease right-of-use assets

 

79,929

 

 

87,770

 

Deferred tax assets

 

443,229

 

 

452,025

 

Other assets

 

22,807

 

 

30,346

 

TOTAL ASSETS

 

$

4,399,372

 

 

$

4,185,290

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

163,102

 

 

$

92,105

 

Accrued liabilities

 

110,348

 

 

140,249

 

Deferred revenue

 

321,290

 

 

312,668

 

Other current liabilities

 

70,043

 

 

52,052

 

Total current liabilities

 

664,783

 

 

597,074

 

Income taxes payable

 

47,918

 

 

55,485

 

Operating lease liabilities, non-current

 

74,903

 

 

83,022

 

Deferred revenue, non-current

 

241,014

 

 

262,620

 

Deferred tax liabilities, non-current

 

247,712

 

 

254,710

 

Other long-term liabilities

 

39,165

 

 

37,693

 

TOTAL LIABILITIES

 

1,315,495

 

 

1,290,604

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock

 

8

 

 

8

 

Additional paid-in capital

 

1,240,147

 

 

1,106,305

 

Retained earnings

 

1,844,656

 

 

1,788,230

 

Accumulated other comprehensive income (loss)

 

(934)

 

 

143

 

TOTAL STOCKHOLDERS’ EQUITY

 

3,083,877

 

 

2,894,686

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

4,399,372

 

 

$

4,185,290

 

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Nine Months Ended September 30,

 

 

2020

 

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

$

451,599

 

 

$

599,175

 

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

 

 

 

 

Depreciation, amortization and other

 

31,975

 

 

24,948

 

Stock-based compensation

 

96,947

 

 

74,845

 

Noncash lease expense

 

12,606

 

 

12,007

 

Deferred income taxes

 

3,261

 

 

10,945

 

Gain on sale of marketable securities

 

(9,432)

 

 

 

Gain on investment in privately-held companies

 

 

 

(5,427)

 

Amortization (accretion) of investment premiums (discounts)

 

6,030

 

 

(6,032)

 

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

98,271

 

 

(115,475)

 

Inventories

 

(193,996)

 

 

24,951

 

Prepaid expenses and other current assets

 

38,654

 

 

59,388

 

Other assets

 

7,850

 

 

(7,009)

 

Accounts payable

 

71,803

 

 

(14,361)

 

Accrued liabilities

 

(29,811)

 

 

5,731

 

Deferred revenue

 

(34,449)

 

 

(58,216)

 

Income taxes payable

 

(1,667)

 

 

29,808

 

Other liabilities

 

(1,451)

 

 

595

 

Net cash provided by operating activities

 

548,190

 

 

635,873

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from maturities of marketable securities

 

1,183,601

 

 

806,519

 

Purchases of marketable securities

 

(2,216,436)

 

 

(840,098)

 

Business acquisitions, net of cash acquired

 

(66,317)

 

 

(1,365)

 

Purchases of property and equipment

 

(7,701)

 

 

(13,319)

 

Investments in privately-held companies

 

3,399

 

 

28,220

 

Proceeds from sale of marketable securities

 

772,978

 

 

 

Net cash used in investing activities

 

(330,476)

 

 

(20,043)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from issuance of common stock under equity plans

 

42,704

 

 

52,177

 

Tax withholding paid on behalf of employees for net share settlement

 

(5,932)

 

 

(7,069)

 

Repurchase of common stock

 

(395,173)

 

 

(214,617)

 

Net cash used in financing activities

 

(358,401)

 

 

(169,509)

 

Effect of exchange rate changes

 

(246)

 

 

(994)

 

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

 

(140,933)

 

 

445,327

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period

 

1,115,515

 

 

654,164

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period

 

$

974,582

 

 

$

1,099,491

 

 

Contacts

Investor 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

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