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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

Contacts:

Investor Contacts
Charles Yager
Product and Investor Advocacy
(408) 547-5892
cyager@arista.com

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