Business Wire | Aug 4, 2020 04:06PM EDT

Arista Networks, Inc. Reports Second Quarter 2020 Financial Results

Aug. 04, 2020

SANTA CLARA, Calif.--(BUSINESS WIRE)--Aug. 04, 2020--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 Networks recognized as a leader in The Forrester Wave(tm): Open, Programmable Switches for A Businesswide SDN, Q3 2020 with the top score in the strategy category.

* 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.

* Arista Networks Announced Independent Validation of Exceptional Network Monitoring Precision at picosecond granularity. Arista MetaWatch, running on the Arista 7130 L-series platform, provides customers with new insight into the behavior of critical network systems, enabling trading firms to optimize performance and exchanges to validate market fairness.

* 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(r) and Arista EOS(r), 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 Six Months Ended June 30, 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 111,544 114,295 224,698 233,964 development

Sales and marketing 51,237 53,040 108,323 104,093

General and 14,319 16,019 32,668 31,525 administrative

Total operating 177,100 183,354 365,689 369,582 expenses

Income from 166,989 206,837 316,651 401,179 operations

Other income, net 8,256 13,811 20,413 26,144

Income before income 175,245 220,648 337,064 427,323 taxes

Provision for income 30,452 31,397 53,840 37,043 taxes

Net income $ 144,793 $ 189,251 $ 283,224 $ 390,280

Net incomeattributable to common stockholders:

Basic $ 144,793 $ 189,152 $ 283,224 $ 390,063

Diluted $ 144,793 $ 189,158 $ 283,224 $ 390,076

Net income per shareattributable to common stockholders:

Basic $ 1.91 $ 2.47 $ 3.72 $ 5.12

Diluted $ 1.83 $ 2.33 $ 3.56 $ 4.80

Weighted-averageshares used incomputing net income per shareattributable tocommon 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 Six Months Ended June 30, 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 1,585 1,028 2,912 2,126 compensation expense

Intangible asset 4,178 2,626 7,838 5,251 amortization

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 $ 166,989 $ 206,837 $ 316,651 $ 401,179 operations

Stock-based 32,922 24,297 60,478 48,588 compensation expense

Litigation expense - 514 - 1,962

Intangible asset 5,811 3,499 10,713 6,998 amortization

Acquisition-related - - 11,860 - costs

Non-GAAP income from $ 205,722 $ 235,147 $ 399,702 $ 458,727 operations

Non-GAAP operating 38.1 % 38.7 % 37.6 % 38.1 %margin



GAAP net income $ 144,793 $ 189,251 $ 283,224 $ 390,280

Stock-based 32,922 24,297 60,478 48,588 compensation expense

Litigation expense - 514 - 1,962

Intangible asset 5,811 3,499 10,713 6,998 amortization

Acquisition-related - - 11,860 - costs ^(1)

Altera stock-based tax - 9,781 - 9,781 charge ^(2)

Gain on investment inprivately-held - - - (1,150 )companies

Tax benefit on (11,682 ) (23,455 ) (26,184 ) (60,509 )stock-based awards

Income tax effect on (4,796 ) (5,324 ) (11,351 ) (9,657 )non-GAAP exclusions

Non-GAAP net income $ 167,048 $ 198,563 $ 328,740 $ 386,293



GAAP diluted net incomeper share attributable $ 1.83 $ 2.33 $ 3.56 $ 4.80 to common stockholders

Non-GAAP adjustments to 0.28 0.11 0.57 (0.05 )net income

Non-GAAP diluted net $ 2.11 $ 2.44 $ 4.13 $ 4.75 income per share

Weighted-average sharesused in computingdiluted net income per 79,298 81,335 79,620 81,271 share attributable tocommon stockholders

Summary of Stock-Based Compensation Expense:

Cost of revenue $ 1,585 $ 1,028 $ 2,912 $ 2,126

Research and 19,378 12,568 35,306 25,699 development

Sales and marketing 8,277 7,097 14,673 13,631

General and 3,682 3,604 7,587 7,132 administrative

Total $ 32,922 $ 24,297 $ 60,478 $ 48,588

___________________

Represents non-recurring costs associated with our acquisition of Big(1) Switch, and primarily include severance, retention bonuses, professional and consulting fees, and facilities restructuring costs.

Represents a discrete income tax expense related to stock-based(2) 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 2,938 (4,260 )(discounts)

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 22,228 38,104 plans

Tax withholding paid on behalf of employees for net (4,000 ) (4,662 )share settlement

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 (311,026 ) 294,472 AND RESTRICTED CASH

CASH, CASH EQUIVALENTS AND RESTRICTED CASH 1,115,515 654,164 -Beginning of period

CASH, CASH EQUIVALENTS AND RESTRICTED CASH -End of $ 804,489 $ 948,636 period

View source version on businesswire.com: https://www.businesswire.com/news/home/20200804005855/en/

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

CONTACT: or

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