Arista Networks, Inc. Reports Fourth Quarter and Year End 2019 Financial Results

Acquires Big Switch Networks for Cloud Networking & Monitoring

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 fourth quarter and year ended December 31, 2019.

Fourth Quarter Financial Highlights

  • Revenue of $552.5 million, a decrease of 15.6% compared to the third quarter of 2019, and a decrease of 7.2% from the fourth quarter of 2018.
  • GAAP gross margin of 64.5%, compared to GAAP gross margin of 63.8% in the third quarter of 2019 and 62.9% in the fourth quarter of 2018.
  • Non-GAAP gross margin of 65.2%, compared to non-GAAP gross margin of 64.4% in the third quarter of 2019 and 64.1% in the fourth quarter of 2018.
  • GAAP net income of $260.7 million, or $3.25 per diluted share, compared to GAAP net income of $170.3 million, or $2.10 per diluted share in the fourth quarter of 2018.
  • Non-GAAP net income of $183.4 million, or $2.29 per diluted share, compared to non-GAAP net income of $182.2 million, or $2.25 per diluted share in the fourth quarter of 2018.

Full Year Financial Highlights

  • Revenue of $2.41 billion, an increase of 12.1% compared to fiscal year 2018.
  • GAAP gross margin of 64.1%, compared to GAAP gross margin of 63.8% in fiscal year 2018.
  • Non-GAAP gross margin of 64.7%, compared to non-GAAP gross margin of 64.4% in fiscal year 2018.
  • GAAP net income of $859.9 million, or $10.63 per diluted share, compared to GAAP net income of $328.1 million, or $4.06 per diluted share, in fiscal year 2018.
  • Non-GAAP net income of $786.8 million or $9.73 per diluted share, compared to non-GAAP net income of $643.3 million, or $7.96 per diluted share, in fiscal year 2018.

“Despite the volatility of cloud spend, 2019 marked the entry of Arista in the campus and mainstream enterprise. Our cloud networking technology is being accepted in thousands of diverse enterprise customers. We are excited by our prospects in 2020 and committed to a multi-year foundation of growth, innovation and profitability,” stated Jayshree Ullal, Arista’s President and CEO.

Commenting on the company’s financial results, Ita Brennan, Arista’s CFO, said, “We were pleased with the solid execution on earnings and cash flow in the quarter.”

Arista today also announced that it has acquired Big Switch Networks, a network monitoring and SDN (Software Defined Networking) pioneer for the past decade.

Fourth Quarter Company Highlights

2019 Company Highlights

Financial Outlook

For the first quarter of 2020, we expect:

  • Revenue between $522 million to $532 million;
  • Non-GAAP gross margin of approximately 63%, and
  • Non-GAAP operating margin of approximately 34%

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 under “Non-GAAP Financial Measures”).

Prepared Materials and Conference Call Information

Arista executives will discuss the fourth quarter and year end 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 1579521.

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 first quarter of fiscal year 2020, and statements regarding 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 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 epidemics like the coronavirus currently affecting China; 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; and 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 November 1, 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 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.

Source: Gartner, Magic Quadrant for Data Center Networking, Andrew Lerner, Mike Toussaint, Jonathan Forest, 15 July 2019. 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, CloudEOS and CloudVision 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

December 31,

 

Twelve Months Ended

December 31,

 

 

2019

 

2018

 

2019

 

2018

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

447,498

 

 

$

503,235

 

 

$

2,021,150

 

 

$

1,841,100

 

Service

 

105,048

 

 

92,491

 

 

389,556

 

 

310,269

 

Total revenue

 

552,546

 

 

595,726

 

 

2,410,706

 

 

2,151,369

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

175,476

 

 

204,507

 

 

792,382

 

 

720,584

 

Service

 

20,767

 

 

16,227

 

 

73,986

 

 

57,408

 

Total cost of revenue

 

196,243

 

 

220,734

 

 

866,368

 

 

777,992

 

Total gross profit

 

356,303

 

 

374,992

 

 

1,544,338

 

 

1,373,377

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

110,063

 

 

118,439

 

 

462,759

 

 

442,468

 

Sales and marketing

 

54,535

 

 

50,911

 

 

213,907

 

 

187,142

 

General and administrative

 

15,716

 

 

12,000

 

 

61,898

 

 

65,420

 

Legal settlement

 

 

 

 

 

 

 

405,000

 

Total operating expenses

 

180,314

 

 

181,350

 

 

738,564

 

 

1,100,030

 

Income from operations

 

175,989

 

 

193,642

 

 

805,774

 

 

273,347

 

Other income (expense), net

 

11,183

 

 

4,848

 

 

56,496

 

 

15,454

 

Income before income taxes

 

187,172

 

 

198,490

 

 

862,270

 

 

288,801

 

Provision for (benefit from) income taxes

 

(73,520

)

 

28,168

 

 

2,403

 

 

(39,314

)

Net income

 

$

260,692

 

 

$

170,322

 

 

$

859,867

 

 

$

328,115

 

Net income attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

260,589

 

 

$

170,211

 

 

$

859,444

 

 

$

327,926

 

Diluted

 

$

260,594

 

 

$

170,218

 

 

$

859,468

 

 

$

327,941

 

Net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

3.41

 

 

$

2.26

 

 

$

11.26

 

 

$

4.39

 

Diluted

 

$

3.25

 

 

$

2.10

 

 

$

10.63

 

 

$

4.06

 

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

 

 

 

 

 

 

 

 

Basic

 

76,345

 

 

75,473

 

 

76,312

 

 

74,750

 

Diluted

 

80,261

 

 

80,928

 

 

80,879

 

 

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

December 31,

 

Twelve Months Ended

December 31,

 

 

2019

 

2018

 

2019

 

2018

GAAP gross profit

 

$

356,303

 

 

$

374,992

 

 

$

1,544,338

 

 

$

1,373,377

 

GAAP gross margin

 

64.5

%

 

62.9

%

 

64.1

%

 

63.8

%

Stock-based compensation expense

 

1,253

 

 

1,381

 

 

4,637

 

 

5,087

 

Intangible asset amortization

 

2,626

 

 

2,626

 

 

10,503

 

 

3,824

 

Acquisition-related costs

 

 

 

3,138

 

 

 

 

3,138

 

Non-GAAP gross profit

 

$

360,182

 

 

$

382,137

 

 

$

1,559,478

 

 

$

1,385,426

 

Non-GAAP gross margin

 

65.2

%

 

64.1

%

 

64.7

%

 

64.4

%

 

 

 

 

 

 

 

 

 

GAAP income from operations

 

$

175,989

 

 

$

193,642

 

 

$

805,774

 

 

$

273,347

 

Stock-based compensation expense

 

26,435

 

 

24,619

 

 

101,280

 

 

91,202

 

Litigation expense (benefit)

 

333

 

 

(3,988

)

 

2,295

 

 

6,566

 

Legal settlement (1)

 

 

 

 

 

 

 

405,000

 

Intangible asset amortization

 

3,084

 

 

3,500

 

 

13,375

 

 

5,110

 

Acquisition-related costs

 

 

 

4,313

 

 

 

 

7,745

 

Non-GAAP income from operations

 

$

205,841

 

 

$

222,086

 

 

$

922,724

 

 

$

788,970

 

Non-GAAP operating margin

 

37.3

%

 

37.3

%

 

38.3

%

 

36.7

%

 

 

 

 

 

 

 

 

 

GAAP net income

 

$

260,692

 

 

$

170,322

 

 

$

859,867

 

 

$

328,115

 

Stock-based compensation expense

 

26,435

 

 

24,619

 

 

101,280

 

 

91,202

 

Litigation expense (benefit)

 

333

 

 

(3,988

)

 

2,295

 

 

6,566

 

Legal settlement (1)

 

 

 

 

 

 

 

405,000

 

Intangible asset amortization

 

3,084

 

 

3,500

 

 

13,375

 

 

5,110

 

Acquisition-related costs

 

 

 

4,313

 

 

 

 

7,745

 

(Gain) loss on investment in privately-held companies

 

 

 

4,700

 

 

(5,427

)

 

13,800

 

Acquisition-related tax expense

 

 

 

 

 

 

 

5,853

 

Altera stock-based tax charge (2)

 

 

 

 

 

9,781

 

 

 

Tax benefit on intra-entity IP transfer (3)

 

(85,819

)

 

 

 

(85,819

)

 

 

Tax benefit on stock-based awards

 

(16,232

)

 

(8,227

)

 

(89,415

)

 

(92,675

)

Impact of the U.S. Tax Cuts and Jobs Act

 

 

 

(12,632

)

 

 

 

(12,632

)

Income tax effect on non-GAAP exclusions

 

(5,045

)

 

(429

)

 

(19,093

)

 

(114,769

)

Non-GAAP net income

 

$

183,448

 

 

$

182,178

 

 

$

786,844

 

 

$

643,315

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income per share attributable to common stockholders

 

$

3.25

 

 

$

2.10

 

 

$

10.63

 

 

$

4.06

 

Non-GAAP adjustments to net income

 

(0.96

)

 

0.15

 

 

(0.90

)

 

3.90

 

Non-GAAP diluted net income per share

 

$

2.29

 

 

$

2.25

 

 

$

9.73

 

 

$

7.96

 

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

 

80,261

 

 

80,928

 

 

80,879

 

 

80,844

 

Summary of Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

1,253

 

 

$

1,381

 

 

$

4,637

 

 

$

5,087

 

Research and development

 

13,897

 

 

13,505

 

 

53,068

 

 

48,205

 

Sales and marketing

 

7,705

 

 

6,224

 

 

29,168

 

 

24,995

 

General and administrative

 

3,580

 

 

3,509

 

 

14,407

 

 

12,915

 

Total

 

$

26,435

 

 

$

24,619

 

 

$

101,280

 

 

$

91,202

 

___________________

(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.

(3)

Represents a one-time tax benefit of $85.8 million upon completion of an intra-entity transaction to sell our non-Americas economic and beneficial intellectual property rights in the current quarter.

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

 

 

December 31,

2019

 

December 31,

2018

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

1,111,286

 

 

$

649,950

 

Marketable securities

 

1,613,082

 

 

1,306,197

 

Accounts receivable

 

391,987

 

 

331,777

 

Inventories

 

243,825

 

 

264,557

 

Prepaid expenses and other current assets

 

111,456

 

 

162,321

 

Total current assets

 

3,471,636

 

 

2,714,802

 

Property and equipment, net

 

39,273

 

 

75,355

 

Acquisition-related intangible assets, net

 

45,235

 

 

58,610

 

Goodwill

 

54,855

 

 

53,684

 

Investments

 

4,150

 

 

30,336

 

Operating lease right-of-use assets

 

87,770

 

 

 

Deferred tax assets

 

452,025

 

 

126,492

 

Other assets

 

30,346

 

 

22,704

 

TOTAL ASSETS

 

$

4,185,290

 

 

$

3,081,983

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

92,105

 

 

$

93,757

 

Accrued liabilities

 

140,249

 

 

123,254

 

Deferred revenue

 

312,668

 

 

358,586

 

Other current liabilities

 

52,052

 

 

30,907

 

Total current liabilities

 

597,074

 

 

606,504

 

Income taxes payable

 

55,485

 

 

36,167

 

Operating lease liabilities, non-current

 

83,022

 

 

 

Finance lease liabilities, non-current

 

 

 

35,431

 

Deferred revenue, non-current

 

262,620

 

 

228,641

 

Deferred tax liabilities, non-current

 

254,710

 

 

3,753

 

Other long-term liabilities

 

37,693

 

 

28,098

 

TOTAL LIABILITIES

 

1,290,604

 

 

938,594

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock

 

8

 

 

8

 

Additional paid-in capital

 

1,106,305

 

 

956,572

 

Retained earnings (1)

 

1,788,230

 

 

1,190,803

 

Accumulated other comprehensive income (loss)

 

143

 

 

(3,994

)

TOTAL STOCKHOLDERS’ EQUITY

 

2,894,686

 

 

2,143,389

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

4,185,290

 

 

$

3,081,983

 

______________________

(1)

We adopted new lease accounting guidance under Accounting Standard Codification Topic 842 – Leases (“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)

 

 

 

Twelve Months Ended December 31,

 

 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

$

859,867

 

 

$

328,115

 

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

 

 

 

 

Depreciation, amortization and other

 

32,849

 

 

27,671

 

Noncash lease expense

 

16,179

 

 

 

Stock-based compensation

 

101,280

 

 

91,202

 

Deferred income taxes

 

(75,741

)

 

(57,896

)

(Gain) loss on investments in privately-held companies, net

 

(5,427

)

 

13,800

 

Amortization (accretion) of investment premiums (discounts)

 

(6,771

)

 

(3,360

)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

(60,210

)

 

(77,916

)

Inventories

 

20,927

 

 

51,054

 

Prepaid expenses and other current assets

 

54,259

 

 

21,411

 

Other assets

 

(8,112

)

 

(3,389

)

Accounts payable

 

(1,937

)

 

39,337

 

Accrued liabilities

 

16,366

 

 

(14,786

)

Deferred revenue

 

(11,939

)

 

70,533

 

Income taxes payable

 

23,523

 

 

(112

)

Other liabilities

 

7,921

 

 

17,455

 

Net cash provided by operating activities

 

963,034

 

 

503,119

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Proceeds from maturities of marketable securities

 

1,208,717

 

 

547,797

 

Purchases of marketable securities

 

(1,503,893

)

 

(1,174,259

)

Business acquisitions, net of cash acquired

 

(1,365

)

 

(96,821

)

Purchases of property and equipment

 

(15,751

)

 

(23,830

)

Investments in privately-held companies

 

28,220

 

 

(8,000

)

Net cash used in investing activities

 

(284,072

)

 

(755,113

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments of lease financing obligations

 

 

 

(1,929

)

Proceeds from issuance of common stock under equity plans

 

57,378

 

 

53,658

 

Tax withholding paid on behalf of employees for net share settlement

 

(9,200

)

 

(8,878

)

Repurchase of common stock

 

(266,142

)

 

 

Net cash provided by (used in) financing activities

 

(217,964

)

 

42,851

 

Effect of exchange rate changes

 

353

 

 

(1,390

)

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

 

461,351

 

 

(210,533

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period

 

654,164

 

 

864,697

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period

 

$

1,115,515

 

 

$

654,164

 

 

Contacts

Investor Contacts
Curtis McKee

Corporate and Investor Development

(408) 547-5701

[email protected]

Charles Yager

Product and Investor Advocacy

(408) 547-5892

[email protected]

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