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
