Arista networks, inc. reports third quarter 2019 financial results
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 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 arista networks announced cloudvision 2019, building upon arista’s cognitive management plane. the cloudvision 2019 release brings new capabilities and integrations, helping customers with operational cost reduction, risk management, and agility in network operations. this is the fifth consecutive year arista networks has been recognized in the leaders quadrant of the 2019 gartner magic quadrant for data center networking, published on 15 july 2019. arista networks announces that it is providing network platforms for sk telecom’s 5g network. vocus group, australia’s specialist fibre and network solutions provider announced arista networks has been appointed the supplier of vocus’ layer 2 and layer 3 network equipment. 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
