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Arista Networks, Inc. Reports Second Quarter 2015 Financial Results

August 6, 2015 4:05 PM

Cloud Networking Adoption Drives Record Revenue and non-GAAP Net Income

SANTA CLARA, Calif.--(BUSINESS WIRE)-- Arista Networks, Inc. (NYSE: ANET), an industry leader in software-driven cloud networking solutions for large data center and computing environments, today announced financial results for its second quarter ended June 30, 2015.

Second Quarter Financial Highlights

"Arista has now shipped a cumulative five million cloud networking ports worldwide,” stated Jayshree Ullal, Arista President and CEO. “I am pleased with this important milestone for the company combined with our continued Q2 2015 customer momentum and solid profitable growth."

Commenting on the company's financial results, Ita Brennan, Arista’s CFO, said, "We continued to execute well in Q2 2015, achieving record revenue with strong growth from our cloud and service provider customers, while increasing non-GAAP diluted earnings per share by more than 50% year-over-year.”

Company Highlights

Financial Outlook

For the third quarter of 2015, we expect:

Guidance for non-GAAP financial measures excludes legal expenses associated with the OptumSoft and Cisco litigation, stock-based compensation and other non-recurring expenses. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis.

Prepared Materials and Conference Call Information

Arista executives will discuss second quarter 2015 financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial 1-877-201-0168 in the United States or 1-647-788-4901 from outside the US. The Conference ID is 79004789.

The financial results conference call will also be available via live webcast on our investor relations website at 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 third quarter of FY 2015. Forward-looking statements are subject to a number of uncertainties and risks that could cause actual results to differ materially from those anticipated in the forward-looking statements including: Arista Networks’ limited operating history; risks associated with Arista Networks’ rapid growth; Arista Networks’ customer concentration; requests for more favorable terms and conditions from our large end customers; declines in the sales prices of our products and services; changes in customer order patterns or customer mix; increased competition in our products and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; the dispute with Cisco Systems, Inc. and OptumSoft, Inc.; the evolution of the cloud networking market and the adoption by end customers of Arista Networks’ cloud networking solutions; and general market, political, economic and business conditions. Additional risks and uncertainties that could affect Arista Networks can be found in Arista’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015, and other filings that the company makes to the SEC from time to time. You can locate these reports through our website at http://investors.arista.com and on the SEC’s website at 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.

Non-GAAP Financial Measures

The company reports certain non-GAAP financial measures that exclude stock-based compensation expenses, expenses associated with the OptumSoft and Cisco litigation, and other non-recurring charges. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that the use of these non-GAAP financial measures is 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 comparable GAAP net income, net income per diluted share, gross margin, or operating margin. 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. 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.

About Arista Networks

Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista’s award-winning 10/40/100 GbE switches redefine scalability, robustness, and price-performance. At the core of Arista’s platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers.

ARISTA, EOS, CloudVision and Spline 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: http://www.arista.com.

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Income

(Unaudited in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,
2015 2014 2015 2014
Revenue:
Product $ 174,072 $ 126,390 $ 334,213 $ 232,883
Service 21,480 11,557 40,384 22,271
Total Revenue 195,552 137,947 374,597 255,154
Cost of revenue:
Product 60,014 40,032 114,453 73,059
Service 7,648 4,535 14,500 7,401
Total cost of revenue 67,662 44,567 128,953 80,460
Total gross profit 127,890 93,380 245,644 174,694
Operating expenses:
Research and development 49,947 34,888 93,287 68,334
Sales and marketing 26,681 20,711 51,268 39,366
General and administrative 18,403 7,126 32,475 14,357
Total operating expenses 95,031 62,725 177,030 122,057
Income from operations 32,859 30,655 68,614 52,637
Other income (expense), net:
Interest expense—related party — (350 ) — (782 )
Interest expense (832 ) (1,854 ) (1,653 ) (3,965 )
Other income (expense), net 417 3,241 (51 ) 3,249
Total other income (expense), net (415 ) 1,037 (1,704 ) (1,498 )
Income before provision for income taxes 32,444 31,692 66,910 51,139
Provision for income taxes 8,448 10,074 18,422 17,192
Net income $ 23,996 $ 21,618 $ 48,488 $ 33,947
Net income attributable to common stockholders:
Basic $ 23,607 $ 14,212 $ 47,594 $ 19,985
Diluted $ 23,638 $ 14,851 $ 47,667 $ 21,121
Net income per share attributable to common stockholders:
Basic $ 0.36 $ 0.37 $ 0.73 $ 0.59
Diluted $ 0.33 $ 0.34 $ 0.67 $ 0.54
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 65,524 38,491 65,018 33,834
Diluted 71,215 44,057 70,919 38,962

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(Unaudited in thousands, except percentages and per share amounts)

Three Months EndedJune 30,

Six Months EndedJune 30,

2015 2014 2015 2014
GAAP gross profit $127,890 $ 93,380 $ 245,644 $ 174,694
GAAP gross margin 65.4 % 67.7 % 65.6 % 68.5 %
Stock-based compensation expense 784 301 1,420 512
Non-GAAP gross profit $ 128,674 $ 93,681 $ 247,064 $ 175,206
Non-GAAP gross margin 65.8 % 67.9 % 66.0 % 68.7 %
GAAP income from operations $ 32,859 $ 30,655 $ 68,614 $ 52,637
Stock-based compensation expense 11,208 6,705 20,047 11,487
Litigation expense 9,909 — 16,579 —
Non-GAAP income from operations $ 53,976 $ 37,360 $ 105,240 $ 64,124
Non-GAAP operating margin 27.6 % 27.1 % 28.1 % 25.1 %
GAAP net income $ 23,996 $ 21,618 $ 48,488 $ 33,947
Stock-based compensation expense 11,208 6,705 20,047 11,487
Litigation expense 9,909 — 16,579 —
Unrealized gain on note receivable — (4,000 ) — (4,000 )
Income tax effect on non-GAAP exclusions (6,335 ) (600 ) (10,804 ) (1,305 )
Non-GAAP net income $ 38,778 $ 23,723 $ 74,310 $ 40,129
Weighted average shares used in computing GAAP diluted income per share attributable to common stockholders 71,215 44,057 70,919 38,962
Additional weighted average dilutive shares1 — 23,413 — 27,823
Non-GAAP weighted average diluted shares 71,215 67,470 70,919 66,785
GAAP diluted net income per share attributable to common stockholders $ 0.33 $ 0.34 $ 0.67 $ 0.54
Net income attributable to participating securities — 0.15 0.01 0.33
Non-GAAP adjustments to net income 0.21 0.05 0.37 0.16
Non-GAAP adjustments to diluted shares — (0.19 ) — (0.43 )
Non-GAAP diluted net income per share $ 0.54 $ 0.35 $ 1.05 $ 0.60
Summary of Stock-Based Compensation Expense
Cost of revenue $ 784 $ 301 $ 1,420 $ 512
Research and development 6,379 3,527 11,307 5,994
Sales and marketing 2,865 1,931 5,274 3,359
General and administrative 1,180 946 2,046 1,622

Total

$ 11,208 $ 6,705 $ 20,047 $ 11,487

______________________________

1Includes weighted average shares from the issuance of shares upon our IPO and the assumed conversion of preferred stock and notes payable at the beginning of the quarter.

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited in thousands)

June 30, 2015

December 31, 2014

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 342,958 $ 240,031
Marketable securities 208,805 209,426
Accounts receivable, net 122,342 96,982
Inventories 100,304 78,006
Deferred tax assets 12,268 12,252
Prepaid expenses and other current assets 63,535 42,782
Total current assets 850,212 679,479
Property and equipment, net 73,178 71,558
Investments 36,636 36,636
Deferred tax assets 13,760 11,510
Other assets 17,053 11,840
TOTAL ASSETS $ 990,839 $ 811,023

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable $ 43,831 $ 32,428
Accrued liabilities 43,347 40,369
Deferred revenue 107,245 60,327
Other current liabilities 8,075 11,249
Total current liabilities 202,498 144,373
Income taxes payable 17,850 17,323
Lease financing obligations, non-current 41,912 42,547
Deferred revenue, non-current 57,198 46,141
Other long-term liabilities 5,839 4,981
TOTAL LIABILITIES 325,297 255,365

STOCKHOLDERS’ EQUITY:

Preferred stock — —
Common stock 7 7
Additional paid-in capital 487,376 426,171
Retained earnings 178,302 129,814
Accumulated other comprehensive loss (143 ) (334 )
TOTAL STOCKHOLDERS’ EQUITY 665,542 555,658
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 990,839 $ 811,023

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

Six Months Ended June 30,

2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 48,488 $ 33,947
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,246 4,713
Stock-based compensation 20,047 11,487
Deferred income taxes (2,266 ) 703
Provision for bad debts 481 374
Excess tax benefit on stock based-compensation (22,975 ) (459 )
Amortization of investment premiums 883 —
Unrealized gain on notes receivable — (4,000 )
Amortization of debt discount — 527
Write-off of debt discount on notes payable — 680
Changes in operating assets and liabilities:
Accounts receivable (25,841 ) 9,678
Inventories (22,297 ) 2,291
Prepaid expenses and other current assets (20,747 ) (5,621 )
Other assets (3,257 ) (596 )
Accounts payable 11,822 4,789
Accrued liabilities 3,082 626
Deferred revenue 57,975 2,779
Income taxes payable 21,846 372
Other liabilities (114 ) 2,616
Interest payable — (1,630 )
Interest payable—related party — 670
Net cash provided by operating activities 73,373 63,946

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment (8,768 ) (8,579 )
Change in restricted cash — 4,040
Purchases of intangible assets (705 ) —
Net cash used in investing activities (9,473 ) (4,539 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal payments of lease financing obligations (514 ) (335 )
Payments—deferred offering costs (261 ) —
Proceeds from issuance of common stock upon exercising options, net of repurchases 11,991 2,078
Proceeds from issuance of common stock under employee stock purchase plan 4,856 —
Excess tax benefit on stock-based compensation 22,975 459
Proceeds from initial public offering, net of issuance cost — 241,862
Repayment on notes payable — (20,000 )
Net cash provided by financing activities 39,047 224,064
Effect of exchange rate changes (20 ) 63
NET INCREASE IN CASH AND CASH EQUIVALENTS 102,927 283,534
CASH AND CASH EQUIVALENTS—Beginning of period 240,031 113,664
CASH AND CASH EQUIVALENTS—End of period $ 342,958 $ 397,198

Arista Networks, Inc.

Media Contact

Amanda Jaramillo, 408-547-5798

Corporate Communications

[email protected]

or

Investor Contact

Chuck Elliott, 408-547-5549

Product and Investor Advocacy

[email protected]

Source: Arista Networks, Inc.

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