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Arista Networks, Inc. Reports Third Quarter 2015 Financial Results

November 5, 2015 4:05 PM

Cloud Networking Adoption Drives Record Revenue and EPS

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 third quarter ended September 30, 2015.

Third Quarter Financial Highlights

"Arista is witnessing the mainstream acceptance of open and programmable cloud networking across the globe,” stated Jayshree Ullal, Arista President and CEO. “I am delighted by our customer traction across four major verticals and our consistent profitable revenue growth."

Commenting on the company's financial results, Ita Brennan, Arista’s CFO, said, "We are pleased with yet another record revenue quarter, as we grew our top line 40% year over year, with continued strong profitability while funding significant product and technology innovation.”

Company Highlights

Financial Outlook

For the fourth 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 third 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 50091413.

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 fourth 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; the dispute with Cisco Systems, Inc. and OptumSoft, Inc.; 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 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 August 7, 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 pioneer and deliver software-driven cloud networking solutions for large data center storage and computing environments. Arista’s award-winning platforms, ranging in Ethernet speeds from 10 to 100 gigabits per second, redefine scalability, agility and resilience. Arista has shipped more than five million cloud networking ports worldwide with CloudVision and EOS, an advanced network operating system. Committed to open standards, Arista is a founding member of the 25/50GbE consortium. Arista Networks products are available worldwide directly and through partners.

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 Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
Revenue:
Product $ 193,339 $ 141,455 $ 527,552 $ 374,338
Service 24,209 14,008 64,593 36,279
Total revenue 217,548 155,463 592,145 410,617
Cost of revenue:
Product 67,990 49,633 182,443 122,692
Service 7,810 4,873 22,310 12,274
Total cost of revenue 75,800 54,506 204,753 134,966
Total gross profit 141,748 100,957 387,392 275,651
Operating expenses:
Research and development 58,748 36,231 152,035 104,565
Sales and marketing 26,508 20,956 77,776 60,322
General and administrative 25,195 9,896 57,670 24,253
Total operating expenses 110,451 67,083 287,481 189,140
Income from operations 31,297 33,874 99,911 86,511
Other income (expense), net:
Interest expense—related party — — — (782 )
Interest expense (753 ) (764 ) (2,406 ) (4,730 )
Other income (expense), net 13 (824 ) (38 ) 2,426
Total other income (expense), net (740 ) (1,588 ) (2,444 ) (3,086 )
Income before provision for income taxes 30,557 32,286 97,467 83,425
Provision for income taxes 1,867 10,420 20,289 27,612
Net income $ 28,690 $ 21,866 $ 77,178 $ 55,813
Net income attributable to common stockholders:
Basic $ 28,301 $ 21,185 $ 75,864 $ 40,556
Diluted $ 28,329 $ 21,255 $ 75,967 $ 41,909
Net income per share attributable to common stockholders:
Basic $ 0.42 $ 0.34 $ 1.16 $ 0.93
Diluted $ 0.39 $ 0.30 $ 1.07 $ 0.85
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 66,629 62,402 65,609 43,453
Diluted 71,887 69,737 71,232 49,323
ARISTA NETWORKS, INC.
Reconciliation of Selected GAAP to Non-GAAP Financial Measures
(Unaudited in thousands, except percentages and per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
GAAP gross profit $ 141,748 $ 100,957 $ 387,392 $ 275,651
GAAP gross margin 65.2 % 64.9 % 65.4 % 67.1 %
Stock-based compensation expense 786 480 2,206 992
Non-GAAP gross profit $ 142,534 $ 101,437 $ 389,598 $ 276,643
Non-GAAP gross margin 65.5 % 65.2 % 65.8 % 67.4 %
GAAP income from operations $ 31,297 $ 33,874 $ 99,911 $ 86,511
Stock-based compensation expense 12,278 8,082 32,325 19,569
Litigation expense 15,889 — 32,468 —
Non-GAAP income from operations $ 59,464 $ 41,956 $ 164,704 $ 106,080
Non-GAAP operating margin 27.3 % 27.0 % 27.8 % 25.8 %
GAAP net income $ 28,690 $ 21,866 $ 77,178 $ 55,813
Stock-based compensation expense 12,278 8,082 32,325 19,569
Release of income tax reserve (6,376 ) — (6,376 ) —
Litigation expense 15,889 — 32,468 —
Unrealized gain on note receivable — — — (4,000 )
Income tax effect on non-GAAP exclusions (8,064 ) (1,876 ) (18,868 ) (3,181 )
Non-GAAP net income $ 42,417 $ 28,072 $ 116,727 $ 68,201
Weighted average shares used in computing GAAP diluted income per share attributable to common stockholders 71,887 69,737 71,232 49,323
Additional weighted average dilutive shares1 — — — 18,447
Non-GAAP weighted average diluted shares 71,887 69,737 71,232 67,770
GAAP diluted net income per share attributable to common stockholders $ 0.39 $ 0.30 $ 1.07 $ 0.85
Net income attributable to participating securities 0.01 0.01 0.02 0.28
Non-GAAP adjustments to net income 0.19 0.09 0.55 0.25
Non-GAAP adjustments to diluted shares — — — (0.37 )
Non-GAAP diluted net income per share $ 0.59 $ 0.40 $ 1.64 $ 1.01
Summary of Stock-Based Compensation Expense
Cost of revenue $ 786 $ 480 $ 2,206 $ 992
Research and development 7,037 4,304 18,344 10,298
Sales and marketing 2,864 2,387 8,138 5,746
General and administrative 1,591 911 3,637 2,533
Total $ 12,278 $ 8,082 $ 32,325 $ 19,569

______________________________

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)
September 30, December 31,
2015 2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 418,500 $ 240,031
Marketable securities 150,117 209,426
Accounts receivable, net 160,230 96,982
Inventories 109,921 78,006
Deferred tax assets 20,197 12,252
Prepaid expenses and other current assets 62,135 42,782
Total current assets 921,100 679,479
Property and equipment, net 75,248 71,558
Investments 36,636 36,636
Deferred tax assets 19,047 11,510
Other assets 20,861 11,840
TOTAL ASSETS $ 1,072,892 $ 811,023
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 31,487 $ 32,428
Accrued liabilities 58,979 40,369
Deferred revenue 124,740 60,327
Other current liabilities 9,760 11,249
Total current liabilities 224,966 144,373
Income taxes payable 11,188 17,323
Lease financing obligations, non-current 41,587 42,547
Deferred revenue, non-current 65,966 46,141
Other long-term liabilities 6,011 4,981
TOTAL LIABILITIES 349,718 255,365
STOCKHOLDERS’ EQUITY:
Preferred stock — —
Common stock 7 7
Additional paid-in capital 516,607 426,171
Retained earnings 206,991 129,814
Accumulated other comprehensive loss (431 ) (334 )
TOTAL STOCKHOLDERS’ EQUITY 723,174 555,658
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,072,892 $ 811,023
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
Nine Months Ended September 30,
2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,178 $ 55,813
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,724 7,366
Stock-based compensation 32,325 19,569
Deferred income taxes (15,483 ) (782 )
Provision for bad debts 650 593
Excess tax benefit on stock based-compensation (32,381 ) (841 )
Amortization of investment premiums 1,332 —
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 (63,898 ) (6,657 )
Inventories (31,915 ) 4,507
Prepaid expenses and other current assets (19,352 ) (8,755 )
Other assets (3,092 ) (2,142 )
Accounts payable (145 ) 5,600
Accrued liabilities 18,102 7,733
Deferred revenue 84,238 18,787
Income taxes payable 24,759 501
Other liabilities 1,980 1,165
Interest payable — (1,630 )
Interest payable—related party — 670
Net cash provided by operating activities 84,022 98,704
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of marketable securities 58,200 —
Purchases of property and equipment (13,974 ) (10,789 )
Change in restricted cash (4,039 ) 4,040
Purchases of intangible assets (743 ) (4,451 )
Investment in private companies — (15,000 )
Net cash provided by (used in) investing activities 39,444 (26,200 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of lease financing obligations (778 ) (554 )
Payments—deferred offering costs (261 ) —
Proceeds from issuance of common stock upon exercising options, net of repurchases 14,562 2,578
Proceeds from issuance of common stock under employee stock purchase plan 9,366 —
Excess tax benefit on stock-based compensation 32,381 841
Proceeds from initial public offering, net of issuance cost — 239,643
Repayment on notes payable — (20,000 )

Net cash provided by financing activities

55,270 222,508
Effect of exchange rate changes (267 ) (80 )
NET INCREASE IN CASH AND CASH EQUIVALENTS 178,469 294,932
CASH AND CASH EQUIVALENTS—Beginning of period 240,031 113,664
CASH AND CASH EQUIVALENTS—End of period $ 418,500 $ 408,596

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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