Arista Networks, Inc. Reports Fourth Quarter and Full Year 2018 Financial Results

Places in Cloud Networking Across Verticals Yields Record 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 fourth
quarter and year ended December 31, 2018 with record revenue and
earnings.

Fourth Quarter Financial Highlights

  • Revenue of $595.7 million, an increase of 5.8% compared to the third
    quarter of 2018, and an increase of 27.3% from the fourth quarter of
    2017.
  • GAAP gross margin of 62.9%, compared to GAAP gross margin of 64.2% in
    the third quarter of 2018 and 65.7% in the fourth quarter of 2017.
  • Non-GAAP gross margin of 64.1%, compared to non-GAAP gross margin of
    64.6% in the third quarter of 2018 and 65.9% in the fourth quarter of
    2017.
  • GAAP net income of $170.3 million, or $2.10 per diluted share,
    compared to GAAP net income of $103.8 million, or $1.29 per diluted
    share, in the fourth quarter of 2017.
  • Non-GAAP net income of $182.2 million, or $2.25 per diluted share,
    compared to non-GAAP net income of $137.3 million, or $1.71 per
    diluted share, in the fourth quarter of 2017.

Full Year Financial Highlights

  • Revenue of $2.15 billion, an increase of 30.7% compared to fiscal year
    2017.
  • GAAP gross margin of 63.8%, compared to GAAP gross margin of 64.5% in
    fiscal year 2017.
  • Non-GAAP gross margin of 64.4%, compared to non-GAAP gross margin of
    64.8% in fiscal year 2017.
  • GAAP net income of $328.1 million, or $4.06 per diluted share,
    compared to GAAP net income of $423.2 million, or $5.35 per diluted
    share, in fiscal year 2017.
  • Non-GAAP net income of $643.3 million or $7.96 per diluted share,
    compared to non-GAAP net income of $442.8 million, or $5.61 per
    diluted share, in fiscal year 2017.

“We are pleased with our solid 2018 financial performance and continued
momentum across cloud titan and enterprise verticals. Arista is earning
a strategic role with customers deploying transformative cloud
networking,” stated Jayshree Ullal, Arista President and CEO.

Commenting on the company’s financial results, Ita Brennan, Arista’s
CFO, said, “The business continued to execute well across all key
financial metrics in 2018, with strong profitable revenue growth and
healthy cash generation.”

Fourth Quarter Company Highlights

  • Arista
    Introduces 400 Gigabit Platforms
    . New 400G fixed systems offer the
    choice of two optical module form factors – OSFP and QSFP-DD
    and deliver the performance that hyperscale cloud networks and
    datacenters need for the growth of applications such as AI (artificial
    intelligence), machine learning, and serverless computing.
  • Arista
    Expands CloudVision to the Campus
    . Arista Networks announced the
    next phase in its campus architecture, changing the way enterprises
    rebuild campus networks in the future. Arista’s Cognitive Campus
    unifies wired and wireless campus networking, applying modern
    software-driven cloud principles. Arista Cognitive WiFi™ eliminates
    legacy WiFi controller bottlenecks to reduce operational costs with
    higher reliability through a cloud-based, cognitive model.
  • Arista
    to Demonstrate Any Cloud Networking for Kubernetes at KubeCon NA 2018
    .
    Arista Networks unveiled a technology preview of Arista’s Any Cloud
    platform for Red Hat OpenShift Container Platform, and Tigera Secure
    Enterprise Edition, providing a consistent and more secure
    enterprise-class solution for Kubernetes-managed container workloads
    spanning host-based and physical network infrastructure.

2018 Company Highlights

Financial Outlook

For the first quarter of 2019, we expect:

  • Revenue between $588 and $598 million;
  • Non-GAAP gross margin between 63% to 65%, and
  • Non-GAAP operating margin of approximately 35%

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 fourth quarter and full year 2018
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 3657578.

The financial results conference call will also be available via live
webcast on our investor relations website at http://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 first quarter of fiscal
2019, and statements regarding the benefits from the introduction of new
products. 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: Arista Networks’ limited operating
history; Arista Networks’ rapid growth; Arista Networks’ customer
concentration; the evolution and growth of the cloud networking market
and the adoption by end customers of Arista Networks’ cloud networking
solutions; changes in our customer’s demand for our products and
services; requests for more favorable terms and conditions from our
large end customers; declines in the sales prices of our products and
services; customer order patterns or customer mix; the timing of orders
and manufacturing and customer lead times; increased competition in our
products and service markets; dependence on the introduction and market
acceptance of new product offerings and standards; the benefits and
impact of acquisitions; rapid technological and market change; Arista
Networks’ dispute with OptumSoft; and general market, political,
economic and business conditions. 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 November 5, 2018,
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 http://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 expense, legal fees and bond costs and
recoveries associated with the OptumSoft and Cisco litigations,
acquisition-related costs, including external professional fees and
severance costs, amortization of acquisition-related intangible assets,
loss/gain on investments in privately held companies, 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, other discrete indirect effects of such awards,
acquisition-related tax expense, and discrete tax items associated with
the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). 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 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.

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.
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. Accordingly, a
reconciliation of the non-GAAP financial measure guidance to the
corresponding GAAP measure is not available without unreasonable effort.

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.

*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, express or implied, with respect to
this research, including any warranties of merchantability or fitness
for a particular purpose.

Additional information and resources can be found at: http://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,
2018   2017 2018   2017
Revenue:
Product $ 503,235 $ 407,195 $ 1,841,100 $ 1,432,810
Service 92,491   60,672   310,269   213,376  
Total revenue 595,726 467,867 2,151,369 1,646,186
Cost of revenue:
Product 204,507 147,919 720,584 538,035
Service 16,227   12,783   57,408   46,382  
Total cost of revenue 220,734   160,702   777,992   584,417  
Total gross profit 374,992 307,165 1,373,377 1,061,769
Operating expenses:
Research and development 118,439 107,180 442,468 349,594
Sales and marketing 50,911 38,808 187,142 155,105
General and administrative 12,000 21,789 65,420 86,798
Legal settlement     405,000    
Total operating expenses 181,350 167,777 1,100,030 591,497
Income from operations 193,642 139,388 273,347 470,272
Other income (expense), net:
Interest expense (661 ) (741 ) (2,701 ) (2,780 )
Other income (expense), net 5,509   2,988   18,155   7,268  
Total other income (expense), net 4,848   2,247   15,454   4,488  
Income before income taxes 198,490 141,635 288,801 474,760
Provision for (benefit from) income taxes 28,168   37,802   (39,314 ) 51,559  
Net income $ 170,322   $ 103,833   $ 328,115   $ 423,201  
Net income attributable to common stockholders:
Basic $ 170,211   $ 103,752   $ 327,926   $ 422,400  
Diluted $ 170,218   $ 103,759   $ 327,941   $ 422,468  
Net income per share attributable to common stockholders:
Basic $ 2.26   $ 1.42   $ 4.39   $ 5.85  
Diluted $ 2.10   $ 1.29   $ 4.06   $ 5.35  
Weighted-average shares used in computing net income per share
attributable to common stockholders:
Basic 75,473   73,310   74,750   72,258  
Diluted 80,928   80,243   80,844   78,977  
 
       
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,
2018   2017 2018   2017
GAAP gross profit $ 374,992 $ 307,165 $ 1,373,377 $ 1,061,769
GAAP gross margin 62.9 % 65.7 % 63.8 % 64.5 %
Stock-based compensation expense 1,381 1,129 5,087 4,353
Intangible asset amortization 2,626 3,824
Acquisition-related costs (1) 3,138     3,138    
Non-GAAP gross profit $ 382,137   $ 308,294   $ 1,385,426   $ 1,066,122  
Non-GAAP gross margin 64.1 % 65.9 % 64.4 % 64.8 %
GAAP income from operations $ 193,642 $ 139,388 $ 273,347 $ 470,272
Stock-based compensation expense 24,619 20,436 91,202 75,427
Litigation expense (benefit) (2) (3,988 ) 9,072 6,566 40,352
Legal settlement (3) 405,000
Intangible asset amortization 3,500 5,110
Acquisition-related costs 4,313     7,745    
Non-GAAP income from operations $ 222,086   $ 168,896   $ 788,970   $ 586,051  
Non-GAAP operating margin 37.3 % 36.1 % 36.7 % 35.6 %
GAAP net income $ 170,322 $ 103,833 $ 328,115 $ 423,201
Stock-based compensation expense 24,619 20,436 91,202 75,427
Litigation expense (benefit) (2) (3,988 ) 9,072 6,566 40,352
Legal settlement (3) 405,000
Intangible asset amortization 3,500 5,110
Acquisition-related costs 4,313 7,745
Loss on investments in privately-held companies, net 4,700 13,800
Acquisition-related tax expense 5,853
Impact of the U.S. Tax Cuts and Jobs Act (4) (12,632 ) 51,812 (12,632 ) 51,812
Tax benefit on share-based awards (8,227 ) (38,287 ) (92,675 ) (111,542 )
Income tax effect on non-GAAP exclusions (429 ) (9,536 ) (114,769 ) (36,421 )
Non-GAAP net income $ 182,178   $ 137,330   $ 643,315   $ 442,829  
GAAP diluted net income per share attributable to common stockholders $ 2.10 $ 1.29 $ 4.06 $ 5.35
Non-GAAP adjustments to net income 0.15   0.42   3.90   0.26  
Non-GAAP diluted net income per share $ 2.25   $ 1.71   $ 7.96   $ 5.61  
Weighted-average shares used in computing diluted net income per
share attributable to common stockholders
80,928   80,243   80,844   78,977  
Summary of Stock-Based Compensation Expense:
Cost of revenue $ 1,381 $ 1,129 $ 5,087 $ 4,353
Research and development 13,505 11,207 48,205 42,184
Sales and marketing 6,224 5,302 24,995 17,953
General and administrative 3,509   2,798   12,915   10,937  
Total $ 24,619   $ 20,436   $ 91,202   $ 75,427  
________________________________

(1)

 

Represents a charge related to our business acquisitions in 2018
resulting from the required revaluation of inventory to its
estimated fair value.

(2)

Includes legal fees and bond costs and recoveries associated with
the OptumSoft and Cisco litigations.

(3)

Represents one-time charges associated with the settlement of our
lawsuit with Cisco on August 6, 2018.

(4)

Represents provisional tax estimates recorded in 2017 resulting
from the enactment of the Tax Act, and subsequent changes to these
amounts in 2018 as we completed our accounting for these tax
effects in the fourth quarter of 2018.

 

     
ARISTA NETWORKS, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
 
December 31,
2018
December 31,
2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 649,950 $ 859,192
Marketable securities 1,306,197 676,363
Accounts receivable 331,777 247,346
Inventories 264,557 306,198
Prepaid expenses and other current assets 162,321   177,330  
Total current assets 2,714,802   2,266,429  
Property and equipment, net 75,355 74,279
Acquisition-related intangible assets, net 58,610
Goodwill 53,684
Investments 30,336 36,136
Deferred tax assets 126,492 65,125
Other assets 22,704   18,891  
TOTAL ASSETS $ 3,081,983   $ 2,460,860  
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 93,757 $ 52,200
Accrued liabilities 123,254 133,827
Deferred revenue 358,586 327,706
Other current liabilities 30,907   16,172  
Total current liabilities 606,504   529,905  
Income taxes payable 36,167 34,067
Lease financing obligations, non-current 35,431 37,673
Deferred revenue, non-current 228,641 187,556
Other long-term liabilities 31,851   9,745  
TOTAL LIABILITIES 938,594   798,946  
STOCKHOLDERS’ EQUITY:
Common stock 8 7
Additional paid-in capital 956,572 804,731
Retained earnings 1,190,803 859,114
Accumulated other comprehensive loss (3,994 ) (1,938 )
TOTAL STOCKHOLDERS’ EQUITY 2,143,389   1,661,914  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,081,983   $ 2,460,860  
 
   
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 
Twelve Months Ended
December 31,
2018  

2017
As Adjusted (1)

 

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 328,115 $ 423,201
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other 27,671 20,640
Stock-based compensation 91,202 75,427
Deferred income taxes (57,896 ) 8,426
Loss on investments in privately-held companies, net 13,800
Amortization (accretion) of investment premiums (discounts) (3,360 ) 1,452
Changes in operating assets and liabilities:
Accounts receivable, net (77,916 ) 5,773
Inventories 51,054 (69,708 )
Prepaid expenses and other current assets 21,411 (11,645 )
Other assets (3,389 ) 907
Accounts payable 39,337 (30,104 )
Accrued liabilities (14,786 ) 43,535
Deferred revenue 70,533 142,327
Income taxes payable (112 ) 19,921
Other liabilities 17,455   1,475  
Net cash provided by operating activities 503,119   631,627  
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 547,797 206,332
Purchases of marketable securities (1,174,259 ) (585,373 )
Business acquisitions, net of cash acquired (96,821 )
Purchases of property and equipment (23,830 ) (15,279 )
Proceeds from repayment of notes receivable 2,000 3,000
Investments in privately-held companies (8,000 )
Other investing activities (2,000 )  
Net cash used in investing activities (1) (755,113 ) (391,320 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of lease financing obligations (1,929 ) (1,617 )
Proceeds from issuance of common stock under equity plans 53,658 57,111
Tax withholding paid on behalf of employees for net share settlement (8,878 ) (4,025 )
Net cash provided by financing activities 42,851   51,469  
Effect of exchange rate changes (1,390 ) 753  
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH (1)
(210,533 ) 292,529
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period
(1)
864,697   572,168  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period (1) $ 654,164   $ 864,697  
____________________________________

(1)

 

The adoption of ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash (“ASU 2016-18”), in the first quarter of 2018
requires the Company to include restricted cash together with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period amounts presented on the statements of cash flows.
As a result, for 2017, the beginning-of-period and end-of-period
amounts increased by $4.2 million and $5.5 million, respectively,
and net cash used in investing activities decreased by $1.3
million.

Contacts

Investor Contacts
Charles Yager
Product and Investor
Advocacy
(408) 547-5892
cyager@arista.com

Chuck Elliott
Business and Investor Development
(408) 547-5549
chuck@arista.com

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