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Arista Networks, Inc. Reports Third Quarter 2017 Financial Results

Cloud Networking Adoption Continues with 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 datacenter and computing environments, today announced financial results for its third quarter ended September 30, 2017.

Third Quarter Financial Highlights

  • Revenue of $437.6 million, an increase of 8.0% compared to the second quarter of 2017, and an increase of 50.8% from the third quarter of 2016.
  • GAAP gross margin of 64.1%, compared to GAAP gross margin of 64.1% in the second quarter of 2017 and 64.2% in the third quarter of 2016.
  • Non-GAAP gross margin of 64.4%, compared to non-GAAP gross margin of 64.4% in the second quarter of 2017 and 64.6% in the third quarter of 2016.
  • GAAP net income of $133.7 million, or $1.68 per diluted share, compared to GAAP net income of $51.3 million, or $0.69 per diluted share, in the third quarter of 2016.
  • Non-GAAP net income of $128.2 million, or $1.62 per diluted share, compared to non-GAAP net income of $61.2 million, or $0.83 per diluted share, in the third quarter of 2016.

"I am proud of our record results and profits in Q3 2017,” stated Jayshree Ullal, Arista President and CEO. “Our performance validates our meaningful traction with customers as they evolve from legacy to universal cloud networking designs.”

Commenting on the company's financial results, Ita Brennan, Arista’s CFO, said, “We are pleased with our execution and strong financial performance in the quarter".

Company Highlights

  • Introduced Arista Any Cloud software platform, reducing operational costs and complexity for enterprises by simplifying integration and management of hybrid clouds across private cloud datacenters and public cloud providers.
  • Arista Networks makes the top 10 in FORTUNE magazine’s 100 Fastest-Growing Companies September 2017 issue.

Financial Outlook

For the fourth quarter of 2017, we expect:

  • Revenue between $450 and $464 million.
  • Non-GAAP gross margin between 63% to 65%, and
  • Non-GAAP operating margin between 30% and 32%

Guidance for non-GAAP financial measures excludes legal expenses of approximately $12 million associated with the OptumSoft and Cisco litigation, stock-based compensation expense, including excess tax benefits on stock-based awards, and other non-recurring expenses. 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 third quarter 2017 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 94689018.

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 fourth quarter of fiscal 2017, 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’ dispute with Cisco Systems, Inc. including the ITC remedial orders which prohibit the importation of Arista products (or components thereof) into the U.S., or the sale of previously imported products, that are covered by those remedial orders, Arista Networks’ ability to redesign its products in a manner not covered by such remedial orders and obtain appropriate governmental approvals for those redesigned products, any penalties assessed by the ITC if Arista’s redesigned products are covered by such remedial orders and Arista Networks’ ability to manage our manufacturing and supply chain including the sourcing of components on commercially reasonable terms; Arista Networks’ limited operating history; Arista Networks’ rapid growth; Arista Networks’ customer concentration; our customer’s adoption of our redesigned 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; changes in customer demand for 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; rapid technological and market change; the evolution of the cloud networking market and the adoption by end customers of Arista Networks’ cloud networking solutions; 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 August 4, 2017, 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 and related excess tax benefits, expenses associated with the OptumSoft and Cisco litigation, other non-recurring charges or benefits, and the income tax effect of these non-GAAP exclusions. 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.

The Company’s guidance for non-GAAP financial measures excludes stock-based compensation expense and related excess tax benefits, expenses associated with the OptumSoft and Cisco litigation, and other non-recurring items. The Company has not reconciled its non-GAAP gross margin or its non-GAAP operating margin guidance to GAAP gross margin or GAAP operating margin, because we do 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. In addition, excess tax benefits on stock-based awards will fluctuate based on these same factors, as well as the timing of exercise or vesting of such awards, all of which are difficult to predict and subject to constant change. The actual amount of stock-based compensation expense and excess tax benefits 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 was founded to pioneer and deliver software-driven cloud networking solutions for large datacenter 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 ten 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 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: http://www.arista.com/

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Income

(Unaudited in thousands, except per share amounts)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2017 2016 2017 2016
Revenue:
Product $ 380,344 $ 254,238 $ 1,025,615 $ 702,329
Service 57,289 36,023 152,704 98,869
Total revenue 437,633 290,261 1,178,319 801,198
Cost of revenue:
Product 145,874 94,777 390,116 261,711
Service 11,142 9,064 33,599 26,526
Total cost of revenue 157,016 103,841 423,715 288,237
Total gross profit 280,617 186,420 754,604 512,961
Operating expenses:
Research and development 79,610 70,648 242,414 202,183
Sales and marketing 40,640 33,216 116,297 92,566
General and administrative 19,535 19,535 65,009 52,298
Total operating expenses 139,785 123,399 423,720 347,047
Income from operations 140,832 63,021 330,884 165,914
Other income (expense), net:
Interest expense (701 ) (735 ) (2,039 ) (2,218 )
Other income (expense), net 2,136 639 4,280 1,392
Total other income (expense), net 1,435 (96 ) 2,241 (826 )
Income before provision for income taxes 142,267 62,925 333,125 165,088
Provision for income taxes 8,545 11,668 13,757 39,682
Net income $ 133,722 $ 51,257 $ 319,368 $ 125,406
Net income attributable to common stockholders:
Basic $ 133,540 $ 50,962 $ 318,643 $ 124,475
Diluted $ 133,555 $ 50,980 $ 318,704 $ 124,531
Net income per share attributable to common stockholders:
Basic $ 1.84 $ 0.74 $ 4.43 $ 1.82
Diluted $ 1.68 $ 0.69 $ 4.06 $ 1.71
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 72,588 69,076 71,903 68,365
Diluted 79,322 73,453 78,528 72,811

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,
2017 2016 2017 2016
GAAP gross profit $ 280,617 $ 186,420 $ 754,604 $ 512,961
GAAP gross margin 64.1 % 64.2 % 64.0 % 64.0 %
Stock-based compensation expense 1,113 955 3,224 2,616
Non-GAAP gross profit $ 281,730 $ 187,375 $ 757,828 $ 515,577
Non-GAAP gross margin 64.4 % 64.6 % 64.3 % 64.4 %
GAAP income from operations $ 140,832 $ 63,021 $ 330,884 $ 165,914
Stock-based compensation expense 20,152 15,116 54,991 42,708
Litigation expense 7,857 9,025 31,280 23,624
Non-GAAP income from operations $ 168,841 $ 87,162 $ 417,155 $ 232,246
Non-GAAP operating margin 38.6 % 30.0 % 35.4 % 29.0 %
GAAP net income $ 133,722 $ 51,257 $ 319,368 $ 125,406
Stock-based compensation expense 20,152 15,116 54,991 42,708
Litigation expense 7,857 9,025 31,280 23,624
Excess tax benefit on share based awards (23,826 ) (71,695 )
Release of income tax reserve (6,293 ) (6,293 )
Income tax effect on non-GAAP exclusions (9,683 ) (7,924 ) (28,445 ) (21,504 )
Non-GAAP net income $ 128,222 $ 61,181 $ 305,499 $ 163,941
GAAP diluted net income per share attributable to common stockholders $ 1.68 $ 0.69 $ 4.06 $ 1.71
Non-GAAP adjustments to net income (0.06 ) 0.14 (0.17 ) 0.54
Non-GAAP diluted net income per share $ 1.62 $ 0.83 $ 3.89 $ 2.25
Weighted-average shares used in computing diluted net income per share attributable to common stockholders 79,322 73,453 78,528 72,811
Summary of Stock-Based Compensation Expense
Cost of revenue $ 1,113 $ 955 $ 3,224 $ 2,616
Research and development 11,048 8,010 30,977 23,062
Sales and marketing 5,115 3,947 12,651 11,374
General and administrative 2,876 2,204 8,139 5,656
Total $ 20,152 $ 15,116 $ 54,991 $ 42,708

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited in thousands)

September 30,
2017
December 31,
2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 854,479 $ 567,923
Marketable securities 488,635 299,910
Accounts receivable 212,611 253,119
Inventories 333,157 236,490
Prepaid expenses and other current assets 186,657 168,684
Total current assets 2,075,539 1,526,126
Property and equipment, net 73,061 76,961
Investments 36,136 36,136
Deferred tax assets 95,697 70,960
Other assets 21,277 18,824
TOTAL ASSETS $ 2,301,710 $ 1,729,007
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 32,893 $ 79,457
Accrued liabilities 94,459 90,951
Deferred revenue 423,705 273,350
Other current liabilities 16,490 15,795
Total current liabilities 567,547 459,553
Income taxes payable 22,161 14,498
Lease financing obligations, non-current 38,199 39,593
Deferred revenue, non-current 141,440 99,585
Other long-term liabilities 7,811 7,958
TOTAL LIABILITIES 777,158 621,187
STOCKHOLDERS’ EQUITY:
Common stock 7 7
Additional paid-in capital 770,339 674,183
Retained earnings 755,281 435,105
Accumulated other comprehensive loss (1,075 ) (1,475 )
TOTAL STOCKHOLDERS’ EQUITY 1,524,552 1,107,820
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,301,710 $ 1,729,007

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

Nine Months Ended
September 30,
2017 2016
Cash flows from operating activities
Net income $ 319,368 $ 125,406
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 15,355 14,807
Stock-based compensation 54,991 42,708
Deferred income taxes (22,743 ) (13,720 )
Amortization of investment premiums 1,106 994
Changes in operating assets and liabilities:
Accounts receivable, net 40,508 (65,980 )
Inventories (96,667 ) (69,998 )
Prepaid expenses and other current assets (20,973 ) (98,050 )
Other assets (1,560 ) 3,208
Accounts payable (46,075 ) 35,510
Accrued liabilities 4,175 15,913
Deferred revenue 192,210 88,027
Income taxes payable 7,421 27,275
Other liabilities 847 2,628
Net cash provided by operating activities 447,963 108,728
Cash flows from investing activities
Proceeds from marketable securities 135,483 41,917
Purchases of marketable securities (325,414 ) (342,484 )
Purchases of property and equipment (12,159 ) (16,484 )
Proceeds from repayment of notes receivable 3,000
Investment in privately-held companies (2,500 )
Change in restricted cash (1,257 )

Net cash used in investing activities

(200,347 ) (319,551 )
Cash flows from financing activities
Principal payments of lease financing obligations (1,170 ) (960 )
Proceeds from issuance of common stock under equity plans 41,870 25,882
Minimum tax withholding paid on behalf of employees for net share settlement (2,457 ) (811 )
Net cash provided by financing activities 38,243 24,111
Effect of exchange rate changes 697 (133 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 286,556 (186,845 )
CASH AND CASH EQUIVALENTS—Beginning of period 567,923 687,326
CASH AND CASH EQUIVALENTS—End of period $ 854,479 $ 500,481

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Arista Networks, Inc.
Media Contact
Amanda Jaramillo, 408-547-5798
Corporate Communications
amanda@arista.com
or
Investor Contact
Charles Yager, 408-547-5892
Product and Investor Advocacy
cyager@arista.com

Source: Arista Networks, Inc.