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Arista Networks, Inc. Reports Second Quarter 2018 Financial Results, with Record Earnings

Arista Networks, Inc. (NYSE: ANET), an industry leader in software-driven, cognitive cloud networking for large-scale datacenter and campus environments, today announced financial results for its second quarter ended June 30, 2018.

Second Quarter Financial Highlights

  • Revenue of $519.8 million, an increase of 10.0% compared to the first quarter of 2018, and an increase of 28.3% from the second quarter of 2017.
  • GAAP gross margin of 64.2%, compared to GAAP gross margin of 64.1% in the first quarter of 2018 and 64.1% in the second quarter of 2017.
  • Non-GAAP gross margin of 64.5%, compared to non-GAAP gross margin of 64.4% in the first quarter of 2018 and 64.4% in the second quarter of 2017.
  • GAAP net income of $150.7 million, or $1.86 per diluted share, compared to GAAP net income of $102.7 million, or $1.30 per diluted share, in the second quarter of 2017.
  • Non-GAAP net income of $155.7 million, or $1.93 per diluted share, compared to non-GAAP net income of $105.5 million, or $1.34 per diluted share, in the second quarter of 2017.

“Arista is one of the fastest networking companies to achieve a $2 billion annual revenue rate, driven by its industry leadership in software-defined networking,” stated Jayshree Ullal, Arista President and CEO. “In Q2 2018 we comfortably surpassed the $500 million revenue mark with record profitability.”

Commenting on the company's financial results, Ita Brennan, Arista’s CFO, said, “The team continues to demonstrate consistent execution, driving healthy revenue growth and earnings expansion.”

Arista Extends the Campus to Cognitive WiFi™ Networking

Arista today also announced that it will acquire Mojo Networks, the inventor of Cognitive WiFi and a leader in cloud-managed wireless networking. The parties expect to close the transaction in Q3 2018. “We are excited about Arista's first acquisition transaction and its significance to Arista's cognitive campus vision. We welcome the Mojo Networks employees to the Arista family,” stated Ms. Ullal.

Company Highlights

Financial Outlook

For the third quarter of 2018, we expect:

  • Revenue between $540 and $552 million
  • Non-GAAP gross margin between 63% to 65%, and
  • Non-GAAP operating margin of approximately 32% to 34%

Guidance for non-GAAP financial measures excludes estimated legal expenses of approximately $6 million associated with the OptumSoft and Cisco litigation, stock-based compensation expense, 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 second quarter 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 8687498.

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 third quarter of fiscal 2018, 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; the benefits and impact of acquisitions; 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 Annual Report on Form 10-K filed with the SEC on February 20, 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, expenses associated with the OptumSoft and Cisco litigation, 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 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, expenses associated with the OptumSoft and Cisco litigation, 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 fifteen 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, FlexRoute 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 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,
2018201720182017
Revenue:
Product $ 444,767 $ 353,904 $ 852,384 $ 645,271
Service 75,078 51,307 139,950 95,415
Total revenue 519,845 405,211 992,334 740,686
Cost of revenue:
Product 171,622 134,406 328,313 244,242
Service 14,340 11,028 27,219 22,457
Total cost of revenue 185,962 145,434 355,532 266,699
Total gross profit 333,883 259,777 636,802 473,987
Operating expenses:
Research and development 104,078 81,194 206,440 162,804
Sales and marketing 46,188 38,630 88,328 75,657
General and administrative 18,420 23,319 38,099 45,474
Total operating expenses 168,686 143,143 332,867 283,935
Income from operations 165,197 116,634 303,935 190,052
Other income (expense), net:
Interest expense (680 ) (623 ) (1,367 ) (1,338 )
Other income (expense), net (1,489 ) 1,119 3,354 2,144
Total other income (expense), net (2,169 ) 496 1,987 806
Income before provision for income taxes 163,028 117,130 305,922 190,858
Provision for income taxes 12,320 14,445 10,676 5,212
Net income $ 150,708 $ 102,685 $ 295,246 $ 185,646
Net income attributable to common stockholders:
Basic $ 150,629 $ 102,454 $ 295,078 $ 185,139
Diluted $ 150,635 $ 102,474 $ 295,091 $ 185,182
Net income per share attributable to common stockholders:
Basic $ 2.02 $ 1.42 $ 3.97 $ 2.59
Diluted $ 1.86 $ 1.30 $ 3.65 $ 2.37
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 74,503 71,992 74,250 71,555
Diluted 80,826 78,756 80,774 78,166

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

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

Three Months Ended June 30,Six Months Ended June 30,
2018201720182017
GAAP gross profit $ 333,883 $ 259,777 $ 636,802 $ 473,987
GAAP gross margin 64.2 % 64.1 % 64.2 % 64.0 %
Stock-based compensation expense 1,236 1,087 2,438 2,111
Non-GAAP gross profit $ 335,119 $ 260,864 $ 639,240 $ 476,098
Non-GAAP gross margin 64.5 % 64.4 % 64.4 % 64.3 %
GAAP income from operations $ 165,197 $ 116,634 $ 303,935 $ 190,052
Stock-based compensation expense 22,478 18,400 43,329 34,839
Litigation expense 3,569 11,957 10,654 23,423
Non-GAAP income from operations $ 191,244 $ 146,991 $ 357,918 $ 248,314
Non-GAAP operating margin 36.8 % 36.3 % 36.1 % 33.5 %
GAAP net income $ 150,708 $ 102,685 $ 295,246 $ 185,646
Stock-based compensation expense 22,478 18,400 43,329 34,839
Litigation expense 3,569 11,957 10,654 23,423
Unrealized loss on investments in privately-held companies, net 9,100 9,100
Tax benefit on stock-based awards (25,472 ) (18,070 ) (58,318 ) (48,693 )
Income tax effect on non-GAAP exclusions (4,663 ) (9,502 ) (10,168 ) (17,938 )
Non-GAAP net income $ 155,720 $ 105,470 $ 289,843 $ 177,277
GAAP diluted net income per share attributable to common stockholders $ 1.86 $ 1.30 $ 3.65 $ 2.37
Non-GAAP adjustments to net income 0.07 0.04 (0.06 ) (0.10 )
Non-GAAP diluted net income per share $ 1.93 $ 1.34 $ 3.59 $ 2.27
Weighted-average shares used in computing diluted net income per share attributable to common stockholders 80,826 78,756 80,774 78,166
Summary of Stock-Based Compensation Expense:
Cost of revenue $ 1,236 $ 1,087 $ 2,438 $ 2,111
Research and development 11,745 10,342 22,690 19,929
Sales and marketing 6,274 4,080 12,234 7,536
General and administrative 3,223 2,891 5,967 5,263
Total $ 22,478 $ 18,400 $ 43,329 $ 34,839

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

June 30, 2018December 31, 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 711,157 $ 859,192
Marketable securities 1,149,247 676,363
Accounts receivable 260,917 247,346
Inventories 245,439 306,198
Prepaid expenses and other current assets 168,779 177,330
Total current assets 2,535,539 2,266,429
Property and equipment, net 73,736 74,279
Investments 35,036 36,136
Deferred tax assets 68,761 65,125
Other assets 20,019 18,891
TOTAL ASSETS $ 2,733,091 $ 2,460,860
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 53,182 $ 52,200
Accrued liabilities 86,693 133,827
Deferred revenue 262,345 327,706
Other current liabilities 19,543 16,172
Total current liabilities 421,763 529,905
Income taxes payable 40,369 34,067
Lease financing obligations, non-current 36,594 37,673
Deferred revenue, non-current 186,299 187,556
Other long-term liabilities 22,116 9,745
TOTAL LIABILITIES 707,141 798,946
STOCKHOLDERS’ EQUITY:
Common stock 8 7
Additional paid-in capital 872,559 804,731
Retained earnings (1) 1,157,934 859,114
Accumulated other comprehensive loss (4,551 ) (1,938 )
TOTAL STOCKHOLDERS’ EQUITY 2,025,950 1,661,914
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,733,091 $ 2,460,860
____________________________

(1) The adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, in the first quarter of 2018 resulted in an adjustment to increase the retained earnings balance by $3.6 million as of January 1, 2018.

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Six Months Ended June 30,
2018

2017
As Adjusted (1)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 295,246 $ 185,646
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other 11,328 10,033
Stock-based compensation 43,329 34,839
Deferred income taxes (4,281 ) (8,515 )
Unrealized loss on investments in privately-held companies, net 9,100
Amortization (accretion) of investment premiums (discounts) (783 ) 753
Changes in operating assets and liabilities:
Accounts receivable, net (13,571 ) (16,505 )
Inventories 60,759 (127,313 )
Prepaid expenses and other current assets 12,605 (22,239 )
Other assets 629 (470 )
Accounts payable 3,597 1,299
Accrued liabilities (47,153 ) (5,981 )
Deferred revenue (50,096 ) 181,575
Income taxes payable 6,653 5,380
Other liabilities (1,237 ) 3,593
Net cash provided by operating activities 326,125 242,095
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 222,764 112,053
Purchases of marketable securities (696,665 ) (114,195 )
Purchases of property and equipment (13,071 ) (9,534 )
Investments in privately-held companies (8,000 )
Other investing activities (2,000 )
Net cash used in investing activities (1) (496,972 ) (11,676 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of lease financing obligations (921 ) (773 )
Proceeds from issuance of common stock under equity plans 28,810 28,105
Tax withholding paid on behalf of employees for net share settlement (4,463 ) (1,356 )
Net cash provided by financing activities 23,426 25,976
Effect of exchange rate changes (607 ) 411
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (148,028 ) 256,806
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period (1) 864,697 572,168
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period (1) $ 716,669 $ 828,974
____________________________________

(1) The adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"), in the first half 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 the six months ended June 30, 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:

Arista Networks, Inc.
Investor Contacts:
Charles Yager, 408-547-5892
Product and Investor Advocacy
cyager@arista.com
or
Chuck Elliott, 408-547-5549
Business and Investor Development
chuck@arista.com

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