Arista Networks, Inc. - FORM 8-K - EX-99.1 - August 2, 2021

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Exhibit 99.1
Arista Networks, Inc. Reports Second Quarter 2021 Financial Results
SANTA CLARA, Calif.- August 2, 2021 -- Arista Networks, Inc. (NYSE: ANET), an industry leader in cognitive cloud networking solutions for large datacenter and campus environments, today announced financial results for its second quarter ended June 30, 2021.
Second Quarter Financial Highlights
•Revenue of $707.3 million, an increase of 6.0% compared to the first quarter of 2021, and an increase of 30.8% from the second quarter of 2020.
•GAAP gross margin of 64.2%, compared to GAAP gross margin of 63.7% in the first quarter of 2021 and 63.7% in the second quarter of 2020.
•Non-GAAP gross margin of 65.2%, compared to non-GAAP gross margin of 64.7% in the first quarter of 2021 and 64.7% in the second quarter of 2020.
•GAAP net income of $196.9 million, or $2.47 per diluted share, compared to GAAP net income of $144.8 million, or $1.83 per diluted share in the second quarter of 2020.
•Non-GAAP net income of $216.8 million, or $2.72 per diluted share, compared to non-GAAP net income of $167.0 million, or $2.11 per diluted share in the second quarter of 2020.
“Our record second quarter reflects continued momentum and diversification across our top verticals and product-lines,” said Jayshree Ullal, Arista's president and CEO. “We are on the cusp of network software and data driven transformation and look forward to delighting many more customers.”
Commenting on the company's financial results, Ita Brennan, Arista’s CFO said, “We are pleased with the strong performance of the business in the quarter, as we continued to work with customers and partners to navigate a challenging supply environment.”
Second Quarter Company Highlights
•In Q2 2021, Arista surpassed 50 million cloud network ports shipped cumulatively.
•Arista Launches Sub 100ns Ultra-low Latency Switch for Financial Services – Arista announced SwitchApp for Arista 7130, a new ultra-low latency switch that cuts latency to less than a third of existing Arista solutions. SwitchApp is based on the latest programmable FPGA technology and is fully integrated with Arista EOS® (Extensible Operating System).
•Arista Boosts Agility for Modern Enterprises - Arista announced CloudVision® 2021, a further expansion of Arista's software-driven approach for modern enterprises. CloudVision 2021 delivers new automation capabilities designed to improve network agility and streamline enterprise business outcomes.
•Arista Networks Cognitive Campus Solutions - Campus networks are undergoing another massive transition in the post-COVID era. As administrators adapt to the shifting boundaries between the office and home around the world, the campus is evolving to distributed workspaces.
Financial Outlook
For the third quarter of 2021, we expect:
•Revenue between $725 million to $745 million;
•Non-GAAP gross margin of 63% to 65%; and
•Non-GAAP operating margin of approximately 37%
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Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and certain 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 under “Non-GAAP Financial Measures”).
Prepared Materials and Conference Call Information
Arista executives will discuss the second quarter financial results on a conference call at 1:30 p.m. Pacific Time today. To listen to the call via telephone, dial (833) 968-2211 in the United States or +1 (778) 560-2896 from international locations. The Conference ID is 6062407.
The financial results conference call will also be available via live webcast on Arista's investor relations website at https://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 quotations from management, 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 2021 and statements regarding the benefits of new products and product enhancements, our leadership in cloud networking, the continued momentum and diversification of our top verticals and product-lines and the evolution of the campus market. 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: the impact of the COVID-19 pandemic on our business; insufficient component supply and inventory; increased costs of components; manufacturing capacity impacted by COVID-19 and increased lead times; interruptions or delays in shipments; the rapid evolution of the networking market; any failure to successfully pursue new products and service offerings and expand into adjacent markets; a decline in our revenue growth rate; unpredictability of our results of operations; adverse economic conditions or reduced information technology and network infrastructure spending; intense competition; expansion of our international sales and operations; investment or acquisition in other businesses; seasonality; our ability to attract new large end customers or sell products and services to existing end customers; our ability to increase market awareness of our company and new products and services; product quality problems; our ability to anticipate technological shifts and develop products to meet those technological shifts; our ability to protect, defend and maintain our intellectual property rights; vulnerabilities in our products and failure of our products to detect security breaches our intellectual property rights; and tax, tariff, import/export restrictions; and other future events. Additional risks and uncertainties that could affect us can be found in our most recent filings with the Securities and Exchange Commission including, but not limited to, our annual report on Form 10-K and quarterly reports on Form 10-Q. You can locate these reports through our website at https://investors.arista.com/ and on the SEC’s website at https://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 we disclaim 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
This press release and accompanying table contain certain non-GAAP financial measures including non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margins, non-GAAP net income and non-GAAP diluted net income per share. These non-GAAP financial measures exclude stock-based compensation expense, amortization of acquisition-related intangible assets, certain 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
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indirect effects of such awards. 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 the comparable GAAP financial measures. 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. Non-GAAP financial measures do not have any standardized meaning and are therefore unlikely to be comparable to similarly titled measures presented by other companies. 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 have 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. A reconciliation of the non-GAAP financial measures guidance to the corresponding GAAP measures on a forward-looking basis is not available because 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.
About Arista Networks
Arista Networks is an industry leader in cognitive cloud networking solutions for large data center and campus environments. Arista’s award-winning platforms deliver availability, agility, automation analytics, and security through CloudVision® and Arista EOS®, an advanced network operating system. For more information visit www.arista.com.
ARISTA, CloudVision, CloudEOS and MSS 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.

Investor Contacts: 

Arista Networks, Inc.
Liz Stine, 512-296-4638
Investor Relations
liz@arista.com

or

Charles Yager, 408-547-5892
Investor Relations
cyager@arista.com
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ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
Three Months Ended June 30,
Six Months Ended June 30,
2021202020212020
Revenue:
Product$566,467 $421,413 $1,105,612 $832,319 
Service 140,852 119,157 269,269 231,280 
Total revenue707,319 540,570 1,374,881 1,063,599 
Cost of revenue:
Product225,779 176,432 444,212 340,061 
Service 27,362 20,049 51,219 41,198 
Total cost of revenue253,141 196,481 495,431 381,259 
Gross profit 454,178 344,089 879,450 682,340 
Operating expenses:
Research and development 143,293 111,544 275,780 224,698 
Sales and marketing 70,625 51,237 141,645 108,323 
General and administrative 20,895 14,319 36,368 32,668 
Total operating expenses 234,813 177,100 453,793 365,689 
Income from operations219,365 166,989 425,657 316,651 
Other income, net 1,719 8,256 3,294 20,413 
Income before income taxes221,084 175,245 428,951 337,064 
Provision for income taxes24,196 30,452 51,697 53,840 
Net income$196,888 $144,793 $377,254 $283,224 
Net income per share:
Basic $2.58 $1.91 $4.94 $3.72 
Diluted $2.47 $1.83 $4.73 $3.56 
Weighted-average shares used in computing net income per share:
Basic 76,461 75,808 76,384 76,036 
Diluted 79,710 79,298 79,677 79,620 

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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,
2021202020212020
GAAP gross profit$454,178 $344,089 $879,450 $682,340 
GAAP gross margin64.2 %63.7 %64.0 %64.2 %
Stock-based compensation expense1,796 1,585 3,196 2,912 
Intangible asset amortization5,465 4,178 10,929 7,838 
Non-GAAP gross profit$461,439 $349,852 $893,575 $693,090 
Non-GAAP gross margin65.2 %64.7 %65.0 %65.2 %
GAAP income from operations$219,365 $166,989 $425,657 $316,651 
Stock-based compensation expense44,944 32,922 82,497 60,478 
Intangible asset amortization7,365 5,811 14,795 10,713 
Acquisition-related costs (1)
— — — 11,860 
Non-GAAP income from operations$271,674 $205,722 $522,949 $399,702 
Non-GAAP operating margin38.4 %38.1 %38.0 %37.6 %
GAAP net income $196,888 $144,793 $377,254 $283,224 
Stock-based compensation expense44,944 32,922 82,497 60,478 
Intangible asset amortization7,365 5,811 14,795 10,713 
Acquisition-related costs (1)
— — — 11,860 
Tax benefit on stock-based awards (24,113)(11,682)(45,019)(26,184)
Income tax effect on non-GAAP exclusions(8,256)(4,796)(13,862)(11,351)
Non-GAAP net income$216,828 $167,048 $415,665 $328,740 
GAAP diluted net income per share$2.47 $1.83 $4.73 $3.56 
Non-GAAP adjustments to net income 0.25 0.28 0.49 0.57 
Non-GAAP diluted net income per share$2.72 $2.11 $5.22 $4.13 
Weighted-average shares used in computing diluted net income per share79,710 79,298 79,677 79,620 
Summary of Stock-Based Compensation Expense:
Cost of revenue$1,796 $1,585 $3,196 $2,912 
Research and development23,139 19,378 45,121 35,306 
Sales and marketing11,368 8,277 21,453 14,673 
General and administrative8,641 3,682 12,727 7,587 
Total$44,944 $32,922 $82,497 $60,478 
___________________
(1) Represents non-recurring costs associated with our acquisition of Big Switch, and primarily includes severance, retention bonuses, professional and consulting fees, and facilities restructuring costs.
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ARISTA NETWORKS, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
June 30, 2021
December 31, 2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $893,688 $893,219 
Marketable securities2,388,015 1,979,649 
Accounts receivable364,214 389,540 
Inventories 543,199 479,668 
Prepaid expenses and other current assets 139,279 94,922 
Total current assets 4,328,395 3,836,998 
Property and equipment, net32,362 32,231 
Acquisition-related intangible assets, net107,995 122,790 
Goodwill188,277 189,696 
Investments13,647 8,314 
Operating lease right-of-use assets70,497 77,288 
Deferred tax assets 433,674 441,531 
Other assets33,433 30,071 
TOTAL ASSETS $5,208,280 $4,738,919 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $145,159 $134,235 
Accrued liabilities 163,245 143,357 
Deferred revenue 482,112 396,259 
Other current liabilities 69,419 94,392 
Total current liabilities 859,935 768,243 
Income taxes payable 57,977 53,053 
Operating lease liabilities, non-current64,295 72,397 
Deferred revenue, non-current263,978 254,568 
Deferred tax liabilities, non-current216,746 227,936 
Other long-term liabilities 47,508 42,431 
TOTAL LIABILITIES 1,510,439 1,418,628 
STOCKHOLDERS’ EQUITY:
Common stock8 8 
Additional paid-in capital 1,395,459 1,292,431 
Retained earnings 2,303,513 2,027,614 
Accumulated other comprehensive income (loss)(1,139)238 
TOTAL STOCKHOLDERS’ EQUITY 3,697,841 3,320,291 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $5,208,280 $4,738,919 

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ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Six Months Ended June 30,
20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $377,254 $283,224 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other25,235 21,170 
Stock-based compensation 82,497 60,478 
Noncash lease expense8,410 8,223 
Deferred income taxes (2,998)2,668 
Amortization of investment premiums 12,121 2,938 
Changes in operating assets and liabilities:
Accounts receivable, net 25,326 15,263 
Inventories (63,531)(82,891)
Prepaid expenses and other current assets (44,356)26,815 
Other assets(3,390)5,360 
Accounts payable 10,879 31,473 
Accrued liabilities 20,025 (39,882)
Deferred revenue 95,263 (19,242)
Income taxes payable (9,144)16,820 
Other liabilities (15,550)646 
Net cash provided by operating activities 518,041 333,063 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities819,807 875,213 
Purchases of marketable securities(1,241,657)(1,236,477)
Purchases of property and equipment (9,567)(5,178)
Business acquisitions, net of cash acquired— (66,317)
Escrow receipts from past business acquisitions1,419 — 
Investment in privately-held companies and intangibles(6,084)— 
Net cash used in investing activities (436,082)(432,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under equity plans26,884 22,228 
Tax withholding paid on behalf of employees for net share settlement(6,353)(4,000)
Repurchase of common stock(101,355)(227,895)
Net cash used in financing activities(80,824)(209,667)
Effect of exchange rate changes (665)(1,663)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH470 (311,026)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period897,454 1,115,515 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period$897,924 $804,489 

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Arista Networks, Inc. Reports