Arista Networks, Inc. — Q2 2022 Form 10-Q
Business and reporting period. Arista supplies cloud networking solutions, including its EOS software, Ethernet switching and routing platforms, and support services. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions except per-share data and percentages.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,051.9 | $707.3 | $1,929.0 | $1,374.9 |
| Gross profit | $643.3 | $454.2 | $1,197.1 | $879.5 |
| Gross margin | 61.2% | 64.2% | 62.1% | 64.0% |
| Operating income | $362.9 | $219.4 | $640.8 | $425.7 |
| Net income | $299.1 | $196.9 | $571.4 | $377.3 |
| Diluted EPS | $0.94 | $0.62 | $1.80 | $1.18 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $318.2 | $518.0 |
Q2 revenue increased 48.7% year over year; product revenue rose 56.4% and service revenue 17.9%. Six-month revenue increased 40.3%. Q2 operating income rose 65.4% and net income rose 51.9% year over year. Gross margin contracted in both comparison periods, principally due to a higher share of discounted sales to large customers and increased material and logistics costs.
For the six months, operating cash flow fell to $318.2 million from $518.0 million. Net income was partly offset by higher working-capital needs, including inventory and prepaid expenses. Investing activities provided $173.0 million, including proceeds from marketable securities; financing activities used $615.7 million, primarily for share repurchases.
Financial position and material changes
- At June 30, cash and cash equivalents were $493.2 million and marketable securities were $2,408.7 million; together, approximately $2.9 billion. Total current assets were $4,729.2 million and current liabilities were $1,278.0 million.
- The balance sheet presents no borrowings. It reports operating lease liabilities, including $51.8 million non-current; total future lease payments were $82.1 million.
- Inventory increased to $852.8 million from $650.1 million at year-end 2021. Deferred revenue increased to $1,033.5 million from $929.3 million.
- Arista completed two acquisitions in the first half for total consideration of $158.9 million, adding $85.1 million of goodwill and $62.3 million of intangible assets. Acquisition-related expenses were $4.7 million.
- The company repurchased $619.9 million of shares in the first half, at an average $104.11 per share. Approximately $307.2 million remained authorized under the program at June 30.
- Other income included a $23.4 million six-month unrealized gain on equity investments; the second quarter included a $5.1 million unrealized loss on equity investments.
Outlook, risks and contingencies
- Management reported strong customer demand but ongoing component shortages, manufacturing and logistics delays, and inflationary supply costs. These conditions constrained timely shipments and pressured gross margin; management said they could continue to affect fulfillment and future results.
- Management expects to continue investing in working capital and extending supply planning horizons. It stated that cash, cash equivalents, marketable securities and operating cash generation should be sufficient for working-capital needs and growth plans for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Remaining performance obligations were approximately $1,313.3 million, with about 83% expected to be recognized over the next two years. Separately, $762.7 million of binding customer agreements primarily related to future product shipments; supply constraints could delay or affect recognition.
- Non-cancellable purchase commitments totaled $4,472.2 million, including $2,937.6 million with confirmed receipt dates within 12 months. These commitments expose the company to excess or obsolete inventory if supply or demand forecasts do not match.
- Beginning in 2022, tax rules requiring capitalization and amortization of research and development costs were estimated to increase annual cash taxes by approximately $184.0 million; the first-half liability had been paid by June 30. Management did not anticipate a material effective-tax-rate change from this rule.
- In the WSOU patent case, one patent was dismissed with prejudice and the case was stayed July 1 pending inter partes review. Management said a possible loss was reasonably possible but could not estimate a loss or range; an adverse ruling could materially affect results.
- Other key risks include dependence on large customers and third-party manufacturers, competitive pricing, economic and geopolitical uncertainty, cybersecurity and product-quality risks, and acquisition integration. The company reported effective disclosure controls and no material quarter-over-quarter change in internal control over financial reporting.
Investor verification points
- Track whether component availability, shipment timing and large-customer order patterns support the reported demand and remaining performance obligations.
- Monitor gross margin recovery or further pressure from customer mix, supply costs, logistics and competitive pricing.
- Assess inventory growth, cash conversion and the scale and timing of the $4.47 billion purchase commitments against actual demand and deliveries.
- Review acquisition integration, related costs, and the contribution and valuation of acquired assets and equity investments.
- Follow the WSOU litigation and any updates to its potential financial exposure, alongside the remaining share-repurchase authorization.