Arista Networks, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in U.S. dollars unless noted. The filing describes Arista as a supplier of cloud networking solutions, including EOS software, switching and routing platforms, network applications, and support services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Product revenue | $566.5m | $421.4m | $1,105.6m | $832.3m |
| Service revenue | $140.9m | $119.2m | $269.3m | $231.3m |
| Total revenue | $707.3m | $540.6m | $1,374.9m | $1,063.6m |
| Gross profit | $454.2m | $344.1m | $879.5m | $682.3m |
| Gross margin | 64.2% | 63.7% | 64.0% | 64.2% |
| Operating income | $219.4m | $167.0m | $425.7m | $316.7m |
| Net income | $196.9m | $144.8m | $377.3m | $283.2m |
| Diluted EPS | $2.47 | $1.83 | $4.73 | $3.56 |
| Operating cash flow | Not presented separately | Not presented separately | $518.0m | $333.1m |
- Q2 revenue grew 30.8% year over year: product revenue rose 34.4% and service revenue 18.2%. Six-month revenue increased 29.3%.
- Q2 operating expenses were $234.8m, up 32.6%, including R&D of $143.3m, sales and marketing of $70.6m, and G&A of $20.9m.
- Q2 effective tax rate was 10.9%, versus 17.4%; the six-month rate was 12.1%, versus 16.0%. The company cited higher stock-based compensation tax benefits and a favorable jurisdictional earnings mix.
- Six-month investing cash outflow was $436.1m, primarily net purchases of marketable securities; financing cash outflow was $80.8m, including $101.4m of share repurchases. Cash, cash equivalents and restricted cash increased by only $0.5m over the six months.
Balance sheet and liquidity
- At June 30, 2021, cash and cash equivalents were $893.7m and marketable securities were $2,388.0m; management reported total cash, cash equivalents and marketable securities of approximately $3.3bn. About $442.8m was held outside the U.S.
- Total current assets were $4,328.4m and current liabilities were $859.9m. Total liabilities were $1,510.4m and stockholders’ equity was $3,697.8m.
- The balance sheet presents no borrowings or debt line item. Liabilities principally included deferred revenue, accounts payable, accrued liabilities, taxes and operating lease obligations.
- Inventory was $543.2m, up from $479.7m at year-end 2020. Deferred revenue was $746.1m, up from $650.8m. The company expected to recognize approximately $998.7m of remaining performance obligations; about 83% was expected over the next two years.
- Management said existing cash, marketable securities and operating cash generation should be sufficient for working capital and growth plans for at least 12 months.
Material changes and management commentary
- Management attributed higher product revenue to demand from new and existing customers, including broader acceptance of enterprise and campus products; service growth reflected expansion of the installed base and support renewals.
- International revenue increased to 27.3% of Q2 revenue from 19.3% a year earlier, with higher purchases from global and in-region customers.
- Q2 gross margin improved 0.5 percentage points year over year, while the six-month margin declined 0.2 points. Management cited a lower proportion of sales to heavily discounted large customers as favorable, offset by supply-chain and product-transition costs, including excess and obsolete inventory charges.
- Other income fell to $1.7m in Q2 from $8.3m, and to $3.3m for six months from $20.4m, primarily because yields on government and corporate bonds declined.
- Operating cash flow benefited from net income and a $95.3m increase in deferred revenue, but was partly offset by inventory growth of $63.5m and a $44.4m increase in prepaid expenses.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or margin guidance. Management expects R&D and sales and marketing spending to rise in absolute dollars and says gross margins may fluctuate; results are not necessarily indicative of full-year performance.
- COVID-19-related component shortages, manufacturing delays and logistics disruption continued to constrain timely product supply. The company expected to invest further in working capital and make incremental purchase commitments; renewed disruption could affect shipments, costs, margins and customer demand.
- Non-cancellable purchase commitments totaled $1,057.5m, including $1,019.0m with contract manufacturers and suppliers. The filing highlights risk of shortages and, if buffer inventory exceeds demand, excess or obsolete inventory charges.
- Customer concentration and order timing remain sources of quarterly variability; large customers may receive discounts, and customer testing, acceptance terms or changing purchasing plans can affect shipment and revenue recognition. Competition and pricing pressure also persist.
- WSOU Investments sued Arista alleging infringement of three patents in certain wireless and switching products. Arista denies the allegations and intends to defend the case. Management said a loss was not probable but reasonably possible; any loss or range could not be estimated at this stage.
- After quarter-end, Arista finalized a commitment to acquire land and improvements for approximately $40.0m, with payment expected in Q3 2021.
- The 2019 share repurchase authorization had approximately $237.3m remaining at June 30, 2021; no repurchases occurred during Q2. Six-month repurchases totaled $101.4m.
Important facts for investors to verify
- Whether component availability, lead times and the $1.06bn of purchase commitments translate into shipments and revenue without excess-inventory or margin pressure.
- Whether strong revenue growth continues across large customers and enterprise/campus markets, given customer concentration and unpredictable order timing.
- Whether gross margin holds near recent levels amid competitive discounts, supply-chain costs and product transitions.
- How much of operating cash generation reflects sustainable earnings versus working-capital movements, particularly deferred revenue and inventory.
- Developments in the WSOU litigation, including any change in the ability to estimate potential loss.
- Execution and funding of the $40.0m post-quarter land purchase, and future use of the remaining repurchase authorization.