Arista Networks, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Arista supplies cloud networking solutions, including EOS software and switching and routing platforms. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $654.4 | $563.3 | $1,858.2 | $1,555.6 |
| Gross profit / margin | $417.3 / 63.8% | $361.6 / 64.2% | $1,188.0 / 63.9% | $998.4 / 64.2% |
| Operating income (loss) | $228.6 | $180.8 | $629.8 | $79.7 |
| Net income | $208.9 | $168.5 | $599.2 | $157.8 |
| Diluted EPS | $2.59 | $2.08 | $7.38 | $1.95 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $635.9 | $207.3 |
- Q3 revenue increased 16.2% year over year; product revenue rose 14.3% and service revenue 27.7%. Nine-month revenue grew 19.4%.
- Q3 operating income rose about 26% and net income about 24% year over year. Nine-month comparisons are significantly affected by the $405 million Cisco legal settlement expense recorded in 2018.
- Gross margin edged down as product-transition costs, including excess and obsolete inventory charges, outweighed improved service margins. Management cited continued product and service pricing pressure.
- At September 30, cash and cash equivalents were $1,095.3 million and marketable securities were $1,351.8 million. The company reported no conventional debt; operating lease liabilities totaled $102.6 million. Current liabilities were $548.2 million.
- Net cash increased $445.3 million over the first nine months. Financing cash use included $214.6 million of share repurchases. The company had $785.4 million remaining under its $1.0 billion repurchase authorization.
Material changes and management commentary
- Sales to the Americas rose sharply, while international revenue share declined to 18.6% for Q3 from 27.8% a year earlier; management attributed this mainly to large customers shifting deployments to the U.S.
- Management reported reduced demand and buying-pattern volatility among certain large customers, with possible continuation into Q4 2019. Large-customer order timing, concentration and discounts can affect revenue and margins.
- Management expects operating expenses to increase in absolute dollars in the near term as it invests in R&D, sales and marketing, and infrastructure. It emphasized continued investment in cloud networking, campus and WiFi markets, and newer products, including 400G platforms. No specific numerical revenue or earnings guidance is provided in the filing.
- Remaining performance obligations were approximately $610.2 million; about 80% was expected to be recognized over the next two years and 20% during years three through five.
Risks, contingencies and unusual items
- Legal matters: The September 24, 2019 OptumSoft settlement released claims set for Phase II, but OptumSoft retained the right to appeal the earlier ruling on disputed EOS software ownership; any resulting loss was not estimable. GlobalFoundries filed patent complaints in August 2019 concerning semiconductor devices Arista buys from Broadcom. The filing notes that TSMC and GlobalFoundries entered a cross-license settlement on October 28, 2019, after quarter-end.
- Commitments and supply: Non-cancellable purchase commitments were $222.4 million, principally with contract manufacturers and suppliers. The company relies on third-party manufacturers and certain limited-source components; excess inventory, shortages, or delays could affect sales and margins.
- Accounting and tax: Adoption of lease standard ASC 842 in January 2019 brought operating lease assets and liabilities onto the balance sheet and reclassified the headquarters lease. A Ninth Circuit tax decision led to a $9.8 million discrete tax expense in the first nine months of 2019.
- Other exposures: Key risks include concentrated and unpredictable large-customer demand, intense competition and pricing pressure, product transitions, tariffs and trade uncertainty, and litigation and intellectual-property claims. Management said liquidity should cover working-capital and growth needs for at least 12 months. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported during the quarter.
Investor verification points
- Check whether large-customer demand, order timing and geographic mix subsequently improved or weakened, particularly in Q4 2019.
- Assess product-margin trends and inventory exposure after the reported transition-related charges.
- Reconcile cash generation with receivables growth, deferred-revenue movements, and continued repurchases.
- Follow the OptumSoft appeal and any developments arising from the GlobalFoundries matter after the reported cross-license settlement.
- Review whether the remaining performance obligations convert to revenue on the stated schedule and whether the expected expense and tax trends persist.