Arista Networks, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Arista supplies cloud networking solutions, including its EOS software, switching and routing platforms, network applications, and support services. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,176.8M | $748.7M | $3,105.8M | $2,123.6M |
| Revenue growth | 57.2% | — | 46.3% | — |
| Gross profit | $710.0M | $478.6M | $1,907.1M | $1,358.1M |
| Gross margin | 60.3% | 63.9% | 61.4% | 64.0% |
| Operating income | $417.3M | $233.3M | $1,058.2M | $659.0M |
| Net income | $354.0M | $224.3M | $925.4M | $601.6M |
| Diluted EPS | $1.13 | $0.70 | $2.92 | $1.89 |
| Cash provided by operations | Not reported for quarter | Not reported for quarter | $452.3M | $790.6M |
- Product revenue was $1,008.7M in Q3, up 67.0% year over year; service revenue was $168.1M, up 16.3%. Management attributed product growth to strong demand across customers, including large cloud customers.
- Operating expenses were $292.6M in Q3, up 19.3%, with R&D the largest category at $187.8M. Nine-month operating expenses rose 21.4% to $848.9M.
- At September 30, cash and cash equivalents were $716.3M and marketable securities were $2,263.8M. Total cash, cash equivalents and marketable securities were approximately $3.0B. Current assets were $5,031.7M and current liabilities $1,254.9M.
- The balance sheet reports no debt. Total liabilities were $1,776.8M and stockholders’ equity was $4,385.2M.
- Inventory increased to $1,100.6M from $650.1M at year-end 2021. Accounts receivable increased to $651.5M from $516.5M.
Changes versus prior comparable periods
- Q3 revenue rose 57.2%; nine-month revenue rose 46.3%. Growth was led by product sales. Americas revenue increased to 83.1% of Q3 sales from 74.5% a year earlier; EMEA revenue declined year over year in Q3.
- Gross margin contracted by 3.6 percentage points in Q3 and 2.6 points over nine months. The company cited a higher sales mix to large customers receiving discounts and higher material and logistics costs, partly offset by fixed-cost leverage.
- Nine-month operating cash flow fell to $452.3M from $790.6M, principally reflecting working-capital needs, including a $449.8M inventory increase and higher receivables and prepaid assets.
- Nine-month financing cash use increased to $649.9M, including $667.5M of share repurchases, versus $235.5M of repurchases in the prior-year period. The remaining authorization under the current repurchase program was approximately $259.6M.
- The effective tax rate increased to 16.5% for Q3 from 4.4%, and to 15.6% for the first nine months from 9.3%. The filing attributes the increase primarily to a lower proportion of tax benefits from stock-based compensation relative to pretax income.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management expects existing cash, cash equivalents, marketable securities and operating cash generation to cover working-capital needs and growth plans for at least the next 12 months.
- Management reported strong overall demand but persistent industry supply constraints, component shortages, longer lead times, labor disruptions and inflationary cost pressure. These conditions may delay shipments, constrain revenue, depress gross margins and increase working-capital requirements.
- Non-cancellable purchase commitments totaled $4.3B, including $3.1B expected to be received within 12 months. Management cautions that demand could differ from forecasts, creating excess or obsolete inventory risk. Separately, $844.2M of binding customer agreements primarily relate to future product shipments and are exposed to supply-related delay or cancellation risk.
- Remaining performance obligations were approximately $1,220.5M, excluding those $844.2M of binding shipment agreements; about 82% was expected to be recognized within two years. The filing notes that supply constraints may affect timing.
- Arista completed two acquisitions during the first nine months for total consideration of $158.9M, including $82.6M of goodwill and $62.3M of acquired intangible assets. Acquisition-related expenses were $4.7M.
- Other income included $24.1M of nine-month unrealized gains on equity investments. Available-for-sale debt securities had $39.6M of unrealized losses at September 30, recorded in other comprehensive income; the company stated it did not expect to need to sell them before recovery and recognized no credit losses or impairments.
- A WSOU patent lawsuit remained stayed pending inter partes review. The company said a loss was reasonably possible but could not estimate a possible loss range. It intends to defend the case.
- Management cited risks from customer concentration, intense competition and pricing pressure, economic and geopolitical uncertainty, export controls and trade restrictions, cybersecurity, and acquisition integration. It also estimated approximately $188M of incremental cash tax impact for 2022 from the requirement to capitalize and amortize R&D costs; the first nine months’ liability had been paid by September 30.
Important facts for investors to verify
- Whether supply availability improves sufficiently to convert strong demand and customer commitments into timely product shipments and revenue.
- Whether elevated inventory and $4.3B of purchase commitments remain aligned with actual demand, and how they affect cash flow, write-down risk and margins.
- Whether gross margins stabilize despite large-customer discounts, component inflation, logistics costs and competitive pricing pressure.
- How customer concentration and the strong Q3 Americas mix evolve, particularly as large cloud customers’ purchasing cycles vary.
- Whether the cash-tax impact of R&D capitalization, uncertain tax positions, acquisition integration and the WSOU litigation create material future cash or earnings effects.