Arista Networks, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Arista supplies cloud networking systems based on its EOS software and switching and routing platforms.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $523.0 million | $595.4 million | Down 12.2% |
| Product revenue | $410.9 million | $505.4 million | Down 18.7% |
| Service revenue | $112.1 million | $90.0 million | Up 24.6% |
| Gross profit / margin | $338.3 million / 64.7% | $380.6 million / 63.9% | Margin up 0.8 percentage points |
| Operating income / margin | $149.7 million / 28.6% | $194.3 million / 32.6% | Income down 23.0% |
| Net income / diluted EPS | $138.4 million / $1.73 | $201.0 million / $2.47 | Net income down 31.1% |
| Operating cash flow | $194.8 million | $170.1 million | Up $24.8 million |
- Operating expenses were $188.6 million, up 1.3% year over year. The effective tax rate rose to 14.5% from 2.7%, primarily reflecting lower tax benefits from equity compensation settlements.
- At March 31, cash and cash equivalents were $761.3 million and marketable securities were $1.876 billion, totaling approximately $2.637 billion. Current assets were $3.337 billion versus current liabilities of $573.0 million. The filing reports no debt borrowings.
- Total liabilities were $1.263 billion and stockholders’ equity was $2.849 billion. Deferred revenue totaled $596.8 million; approximately $716.5 million of remaining performance obligations was expected to be recognized, about 80% over the next two years.
- Cash and cash equivalents declined from $1.111 billion at year-end, in part as the company purchased marketable securities, acquired Big Switch, and repurchased shares. Q1 operating cash flow included strong receivable collections; financing cash use included $227.9 million of share repurchases.
Material changes and notable items
- Product revenue fell $94.5 million. The comparison was affected by $82.9 million of deferred revenue recognized in Q1 2019 for earlier shipments subject to customer acceptance, as well as lower current-period demand, particularly from some large customers.
- Gross margin improved mainly because product-transition costs, including some excess and obsolete inventory charges, declined; lower service margins partly offset the improvement.
- Americas revenue was $400.7 million, EMEA $72.6 million, and Asia-Pacific $49.7 million. International revenue represented 23.4% of total revenue, down from 26.2% a year earlier.
- On February 5, Arista acquired Big Switch Networks for $73.3 million in cash, including $5.3 million of post-combination severance and other costs. The preliminary allocation included $49.0 million of intangible assets and $29.9 million of goodwill. The acquisition did not materially affect Q1 revenue or net income.
- Arista repurchased 1.209 million shares for $227.9 million, at an average $188.61 per share. Approximately $506.0 million remained under the $1.0 billion authorization.
Outlook, risks and contingencies
- Management said COVID-19 had disrupted sales activity, employee operations, suppliers, manufacturing and logistics. Contract manufacturers were operational but not at full capacity, contributing to supply constraints and longer product lead times.
- The company warned that pandemic-related demand disruption and longer sales cycles—especially among campus and enterprise prospects—could cause year-over-year revenue to decline in Q2 2020 and potentially into Q3 or beyond. It also anticipated some near-term strength from cloud-titan customers, which might be more than offset by weaker demand elsewhere. No numerical revenue or earnings guidance was provided.
- Management planned to reduce discretionary spending while maintaining key initiatives; it expected R&D spending could decrease from prior-year levels and sales and marketing expenses to remain relatively flat for the rest of 2020. The pandemic’s full financial impact was described as uncertain and not estimable.
- Large-customer concentration remains important: Microsoft and Facebook represented 23% and 17% of 2019 revenue, respectively, and management expected their shares of 2020 revenue to decline. Large-customer order timing, pricing concessions, competition and sales-cycle variability may affect growth and margins.
- Other highlighted risks include component shortages and supplier dependence, delayed ramp of 400G products due to limited optical-component availability, inventory obsolescence, tariffs, and competitive pricing pressure. Non-cancellable purchase commitments were $352.4 million at quarter-end.
- Management believed cash, cash equivalents, marketable securities and operating cash generation would meet working-capital and growth needs for at least 12 months. Routine legal matters were disclosed; recorded provisions were not significant, though the filing notes litigation outcomes are inherently uncertain and could be material if unfavorable.
Investor verification priorities
- Track Q2 and subsequent revenue, customer demand and sales-cycle trends against the stated possibility of year-over-year declines; the filing provides no numerical guidance.
- Assess whether product demand stabilizes and whether service growth can offset product weakness, including the effect of large-customer concentration and pricing.
- Monitor supply constraints, product lead times, 400G component availability, and the risk that purchase commitments or inventory become excess or obsolete.
- Review liquidity and cash deployment, including marketable-security maturities, acquisition integration, and the pace and remaining authorization of share repurchases.
- Check subsequent filings for updated COVID-19 impacts, Big Switch purchase-accounting adjustments, contingencies, and material legal developments.