Arista Networks, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results are compared with the corresponding 2020 periods. Arista supplies cloud networking solutions, including EOS software and switching and routing platforms.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Change | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|---|
| Product revenue | $604.2 | $480.2 | +25.8% | $1,709.8 | $1,312.6 |
| Service revenue | $144.5 | $125.2 | +15.5% | $413.8 | $356.5 |
| Total revenue | $748.7 | $605.4 | +23.7% | $2,123.6 | $1,669.0 |
| Gross profit / margin | $478.6 / 63.9% | $385.0 / 63.6% | +24.3% | $1,358.1 / 64.0% | $1,067.3 / 63.9% |
| Operating income / margin | $233.3 / 31.2% | $188.4 / 31.1% | +23.8% | $659.0 / 31.0% | $505.0 / 30.3% |
| Net income | $224.3 | $168.4 | +33.2% | $601.6 | $451.6 |
| Diluted EPS | $2.81 | $2.12 | +32.5% | $7.54 | $5.68 |
| Operating cash flow | Not separately reported for the quarter | $790.6 | $548.2 |
Balance sheet and liquidity
- At September 30, 2021, cash and cash equivalents were $631.0 million and marketable securities were $2,755.5 million, totaling approximately $3.4 billion. About $493.8 million was held outside the United States.
- Total assets were $5.44 billion; total liabilities were $1.57 billion. The balance sheet reports no debt.
- Current assets were $4.52 billion versus current liabilities of $893.4 million. Deferred revenue totaled $800.4 million, including current and non-current balances.
- Cash, cash equivalents and restricted cash declined by $262.2 million over the nine months, to $635.2 million. Investing cash outflow was $861.4 million, mainly reflecting net purchases of marketable securities and $55.5 million of property and equipment. Financing cash outflow was $190.0 million, including $235.5 million of share repurchases.
Material changes and management commentary
- Revenue growth reflected higher product demand from new and existing customers, including broader acceptance of enterprise and campus products, and growth in initial and renewed support contracts. International revenue reached 25.5% of Q3 revenue, compared with 25.2% a year earlier.
- Gross margin edged higher year over year. Management cited a lower proportion of sales to large customers receiving higher discounts as a benefit, partly offset by supply-chain, product-transition and excess/obsolete inventory costs.
- Operating expenses rose 24.8% in Q3, led by higher R&D and sales and marketing spending, primarily associated with headcount growth. Stock-based compensation was $53.1 million for Q3 and $135.6 million for the nine months.
- Q3 net income benefited from a lower effective tax rate: 4.4%, versus 16.5% a year earlier. The nine-month rates were 9.3% and 16.2%, respectively; the filing attributes the decrease mainly to stock-based compensation tax benefits and a favorable earnings mix by jurisdiction.
- Other income fell to $1.3 million in Q3 and $4.6 million for the nine months, largely because investment yields declined and the prior-year periods included a $9.4 million gain on sale of marketable securities.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said existing cash, cash equivalents, marketable securities and operating cash generation should cover working-capital needs and growth plans for at least the next 12 months. It expects R&D and sales and marketing expenses to increase in absolute dollars.
- COVID-19-related manufacturing and supply-chain constraints, component shortages, longer lead times and higher costs were limiting timely product supply despite improving customer demand. Management expected continued working-capital investment and increased purchase commitments, while warning that fulfillment constraints could hurt future results.
- Non-cancellable purchase commitments were $2.147 billion at September 30, 2021, including $2.110 billion to contract manufacturers and suppliers. These commitments, together with higher inventory and deposits, increase exposure if demand forecasts prove inaccurate or supply conditions change.
- Customer concentration and order timing, competitive pricing, product transitions, supply availability, excess inventory, and the ability to expand in enterprise and campus markets may cause results and margins to vary. No single customer concentration percentage for the current period is provided in the presented filing text.
- WSOU Investments alleged infringement of three patents in a lawsuit concerning certain wireless and switching product features. Arista denied the allegations; trial was set for August 8, 2022. The company said loss was reasonably possible but not probable and that a possible loss range could not be estimated.
- After quarter-end, Arista announced a four-for-one stock split and authorized a new $1.0 billion repurchase program. The existing program had approximately $103.2 million remaining at September 30, 2021.
Important facts for investors to verify
- Whether supply-chain constraints, component availability and the $2.147 billion of purchase commitments translate into shipments, revenue, margin pressure or excess inventory.
- Whether revenue growth and customer demand remain durable, particularly given large-customer concentration, order timing and potential advance ordering.
- How margins and operating expenses develop as pricing competition, supply costs, product transitions and headcount investments evolve.
- Whether deferred revenue and the $1.131 billion of remaining performance obligations convert to revenue as expected; approximately 80% was expected within two years.
- Developments in the WSOU patent litigation and any other material contingencies.
- The effects of the post-quarter stock split and new repurchase authorization on shares outstanding, cash use and per-share comparisons.