Arista Networks, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. Amounts are in U.S. dollars.
Business context
Arista sells Ethernet switching and routing platforms, EOS software, network applications and post-contract customer support. It serves data-center, cloud, campus and adjacent networking markets, through direct sales and channel partners. Microsoft represented 21.5% of FY2020 revenue; no other customer exceeded 10% of revenue. The company acquired network-monitoring provider Big Switch Networks in February and network-detection-and-response provider Awake Security in October 2020.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $2.318 billion | $2.411 billion |
| Gross profit / margin | $1.482 billion / 63.9% | $1.544 billion / 64.1% |
| Operating income / margin | $699.7 million / 30.2% | $805.8 million / 33.4% |
| Net income | $634.6 million | $859.9 million |
| Diluted EPS | $7.99 | $10.63 |
| Cash from operating activities | $735.1 million | $963.0 million |
| Cash, cash equivalents and marketable securities at year-end | $2.873 billion | $2.724 billion |
| Working capital at year-end | $3.069 billion | $2.875 billion |
| Total indebtedness | None | None |
FY2020 product revenue was $1.831 billion, down 9.4%; service revenue was $486.7 million, up 24.9%. Fourth-quarter revenue was $648.5 million, versus $552.5 million in Q4 2019. Q4 net income was $183.0 million, versus $260.7 million; the comparison reflects, in part, a $73.5 million income-tax benefit in Q4 2019.
Changes versus prior comparable period
- Annual revenue declined 3.9%, following 12.1% growth in 2019. Management attributed the decline primarily to lower product sales to large customers, COVID-related supply constraints and the prior-year recognition of $125.1 million in deferred product revenue.
- Service revenue grew as the installed base and initial and renewal support contracts expanded, increasing its share of revenue to 21.0% from 16.2%.
- Gross margin slipped to 63.9% from 64.1%. COVID-related supply-chain costs, product-transition costs and lower revenue weighed on margins; lower sales to highly discounted large customers and improved service margins partly offset the impact.
- Operating expenses rose 5.9% to $782.2 million, with higher R&D, sales and marketing, and acquisition-related costs. Operating income fell 13.2%.
- Cash from operations decreased to $735.1 million, including a $235.3 million inventory build to mitigate supply disruptions. Inventory nearly doubled to $479.7 million.
- Income-tax expense rose to $104.3 million from $2.4 million. The 2019 tax provision was affected by an $86 million benefit from an intra-entity intellectual-property transaction.
Outlook, risks and unusual items
- Outlook: The filing provides no specific numerical FY2021 revenue or earnings guidance. Management said cash and expected operating cash flows should meet working-capital needs and growth plans for at least 12 months, but could not estimate COVID-19’s future financial impact. It plans continued investment in R&D, sales and marketing, and product expansion.
- COVID-19 and supply: Factory and logistics disruption increased lead times and supply costs. Management reported that demand stabilized and improved during 2020, but warned of possible renewed disruption, delayed shipments, excess inventory and margin pressure.
- Customer concentration: Large customers’ purchasing patterns can drive material period-to-period variation. Microsoft and Facebook together accounted for 40% of 2019 revenue; Microsoft represented 21.5% in 2020, while Facebook was below 10%.
- Inventory and commitments: Inventory write-down charges were $50.5 million in 2020, versus $41.2 million in 2019. The company disclosed $421.9 million in purchase commitments with manufacturers and suppliers due within one year, plus $32.1 million of other non-cancellable purchase obligations.
- Acquisitions and capital allocation: Big Switch and Awake Security involved $227.4 million of cash outflows for business combinations, net of cash acquired. The company repurchased $395.2 million of stock during 2020; $338.7 million remained authorized under its $1.0 billion program at year-end.
- Liquidity and obligations: Cash, cash equivalents and marketable securities totaled $2.873 billion; approximately $421 million was held outside the U.S. Lease liabilities were $90.2 million. The filing also reports $92.5 million of gross unrecognized tax benefits, with settlement timing uncertain.
- Contingencies and controls: Management said unresolved legal matters were not considered probable or estimable at filing and were not expected to be material, while noting litigation uncertainty. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether large-customer demand and product revenue recover, and whether revenue concentration changes.
- Whether supply availability, lead times and elevated inventory improve without further write-downs or margin effects.
- Whether service growth and the Big Switch and Awake Security integrations contribute meaningfully to results relative to acquisition and stock-based compensation costs.
- How the unusually low 2019 tax expense affects comparisons, and how uncertain tax positions are ultimately resolved.
- Whether operating cash generation remains strong after working-capital needs, acquisitions and share repurchases.