Arista Networks, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Arista supplies cloud networking systems, software, and related support services. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $605.4m | $654.4m | $1,669.0m | $1,858.2m |
| Gross profit / margin | $385.0m / 63.6% | $417.3m / 63.8% | $1,067.3m / 63.9% | $1,188.0m / 63.9% |
| Operating income | $188.4m | $228.6m | $505.0m | $629.8m |
| Net income | $168.4m | $208.9m | $451.6m | $599.2m |
| Diluted EPS | $2.12 | $2.59 | $5.68 | $7.38 |
- Q3 product revenue fell 13.5% year over year to $480.2m; service revenue rose 26.0% to $125.2m. For the nine months, product revenue fell 16.6% and service revenue grew 25.3%.
- Operating expenses were $196.6m in Q3 and $562.3m for the nine months. Derived operating margins were approximately 31.1% and 30.3%, respectively.
- Cash provided by operations was $548.2m for the nine months, versus $635.9m in 2019. Cash used in investing was $330.5m and cash used in financing was $358.4m.
- At September 30, cash and cash equivalents were $970.3m and marketable securities were $1,875.6m, totaling about $2.85bn. Current assets were $3.65bn versus current liabilities of $664.8m. The filing reports no debt balance; operating lease liabilities were $74.9m non-current.
Changes and notable items
- Total revenue declined 7.5% in Q3 and 10.2% for the nine-month period. Product sales were affected by lower year-over-year sales to large customers and COVID-related supply constraints. The nine-month comparison also reflects $116.8m of deferred revenue recognized in 2019 following customer acceptance.
- Gross margin was broadly stable. Management cited COVID-related supply-chain costs and relatively fixed overhead on lower revenue as pressures.
- Other income included a $9.4m realized gain on marketable securities in Q3 2020. Lower interest income partly offset this gain; 2019 included gains on private-company investments that did not recur.
- Inventory increased to $438.1m from $243.8m at year-end, as Arista built inventory to mitigate supply disruptions. Nine-month operating cash flow also reflected a $194.0m inventory cash use.
- Arista repurchased $395.2m of stock in the first nine months, including $167.3m in Q3; $338.7m remained authorized under its $1.0bn program.
Outlook, risks, and contingencies
- Management expected a year-over-year revenue decline for full-year 2020, citing COVID-related demand and supply uncertainty and lower expected contributions from major cloud customers. It reported some improvement in cloud-titan demand and stabilization in campus and enterprise sales, but gave no numerical revenue guidance.
- COVID-19 had disrupted customers, sales activity, suppliers, manufacturing, logistics, and employee work arrangements. Arista warned that further disruption could constrain shipments, extend lead times, raise costs, pressure margins, or weaken demand. Management said the full financial impact could not be estimated.
- Customer concentration and order timing remain important risks. Microsoft and Facebook together represented 40% of 2019 revenue; management expected their share to decline in 2020. Competitive pricing pressure and dependence on third-party manufacturers and limited-source components may also affect sales and margins.
- Non-cancellable purchase commitments totaled $501.5m at September 30, including $484.8m to contract manufacturers and suppliers. Remaining performance obligations were approximately $676.4m; about 81% was expected to be recognized over the next two years.
- Arista said existing cash, securities, and operating cash generation should meet working-capital and growth needs for at least 12 months. It had no off-balance-sheet arrangements. Management reported no material recorded provisions for other legal matters, while noting litigation outcomes remain uncertain.
- Arista acquired Big Switch Networks in February for $73.3m cash, including post-combination costs; the acquisition did not materially affect current-period revenue or net income. It completed the Awake Security acquisition on October 7, after quarter-end, to be funded from existing cash.
Most important facts for investors to verify
- Whether the expected 2020 revenue decline and major-customer mix shift materialized, and how demand evolved across cloud, enterprise, and campus markets.
- Whether supply constraints eased, and whether elevated inventory and $501.5m of purchase commitments led to excess or obsolete inventory, delayed shipments, or margin pressure.
- Whether service revenue growth and $676.4m of remaining performance obligations translated into recognized revenue and cash collections.
- The cash-flow and earnings effects of stock repurchases, the Big Switch integration, and the post-quarter Awake Security acquisition.
- Whether competitive pricing, customer concentration, COVID-19 disruption, or unresolved legal matters materially changed subsequent results or risk exposure.