Arista Networks, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with the three months ended March 31, 2020. Arista supplies cloud networking solutions, including switching and routing platforms, EOS software, network applications, and post-contract support. Results are unaudited. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Product revenue | $539.1 | $410.9 | +31.2% |
| Service revenue | $128.4 | $112.1 | +14.5% |
| Total revenue | $667.6 | $523.0 | +27.6% |
| Gross profit / gross margin | $425.3 / 63.7% | $338.3 / 64.7% | Profit +25.7%; margin down 1.0 point |
| Operating income / operating margin | $206.3 / 30.9% | $149.7 / 28.6% | Income +37.8% |
| Net income | $180.4 | $138.4 | +30.3% |
| Diluted EPS | $2.27 | $1.73 | +31.2% |
| Operating cash flow | $254.7 | $194.8 | +$59.8 |
Net margin was 27.0%, compared with 26.5%. The effective tax rate was 13.2%, down from 14.5%, primarily reflecting increased tax benefits from stock-based awards. Interest income fell to $2.0 million from $11.7 million, largely due to lower market rates and portfolio mix.
Balance sheet, cash flow, and liquidity
- Cash and cash equivalents were $843.3 million and marketable securities were $2,184.3 million at March 31, 2021; together, $3,027.7 million. Total cash, cash equivalents, and marketable securities were approximately $3.0 billion, including approximately $440.5 million held outside the United States.
- Total assets were $4,893.7 million; total liabilities were $1,442.4 million. The balance sheet reports no interest-bearing debt.
- Operating cash flow was $254.7 million. Capital expenditures were $5.1 million; operating cash flow less capital expenditures was approximately $249.6 million.
- Cash used in investing activities was $217.9 million, mainly reflecting net purchases of marketable securities. Cash used in financing was $85.8 million, including $101.4 million of share repurchases.
- Cash, cash equivalents, and restricted cash decreased $49.9 million during the quarter. Management said existing liquidity and operating cash generation should cover working capital and growth needs for at least the next 12 months.
- Current deferred revenue was $457.8 million; total deferred revenue was $720.0 million. Remaining performance obligations were approximately $972.2 million, with about 80% expected to be recognized over the next two years and 20% in years three to five.
Material changes and management commentary
- Revenue growth reflected higher demand for switching and routing products from existing customers and broader acceptance of campus and enterprise products. Service revenue grew with the installed base and support renewals.
- Gross margin declined to 63.7%, principally due to product-transition costs, including excess and obsolete inventory charges. Management also cited competitive pricing pressure; a lower share of sales to larger, more heavily discounted customers partly offset the margin pressure.
- Research and development expense rose 17.1% and sales and marketing expense rose 24.4%, primarily with personnel and product-development investment. General and administrative expense fell 15.7%, partly because Q1 2020 included Big Switch acquisition-related costs.
- COVID-19-related component shortages and delays continued to affect supply and timely product delivery. Arista said it was funding additional working capital and purchase commitments and expected to continue investing in working capital to address sourcing delays. Customer demand had stabilized after initial pandemic volatility, with incremental improvement reported.
- No numerical revenue or earnings guidance is provided in the filing text. Management cautioned that the pandemic’s future effects are uncertain and that quarterly results may vary, including because of large-customer order timing, supply constraints, competition, pricing, and product transitions.
Risks, contingencies, and unusual items
- Non-cancellable purchase commitments totaled $747.6 million at March 31, 2021, including $712.7 million to contract manufacturers and suppliers. The filing also notes supply-chain disruption, component concentration, longer lead times, and the risk of excess or obsolete inventory.
- WSOU Investments sued Arista alleging that certain wireless and switching products infringe three patents. Arista denied the allegations and intends to defend itself. Management considered a loss reasonably possible but said any loss or range of loss could not be estimated at this stage.
- The company repurchased $101.4 million of stock during the quarter, or 367,000 shares at an average $275.88 per share. Approximately $237.3 million remained authorized under the program, which expires in April 2022.
- Market interest-rate sensitivity: a hypothetical 100-basis-point increase was estimated to reduce the fair value of available-for-sale fixed-income securities by approximately $21.7 million. The filing also identifies risks from customer concentration, competition, foreign exchange, cybersecurity, trade restrictions, and litigation.
- Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether component shortages, delivery delays, and the $747.6 million purchase-commitment exposure affect future shipments, inventory write-downs, and gross margins.
- How much revenue and future demand depend on large customers, and whether customer order timing or pricing concessions change materially.
- Whether the gross-margin decline from 64.7% to 63.7% persists as product transitions and supply costs evolve.
- Developments in the WSOU patent litigation and any resulting financial or operational exposure.
- Whether management’s stated liquidity coverage and expected recognition of remaining performance obligations remain consistent with subsequent filings.