ANET Arista Networks

Cloud Networking Pace Drives Stellar Revenue and Record EPS

Arista Networks, Inc. (NYSE: ANET), an industry leader in software-driven cloud networking solutions for large data center and computing environments, today announced financial results for its fourth quarter and year ended December 31, 2016.

Fourth Quarter Financial Highlights

• Revenue of $328.0 million, an increase of 33.6% compared to the fourth quarter of 2015, and an increase of 13.0% from the third quarter of 2016.
• GAAP gross margin of 64.1%, compared to GAAP gross margin of 63.6% in the fourth quarter of 2015 and 64.2% in the third quarter of 2016.
• Non-GAAP gross margin of 64.4%, compared to non-GAAP gross margin of 64.0% in the fourth quarter of 2015 and 64.6% in the third quarter of 2016.
• GAAP net income of $58.8 million, or $0.79 per diluted share, compared to GAAP net income of $43.9 million, or $0.60 per diluted share, in the fourth quarter of 2015.
• Non-GAAP net income of $77.5 million, or $1.04 per diluted share, compared to non-GAAP net income of $57.5 million, or $0.80 per diluted share, in the fourth quarter of 2015.

"2016 was indeed a historic year for Arista, as we exceeded one billion dollars in annual sales within two years of becoming a public company,” stated Jayshree Ullal, Arista President and CEO. “Our customers are adopting cloud networking at an unprecedented pace.”

Full Year Financial Highlights

• Revenue of $1.1 billion, an increase of 34.8% compared to fiscal year 2015.
• GAAP gross margin of 64.0%, compared to GAAP gross margin of 64.9% in fiscal year 2015.
• Non-GAAP gross margin of 64.4%, compared to non-GAAP gross margin of 65.3% in fiscal year 2015.
• GAAP net income of $184.2 million, or $2.50 per diluted share, compared to GAAP net income of $121.1 million, or $1.67 per diluted share, in fiscal year 2015.
• Non-GAAP net income of $241.4 million or $3.30 per diluted share, compared to non-GAAP net income of $174.2 million, or $2.44 per diluted share, in fiscal year 2015.

Commenting on the company's financial results for the quarter, Ita Brennan, Arista’s CFO, said, “We are pleased with our outstanding financial performance in the fourth quarter, reflecting strong customer demand and consistent execution.”

Fourth Quarter Company Highlights

• Introduced Arista AlgoMatch™, an innovation that delivers advanced network policy enforcement for modern cloud networking along with the new Arista 7160 Series 25/100GbE programmable platforms. Arista AlgoMatch provides customers with more flexible and scalable solutions for access control, telemetry and secure cloud networking. The Arista 7160 Series utilizes new merchant silicon from Cavium to provide a programmable platform that lowers operational costs by supporting Flexible Profiles to reduce network complexity and delivers native 25GbE interfaces that support the new IEEE standard.

2016 Company Highlights

• Delivered the Arista 7500R Universal Spine and Arista 7280R Universal Leaf platforms.
• Introduced the Arista FlexRoute™ Engine, which provides support for the full internet routing table, in hardware, and scales to more than one million routes on the Arista 7500R Universal Spine and Arista 7280R Universal Leaf platforms.
• Positioned by Gartner, Inc. in the “Leaders” quadrant of the 16 May 2016 Magic Quadrant for Data Center Networking.
• Announced next-generation, real-time telemetry and analytics capabilities that leverage Arista EOS® and CloudVision®.
• Initiated a strategic partnership with Hewlett Packard Enterprise ("HPE") to deliver on a common vision of secure Hybrid IT solutions.
• Unveiled the next phase of Arista EOS (Extensible Operating System) enabling network-wide state with NetDB™.

Financial Outlook

For the first quarter of 2017, we expect:

• Revenue between $320 and $330 million.
• Non-GAAP gross margin between 61% to 64%, and
• Non-GAAP operating margin of approximately 27%.

Guidance for non-GAAP financial measures excludes legal expenses of approximately $12 million associated with the OptumSoft and Cisco litigation, stock-based compensation and other non-recurring expenses. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis (see further explanation below).

Prepared Materials and Conference Call Information

Arista executives will discuss fourth quarter and fiscal 2016 financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial 1-877-201-0168 in the United States or 1-647-788-4901 from outside the US. The Conference ID is 49206884.

The financial results conference call will also be available via live webcast on our investor relations website at investors.arista.com. Shortly after the conclusion of the conference call, a replay of the audio webcast will be available on Arista’s Investor Relations website.

Forward-Looking Statements

This press release contains “forward-looking statements” regarding our future performance, including statements in the section entitled “Financial Outlook,” such as estimates regarding revenue, non-GAAP gross margin and non-GAAP operating margin for the first quarter of fiscal 2017, statements regarding the adoption of cloud networking by our customers at an unprecedented pace, and statements regarding the benefits from the introduction of Arista AlgoMatch™ and the Arista 7160 Series platforms. Forward-looking statements are subject to a number of uncertainties and risks that could cause actual results to differ materially from those anticipated in the forward-looking statements including risks associated with: Arista Networks’ limited operating history; risks associated with Arista Networks’ rapid growth; Arista Networks’ customer concentration; Arista Networks’ dispute with Cisco Systems, Inc. including Arista Networks’ ability to obtain a determination that alternative product implementations are not covered by remedial orders and our ability to manage our manufacturing and supply chain including the sourcing of components on commercially reasonable terms, if at all; risks associated with our customer’s adoption of our redesigned products and services and requests for more favorable terms and conditions; declines in the sales prices of our products and services; changes in customer order patterns or customer mix; increased competition in our products and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; the evolution of the cloud networking market and the adoption by end customers of Arista Networks’ cloud networking solutions; Arista’s dispute with OptumSoft; and general market, political, economic and business conditions. Additional risks and uncertainties that could affect Arista Networks can be found in Arista’s Quarterly Reporting on Form 10-Q filed with the SEC on November 3, 2016, and other filings that the company makes to the SEC from time to time. You can locate these reports through our website at http://investors.arista.com and on the SEC’s website at www.sec.gov. All forward-looking statements in this press release are based on information available to the company as of the date hereof and Arista Networks disclaims any obligation to publicly update or revise any forward-looking statement to reflect events that occur or circumstances that exist after the date on which they were made.

Non-GAAP Financial Measures

The company reports certain non-GAAP financial measures that exclude stock-based compensation expense, expenses associated with the OptumSoft and Cisco litigation, and other non-recurring charges. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that the use of these non-GAAP financial measures is useful to investors as an additional tool to evaluate ongoing operating results and trends. In addition, these measures are the primary indicators management uses as a basis for its planning and forecasting for future periods.

Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP net income, net income per diluted share, gross margin, or operating margin. Non-GAAP financial measures are subject to limitations, and should be read only in conjunction with the company's consolidated financial statements prepared in accordance with GAAP. A description of these non-GAAP financial measures and a reconciliation of the company’s non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.

The Company’s guidance for non-GAAP financial measures excludes stock-based compensation, expenses associated with the OptumSoft and Cisco litigation, and other non-recurring charges. The Company has not reconciled its non-GAAP gross margin or its non-GAAP operating margin guidance to GAAP gross margin or GAAP operating margin, because we do not provide guidance on GAAP gross margin or GAAP operating margin or the various reconciling cash and non-cash items between GAAP gross margin and GAAP operating margin and non-GAAP gross margin and non-GAAP operating margin. Stock-based compensation expense is impacted by the Company’s future hiring and retention needs, as well as the future fair market value of the Company’s common stock, all of which is difficult to predict and subject to constant change. The actual amount of stock-based compensation in the fiscal first quarter of 2017 will have a significant impact on the Company’s GAAP gross margin and GAAP operating margin. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.

About Arista Networks

Arista Networks was founded to pioneer and deliver software-driven cloud networking solutions for large datacenter storage and computing environments. Arista’s award-winning platforms, ranging in Ethernet speeds from 10 to 100 gigabits per second, redefine scalability, agility and resilience. Arista has shipped more than ten million cloud networking ports worldwide with CloudVision and EOS, an advanced network operating system. Committed to open standards, Arista is a founding member of the 25/50GbE consortium. Arista Networks products are available worldwide directly and through partners.

ARISTA, EOS, CloudVision, and AlgoMatch are among the registered and unregistered trademarks of Arista Networks, Inc. in jurisdictions around the world. Other company names or product names may be trademarks of their respective owners.

Additional information and resources can be found at: http://www.arista.com

   

ARISTA NETWORKS, INC.

Consolidated Statements of Income

(Unaudited in thousands, except per share amounts)

  Three Months Ended December 31, Year Ended December 31, 2016   2015 2016   2015 Revenue: Product $ 289,008 $ 217,325 $ 991,337 $ 744,877 Service 38,961   28,121   137,830   92,714   Total revenue 327,969   245,446   1,129,167   837,591   Cost of revenue: Product 108,057 81,142 369,768 263,585 Service 9,757   8,136   36,283   30,446   Total cost of revenue 117,814   89,278   406,051   294,031   Gross profit 210,155 156,168 723,116 543,560 Operating expenses: Research and development 71,398 57,413 273,581 209,448 Sales and marketing 38,321 31,308 130,887 109,084 General and administrative 22,941   18,050   75,239   75,720   Total operating expenses 132,660   106,771   479,707   394,252   Income from operations 77,495 49,397 243,409 149,308 Other income (expense), net: Interest expense (918 ) (746 ) (3,136 ) (3,152 ) Other income (expense), net 560   (109 ) 1,952   (147 ) Total other income (expense), net (358 ) (855 ) (1,184 ) (3,299 ) Income before provision for income taxes 77,137 48,542 242,225 146,009 Provision for income taxes 18,354   4,618   58,036   24,907   Net income $ 58,783   $ 43,924   $ 184,189   $ 121,102   Net income attributable to common stockholders: Basic $ 58,527   $ 43,431   $ 182,965   $ 119,115   Diluted $ 58,542   $ 43,464   $ 183,039   $ 119,264   Net income per share attributable to common stockholders: Basic $ 0.84   $ 0.65   $ 2.66   $ 1.81   Diluted $ 0.79   $ 0.60   $ 2.50   $ 1.67   Weighted-average shares used in computing net income per share attributable to common stockholders: Basic 69,980   67,111   68,771   65,964   Diluted 74,384   72,062   73,222   71,411      

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(Unaudited in thousands, except percentages and per share amounts)

  Three Months Ended December 31, Year Ended December 31, 2016   2015 2016   2015 GAAP gross profit $ 210,155 $ 156,168 $ 723,116 $ 543,560 GAAP gross margin 64.1 % 63.6 % 64.0 % 64.9 % Stock-based compensation expense 1,004   842   3,620   3,048   Non-GAAP gross profit $ 211,159   $ 157,010   $ 726,736   $ 546,608   Non-GAAP gross margin 64.4 % 64.0 % 64.4 % 65.3 %   GAAP income from operations $ 77,495 $ 49,397 $ 243,409 $ 149,308 Stock-based compensation expense 16,324 12,978 59,032 45,303 Litigation expense 12,209   8,956   35,833   41,424   Non-GAAP income from operations $ 106,028   $ 71,331   $ 338,274   $ 236,035   Non-GAAP operating margin 32.3 % 29.1 % 30.0 % 28.2 %   GAAP net income $ 58,783 $ 43,924 $ 184,189 $ 121,102 Stock-based compensation expense 16,324 12,978 59,032 45,303 Litigation expense 12,209 8,956 35,833 41,424 Release of income tax reserve — (968 ) (6,293 ) (7,344 ) Income tax effect on non-GAAP exclusions (9,836 ) (7,424 ) (31,340 ) (26,292 ) Non-GAAP net income $ 77,480   $ 57,466   $ 241,421   $ 174,193           Weighted average shares used in computing GAAP diluted income per share attributable to common stockholders 74,384   72,062   73,222   71,411     GAAP diluted net income per share attributable to common stockholders $ 0.79 $ 0.60 $ 2.50 $ 1.67 Net income attributable to participating securities — 0.01 0.02 0.03 Non-GAAP adjustments to net income 0.25   0.19   0.78   0.74   Non-GAAP diluted net income per share $ 1.04   $ 0.80   $ 3.30   $ 2.44   Summary of Stock-Based Compensation Expense Cost of revenue $ 1,004 $ 842 $ 3,620 $ 3,048 Research and development 8,830 7,171 31,892 25,515 Sales and marketing 4,292 3,316 15,666 11,454 General and administrative 2,198   1,649   7,854   5,286   Total $ 16,324   $ 12,978   $ 59,032   $ 45,303    

ARISTA NETWORKS, INC.

Consolidated Balance Sheets

(Unaudited in thousands)

  December 31, 2016   2015 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 567,923 $ 687,326 Marketable securities 299,910 — Accounts receivable 253,119 144,263 Inventories 236,490 92,129 Prepaid expenses and other current assets 168,684   50,610   Total current assets 1,526,126 974,328 Property and equipment, net 76,961 79,706 Investments 36,136 36,636 Deferred tax assets 70,960 48,429 Other assets 18,824   20,791   TOTAL ASSETS $ 1,729,007   $ 1,159,890   LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 79,457 $ 43,966 Accrued liabilities 90,951 60,971 Deferred revenue 273,350 122,049 Other current liabilities 15,795   8,025   Total current liabilities 459,553 235,011 Income taxes payable 14,498 14,060 Lease financing obligations, non-current 39,593 41,210 Deferred revenue, non-current 99,585 74,759 Other long-term liabilities 7,958   6,698   TOTAL LIABILITIES 621,187   371,738   Commitments and contingencies STOCKHOLDERS’ EQUITY: Common stock 7 7 Additional paid-in capital 674,183 537,904 Retained earnings 435,105 250,916 Accumulated other comprehensive loss (1,475 ) (675 ) TOTAL STOCKHOLDERS’ EQUITY 1,107,820   788,152   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,729,007   $ 1,159,890    

ARISTA NETWORKS, INC.

Consolidated Statements of Cash Flows

(Unaudited in thousands)

  Year Ended December 31, 2016   2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 184,189 $ 121,102 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,749 13,671 Stock-based compensation 59,032 45,303 Deferred income taxes (21,720 ) (24,409 ) Excess tax benefit on stock based-compensation (42,855 ) (37,251 ) Amortization of investment premiums 1,493 1,471 Changes in operating assets and liabilities: Accounts receivable (108,856 ) (47,281 ) Inventories (144,361 ) (14,123 ) Prepaid expenses and other current assets (115,074 ) (7,827 ) Other assets 2,866 (3,087 ) Accounts payable 38,678 9,037 Accrued liabilities 30,629 20,398 Deferred revenue 176,126 90,340 Income taxes payable 42,650 32,018 Other liabilities 8,894   1,171   Net cash provided by operating activities 131,440   200,533   CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from marketable securities 137,855 208,200 Purchases of marketable securities (439,711 ) — Purchases of property and equipment (21,419 ) (19,989 ) Other investing activities (2,500 ) — Change in restricted cash (204 ) (4,041 ) Net cash provided by (used) in investing activities (325,979 ) 184,170   CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of lease financing obligations (1,336 ) (1,086 ) Proceeds from issuance of common stock upon exercising options, net of repurchases 24,855 17,835 Minimum tax withholding paid on behalf of employees for net share settlement (1,100 ) — Proceeds from issuance of common stock, employee stock purchase plan 10,326 9,366 Excess tax benefit on stock-based compensation 42,855 37,251 Issuance costs from initial public offering —   (261 ) Net cash provided by financing activities 75,600   63,105   Effect of exchange rate changes (464 ) (513 ) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (119,403 ) 447,295 CASH AND CASH EQUIVALENTS—Beginning of year 687,326   240,031   CASH AND CASH EQUIVALENTS—End of year $ 567,923   $ 687,326  

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Arista Networks, Inc.Investor Contact:Chuck Elliott, 408-547-5549Business and Investor Developmentelliott@arista.comorCharles Yager, 408-547-5892Product and Investor Advocacycyager@arista.com