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2019.See Note 4 of the accompanying notes for a reconciliation of
the ending balance of cash, cash equivalents and restricted cash as
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended September 30, 2020
or
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from
to
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Commission File Number:
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001-36468
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Arista Networks, Inc.
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(Exact Name of Registrant as Specified in its Charter)
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Delaware |
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20-1751121 |
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(State or Other Jurisdiction of Incorporation or
Organization) |
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(I.R.S. Employer Identification No.) |
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5453 Great America Parkway |
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Santa Clara |
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California |
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95054 |
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(Address of principal executive offices)
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(Zip Code)
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(408)
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547-5500
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(Registrant’s telephone number, including area code) |
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Not Applicable |
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(Former name, former address and former fiscal year, if changed
since last report) |
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, $0.0001 par value |
ANET |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days. Yes x No o
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such
files). Yes x No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
☐ |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ý
The number of shares outstanding of the registrant’s Common Stock,
$0.0001 par value, as of October 27, 2020 was
75,661,464.
ARISTA NETWORKS, INC.
TABLE OF CONTENTS
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Page |
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PART I. FINANCIAL INFORMATION
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II. OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ARISTA NETWORKS, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except par value)
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September 30, 2020 |
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December 31, 2019 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
970,349 |
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$ |
1,111,286 |
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Marketable securities |
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1,875,552 |
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1,613,082 |
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Accounts receivable, net of rebates and allowances of $4,326 and
$6,160, respectively
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300,217 |
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391,987 |
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Inventories |
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438,102 |
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243,825 |
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Prepaid expenses and other current assets |
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69,647 |
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111,456 |
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Total current assets |
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3,653,867 |
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3,471,636 |
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Property and equipment, net |
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32,670 |
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39,273 |
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Acquisition-related intangible assets, net |
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77,752 |
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45,235 |
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Goodwill |
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84,968 |
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54,855 |
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Investments |
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4,150 |
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4,150 |
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Operating lease right-of-use assets |
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79,929 |
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87,770 |
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Deferred tax assets |
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443,229 |
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452,025 |
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Other assets |
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22,807 |
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30,346 |
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TOTAL ASSETS |
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$ |
4,399,372 |
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$ |
4,185,290 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
163,102 |
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$ |
92,105 |
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Accrued liabilities |
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110,348 |
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140,249 |
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Deferred revenue |
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321,290 |
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312,668 |
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Other current liabilities |
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70,043 |
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52,052 |
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Total current liabilities |
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664,783 |
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597,074 |
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Income taxes payable |
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47,918 |
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55,485 |
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Operating lease liabilities, non-current |
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74,903 |
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83,022 |
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Deferred revenue, non-current |
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241,014 |
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262,620 |
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Deferred tax liabilities, non-current |
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247,712 |
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254,710 |
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Other long-term liabilities |
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39,165 |
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37,693 |
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TOTAL LIABILITIES |
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1,315,495 |
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1,290,604 |
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Commitments and contingencies (Note 6) |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock, $0.0001 par value—100,000 shares authorized and no
shares issued and outstanding as of September 30, 2020 and December
31, 2019
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— |
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— |
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Common stock, $0.0001 par value—1,000,000 shares authorized as of
September 30, 2020 and December 31, 2019; 75,632 and 76,389 shares
issued and outstanding as of September 30, 2020 and December 31,
2019
|
|
8 |
|
8 |
|
|
Additional paid-in capital |
|
1,240,147 |
|
1,106,305 |
|
|
Retained earnings |
|
1,844,656 |
|
1,788,230 |
|
|
Accumulated other comprehensive income (loss) |
|
(934) |
|
143 |
|
|
TOTAL STOCKHOLDERS’ EQUITY |
|
3,083,877 |
|
|
2,894,686 |
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
4,399,372 |
|
|
$ |
4,185,290 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
Product |
|
$ |
480,242 |
|
|
$ |
555,066 |
|
|
$ |
1,312,561 |
|
|
$ |
1,573,652 |
|
|
Service |
|
125,189 |
|
|
99,349 |
|
|
356,469 |
|
|
284,508 |
|
|
Total revenue |
|
605,431 |
|
|
654,415 |
|
|
1,669,030 |
|
|
1,858,160 |
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
Product |
|
199,465 |
|
|
218,220 |
|
|
539,526 |
|
|
616,906 |
|
|
Service |
|
21,004 |
|
|
18,921 |
|
|
62,202 |
|
|
53,219 |
|
|
Total cost of revenue |
|
220,469 |
|
|
237,141 |
|
|
601,728 |
|
|
670,125 |
|
|
Gross profit |
|
384,962 |
|
|
417,274 |
|
|
1,067,302 |
|
|
1,188,035 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Research and development |
|
128,049 |
|
|
118,732 |
|
|
352,747 |
|
|
352,696 |
|
|
Sales and marketing |
|
53,372 |
|
|
55,279 |
|
|
161,695 |
|
|
159,372 |
|
|
General and administrative |
|
15,146 |
|
|
14,657 |
|
|
47,814 |
|
|
46,182 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
196,567 |
|
|
188,668 |
|
|
562,256 |
|
|
558,250 |
|
|
Income from operations |
|
188,395 |
|
|
228,606 |
|
|
505,046 |
|
|
629,785 |
|
|
Other income, net |
|
13,224 |
|
|
19,169 |
|
|
33,637 |
|
|
45,313 |
|
|
Income before income taxes |
|
201,619 |
|
|
247,775 |
|
|
538,683 |
|
|
675,098 |
|
|
Provision for income taxes |
|
33,244 |
|
|
38,880 |
|
|
87,084 |
|
|
75,923 |
|
|
Net income |
|
$ |
168,375 |
|
|
$ |
208,895 |
|
|
$ |
451,599 |
|
|
$ |
599,175 |
|
|
Net income attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
168,375 |
|
|
$ |
208,799 |
|
|
$ |
451,599 |
|
|
$ |
598,861 |
|
|
Diluted |
|
$ |
168,375 |
|
|
$ |
208,804 |
|
|
$ |
451,599 |
|
|
$ |
598,880 |
|
|
Net income per share attributable to common
stockholders: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.22 |
|
|
$ |
2.73 |
|
|
$ |
5.94 |
|
|
$ |
7.85 |
|
|
Diluted |
|
$ |
2.12 |
|
|
$ |
2.59 |
|
|
$ |
5.68 |
|
|
$ |
7.38 |
|
|
Weighted-average shares used in computing net income per share
attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
Basic |
|
75,999 |
|
|
76,426 |
|
|
76,024 |
|
|
76,301 |
|
|
Diluted |
|
79,313 |
|
|
80,753 |
|
|
79,519 |
|
|
81,104 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive
Income
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Net income |
|
$ |
168,375 |
|
|
$ |
208,895 |
|
|
$ |
451,599 |
|
|
$ |
599,175 |
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
1,065 |
|
|
(1,730) |
|
|
(481) |
|
|
(1,767) |
|
|
Available-for-sale
investments: |
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on available-for-sale
securities |
|
(390) |
|
|
(104) |
|
|
8,836 |
|
|
5,962 |
|
|
Less: reclassification adjustment for net (gains) included in net
income |
|
(9,432) |
|
|
— |
|
|
(9,432) |
|
|
— |
|
|
Net change |
|
(9,822) |
|
|
(104) |
|
|
(596) |
|
|
5,962 |
|
|
Other comprehensive income (loss) |
|
(8,757) |
|
|
(1,834) |
|
|
(1,077) |
|
|
4,195 |
|
|
Comprehensive income |
|
$ |
159,618 |
|
|
$ |
207,061 |
|
|
$ |
450,522 |
|
|
$ |
603,370 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of
Stockholders’
Equity
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020 |
|
Nine Months Ended September 30, 2020 |
|
|
Common Stock |
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’ Equity |
|
Common Stock |
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’
Equity |
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
|
Balance at beginning of period |
|
75,964 |
|
|
$ |
8 |
|
|
$ |
1,185,093 |
|
|
$ |
1,843,559 |
|
|
$ |
7,823 |
|
|
$ |
3,036,483 |
|
|
76,389 |
|
|
$ |
8 |
|
|
$ |
1,106,305 |
|
|
$ |
1,788,230 |
|
|
$ |
143 |
|
|
$ |
2,894,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
168,375 |
|
|
— |
|
|
168,375 |
|
|
— |
|
|
— |
|
|
— |
|
|
451,599 |
|
|
— |
|
|
451,599 |
|
|
Other comprehensive loss, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8,757) |
|
|
(8,757) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,077) |
|
|
(1,077) |
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
36,469 |
|
|
— |
|
|
— |
|
|
36,469 |
|
|
— |
|
|
— |
|
|
96,947 |
|
|
— |
|
|
— |
|
|
96,947 |
|
|
Issuance of common stock in connection with employee equity
incentive plans |
|
480 |
|
|
— |
|
|
20,476 |
|
|
— |
|
|
— |
|
|
20,476 |
|
|
1,281 |
|
|
— |
|
|
42,704 |
|
|
|
|
|
|
42,704 |
|
|
Tax withholding paid for net share settlement of equity
awards |
|
(9) |
|
|
— |
|
|
(1,932) |
|
|
— |
|
|
— |
|
|
(1,932) |
|
|
(26) |
|
|
— |
|
|
(5,932) |
|
|
— |
|
|
— |
|
|
(5,932) |
|
|
Vesting of early-exercised stock options |
|
— |
|
|
— |
|
|
41 |
|
|
— |
|
|
— |
|
|
41 |
|
|
— |
|
|
— |
|
|
123 |
|
|
— |
|
|
— |
|
|
123 |
|
|
Repurchase of common stock |
|
(803) |
|
|
— |
|
|
— |
|
|
(167,278) |
|
|
— |
|
|
(167,278) |
|
|
(2,012) |
|
|
— |
|
|
— |
|
|
(395,173) |
|
|
— |
|
|
(395,173) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
75,632 |
|
|
$ |
8 |
|
|
$ |
1,240,147 |
|
|
$ |
1,844,656 |
|
|
$ |
(934) |
|
|
$ |
3,083,877 |
|
|
75,632 |
|
|
$ |
8 |
|
|
$ |
1,240,147 |
|
|
$ |
1,844,656 |
|
|
$ |
(934) |
|
|
$ |
3,083,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019 |
|
Nine Months Ended September 30, 2019 |
|
|
Common Stock |
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’
Equity |
|
Common Stock |
|
Additional
Paid-In Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’
Equity |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
Balance at beginning of period |
|
76,555 |
|
|
$ |
8 |
|
|
$ |
1,038,740 |
|
|
$ |
1,484,777 |
|
|
$ |
2,035 |
|
|
$ |
2,525,560 |
|
|
75,668 |
|
|
$ |
8 |
|
|
$ |
956,572 |
|
|
$ |
1,190,803 |
|
|
$ |
(3,994) |
|
|
$ |
2,143,389 |
|
|
Cumulative-effect adjustment to beginning
balance(1)
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,702 |
|
|
— |
|
|
3,702 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
208,895 |
|
|
— |
|
|
208,895 |
|
|
— |
|
|
— |
|
|
— |
|
|
599,175 |
|
|
— |
|
|
599,175 |
|
|
Other comprehensive income (loss), net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,834) |
|
|
(1,834) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,195 |
|
|
4,195 |
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
26,257 |
|
|
— |
|
|
— |
|
|
26,257 |
|
|
— |
|
|
— |
|
|
74,845 |
|
|
— |
|
|
— |
|
|
74,845 |
|
|
Issuance of common stock in connection with employee equity
incentive plans |
|
336 |
|
|
— |
|
|
14,073 |
|
|
— |
|
|
— |
|
|
14,073 |
|
|
1,648 |
|
|
— |
|
|
52,177 |
|
|
|
|
|
|
52,177 |
|
|
Tax withholding paid for net share settlement of equity
awards |
|
(11) |
|
|
— |
|
|
(2,407) |
|
|
— |
|
|
— |
|
|
(2,407) |
|
|
(29) |
|
|
— |
|
|
(7,069) |
|
|
— |
|
|
— |
|
|
(7,069) |
|
|
Vesting of early-exercised stock options |
|
— |
|
|
— |
|
|
69 |
|
|
— |
|
|
— |
|
|
69 |
|
|
— |
|
|
— |
|
|
207 |
|
|
— |
|
|
— |
|
|
207 |
|
|
Repurchase of common stock |
|
(512) |
|
|
— |
|
|
— |
|
|
(114,609) |
|
|
— |
|
|
(114,609) |
|
|
(919) |
|
|
— |
|
|
— |
|
|
(214,617) |
|
|
— |
|
|
(214,617) |
|
|
Balance at end of period |
|
76,368 |
|
|
$ |
8 |
|
|
$ |
1,076,732 |
|
|
$ |
1,579,063 |
|
|
$ |
201 |
|
|
$ |
2,656,004 |
|
|
76,368 |
|
|
$ |
8 |
|
|
$ |
1,076,732 |
|
|
$ |
1,579,063 |
|
|
$ |
201 |
|
|
$ |
2,656,004 |
|
|
_________________________________________ |
|
(1) On January 1, 2019, we adopted Accounting Standard Codification
Topic 842 - Leases (“ASC 842”), which resulted in a
cumulative-effect adjustment to the beginning balance of Retained
Earnings for 2019. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
Net income |
|
$ |
451,599 |
|
|
$ |
599,175 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
Depreciation, amortization and other |
|
31,975 |
|
|
24,948 |
|
|
Stock-based compensation |
|
96,947 |
|
|
74,845 |
|
|
Noncash lease expense |
|
12,606 |
|
|
12,007 |
|
|
Deferred income taxes |
|
3,261 |
|
|
10,945 |
|
|
Gain on sale of marketable securities |
|
(9,432) |
|
|
— |
|
|
Gain on investments in privately-held companies |
|
— |
|
|
(5,427) |
|
|
Amortization (accretion) of investment premiums
(discounts) |
|
6,030 |
|
|
(6,032) |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable, net |
|
98,271 |
|
|
(115,475) |
|
|
Inventories |
|
(193,996) |
|
|
24,951 |
|
|
Prepaid expenses and other current assets |
|
38,654 |
|
|
59,388 |
|
|
Other assets |
|
7,850 |
|
|
(7,009) |
|
|
Accounts payable |
|
71,803 |
|
|
(14,361) |
|
|
Accrued liabilities |
|
(29,811) |
|
|
5,731 |
|
|
|
|
|
|
|
Deferred revenue |
|
(34,449) |
|
|
(58,216) |
|
|
Income taxes payable |
|
(1,667) |
|
|
29,808 |
|
|
Other liabilities |
|
(1,451) |
|
|
595 |
|
|
Net cash provided by operating activities |
|
548,190 |
|
|
635,873 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
Proceeds from maturities of marketable securities |
|
1,183,601 |
|
|
806,519 |
|
|
Purchases of marketable securities |
|
(2,216,436) |
|
|
(840,098) |
|
|
Business acquisitions, net of cash acquired |
|
(66,317) |
|
|
(1,365) |
|
|
Purchases of property and equipment |
|
(7,701) |
|
|
(13,319) |
|
|
Proceeds from investments in privately-held companies |
|
3,399 |
|
|
28,220 |
|
|
Proceeds from sale of marketable securities |
|
772,978 |
|
|
— |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
(330,476) |
|
|
(20,043) |
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under equity
plans |
|
42,704 |
|
|
52,177 |
|
|
Tax withholding paid on behalf of employees for net share
settlement |
|
(5,932) |
|
|
(7,069) |
|
|
Repurchase of common stock |
|
(395,173) |
|
|
(214,617) |
|
|
Net cash provided used in financing activities |
|
(358,401) |
|
|
(169,509) |
|
|
Effect of exchange rate changes |
|
(246) |
|
|
(994) |
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH |
|
(140,933) |
|
|
445,327 |
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of
period |
|
1,115,515 |
|
|
654,164 |
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period
(1)
|
|
$ |
974,582 |
|
|
$ |
1,099,491 |
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
INFORMATION: |
|
Right-of-use assets recognized upon the adoption of ASC
842 |
|
$ |
— |
|
|
$ |
93,207 |
|
|
Right-of-use assets obtained in exchange for new operating lease
liabilities |
|
5,031 |
|
|
10,948 |
|
|
Property and equipment included in accounts payable and accrued
liabilities |
|
456 |
|
|
684 |
|
|
|
|
|
|
|
___________________________________________________ |
|
|
|
|
|
(1) See Note 4 of the accompanying notes for a reconciliation of
the ending balance of cash, cash equivalents and restricted cash as
shown in these condensed consolidated statements of cash
flows.
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARISTA NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Summary of Significant
Accounting Policies
Organization
Arista Networks, Inc. (together with our
subsidiaries, “we,” “our,” "Arista," "Company" or “us”) is a
supplier of cloud networking solutions that use software
innovations to address the needs of large-scale Internet companies,
cloud service providers and next-generation enterprise. Our cloud
networking solutions consist of our Extensible Operating System
("EOS"), a set of network applications and our
1/2.5/5/10/25/40/50/100/400 Gigabit Ethernet switching and routing
platforms. We are incorporated in the state of Delaware. Our
corporate headquarters are located in Santa Clara, California, and
we have wholly-owned subsidiaries throughout the world, including
North America, Europe, Asia and Australia.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed
consolidated financial statements include the accounts of Arista
Networks, Inc. and its wholly owned subsidiaries and have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) and the requirements of the U.S. Securities and
Exchange Commission (the “SEC”) for interim reporting. As permitted
under those rules, certain footnotes or other financial information
that are normally required by GAAP can be condensed or omitted. In
management’s opinion, the unaudited condensed consolidated
financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all
adjustments, which include only normal recurring adjustments,
necessary for the fair presentation of our financial information.
The results for the three and nine months ended September 30,
2020, are not necessarily indicative of the results expected for
the full fiscal year. The condensed consolidated balance sheet as
of December 31, 2019 has been derived from the audited
consolidated financial statements at that date but does not include
all of the information and notes required by GAAP for complete
financial statements. All significant inter-company accounts and
transactions have been eliminated.
Our condensed consolidated financial
statements and related financial information in this Quarterly
Report on Form 10-Q should be read in conjunction with the audited
consolidated financial statements and related footnotes included in
our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019, filed with the SEC on February
14, 2020.
Use of Estimates
The preparation of the accompanying
condensed consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect the
amounts reported and disclosed in the consolidated financial
statements and accompanying notes. Those estimates and assumptions
include, but are not limited to, revenue recognition and deferred
revenue; allowance for doubtful accounts, sales rebates and return
reserves; valuation of goodwill and acquisition-related intangible
assets, accounting for income taxes, including the valuation
allowance on deferred tax assets and reserves for uncertain tax
positions; estimate of useful lives of long-lived assets including
intangible assets; valuation of inventory and contract
manufacturer/supplier liabilities; and the recognition and
measurement of contingent liabilities. We evaluate our estimates
and assumptions based on historical experience and other factors
and adjust those estimates and assumptions when facts and
circumstances dictate. Actual results could differ materially from
those estimates.
Risks and Uncertainties
The global coronavirus ("COVID-19")
pandemic and resulting mitigation efforts by governments around the
world to contain or slow its spread have negatively impacted
the global economy, disrupted business, sales activities, global
supply chains and workforce participation, including our own, and
created significant volatility and disruption of financial
markets.
Our contract manufacturers and suppliers
have experienced delays in the production and export of their
products, which have negatively impacted our supply chain and could
negatively impact our business in the future. In addition, we
expect that COVID-19 related disruptions may have a negative impact
on demand from our customers in future periods and contribute to an
expected year-over-year decline in revenues for the year ending
December 31, 2020. However, the extent of the impact of
COVID-19 on our operational and financial performance,
including our ability to execute our business strategies and
initiatives in the expected time frame, and the impact of any
initiatives and programs we may undertake to address financial and
operational challenges, will depend on future developments,
including the duration and spread of the pandemic and related
mitigation efforts, as well as restrictions on travel and
transport, all of which are uncertain and cannot be predicted.
Management is actively monitoring the impact of the pandemic on the
Company's financial condition, liquidity, operations, suppliers,
industry, and workforce. As of the date of issuance of these
condensed consolidated financial statements, the extent to which
the COVID-19 pandemic may materially impact the Company's financial
condition, liquidity, or results of operations is
uncertain.
Recently Adopted Accounting Pronouncements
Credit Losses of Financial Instruments
In June 2016, the FASB issued ASU
2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments,
to replace the incurred loss impairment methodology under current
GAAP with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. The
standard requires a financial asset measured at amortized cost
basis to be presented at the net amount expected to be collected.
For trade receivables, we are required to estimate lifetime
expected credit losses. For available-for-sale debt securities, we
are required to recognize an allowance for credit losses rather
than a reduction to the carrying value of the asset. We adopted the
new guidance in our first quarter of 2020 under a modified
retrospective approach, and there was no material impact to our
financial statements upon adoption. In addition, we do not
anticipate that it will have a material impact on our consolidated
statement of operations or consolidated statements of cash flows
going forward.
2. Business Combinations
On February 5, 2020, the Company completed
its acquisition of Big Switch Networks, Inc. (“Big Switch”), a
network monitoring and software-defined networking pioneer
headquartered in Santa Clara, California. With the acquisition of
Big Switch, we expect to expand our data center networking
solutions and further strengthen our network monitoring and
observability suite delivered through Arista’s software platform
CloudVision and DANZ (DataANalyZer) capabilities.
We paid an aggregate of $73.3 million in
cash for the acquisition, of which $5.3 million in severance and
other costs was accounted for as post-combination expense and was
excluded from the purchase consideration. We also incurred certain
acquisition-related expenses and restructuring costs of $6.6
million, which primarily consisted of retention bonuses to
continuing employees, professional and consulting fees, and
facilities restructuring costs. The following table summarizes the
purchase consideration of $68.0 million, and the preliminary
purchase price allocation based on the estimated fair value of the
assets acquired and liabilities assumed at the acquisition date (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation |
|
|
|
|
Tangible assets |
|
$ |
13,376 |
|
|
Liabilities |
|
(24,346) |
|
|
Intangible assets |
|
49,040 |
|
|
Goodwill |
|
29,926 |
|
|
Net assets acquired |
|
$ |
67,996 |
|
We continue the process of identifying and
evaluating pending escrow claims related to tax and other
liabilities. Accordingly, the preliminary values reflected in the
table above are subject to potential measurement period
adjustments.
The acquired intangible assets are
amortized on a straight-line basis over their estimated useful
lives as we believe this method most closely reflects the pattern
in which the economic benefits of the assets will be
consumed. The following table shows the valuation of the
intangible assets acquired (in thousands) along with their
estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Date Fair Value |
|
Estimated Useful Life |
|
Developed technology |
|
$ |
31,040 |
|
|
5 years |
|
Customer relationships |
|
13,150 |
|
|
7 years |
|
Non-compete agreements |
|
4,060 |
|
|
2 years |
|
Trade name |
|
790 |
|
|
1 year |
|
|
|
|
|
|
Total
intangible assets acquired |
|
$ |
49,040 |
|
|
|
Goodwill of $29.9 million is primarily
attributable to the expected synergies created by incorporating
the
solutions
of the acquired businesses into our technology platform, and the
value of the assembled workforce. Goodwill is not deductible for
income taxes purposes. In addition, the acquisition of Big Switch
did not have a material impact on our revenue and net income for
the current period, and therefore pro forma financial information
has not been presented.
3. Fair Value Measurements
Assets and liabilities recorded at fair
value on a recurring basis on the accompanying condensed
consolidated balance sheets are categorized based upon the level of
judgment associated with the inputs used to measure their fair
value. We use a fair value hierarchy to measure fair value,
maximizing the use of observable inputs and minimizing the use of
unobservable inputs. The three-tiers of the fair value hierarchy
are as follows:
Level I - Inputs are unadjusted, quoted
prices in active markets for identical assets or liabilities at the
measurement date;
Level II - Inputs are observable,
unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar
assets or liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the related assets
or liabilities; and
Level III - Unobservable inputs that are
supported by little or no market data for the related assets or
liabilities and typically reflect management’s estimate of
assumptions that market participants would use in pricing the asset
or liability.
We measure and report our cash equivalents,
restricted cash, and available-for-sale marketable securities at
fair value on a recurring basis. The following tables summarize the
amortized costs, unrealized gains and losses and fair value of
these financial assets by significant investment category and their
level within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|
Amortized Cost |
|
Unrealized Gains |
|
Unrealized Losses |
|
Fair Value |
|
Level I |
|
Level II |
|
Level III |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
478,702 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
478,702 |
|
|
$ |
478,702 |
|
|
$ |
— |
|
|
$ |
— |
|
|
U.S. Treasuries |
|
73,656 |
|
|
— |
|
|
— |
|
|
73,656 |
|
|
73,656 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552,358 |
|
|
— |
|
|
— |
|
|
552,358 |
|
|
552,358 |
|
|
— |
|
|
— |
|
|
Marketable Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
51,926 |
|
|
— |
|
|
— |
|
|
51,926 |
|
|
— |
|
|
51,926 |
|
|
— |
|
|
Certificate of deposits(1)
|
|
21,218 |
|
|
— |
|
|
— |
|
|
21,218 |
|
|
— |
|
|
21,218 |
|
|
— |
|
|
U.S. government notes |
|
522,044 |
|
|
412 |
|
|
(6) |
|
|
522,450 |
|
|
522,450 |
|
|
— |
|
|
— |
|
|
Corporate bonds |
|
824,132 |
|
|
2,079 |
|
|
(401) |
|
|
825,810 |
|
|
— |
|
|
825,810 |
|
|
— |
|
|
Agency securities |
|
453,773 |
|
|
387 |
|
|
(12) |
|
|
454,148 |
|
|
— |
|
|
454,148 |
|
|
— |
|
|
|
|
1,873,093 |
|
|
2,878 |
|
|
(419) |
|
|
1,875,552 |
|
|
522,450 |
|
|
1,353,102 |
|
|
— |
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds - restricted |
|
4,233 |
|
|
— |
|
|
— |
|
|
4,233 |
|
|
4,233 |
|
|
— |
|
|
— |
|
|
Total Financial Assets |
|
$ |
2,429,684 |
|
|
$ |
2,878 |
|
|
$ |
(419) |
|
|
$ |
2,432,143 |
|
|
$ |
1,079,041 |
|
|
$ |
1,353,102 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
Amortized Cost |
|
Unrealized Gains |
|
Unrealized Losses |
|
Fair Value |
|
Level I |
|
Level II |
|
Level III |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
562,580 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
562,580 |
|
|
$ |
562,580 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Certificate of deposits(1)
|
|
4,001 |
|
|
— |
|
|
— |
|
|
4,001 |
|
|
— |
|
|
4,001 |
|
|
— |
|
|
|
|
566,581 |
|
|
— |
|
|
— |
|
|
566,581 |
|
|
562,580 |
|
|
4,001 |
|
|
— |
|
|
Marketable Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
66,717 |
|
|
— |
|
|
— |
|
|
66,717 |
|
|
— |
|
|
66,717 |
|
|
— |
|
|
Certificate of deposits(1)
|
|
3,000 |
|
|
— |
|
|
— |
|
|
3,000 |
|
|
— |
|
|
3,000 |
|
|
— |
|
|
U.S. government notes |
|
518,884 |
|
|
414 |
|
|
(20) |
|
|
519,278 |
|
|
519,278 |
|
|
— |
|
|
— |
|
|
Corporate bonds |
|
787,741 |
|
|
2,392 |
|
|
(73) |
|
|
790,060 |
|
|
— |
|
|
790,060 |
|
|
— |
|
|
Agency securities |
|
233,491 |
|
|
577 |
|
|
(41) |
|
|
234,027 |
|
|
— |
|
|
234,027 |
|
|
— |
|
|
|
|
1,609,833 |
|
|
3,383 |
|
|
(134) |
|
|
1,613,082 |
|
|
519,278 |
|
|
1,093,804 |
|
|
— |
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds - restricted |
|
4,229 |
|
|
— |
|
|
— |
|
|
4,229 |
|
|
4,229 |
|
|
— |
|
|
— |
|
|
Total Financial Assets
|
|
$ |
2,180,643 |
|
|
$ |
3,383 |
|
|
$ |
(134) |
|
|
$ |
2,183,892 |
|
|
$ |
1,086,087 |
|
|
$ |
1,097,805 |
|
|
$ |
— |
|
______________________
(1) As of September 30, 2020 and December 31, 2019, all
of our certificates of deposits were domestic
deposits.
The unrealized losses associated with our
marketable securities were immaterial as of September 30, 2020, and
December 31, 2019. As of September 30, 2020 and December 31, 2019,
we did not have any marketable securities that have been in a
continuous unrealized loss position for more than twelve months. We
invest in marketable securities that have maximum maturities of up
to two years and are generally deemed to be low risk based on their
credit ratings from the major rating agencies. We did not recognize
any credit losses or non-credit-related impairments related to our
available-for-sale marketable securities during the three and nine
months ended September 30, 2020.
As of September 30, 2020, the
contractual maturities of our investments did not exceed 24 months.
The fair values of available-for-sale marketable securities, by
remaining contractual maturity, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
Due in 1 year or less |
|
$ |
1,161,664 |
|
|
Due in over 1 year through 2 years |
|
713,888 |
|
|
Total marketable
securities
|
|
$ |
1,875,552 |
|
The weighted-average remaining duration of
our current marketable securities is approximately 0.9 years as
of September 30, 2020. As we view these securities as
available to support current operations, we classify securities
with maturities beyond 12 months as current assets under the
caption marketable securities on the accompanying unaudited
condensed consolidated balance sheets.
4. Financial Statements Details
Cash, Cash Equivalents and Restricted Cash
The following table is a reconciliation of
cash, cash equivalents and restricted cash reported within the
accompanying condensed consolidated balance sheets that sum to the
total of the same such amounts shown in the accompanying condensed
consolidated statements of cash flows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
September 30, 2019 |
|
Cash and cash equivalents |
|
$ |
970,349 |
|
|
$ |
1,095,265 |
|
|
Restricted cash included in Other assets |
|
4,233 |
|
|
4,226 |
|
|
Total cash, cash equivalents and restricted
cash |
|
$ |
974,582 |
|
|
$ |
1,099,491 |
|
Restricted cash, which was included in
"Other assets" on the accompanying condensed consolidated balance
sheets as of September 30, 2020 and September 30, 2019,
primarily consisted of $4.0 million pledged as collateral
representing a security deposit required for a facility
lease.
Accounts Receivable, Net
Accounts receivable, net consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Accounts receivable |
|
$ |
304,543 |
|
|
$ |
398,147 |
|
|
Allowance for doubtful accounts |
|
(541) |
|
|
(638) |
|
|
Product sales rebate and returns reserve |
|
(3,785) |
|
|
(5,522) |
|
|
Accounts receivable, net |
|
$ |
300,217 |
|
|
$ |
391,987 |
|
Inventories
Inventories consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Raw materials |
|
$ |
223,423 |
|
|
$ |
96,712 |
|
|
Finished goods |
|
214,679 |
|
|
147,113 |
|
|
Total inventories |
|
$ |
438,102 |
|
|
$ |
243,825 |
|
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Prepaid income taxes |
|
$ |
564 |
|
|
$ |
20,153 |
|
|
Inventory deposit |
|
10,024 |
|
|
13,716 |
|
|
Other current assets |
|
43,311 |
|
|
64,464 |
|
|
Other prepaid expenses and deposits |
|
15,748 |
|
|
13,123 |
|
|
Total prepaid expenses and other current
assets |
|
$ |
69,647 |
|
|
$ |
111,456 |
|
Property and Equipment, Net
Property
and equipment, net consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Equipment and machinery |
|
$ |
67,978 |
|
|
$ |
64,748 |
|
|
Computer hardware and software |
|
39,335 |
|
|
36,627 |
|
|
Leasehold improvements
|
|
31,309 |
|
|
31,235 |
|
|
Furniture and fixtures |
|
3,754 |
|
|
3,774 |
|
|
|
|
|
|
|
Construction-in-process |
|
308 |
|
|
265 |
|
|
Property and equipment, gross |
|
142,684 |
|
|
136,649 |
|
|
Less: accumulated depreciation |
|
(110,014) |
|
|
(97,376) |
|
|
Property and equipment, net |
|
$ |
32,670 |
|
|
$ |
39,273 |
|
Depreciation expense was $4.9 million and
$4.8 million for the three months ended September 30, 2020 and
2019, respectively, and $15.1 million and $14.3 million for
the nine months ended September 30,
2020 and 2019, respectively.
Accrued Liabilities
Accrued liabilities consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Accrued payroll related costs |
|
$ |
44,920 |
|
|
$ |
80,133 |
|
|
Accrued manufacturing costs |
|
30,154 |
|
|
31,920 |
|
|
Accrued product development costs |
|
16,983 |
|
|
11,410 |
|
|
Accrued professional fees |
|
5,152 |
|
|
6,335 |
|
|
Accrued warranty costs |
|
6,732 |
|
|
6,742 |
|
|
Accrued taxes |
|
1,866 |
|
|
1,716 |
|
|
Other |
|
4,541 |
|
|
1,993 |
|
|
Total accrued liabilities |
|
$ |
110,348 |
|
|
$ |
140,249 |
|
Warranty Accrual
The following table summarizes the activity
related to our accrued liability for estimated future warranty
costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
Warranty accrual, beginning of period |
|
$ |
6,742 |
|
|
$ |
5,362 |
|
|
Liabilities accrued for warranties issued during the
period |
|
4,507 |
|
|
3,887 |
|
|
Warranty costs incurred during the period |
|
(4,517) |
|
|
(3,841) |
|
|
Warranty accrual, end of period |
|
$ |
6,732 |
|
|
$ |
5,408 |
|
Contract Balances
The following table summarizes the balances
of our contract assets included in "Prepaid and other current
assets" on the accompanying condensed consolidated balance sheets
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2020 |
|
Contract assets, beginning balance |
|
$ |
25,565 |
|
|
Contract assets, ending balance |
|
6,004 |
|
The following table summarizes the activity
related to our contract liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Contract liabilities, beginning balance |
|
$ |
67,268 |
|
|
$ |
42,026 |
|
|
$ |
61,050 |
|
|
$ |
32,595 |
|
|
Less: Revenue recognized from beginning balance |
|
(6,525) |
|
|
(3,700) |
|
|
(17,946) |
|
|
(10,134) |
|
|
Less: Beginning balance reclassified to deferred
revenue |
|
(2,828) |
|
|
(1,689) |
|
|
(1,942) |
|
|
(967) |
|
|
Add: Contract liabilities recognized |
|
12,362 |
|
|
13,506 |
|
|
29,115 |
|
|
28,649 |
|
|
Contract liabilities, ending balance |
|
$ |
70,277 |
|
|
$ |
50,143 |
|
|
$ |
70,277 |
|
|
$ |
50,143 |
|
As of September 30, 2020 and
December 31, 2019, $31.1 million and $23.4 million of our
contract liabilities, respectively, were included in "Other current
liabilities" with the remaining balances included in "Other
long-term liabilities" on the accompanying condensed consolidated
balance sheets.
Deferred Revenue and Performance Obligations
Deferred revenue is comprised primarily of
unearned revenue related to multi-year post contract support, or
PCS, contracts, services and product deferrals related to
acceptance clauses. The following table summarizes the activity
related to our deferred revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Deferred revenue, beginning balance
|
|
$ |
577,511 |
|
|
$ |
502,218 |
|
|
$ |
575,288 |
|
|
$ |
587,227 |
|
|
Less: Revenue recognized from beginning balance |
|
(103,889) |
|
|
(84,277) |
|
|
(243,422) |
|
|
(306,909) |
|
|
Add: Deferral of revenue in current period, excluding amounts
recognized during the period |
|
88,682 |
|
|
111,071 |
|
|
230,438 |
|
|
248,694 |
|
|
Deferred revenue, ending balance |
|
$ |
562,304 |
|
|
$ |
529,012 |
|
|
$ |
562,304 |
|
|
$ |
529,012 |
|
Revenue from Remaining Performance Obligations
Revenue from remaining performance
obligations represents contracted revenue that has not yet been
recognized. This consists of contract liabilities, deferred revenue
and amounts that will be invoiced in future periods. As
of September 30, 2020, approximately $676.4 million
of revenue is expected to be recognized from remaining performance
obligations. We expect to recognize revenue on approximately 81% of
these remaining performance obligations over the next two years and
19% during the third to the fifth year.
Other Income, Net
Other income, net consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Interest income |
|
$ |
4,319 |
|
|
$ |
13,446 |
|
|
$ |
24,649 |
|
|
$ |
38,451 |
|
|
Gain on sale of marketable securities |
|
9,432 |
|
|
— |
|
|
9,432 |
|
|
— |
|
|
Gain on investment in privately-held companies |
|
— |
|
|
4,277 |
|
|
— |
|
|
5,427 |
|
|
Other income (expense), net |
|
(527) |
|
|
1,446 |
|
|
(444) |
|
|
1,435 |
|
|
Total |
|
$ |
13,224 |
|
|
$ |
19,169 |
|
|
$ |
33,637 |
|
|
$ |
45,313 |
|
5. Investments
Investments in Privately-Held Companies
Our investments are in the equity of
privately-held companies, which do not have readily determinable
fair values. These non-marketable equity securities are initially
recorded at cost, and subsequently remeasured to fair value on a
non-recurring basis based on observable price changes in orderly
transactions for similar investments of the same issuer, or for
impairment. These investments are classified within Level III of
the fair value hierarchy as we estimate the value based on
valuation methods using the observable transaction price at the
transaction date and other significant unobservable inputs, such as
volatility, rights, and obligations related to those investments.
In addition, the valuation requires management judgment due to the
absence of market price and inherent lack of liquidity. The
following table summarizes the activity related to our investments
in privately-held companies held as of September 30, 2020
and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Cost of investment |
|
$ |
3,000 |
|
|
$ |
3,000 |
|
|
Cumulative impairment |
|
— |
|
|
— |
|
|
Cumulative upward adjustment |
|
1,150 |
|
|
1,150 |
|
|
Carrying amount of investment |
|
$ |
4,150 |
|
|
$ |
4,150 |
|
During the three and nine months ended
September 30, 2020, there were no realized or unrealized gains
or losses recorded on investments. During the three months ended
September 30, 2019, the Company recorded a realized gain of
$4.3 million upon the sale of one of our investments. The
realized gains were classified in "Other income, net" in
the
accompanying condensed consolidated statements of operations.
During the three months ended September 30, 2019, there were no
realized or unrealized gains or losses recorded on our remaining
investments. During the nine months ended September 30, 2019,
we recorded $1.2 million of unrealized gain on investments held as
of September 30, 2020. The unrealized gain was recorded on an
investment that was remeasured to fair value as of the date an
observable transaction occurred.
6. Commitments and
Contingencies
Purchase Commitments
We
outsource most of our manufacturing and supply chain management
operations to third-party contract manufacturers, who procure
components and assemble products on our behalf based on our
forecasts in order to reduce manufacturing lead times and ensure
adequate component supply. We issue purchase orders to our contract
manufacturers for finished products and a significant portion of
these orders consists of firm non-cancellable commitments. In
addition, we purchase strategic component inventory from certain
suppliers under purchase commitments that in some cases are
non-cancellable, including integrated circuits, which are consigned
to our contract manufacturers. As of September 30, 2020, we
had non-cancellable purchase commitments of $501.5 million, of
which $484.8 million were to our contract manufacturers and
suppliers. In addition, we have provided suppliers with inventory
deposits to secure our obligations to purchase inventory and the
amount of these deposits may increase in future periods as we work
to reduce product lead times and ensure adequate component supply
to meet future demand. We had $12.8 million and $16.5 million in
deposits as of September 30, 2020 and December 31, 2019,
respectively. These deposits are included in “Prepaid expenses and
other current assets” and “Other assets” on the accompanying
condensed consolidated balance sheets.
Guarantees
We have entered into agreements with some
of our direct customers and channel partners that contain
indemnification provisions relating to potential situations where
claims could be alleged that our products infringe on the
intellectual property rights of a third party. We have, at our
option and expense, the ability to repair any infringement, replace
product with a non-infringing equivalent-in-function product or
refund our customers all or a portion of the value of the product.
Other guarantees or indemnification agreements include guarantees
of product and service performance and standby letters of credit
for leased facilities and corporate credit cards. We have not
recorded a liability related to these indemnification and guarantee
provisions and our guarantee and indemnification arrangements have
not had a significant impact on our consolidated financial
statements to date.
Legal Proceedings
In the ordinary course of business, we are
a party to other claims and legal proceedings including matters
relating to commercial, employee relations, business practices and
intellectual property.
We record a provision for contingent losses
when it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. As of
September 30, 2020, provisions recorded for contingent losses
related to other claims and matters have not been significant.
Based on currently available information, management does not
believe that any additional liabilities relating to other
unresolved matters are probable or that the amount of any resulting
loss is estimable, and believes these other matters are not likely,
individually and in the aggregate, to have a material adverse
effect on our financial position, results of operations or cash
flows. However, litigation is subject to inherent uncertainties and
our view of these matters may change in the future. Were an
unfavorable outcome to occur, there exists the possibility of a
material adverse impact on our financial position, results of
operations or cash flows for the period in which the unfavorable
outcome occurs, and potentially in future periods.
7. Stockholders’ Equity
Stock Repurchase Program
In
April 2019, our board of directors authorized a $1.0 billion
stock repurchase program (the “Repurchase Program”). This
authorization allows us to repurchase shares of our common stock
opportunistically and will be funded from working capital.
Repurchases may be made at management’s discretion from time to
time on the open market, through privately negotiated transactions,
transactions structured through investment banking institutions,
block purchases, trading plans under Rule 10b5-1 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”),
or a combination of the foregoing. The Repurchase Program, which
expires in April 2022, does not obligate us to acquire any of our
common stock, and may be suspended or discontinued by us at any
time without prior notice. As of September 30, 2020, the
remaining authorized amount for stock repurchases under this
program was approximately $338.7 million.
A summary of the stock repurchase activity
under the Repurchase Program for the three and nine months ended
September 30, 2020 is as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2020 |
|
September 30, 2020 |
|
Aggregate purchase price |
|
$ |
167,278 |
|
|
$ |
395,173 |
|
|
Shares repurchased |
|
803 |
|
|
2,012 |
|
|
Average price paid per share |
|
$ |
208.19 |
|
|
$ |
196.43 |
|
The aggregate purchase price of repurchased
shares of our common stock is recorded as a reduction to retained
earnings. All shares repurchased under the Repurchase Program have
been retired.
Equity Award Plan Activities
2014 Equity Incentive Plan
Effective January 1, 2020, the
Company's board of directors authorized an increase of 2,291,660
shares to the shares available for issuance under the 2014 Equity
Incentive Plan (the “2014 Plan”). Pursuant to the 2014 Plan, the
2020 share increase is determined based on 3% of the total shares
of common stock outstanding as of December 31, 2019, but
not to exceed 12,500,000 shares, unless the board of
directors, in its discretion, determines to make a smaller
increase. As of September 30, 2020, there remained
approximately 21.9 million shares available for issuance
under the 2014 Plan.
2014 Employee Stock Purchase Plan
Effective January 1, 2020, our board of
directors authorized an increase of 763,886 shares to the shares
available for issuance under our 2014 Employee Stock Purchase Plan
(the “ESPP”). Pursuant to the ESPP, the 2020 share increase was
determined based on the least of 1% of the total shares of common
stock outstanding on December 31, 2019, 2,500,000 shares,
or such amount as determined by our board of directors. During the
nine months ended September 30, 2020, we issued 105,667
shares at a weighted-average purchase price of $183.45 per
share under the ESPP. As of September 30, 2020,
there remained 3,850,993 shares available for issuance under
the ESPP.
Stock Option Activities
The
following table summarizes the option activity under our stock
plans and related information (in thousands, except years and per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
Number of
Shares
Underlying
Outstanding Options |
|
Weighted-
Average
Exercise
Price per Share |
|
Weighted-
Average
Remaining
Contractual
Term (Years) of
Stock Options |
|
Aggregate
Intrinsic
Value
of Stock
Options
Outstanding |
|
Balance—December 31, 2019 |
|
4,564 |
|
|
$ |
42.50 |
|
|
4.4 |
|
$ |
740,387 |
|
|
Options
granted |
|
— |
|
|
— |
|
|
|
|
|
|
Options
exercised |
|
(800) |
|
|
29.15 |
|
|
|
|
|
|
Options
canceled |
|
(31) |
|
|
121.24 |
|
|
|
|
|
|
Balance—September 30, 2020 |
|
3,733 |
|
|
$ |
44.71 |
|
|
3.7 |
|
$ |
610,580 |
|
|
Vested and exercisable—September 30, 2020 |
|
2,489 |
|
|
$ |
31.62 |
|
|
3.3 |
|
$ |
436,617 |
|
Restricted Stock Unit (RSU) Activities
A
summary of the RSU activity under the 2014 Plan and related
information are presented below (in thousands, except years and per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
Weighted-
Average Grant
Date Fair Value Per Share |
|
Weighted-Average
Remaining
Contractual Term (in years) |
|
Aggregate Intrinsic Value |
|
Unvested balance—December 31, 2019 |
|
1,070 |
|
|
$ |
190.35 |
|
|
1.5 |
|
$ |
217,701 |
|
|
RSUs
granted |
|
1,208 |
|
|
213.75 |
|
|
|
|
|
|
RSUs
vested |
|
(375) |
|
|
158.18 |
|
|
|
|
|
|
RSUs
forfeited/canceled |
|
(81) |
|
|
222.27 |
|
|
|
|
|
|
Unvested balance—September 30, 2020 |
|
1,822 |
|
|
$ |
211.07 |
|
|
1.9 |
|
$ |
377,024 |
|
Shares Available for Grant
The
following table presents the stock activity and the total number of
shares available for grant under the 2014 Plan as
of September 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Balance—December 31, 2019 |
|
15,146 |
|
|
Authorized |
|
2,292 |
|
|
Options
granted |
|
— |
|
|
RSUs granted |
|
(1,208) |
|
|
Options
canceled |
|
31 |
|
|
RSUs
forfeited |
|
81 |
|
|
Shares traded for
taxes |
|
26 |
|
|
Balance—September 30, 2020 |
|
16,368 |
|
Stock-Based Compensation Expense
Total stock-based compensation expenses
related to options, restricted stock units, restricted stock, and
employee stock purchase rights granted were allocated as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Cost of revenue |
|
$ |
1,806 |
|
|
$ |
1,258 |
|
|
$ |
4,718 |
|
|
$ |
3,384 |
|
|
Research and development |
|
21,423 |
|
|
13,472 |
|
|
56,729 |
|
|
39,171 |
|
|
Sales and marketing
|
|
9,083 |
|
|
7,832 |
|
|
23,756 |
|
|
21,463 |
|
|
General and administrative |
|
4,157 |
|
|
3,695 |
|
|
11,744 |
|
|
10,827 |
|
|
Total
stock-based compensation |
|
$ |
36,469 |
|
|
$ |
26,257 |
|
|
$ |
96,947 |
|
|
$ |
74,845 |
|
As of September 30, 2020,
unrecognized stock-based compensation expenses by award type and
their expected weighted-average recognition periods are summarized
in the following table (in thousands, except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
|
Stock Option |
|
RSU |
|
ESPP |
|
Restricted Stock |
|
Unrecognized stock-based compensation expense |
|
$ |
31,114 |
|
|
$ |
338,561 |
|
|
$ |
12,641 |
|
|
$ |
2,839 |
|
|
Weighted-average amortization period |
|
2.7 years |
|
3.4 years |
|
1.4 years |
|
2.0 years |
8. Net Income Per Share Available to Common
Stock
The following table sets forth the
computation of our basic and diluted net income per share
attributable to common stockholders (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
168,375 |
|
|
$ |
208,895 |
|
|
$ |
451,599 |
|
|
$ |
599,175 |
|
|
|
|
|
|
Less: undistributed earnings allocated to participating
securities |
|
— |
|
|
(96) |
|
|
— |
|
|
(314) |
|
|
|
|
|
|
Net income available to common
stockholders, basic |
|
$ |
168,375 |
|
|
$ |
208,799 |
|
|
$ |
451,599 |
|
|
$ |
598,861 |
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders, basic |
|
$ |
168,375 |
|
|
$ |
208,799 |
|
|
$ |
451,599 |
|
|
$ |
598,861 |
|
|
|
|
|
|
Add: undistributed earnings allocated to participating
securities |
|
— |
|
|
5 |
|
|
— |
|
|
19 |
|
|
|
|
|
|
Net income attributable to common
stockholders, diluted |
|
$ |
168,375 |
|
|
$ |
208,804 |
|
|
$ |
451,599 |
|
|
$ |
598,880 |
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net income per share
available to common stockholders, basic |
|
75,999 |
|
|
76,426 |
|
|
76,024 |
|
|
76,301 |
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net income per share
available to common stockholders, basic |
|
75,999 |
|
|
76,426 |
|
|
76,024 |
|
|
76,301 |
|
|
|
|
|
|
Add weighted-average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and RSUs |
|
3,308 |
|
|
4,308 |
|
|
3,489 |
|
|
4,784 |
|
|
|
|
|
|
Employee stock purchase plan |
|
6 |
|
|
19 |
|
|
6 |
|
|
19 |
|
|
|
|
|
|
Weighted-average shares used in computing net income per share
available to common stockholders, diluted |
|
79,313 |
|
|
80,753 |
|
|
79,519 |
|
|
81,104 |
|
|
|
|
|
|
Net income per share attributable to common
stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.22 |
|
|
$ |
2.73 |
|
|
$ |
5.94 |
|
|
$ |
7.85 |
|
|
|
|
|
|
Diluted |
|
$ |
2.12 |
|
|
$ |
2.59 |
|
|
$ |
5.68 |
|
|
$ |
7.38 |
|
|
|
|
|
The following weighted-average outstanding
shares of common stock equivalents were excluded from the
computation of diluted net income per share attributable to common
stockholders for the periods presented because including them would
have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
Stock options and RSUs to purchase common stock |
|
251 |
|
|
277 |
|
|
395 |
|
|
211 |
|
|
|
|
|
|
Employee stock purchase plan |
|
17 |
|
|
41 |
|
|
84 |
|
|
59 |
|
|
|
|
|
|
Total |
|
268 |
|
|
318 |
|
|
479 |
|
|
270 |
|
|
|
|
|
9. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
(in thousands, except percentages) |
|
|
|
|
|
Income before income taxes |
|
$ |
201,619 |
|
|
$ |
247,775 |
|
|
$ |
538,683 |
|
|
$ |
675,098 |
|
|
|
|
|
|
Provision for income taxes |
|
33,244 |
|
|
38,880 |
|
|
87,084 |
|
|
75,923 |
|
|
|
|
|
|
Effective tax rate |
|
16.5 |
% |
|
15.7 |
% |
|
16.2 |
% |
|
11.2 |
% |
|
|
|
|
The effective tax rates reflect tax
expense recorded on pre-tax income in the three and nine months
ended September 30, 2020 and September 30, 2019, respectively. The
change in the effective tax rates in the three and nine months
ended September 30, 2020, as compared to the same periods in 2019,
was primarily due to a decrease in tax benefits attributable to
stock-based compensation.
10. Segment Information
We operate in one reportable segment. The
following table represents revenue based on the customer’s
location, as determined by the customer’s shipping address (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Americas |
|
$ |
452,693 |
|
|
$ |
532,318 |
|
|
$ |
1,289,182 |
|
|
$ |
1,418,325 |
|
|
Europe, Middle East and Africa |
|
89,588 |
|
|
75,439 |
|
|
226,189 |
|
|
298,768 |
|
|
Asia-Pacific |
|
63,150 |
|
|
46,658 |
|
|
153,659 |
|
|
141,067 |
|
|
Total revenue |
|
$ |
605,431 |
|
|
$ |
654,415 |
|
|
$ |
1,669,030 |
|
|
$ |
1,858,160 |
|
Long-lived assets, net, excluding
intercompany receivables, investments in subsidiaries,
privately-held equity investments and deferred tax assets, by
location, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
United States |
|
$ |
24,469 |
|
|
$ |
32,565 |
|
|
International |
|
8,201 |
|
|
6,708 |
|
|
Total |
|
$ |
32,670 |
|
|
$ |
39,273 |
|
11. Subsequent Events
On September 21, 2020, the Company entered
into a Merger Agreement to acquire Awake Security, Inc. (“Awake
Security”), a network detection and response (“NDR”) platform
provider headquartered in Santa Clara, California, and on October
7, 2020, we completed the acquisition of Awake
Security.
The acquisition will be included in our
consolidated financial statements beginning in the fourth quarter
of 2020, and will be financed from our existing cash
balance.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion
and analysis of our financial condition and results of operations
together with the unaudited condensed consolidated financial
statements and related notes that are included elsewhere in this
Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K
filed with the SEC on February 14, 2020. This discussion
contains forward-looking statements based upon current plans,
expectations and beliefs that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including those set forth under “Risk Factors” and elsewhere in
this Quarterly Report on Form 10-Q.
Overview
Arista Networks pioneered software-driven,
cognitive cloud networking for large-scale data center and campus
environments. Our cloud networking solutions consist of our EOS, a
set of network applications and our Ethernet switching and routing
platforms. Our cloud networking solutions deliver industry-leading
performance, scalability, availability, programmability, automation
and visibility. At the core of our cloud networking platform is
EOS, which was purpose-built to be fully programmable, highly
modular and reliable. The programmability of EOS has allowed us to
create a set of software applications that address the requirements
of cloud networking, including workflow automation, network
visibility and analytics, and has also allowed us to rapidly
integrate with a wide range of third-party applications for
virtualization, management, automation, orchestration and network
services.
We believe that cloud networking will
continue to replace legacy network technologies across data center
and campus environments. Our cloud networking platforms are well
positioned to address the growing cloud networking market, and to
address increasing performance requirements driven by the growing
number of connected devices, as well as the need for constant
connectivity and access to data and applications.
We generate revenue primarily from sales of
our switching and routing products which incorporate our EOS
software. We generate the majority of our services revenue from
post contract support, or PCS, which end customers typically
purchase in conjunction with our products. Our end customers span a
range of industries and include large Internet companies, service
providers, financial services organizations, government agencies,
media and entertainment companies and others. As we have grown the
functionality of our EOS software, expanded the range of our
product portfolio and increased the size of our sales force, our
revenue has grown rapidly. We have also been profitable and
operating cash flow positive for each year since 2010.
We believe our future success is dependent
upon our ability to continue to develop market leading products and
features that address the needs of our end customers and our
ability to sell these products to new and existing customers,
including an increase in sales in the enterprise data center
switching, campus and WiFi networking markets. We intend to
continue to invest in our sales activities in key geographies, as
well as in our relationships with channel, technology and
system-level partners in order to reach new end customers more
effectively, increase sales to existing customers, and provide
services and support. In addition, we intend to continue to invest
in our research and development organization to enhance the
functionality of our existing cloud networking platform, introduce
new products and features, and build upon our technology
leadership. We believe one of our greatest strengths lies in our
rapid development of new features and applications.
Our development model is focused on the
development of new products based on our EOS software and
enhancements to EOS. We engineer our products to be agnostic to the
underlying merchant silicon architecture. Today, we combine our EOS
software with merchant silicon into a family of switching and
routing products. This enables us to focus our research and
development resources on our software core competencies and to
leverage the investments made by merchant silicon vendors to
achieve cost-effective solutions. We work closely with third-party
contract manufacturers to manufacture our products. Our contract
manufacturers deliver our products to our third-party direct
fulfillment facilities. We and our fulfillment partners then
perform labeling, final configuration, quality assurance testing
and shipment to our customers.
Historically, large purchases by a
relatively limited number of end customers have accounted for a
significant portion of our revenue. We have experienced
unpredictability in the timing of orders from these large end
customers primarily due to changes in demand patterns specific to
these customers, the time it takes these end customers to evaluate,
test, qualify and accept our products, and the overall complexity
of these large orders. We expect continued variability in our
customer concentration and timing of sales on a quarterly and
annual basis. For example, our sales to Microsoft and Facebook as
end users in fiscal 2019 collectively represented 40% of our
revenue, and benefited from certain factors that are not expected
to repeat in fiscal 2020. Consequently, the percentage of our
revenue from these customers in fiscal 2020 is expected to decline,
which will contribute to an expected year-over-year decline in our
revenue for fiscal 2020. In addition, we have provided, and may in
the future provide, pricing discounts to large end customers, which
may result in lower margins for the period in which such sales
occur.
Recent Developments
The global coronavirus (“COVID-19”)
pandemic and related shelter in place, travel and social distancing
restrictions imposed by governments around the world in an effort
to contain or slow its spread have negatively impacted the global
economy, disrupted business, sales activities, supply chains and
workforce participation, including our own, and created significant
volatility and disruption of financial markets, and we expect that
the global health crisis caused by COVID-19 will continue to
negatively impact business activity for the foreseeable
future.
We have taken numerous steps, and will
continue to take further actions, in our approach to address
COVID-19. We have prioritized the protection of our employees
during this pandemic and, as a result, have closed our offices
across the globe (including our corporate headquarters) limiting
access to only those employees providing essential activities,
instructed employees to work from home, and implemented travel
restrictions. We continue to work closely with our
contract
manufacturers and supply chain partners who have experienced delays
in component sourcing, workforce disruptions and governmental
restrictions on the production and export of their products.
Although we have worked diligently to drive improvements in these
areas, including funding additional working capital and incremental
purchase commitments, these delays have negatively impacted our
ability to supply products to our customers on a timely basis. We
expect to continue to invest in working capital as supply
availability improves in order to address the risk of future
COVID-19 related supply chain disruptions, but we cannot be certain
that such disruptions will not occur.
The extent of the impact of
COVID-19 on our operational and financial performance,
including our ability to execute our business strategies and
initiatives in the expected time frame, will depend on future
developments, including the duration and spread of the pandemic,
the breadth and duration of governmental containment measures such
as shelter in place, travel and social distancing restrictions as
well as the reauthorization of or increase in such measures in the
event of spikes in COVID-19 infection rates, and the impact on our
customers, partners, contract manufacturers and supply chain, all
of which are uncertain and cannot be predicted. However, any
continued or renewed disruption in manufacturing and supply
resulting from the COVID-19 pandemic or related containment
measures would negatively impact our business. We also believe
that any extended or renewed COVID-19 related economic disruption
could have a negative impact on demand from our customers in future
periods. While we have experienced some incremental
improvement in demand from our cloud titan customers and some
stabilization in sales activity in our campus and enterprise
markets in the period, we continue to expect a year-over-year
decline in total revenue for the year ending December 31,
2020. Accordingly, current results and financial condition
discussed herein may not be indicative of future operating results
and trends.
In response to potential future COVID-19
related disruptions to our business, we have continued to carefully
review our investment and spending plans, cautiously reintroducing
some incremental spending beginning in the third quarter as overall
customer demand began to stabilize. Although management is actively
monitoring the impact of COVID-19 on the Company’s financial
condition, liquidity, operations, suppliers, industry, and
workforce, the full impact of the pandemic continues to evolve as
of the date of this report. As such, the Company is unable to
estimate the effects of COVID-19 on its future results of
operations, financial condition, or liquidity.
Acquisitions
On February 5, 2020, we acquired Big Switch
Networks, Inc. (“Big Switch”), a network monitoring and
software-defined networking pioneer headquartered in Santa Clara,
California. With the acquisition of Big Switch, we expect to expand
our data center networking solutions and further strengthen our
network monitoring and observability suite delivered through
Arista’s software platform CloudVision and DANZ (DataANalyZer)
capabilities. In addition, on October 7, 2020, we completed the
acquisition of Awake Security Inc. (“Awake Security”), a network
detection and response (“NDR”) platform provider headquartered in
Santa Clara, California. With the acquisition of Awake Security, we
are adding an NDR platform to our product portfolio that combines
artificial intelligence (AI) with human expertise to autonomously
hunt for and respond to insider and external threats.
Results of Operations
Three and Nine Months Ended September 30, 2020 Compared to
Three and Nine Months Ended September 30, 2019
Revenue, Cost of Revenue and Gross Profit (in thousands, except
percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
Change in |
|
2020 |
|
2019 |
|
Change in |
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
480,242 |
|
|
$ |
555,066 |
|
|
$ |
(74,824) |
|
|
(13.5) |
% |
|
$ |
1,312,561 |
|
|
$ |
1,573,652 |
|
|
$ |
(261,091) |
|
|
(16.6) |
% |
|
Service |
|
125,189 |
|
|
99,349 |
|
|
25,840 |
|
|
26.0 |
|
|
356,469 |
|
|
284,508 |
|
|
71,961 |
|
|
25.3 |
|
|
Total revenue |
|
605,431 |
|
|
654,415 |
|
|
(48,984) |
|
|
(7.5) |
|
|
1,669,030 |
|
|
1,858,160 |
|
|
(189,130) |
|
|
(10.2) |
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
199,465 |
|
|
218,220 |
|
|
(18,755) |
|
|
(8.6) |
|
|
539,526 |
|
|
616,906 |
|
|
(77,380) |
|
|
(12.5) |
|
|
Service |
|
21,004 |
|
|
18,921 |
|
|
2,083 |
|
|
11.0 |
|
|
62,202 |
|
|
53,219 |
|
|
8,983 |
|
|
16.9 |
|
|
Total cost of revenue |
|
220,469 |
|
|
237,141 |
|
|
(16,672) |
|
|
(7.0) |
|
|
601,728 |
|
|
670,125 |
|
|
(68,397) |
|
|
(10.2) |
|
|
Gross profit |
|
$ |
384,962 |
|
|
$ |
417,274 |
|
|
$ |
(32,312) |
|
|
(7.7) |
% |
|
$ |
1,067,302 |
|
|
$ |
1,188,035 |
|
|
$ |
(120,733) |
|
|
(10.2) |
% |
|
Gross margin |
|
63.6 |
% |
|
63.8 |
% |
|
|
|
|
|
63.9 |
% |
|
63.9 |
% |
|
|
|
|
Revenue by Geography (in thousands, except
percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
% of Total |
|
2019 |
|
% of Total |
|
2020 |
|
% of Total |
|
2019 |
|
% of Total |
|
Americas |
|
$ |
452,693 |
|
|
74.8 |
% |
|
$ |
532,318 |
|
|
81.4 |
% |
|
$ |
1,289,182 |
|
|
77.2 |
% |
|
$ |
1,418,325 |
|
|
76.3 |
% |
|
Europe, Middle East and Africa |
|
89,588 |
|
|
14.8 |
|
|
75,439 |
|
|
11.5 |
|
|
226,189 |
|
|
13.6 |
|
|
298,768 |
|
|
16.1 |
|
|
Asia-Pacific |
|
63,150 |
|
|
10.4 |
|
|
46,658 |
|
|
7.1 |
|
|
153,659 |
|
|
9.2 |
|
|
141,067 |
|
|
7.6 |
|
|
Total revenue |
|
$ |
605,431 |
|
|
100.0 |
% |
|
$ |
654,415 |
|
|
100.0 |
% |
|
$ |
1,669,030 |
|
|
100.0 |
% |
|
$ |
1,858,160 |
|
|
100.0 |
% |
Revenue
We generate revenue primarily from sales of
our products. We also derive a portion of our revenue from sales of
PCS, which is typically purchased in conjunction with our products,
and subsequent renewals of those contracts. We expect our revenue
may vary from period to period based on, among other things, the
timing, size and complexity of orders, especially with respect to
our large end customers.
Product
revenue decreased $74.8 million, or 13.5%, and $261.1 million, or
16.6%, for the three and nine months ended September 30, 2020,
respectively, compared to the same periods in 2019.
The
decrease of $74.8 million was primarily driven by reduced sales on
a year-over-year basis to our larger customers, combined with some
COVID-19 related supply constraints in fiscal 2020. The decrease of
$261.1 million was primarily the result of the recognition of
$116.8 million of deferred revenue related to customer acceptance
of prior period sales transactions in the nine months ended
September 30, 2019 combined with some reduction in sales to our
larger customers in the period, and the impact of COVID-19 related
supply constraints. Service revenue increased $25.8 million, or
26.0%, and $72.0 million, or 25.3%, in the three and nine months
ended September 30, 2020, compared to the same periods in
2019, as a result of
continued growth in support contracts as our customer installed
base has continued to expand. International revenues represented
25.2% and 22.8% of total revenues in the three and nine months
ended September 30, 2020, respectively, an increase from 18.6% and
a decrease from 23.7% compared to the same periods in the prior
year. International revenues generally fluctuate based on the
timing of deployments by certain of our large end customers. In
addition, the increase in the current quarter was mainly due to an
increase in demand in both our EMEA and Asia-Pacific regions. We
continued to experience competitive pricing pressure on our
products and services.
Cost of Revenue and Gross Margin
Cost of revenue primarily consists of
amounts paid for inventory to our third-party contract
manufacturers and merchant silicon vendors, overhead costs in our
manufacturing operations department, and other
manufacturing-related costs associated with manufacturing our
products and managing our inventory. Costs of providing PCS and
other services primarily consist of personnel costs for our global
customer support organization.
Cost
of revenue decreased $16.7 million, or 7.0%, and $68.4 million, or
10.2%, for the three and nine months ended September 30, 2020,
respectively, compared to the same periods in 2019. These decreases
were primarily driven by a corresponding decrease in
revenue.
Gross margin, or gross profit as a
percentage of revenue, has been and will continue to be affected by
a variety of factors, including sales to large end customers who
generally receive lower pricing, manufacturing-related costs
including costs associated with supply chain sourcing activities,
merchant silicon costs, the mix of products sold, and excess and
obsolete inventory write-downs, including charges for excess and
obsolete component inventory held by our contract manufacturers. We
expect our gross margins to fluctuate over time, depending on the
factors described above.
Gross margin remained consistent for the
three and nine months ended September 30, 2020, compared to the
same periods in 2019. Gross margin in each period was unfavorably
impacted by incremental COVID-19 related supply chain costs
combined with some relatively fixed overhead costs on a lower
revenue base.
Operating Expenses (in thousands, except percentages)
Our operating expenses consist of research
and development, sales and marketing, and general and
administrative expenses. The largest component of our operating
expenses is personnel costs. Personnel costs consist of wages,
benefits, bonuses and, with respect to sales and marketing
expenses, sales commissions. Personnel costs also include
stock-based compensation and travel expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
2020 |
|
2019 |
|
Change in |
|
2020 |
|
2019 |
|
Change in |
|
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
128,049 |
|
|
$ |
118,732 |
|
|
$ |
9,317 |
|
|
7.8 |
% |
|
$ |
352,747 |
|
|
$ |
352,696 |
|
|
$ |
51 |
|
|
— |
% |
|
Sales and marketing |
|
53,372 |
|
|
55,279 |
|
|
(1,907) |
|
|
(3.4) |
|
|
161,695 |
|
|
159,372 |
|
|
2,323 |
|
|
1.5 |
|
|
General and administrative |
|
15,146 |
|
|
14,657 |
|
|
489 |
|
|
3.3 |
|
|
47,814 |
|
|
46,182 |
|
|
1,632 |
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
196,567 |
|
|
$ |
188,668 |
|
|
$ |
7,899 |
|
|
4.2 |
% |
|
$ |
562,256 |
|
|
$ |
558,250 |
|
|
$ |
4,006 |
|
|
0.7 |
% |
Research and development
Research and development expenses consist
primarily of personnel costs, prototype expenses, third-party
engineering and contractor support costs, and an allocated portion
of facility and IT costs including depreciation. Our research and
development efforts are focused on maintaining and developing
additional functionality for our existing products and on new
product development, including new releases and upgrades to our EOS
software and applications. We plan to continue to expand the
capabilities of our cloud networking platform, introduce new
products and features and build upon our technology
leadership.
Research and development expenses increased
$9.3 million, or 7.8% in the three months ended September 30,
2020 compared to the same period in 2019. The increase was
primarily due to an increase of $3.7 million in new product
introduction costs in the current period combined with an increase
of $5.6 million in personnel costs, which included an increase in
stock-based compensation costs of $8.0 million, partially offset by
a decrease in corporate bonus expense. For the nine months ended
September 30, 2020, research and development expenses remained
relatively constant compared to the same period in 2019, resulting
from an increase of $5.6 million in personnel costs, an increase of
$7.3 million in acquisition-related costs, and an offsetting
decrease of $12.8 million in new product introduction costs in the
nine months ended September 30, 2020.
Sales and marketing
Sales and marketing expenses consist
primarily of personnel costs, marketing, trade shows, and other
promotional activities, and an allocated portion of facility and IT
costs, including depreciation. We continue to prudently manage our
sales and marketing spend in fiscal 2020 with some targeted
investment in strategic sales activities and, accordingly, expect a
marginal increase in sales and marketing expenses in fiscal 2020
compared to fiscal 2019.
Sales and marketing expenses decreased $1.9
million, or 3.4%, for the three months ended September 30,
2020 compared to the same period in 2019. The decrease primarily
resulted from COVID-19 related reductions in marketing and travel
expenses, partially offset by increased salaries and stock-based
compensation due to increased headcount. The increase of $2.3
million, or 1.5%, in the nine months ended September 30, 2020
compared to the same period in 2019, was primarily driven by an
increase in salaries and stock-based compensation due to increased
headcount, and an increase of $3.7 million in acquisition-related
expenses. This increase was partially offset by a reduction in
travel expenses and other sales and marketing activities due to
COVID-19.
General and administrative
General and administrative expenses consist
primarily of personnel costs and professional services fees.
General and administrative personnel costs include those for our
executive, finance, human resources and legal functions. Our
professional services fees are primarily due to external legal,
accounting and tax services.
General and administrative expenses
increased $0.5 million, or 3.3%, in the three months ended
September 30, 2020, and $1.6 million, or 3.5%, in the nine
months ended September 30, 2020 compared to the same periods
in 2019. The increase in each period was primarily due to
acquisition-related expenses, partially offset by lower personnel
costs. In addition, litigation-related costs decreased in the three
and nine months ended September 30, 2020 due to the settlement of
our litigation with Optumsoft in December 2019.
Other Income, Net (in thousands, except percentages)
Other income consists primarily of interest
income from our cash, cash equivalents and marketable securities,
gains and losses on our investments in privately-held companies,
and foreign currency transaction gains and losses. We expect that
interest income from our fixed-income marketable securities will
decline for the year ending December 31, 2020 as a result of lower
interest rates in 2020 compared to 2019 and the sale of marketable
securities in the three months ended September 30,
2020. In addition, we expect other income may fluctuate in the
future as a result of the re-measurement of our private company
equity investments upon the occurrence of observable price changes
and/or impairments, changes in returns on our cash and cash
equivalents and marketable securities, and foreign currency
exchange rate fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
2020 |
|
2019 |
|
Change in |
|
2020 |
|
2019 |
|
Change in |
|
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Other income, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
4,319 |
|
|
$ |
13,446 |
|
|
$ |
(9,127) |
|
|
(67.9) |
% |
|
$ |
24,649 |
|
|
$ |
38,451 |
|
|
$ |
(13,802) |
|
|
(35.9) |
% |
|
Gain on sale of marketable securities
|
|
9,432 |
|
|
— |
|
|
9,432 |
|
|
100.0 |
|
|
9,432 |
|
|
— |
|
|
9,432 |
|
|
100.0 |
|
|
Gain on investments in privately-held companies |
|
— |
|
|
4,277 |
|
|
(4,277) |
|
|
(100.0) |
|
|
— |
|
|
5,427 |
|
|
(5,427) |
|
|
(100.0) |
|
|
Other income (expense), net |
|
(527) |
|
|
1,446 |
|
|
(1,973) |
|
|
(136.4) |
|
|
(444) |
|
|
1,435 |
|
|
(1,879) |
|
|
(130.9) |
|
|
Total other income, net |
|
$ |
13,224 |
|
|
$ |
19,169 |
|
|
$ |
(5,945) |
|
|
(31.0) |
% |
|
$ |
33,637 |
|
|
$ |
45,313 |
|
|
$ |
(11,676) |
|
|
(25.8) |
% |
The unfavorable change in Other income,
net, during the three and nine months ended September 30, 2020
as compared to the same periods in 2019 was primarily driven by a
decrease in interest income from our fixed-income marketable
securities caused by reduced interest rates. In addition, we
recorded a gain on our investments in privately-held companies in
the nine months ended September 30, 2019, which did not recur in
the current period. The decrease in each period was partially
offset by a realized gain of $9.4 million from the sale of our
marketable securities in the three months ended September 30,
2020.
Provision for Income Taxes (in thousands, except
percentages)
We operate in a number of tax jurisdictions
and are subject to taxes in each country or jurisdiction in which
we conduct business. Earnings from our non-U.S. activities are
subject to local country income tax and may also be subject to U.S.
income tax. Generally, our U.S. tax obligations are reduced by a
credit for foreign income taxes paid on these foreign earnings
which avoids double taxation. Our tax expense to date consists of
federal, state and foreign current and deferred income
taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
2020 |
|
2019 |
|
Change in |
|
2020 |
|
2019 |
|
Change in |
|
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Income before income taxes |
|
$ |
201,619 |
|
|
$ |
247,775 |
|
|
$ |
(46,156) |
|
|
(18.6) |
% |
|
$ |
538,683 |
|
|
$ |
675,098 |
|
|
$ |
(136,415) |
|
|
(20.2) |
% |
|
Provision for income taxes |
|
33,244 |
|
|
38,880 |
|
|
(5,636) |
|
|
(14.5) |
% |
|
87,084 |
|
|
75,923 |
|
|
11,161 |
|
|
14.7 |
% |
|
Effective tax rate |
|
16.5 |
% |
|
15.7 |
% |
|
|
|
|
|
16.2 |
% |
|
11.2 |
% |
|
|
|
|
For the three and nine months ended
September 30, 2020, we recorded expenses of $33.2 million and
$87.1 million for income taxes, respectively. For the three and
nine months ended September 30, 2019, we recorded expenses of $38.9
million and $75.9 million, respectively. Income taxes for the three
and nine months ended September 30, 2020 were attributable to
the overall decrease in worldwide earnings offset by lower tax
benefits realized from stock-based compensation.
Liquidity and Capital Resources
Our principal sources of liquidity are
cash, cash equivalents, marketable securities, and cash generated
from operations. As of September 30, 2020, our total balance
of cash, cash equivalents and marketable securities was
approximately $2.8 billion, of which approximately $409.5 million
was held outside the U.S. in our foreign
subsidiaries.
Our cash, cash equivalents and marketable
securities are held for working capital purposes. Our marketable
securities investment portfolio is primarily invested in highly
rated securities with the primary objective of minimizing the
potential risk of principal loss. We plan to continue to invest for
long-term growth. We believe that our existing balances of cash,
cash
equivalents and marketable securities together with cash generated
from operations will be sufficient to meet our working capital
requirements and our growth strategies for at least the next 12
months. Our future capital requirements will depend on many
factors, including our growth rate, the timing and extent of our
spending to support research and development activities, the timing
and cost of establishing additional sales a