000159653212/312022Q3FALSE305,572,616On
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.
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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, 2022
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, a
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 26, 2022 was
305,572,616.
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, 2022 |
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December 31, 2021 |
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ASSETS |
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CURRENT ASSETS: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
716,253 |
|
|
$ |
620,813 |
|
|
Marketable securities |
|
2,263,818 |
|
|
2,787,502 |
|
|
Accounts receivable, net |
|
651,512 |
|
|
516,509 |
|
|
Inventories |
|
1,100,550 |
|
|
650,117 |
|
|
Prepaid expenses and other current assets |
|
299,545 |
|
|
237,735 |
|
|
Total current assets |
|
5,031,678 |
|
|
4,812,676 |
|
|
Property and equipment, net |
|
96,449 |
|
|
78,634 |
|
|
Acquisition-related intangible assets, net |
|
131,520 |
|
|
93,555 |
|
|
Goodwill |
|
271,018 |
|
|
188,397 |
|
|
Investments |
|
39,677 |
|
|
20,247 |
|
|
Operating lease right-of-use assets |
|
58,205 |
|
|
65,182 |
|
|
Deferred tax assets |
|
473,808 |
|
|
442,295 |
|
|
Other assets |
|
59,655 |
|
|
33,443 |
|
|
TOTAL ASSETS |
|
$ |
6,162,010 |
|
|
$ |
5,734,429 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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CURRENT LIABILITIES: |
|
|
|
|
|
Accounts payable |
|
$ |
278,469 |
|
|
$ |
202,636 |
|
|
Accrued liabilities |
|
240,609 |
|
|
226,643 |
|
|
|
|
|
|
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Deferred revenue |
|
607,189 |
|
|
593,578 |
|
|
Other current liabilities |
|
128,645 |
|
|
86,972 |
|
|
Total current liabilities |
|
1,254,912 |
|
|
1,109,829 |
|
|
Income taxes payable |
|
82,167 |
|
|
69,916 |
|
|
Operating lease liabilities, non-current |
|
47,067 |
|
|
56,527 |
|
|
|
|
|
|
|
Deferred revenue, non-current |
|
333,855 |
|
|
335,734 |
|
|
Deferred tax liabilities, non-current |
|
— |
|
|
129,074 |
|
|
Other long-term liabilities |
|
58,791 |
|
|
54,749 |
|
|
TOTAL LIABILITIES |
|
1,776,792 |
|
|
1,755,829 |
|
|
Commitments and contingencies (Note 5)
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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, 2022 and December
31, 2021
|
|
— |
|
|
— |
|
|
Common stock, $0.0001 par value—1,000,000 shares authorized as of
September 30, 2022 and December 31, 2021; 305,515 and 307,681
shares issued and outstanding as of September 30, 2022 and December
31, 2021
|
|
31 |
|
31 |
|
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Additional paid-in capital |
|
1,717,605 |
|
1,530,046 |
|
|
Retained earnings |
|
2,714,711 |
|
2,456,823 |
|
|
Accumulated other comprehensive income (loss) |
|
(47,129) |
|
(8,300) |
|
|
TOTAL STOCKHOLDERS’ EQUITY |
|
4,385,218 |
|
|
3,978,600 |
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
6,162,010 |
|
|
$ |
5,734,429 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements (unaudited).
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
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|
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Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Revenue: |
|
|
|
|
|
|
|
|
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Product |
|
$ |
1,008,689 |
|
|
$ |
604,160 |
|
|
$ |
2,619,213 |
|
|
$ |
1,709,772 |
|
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Service |
|
168,112 |
|
|
144,537 |
|
|
486,545 |
|
|
413,806 |
|
|
Total revenue |
|
1,176,801 |
|
|
748,697 |
|
|
3,105,758 |
|
|
2,123,578 |
|
|
Cost of revenue:
|
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|
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|
|
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Product |
|
432,569 |
|
|
243,342 |
|
|
1,102,012 |
|
|
687,554 |
|
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Service |
|
34,252 |
|
|
26,740 |
|
|
96,656 |
|
|
77,959 |
|
|
Total cost of revenue |
|
466,821 |
|
|
270,082 |
|
|
1,198,668 |
|
|
765,513 |
|
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Gross profit |
|
709,980 |
|
|
478,615 |
|
|
1,907,090 |
|
|
1,358,065 |
|
|
Operating expenses: |
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|
|
|
|
|
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|
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Research and development |
|
187,807 |
|
|
153,093 |
|
|
537,971 |
|
|
428,873 |
|
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Sales and marketing |
|
81,401 |
|
|
69,740 |
|
|
241,512 |
|
|
211,385 |
|
|
General and administrative |
|
23,425 |
|
|
22,488 |
|
|
69,420 |
|
|
58,856 |
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
292,633 |
|
|
245,321 |
|
|
848,903 |
|
|
699,114 |
|
|
Income from operations |
|
417,347 |
|
|
233,294 |
|
|
1,058,187 |
|
|
658,951 |
|
|
Other income (expense), net |
|
6,817 |
|
|
1,346 |
|
|
37,764 |
|
|
4,640 |
|
|
Income before income taxes |
|
424,164 |
|
|
234,640 |
|
|
1,095,951 |
|
|
663,591 |
|
|
Provision for income taxes |
|
70,165 |
|
|
10,335 |
|
|
170,594 |
|
|
62,032 |
|
|
Net income |
|
$ |
353,999 |
|
|
$ |
224,305 |
|
|
$ |
925,357 |
|
|
$ |
601,559 |
|
|
Net income per share
(1):
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.16 |
|
|
$ |
0.73 |
|
|
$ |
3.02 |
|
|
$ |
1.96 |
|
|
Diluted |
|
$ |
1.13 |
|
|
$ |
0.70 |
|
|
$ |
2.92 |
|
|
$ |
1.89 |
|
|
Weighted-average shares used in computing net income per
share
(1):
|
|
|
|
|
|
|
|
|
|
Basic |
|
304,931 |
|
|
307,456 |
|
|
306,576 |
|
|
306,176 |
|
|
Diluted |
|
314,401 |
|
|
319,636 |
|
|
316,745 |
|
|
318,976 |
|
(1) Prior periods have been adjusted to reflect the four-for-one
stock split effected in the form of a stock dividend in November
2021.
The accompanying notes are an integral part of these condensed
consolidated financial statements (unaudited).
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Income
(Loss)
(Unaudited, in thousands)
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net income |
|
$ |
353,999 |
|
|
$ |
224,305 |
|
|
$ |
925,357 |
|
|
$ |
601,559 |
|
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
(2,574) |
|
|
(747) |
|
|
(5,306) |
|
|
(1,097) |
|
|
Net change in unrealized gains (losses) on available-for-sale
securities |
|
(3,236) |
|
|
(118) |
|
|
(33,523) |
|
|
(1,145) |
|
|
Other comprehensive income (loss) |
|
(5,810) |
|
|
(865) |
|
|
(38,829) |
|
|
(2,242) |
|
|
Comprehensive income |
|
$ |
348,189 |
|
|
$ |
223,440 |
|
|
$ |
886,528 |
|
|
$ |
599,317 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements (unaudited).
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of
Stockholders’
Equity
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2022 |
|
Nine Months Ended September 30, 2022 |
|
|
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 |
|
304,455 |
|
|
$ |
30 |
|
|
$ |
1,638,787 |
|
|
$ |
2,408,294 |
|
|
$ |
(41,319) |
|
|
$ |
4,005,792 |
|
|
307,681 |
|
|
$ |
31 |
|
|
$ |
1,530,046 |
|
|
$ |
2,456,823 |
|
|
$ |
(8,300) |
|
|
$ |
3,978,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
353,999 |
|
|
— |
|
|
353,999 |
|
|
— |
|
|
— |
|
|
— |
|
|
925,357 |
|
|
— |
|
|
925,357 |
|
|
Other comprehensive loss, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,810) |
|
|
(5,810) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(38,829) |
|
|
(38,829) |
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
65,477 |
|
|
— |
|
|
— |
|
|
65,477 |
|
|
— |
|
|
— |
|
|
165,980 |
|
|
— |
|
|
— |
|
|
165,980 |
|
|
Issuance of common stock in connection with employee equity
incentive plans |
|
1,593 |
|
|
1 |
|
|
20,081 |
|
|
— |
|
|
— |
|
|
20,082 |
|
|
4,451 |
|
|
1 |
|
|
43,072 |
|
|
— |
|
|
— |
|
|
43,073 |
|
|
Repurchase of common stock |
|
(479) |
|
|
— |
|
|
— |
|
|
(47,582) |
|
|
— |
|
|
(47,582) |
|
|
(6,433) |
|
|
(1) |
|
|
— |
|
|
(667,469) |
|
|
— |
|
|
(667,470) |
|
|
Tax withholding paid for net share settlement of equity
awards |
|
(54) |
|
|
— |
|
|
(6,740) |
|
|
— |
|
|
— |
|
|
(6,740) |
|
|
(217) |
|
|
— |
|
|
(25,542) |
|
|
— |
|
|
— |
|
|
(25,542) |
|
|
Common stock issued for business acquisition |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
33 |
|
|
— |
|
|
4,049 |
|
|
— |
|
|
— |
|
|
4,049 |
|
|
Balance at end of period |
|
305,515 |
|
|
$ |
31 |
|
|
$ |
1,717,605 |
|
|
$ |
2,714,711 |
|
|
$ |
(47,129) |
|
|
$ |
4,385,218 |
|
|
305,515 |
|
|
$ |
31 |
|
|
$ |
1,717,605 |
|
|
$ |
2,714,711 |
|
|
$ |
(47,129) |
|
|
$ |
4,385,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021 |
|
Nine Months Ended September 30, 2021 |
|
|
Common Stock |
|
Additional
Paid-In Capital (1) |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’
Equity |
|
Common Stock |
|
Additional
Paid-In Capital (1) |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’
Equity |
|
|
Shares (1) |
|
Amount (1) |
|
Shares (1) |
|
Amount (1) |
|
|
Balance at beginning of period |
|
306,660 |
|
|
$ |
31 |
|
|
$ |
1,395,436 |
|
|
$ |
2,303,513 |
|
|
$ |
(1,139) |
|
|
$ |
3,697,841 |
|
|
304,696 |
|
|
$ |
30 |
|
|
$ |
1,292,409 |
|
|
$ |
2,027,614 |
|
|
$ |
238 |
|
|
$ |
3,320,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
224,305 |
|
|
— |
|
|
224,305 |
|
|
— |
|
|
— |
|
|
— |
|
|
601,559 |
|
|
— |
|
|
601,559 |
|
|
Other comprehensive loss, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(865) |
|
|
(865) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,242) |
|
|
(2,242) |
|
|
Stock-based compensation |
|
— |
|
|
— |
|
|
53,135 |
|
|
— |
|
|
— |
|
|
53,135 |
|
|
— |
|
|
— |
|
|
135,632 |
|
|
— |
|
|
— |
|
|
135,632 |
|
|
Issuance of common stock in connection with employee equity
incentive plans |
|
2,436 |
|
|
— |
|
|
29,270 |
|
|
— |
|
|
— |
|
|
29,270 |
|
|
5,948 |
|
|
1 |
|
|
56,153 |
|
|
— |
|
|
— |
|
|
56,154 |
|
|
Repurchase of common stock |
|
(1,504) |
|
|
— |
|
|
— |
|
|
(134,157) |
|
|
— |
|
|
(134,157) |
|
|
(2,972) |
|
|
— |
|
|
— |
|
|
(235,512) |
|
|
— |
|
|
(235,512) |
|
|
Tax withholding paid for net share settlement of equity
awards |
|
(48) |
|
|
— |
|
|
(4,269) |
|
|
— |
|
|
— |
|
|
(4,269) |
|
|
(128) |
|
|
— |
|
|
(10,622) |
|
|
— |
|
|
— |
|
|
(10,622) |
|
|
Balance at end of period |
|
307,544 |
|
|
$ |
31 |
|
|
$ |
1,473,572 |
|
|
$ |
2,393,661 |
|
|
$ |
(2,004) |
|
|
$ |
3,865,260 |
|
|
307,544 |
|
|
$ |
31 |
|
|
$ |
1,473,572 |
|
|
$ |
2,393,661 |
|
|
$ |
(2,004) |
|
|
$ |
3,865,260 |
|
(1) Prior periods have been adjusted to reflect the four-for-one
stock split effected in the form of a stock dividend in November
2021.
The accompanying notes are an integral part of these condensed
consolidated financial statements (unaudited).
ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
Net income |
|
$ |
925,357 |
|
|
$ |
601,559 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
Depreciation, amortization and other |
|
45,169 |
|
|
37,864 |
|
|
Stock-based compensation |
|
165,980 |
|
|
135,632 |
|
|
Noncash lease expense |
|
13,837 |
|
|
12,738 |
|
|
Deferred income taxes |
|
(148,355) |
|
|
(573) |
|
|
Unrealized gain on equity investments |
|
(24,121) |
|
|
— |
|
|
Amortization of investment premiums |
|
14,167 |
|
|
19,193 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable, net |
|
(129,947) |
|
|
(6,050) |
|
|
Inventories |
|
(449,792) |
|
|
(95,997) |
|
|
Prepaid expenses and other current assets |
|
(68,996) |
|
|
(71,300) |
|
|
Other assets |
|
(17,899) |
|
|
(2,915) |
|
|
Accounts payable |
|
73,480 |
|
|
(1,075) |
|
|
Accrued liabilities |
|
14,690 |
|
|
31,316 |
|
|
|
|
|
|
|
Deferred revenue |
|
(1,245) |
|
|
149,613 |
|
|
Income taxes payable |
|
41,074 |
|
|
(3,565) |
|
|
Other liabilities |
|
(1,059) |
|
|
(15,820) |
|
|
Net cash provided by operating activities |
|
452,340 |
|
|
790,620 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
Proceeds from maturities of marketable securities |
|
1,277,821 |
|
|
1,158,723 |
|
|
Purchases of marketable securities |
|
(973,489) |
|
|
(1,974,853) |
|
|
Purchases of property and equipment |
|
(34,184) |
|
|
(55,455) |
|
|
Business acquisitions, net of cash acquired |
|
(145,087) |
|
|
— |
|
|
Escrow receipts from past business acquisitions |
|
— |
|
|
1,299 |
|
|
Investments and notes receivable in privately-held
companies |
|
(12,691) |
|
|
(10,684) |
|
|
Proceeds from sale of marketable securities |
|
186,782 |
|
|
19,607 |
|
|
Net cash provided by (used in) investing activities |
|
299,152 |
|
|
(861,363) |
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under equity
plans |
|
43,073 |
|
|
56,154 |
|
|
Tax withholdings paid on behalf of employees for net share
settlement |
|
(25,542) |
|
|
(10,622) |
|
|
Repurchases of common stock |
|
(667,470) |
|
|
(235,512) |
|
|
Net cash used in financing activities |
|
(649,939) |
|
|
(189,980) |
|
|
Effect of exchange rate changes |
|
(6,090) |
|
|
(1,513) |
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH
|
|
95,463 |
|
|
(262,236) |
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of
period |
|
625,050 |
|
|
897,454 |
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of
period |
|
$ |
720,513 |
|
|
$ |
635,218 |
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
INFORMATION: |
|
Right-of-use assets obtained in exchange for new operating lease
liabilities |
|
$ |
7,300 |
|
|
$ |
4,824 |
|
|
Property and equipment included in accounts payable and accrued
liabilities |
|
5,704 |
|
|
3,849 |
|
|
Common stock issued for business acquisition |
|
4,049 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements (unaudited).
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 enterprises. Our cloud
networking solutions consist of our Extensible Operating System
("EOS"), a set of network applications and our 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,
2022, are not necessarily indicative of the results expected for
the full fiscal year. The condensed consolidated balance sheet as
of December 31, 2021 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, 2021, filed with the SEC on February
15, 2022.
Use of Estimates
The preparation of the accompanying
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, valuation of inventory and contract
manufacturer/supplier liabilities, accounting for income taxes,
including the recognition of deferred tax assets and liabilities,
valuation allowance on deferred tax assets and reserves for
uncertain tax positions, revenue recognition and deferred revenue,
allowance for doubtful accounts, sales rebates and return reserves,
valuation of goodwill and acquisition-related intangible assets,
estimate of useful lives of long-lived assets including intangible
assets, and the recognition and measurement of contingent
liabilities. We evaluate our estimates and assumptions based on
historical experience and other factors and adjust these estimates
and assumptions when facts and circumstances dictate. Actual
results could differ materially from these estimates.
Risks and Uncertainties
Global economic and business activities
continue to face widespread macroeconomic uncertainties, including
supply chain and labor shortages, inflation and monetary policy
shifts, recession risks, the ongoing global coronavirus
("COVID-19") pandemic and potential disruptions from the
Russia-Ukraine conflict and the U.S. trade war with
China.
Our contract manufacturers and suppliers
have experienced workforce disruptions, delays in component
sourcing, production and export of their products and component
shortages and increased component costs, which have disrupted our
supply chain and have impacted and will likely continue to impact
our ability to supply products to our customers on a timely basis.
While overall demand remains strong across our customers base, we
believe ongoing supply disruptions combined with other supply chain
related constraints could impact our ability to fulfill this
increased demand and as a result could negatively impact our
business in future periods. In addition, inflation pressure in our
supply chain and scarcity of some materials needed to build our
products have increased our cost of revenue and have impacted, and
may continue to negatively impact our gross margin. Our operating
cash flows have also been and may continue to be negatively
impacted by increased component inventories on hand or at our
contract manufacturers, awaiting supply of a limited number of
scarce components necessary to build and ship the completed
product. The extent of the impact 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, the impact to
our customers, partners, employees, contract manufacturers and
supply chain, all of which continue to evolve and are
unpredictable. Management continues to actively monitor the impact
of these macroeconomic factors 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 these
factors may materially impact the Company's financial condition,
liquidity, or results of operations is uncertain.
Recently Adopted Accounting Pronouncements
In
October 2021, the FASB issued ASU 2021-08, Business Combinations
(Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers. ASU 2021-08 requires
companies to recognize and measure contract assets and contract
liabilities relating to contracts with customers that are acquired
in a business combination in accordance with ASC 606. Under
previous GAAP, an acquirer generally recognized assets acquired and
liabilities assumed in a business combination, including contract
assets and contract liabilities arising from revenue contracts with
customers, at fair value on the acquisition date. ASU No. 2021-08
results in the acquirer recording acquired contract assets and
liabilities on the same basis that would have been recorded by the
acquiree before the acquisition under ASC Topic 606. The ASU is
effective for fiscal years beginning after December 15, 2022, with
early adoption permitted. The Company adopted this ASU as of
January 1, 2022 on a prospective basis and the adoption impact was
immaterial to the condensed consolidated financial statements. The
standard did not impact acquired contract assets or liabilities
from business combinations occurring prior to the adoption
date.
2. Fair Value Measurements
Assets
measured at fair values on a recurring basis
We measure and report our cash equivalents,
restricted cash, marketable equity securities and
available-for-sale debt securities at fair value on a recurring
basis. The following tables summarize the fair value of these
financial assets by significant investment category and their
levels within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
|
Level I |
|
Level II |
|
Level III |
|
Total |
|
Level I |
|
Level II |
|
Level III |
|
Total |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
353,987 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
353,987 |
|
|
$ |
221,382 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
221,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits(1)
|
|
— |
|
|
14,556 |
|
|
— |
|
|
14,556 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
U.S. government notes |
|
23,368 |
|
|
— |
|
|
— |
|
|
23,368 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Agency securities |
|
— |
|
|
46,000 |
|
|
— |
|
|
46,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377,355 |
|
|
60,556 |
|
|
— |
|
|
437,911 |
|
|
221,382 |
|
|
— |
|
|
— |
|
|
221,382 |
|
|
Marketable Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
— |
|
|
3,487 |
|
|
— |
|
|
3,487 |
|
|
— |
|
|
141,274 |
|
|
— |
|
|
141,274 |
|
|
Certificate of deposits(1)
|
|
— |
|
|
11,422 |
|
|
— |
|
|
11,422 |
|
|
— |
|
|
44,931 |
|
|
— |
|
|
44,931 |
|
|
U.S. government notes |
|
1,169,899 |
|
|
— |
|
|
— |
|
|
1,169,899 |
|
|
1,057,810 |
|
|
— |
|
|
— |
|
|
1,057,810 |
|
|
Corporate bonds |
|
— |
|
|
883,784 |
|
|
— |
|
|
883,784 |
|
|
— |
|
|
1,252,226 |
|
|
— |
|
|
1,252,226 |
|
|
Agency securities |
|
— |
|
|
179,473 |
|
|
— |
|
|
179,473 |
|
|
— |
|
|
291,261 |
|
|
— |
|
|
291,261 |
|
|
Marketable equity securities(2)
|
|
15,753 |
|
|
— |
|
|
— |
|
|
15,753 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
1,185,652 |
|
|
1,078,166 |
|
|
— |
|
|
2,263,818 |
|
|
1,057,810 |
|
|
1,729,692 |
|
|
— |
|
|
2,787,502 |
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds - restricted |
|
4,260 |
|
|
— |
|
|
— |
|
|
4,260 |
|
|
4,237 |
|
|
— |
|
|
— |
|
|
4,237 |
|
|
Total Financial Assets |
|
$ |
1,567,267 |
|
|
$ |
1,138,722 |
|
|
$ |
— |
|
|
$ |
2,705,989 |
|
|
$ |
1,283,429 |
|
|
$ |
1,729,692 |
|
|
$ |
— |
|
|
$ |
3,013,121 |
|
______________________________________
(1) As of September 30, 2022 and December 31, 2021, all
of our certificates of deposits were domestic
deposits.
(2) The $15.8 million represents the fair value of marketable
equity securities as of September 30, 2022. This amount
includes $8.3 million that was reclassified from Investments
on our condensed consolidated balance sheet following the
commencement of public market trading of the issuer in January
2022. This publicly-traded equity investment generated an
unrealized gain of $7.5 million for the nine months ended
September 30, 2022, and an unrealized loss of
$0.9 million for the three months ended September 30,
2022. The unrealized gains and losses are included in Other income
(expense), net on the unaudited Condensed Consolidated Statements
of Operations. Refer to Note 3. Financial Statements
Details.
During the three and nine months ended on
September 30, 2022, the Company did not make any transfers
between the levels of the fair value hierarchy.
Marketable
debt securities
The following table summarizes the
amortized cost, unrealized gains and losses, and fair value of our
debt securities measured at fair value on a recurring basis (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
|
Amortized Cost |
|
Unrealized Gains |
|
Unrealized Losses |
|
Fair Value |
|
Amortized Cost |
|
Unrealized Gains |
|
Unrealized Losses |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
3,487 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,487 |
|
|
$ |
141,274 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
141,274 |
|
|
U.S. government |
|
1,187,901 |
|
|
— |
|
|
(18,002) |
|
|
1,169,899 |
|
|
1,060,716 |
|
|
3 |
|
|
(2,909) |
|
|
1,057,810 |
|
|
Corporate bonds |
|
902,133 |
|
|
— |
|
|
(18,349) |
|
|
883,784 |
|
|
1,255,149 |
|
|
105 |
|
|
(3,028) |
|
|
1,252,226 |
|
|
Agency securities |
|
182,771 |
|
|
— |
|
|
(3,298) |
|
|
179,473 |
|
|
291,558 |
|
|
36 |
|
|
(333) |
|
|
291,261 |
|
|
Total |
|
$ |
2,276,292 |
|
|
$ |
— |
|
|
$ |
(39,649) |
|
|
$ |
2,236,643 |
|
|
$ |
2,748,697 |
|
|
$ |
144 |
|
|
$ |
(6,270) |
|
|
$ |
2,742,571 |
|
For debt securities in unrealized loss
positions, it is not likely that we will be required to sell such
securities before recovery of their amortized cost basis nor do we
have the intent to sell such securities before maturity; we invest
in debt securities that have maximum maturities of two years and
are generally deemed to be low risk based on their credit ratings
from the major rating agencies. The longer the duration of these
marketable securities, the more susceptible they are to changes in
market interest rates and bond yields. Given the short-term and
conservative nature of our portfolio, the unrealized losses are not
related to credit risk; therefore, we did not recognize any credit
losses or non-credit-related impairments related to our
available-for-sale marketable debt securities for the three and
nine months ended September 30, 2022. All unrealized losses were
recognized in other comprehensive income (loss). Realized losses
were immaterial for the three and nine months ended September 30,
2022.
The following table is an analysis of our
marketable debt securities in unrealized loss positions (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
Unrealized Losses within 12 months |
|
Unrealized Losses 12 months or greater |
|
Total |
|
|
Fair Value |
|
Unrealized Losses |
|
Fair Value |
|
Unrealized Losses |
|
Fair Value |
|
Unrealized Losses |
|
U.S. government notes |
|
$ |
877,442 |
|
|
$ |
(13,026) |
|
|
$ |
292,554 |
|
|
$ |
(4,976) |
|
|
$ |
1,169,996 |
|
|
$ |
(18,002) |
|
|
Corporate bonds |
|
625,577 |
|
|
(13,314) |
|
|
258,208 |
|
|
(5,035) |
|
|
883,785 |
|
|
(18,349) |
|
|
Agency securities |
|
155,296 |
|
|
(2,807) |
|
|
24,176 |
|
|
(491) |
|
|
179,472 |
|
|
(3,298) |
|
|
Total |
|
$ |
1,658,315 |
|
|
$ |
(29,147) |
|
|
$ |
574,938 |
|
|
$ |
(10,502) |
|
|
$ |
2,233,253 |
|
|
$ |
(39,649) |
|
As of September 30, 2022, we had
no marketable debt securities with contractual maturities that
exceed 24 months. The fair values of marketable debt securities, by
remaining contractual maturities, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
Fair Value |
|
Due in 1 year or less |
|
$ |
1,773,158 |
|
|
Due in 1 to 2 years |
|
463,485 |
|
|
Total debt securities |
|
$ |
2,236,643 |
|
The weighted-average remaining duration of
our marketable debt securities is approximately 0.6 years as
of September 30, 2022. As we view these marketable debt
securities as available to support current operations, we classify
marketable debt securities with maturities beyond 12 months as
current assets under the caption "Marketable securities" on the
condensed consolidated balance sheets.
Assets measured at fair value on a non-recurring basis
Non-Marketable
Equity Securities
We have non-marketable equity securities in
privately-held companies that do not have readily-determinable fair
values. These equity securities are included in Investments on the
condensed consolidated balance sheets. Their initial cost is
adjusted to fair value on a non-recurring basis based on observable
price changes from orderly transactions of identical or similar
securities 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 these securities. In addition, the valuation requires
management judgment due to the absence of market price and lack of
liquidity.
We did not record any realized gains or
losses for our non-marketable equity securities measured at fair
value on a non-recurring basis during the three and nine months
ended September 30, 2022 and September 30, 2021. We
recorded unrealized gains of $1.7 million and
$16.7 million on non-marketable equity securities based on
observable price changes from orderly transactions of identical or
similar securities in three and the nine months ended
September 30, 2022. We recorded immaterial unrealized losses
in the three and nine months ended September 30, 2022. We
evaluate our non-marketable equity securities for impairment at
each reporting period via a qualitative assessment with various
potential impairment indicators, including, but not limited to, an
assessment of a significant adverse change in the economic
environment, significant adverse changes in the general market
condition of the geographies and industries in which our investees
operate, and other publicly-available information that affected the
value of the its non-marketable equity securities.
The following table summarizes the activity
related to our non-marketable equity securities as
of September 30, 2022 and December 31, 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Cost of investments (1) |
|
$ |
23,625 |
|
|
$ |
14,933 |
|
|
Cumulative impairment and downward adjustment |
|
(629) |
|
|
— |
|
|
Cumulative upward adjustment (1) |
|
16,681 |
|
|
5,314 |
|
|
Carrying amount of investments |
|
$ |
39,677 |
|
|
$ |
20,247 |
|
(1) During the nine months ended September 30, 2022,
$3.0 million previously included in the Cost of investments
and $5.3 million previously included in the Cumulative upward
adjustment, or $8.3 million in aggregate, were reclassified
from Investments to Marketable securities on our condensed
consolidated balance sheet following the commencement of public
market trading of the issuer. There was no such activity in the
three months ended September 30, 2022.
3. Financial Statements Details
Cash, Cash Equivalents and Restricted Cash
The reconciliation of cash, cash
equivalents and restricted cash reported on the unaudited condensed
consolidated balance sheets to the total of the same such amounts
in the unaudited condensed consolidated statements of cash flows is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Cash and cash equivalents |
|
$ |
716,253 |
|
|
$ |
620,813 |
|
|
Restricted cash included in other assets |
|
4,260 |
|
|
4,237 |
|
|
Total cash, cash equivalents and restricted cash |
|
$ |
720,513 |
|
|
$ |
625,050 |
|
Accounts Receivable, net
Accounts receivable, net consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Accounts receivable |
|
$ |
660,108 |
|
|
$ |
521,597 |
|
|
Allowance for doubtful accounts |
|
(215) |
|
|
(132) |
|
|
Product sales rebate and returns reserve |
|
(8,381) |
|
|
(4,956) |
|
|
Accounts receivable, net |
|
$ |
651,512 |
|
|
$ |
516,509 |
|
Inventories
Inventories consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Raw materials |
|
$ |
629,058 |
|
|
$ |
316,737 |
|
|
Finished goods |
|
471,492 |
|
|
333,380 |
|
|
Total inventories |
|
$ |
1,100,550 |
|
|
$ |
650,117 |
|
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Inventory deposits |
|
$ |
121,916 |
|
|
$ |
46,311 |
|
|
Prepaid income taxes |
|
1,409 |
|
|
8,977 |
|
|
Other current assets |
|
142,627 |
|
|
163,916 |
|
|
Other prepaid expenses and deposits |
|
33,593 |
|
|
18,531 |
|
|
Total prepaid expenses and other current
assets |
|
$ |
299,545 |
|
|
$ |
237,735 |
|
Property and Equipment, net
Property
and equipment, net consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Land |
|
$ |
40,601 |
|
|
$ |
40,145 |
|
|
Equipment and machinery |
|
119,379 |
|
|
90,915 |
|
|
Computer hardware and software |
|
51,254 |
|
|
44,083 |
|
|
Leasehold improvements
|
|
30,060 |
|
|
30,502 |
|
|
Furniture and fixtures |
|
3,573 |
|
|
3,634 |
|
|
Construction-in-process |
|
1,997 |
|
|
2,378 |
|
|
Property and equipment, gross |
|
246,864 |
|
|
211,657 |
|
|
Less: accumulated depreciation |
|
(150,415) |
|
|
(133,023) |
|
|
Property and equipment, net |
|
$ |
96,449 |
|
|
$ |
78,634 |
|
Depreciation expense was $6.9 million and
$4.9 million for the three months ended September 30, 2022 and
2021, respectively, and $18.7 million and $14.6 million for
the nine months ended September 30,
2022 and 2021, respectively.
Accrued Liabilities
Accrued liabilities consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Accrued payroll related costs |
|
$ |
82,791 |
|
|
$ |
99,571 |
|
|
Accrued manufacturing costs |
|
103,098 |
|
|
80,213 |
|
|
Accrued product development costs |
|
25,282 |
|
|
22,188 |
|
|
Accrued warranty costs |
|
14,314 |
|
|
10,414 |
|
|
Other |
|
15,124 |
|
|
14,257 |
|
|
Total accrued liabilities |
|
$ |
240,609 |
|
|
$ |
226,643 |
|
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, |
|
|
2022 |
|
2021 |
|
Warranty accrual, beginning of period |
|
$ |
10,414 |
|
|
$ |
9,314 |
|
|
Liabilities accrued for warranties issued during the
period |
|
13,887 |
|
|
8,643 |
|
|
Warranty costs incurred during the period |
|
(9,987) |
|
|
(8,429) |
|
|
Warranty accrual, end of period |
|
$ |
14,314 |
|
|
$ |
9,528 |
|
Contract Assets
The following table summarizes the
beginning and ending balances of our contract assets included in
"Prepaid and other current assets" on the condensed consolidated
balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
|
|
|
|
Contract assets, beginning balance |
|
$ |
24,388 |
|
|
|
|
|
|
Contract assets, ending balance |
|
13,525 |
|
|
|
|
|
Contract Liabilities, Deferred Revenue and Other Performance
Obligations
Contract Liabilities
A contract liability is recognized when we
have received customer payments in advance of our satisfaction of a
performance obligation under a cancellable contract. The following
table summarizes the activity related to our contract liabilities
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Contract liabilities, beginning balance |
|
$ |
101,600 |
|
|
$ |
83,354 |
|
|
$ |
93,382 |
|
|
$ |
85,957 |
|
|
Less: Revenue recognized from beginning balance |
|
(9,173) |
|
|
(8,763) |
|
|
(29,296) |
|
|
(27,251) |
|
|
Less: Beginning balance reclassified to deferred
revenue |
|
(9,898) |
|
|
(3,996) |
|
|
(2,998) |
|
|
(2,443) |
|
|
Add: Contract liabilities recognized |
|
18,247 |
|
|
16,976 |
|
|
39,688 |
|
|
31,308 |
|
|
Contract liabilities, ending balance |
|
$ |
100,776 |
|
|
$ |
87,571 |
|
|
$ |
100,776 |
|
|
$ |
87,571 |
|
As of September 30, 2022 and
December 31, 2021, $42.2 million and $38.7 million of our
contract liabilities, respectively, were included in "Other current
liabilities" with the remaining balances included in "Other
long-term liabilities" on the condensed consolidated balance
sheets.
Deferred Revenue
Deferred revenue is comprised mainly of
unearned revenue related to multi-year post-contract support
("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, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Deferred revenue, beginning balance
|
|
$ |
1,033,490 |
|
|
$ |
746,090 |
|
|
$ |
929,312 |
|
|
$ |
650,827 |
|
|
Less: Revenue recognized from beginning balance |
|
(234,515) |
|
|
(164,188) |
|
|
(457,309) |
|
|
(327,300) |
|
|
Add: Deferral of revenue in current period, excluding amounts
recognized during the period |
|
142,069 |
|
|
218,538 |
|
|
469,041 |
|
|
476,913 |
|
|
Deferred revenue, ending balance |
|
$ |
941,044 |
|
|
$ |
800,440 |
|
|
$ |
941,044 |
|
|
$ |
800,440 |
|
Other Performance Obligations
Other performance obligations include
unbilled contract revenue for services and products that will be
recognized in future periods. As of September 30, 2022, other
performance obligations of $178.6 million were comprised
mainly of unbilled multi-year PCS contract amounts that will be
recognized as revenue in future periods. In addition, as of
September 30, 2022 the company had entered into $844.2 million
of binding contractual agreements with certain customers that are
primarily related to future product shipments.
Revenue from Total Remaining Performance Obligations
Revenue from total remaining performance
obligations represents contract liabilities, deferred revenue and
unbilled contract revenue that will be recognized in future
periods. As of September 30, 2022,
approximately $1,220.5 million of revenue is expected to be
recognized from remaining performance obligations, of which
approximately 82% is expected to be
recognized over the next two years and approximately 18% is
expected to be recognized during the third to the fifth year. These
amounts do not include the $844.2 million of binding
contractual agreements related primarily to future product
shipments outlined above. As of September 30, 2022, it is expected
that the majority of the amounts allocated to these specific
performance obligations will be recognized as revenue upon product
shipment over the next two years; however, given the current
uncertain supply chain environment and industry wide supply
constraints, we may experience manufacturing and shipment delays or
cancellations related to these performance obligations, which could
impact revenue recognition.
Other Income (Expense), net
Other income (expense), net consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Interest income |
|
$ |
6,929 |
|
|
$ |
1,636 |
|
|
$ |
13,783 |
|
|
$ |
5,553 |
|
|
Unrealized gain on equity investments |
|
708 |
|
|
— |
|
|
24,121 |
|
|
— |
|
|
Other income (expense), net |
|
(820) |
|
|
(290) |
|
|
(140) |
|
|
(913) |
|
|
Total |
|
$ |
6,817 |
|
|
$ |
1,346 |
|
|
$ |
37,764 |
|
|
$ |
4,640 |
|
4. Acquisition, Goodwill and
Acquisition-Related Intangible Assets
Acquisitions
During
the nine months ended September 30, 2022, we completed two
acquisitions of private companies for total consideration of $158.9
million including $4.0 million in common stock and the remainder in
cash. The purchase prices included $62.3 million of intangible
assets, $82.6 million of goodwill and $14.0 million of
net tangible assets acquired. We also incurred certain
acquisition-related expenses of $4.7 million, which primarily
consisted of retention bonuses to continuing employees as well as
professional and consulting fees.
The
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 sets forth the components of
identifiable intangible assets acquired and their estimated useful
lives as of the date of acquisition (in thousands, except
years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Date Fair Value |
|
Weighted Average Estimated Useful Life (in years) |
|
Developed technology |
|
$ |
30,200 |
|
|
5.7 |
|
Customer relationships |
|
28,700 |
|
|
7.0 |
|
Trade name |
|
3,400 |
|
|
3.0 |
|
Total intangible assets acquired |
|
$ |
62,300 |
|
|
|
Goodwill
The
changes in the carrying values of goodwill for the three and nine
months ended September 30, 2022 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Balance at December 31, 2021 |
|
$ |
188,397 |
|
|
Additions related to the acquisition completed in January
2022 |
|
28,518 |
|
|
Balance at March 31, 2022 |
|
$ |
216,915 |
|
|
Additions related to the acquisition completed in June
2022 |
|
56,530 |
|
|
Measurement-period adjustments |
|
49 |
|
|
Balance at June 30, 2022 |
|
$ |
273,494 |
|
|
Measurement-period adjustments |
|
(2,476) |
|
|
Balance at September 30, 2022 |
|
$ |
271,018 |
|
Acquisition-Related Intangible Assets
Acquisition-related
intangible assets were as follows (in thousands, except
years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Net Carrying Amount |
|
Weighted Average Remaining Useful Life (in years) |
|
|
December 31, 2021
|
|
Additions |
|
September 30, 2022 |
|
December 31, 2021
|
|
Amortization |
|
September 30, 2022 |
|
December 31, 2021
|
|
September 30, 2022 |
|
|
Developed technology |
$ |
124,730 |
|
|
$ |
30,200 |
|
|
$ |
154,930 |
|
|
$ |
(53,663) |
|
|
$ |
(18,553) |
|
|
$ |
(72,216) |
|
|
$ |
71,067 |
|
|
$ |
82,714 |
|
|
4.5 |
|
Customer relationships |
25,920 |
|
|
28,700 |
|
|
54,620 |
|
|
(7,899) |
|
|
(4,272) |
|
|
(12,171) |
|
|
18,021 |
|
|
42,449 |
|
|
5.9 |
|
Trade name |
8,990 |
|
|
3,400 |
|
|
12,390 |
|
|
(4,693) |
|
|
(1,340) |
|
|
(6,033) |
|
|
4,297 |
|
|
6,357 |
|
|
2.8 |
|
Others |
5,720 |
|
|
— |
|
|
5,720 |
|
|
(5,550) |
|
|
(170) |
|
|
(5,720) |
|
|
170 |
|
|
— |
|
|
0.0 |
|
Total |
$ |
165,360 |
|
|
$ |
62,300 |
|
|
$ |
227,660 |
|
|
$ |
(71,805) |
|
|
$ |
(24,335) |
|
|
$ |
(96,140) |
|
|
$ |
93,555 |
|
|
$ |
131,520 |
|
|
4.9 |
Amortization
expense related to acquisition-related intangible assets
was $9.3 million, and $7.3 million for the three
months ended September 30, 2022 and 2021, and
$24.3 million and $22.1 million for the nine months ended
September 30, 2022 and 2021, respectively.
As
of September 30, 2022, future estimated amortization
expense related to the acquisition-related intangible assets is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Future Amortization Expense |
|
Remainder of 2022 |
|
$ |
9,315 |
|
|
2023 |
|
33,438 |
|
|
2024 |
|
26,759 |
|
|
2025 |
|
19,642 |
|
|
2026 |
|
17,260 |
|
|
Thereafter |
|
25,106 |
|
|
Total |
|
$ |
131,520 |
|
5. 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. A significant
portion of our purchase orders to our contract manufacturers for
finished products consists of non-cancellable purchase commitments.
In addition, we purchase strategic component inventory from certain
suppliers under non-cancellable purchase commitments, including
integrated circuits, which are consigned to our contract
manufacturers. As of September 30, 2022, we had
non-cancellable purchase commitments of $4.3 billion, of
which
$3.1 billion have confirmed receipt dates within 12 months, and
$1.2 billion have confirmed receipt dates greater than 12
months. These open purchase orders are considered enforceable and
legally binding, and while we may have some limited
ability to reschedule, and adjust our requirements based on our
business needs prior to the delivery of goods or performance of
services, this can only occur with the agreement of the related
supplier.
We
also had deposits to our contract manufacturers to secure our
purchase commitments in the amount of $124.7 million and
$49.1 million as of September 30, 2022 and
December 31, 2021, respectively, which were recorded within
prepaid expenses and other current assets, as well as other assets
in the 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 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
WSOU
Investments, LLC
On November 25, 2020, WSOU Investments LLC
("WSOU") filed a lawsuit against us in the Western District of
Texas asserting that certain of our products infringe three WSOU
patents. WSOU's allegations are directed to certain features of our
wireless and switching products. WSOU seeks remedies including
monetary damages, attorney's fees and costs. On February 4, 2021,
we filed an answer denying WSOU's allegations. On November 5, 2021,
the case was transferred to the Northern District of California. On
March 30, 2022, WSOU dismissed one of the patents with prejudice,
removing Arista wireless products from those accused of
infringement. On July 1, 2022, the court stayed the case pending
the resolution of an
inter partes
review of one of the patents-in-suit.
We
intend to vigorously defend against the claims brought against us
by WSOU; however, we cannot be certain that any of WSOU's claims
will be resolved in our favor, regardless of the merits of those
claims. Any adverse litigation ruling could result in a significant
damages award against us and injunctive relief.
With
respect to the legal proceedings described above, it is our belief
that while a loss is not probable, it may be reasonably possible.
Further, at this stage in the litigation, any possible loss or
range of loss cannot be estimated; however, the outcome of
litigation is inherently uncertain. Therefore, if this legal matter
were resolved against us in a reporting period for a material
amount, our consolidated financial statements for that reporting
period could be materially adversely affected.
Other
matters
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 both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. As of
September 30, 2022, 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.
6. Stockholders’ Equity and Stock-Based
Compensation
Stock Repurchase Program
In
April 2019, our board of directors authorized
a $1.0 billion stock repurchase program (the "Repurchase
Program"). This authorization allowed us to repurchase shares of
our common stock over three years, and we completed our repurchases
under the Repurchase Program during the fourth quarter of 2021. In
the fourth quarter of 2021, our board of directors authorized an
additional $1.0 billion stock repurchase program (the “New
Repurchase Program”), which allows us to repurchase shares of our
common stock to 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 Exchange Act, or
a combination of the foregoing. The New Repurchase Program
commenced in November 2021 and expires on the three-year
anniversary thereof. The New Repurchase Program 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, 2022, the remaining authorized amount
for stock repurchases under this program was
approximately $259.6 million.
A summary of the stock repurchase activity
under the New Repurchase Program for the nine months ended
September 30, 2022 is as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, 2022 |
|
Aggregate purchase price |
|
|
|
|
|
$ |
667,470 |
|
|
Shares repurchased |
|
|
|
|
|
6,433 |
|
|
Average price paid per share |
|
|
|
|
|
$ |
103.75 |
|
The aggregate purchase price of repurchased
shares of our common stock is recorded as a reduction to retained
earnings in our unaudited condensed consolidated statements of
stockholders' equity. All shares repurchased have been
retired.
Equity Award Plan Activities
2014 Equity Incentive Plan
In April 2014, our board of directors and
stockholders approved the 2014 Equity Incentive Plan (the “2014
Plan”), effective on the first day that our common stock was
publicly traded, and simultaneously terminated the 2004 and 2011
equity plans as to future grants; however, these plans will
continue to govern the terms and conditions of the outstanding
options previously granted thereunder.
Awards granted under the 2014 Plan could be
in the form of Incentive Stock Options (“ISOs”), Nonstatutory Stock
Options (“NSOs”), Restricted Stock Units (“RSUs”), Restricted Stock
Awards (“RSAs”) or Stock Appreciation Rights (“SARs”). The number
of shares available for grant and issuance under the 2014 Plan
increases automatically on January 1 of each year commencing with
2016 by the number of shares equal to 3% of the outstanding shares
of our common stock on the immediately preceding December 31, but
not to exceed 50,000,000 shares (the “2014 Plan Evergreen
Increase”), unless our board of directors, in its discretion,
determines to make a smaller increase. Effective January 1, 2022,
our board of directors authorized an increase of 9,230,434 shares
to the shares available for issuance under the 2014 Plan. As of
September 30, 2022, there remained approximately 93.4 million
shares available for issuance under the 2014 Plan.
2014 Employee Stock Purchase Plan
In April 2014, our board of directors and
stockholders approved the 2014 Employee Stock Purchase Plan (the
“ESPP”). The ESPP became effective on the first day that our common
stock was publicly traded. The number of shares reserved for
issuance under the ESPP increases automatically on January 1 of
each year by the number of shares equal to 1% of our shares
outstanding on the immediately preceding December 31, but not to
exceed 10,000,000 shares, unless our board of directors, in its
discretion, determines to make a smaller increase. Effective
January 1, 2022, our board of directors authorized an increase of
3,076,811 shares to the shares available for issuance under the
ESPP. During the nine months ended September 30, 2022, we
issued 485,303 shares at a weighted-average purchase price of
$50.37 per share under the ESPP. As of September 30,
2022, there remained approximately 20.6 million 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Underlying
Outstanding Options |
|
Weighted-
Average
Exercise
Price per Share |
|
Weighted-
Average
Remaining
Contractual
Term (in years) |
|
Aggregate
Intrinsic
Value |
|
Balance—December 31, 2021 |
|
8,685 |
|
|
$ |
12.45 |
|
|
2.8 |
|
$ |
1,140,369 |
|
|
Options
granted |
|
— |
|
|
— |
|
|
|
|
|
|
Options
exercised |
|
(1,938) |
|
|
9.61 |
|
|
|
|
|
|
Options
canceled |
|
(177) |
|
|
15.68 |
|
|
|
|
|
|
Balance—September 30, 2022 |
|
6,570 |
|
|
$ |
13.19 |
|
|
2.1 |
|
$ |
654,987 |
|
|
Vested and exercisable—September 30, 2022 |
|
5,759 |
|
|
$ |
10.91 |
|
|
1.8 |
|
$ |
587,246 |
|
Restricted Stock Unit (RSU) Activities
A
summary of the RSU activity is 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, 2021 |
|
7,821 |
|
|
$ |
70.98 |
|
|
1.7 |
|
$ |
1,124,229 |
|
|
RSUs
granted |
|
3,469 |
|
|
100.56 |
|
|
|
|
|
|
RSUs
vested |
|
(2,006) |
|
|
64.50 |
|
|
|
|
|
|
RSUs
forfeited/canceled |
|
(389) |
|
|
76.53 |
|
|
|
|
|
|
Unvested balance—September 30, 2022 |
|
8,895 |
|
|
$ |
83.91 |
|
|
1.8 |
|
$ |
1,004,214 |
|
Stock-Based Compensation Expense
The following table summarizes the
stock-based compensation expense related to our equity awards (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Cost of revenue |
|
$ |
2,992 |
|
|
$ |
2,002 |
|
|
$ |
6,613 |
|
|
$ |
5,198 |
|
|
Research and development |
|
37,698 |
|
|
27,552 |
|
|
93,723 |
|
|
72,673 |
|
|
Sales and marketing
|
|
16,103 |
|
|
12,680 |
|
|
42,039 |
|
|
34,133 |
|
|
General and administrative |
|
8,684 |
|
|
10,901 |
|
|
23,605 |
|
|
23,628 |
|
|
Total
stock-based compensation |
|
$ |
65,477 |
|
|
$ |
53,135 |
|
|
$ |
165,980 |
|
|
$ |
135,632 |
|
As of September 30, 2022, there
were $667.1 million of unamortized compensation costs related to
all unvested awards. The unamortized compensation costs are
expected to be recognized over a weighted-average period of
approximately 3.4 years.
7. Net Income Per Share
The following table sets forth the
computation of our basic and diluted net income per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 (1) |
|
2022 |
|
2021 (1) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
353,999 |
|
|
$ |
224,305 |
|
|
$ |
925,357 |
|
|
$ |
601,559 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net income per share,
basic |
|
304,931 |
|
|
307,456 |
|
|
306,576 |
|
|
306,176 |
|
|
Add weighted-average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
Employee equity awards |
|
9,470 |
|
|
12,180 |
|
|
10,169 |
|
|
12,800 |
|
|
Weighted-average shares used in computing net income per share,
diluted |
|
314,401 |
|
|
319,636 |
|
|
316,745 |
|
|
318,976 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.16 |
|
|
$ |
0.73 |
|
|
$ |
3.02 |
|
|
$ |
1.96 |
|
|
Diluted |
|
$ |
1.13 |
|
|
$ |
0.70 |
|
|
$ |
2.92 |
|
|
$ |
1.89 |
|
(1) Prior periods have been adjusted to reflect the four-for-one
stock split effected in the form of a stock dividend in November
2021.
The following weighted-average outstanding
shares of common stock equivalents were excluded from the
computation of diluted net income per share for the periods
presented because their effect would have been anti-dilutive for
the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
2022 |
|
2021 (1) |
|
2022 |
|
2021 (1) |
|
|
|
|
|
Stock options and RSUs |
|
292 |
|
|
36 |
|
|
379 |
|
|
320 |
|
|
|
|
|
|
Employee stock purchase plan |
|
295 |
|
|
24 |
|
|
104 |
|
|
48 |
|
|
|
|
|
|
Total |
|
587 |
|
|
60 |
|
|
483 |
|
|
368 |
|
|
|
|
|
(1) Prior periods have been adjusted to reflect the four-for-one
stock split effected in the form of a stock dividend in November
2021.
8. Income Taxes (in thousands, except
percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
|
|
|
Income before income taxes |
|
$ |
424,164 |
|
|
$ |
234,640 |
|
|
$ |
1,095,951 |
|
$ |
663,591 |
|
|
|
|
|
|
Provision for income taxes |
|
70,165 |
|
|
10,335 |
|
|
$ |
170,594 |
|
62,032 |
|
|
|
|
|
|
Effective tax rate |
|
16.5 |
% |
|
4.4 |
% |
|
15.6 |
% |
|
9.3 |
% |
|
|
|
|
The increase in the effective tax rates in
the three and nine months ended September 30, 2022, as compared to
the same periods in 2021, was primarily due to a decrease in the
proportion of tax benefits attributable to stock-based compensation
versus total pre-tax income.
9. Geographical Information
We operate in one reportable segment. The
following table represents revenue based on customers’ shipping
addresses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Americas |
|
$ |
977,674 |
|
|
$ |
557,814 |
|
|
$ |
2,487,106 |
|
|
$ |
1,573,835 |
|
|
Europe, Middle East and Africa |
|
110,793 |
|
|
121,722 |
|
|
350,136 |
|
|
330,044 |
|
|
Asia-Pacific |
|
88,334 |
|
|
69,161 |
|
|
268,516 |
|
|
219,699 |
|
|
Total revenue |
|
$ |
1,176,801 |
|
|
$ |
748,697 |
|
|
$ |
3,105,758 |
|
|
$ |
2,123,578 |
|
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, 2022 |
|
December 31, 2021 |
|
United States |
|
$ |
76,578 |
|
|
$ |
62,163 |
|
|
International |
|
19,871 |
|
|
16,471 |
|
|
Total |
|
$ |
96,449 |
|
|
$ |
78,634 |
|
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 15, 2022. 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 data-driven,
cognitive cloud networking for large-scale data center and campus
workspace environments. Our cloud networking solutions consist of
our Extensible Operating System ("EOS"), a set of network
applications and our Ethernet switching and routing platforms. We
are a leader in cloud networking solutions delivering high
performance, scalability, availability, programmability, workload
orchestration, automation and visibility. In recent years, we have
sought to bring the operational consistency and principles of cloud
networking to the broader enterprise and campus markets with our
cognitive cloud networking approach, extending EOS across the
enterprise data center and campus wired and wireless
workspaces.
We
generate revenue primarily from sales of our switching and routing
platforms, which incorporate our EOS software, and related network
applications. We also generate revenue from post-contract support
("PCS"), which end customers typically purchase in conjunction with
our products, and renewals of PCS. We sell our products through
both our direct sales force and our channel partners. As of
December 31, 2021, we had delivered our cloud networking solutions
to over 8,000 end customers worldwide. 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.
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. For example, sales to our end
customers Microsoft and Meta Platforms in fiscal 2019 collectively
represented 40% of our total revenue, whereas sales to our end
customer Microsoft in fiscal 2020 and 2021 amounted to 21.5% and
15.0% of our revenues, respectively, with our end customer Meta
Platforms representing less than 10% of our revenues in both fiscal
2020 and 2021. In addition, we have experienced and expect the
collective revenue contribution from these same customers to return
to more elevated levels during fiscal 2022 as they broadly adopt
our newer 400 GbE and related networking products. This variability
in customer concentration has been linked to the timing of new
product deployments and spending cycles with these customers, and
we expect continued variability in our customer concentration and
timing of sales on a quarterly and annual basis. Furthermore, we
typically provide pricing discounts to large end customers, which
may result in lower margins for the period in which such sales
occur.
We
believe that cloud computing represents a fundamental shift from
traditional legacy network architectures. As organizations of all
sizes have moved workloads to the cloud, spending on cloud and
next-generation data centers has increased rapidly, while
traditional legacy IT spending has grown more slowly. 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.
The
markets for cloud networking solutions are highly competitive and
characterized by rapidly changing technology, changing end-customer
needs, evolving industry standards, frequent introductions of new
products and services, and industry consolidation. We expect
competition to intensify in the future as the market for cloud
networking expands and existing competitors and new market entrants
introduce new products or enhance existing products. Our future
success is dependent upon our ability to continue to evolve and
adapt to our rapidly changing environment. We must also continue to
develop market-leading products and features that address the needs
of our existing and new customers, and increase sales in the
enterprise data center switching, and campus workspace markets. We
intend to continue expanding our sales force and marketing
activities in key geographies, as well as 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 ability to rapidly develop 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 with respect to the underlying merchant
silicon architecture. The programmability of EOS has allowed us to
expand our software applications to address the ever-increasing
demands of cloud networking, including workflow automation, network
visibility, analytics and network detection and response, and has
further allowed us to integrate rapidly with a wide range of
third-party applications for virtualization, management,
automation, orchestration and network services. 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.
Macroeconomic Update
Global economic and business activities
continue to face widespread macroeconomic uncertainties, including
supply chain and labor shortages, inflation and monetary supply
shifts, recession risks, the ongoing global coronavirus
("COVID-19") pandemic, and potential disruptions from the
Russia-Ukraine conflict and U.S. trade war with China.
Our manufacturing and supply chain
operations continue to experience significant constraints, with
component shortages, increased component and supply chain costs and
delays broadly impacting the industry as a whole. 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 have extended our
demand planning horizon, increased our purchase commitments and
expect to continue to invest in working capital to address delays
in component sourcing and the risk of future supply chain
disruptions, but we cannot be certain that such delays or
disruptions will not occur. In addition, inflation pressure in our
supply chain and scarcity of some materials needed to build our
products have increased our cost of revenue and have impacted, and
may continue to negatively impact our gross margin. Our operating
cash-flows have also been and may continue to be negatively
impacted by increased component inventories on hand or at our
contract manufacturers, awaiting supply of a limited number of
scarce components necessary to build and ship the completed
product. While overall demand remains strong across our customers
base, we believe ongoing supply disruptions combined with other
supply chain related constraints, could impact our ability to
fulfill this increased demand and as a result could negatively
impact our business in future periods. In addition, although our
business has experienced limited disruption as a result of the
Russia-Ukraine conflict, continued escalation of the conflict may
negatively impact the global economy and our future operating
results and financial condition.
Management
continues to actively monitor the impact of these macroeconomic
factors on the Company's financial condition, liquidity,
operations, suppliers, industry, and workforce. The extent of the
impact of these factors 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, the impact on our customers, partners,
employees, 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 these
factors could negatively impact our business. We also believe that
any extended or renewed economic disruptions or deterioration in
the global economy could have a negative impact on demand from our
customers in future periods. Accordingly, current results and
financial condition discussed herein may not be indicative of
future operating results and trends.
Results of Operations
Three and Nine Months Ended September 30, 2022 Compared to
Three and Nine Months Ended September 30, 2021
Revenue, Cost of Revenue and Gross Margin (in thousands, except
percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
Change in |
|
2022 |
|
2021 |
|
Change in |
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
1,008,689 |
|
|
$ |
604,160 |
|
|
$ |
404,529 |
|
|
67.0 |
% |
|
$ |
2,619,213 |
|
|
$ |
1,709,772 |
|
|
$ |
909,441 |
|
|
53.2 |
% |
|
Service |
|
168,112 |
|
|
144,537 |
|
|
23,575 |
|
|
16.3 |
|
|
486,545 |
|
|
413,806 |
|
|
72,739 |
|
|
17.6 |
|
|
Total revenue |
|
1,176,801 |
|
|
748,697 |
|
|
428,104 |
|
|
57.2 |
|
|
3,105,758 |
|
|
2,123,578 |
|
|
982,180 |
|
|
46.3 |
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
432,569 |
|
|
243,342 |
|
|
189,227 |
|
|
77.8 |
|
|
1,102,012 |
|
|
687,554 |
|
|
414,458 |
|
|
60.3 |
|
|
Service |
|
34,252 |
|
|
26,740 |
|
|
7,512 |
|
|
28.1 |
|
|
96,656 |
|
|
77,959 |
|
|
18,697 |
|
|
24.0 |
|
|
Total cost of revenue |
|
466,821 |
|
|
270,082 |
|
|
196,739 |
|
|
72.8 |
|
|
1,198,668 |
|
|
765,513 |
|
|
433,155 |
|
|
56.6 |
|
|
Gross profit |
|
$ |
709,980 |
|
|
$ |
478,615 |
|
|
$ |
231,365 |
|
|
48.3 |
% |
|
$ |
1,907,090 |
|
|
$ |
1,358,065 |
|
|
$ |
549,025 |
|
|
40.4 |
% |
|
Gross margin |
|
60.3 |
% |
|
63.9 |
% |
|
|
|
|
|
61.4 |
% |
|
64.0 |
% |
|
|
|
|
Revenue by Geography (in thousands, except
percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
% of Total |
|
2021 |
|
% of Total |
|
2022 |
|
% of Total |
|
2021 |
|
% of Total |
|
Americas |
|
$ |
977,674 |
|
|
83.1 |
% |
|
$ |
557,814 |
|
|
74.5 |
% |
|
$ |
2,487,106 |
|
|
80.1 |
% |
|
$ |
1,573,835 |
|
|
74.2 |
% |
|
Europe, Middle East and Africa |
|
110,793 |
|
|
9.4 |
|
|
121,722 |
|
|
16.3 |
|
|
350,136 |
|
|
11.3 |
|
|
330,044 |
|
|
15.5 |
|
|
Asia-Pacific |
|
88,334 |
|
|
7.5 |
|
|
69,161 |
|
|
9.2 |
|
|
268,516 |
|
|
8.6 |
|
|
219,699 |
|
|
10.3 |
|
|
Total revenue |
|
$ |
1,176,801 |
|
|
100.0 |
% |
|
$ |
748,697 |
|
|
100.0 |
% |
|
$ |
3,105,758 |
|
|
100.0 |
% |
|
$ |
2,123,578 |
|
|
100.0 |
% |
Revenue
Product revenue primarily consists of sales
of our switching and routing products, and related network
applications. Service revenue is primarily derived from sales of
PCS contracts, which are 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 increased $404.5 million, or 67.0%, and $909.4 million, or
53.2%, for the three and nine months ended September 30, 2022,
respectively, compared to the same periods in 2021. These increases
reflect strong demand for our switching and routing platforms from
across our customer base, including healthy contributions from our
large cloud customers. Supply chain constraints continued to impact
our revenue performance in these periods and while changes in
product deferred revenue impacted the timing of revenue recognition
on a quarterly basis, it was not a net contributor to revenue for
the nine-month period ended September 30, 2022. In addition,
service revenue increased $23.6 million, or 16.3%, and $72.7
million, or 17.6%, in the three and nine months ended
September 30, 2022, compared to the same periods in 2021, as a
result of continued growth in initial and renewal support contracts
as our customer installed base has continued to expand.
International revenues represented
16.9% and 19.9% of
total revenues in the three and nine months ended
September 30, 2022, respectively, decreasing from 25.5% and
25.8% for the same periods in the prior year, which was primarily
driven by increased purchases from large global customers in our
Americas region. We continued to experience competitive pricing
pressure on our products and services.
Cost of Revenue and Gross Margin
Cost of product revenue primarily consists
of amounts paid for inventory to our third-party contract
manufacturers and merchant silicon vendors, overhead costs of our
manufacturing operations, including freight, and other costs
associated with manufacturing our products and managing our
inventory and supply chain. Cost of service revenue primarily
consists of personnel and other costs associated with our global
customer support and services organizations.
Cost
of revenue increased $196.7 million, or 72.8%, and $433.2 million,
or 56.6%, for the three and nine months
ended September 30, 2022, respectively, compared to the same
periods in 2021. These increases were primarily driven by a
corresponding increase in product and service revenues, combined
with an increase in material and logistics costs to mitigate supply
chain constraints and to meet customer demand.
Gross margin, or gross profit as a
percentage of revenue, has been and will continue to be affected by
a variety of factors, including pricing pressure on our products
and services due to competition, the mix of sales to large end
customers who generally receive lower pricing, the mix of products
sold, manufacturing-related costs, including costs associated with
supply chain sourcing activities, merchant silicon costs, and
excess/obsolete inventory write-downs, including charges for
excess/obsolete component inventory held by our contract
manufacturers. We expect our gross margin to fluctuate over time,
depending on the factors described above.
Gross margin decreased from 63.9% to 60.3%
for the three months ended September 30, 2022, and decreased
from 64.0% to 61.4% for the nine months ended September 30,
2022, compared to the same periods in 2021. The decrease in each
period was primarily driven by an increased proportion of our sales
to larger end customers who generally receive larger discounts and,
increased material and logistics costs to mitigate supply chain
constraints, partly offset by the impact of fixed overhead costs on
a higher 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, |
|
|
|
2022 |
|
2021 |
|
Change in |
|
2022 |
|
2021 |
|
Change in |
|
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
187,807 |
|
|
$ |
153,093 |
|
|
$ |
34,714 |
|
|
22.7 |
% |
|
$ |
537,971 |
|
|
$ |
428,873 |
|
|
$ |
109,098 |
|
|
25.4 |
% |
|
Sales and marketing |
|
81,401 |
|
|
69,740 |
|
|
11,661 |
|
|
16.7 |
|
|
241,512 |
|
|
211,385 |
|
|
30,127 |
|
|
14.3 |
|
|
General and administrative |
|
23,425 |
|
|
22,488 |
|
|
937 |
|
|
4.2 |
|
|
69,420 |
|
|
58,856 |
|
|
10,564 |
|
|
17.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
292,633 |
|
|
$ |
245,321 |
|
|
$ |
47,312 |
|
|
19.3 |
% |
|
$ |
848,903 |
|
|
$ |
699,114 |
|
|
$ |
149,789 |
|
|
21.4 |
% |
Research and development
Research and development expenses consist
primarily of personnel costs, prototype expenses, third-party
engineering costs, and an allocated portion of facility and IT
costs. Our research and development efforts are focused on new
product development and maintaining and developing additional
functionality for our existing products, including new releases and
upgrades to our EOS software and applications. We expect our
research and development expenses to increase in absolute dollars
as we continue to invest in software development in order to expand
the capabilities of our cloud networking platform, introduce new
products and features, and continue to invest in our
technology.
Research and development expenses increased
$34.7 million, or 22.7%, and $109.1 million, or 25.4%, in the three
and nine months ended September 30, 2022, respectively,
compared to the same periods in 2021. The increases were primarily
driven by an increase in personnel costs of $25.1 million and $50.5
million for the three and nine months ended September 30,
2022, respectively, compared to the same periods in 2021 due to
headcount growth. In addition, new product introduction costs
increased by $5.5 million and $37.5 million for the three and nine
months ended September 30, 2022, respectively, compared to the
same periods in 2021.
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. We expect our sales and marketing expenses to increase in
absolute dollars as we continue to expand our sales and marketing
efforts worldwide.
Sales and marketing expenses increased
$11.7 million, or 16.7%, and $30.1 million, or 14.3%, for the three
and nine months ended September 30, 2022, respectively,
compared to the same periods in 2021, which was primarily caused by
increased personnel costs driven by headcount growth.
General and administrative
General and administrative expenses consist
primarily of personnel costs and professional services costs.
General and administrative personnel costs include those for
certain executive functions, as well as finance, human resources
and legal functions. Our professional services costs are primarily
related to external legal, accounting and tax
services.
General and administrative expenses
increased $0.9 million, or 4.2%, and $10.6 million, or 17.9%, in
the three and nine months ended September 30, 2022 compared to
the same periods in 2021. The increase in the nine months ended
September 30, 2022 included an increase in personnel costs, and
increased legal and professional fees, primarily driven by
acquisitions during the first half of 2022.
Other Income (Expense), Net (in thousands, except
percentages)
Other income (expense), net consists
primarily of interest income from our cash, cash equivalents and
marketable securities, gains and losses on our equity investments
in privately-held companies and marketable securities, and foreign
currency transaction gains and losses. We expect other income
(expense), net may fluctuate in the future as a result of the
re-measurement of our equity investments upon the occurrence of
observable price changes and/or impairments, changes in interest
rates or 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, |
|
|
|
2022 |
|
2021 |
|
Change in |
|
2022 |
|
2021 |
|
Change in |
|
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
6,929 |
|
|
$ |
1,636 |
|
|
$ |
5,293 |
|
|
323.5 |
% |
|
$ |
13,783 |
|
|
$ |
5,553 |
|
|
$ |
8,230 |
|
|
148.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
708 |
|
|
— |
|
|
708 |
|
|
100.0 |
|
|
24,121 |
|
|
— |
|
|
24,121 |
|
|
100.0 |
|
|
Other income (expense), net |
|
(820) |
|
|
(290) |
|
|
(530) |
|
|
182.8 |
|
|
(140) |
|
|
(913) |
|
|
773 |
|
|
(84.7) |
|
|
Total other income (expense), net |
|
$ |
6,817 |
|
|
$ |
1,346 |
|
|
$ |
5,471 |
|
|
406.5 |
% |
|
$ |
37,764 |
|
|
$ |
4,640 |
|
|
$ |
33,124 |
|
|
713.9 |
% |
The movements in other income (expense),
net, during the three and nine months ended September 30, 2022
as compared to the same periods in 2021 were driven by an increase
in interest income due to higher interest rates. In addition, we
had unrealized gains of $24.1 million in the nine months ended
September 30, 2022 related to our equity investments.
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, |
|
|
|
2022 |
|
2021 |
|
Change in |
|
2022 |
|
2021 |
|
Change in |
|
|
|
$ |
|
$ |
|
$ |
|
% |
|
$ |
|
$ |
|
$ |
|
% |
|
Income before income taxes |
|
$ |
424,164 |
|
|
$ |
234,640 |
|
|
$ |
189,524 |
|
|
80.8 |
% |
|
$ |
1,095,951 |
|
|
$ |
663,591 |
|
|
$ |
432,360 |
|
|
65.2 |
% |
|
Provision for income taxes |
|
70,165 |
|
|
10,335 |
|
|
59,830 |
|
|
578.9 |
% |
|
170,594 |
|
|
62,032 |
|
|
108,562 </ |