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Arista Networks Reports Fourth Quarter and Full Year 2014 Financial Results

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Arista Networks, Inc. (NYSE:ANET) , an industry leader in software-driven cloud networking solutions for large data center and computing environments, today announced financial results for its fourth quarter and year ended December 31, 2014.

Fourth Quarter Financial Highlights

  • Revenue of $173.5 million, an increase of 51.2% compared to the fourth quarter of 2013, and an increase of 11.6% from the third quarter of 2014.
  • GAAP gross margin of 67.1%, compared to GAAP gross margin of 67.5% in the fourth quarter of 2013 and 64.9% in the third quarter of 2014.
  • GAAP net income of $31.0 million, or $0.43 per diluted share, compared to GAAP net income of $13.7 million, or $0.23 per diluted share, in the fourth quarter of 2013.
  • Non-GAAP net income of $37.3 million or $0.53 per diluted share, compared to non-GAAP net income of $17.5 million, or $0.27 per diluted share, in the fourth quarter of 2013.
  • Operating cash flow of $15.8 million, compared to $6.0 million of operating cash used in the fourth quarter of 2013.

“We are pleased with our annual revenue growth in 2014 of 61.7% over 2013, with broad customer momentum across our key verticals,” stated Jayshree Ullal, Arista President and CEO. “Our pioneering innovations in EOS+, in combination with our flagship 7000 series spine and spline models have made cloud networking transition a reality.”

Full Year Financial Highlights

  • Revenue of $584.1 million, an increase of 61.7% compared to fiscal year 2013.
  • GAAP gross margin of 67.1%, compared to GAAP gross margin of 66.0% in fiscal year 2013.
  • GAAP net income of $86.9 million, or $1.29 per diluted share, compared to GAAP net income of $42.5 million, or $0.72 per diluted share, in fiscal year 2013.
  • Non-GAAP net income of $105.5 million or $1.54 per diluted share, compared to non-GAAP net income of $52.6 million, or $0.84 per diluted share, in fiscal year 2013.
  • Operating cash flow of $114.5 million, compared to $34.6 million in fiscal year 2013.

Commenting on the company’s financial results, Kelyn Brannon, CFO of Arista Networks, said, “We executed strongly on our business model throughout 2014 and achieved impressive financial results. The fourth quarter capped off a year of record revenue, EPS and operating cash flow, while we also increased non-GAAP operating margin to 26% for the year.”

Financial Outlook

For the first quarter of 2015, we expect:

  • Revenue between $164 and $172 million.
  • Non-GAAP gross margin in the range of 63% to 66% and
  • Non-GAAP operating margin in the range of 22% to 25%.

Guidance for non-GAAP financial measures excludes legal expenses associated with the OptumSoft and Cisco litigation, stock-based compensation and other non-recurring expenses. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis.

Prepared Materials and Conference Call Information

Arista executives will discuss fourth quarter 2014 financial results on a conference call at 1:30 p.m. Pacific time today. The conference call can be heard via webcast on our investor relations website: investors.arista.com, or by dialing 1-877-201-0168 in the United States or 1-647-788-4901 from international locations. The Conference ID is 78056197.

Shortly after the conclusion of the conference call, a replay of the audio webcast will be available on Arista’s Investor Relations website.

Forward-Looking Statements

This press release contains “forward-looking statements” regarding our performance, including statements in the section entitled “Financial Outlook,” such as estimates regarding revenue, non-GAAP gross margin and non-GAAP operating margin for the first quarter of FY 2015. Forward-looking statements are subject to a number of uncertainties and risks that could cause actual results to differ materially from those anticipated in the forward-looking statements including: Arista Networks’ limited operating history; risks associated with Arista Networks’ rapid growth; Arista Networks’ customer concentration; requests for more favorable terms and conditions from our large end customers; declines in the sales prices of our products and services; changes in customer order patterns or customer mix; increased competition in our products and service markets, including the data center market; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; the dispute with Cisco Systems, Inc. and OptumSoft, Inc.; the evolution of the cloud networking market and the adoption by end customers of Arista Networks’ cloud networking solutions; and general market, political, economic and business conditions. Additional risks and uncertainties that could affect Arista Networks can be found in Arista’s Annual Report on Form 10-K that will be filed with the SEC for the year ended December 31, 2014, and other filings that the company makes to the SEC from time to time. You can locate these reports through our website at http://investors.arista.com and on the SEC’s website at www.sec.gov. All forward-looking statements in this press release are based on information available to the company as of the date hereof and Arista Networks disclaims any obligation to publicly update or revise any forward-looking statement to reflect events that occur or circumstances that exist after the date on which they were made.

Non-GAAP Financial Measures

The company reports non-GAAP results for gross margins, net income and net income per share in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that the use of these non-GAAP financial measures is useful to investors as an additional tool to evaluate ongoing operating results and trends.

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

Arista Networks defines non-GAAP gross margins as total gross profit, excluding stock-based compensation expenses, divided by total revenue. Arista Networks defines non-GAAP net income as net income, excluding stock based compensation expense, realized gain on note receivable, and the related income tax effect of these exclusions. Arista Networks defines non-GAAP net income per share as non-GAAP net income divided by the diluted weighted average shares outstanding on a pro forma basis. In order to evaluate per share information on a comparative basis, the company believes it is meaningful to provide a non-GAAP financial measure that gives pro forma effect to the conversion of the preferred shares and notes payable into common shares and the issuance of common shares in connection with the company’s initial public offering as if each happened at the beginning of each period presented.

About Arista Networks

Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista’s award-winning 10/40/100 GbE switches redefine scalability, robustness, and price-performance, with over 3,000 customers and more than three million cloud networking ports deployed worldwide. At the core of Arista’s platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers.

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

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

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Income

(Unaudited in thousands, except per share amounts)

Three Months Ended December 31,

Year Ended December 31,
2014 2013 2014 2013
Revenue $ 173,489 $ 114,766 $ 584,106 $ 361,224
Cost of revenue 57,049 37,293 192,015 122,686
Gross profit 116,440 77,473 392,091 238,538
Operating expenses:
Research and development 44,344 31,352 148,909 98,587
Sales and marketing 25,016 17,412 85,338 55,115
General and administrative 8,078 6,204 32,331 18,688
Total operating expenses 77,438 54,968 266,578 172,390
Income from operations 39,002 22,505 125,513 66,148
Other income (expense), net:
Interest expense-related party (439 ) (782 ) (1,739 )
Interest expense (768 ) (1,360 ) (5,498 ) (5,380 )
Other income (expense), net (151 ) (631 ) 2,275 (754 )
Total other income (expense), net (919 ) (2,430 ) (4,005 ) (7,873 )
Income before provision for income taxes 38,083 20,075 121,508 58,275
Provision for income taxes 7,046 6,333 34,658 15,815
Net income $ 31,037 $ 13,742 $ 86,850 $ 42,460
Net income attributable to common stockholders:
Basic $ 30,251 $ 6,970 $ 68,889 $ 20,777
Diluted $ 30,328 $ 7,415 $ 70,524 $ 21,780
Net income per share attributable to common stockholders:
Basic $ 0.48 $ 0.24 $ 1.42 $ 0.76
Diluted $ 0.43 $ 0.23 $ 1.29 $ 0.72
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 63,186 28,487 48,427 27,320
Diluted 70,219 32,470 54,590 30,051

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

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

Three Months Ended December 31, Year Ended December 31,
2014 2013 2014 2013
GAAP gross profit $ 116,440 $ 77,473 $ 392,091 $ 238,538
GAAP gross margin 67.1 % 67.5 % 67.1 % 66.0 %
Stock-based compensation expense 543 151 1,535 408
Non-GAAP gross profit $ 116,983 $ 77,624 $ 393,626 $ 238,946
Non-GAAP gross margin 67.4 % 67.6 % 67.4 % 66.1 %
GAAP income from operations $ 39,002 $ 22,505 $ 125,513 $ 66,148
Stock-based compensation expense 8,050 3,760 27,619 10,159
Non-GAAP income from operations $ 47,052 $ 26,265 $ 153,132 $ 76,307
Non-GAAP operating margin 27.1 % 22.9 % 26.2 % 21.1 %
GAAP net income $ 31,037 $ 13,742 $ 86,850 $ 42,460
Stock-based compensation expense 8,050 3,760 27,619 10,159

Realized gain on note receivable

(4,000 )
Income tax effect on non-GAAP exclusions (1,750 ) (4,931 )
Non-GAAP net income $ 37,337 $ 17,502 $ 105,538 $ 52,619
Weighted average shares used in computing GAAP diluted income per share attributable to common stockholders 70,219 32,470 54,590 30,051
Additional weighted average dilutive shares1 32,282 13,797 32,282
Non-GAAP weighted average diluted shares 70,219 64,752 68,387 62,333
GAAP diluted net income per share attributable to common stockholders $ 0.43 $ 0.23 $ 1.29 $ 0.72
Net income attributable to participating securities 0.01 0.19 0.30 0.69
Non-GAAP adjustments to net income 0.09 0.12 0.34 0.34
Non-GAAP adjustments to diluted shares (0.27 ) (0.39 ) (0.91 )
Non-GAAP diluted net income per share $ 0.53 $ 0.27 $ 1.54 $ 0.84
Summary of Stock-Based Compensation Expense
Cost of revenue $ 543 $ 151 $ 1,535 $ 408
Research and development 4,688 2,015 14,986 5,464
Sales and marketing 1,897 1,126 7,643 2,985
General and administrative 922 468 3,455 1,302
Total $ 8,050 $ 3,760 $ 27,619 $ 10,159

1Includes weighted average shares from the issuance of shares upon our IPO and the assumed conversion of preferred stock and notes payable at the beginning of each quarter.

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited in thousands)

December 31,
2014
December 31,
2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 240,031 $ 113,664
Marketable securities 209,426
Accounts receivable, net 96,982 77,999
Inventories 80,519 67,094
Deferred tax assets 12,252 12,356
Prepaid expenses and other current assets 40,269 7,653
Notes receivable 4,000
Total current assets 679,479 282,766
Property and equipment, net 71,558 67,204
Deferred tax assets 11,510 4,541
Other assets 48,476 10,009
TOTAL ASSETS $ 811,023 $ 364,520
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 32,428 $ 20,111
Accrued liabilities 40,369 21,539
Deferred revenue 60,327 41,306
Convertible notes payable, related party 24,743
Accrued interest payable, related party 4,484
Convertible notes payable 74,050
Accrued interest payable 12,967
Other current liabilities 11,249 10,144
Total current liabilities 144,373 209,344
Income taxes payable 17,323 14,716
Lease financing obligations, non-current 42,547 43,152
Other long-term liabilities 51,122 19,576
TOTAL LIABILITIES 255,365 286,788
STOCKHOLDERS’ EQUITY:
Convertible preferred stock 5,992
Common stock 7 3
Additional paid-in capital 426,171 28,737
Retained earnings 129,814 42,964
Accumulated other comprehensive income (loss) (334 ) 36
TOTAL STOCKHOLDERS’ EQUITY 555,658 77,732
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 811,023 $ 364,520

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

Year Ended December 31,
2014 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 86,850 $ 42,460
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,021 5,044
Stock-based compensation 27,619 10,159
Deferred income taxes (6,774 ) (8,831 )
Provision for bad debts 860 191

Realized gain on notes receivable

(4,000 )
Amortization of debt discount 527 1,118
Write-off of debt discount on notes payable 680
Excess tax benefit on stock based-compensation (17,436 ) (882 )
Other 348
Changes in operating assets and liabilities:
Accounts receivable (19,844 ) (28,289 )
Inventories (13,425 ) (49,179 )
Prepaid expenses and other current assets (32,616 ) 2,981
Other assets (4,261 ) (305 )
Accounts payable 14,007 3,865
Accrued liabilities 18,874 11,967
Deferred revenue 47,564 34,127
Interest payable (1,630 ) 4,501
Interest payable-related party 670 1,500
Income taxes payable 4,377 2,141
Other liabilities 2,105 2,080
Net cash provided by operating activities 114,516 34,648
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (13,134 ) (20,316 )
Purchases of marketable securities (210,019 )
Proceeds from repayment of notes receivable 8,000 1,000
Change in restricted cash 4,040
Other investing activities (38,249 ) (175 )
Net cash used in investing activities (249,362 ) (19,491 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of issuance cost 239,315
Repayment on notes payable (20,000 )
Principal payments of lease financing obligations (793 )
Proceeds from issuance of common stock upon exercising options, net of repurchases 25,379 9,004
Excess tax benefit on stock-based compensation 17,436 882
Net cash provided by financing activities 261,337 9,886
Effect of exchange rate changes (124 ) (34 )
NET INCREASE IN CASH AND CASH EQUIVALENTS 126,367 25,009
CASH AND CASH EQUIVALENTS-Beginning of period 113,664 88,655
CASH AND CASH EQUIVALENTS-End of period $ 240,031 $ 113,664

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