01—Abstract
Summary
Summary of the 10-K filed March 12, 2015. Cited figures are marked; the original filing is the authoritative source.
Arista Networks' first 10-K as a public company (fiscal 2014) shows a business that grew very quickly and became solidly profitable.
Revenue rose 61.7% to $584.1 milliona from $361.2 million, and net income reached $86.9 million, a 14.9% net margin, up from $42.5 million in 2013. Gross margin improved to 67.1% from 66.0%, helped by lower warranty and excess-inventory charges that did not recur. Operating margin expanded to 21.5%.
Operating cash flow was $114.5 millionb, and cash plus marketable securities totaled $449.5 million after the June 2014 IPO, which raised net proceeds of about $239.1 million at $43.00 per share. The main risks for investors are customer concentration and litigation. Microsoft, through channel partner World Wide Technology, accounted for 14.9% of 2014 revenue, down from 21.9% in 2013.
Cisco has filed two patent and copyright suits in federal court and two ITC Section 337 investigations, which could lead to an exclusion order on the 7000 Series switches that generate most product revenue. Management says it does not believe a loss is probable at this stage. A separate OptumSoft lawsuit challenges Arista's ownership of parts of its EOS operating system.
Operating expenses grew faster than revenue, and management says operating margins could decline in the short to medium term as it invests in R&D, sales, and infrastructure. Competition is intensifying from Cisco, Juniper, Brocade, HP, Dell, and white-box vendors.
Arista argues its single-binary EOS platform and cloud networking focus differentiate it. Investors should weigh the strong growth and profitability against the litigation overhang, customer concentration, and average selling price pressure (down 15%c per port in 2014).
02—Key points
Key Highlights
- Revenue grew 61.7% to $584.1 million in 2014, and net income rose to $86.9 million from $42.5 million, a 14.9% net margin.
- Gross margin improved to 67.1% from 66.0%, mainly because warranty and excess/obsolete inventory charges of roughly $10.3 million from 2013 did not recur.
- The June 2014 IPO at $43.00 per share raised about $239.1 million in net proceeds; year-end cash and marketable securities were $449.5 million with no long-term debt remaining.
- Customer concentration remains high: Microsoft (via World Wide Technology) was 14.9% of 2014 revenue, and the largest end customer drove significant quarterly variability.
- Cisco has filed two federal patent and copyright suits and two ITC Section 337 investigations seeking possible import exclusion of the 7000 Series switches, which generate most product revenue.
- Average selling price per switch port fell 15.0% in 2014 due to product mix and lower pricing for large end customers, while switch ports shipped grew 82.4%.
- Operating margin was 21.5%, but management warned that operating profit as a percentage of revenue could decline in the short to medium term because of investments in R&D, sales, and infrastructure.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Arista Networks, Inc. kept $0.15.
- Revenue$584.1M100.0%
- Cost of revenue−$192.0M32.9%
- Gross profit$392.1M67.1%
- Operating costs−$266.6M45.6%
- Operating income$125.5M21.5%
- Interest, other & tax−$38.7M6.6%
- Net income$86.8M14.9%
Where FY2014 revenue went
$584.1M- Cost of revenue: $192.0M, 33% of revenue
- R&D: $148.9M, 25% of revenue
- Other operating costs: $117.7M, 20% of revenue
- Net income: $86.8M, 15% of revenue
- Interest, other & tax: $38.7M, 6.6% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 12, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $584.11M$361.22M | +61.7% |
| Cost of Revenue | $192.01M$122.69M | +56.5% |
| Gross Profit | $392.09M$238.54M | +64.4% |
| R&D Expenses | $148.91M$98.59M | +51.0% |
| Operating Expenses | $266.58M$172.39M | +54.6% |
| Operating Income | $125.51M$66.15M | +89.7% |
| Net Income | $86.85M$42.46M | +104.5% |
| EPS (Basic) | $0.09$0.05 | +86.8% |
| EPS (Diluted) | $0.08$0.04 | +79.2% |
| Shares Outstanding (Basic) | 774.83M437.12M | +77.3% |
| Shares Outstanding (Diluted) | 873.44M480.82M | +81.7% |
05—Questions
Frequently Asked Questions
How much did Arista grow in 2014, and was it profitable?
Revenue grew 61.7% to $584.1 million from $361.2 million in 2013. Net income was $86.9 million, up from $42.5 million, and income from operations was $125.5 million, a 21.5% operating margin. The company says it has been profitable and cash-flow positive every year since 2010.
What is the biggest legal risk to investors?
The Cisco litigation is the largest risk. Cisco filed two federal suits in December 2014 and two ITC investigations that seek a limited exclusion order against certain Arista switches, including the 7000 Series. Management says it intends to defend vigorously and that a loss is not currently probable or estimable. An adverse ruling could bring damages, royalties, product modifications, or an import ban on key products. The OptumSoft suit over EOS code ownership adds further uncertainty.
How concentrated is Arista's customer base?
Concentration is significant. Microsoft, through channel partner World Wide Technology, accounted for 14.9% of 2014 revenue, 21.9% in 2013, and 15.3% in 2012. The company says large purchases by a limited number of end customers will continue to make up a substantial share of revenue. That concentration makes quarterly results hard to predict.
Why did gross margin improve, and will that last?
Gross margin rose to 67.1% from 66.0%, mainly because 2013 included about $10.3 million of warranty and excess/obsolete inventory charges that did not recur in 2014. Those gains were partly offset by $7.4 million of higher manufacturing overhead and by pricing discounts to large customers. Management expects margins to vary over time with product mix, pricing, and component costs, so the 2014 level should not be assumed to be permanent.
How is Arista positioned against larger competitors like Cisco?
Arista competes mainly on its EOS software, which is modular, programmable, and runs the same binary image across all its switches. It has also built integrations with VMware, Microsoft, and other cloud platforms, and it targets cloud and next-generation data center customers. Management acknowledges that Cisco, Juniper, Brocade, HP, Dell, and white-box vendors have far greater resources, name recognition, and bundling ability, and that competition is expected to intensify and push prices down.
06—Continue