10-QPeriod: Q1 FY2015

Arista Networks, Inc. Quarterly Report for Q1 Ended Mar 31, 2015

Filed May 15, 2015For Securities:ANET

Summary

Arista Networks, Inc. (ANET) filed its Form 10-Q for the period ending March 30, 2015, detailing its operational risks and financial considerations as an emerging growth company. The company is subject to various risks, including those related to its reliance on a few key component suppliers and third-party manufacturers, potential supply chain disruptions, and the complexity of managing inventory. Arista also faces risks associated with its sales model, including long and unpredictable sales cycles, reliance on end-customer renewals for maintenance and support contracts, and potential price erosion due to competition and customer concessions. Furthermore, the company highlights its ongoing efforts to strengthen internal controls over financial reporting, noting a previously identified material weakness that is under remediation. Arista also discusses risks related to intellectual property, litigation, international operations, cybersecurity, and the volatility of its common stock price. Investors should note the company's strategy to prioritize long-term growth over short-term profitability, which may impact current profit margins. The filing also confirms that Arista does not intend to pay dividends for the foreseeable future.

Financial Highlights

49 data points
Beta

Revenue

$179.04M

65.8% Gross Margin

Net Income

$24.49M

13.7% Net Margin

EPS (Diluted)

$0.02

Total Assets

$875.09M

Cash & Equivalents

$275.19M

Free Cash Flow

$15.63M

Financial Statements
Beta
Revenue$179.04M
Cost of Revenue$61.29M
Gross Profit$117.75M
R&D Expenses$43.34M
Operating Expenses$82.00M
Operating Income$35.76M
Net Income$24.49M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)1.03B
Shares Outstanding (Diluted)1.13B

Key Highlights

  • 1Arista Networks is operating as an 'emerging growth company,' allowing for certain regulatory and disclosure exemptions, but has chosen to opt out of extended transition periods for new accounting standards.
  • 2The company acknowledges a material weakness in internal control over financial reporting that was identified for the year ended December 31, 2014, and is currently under remediation, posing a risk to investor confidence if not effectively resolved.
  • 3Significant reliance on a limited number of sole-source component suppliers and third-party contract manufacturers (like Jabil Circuit and Foxconn) creates vulnerability to supply shortages, delays, and pricing fluctuations.
  • 4The business is subject to long and unpredictable sales cycles, especially with large enterprise customers, which can lead to variability in revenue recognition and make forecasting challenging.
  • 5Arista's revenue is heavily dependent on sales of its 7000 Series of switches, making it vulnerable to declines in this product line's performance or failure to successfully launch next-generation versions.
  • 6The company prioritizes long-term growth over short-term profitability, indicating that investments in R&D, sales, and marketing may lead to lower operating profits in the short to medium term.
  • 7Stock price volatility is a significant concern, influenced by product announcements, competitive landscape, and broader market trends, with no intention to pay dividends in the foreseeable future.

Frequently Asked Questions

Arista Networks is designated as an 'emerging growth company' under the JOBS Act. This status provides exemptions from certain disclosure requirements, particularly regarding executive compensation and auditor attestation for internal controls (Section 404 of Sarbanes-Oxley Act). While beneficial for the company, investors should be aware that reduced disclosure may be a factor. Importantly, Arista has opted out of the extended transition period for new accounting standards, meaning it will comply with new standards on the same timeline as non-emerging growth companies.

Arista faces significant risks from its reliance on a limited number of sole-source component suppliers and third-party contract manufacturers such as Jabil Circuit and Foxconn. Potential issues include supply shortages, manufacturing delays, quality control problems, and price fluctuations. These factors could disrupt product delivery, lead to lost sales opportunities, and adversely affect gross margins. The company is actively working to manage these complexities, including issuing non-cancelable purchase orders, but inherent risks remain.

Arista's strategy explicitly prioritizes long-term growth over short-term profitability. This means the company is willing to incur significant expenses in areas like research and development, sales, and marketing, which may lead to lower operating profits in the short to medium term. Investors should understand that this focus on growth is a deliberate choice and may influence profit margins. The market price of Arista's common stock is noted as volatile, influenced by many factors, and the company does not intend to pay dividends, meaning investor returns are primarily expected from stock appreciation.

Arista acknowledges that a material weakness in internal control over financial reporting was identified for the year ended December 31, 2014, and remediation efforts are in progress but not yet complete. The company also notes a previously identified material weakness for 2010-2013 that has been remediated. The effectiveness of internal controls is crucial for investor confidence, and any failure to maintain effective controls could lead to a decline in stock price, regulatory scrutiny, or litigation. Investors should monitor the progress and successful remediation of these control deficiencies.