10-QPeriod: Q1 FY2016

Arista Networks, Inc. Quarterly Report for Q1 Ended Mar 31, 2016

Filed May 5, 2016For Securities:ANET

Summary

Arista Networks, Inc. (ANET) reported strong revenue growth in its first quarter of 2016, with total revenue reaching $242.2 million, a 35.3% increase year-over-year. This growth was primarily driven by increased shipments to existing customers, reflecting their continued expansion and demand for Arista's cloud networking solutions. The company also saw a significant increase in service revenue, up 57.2%, attributed to the growing customer installed base and initial/renewal support contracts. While gross margin saw a slight decrease to 64.0% from 65.8% in the prior year, primarily due to a shift in customer mix towards larger clients and increased manufacturing infrastructure costs, the company demonstrated robust operational performance. Net income also saw a healthy increase to $35.2 million from $24.5 million in Q1 2015. Arista's liquidity remains strong, with cash and cash equivalents and marketable securities totaling $762.3 million as of March 31, 2016. The company continues to invest in research and development to enhance its product offerings and expand its market presence, anticipating continued growth in the cloud networking segment.

Financial Highlights

49 data points
Beta

Revenue

$242.20M

64.0% Gross Margin

Net Income

$35.24M

14.6% Net Margin

EPS (Diluted)

$0.03

Total Assets

$1.21B

Cash & Equivalents

$710.66M

Free Cash Flow

$68.50M

Financial Statements
Beta
Revenue$242.20M
Cost of Revenue$87.11M
Gross Profit$155.09M
R&D Expenses$62.52M
Operating Expenses$105.36M
Operating Income$49.73M
Net Income$35.24M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)1.08B
Shares Outstanding (Diluted)1.16B

Key Highlights

  • 1Total revenue for Q1 2016 was $242.2 million, a 35.3% increase compared to $179.0 million in Q1 2015.
  • 2Service revenue grew by 57.2% year-over-year, indicating strong adoption of support contracts.
  • 3Net income increased to $35.2 million ($0.48 diluted EPS) in Q1 2016, up from $24.5 million ($0.34 diluted EPS) in Q1 2015.
  • 4Gross margin slightly decreased to 64.0% from 65.8%, attributed to customer mix and manufacturing infrastructure investments.
  • 5Operating expenses increased by 28.5% to $105.4 million, primarily driven by significant R&D investments (+44.2%).
  • 6Cash and cash equivalents and marketable securities totaled $762.3 million as of March 31, 2016, indicating strong liquidity.
  • 7The company is actively defending against significant intellectual property litigation with Cisco Systems.

Frequently Asked Questions

Arista Networks' primary driver of revenue growth in Q1 2016 was increased shipments to existing customers who were expanding their businesses. The company also benefited from a significant increase in service revenue, which grew 57.2% year-over-year, due to a growing customer base and demand for support contracts.

Arista Networks is actively engaged in multiple patent and copyright infringement lawsuits with Cisco Systems. As of the filing date, Arista is defending against these claims, and some proceedings before the USITC are ongoing with initial determinations made, but under review. The company is also pursuing antitrust and unfair competition claims against Cisco. The outcome of these litigations is uncertain and could materially affect Arista's financial condition and results of operations.

Arista Networks maintained a strong liquidity position as of March 31, 2016, with $762.3 million in cash, cash equivalents, and marketable securities. The company generated $71.1 million in cash flow from operating activities in Q1 2016 and believes its current resources are sufficient to meet working capital needs and growth strategies. They are also investing in R&D and infrastructure, which may impact short-term operating profit margins but are expected to support long-term growth.

Arista Networks significantly increased its R&D expenses by 44.2% in Q1 2016 compared to Q1 2015, totaling $62.5 million. This investment is strategic, aimed at enhancing its cloud networking platform, developing new products, and maintaining technology leadership. While this increases operating expenses, the company views it as crucial for long-term growth and market competitiveness.