Arista Networks, Inc. - FORM 8-K - EX-99.1 - February 18, 2021

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Exhibit 99.1
Arista Networks, Inc. Reports Fourth Quarter and Year End 2020 Financial Results
SANTA CLARA, Calif.- February 18, 2021 -- Arista Networks, Inc. (NYSE: ANET), an industry leader in cognitive cloud networking for large datacenter and campus environments, today announced financial results for its fourth quarter and year ended December 31, 2020.
Fourth Quarter Financial Results
•Revenue of $648.5 million, an increase of 7.1% compared to the third quarter of 2020, and an increase of 17.4% from the fourth quarter of 2019.
•GAAP gross margin of 63.9%, compared to GAAP gross margin of 63.6% in the third quarter of 2020 and 64.5% in the fourth quarter of 2019.
•Non-GAAP gross margin of 65.0%, compared to non-GAAP gross margin of 64.6% in the third quarter of 2020 and 65.2% in the fourth quarter of 2019.
•GAAP net income of $183.0 million, or $2.31 per diluted share, compared to GAAP net income of $260.7 million, or $3.25 per diluted share in the fourth quarter of 2019.
•Non-GAAP net income of $197.7 million, or $2.49 per diluted share, compared to non-GAAP net income of $183.4 million, or $2.29 per diluted share in the fourth quarter of 2019.
Full Year Financial Results
•Revenue of $2.32 billion, a decrease of 3.9% compared to fiscal year 2019.
•GAAP gross margin of 63.9%, compared to GAAP gross margin of 64.1% in fiscal year 2019.
•Non-GAAP gross margin of 65.0%, compared to non-GAAP gross margin of 64.7% in fiscal year 2019.
•GAAP net income of $634.6 million, or $7.99 per diluted share, compared to GAAP net income of $859.9 million, or $10.63 per diluted share, in fiscal year 2019.
•Non-GAAP net income of $718.4 million or $9.04 per diluted share, compared to non-GAAP net income of $786.8 million or $9.73 per diluted share, in fiscal year 2019.
“I am pleased with Arista's return to growth in Q4 2020. With our laser focus on customer success, pristine financials and transformative innovations, Arista is well positioned to continue our momentum in the post pandemic era,” stated Jayshree Ullal, President and CEO of Arista Networks.
Commenting on the company's financial results, Ita Brennan, Arista’s CFO said, “The Arista team showed great resilience and flexibility throughout 2020, maintaining operational excellence, while executing well on our market and product diversification initiatives.”
Fourth Quarter Company Highlights
•Arista announced the 750 Series – Arista expands its Cognitive Campus portfolio with the new 750 Series modular chassis for enhanced security solutions and simplified automation workflows.
•Arista Delivers Network Observability with DANZ Monitoring Fabric – Arista announced a network observability software, DANZ Monitoring Fabric (DMF), on Arista switching platforms for enterprise-wide traffic visibility and contextual insights.
•Arista Unveils Attack Surface Assessment Service – Arista announced an Attack Surface Assessment, an advanced security service delivered through the recent acquisition of Awake Security.
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Full Year Company Highlights
•Arista Networks acquired Awake Security, a Network Detection and Response (NDR) platform provider that combines artificial intelligence (AI) with human expertise to autonomously hunt and respond to insider and external threats.
•Arista Networks acquired Big Switch Networks, a network monitoring and SDN (Software Defined Networking) pioneer.
•Arista Networks recognized as a leader in The Forrester Wave™: Open, Programmable Switches for A Businesswide SDN, Q3 2020 with the top score in the strategy category.
•Arista Networks Announced Optical Line System for 400G – The Arista OSFP-LS is a highly compact, low power and cost-effective solution for increasing bandwidth between data centers without the need for external optical line systems.
•This is the sixth consecutive year Arista Networks has been recognized in the Leaders Quadrant of the 2020 Gartner Magic Quadrant for Data Center Networking published on 30 June 2020.
Financial Outlook
For the first quarter of 2021, we expect:
•Revenue between $630 million to $650 million;
•Non-GAAP gross margin of 63% to 65%; and
•Non-GAAP operating margin of approximately 37%.
Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and certain non-recurring items. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis (see further explanation below under “Non-GAAP Financial Measures”).
Prepared Materials and Conference Call Information
Arista executives will discuss the fourth quarter and year end 2020 financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial (833) 968-2211 in the United States or +1 (778) 560-2896 from international locations. The Conference ID is 9269847.
The financial results conference call will also be available via live webcast on our investor relations website at https://investors.arista.com/. 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 future performance, including quotations from management, 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 fiscal year 2021, statements regarding the benefits of the introduction of new products and our leadership in cloud networking, and statements regarding Arista’s ability to continue its momentum in the post pandemic era. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause actual results, performance or achievements to differ materially from those anticipated in or implied by the forward-looking statements including risks associated with: the impact of the COVID-19 pandemic on our business; the rapid evolution of the networking market; any failure to successfully pursue new products and service offerings and expand into adjacent markets; a decline in our revenue growth rate; unpredictability of our results of operations;
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interruptions or delays in shipments; adverse economic conditions or reduced information technology and network infrastructure spending; intense competition; expansion of our international sales and operations; investment or acquisition in other businesses; seasonality; our ability to attract new large end customers or sell products and services to existing end customers; our ability to increase market awareness of our company and new products and services; product quality problems; our ability to anticipate technological shifts and develop products to meet those technological shifts; insufficient component supply and inventory; our ability to protect, defend and maintain our intellectual property rights; vulnerabilities in our products and failure of our products to detect security breaches our intellectual property rights; and tax, tariff, import/export restrictions; and other future events. Additional risks and uncertainties that could affect us can be found in our most recent filings with the Securities and Exchange Commission including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q. You can locate these reports through our website at https://investors.arista.com/ and on the SEC’s website at https://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 we disclaim 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.
Gartner “Magic Quadrant for Data Center and Cloud Networking,” Andrew Lerner, et al, 30 June 2020. Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose. The Gartner content described herein, (the "Gartner content") represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Gartner Content speaks as of its original publication date (and not as of the date of this Form 8-K) and the opinions expressed in the Gartner Content are subject to change without notice.
Non-GAAP Financial Measures
This press release and accompanying table contain certain non-GAAP financial measures including non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margins, non-GAAP net income and non-GAAP diluted net income per share. These non-GAAP financial measures exclude stock-based compensation expense, amortization of acquisition-related intangible assets, certain non-recurring charges or benefits, and the income tax effect of these non-GAAP exclusions. In addition, non-GAAP financial measures exclude net tax benefits associated with stock-based awards, which include excess tax benefits, and other discrete indirect effects of such awards. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that these non-GAAP financial measures are useful to investors as an additional tool to evaluate ongoing operating results and trends. In addition, these measures are the primary indicators management uses as a basis for its planning and forecasting for future periods.
Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP financial measures. Non-GAAP financial measures are subject to limitations, and should be read only in conjunction with the company's consolidated financial statements prepared in accordance with GAAP. Non-GAAP financial measures do not have any standardized meaning and are therefore unlikely to be comparable to similarly titled measures presented by other companies. A description of these non-GAAP financial measures and a reconciliation of the company’s non-GAAP financial measures to their most directly comparable GAAP measures have been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.
The company’s guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and other non-recurring items. The company does not provide
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guidance on GAAP gross margin or GAAP operating margin or the various reconciling items between GAAP gross margin and GAAP operating margin and non-GAAP gross margin and non-GAAP operating margin. A reconciliation of the non-GAAP financial measures guidance to the corresponding GAAP measures on a forward-looking basis is not available because stock-based compensation expense is impacted by the company’s future hiring and retention needs and the future fair market value of the company’s common stock, all of which are difficult to predict and subject to constant change. The actual amount of stock-based compensation expense will have a significant impact on the company’s GAAP gross margin and GAAP operating margin.
About Arista Networks
Arista Networks is an industry leader in cognitive cloud networking solutions for large data center and campus environments. Arista’s award-winning platforms deliver availability, agility, automation analytics, and security through CloudVision® and Arista EOS®, an advanced network operating system. For more information visit www.arista.com.
ARISTA, CloudVision, CloudEOS and MSS 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 www.arista.com.
Investor Contacts
Arista Networks, Inc.
Charles Yager, 408-547-5892
Product and Investor Advocacy
cyager@arista.com

or
Curtis McKee, 408-547-5549
Corporate and Investor Development
curtism@arista.com
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ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
Three Months Ended December 31,Twelve Months Ended December 31,
2020201920202019
Revenue:
Product$518,281 $447,498 $1,830,842 $2,021,150 
Service 130,201 105,048 486,670 389,556 
Total revenue648,482 552,546 2,317,512 2,410,706 
Cost of revenue:
Product210,436 175,476 749,962 792,382 
Service 23,462 20,767 85,664 73,986 
Total cost of revenue233,898 196,243 835,626 866,368 
Total gross profit 414,584 356,303 1,481,886 1,544,338 
Operating expenses:
Research and development 133,847 110,063 486,594 462,759 
Sales and marketing 67,671 54,535 229,366 213,907 
General and administrative 18,428 15,716 66,242 61,898 
Total operating expenses 219,946 180,314 782,202 738,564 
Income from operations 194,638 175,989 699,684 805,774 
Other income, net5,542 11,183 39,179 56,496 
Income before income taxes200,180 187,172 738,863 862,270 
Provision for (benefit from) income taxes17,222 (73,520)104,306 2,403 
Net income$182,958 $260,692 $634,557 $859,867 
Net income attributable to common stockholders:
Basic $182,958 $260,589 $634,557 $859,444 
Diluted $182,958 $260,594 $634,557 $859,468 
Net income per share attributable to common stockholders:
Basic $2.41 $3.41 $8.35 $11.26 
Diluted $2.31 $3.25 $7.99 $10.63 
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 75,864 76,345 75,984 76,312 
Diluted 79,261 80,261 79,465 80,879 

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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,		Twelve Months Ended
December 31,
2020201920202019
GAAP gross profit$414,584 $356,303 $1,481,886 $1,544,338 
GAAP gross margin63.9 %64.5 %63.9 %64.1 %
Stock-based compensation expense1,554 1,253 6,272 4,637 
Intangible asset amortization5,464 2,626 17,480 10,503 
Non-GAAP gross profit$421,602 $360,182 $1,505,638 $1,559,478 
Non-GAAP gross margin65.0 %65.2 %65.0 %64.7 %
GAAP income from operations$194,638 $175,989 $699,684 $805,774 
Stock-based compensation expense40,095 26,435 137,042 101,280 
Litigation expense — 333 — 2,295 
Intangible asset amortization7,562 3,084 24,086 13,375 
Acquisition-related costs(1)
1,215 — 13,933 — 
Non-GAAP income from operations$243,510 $205,841 $874,745 $922,724 
Non-GAAP operating margin37.6 %37.3 %37.7 %38.3 %
GAAP net income$182,958 $260,692 $634,557 $859,867 
Stock-based compensation expense40,095 26,435 137,042 101,280 
Litigation expense — 333 — 2,295 
Intangible asset amortization7,562 3,084 24,086 13,375 
Acquisition-related costs1,215 — 13,933 — 
Gain on investment in privately-held companies(4,164)— (4,164)(5,427)
Altera stock-based tax charge (2)
— — — 9,781 
Tax benefit on intra-entity IP transfer (3)
— (85,819)— (85,819)
Tax benefit on stock-based awards (19,802)(16,232)(60,880)(89,415)
Income tax effect on non-GAAP exclusions(10,188)(5,045)(26,163)(19,093)
Non-GAAP net income$197,676 $183,448 $718,411 $786,844 
GAAP diluted net income per share attributable to common stockholders$2.31 $3.25 $7.99 $10.63 
Non-GAAP adjustments to net income0.18 (0.96)1.05 (0.90)
Non-GAAP diluted net income per share$2.49 $2.29 $9.04 $9.73 
Weighted-average shares used in computing GAAP and Non-GAAP diluted net income per share attributable to common stockholders79,261 80,261 79,465 80,879 
Summary of Stock-Based Compensation Expense:
Cost of revenue$1,554 $1,253 $6,272 $4,637 
Research and development23,184 13,897 79,913 53,068 
Sales and marketing11,188 7,705 34,944 29,168 
General and administrative4,169 3,580 15,913 14,407 
Total$40,095 $26,435 $137,042 $101,280 
___________________
(1) Represents non-recurring costs associated with our acquisitions, which primarily include retention bonuses, professional and consulting fees, and restructuring costs.
(2) Represents a discrete income tax expense related to stock-based compensation as a result of an opinion on Altera Corporation and Subsidiaries vs. Commissioner on Internal Revenue issued by the Court of Appeals for the Ninth Circuit on June 7, 2019.
(3) Represents a one-time tax benefit of $85.8 million upon completion of an intra-entity transaction to sell our non-Americas economic and beneficial intellectual property rights in the current quarter.
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ARISTA NETWORKS, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
December 31, 2020December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $893,219 $1,111,286 
Marketable securities1,979,649 1,613,082 
Accounts receivable389,540 391,987 
Inventories 479,668 243,825 
Prepaid expenses and other current assets 94,922 111,456 
Total current assets 3,836,998 3,471,636 
Property and equipment, net32,231 39,273 
Acquisition-related intangible assets, net122,790 45,235 
Goodwill189,696 54,855 
Investments8,314 4,150 
Operating lease right-of-use assets77,288 87,770 
Deferred tax assets 441,531 452,025 
Other assets30,071 30,346 
TOTAL ASSETS $4,738,919 $4,185,290 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $134,235 $92,105 
Accrued liabilities 143,357 140,249 
Deferred revenue 396,259 312,668 
Other current liabilities 94,392 52,052 
Total current liabilities 768,243 597,074 
Income taxes payable 53,053 55,485 
Operating lease liabilities, non-current72,397 83,022 
Deferred revenue, non-current254,568 262,620 
Deferred tax liabilities, non-current227,936 254,710 
Other long-term liabilities 42,431 37,693 
TOTAL LIABILITIES 1,418,628 1,290,604 
STOCKHOLDERS’ EQUITY:
Common stock8 8 
Additional paid-in capital 1,292,431 1,106,305 
Retained earnings (1)
2,027,614 1,788,230 
Accumulated other comprehensive income 238 143 
TOTAL STOCKHOLDERS’ EQUITY 3,320,291 2,894,686 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $4,738,919 $4,185,290 
______________________
(1) We adopted new lease accounting guidance under Accounting Standard Codification Topic 842 - Leases (“ASC 842”), which resulted in a cumulative-effect adjustment of $3.7 million to retained earnings as of January 1, 2019.

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ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Twelve Months Ended December 31,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $634,557 $859,867 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other44,590 32,849 
Noncash lease expense16,970 16,179 
Stock-based compensation 137,042 101,280 
Deferred income taxes (9,144)(75,741)
Gain on investments in privately-held companies, net(4,164)(5,427)
Gain on sale of marketable securities (9,432)— 
Amortization (accretion) of investment premiums (discounts)10,381 (6,771)
Changes in operating assets and liabilities:
Accounts receivable, net 10,673 (60,210)
Inventories (235,318)20,927 
Prepaid expenses and other current assets 13,846 54,259 
Other assets4,965 (8,112)
Accounts payable 41,161 (1,937)
Accrued liabilities 2,728 16,366 
Deferred revenue 50,352 (11,939)
Income taxes payable 8,805 23,523 
Other liabilities17,102 7,921 
Net cash provided by operating activities 735,114 963,034 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities1,545,689 1,208,717 
Purchases of marketable securities(2,688,064)(1,503,893)
Business combinations, net of cash acquired(227,420)(1,365)
Purchases of property, equipment and intangible assets(15,384)(15,751)
Investments in privately-held companies3,399 28,220 
Proceeds from sale of marketable securities 772,978 — 
Net cash used in investing activities (608,802)(284,072)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under equity plans 57,556 57,378 
Tax withholding paid on behalf of employees for net share settlement(8,722)(9,200)
Repurchase of common stock(395,173)(266,142)
Net cash used in financing activities(346,339)(217,964)
Effect of exchange rate changes 1,966 353 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(218,061)461,351 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period1,115,515 654,164 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period$897,454 $1,115,515 
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Arista Networks, Inc. Reports