Arista Networks, Inc. (Exact Name of Registrant As Specified in Its Charter)

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Arista Networks, Inc. (Exact Name of Registrant As Specified in Its Charter) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-36468 Arista Networks, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 20-1751121 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 5453 Great America Parkway , Santa Clara , California 95054 (Address of principal executive offices) (Zip Code) (408) 547-5500 (Registrant’s telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, $0.0001 par value ANET New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of October 25, 2019 was 76,399,052. ARISTA NETWORKS, INC. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 1 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 2 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 3 Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 6 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 1A. Risk Factors 32 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61 Item 3. Defaults Upon Senior Securities 62 Item 4. Mine Safety Disclosures 62 Item 5. Other Information 62 Item 6. Exhibits 63 Signatures 64 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) ARISTA NETWORKS, INC. Condensed Consolidated Balance Sheets (Unaudited, in thousands, except par value) September 30, 2019 December 31, 2018 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,095,265 $ 649,950 Marketable securities 1,351,775 1,306,197 Accounts receivable, net of rebates and allowances of $6,711 and $9,120, respectively 447,252 331,777 Inventories 239,802 264,557 Prepaid expenses and other current assets 106,326 162,321 Total current assets 3,240,420 2,714,802 Property and equipment, net 40,188 75,355 Acquisition-related intangible assets, net 48,319 58,610 Goodwill 54,855 53,684 Investments 4,150 30,336 Operating lease right-of-use assets 91,903 — Deferred tax assets 110,630 126,492 Other assets 29,360 22,704 TOTAL ASSETS $ 3,619,825 $ 3,081,983 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 78,600 $ 93,757 Accrued liabilities 128,930 123,254 Deferred revenue 291,384 358,586 Other current liabilities 49,275 30,907 Total current liabilities 548,189 606,504 Income taxes payable 60,278 36,167 Operating lease liabilities, non-current 87,099 — Finance lease liabilities, non-current — 35,431 Deferred revenue, non-current 237,628 228,641 Other long-term liabilities 30,627 31,851 TOTAL LIABILITIES 963,821 938,594 Commitments and contingencies (Note 7) STOCKHOLDERS’ EQUITY: Preferred stock, $0.0001 par value—100,000 shares authorized and no shares issued and outstanding as of September 30, 2019 and December 31, 2018 — — Common stock, $0.0001 par value—1,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 76,368 and 75,668 shares issued and outstanding as of September 30, 2019 and December 31, 2018 8 8 Additional paid-in capital 1,076,732 956,572 Retained earnings 1,579,063 1,190,803 Accumulated other comprehensive income (loss) 201 (3,994) TOTAL STOCKHOLDERS’ EQUITY 2,656,004 2,143,389 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,619,825 $ 3,081,983 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Revenue: Product $ 555,066 $ 485,481 $ 1,573,652 $ 1,337,865 Service 99,349 77,828 284,508 217,778 Total revenue 654,415 563,309 1,858,160 1,555,643 Cost of revenue: Product 218,220 187,764 616,906 516,077 Service 18,921 13,962 53,219 41,181 Total cost of revenue 237,141 201,726 670,125 557,258 Gross profit 417,274 361,583 1,188,035 998,385 Operating expenses: Research and development 118,732 117,589 352,696 324,029 Sales and marketing 55,279 47,903 159,372 136,231 General and administrative 14,657 15,321 46,182 53,420 Legal settlement — — — 405,000 Total operating expenses 188,668 180,813 558,250 918,680 Income from operations 228,606 180,770 629,785 79,705 Other income (expense), net 19,169 8,619 45,313 10,606 Income before income taxes 247,775 189,389 675,098 90,311 Provision for (benefit from) income taxes 38,880 20,865 75,923 (67,482) Net income $ 208,895 $ 168,524 $ 599,175 $ 157,793 Net income attributable to common stockholders: Basic $ 208,799 $ 168,439 $ 598,861 $ 157,706 Diluted $ 208,804 $ 168,445 $ 598,880 $ 157,713 Net income per share attributable to common stockholders: Basic $ 2.73 $ 2.25 $ 7.85 $ 2.12 Diluted $ 2.59 $ 2.08 $ 7.38 $ 1.95 Weighted-average shares used in computing net income per share attributable to common stockholders: Basic 76,426 75,011 76,301 74,506 Diluted 80,753 81,018 81,104 80,844 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Net income $ 208,895 $ 168,524 $ 599,175 $ 157,793 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (1,730) (379) (1,767) (1,193) Net change in unrealized gains (losses) on available-for-sale securities (104) 488 5,962 (1,311) Other comprehensive income (loss) (1,834) 109 4,195 (2,504) Comprehensive income $ 207,061 $ 168,633 $ 603,370 $ 155,289 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited, in thousands) Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Common Stock Accumulated Common Stock Accumulated Additional Other Total Additional Other Total Paid- Retained Comprehensive Stockholders’ Paid- Retained Comprehensive Stockholders’ Shares Amount In Capital Earnings Income (Loss) Equity Shares Amount In Capital Earnings Income (Loss) Equity Balance at beginning of period 76,555 $ 8 $1,038,740 $1,484,777 $ 2,035 $ 2,525,560 75,668 $ 8 $ 956,572 $1,190,803 $ (3,994) $ 2,143,389 Cumulative- effect adjustment to beginning balance (1) — — — — — — — — — 3,702 — 3,702 Net income — — — 208,895 — 208,895 — — — 599,175 — 599,175 Other comprehensive income (loss), net of tax — — — — (1,834) (1,834) — — — — 4,195 4,195 Stock-based compensation — — 26,257 — — 26,257 — — 74,845 — — 74,845 Issuance of common stock in connection with employee equity incentive plans 336 — 14,073 — — 14,073 1,648 — 52,177 52,177 Tax withholding paid for net share settlement of equity awards (11) — (2,407) — — (2,407) (29) — (7,069) — — (7,069) Vesting of early- exercised stock options — — 69 — — 69 — — 207 — — 207 Repurchase of common stock (512) — — (114,609) — (114,609) (919) — — (214,617) — (214,617) Balance at end of period 76,368 $ 8 $1,076,732 $1,579,063 $ 201 $ 2,656,004 76,368 $ 8 $1,076,732 $1,579,063 $ 201 $ 2,656,004 _________________________________________ (1) On January 1, 2019, we adopted Accounting Standard Codification Topic 842 - Leases (“ASC 842”), which resulted in a cumulative-effect adjustment to the beginning balance of Retained Earnings for 2019.
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