Arista(US:ANET)2024-07-30 22:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended June 30, 2024, show significant growth in revenue and net income, with total assets increasing to $11.6 billion and operating cash flow nearly doubling to $1.5 billion Condensed Consolidated Balance Sheets As of June 30, 2024, total assets increased to $11.62 billion, driven by cash and marketable securities, while liabilities rose to $3.19 billion due to deferred revenue, and equity reached $8.43 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $9,842,318 | $8,390,235 | | Cash and cash equivalents | $2,429,031 | $1,938,606 | | Marketable securities | $3,844,923 | $3,069,362 | | Inventories | $1,853,776 | $1,945,180 | | Total Assets | $11,623,235 | $9,946,806 | | Total Current Liabilities | $2,161,879 | $1,909,606 | | Deferred revenue (current) | $1,329,450 | $915,204 | | Total Liabilities | $3,192,427 | $2,727,747 | | Total Stockholders' Equity | $8,430,808 | $7,219,059 | Condensed Consolidated Income Statements For the second quarter of 2024, Arista reported total revenue of $1.69 billion, a 15.9% increase year-over-year, and net income of $665.4 million, up 35.3% YoY For the six months ended June 30, 2024, revenue grew 16.1% to $3.26 billion, and net income increased 40.4% to $1.30 billion Q2 2024 vs Q2 2023 Performance (in thousands, except per share) | Metric | Q2 2024 | Q2 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,690,400 | $1,458,924 | +15.9% | | Gross Profit | $1,097,213 | $884,129 | +24.1% | | Income from Operations | $699,573 | $530,062 | +32.0% | | Net Income | $665,428 | $491,885 | +35.3% | | Diluted EPS | $2.08 | $1.55 | +34.2% | H1 2024 vs H1 2023 Performance (in thousands, except per share) | Metric | H1 2024 | H1 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $3,261,774 | $2,810,275 | +16.1% | | Gross Profit | $2,098,592 | $1,688,636 | +24.3% | | Income from Operations | $1,359,714 | $1,014,640 | +34.0% | | Net Income | $1,303,120 | $928,358 | +40.4% | | Diluted EPS | $4.07 | $2.94 | +38.4% | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2024, operating cash flow significantly increased to $1.50 billion, while investing activities used $773.5 million and financing activities used $236.1 million, primarily for stock repurchases Six Months Ended June 30, Cash Flow Summary (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,502,816 | $808,573 | | Net cash used in investing activities | ($773,541) | ($124,653) | | Net cash used in financing activities | ($236,148) | ($97,635) | | Net increase in cash | $490,435 | $586,714 | - The substantial increase in operating cash flow was primarily driven by a $612.6 million increase in deferred revenue and a $91.4 million decrease in inventories, compared to a much smaller deferred revenue increase and a large inventory build-up in the prior year period19 Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies and provide further breakdown of financial statement items, including fair value measurements of $3.8 billion in marketable securities, a significant increase in deferred revenue to $2.1 billion, non-cancellable purchase commitments of $2.1 billion, and an ongoing stock repurchase program with $1.1 billion remaining authorization - The company faces risks from macroeconomic uncertainties, including inflation and supply chain disruptions, which could impact future demand and gross margins The shift in customer priorities towards AI may also affect investment plans for other technologies2527 - As of June 30, 2024, the company had non-cancellable purchase commitments of $2.1 billion, with $1.7 billion expected within 12 months, primarily to secure components and manufacturing capacity62 - The company is involved in a patent infringement lawsuit with WSOU Investments, LLC While a loss is not considered probable, it is deemed reasonably possible, but an estimate of potential loss cannot be made at this stage64 - In May 2024, a new $1.2 billion stock repurchase program was authorized, expiring in May 2027 As of June 30, 2024, approximately $1.1 billion remained available for repurchases under this new program68 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes strong H1 2024 performance to healthy demand, with 16.1% revenue growth and significant gross margin expansion to 64.3% due to lower inventory charges, while operating expenses grew slower, improving leverage and maintaining strong liquidity Overview Arista Networks is a leader in data-driven networking for large data centers, campuses, and routing environments, centered around its EOS software, with revenue from switching platforms and post-contract support concentrated with large cloud customers like Microsoft and Meta, leading to revenue variability based on their deployment cycles and increasing focus on AI infrastructure - The company's business is characterized by large purchases from a limited number of customers, leading to revenue unpredictability Sales to end customers Microsoft and Meta Platforms represented 18% and 21% of total revenue in 2023, respectively89 - An increased focus on AI deployment by large customers is accelerating demand for advanced technology but has also led to cost reduction measures in non-AI capital expenditures, reducing demand visibility for some existing products89 Results of Operations For Q2 2024, revenue increased 15.9% YoY to $1.69 billion, driven by a 12.8% rise in product revenue and a 35.3% increase in service revenue Gross margin expanded significantly to 64.9% from 60.6% in Q2 2023, mainly due to lower excess and obsolete inventory charges Operating expenses grew 12.3%, slower than revenue, resulting in a 32% increase in operating income The effective tax rate decreased to 13.6% from 16.1% due to higher stock-based compensation tax benefits Revenue and Gross Margin Analysis (Q2 2024 vs Q2 2023, in thousands) | Category | Q2 2024 | Q2 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,690,400 | $1,458,924 | $231,476 | 15.9% | | Product Revenue | $1,423,271 | $1,261,537 | $161,734 | 12.8% | | Service Revenue | $267,129 | $197,387 | $69,742 | 35.3% | | Gross Profit | $1,097,213 | $884,129 | $213,084 | 24.1% | | Gross Margin | 64.9% | 60.6% | - | - | - The increase in gross margin for Q2 and H1 2024 was primarily driven by an improvement in product margins due to lower net excess/obsolete inventory and supplier liability charges compared to the same periods in 2023100 Operating Expense Analysis (Q2 2024 vs Q2 2023, in thousands) | Category | Q2 2024 | Q2 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Research and development | $267,482 | $229,676 | $37,806 | 16.5% | | Sales and marketing | $104,403 | $97,971 | $6,432 | 6.6% | | General and administrative | $25,755 | $26,420 | ($665) | (2.5)% | | Total operating expenses | $397,640 | $354,067 | $43,573 | 12.3% | Liquidity and Capital Resources The company's liquidity remains robust, with cash, cash equivalents, and marketable securities totaling $6.3 billion as of June 30, 2024, and cash flow from operations for the first six months of 2024 was $1.5 billion, a substantial increase from the prior year, with material cash requirements including $2.1 billion in purchase obligations and an estimated $210 million incremental cash tax impact for 2024 - Principal sources of liquidity are cash, cash equivalents, and marketable securities, totaling approximately $6.3 billion as of June 30, 2024108 - Material cash requirements include $2.1 billion in non-cancellable purchase obligations, $61.6 million in lease obligations, and approximately $50 million for a new property project in 2024118119 - The requirement to capitalize and amortize R&D expenses under IRC Section 174 is expected to have an incremental cash tax impact of approximately $210.0 million for 2024120 Quantitative and Qualitative Disclosures About Market Risk The company states that its exposure to financial market risks, including changes in foreign currency exchange rates, interest rates, and equity investment risk, has not changed materially since December 31, 2023 - There have been no material changes in the company's exposure to market risk since the end of the previous fiscal year126 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2024, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that as of June 30, 2024, the company's disclosure controls and procedures are effective at a reasonable assurance level127 - No changes occurred during the quarter ended June 30, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting128 PART II. OTHER INFORMATION Legal Proceedings The company incorporates by reference the information on legal proceedings from Note 5 of the financial statements, which primarily discusses the ongoing patent infringement lawsuit with WSOU Investments, LLC - Information regarding legal proceedings is detailed in Note 5 of the financial statements, highlighting the WSOU Investments LLC patent case13264 Risk Factors The company outlines numerous business risks, including dependence on a limited number of large customers, susceptibility to supply chain disruptions, intense competition, and the volatility of revenue and growth rates, alongside risks from rapid market evolution, intellectual property litigation, and cybersecurity threats - A substantial portion of revenue comes from large purchases by a limited number of customers, making results volatile and dependent on their spending cycles and priorities, particularly around AI134146 - The company is susceptible to supply shortages and price fluctuations as key components come from sole or limited sources, which could disrupt product deliveries and harm gross margins134148 - The networking market is intensely competitive, with pressure from larger, well-established companies, industry consolidation, and the potential for customers to adopt "white box" solutions134160 - Managing the complex supply chain is a significant risk Insufficient supply can lead to lost sales, while excess inventory from inaccurate forecasting can harm gross margins, a risk heightened by long-lead-time purchase commitments138183 Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2024, Arista completed its previous $1.0 billion stock repurchase program and initiated a new $1.2 billion program, repurchasing 614,000 shares for approximately $172.0 million in total during the quarter - The prior $1.0 billion stock repurchase program was completed in April 2024 A new $1.2 billion program was authorized in May 2024226 Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2024 | 308 | $266.12 | | May 2024 | 203 | $295.69 | | June 2024 | 103 | $292.04 | | Total | 614 | - | Other Information During the last fiscal quarter, two members of the Board of Directors, Kelly Battles and Charles Giancarlo, adopted Rule 10b5-1 trading arrangements for the potential sale of company stock - On June 13, 2024, Director Kelly Battles adopted a Rule 10b5-1 plan for the sale of up to 1,706 shares231 - On June 14, 2024, Director Charles Giancarlo adopted a Rule 10b5-1 plan for the sale of up to 24,000 shares231