Summary

• Arista Networks provides a range of cloud networking solutions. Its product portfolio includes extensible operating systems (EOS), routers, switches and cables. The company also offers solutions such as cloud networking, cloud grade routing, hybrid cloud, IP storage, big data, security, telemetry and analytics, and TAP aggregation solutions.
• ANET sell products and services through both direct sales force and channel partners, and compete primarily in the high-speed data center switching market for 10 Gigabit Ethernet and above, excluding blade switches. The company subcontract the manufacturing of all of its products to various contract manufacturers.
• In recent years, it brought cloud networking to the broader enterprise and campus markets with Cognitive Cloud Networking approach, extending EOS across the enterprise data center and campus wired and wireless workspace.
• In 2022, the company experienced a significant growth in sales, with total sales reaching $4,381 million. This marked an increase of $1,433 million or approximately 48.5% compared to the sales figure of $2,948 million in 2021.
• The company's gross profit for 2022 amounted to $2,675.69 million, reflecting a substantial difference of $794.91 million or roughly 42.3% from the gross profit of $1,880.78 million in the previous year, 2021.
• Operating profit increased in 2022, totaling $1,527.10 million, which was higher by $602.37 million or approximately 65.2% compared to the operating profit of $924.73 million in 2021. The net profit for the year 2022 was $1,352.44 million, representing a notable increase of $511.59 million or around 60.9% compared to the net profit of $840.85 million in 2021.
• The diluted earnings per share (EPS) for 2022 were reported as $4.27, which showed a substantial increase of $1.64 or approximately 62.3% compared to the diluted EPS of $2.63 in 2021.

Brief Company Overview

Arista Networks (NYSE:ANET) is a data-driven, client-to-cloud networking for next-generation data center and campus workspace environments. Arista’s Extensible Operating System (“EOS”) combined with a set of network applications and ethernet switching and routing platforms using merchant silicon, provides cloud networking solution with high performance scale and availability, and enabling network automation, visibility, and security. In recent years, it brought cloud networking to the broader enterprise and campus markets with Cognitive Cloud Networking approach, extending EOS across the enterprise data center and campus wired and wireless workspace. CloudVision®, workload orchestration and automation solution, leverages EOS based network wide data models to deliver turnkey automation and configuration capabilities across data center, wired and wireless workspaces, multi-cloud, and WAN routing use cases.

ANET sell products and services through both direct sales force and channel partners, and compete primarily in the high-speed data center switching market for 10 Gigabit Ethernet and above, excluding blade switches. The company subcontract the manufacturing of all of its products to various contract manufacturers. This approach allows it to reduce costs, manufacturing overhead and inventory position and allows to adjust more quickly to changing end-customer demand. ANET uses four direct fulfillment facilities worldwide to hold finished goods inventory, perform product transformations, and install EOS software to ship to customers and partners.

As of September 2023, the company had a 52-week share price range of $106.50 to $198.70. The trailing P/E ratio of the company is 34.40 times, the price-to-sales ratio (ttm) is 11.16 times, the profit margin is 32.48%, the operating margin is 36.12%, the return on assets (ttm) is 16.96%, the return on equity is 34.66%, and the diluted earnings per share (ttm) is $5.27. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $23,073,707,198 as of June 30, 2022 (the last business day of the registrant's most recently completed second fiscal quarter) based on the closing price of the registrant’s common stock on the New York Stock Exchange on such date. Shares held by persons who may be deemed affiliates have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On February 8, 2023, 306,395,384 shares of the registrant’s common stock were outstanding, par value $0.0001 per share.

Recent Developments

• The Arrival of Open AI Networking – On July 19, 2023, suppliers and operators of many of the largest AI and HPC networks came together to launch the Ultra Ethernet Consortium (UEC). Arista is a founding member of UEC.
• In the second quarter 2023. Arista Modernizes Routing in the Wide Area Network - Arista introduced the Arista WAN Routing System, which combines three new networking offerings: enterprise-class routing platforms, carrier/cloud-neutral internet transit capabilities, and the CloudVision®Pathfinder Service to simplify and improve customer wide area networks.
• In 2022 Arista acquired Untangle and subsequently launched the next phase of its cognitive campus vision with the introduction of Arista CUE™ (Cognitive Unified Edge). CUE enables commercial customers to accelerate new services and technology innovations by consolidating multiple security and networking functions into an “edge as a service” cloud-managed solution.¹
• In the second half of 2022, Pluribus Networks was acquired to meet the demands of 4/5G networks and accelerate the delivery of Cloud Unified fabrics with joint partners such as Ericsson.²

Financial Performance Highlights

Q2 2023 Highlights

In the second quarter of 2023, the company reported sales of $1,458.92 million, reflecting an increase of $406.92 million or approximately 38.6% compared to the second quarter of 2022, which had sales of $1052 million. The net profit for the second quarter of 2023 was $491.88 million, showing an increase of $192.78 million or around 64.4% when compared to the net profit of $299.1 million in the second quarter of 2022. Furthermore, the company's diluted earnings per share (EPS) for the second quarter of 2023 increased to $1.55, marking a positive change of $0.61 or approximately 64.9% compared to the diluted EPS of $0.94 in the second quarter of 2022.

Annual Performance Highlights

In 2022, the company experienced a significant growth in sales, with total sales reaching $4,381 million. This marked an increase of $1,433 million or approximately 48.5% compared to the sales figure of $2,948 million in 2021. The company's gross profit for 2022 amounted to $2,675.69 million, reflecting a substantial difference of $794.91 million or roughly 42.3% from the gross profit of $1,880.78 million in the previous year, 2021. Additionally, the company's operating profit increased in 2022, totaling $1,527.10 million, which was higher by $602.37 million or approximately 65.2% compared to the operating profit of $924.73 million in 2021. The net profit for the year 2022 was $1,352.44 million, representing a notable increase of $511.59 million or around 60.9% compared to the net profit of $840.85 million in 2021. Moreover, the diluted earnings per share (EPS) for 2022 were reported as $4.27, which showed a substantial increase of $1.64 or approximately 62.3% compared to the diluted EPS of $2.63 in 2021.

Top of Form

Product revenue primarily consists of sales of switching and routing products, and related network applications. Service revenue is primarily derived from sales of PCS contracts, which is typically purchased in conjunction with ANET’s products, and subsequent renewals of those contracts. Revenue may vary from period to period based on, among other things, the timing, size, and complexity of orders, especially with respect to large end customers. Product revenue increased by $1.3 billion, or 56.3%, in the year ended December 31, 2022 compared to 2021. The increase reflects strong demand for switching and routing platforms from across customer base, including healthy contributions from large cloud customers. Although the company experienced some improvement in component supply in the latter part of fiscal 2022, supply chain and manufacturing constraints limited its revenue performance throughout the year, and while changes in product deferred revenue impacted the timing of revenue recognition on a quarterly basis, the net change in product deferred revenue for the full year was an immaterial contributor to revenue for the year ended December 31, 2022. In addition, service revenue increased by $94.9 million, or 16.6%, in the year ended December 31, 2022 compared to 2021, as a result of continued growth in initial and renewal PCS contracts as ANET’s customer installed base continued to expand. International revenues as a percentage of total revenues decreased from 26.8% in 2021 to 21.0% in 2022, which was primarily driven by increased purchases from large cloud customers in Americas region.

During the year ended December 31, 2022, cash provided by operating activities was $492.8 million, primarily from net income of $1.4 billion and net non-cash adjustments to net income of $53.2 million, partially offset by a net increase of $912.8 million in working capital requirements. Net non-cash adjustments primarily consisted of $230.9 million of stock-based compensation expenses and $62.7 million of depreciation, amortization and other expenses, which were largely offset by an increase in deferred income taxes of $244.4 million primarily resulting from increased deferred tax assets associated with the capitalization of research and development costs under IRC Section 174. The increase in working capital requirements primarily consisted of a $638.9 million increase in inventory in response to a significant increase in business volume, increased lead times and supply chain disruptions, and a $401.5 million increase in accounts receivable due to the larger business volume and timing of shipments in the fourth quarter of 2022.

Investing activities consist of marketable securities investments, business combinations, and investments in privately-held companies, and capital expenditures. During the year ended December 31, 2022, cash provided by investing activities was $216.3 million, consisting of proceeds of $1.6 billion from maturities of marketable securities, proceeds from the sale of marketable securities of $193.8 million, partially offset by purchases of available-for-sale securities of $1.4 billion, $145.1 million for business acquisitions, purchases of property, equipment and intangible assets of $44.6 million, and investments and notes receivable in private companies of $12.7 million.

Financing activities consist of proceeds from the issuance of common stock under employee equity incentive plans, offset by repurchases of common stock. During the year ended December 31, 2022, cash used in financing activities was $654.6 million, consisting primarily of common stock repurchases of $670.3 million and taxes paid of $32.7 million upon vesting of restricted stock units, offset partially by proceeds from the issuance of common stock under employee equity incentive plans of $48.4 million.

Business Overview

Arista Networks provides a range of cloud networking solutions. Its product portfolio includes extensible operating systems (EOS), routers, switches and cables. The company also offers solutions such as cloud networking, cloud grade routing, hybrid cloud, IP storage, big data, security, telemetry and analytics, and TAP aggregation solutions. Arista offers its products and services to internet companies, cloud service providers, financial service organizations, and entertainment companies. The company operates in North America, Asia Pacific, and Europe. Arista is headquartered in Santa Clara, California, the US.³

ANET’s portfolio of products and technology consists of Core Data Center/Cloud Switching Products, Adjacent Campus and Routing Products and Network Software and Services. Those are as follows:

Extensible Operating System (EOS)

The core of ANET’s cloud networking platform is data-driven operating system, EOS, which runs on top of standard Linux and offers programmability at all layers of the stack. System state and data are stored in EOS and maintained in a highly 6 Table of Contents efficient, centralized system database where data is accessed via an automated publish/subscribe model. This distinct design principle provides module independence, self-healing resiliency, and multiprocess software stability. The EOS Network Data Lake (NetDL™) unifies the multiple data types gathered in a network and allows for external data ingestion and enrichment. NetDL™ aggregates data from systems, platforms, and services enabling smoother operations between NetOps, CloudOps, and DevOps operators. The modular and programmable architecture of EOS enables the company to offer a set of attributes, capabilities and features that are essential for cloud networking and next-generation data centers. High Availability EOS is self-healing in the sense that individual processes can be restarted without impacting application traffic. It is also programmable at all layers from the Linux kernel to switch configuration, provisioning, automation and detailed monitoring of the network. Customers can leverage tools such as the EOS Software Development Kit (“SDK”) and eAPI to implement fully customized infrastructure automation solutions. EOS developed a wide range of applications available to customers for purchase as additional licenses that enable enhanced network monitoring and visibility without requiring additional external monitoring devices. This includes  DANZ, which provides access to raw network data for analysis by security, troubleshooting and performance management tools, (ii) Latency/loss ANalyZer (LANZ), which provides access to internal network performance loads and packet loss and latency occurring at the microsecond level, (iii) Network Telemetry, which provides network state information including correlations with the dynamic state of the systems operating on the network such as Hypervisors and, distributed job controls, and (iv) Network Tracers, which provide active integration and diagnostics for various workload conditions dependent upon network performance. Network Automation EOS supports Puppet, Chef and Ansible, which enable automatic network configuration in the same manner as servers and storage. In addition, CloudVision provides visibility, orchestration and automation that greatly reduce network operational costs.

Core Datacenter/Cloud

ANET offer one of the broadest product lines of datacenter 1/2.5/5/10/25/40/50/100/400/800 Gigabit Ethernet switches in the industry, comprising of 7050/7060 Series, 7130 Series, 7150 Series, 7160 Series, 7170 Series, 7280 Series, 7500 Series and 7800 Series data-driven platforms. The company deliver switching platforms with industry-leading capacity, low latency, port density and power efficiency. It also innovated in areas such as deep packet buffers, embedded optics and reversible cooling.

Adjacent Campus and Routing

Cognitive Campus Switching and Routing ANET’s adjacent products include Cognitive Campus switching products such as 720XP fixed PoE switches, 750 modular PoE switches and 7300X3 spline switches, as well as Universal Spine and Leaf Routing products such as 7020R fixed routers, 7280R fixed routers, 7368X4 modular router, 7500R modular routers and 7800R modular routers. Similarly, Cognitive WiFi consists of access point solutions (“APs”) that are tailored for a controller-less wireless network. These APs are available in disaggregated options harnessing the power of cloud, machine learning and cognitive networking. By integrating with CloudVision, Cognitive WiFi is based on a similar CMP model for cognitive analytics unifying the operational experience across wired and wireless. It enhances real-time insight into the experience of WiFi clients to connect and utilize the network. Cognitive WiFi also includes a suite of WiFi Tracer tools for wireless security, reachability and network health diagnostics.

Networking Software and Services

CloudVision: CloudVision is ANET’s network management plane solution for workload orchestration and workflow automation, which delivers a turnkey solution for cloud networking. CloudVision’s abstraction of the physical network to a broader, network-wide perspective provides a simplified approach for consistent network operations across network domains, including data center, campus wired and wireless, routing interconnect, and multi-cloud networks. CloudVision includes Centralized representation of distributed state based on NetDL™, allowing for a single point of integration and network-wide visibility and analytics; Controller-agnostic support for physical and virtual workload orchestration through open APIs; Turn-key automation for zero touch provisioning, configuration management and network-wide upgrades and rollback; Compliance dashboard for security, audit and patch management; Cognitive AI/ML, driven by Autonomous Virtual Assist ("AVA") for dynamic insights and recommendations, built on a modern approach of real-time streaming for telemetry and as a replacement for legacy polling per device; Granular visibility and historical troubleshooting with predictive insights across the unified edge wired and wireless networks, including IoT vision; and finally Multi-domain segmentation for the zero trust enterprise, enabling macro-segmentation services (MSS®) for an open and scalable approach for network policy management and with dynamic integrations into security management systems from Arista’s security ecosystem partners.

DANZ Monitoring Fabric (DMF): DANZ Monitoring Fabric (DMF) is a next-generation network packet broker (NPB) designed for pervasive, organization-wide network observability and security visibility, enabling IT to deliver multi-tenant monitoring-as-a-service. Leveraging Arista's high-performance and versatile 1G/10G/25G, 40G/100G and 400G Ethernet switch platforms with DMF, IT operators can pervasively monitor all user, device/IoT and application traffic (north-south and east-west) by gaining complete visibility into physical, virtual and container environments. DMF switch licenses are procured as subscription software. Additionally, DMF’s advanced services include deep hop-by-hop visibility, predictive analytics, contextual insights and scale-out packet capture — integrated through a single dashboard — to provide simplified network performance monitoring (NPM) and SecMon workflows for real-time and historical context. For enterprises, service providers and cloud providers, DMF provides a one-stop network observability solution for production data centers, enterprise campus/branch and 4G/5G mobile networks. Arista Network Detection and Response (NDR) The AI-driven Security Platform, driven by AVA, deeply analyzes billions of network communications to autonomously discover, profile and classify every device, user and application across any network. Using a multi-dimensional ensemble machine learning approach, Arista NDR then models complex adversarial behaviors and detects threats by connecting the dots across entities, time, protocols and attack stages. By combining artificial intelligence with human expertise, Arista NDR hunts for both insider and external attacker behaviors, while providing triage, digital forensics and incident response across the entire network.

CloudEOS

CloudEOS™ is ANET’s multi-cloud and cloud-native networking solution enabling a highly secure and reliable networking experience with consistent segmentation, telemetry, provisioning and troubleshooting for the entire enterprise. It can be deployed across the enterprise edge, WAN, campus workspace, data center, on-premises Kubernetes clusters, and multiple public and private clouds. CloudEOS provides multi-cloud connectivity across the entire enterprise cloud environment with high-performance virtual and container-based instances of EOS software that simplify network operations and integrate with declarative cloud provisioning toolchains like Terraform, Ansible, and other popular CloudOps and DevOps tools. CloudEOS is designed for consumption on Amazon AWS, Microsoft Azure, and Google public clouds via their marketplace and service catalogs, and it is also available as a cloud-native instance for deployment in Kubernetes clusters. With CloudEOS and CloudVision, customers can integrate their cloud network deployments with the elasticity and automation of the public cloud, private cloud and cloud native platforms.

Revenue Stream

ANET generate revenue primarily from sales of switching and routing platforms, which incorporate EOS software, and related network applications. It also generate revenue from postcontract support ("PCS"), which end customers typically purchase in conjunction with products, and renewals of PCS. The company sell products through both direct sales force and channel partners.

The majority of their revenue, accounting for 84.8%, was generated from the sale of their extensive product portfolio. Additionally, Arista's service segment contributed to their revenue, with $665.23 million in earnings, representing 15.2% of their total revenue.

Geographically, the Americas proved to be the most substantial market for Arista, contributing $3,462.62 million, or 79.0% of their revenue. Europe, the Middle East, and Africa accounted for $529.8 million, representing 12.1% of their earnings. The Asia-Pacific region generated $388.89 million, making up 8.9% of the total revenue.

 Other Business Information

ANET’s success depends substantially upon core technology and intellectual property. They patent, trademark and copyright laws, trade secret protection and confidentiality agreements with employees, end customers, resellers, systems integrators, manufacturers, and others to protect their intellectual property rights. The company file U.S and foreign patent applications to protect intellectual property and the duration of the issued patents is adequate relative to the expected lives of products. Patents generally have a duration of twenty years from filing.

Company History

Arista Networks, based in Santa Clara, California, has earned a prominent place in the world of data center networking. The company offers a range of cutting-edge network switches, catering to the demands of large data centers, cloud computing, high-performance computing, and high-frequency trading environments. Arista Networks was born out of the rich industry experiences of its founders. Andy Bechtolsheim, a key co-founder, played a pivotal role at Sun Microsystems, where he was the chief hardware designer. His deep understanding of hardware architecture and design laid the foundation for Arista's innovative products. David Cheriton, another co-founder, joined forces with Bechtolsheim in 1995 to create Granite Systems, focusing on Gigabit Ethernet products. This venture caught the attention of Cisco, which acquired the company in 1996, marking the beginning of the founders' close association with the networking giant.

The collaborative journey continued with the establishment of Kealia in 2001, which, unsurprisingly, was also acquired by Sun Microsystems in 2004. During this period, Bechtolsheim, Cheriton, and Kenneth Duda, who had been the first employee at Granite Systems, held executive positions at Cisco, where they played pivotal roles in the development of the Catalyst product line. Their collective expertise significantly contributed to the evolution of networking technology.

In 2004, Bechtolsheim, Cheriton, and Duda embarked on a new venture, initially named Arastra, which later became Arista Networks. This marked a significant turning point, and the company's founders funded the venture themselves. In 2008, Jayshree Ullal, a former Cisco executive with 15 years of experience at the firm, joined the team and assumed the role of President and CEO. This period heralded a new chapter for Arista, characterized by its dedication to pioneering technology and innovation.

Arista Networks rapidly ascended in the networking industry, credit goes to its groundbreaking switch products introduced in 2010. These switches provided an unprecedented sixfold increase in throughput compared to other offerings in the market. Initially catering to high-frequency trading firms, Arista's switches demonstrated exceptional speed and minimal latency. The company's stellar performance drew the attention of tech giant Microsoft, which became one of Arista's earliest cloud customers. This strategic partnership solidified Arista's position as a leader in delivering next-generation networking technology. This phase marked the inception of a new chapter, with Arista Networks making its public debut in 2014 on the New York Stock Exchange under the symbol ANET.

Despite its success, Arista faced challenges along the way. In 2014, Cisco filed lawsuits against Arista, alleging intellectual property infringement. Legal battles ensued, but Arista's resilience and innovation eventually led to a turning point in the legal dispute. By 2016, the import ban was reversed, and two of Cisco's patents were overturned. The legal dispute culminated in a significant settlement in August 2018, with Arista agreeing to pay Cisco $400 million.

The company consistently expanded through strategic acquisitions. Notable purchases included Mojo Networks, which enhanced Arista's offerings with Wi-Fi solutions for campus and enterprise networks. The acquisition of Metamako further augmented Arista's capabilities in the low-latency networking domain. In addition, the acquisition of Big Switch Networks bolstered Arista's monitoring and visibility capabilities, resulting in the development of DANZ Monitoring Fabric. This advanced software provided network observability across all of Arista's switching platforms, ensuring that the company remained at the forefront of technological advancements.

References

1. ^ https://www.bloomberg.com/press-releases/2021-10-06/arista-expands-its-cognitive-campus-with-the-latest-generation-wi-fi-6e-solution
2. ^ https://www.techtarget.com/searchnetworking/news/252523483/Arista-acquires-Pluribus-Networks-for-cloud-fabric-product
3. ^ https://www.forbes.com/companies/arista-networks/?sh=3f1dcb771b37