THE BUZZ Cloud computing has fundamentally changed the way companies build data centers and deliver software applications.
Arista Networks (ANET), a leading provider of cloud networking solutions, is tapping into this enthusiasm with an initial public offering scheduled to begin trading Friday.
Cloud-computing centers consist of thousands of servers and storage systems connected by optical-fiber lines, routers and switches that can rapidly distribute software apps and data across the Internet and wireless networks to smartphones, tablets, PCs and other systems.
Businesses large and small are rapidly moving to cloud computing. Amazon (AMZN), eBay (EBAY), Facebook (FB), Google (GOOGL), Yahoo (YHOO) and Microsoft (MSFT) pioneered the development of large-scale cloud-data centers in order to meet the growing demands of customers.
"We believe that cloud computing represents a fundamental shift from traditional legacy data centers and that cloud networking is the fastest-growing segment within the data-center switching market," Arista Networks said in its IPO prospectus.
Arista plans to raise $200 million by offering 5.3 million shares at a price range of 36 to 40, giving it a market valuation near $2.7 billion. It will trade on the NYSE with the ticker ANET.
Arista Networks manages data traffic at large Internet centers for companies such as Facebook, Yahoo and Comcast (CMCSA). Its technology was initially embraced for high-frequency stock-trading environments, where fast data handling is vital. Then its use was expanded to elsewhere in the financial industry.
Arista's core product consists of a line of ethernet switching modules used to connect servers, storage devices and other components. At the core of its cloud networking platform is Arista's Extensible Operating System, or EOS. The software operating system manages all aspects of the network and enables customers to integrate a wide range of applications and other customized features quickly.
"We believe that our networking technology represents a fundamental advance in networking software," the company said.
Arista has developed strategic relationships with a number of "technology ecosystem participants," including Microsoft, Aruba Networks (ARUN), F5 Networks (FFIV), Palo Alto Networks (PANW), Splunk (SPLK) and VMware (VMW) "to allow integration of our cloud networking solutions with their offerings.
Arista competes in the data-center market for ethernet switches that run at per-second speeds from 10 gigabits to 100 gigabits. According to Crehan Research, this market will grow from approximately $6 billion in 2013 to $12 billion in 2017, a 19% compound annual growth rate.
"Arista is a disruptive player in data centers," said Evercore analyst Mark McKechnie. "Arista Networks started with a clean sheet of paper and is clearly disrupting Cisco's (CSCO) incumbent market position in data-center switches.
Arista has 850 full-time employees and more than 2,500 customers, up from 570 at the end of 2010. Customers span a range of industries and include Internet service providers, financial services organizations, government agencies and media and entertainment companies. They include big cloud-service providers such as eBay, Facebook, Microsoft and Yahoo, as well as financial services organizations such as Barclays, Citigroup (C) and Morgan Stanley (MS). One of Arista's largest customers is Microsoft, which accounted for 22% of revenue in 2013.
The market for data-center technology is intensely competitive. Arista's rivals include Juniper Networks (JNPR), Brocade Communications Systems (BRCD), Hewlett-Packard (HPQ) and Cisco Systems. Cisco is the dominant player in the data-switching category, with a market share above 60%.
"Arista found an opportunity to break into Cisco's front yard, but Cisco has them in their sights," McKechnie said.
Arista has a relatively short business history. Its first products shipped in 2008, though most of its revenue growth has occurred since early 2010. The company's 10 largest customers in 2013 accounted for 43% of revenue, up from 39% in 2012.
Arista's revenue comes primarily from sales of switching products and software, in addition to its services revenue. Arista revenue rose 87% to $361 million in 2013 from the same period a year earlier. The company reported net income of $42.5 million, up from $21.3 million. For the three-month period ended March 31, Arista reported revenue of $117.2 million, up 91% from the year-earlier period, and net income of $12.3 million. Not including proceeds from the IPO, Arista reports having cash and equivalents of $129.5 million.
"The financials look solid for this company, as they have been profitable in the three years leading up to this stock offering — a rarity for tech companies in this day of IPOs," said research firm IPOboutique in a report.
USE OF PROCEEDS
Arista Networks plans to raise $200 million by offering 5.3 million shares at a price range of 36 to 40. The company estimates that net proceeds form the offering will be approximately $182.4 million, or about $210.6 million if the underwriters exercise their over-allotment option in full at an assumed IPO price of 38 per share. It intends to use approximately $23.6 million of the net proceeds to pay down debt and the remaining proceeds for general corporate purposes, including working capital, sales and marketing activities, and product development.
President, chief executive officer
Ullal, 53, served in various management positions at Cisco Systems from 1993 to May 2008. She has also held various positions at Advanced Micro Devices and Fairchild Semiconductor. She holds a B.S. in electrical engineering from San Francisco State University and an M.S. in engineering management from Santa Clara University.
Founder, chief development officer
Bechtolsheim, 58, has served as chairman since 2004 and as Arista's chief development officer since 2009. In 1982, Bechtolsheim co-founded Sun Microsystems. From April 2004 to October 2008, he served as Sun's senior vice president and chief systems architect. He attended the University of Technology Munich and holds an M.S. in computer engineering from Carnegie Mellon University. He was also a doctoral student in electrical engineering and computer science at Stanford University from 1977 to 1982.
Founder, chief technology officer
Duda, 42, has served in various roles at Arista since 2004. He holds B.S. and M.S. degrees in computer science and electrical engineering from the Massachusetts Institute of Technology and a Ph.D. in computer science from Stanford University.
Arista Networks Santa Clara, Calif.
(408) 547-5500 Arista.com Lead underwriters: Morgan Stanley, Citigroup Offering price: 36 to 40 Expected date: June 6 Ticker: ANET