I’m really torn about what to do about Arista (ANET). Here’s a little discussion I had with David K (TMF Pencils) who is very positive about them, on the Arista board. David gave a very nice update on the quarterly earnings and the lawsuit picture, but tended to minimize the danger from the lawsuit, saying “And the lawsuit hasn’t dented Arista’s ability to bring new customers on board.” and giving the following quote from the CEO as proof:
“In terms of the lawsuit, initially we had customers coming to me that they understand that this is because of our success. Literally, quotes from different folks like, “If they can’t innovate, they litigate.” So no question that they want us to continue to innovate and indemnify their contracts but, frankly, the investors are more worried about it than our customers.”
“David, they slipped this one past you: So no question that they want us to continue to innovate and indemnify their contracts
That means the customers are putting into every contract that if Arista loses the lawsuit, they have to compensate each of these customers for any loss or inconvenience. I assume this means even if they have to take out the Arista system, which could be VERY expensive.”
Here’s my dictionary definition of indemnify:
compensate (someone) for harm or loss: the amount of insurance that may be carried to indemnify the owner in the event of a loss.
• secure (someone) against legal responsibility for their actions:
I pointed out that Arista could have a lot of losses if they lose the suit.
He responded: To be clear, I don’t mean to imply that the lawsuits aren’t a risk for Arista investors. They absolutely are a risk and could (as you point out) turn out to be very costly for Arista if the company is found to be in the wrong. Thankfully the company does have a hefty and growing cash pile which could absorb short-term legal settlement costs.
The bigger long-term risk, in my mind, is if Arista is no longer able to sell its products/services in their current form if Cisco and/or Optumsoft come out ahead in the lawsuits. I’m less worried about short-term cash costs and more concerned about Arista’s ability to innovate and compete over the long haul. The lawsuits could dent the product differentiation Arista currently offers with its networking solutions.
I responded as follows:
“David, It’s very hard to see how Cisco could completely lose the lawsuit. After all, all these guys worked out the system that Arista is using while they were all working at Cisco! In addition, the fact that Arista copied the Cisco manuals probably isn’t a case winner in itself, but it will sure look bad and influence a jury. The real question is what will Cisco win? If it’s just a lot of money, and that Arista has to pay a license fee, they can probably survive that without much problem, but if they can no longer use the system they are currently using, that would be a VERY big deal. We won’t know until 2016, but there are plenty of RB stocks that don’t have potential business-breaking lawsuits in progress.”
He responded that he doesn’t feel that Cisco winning is a done deal, and pointed out that he’s suspicious about the timing ot the Cisco suit, etc, and that the Arista insiders have a lot of stock, and good lawyers.
So you can see there’s plenty of room for very differnet views, and I’m wondering if I should take a tiny position to keep it on my radar screen, or just forget about it. I really don’t like companies with major problems, as there are plenty around that don’t have them.
What are your thoughts?