Arista (ANET) Beats On Q2 Earnings, Revenues Up Y/Y

Arista Networks Inc. (NYSE:ANET) reported earnings (including stock-based compensation) of $1.10 per share in second-quarter 2017, which comfortably surpassed the Zacks Consensus Estimate of 79 cents.

Excluding stock-based compensation but including all other one-time items, non-GAAP earnings was $1.34 per share, which surged 81.1% on a year-over-year basis.

Revenues of $405.2 million soared 50.8% from the year-ago quarter. The figure was better than management’s guided range of $354–$364 million. Product revenues (87.3% of total revenue) surged 50.2% to $353.9 million. Service revenues (12.7% of total revenue) jumped 54.9% to $51.3 million.

Arista expects revenue growth in the current-quarter to moderate sequentially as expenses are likely to grow faster than revenues due to higher investments.

Management stated that gross margins can be negatively impacted due to re-design of the products affected by import ban related to the '945 case, which the company is fighting against Cisco (NASDAQ:CSCO) .

Arista is now using the U.S. contract manufacturer to produce these, which will further negatively impact gross margin.

The stock has gained 79.6% year to date, substantially outperforming the 21.3% rally of the industry it belongs to.

Quarter Details

International revenues came in at $101.2 million, or 25% of total revenue, up from 21% in the previous quarter.

The company is benefiting from the expanding cloud networking market driven by strong demand for scalable infrastructure. The robust product portfolio is helping it win customers on a regular basis.

Gross margin expanded 30 basis points (bps) to 64.1% and was better than the company’s guided range of 61–64%. Product gross margin contracted 60 bps, while service margin expanded 110 bps.

Operating expenses, as percentage of revenues, declined 870 bps to 35.3%. Research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses declined 560 bps, 230 bps and 80 bps, respectively.

The lower R&D expense reflects reduced prototype and NRE spending, following the launch of Arista’s R2 products, offset by continued headcount growth.

Operating margin expanded almost 900 bps on a year-over-year basis to 28.8%.

Legal expenses associated with the ongoing lawsuits came in at $12 million for the quarter.

Balance Sheet & Cash Flow

Cash & cash equivalents and marketable securities as of Jun 30 were $1.12 billion as compared with $1.04 billion as of Mar 31. Cash flow from operating activities was $79.2 million.

Inventory increased to $363.8 million in the quarter, up from $286.8 million in the prior period.

Deferred revenue balance was $554.5 million, up from $497.2 million in the previous quarter driven by growth in services renewals.

Guidance

For third-quarter 2017, management projects revenues in the range of approximately $405–$420 million, gross margin of approximately 61–64% and operating margin of approximately 30%.

Zacks Rank & Key Stocks

Arista has a Zacks Rank #2 (Buy). Better-ranked stocks in the broader technology sector include Alibaba Group (NYSE:BABA) and Lam Research (NASDAQ:LRCX) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rates for Alibaba and Lam Research are projected to be 28.97% and 17.20%, respectively.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look. See the pot trades we're targeting>>