Arista (ANET) Beats Q3 Earnings Estimates, Revenues Up Y/Y

Arista Networks Inc. (NYSE:ANET) reported non-GAAP earnings of $1.62 per share in third-quarter 2017, which comfortably surpassed the Zacks Consensus Estimate by 41 cents. The figure surged 94.1% on a year-over-year basis.

Revenues of $437.6 million soared 50.8% from the year-ago quarter. The figure surpassed management’s guidance of $405-$420 million. Product revenues (86.9% of total revenues) surged 49.6% to $380.3 million. Service revenues (13.1% of total revenues) rose 59% to $57.3 million.

Arista is benefiting from strong demand for 100-gigabit routing and switching products, particularly from cloud titans. Top five customer verticals in the quarter were cloud titans, Tier 1 and 2 service providers, cloud specialty providers, high tech enterprises and financials.

Arista stated that visibility around cloud titans remains strong for the next one or two quarters. Management noted that FlexRoute license (almost 150 customers) has helped the company enter additional layers of the spine for routing and data-center interconnect, where Cisco Systems Inc (NASDAQ:CSCO) and Juniper Networks Inc. (NYSE:JNPR) were dominant names.

Due to the import ban related to the ‘945 case (versus Cisco), Arista launched workaround features in mid-September. This prolonged customer testing cycle and qualification time for a few cloud titan customers, which moderately affected the top line in the quarter.

The stock has returned 108.2% year to date, substantially outperforming the 20.1% rally of the industry.

Quarter Details

International revenues were $128.3 million, or 29% of total revenues, up from 25% in the previous quarter.

During the quarter, the company launched Arista Any Cloud software platform, which helps in reducing operational costs and complexity for enterprises by simplifying integration and management of hybrid clouds across private cloud data centers and public cloud providers.

Gross margin contracted 20 basis points (bps) to 64.4%. However, the figure surpassed the company’s guidance of 61-64%, primarily driven by strong revenues and favorable customer mix. Product gross margin contracted 110 bps, while service margin expanded 130 bps.

Operating expenses, as percentage of revenues, were 31.9% as compared with 42.5% in the year-ago quarter. Research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses declined 610 bps, 220 bps and 230 bps, respectively.

The lower R&D expenses reflect reduced prototype and NRE spending, offset by continued headcount growth.

As a result, non-GAAP operating margin expanded almost 860 bps on a year-over-year basis to 38.6%.

Legal expenses associated with the ongoing lawsuits were $7.9 million in the quarter.

Balance Sheet & Cash Flow

Cash & cash equivalents and marketable securities as of Sep 30 were $854.5 million compared with $1.04 billion as of Jun 30. Cash flow from operating activities was $205.9 million.

Inventory declined to $333.2 million in the quarter from $363.8 million in the previous quarter.

Deferred revenue balance was $565.1 million, up from $554.5 million in the previous quarter.

Guidance

For fourth-quarter 2017, Arista projects revenues in the range of $450-$464 million. The company projects gross margin of 63-65% and operating margin of 30-32%.

Management anticipates R&D spending to increase in the fourth quarter of 2017. Moreover, Arista expects costs associated with the ongoing lawsuits to be approximately $12 million for the quarter.

Over the long term, Arista expects R&D, S&M and G&A expenses as percentage of revenues, at 20%, 10% and 3%, respectively.

Zacks Rank & Another Key Pick

Currently, Arista has a Zacks Rank #2 (Buy). Sonus Networks Inc. (NASDAQ:SONS) , with a Zacks Rank #1 (Strong Buy), is a stock worth considering in the broader technology sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Sonus is currently pegged at 12%.

Wall Street’s Next Amazon (NASDAQ:AMZN)

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>