Arista Networks (ANET) Beats On Q1 Earnings, Revenues Up Y/Y

Arista Networks Inc. (NYSE:ANET) delivered first-quarter 2018 non-GAAP earnings of $1.66 per share, comfortably surpassing the Zacks Consensus Estimate of $1.52 per share. The figure also soared 78.5% on a year-over-year basis.

Revenues of $472.5 million surged 40.8% from the year-ago quarter and outpaced the Zacks Consensus Estimate of $461 million. Further, the figure came ahead of management’s guidance of $450-$468 million.

Product revenues (86.3% of total revenues) surged 39.9% to $407.6 million. Service revenues (13.7% of total revenues) rose 47.1% to $64.9 million.

Arista is benefiting from strong demand of the ‘Cloud Titans’ vertical which was also the top revenue contributor for the first quarter followed by ‘Enterprises’, ‘Service providers and Cloud specialized providers’ and ‘Financials’ in the second, third and fourth positions, respectively. Its existing products Flexroute and CloudVision have aided revenue growth in the first quarter.

Quarter Details

Arista noted that new client addition was strong and as of Mar 31, 2018, the company exceeded more than 5,000 cumulative customers.

Non-GAAP gross margin expanded 20 basis points (bps) to 64.4%. Further, the figure is above the mid-point of management’s guidance of 63-65%, primarily driven by strong revenues and favorable customer mix. Product gross margin contracted 100 bps, while service margin expanded 130 bps.

Operating expenses, as percentage of revenues, were 34.7% as compared with 42% in the year-ago quarter. Research & development (R&D) and sales & marketing (S&M) expenses declined 270 bps and 210 bps, respectively.

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

As a result, non-GAAP operating margin expanded almost 510 bps on a year-over-year basis to 35.3%.

Legal expenses associated with the ongoing lawsuits were $7.1 million in the quarter.

Balance Sheet & Cash Flow

Cash & cash equivalents, marketable securities and investments as of Mar 31, 2018, were $1.7 billion compared with $1.53 billion in the previous quarter. Cash flow from operating activities during the quarter was $195.5 million.

Inventory declined to $268.1 million in the quarter from $306.2 million in the previous quarter.

Deferred revenue balance was $456.1 million, down from $515.3 million in the previous quarter.

Guidance

For second-quarter 2018, Arista projects revenues in the range of $500-$514 million. The Zacks Consensus Estimate is pegged at $502.9 million.

The company anticipates non-GAAP gross margin of 62-64% and operating margin of approximately 32-34%.

Moreover, Arista expects costs associated with the ongoing lawsuits to be approximately $6 million for the second quarter.

Zacks Rank & Key Picks

Currently, Arista carries a Zacks Rank #3 (Hold).

Spirent Communications (OTC:SPMYY) , Corning (NYSE:GLW) and Viavi Solutions (NASDAQ:VIAV) are stocks worth considering in the same sector. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for Spirent, Corning and Viavi is currently pegged at 11%, 4% and 20%, respectively.

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