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Arista Networks (ANET) Up 23.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
In the latest trading session, OptimizeRx (OPRX) closed at $15, marking a -0.73% move from the previous day.

A month has gone by since the last earnings report for Arista Networks (ANET). Shares have added about 23.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Arista Networks due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Arista Q4 Earnings Beat on Strong Revenue Growth

Arista reported solid fourth-quarter 2018 financial results, wherein both the bottom line and the top line surpassed the respective Zacks Consensus Estimate, and increased year over year.

Net Income

On a GAAP basis, net income increased to $170.2 million or $2.10 per share from $103.8 million or $1.29 per share in the year-ago quarter driven by top-line growth. For full-year 2018, net income decreased to $327.9 million or $4.06 per share from $422.5 million or $5.35 per share in 2017 due to higher operating expenses, which is largely attributable to legal settlement.

Quarterly non-GAAP net income came in at $182.2 million or $2.25 per share compared with $137.3 million or $1.71 per share in the year-ago quarter. The bottom line beat the consensus estimate by 21 cents.

Revenues

Quarterly total revenues increased 27.3% year over year to $595.7 million and was above the company’s guidance of $582-$594 million, driven by healthy overall demand with strength across the business, particularly in the cloud titans vertical. The top line surpassed the Zacks Consensus Estimate of $589 million. Product revenues improved to $503.2 million from $407.2 million while Service revenues rose to $92.5 million from $60.7 million. For full-year 2018, revenues increased 30.7% year over year to $2,151.4 million.

Other Quarterly Details

Non-GAAP gross profit was $382.1 million compared with $308.3 million in the prior-year quarter. Non-GAAP gross margin was 64.1%, down from 65.9% and was just above the mid-point of management’s guidance of 63-65%. This was reflective of healthy mix of cloud titan revenues as expected and some incremental costs related to the previously announced trade tariff.

Total operating expenses were $181.4 million compared with $167.8 million in the year-ago quarter. Operating income came in at $193.6 million compared with $139.4 million a year ago. Non-GAAP operating margin improved to 37.3% from 36.1% in the prior-year quarter.

Cash Flow and Liquidity

For full-year 2018, Arista generated $503.1 million of cash from operating activities compared with $631.6 million in 2017. As of Dec 31, 2018, the cloud networking company had $650 million of cash and cash equivalents with $228.6 million of non-current deferred revenue balance compared with the respective tallies of $859.2 million and $187.6 million a year ago.

Outlook

Arista is well positioned with its key cloud customers and is focused on expanding presence across all the verticals. For first-quarter 2019, the company projects revenues in the range of $588-$598 million. The company anticipates non-GAAP gross margin of 63-65% and non-GAAP operating margin of approximately 35%.

Looking Ahead

While driving the cloud area networking, Arista boasts the number one market position in 100-gigabit Ethernet switching share in port for the high-speed datacenter segment. The company has successfully integrated two M&A transactions, Mojo Networks for Cognitive Wi-Fi in the campus and Metamako for ultra-low latency networking, which remain additional tailwinds for business growth. Moreover, it is earning a strategic role with customers deploying transformative cloud networking. Arista aims to sustain profitable revenue growth and healthy cash generation in 2019 and beyond on the back of industry-leading product offerings.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 6.19% due to these changes.

VGM Scores

At this time, Arista Networks has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Arista Networks has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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