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Arista Networks (ANET) Up 5.5% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Arista Networks (ANET). Shares have added about 5.5% 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 Q1 Earnings Beat Estimates on Top-Line Growth

Arista reported solid first-quarter 2021 results, wherein the bottom and the top lines beat the respective Zacks Consensus Estimate, driven by a healthy momentum in the enterprise vertical and solid customer additions. Also, both adjusted earnings and revenues improved year over year.

Net Income

On a GAAP basis, net income in the reported quarter improved to $180.4 million or $2.27 per share from $138.4 million or $1.73 per share in the prior-year quarter, primarily driven by top-line growth.

Excluding non-recurring items, non-GAAP net income came in at $198.8 million or $2.50 per share compared with $161.7 million or $2.02 per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 12 cents.

Revenues

Quarterly total revenues were up 27.6% year over year to $667.6 million and was well ahead of the company’s guidance of $630-$650 million. The rise was primarily led by solid customer additions and growth in the enterprise vertical, partially offset by shipment constraints resulting from the COVID-19 operating environment and supply-chain disruptions. The top line surpassed the consensus estimate of $640 million.

Arista generated 75% of total revenues from the Americas and the remainder from international operations. Product revenues jumped to $539.1 million from $410.9 million, while Service revenues grew to $128.4 million from $112.1 million, supported by renewals and subscriptions. In terms of the vertical mix, cloud titans was the largest vertical followed by enterprise, financials, specialty cloud providers and service providers. With improved customer demand and visibility, the company is taking decisive steps to improve inventory levels and manufacturing capacity in order to negate supply-chain headwinds. Notably, Arista is increasingly offering software-driven, data-centric approach to help customers build their cloud architecture and augment their cloud experience.

Other Details

Non-GAAP gross profit improved to $432.1 million from $343.2 million for respective margins of 64.7% and 65.6%. The non-GAAP gross margin was at the high end of the company’s guidance of 63-65%, reflecting healthy software and services mix.

Total operating expenses increased to $219 million from $188.6 million in the prior-year quarter owing to higher R&D costs, high variable compensation and other headcount-related charges, partially offset by lower COVID-related travel and marketing expenses. Non-GAAP operating income was up to $251.3 million from $194 million in the year-ago quarter with corresponding margins of 37.6% and 37.1%, respectively.

Cash Flow & Liquidity

In the first three months of 2021, Arista generated $254.7 million of net cash from operating activities compared with $194.8 million in the prior-year period. As of Mar 31, 2021, the cloud networking company had $843.3 million in cash and cash equivalents with $225.9 million of non-current deferred tax liabilities. Arista repurchased $101 million worth of shares during the quarter at an average price of $276 per share. Notably, the company has purchased $763 million worth of shares to date since the initiation of its $1 billion share repurchase program in second-quarter 2019.

Q2 Outlook

The company expects to witness continued growth within its enterprise vertical in the forthcoming quarters with customer mix remaining the key driver. For the second quarter of 2021, Arista expects revenues of $675-$695 million. It anticipates a non-GAAP gross margin of 63-65% and a non-GAAP operating margin of around 37%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Arista Networks has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Arista Networks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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