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Arista Networks (ANET) Down 20.2% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Arista Networks (ANET). Shares have lost about 20.2% in that time frame, underperforming the S&P 500.

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

Arista Outpaces Q1 Earnings and Revenue Estimates

Arista reported solid first-quarter 2019 results, wherein both the bottom line and the top line surpassed the respective Zacks Consensus Estimate, and increased year over year. Despite seasonality issues, the strong quarterly performance signified the resilient business model and diligent execution of operational plans.

Net Income

On a GAAP basis, net income increased to $200.9 million or $2.47 per share from $144.5 million or $1.79 per share in the year-ago quarter driven by top-line growth.

Quarterly non-GAAP net income came in at $187.7 million or $2.31 per share compared with $134.1 million or $1.66 per share in the year-ago quarter. The bottom line beat the consensus estimate by 24 cents.

Revenues

Quarterly total revenues increased 26% year over year to $595.4 million and was at the higher end of the company’s guidance of $588-$598 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 $594 million. Product revenues improved to $505.4 million from $407.6 million while Service revenues rose to $90 million from $64.9 million.

Other Quarterly Details

Non-GAAP gross profit was $384.3 million compared with $304.1 million in the prior-year quarter. Non-GAAP gross margin remained almost flat at 64.5% and was just above the mid-point of management’s guidance of 63-65%. This was reflective of healthy enterprise and service contributions combined with a continued focus on cost optimization.

Non-GAAP operating income came in at $223.6 million compared with $166.7 million a year ago. Non-GAAP operating margin improved to 37.5% from 35.3%.

Cash Flow and Liquidity

Arista generated $170.1 million of cash from operating activities in the reported quarter compared with $195.5 million a year ago. As of Mar 31, 2019, the cloud networking company had $809.5 million of cash and cash equivalents with $231.7 million of non-current deferred revenue balance. During the quarter, management authorized a $1 billion share repurchase program, under which the company can repurchase shares till its expiry in April 2022.

Outlook

Arista is well positioned with its key cloud customers and is focused on expanding presence across all the verticals. For second-quarter 2019, the company projects revenues in the range of $600-$610 million. It anticipates non-GAAP gross margin of 64-65% and non-GAAP operating margin of approximately 36%.

Moving Forward

Apart from driving 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 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?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Arista Networks has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision 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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