Arista Networks (NYSE: ANET) has a habit of beating expectations on both the top and bottom lines, having done so in each of the past three earnings reports. The company has achieved this with impressive revenue growth, increasing sales by 41%, 28%, and 29% for the first, second, and third quarters, respectively.
You wouldn't know it by the stock price, however, which ended 2018 on a sour note, losing all its gains and falling 10% for the year, versus a 6% decline for the S&P 500. This was largely the result of the year-end correction that was especially brutal on technology stocks, and fears about the company's slowing growth rate.
The cloud networking-solutions provider will have another opportunity to impress investors, as the company is scheduled to report the financial results of its fourth quarter after the market close on Thursday, Feb. 14. Let's recap Arista Networks' third-quarter results for any insight into what investors can expect in the next earnings report.
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For the third quarter, Arista reported revenue of $563.3 million, an increase of 29% year over year, exceeding analysts' consensus estimates of $549 million and surpassing the high end of the company's forecast range, which topped out at $552 million.
This generated adjusted net income of $171 million and adjusted earnings per share of $2.11, up 30% versus the prior-year quarter, easily surpassing expectations of $1.84. It also marked the second consecutive quarter of record earnings.
The growth came from both of Arista's operating segments. Product revenue of $485 million increased 28% year over year, while the smaller service segment produced sales of $78 million, up 36% compared with the prior-year quarter.
Arista's cost discipline continued, as general and administrative expenses declined 22% year over year, while sales and marketing expense increased just 18%. The company continues to invest heavily to create the next generation of products, resulting in research and development expenses that grew 48% year over year. This puts the company in a strong position to maintain momentum.
What the quarter could hold
For the fourth quarter, Arista forecast revenue in a range of $582 million to $594 million, which would represent year-over-year growth between 24% and 27%. The company is expecting adjusted gross margin between 63% and 65%, resulting in an adjusted operating margin of approximately 35%.
To put that into the perspective of the overall sentiment for the company (although we don't want to fall victim to Wall Street's quarter-to-quarter thinking), analysts' consensus estimates are calling for revenue of $591.6 million, up 26.4% year over year, nearer the high end of management's guidance. Analysts also anticipate adjusted EPS of $2.07, up 21% versus the prior-year quarter. Analysts' estimates have been growing in recent weeks, as enthusiasm regarding Arista prospects continues to climb.
The stock price has lagged the company's growth over the past year, leading to an imbalance that will eventually correct itself. If Arista shows that its impressive revenue and earnings growth can continue, it could see big gains when it reports earnings after the market close on Thursday, Feb. 14.
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