It has been about a month since the last earnings report for Arista Networks (ANET). Shares have added about 11.2% 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 drivers.
Arista Trumps on Q1Earnings Despite Lower Revenues
Arista reported mixed first-quarter 2020 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. However, it reported lower revenues year over year due to muted demand in the cloud business, owing to the adverse impact of the coronavirus pandemic.
On a GAAP basis, net income declined to $138.4 million or $1.73 per share from $200.9 million or $2.47 per share in the year-ago quarter, primarily resulting from lower revenues.
Quarterly non-GAAP net income came in at $161.7 million or $2.02 per share compared with $187.7 million or $2.31 per share in the year-ago quarter. The year-over-year decrease was primarily attributable to lower revenues due to COVID-19-related adversities and recognition of approximately $83 million of deferred revenues in the first quarter of 2019. However, the bottom line beat the consensus mark by 23 cents.
Quarterly total revenues decreased 12.2% year over year to $523 million and were near the lower end of the company’s guidance of $522-$532 million, due to operational challenges triggered by irregular raw-material supply and manufacturing constraints, driven by the virus outbreak. This, in turn, resulted in extended lead times and lower shipments. The decline in revenues was also due to the recognition of approximately $83 million of deferred revenues in the first quarter of 2019. The top line, however, surpassed the Zacks Consensus Estimate of $513 million.
Arista generated 77% of total revenues from the Americas and the remainder from international operations. About 40% of the revenue mix was driven by the cloud titans, followed by 35% from the enterprise sector and 25% from the service and cloud specialty provider sector. Product revenues declined to $410.9 million from $505.4 million, while Service revenues rose to $112.1 million from $90 million on healthy renewal activities.
Other Quarterly Details
Non-GAAP gross profit contracted to $343.2 million from $384.3 million, with the respective margins being 65.6% and 64.5%. The non-GAAP gross margin was above the management’s guidance of 63%. This was reflective of healthy enterprise and financial verticals with a lower impact on margin from the cloud business.
Non-GAAP operating income declined to $194 million from $223.6 million a year ago, with the respective margins being 37.1% and 37.5%.
Cash Flow and Liquidity
Arista generated $194.8 million of cash from operating activities in the quarter compared with $170.1 million a year ago. As of Mar 31, 2020, the cloud networking company had $761.3 million of cash and cash equivalents with $264.6 million of non-current deferred revenue balance. During the quarter, the company repurchased $228 million worth shares at a weighted average price of $189 per share.
The company expects near-term volatility to continue due to the coronavirus-led pandemonium despite the underlying strength of the resilient business model and the diligent execution of operational plans. Despite uncertainty over the impact of coronavirus on long-term revenues and visibility, management offered guidance for the second quarter. For second-quarter 2020, Arista projects revenues of $520-$540 million. It anticipates non-GAAP gross margin of 63-65% and non-GAAP operating margin of approximately 35%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
At this time, Arista Networks has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
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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