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Why Is Arista Networks (ANET) Down 2.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Arista Networks (ANET - Free Report) . Shares have lost about 2.8% 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 the most recent earnings report in order to get a better handle on the important drivers.

Arista Q2 Earnings & Revenues Beat Estimates, Down Y/Y

Arista reported decent second-quarter 2020 results, with the top and the bottom line beating the respective Zacks Consensus Estimate. However, both figures declined on a year-over-year basis.

Net Income

On a GAAP basis, net income in the June-end quarter declined to $144.8 million or $1.83 per share from $189.2 million or $2.33 per share in the prior-year quarter, primarily due to lower operating income.

Non-GAAP net income came in at $167 million or $2.11 per share compared with $198.6 million or $2.44 per share in the year-ago quarter. However, the bottom line beat the Zacks Consensus Estimate by 14 cents, with an earnings surprise of 7.1%.

Revenues

Quarterly total revenues fell 11.1% year over year to $540.6 million (but were at the upper end of the company’s guidance of $520-$540 million) due to COVID-19 related supply challenges. This resulted in extended lead time and shipment constraints. The top line, however, surpassed the consensus estimate of $530 million.

Arista generated 81% of total revenues from the Americas and the remainder from international operations. Almost 40% of the vertical mix was driven by cloud titans, followed by 35% from enterprises, including financial services, and 25% from service and cloud specialty providers. Product revenues declined to $421.4 million from $513.2 million, while Service revenues rose to $119.2 million from $95.2 million supported by renewals.

Other Details

Non-GAAP gross profit contracted to $349.9 million from $393.8 million, with the respective margins remaining stable at 64.7%. The non-GAAP gross margin was above the midpoint of the company’s guidance of 63-65%, reflecting software and services mix. Non-GAAP operating income declined to $205.7 million from $235.1 million in the year-ago quarter with a margin of 38.1% and 38.7%, respectively.

Cash Flow & Liquidity

In the first half of 2020, Arista generated $333.1 million of net cash from operating activities compared with $366.5 million in the prior-year period. As of Jun 30, the cloud networking company had $800.2 million in cash and cash equivalents with $249 million of non-current deferred revenues.

Q3 Outlook

For the third quarter of 2020, Arista expects revenues of $570-$590 million. It anticipates a non-GAAP gross margin of 63-65% and a non-GAAP operating margin of nearly 37%.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Arista Networks has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, 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 C. 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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