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Arista Networks (ANET) Down 10.3% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Arista Networks (ANET - Free Report) . Shares have lost about 10.3% 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 Beats Q1 Earnings Estimates on Record Revenues

Arista reported strong first-quarter 2022 results, wherein both the bottom and the top lines beat the respective Zacks Consensus Estimate, driven by solid demand trends and healthy customer additions. Adjusted earnings and revenues also improved year over year.

Net Income

On a GAAP basis, net income in the reported quarter improved to $272.3 million or 85 cents per share from $180.4 million or 57 cents per share in the prior-year quarter, primarily driven by top-line growth.

Excluding non-recurring items, non-GAAP net income was $268.5 million or 84 cents per share compared with $198.8 million or 62 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 3 cents.

Revenues

Despite supply chain disruptions, total revenues were record high and soared 31.4% year over year to $877.1 million. The top line surpassed the company’s guidance of $840-$860 million and exceeded the consensus estimate of $854 million. The rise was primarily led by solid customer additions and growth in the enterprise vertical along with accelerated shipments to cloud titan customers that were mostly deferred from the previous quarter.

Arista generated 76% of total quarterly revenues from the Americas and the remainder from international operations. Product revenues increased to $724.7 million from $539.1 million on healthy traction from existing products and ramp up of newer ones with a successful transition from prototype to trials. Service revenues grew to $152.3 million from $128.4 million, supported by renewals and subscriptions. Cloud titans were the largest in terms of the vertical mix, followed by enterprise, specialty cloud providers, financials and service providers. The company maintained its leading position in 100, 200 and 400-gig switching and achieved a solid market control in client to cloud networking domain.

Other Details

Non-GAAP gross profit improved to $560.9 million from $432.1 million for respective margins of 63.9% and 64.7%. The non-GAAP gross margin was at the higher end of the company’s guidance of 63-64%, reflecting healthy software and services mix.

Total operating expenses increased to $275.9 million from $219 million in the prior-year quarter, owing to higher R&D costs, increased variable compensation and other headcount-related charges, partially offset by lower COVID-related travel and marketing expenses. Non-GAAP operating income increased to $335.6 million from $251.3 million in the year-ago quarter, with corresponding margins of 38.3% and 37.6%, respectively.

With improved customer demand and order visibility, the company is taking decisive steps to improve inventory levels and manufacturing capacity to negate supply-chain headwinds. First-quarter inventory was up to 694.2 million from 650.1 million in the prior-year quarter as it continued to maintain buffer levels for certain components and products.

Cash Flow & Liquidity

In first-quarter 2022, Arista generated $217.1 million of net cash from operating activities compared with $254.7 million in the prior-year period. As of Mar 31, 2022, the cloud networking company had $635 million in cash and cash equivalents with $51.1 million of non-current deferred tax liabilities. Arista repurchased shares worth $136.2 million during the quarter at an average price of $116 per share. The company has so far bought 1.8 million shares for $209 million as part of its $1 billion share repurchase program initiated in October 2021.

Q2 View

Arista is increasingly offering a software-driven, data-centric approach to help customers build their cloud architecture and augment their cloud experience. The company is increasingly gaining market traction in 100-, 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in data-driven cloud networking business with proactive platforms and predictive operations. Arista expects to witness continued growth within its enterprise vertical in the forthcoming quarters, with customer mix being the key driver. For the second quarter of 2022, it expects revenues of $950-$1,000 million. It anticipates a non-GAAP gross margin of 60-62% and a non-GAAP operating margin of 37-38%.

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 nice Growth Score of B, a grade with the same score on the momentum front. 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.

Performance of an Industry Player

Arista Networks is part of the Zacks Communication - Components industry. Over the past month, Knowles (KN - Free Report) , a stock from the same industry, has gained 1.4%. The company reported its results for the quarter ended March 2022 more than a month ago.

Knowles reported revenues of $201.4 million in the last reported quarter, representing a year-over-year change of +0.2%. EPS of $0.35 for the same period compares with $0.29 a year ago.

For the current quarter, Knowles is expected to post earnings of $0.31 per share, indicating no change from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Knowles. Also, the stock has a VGM Score of B.


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