Arista Networks, Inc. (ANET Quick QuoteANET - Free Report) reported strong second-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 $299.1 million or 94 cents per share from $196.9 million or 62 cents per share in the prior-year quarter, primarily driven by top-line growth.

Excluding non-recurring items, non-GAAP net income was $342.7 million or $1.08 per share compared with $216.8 million or 68 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 16 cents.

Revenues

Despite supply chain disruptions, total revenues soared 48.7% year over year to $1,051.9 million. The top line surpassed the company’s guidance of $950-$1,000 million and exceeded the consensus estimate of $976 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 80% of total quarterly revenues from the Americas and the remainder from international operations. Product revenues increased to $885.8 million from $566.5 million on healthy traction from existing products and ramp up of newer ones with the launch of various products. Service revenues grew to $166.1 million from $140.9 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 solid market control in client to cloud networking domain.

Other Details

Non-GAAP gross profit improved to $651.6 million from $461.4 million for respective margins of 61.9% and 65.2%. The non-GAAP gross margin was at the higher end of the company’s guidance of 60-62%, reflecting healthy software and services mix.

Total operating expenses increased to $280.4 million from $234.8 million in the prior-year quarter, owing to higher R&D costs, increased variable compensation and other headcount-related charges, partially offset by lower variable expenses. Non-GAAP operating income increased to $425.5 million from $271.7 million in the year-ago quarter, with corresponding margins of 40.4% and 38.4%, 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. Second-quarter inventory was up to 852.8 million from 694.2 million in the prior quarter as it maintained buffer levels for certain components and products.

Cash Flow & Liquidity

For the first six months of 2022, Arista generated $318.2 million of net cash from operating activities compared with $518 million in the prior-year period. As of Jun 30, 2022, the cloud networking company had $493.2 million in cash and cash equivalents with $13.4 million of non-current deferred tax liabilities. Arista repurchased shares worth $483.7 million during the quarter at an average price of $101 per share. The company has so far bought 6.5 million shares for $693 million as part of its $1 billion share repurchase program initiated in October 2021.

Q3 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 continued growth within its enterprise vertical in the forthcoming quarters, with customer mix being the key driver. For the third quarter of 2022, it expects revenues of $1,025-$1,075 million. It anticipates a non-GAAP gross margin of 60-62% and a non-GAAP operating margin of 39%.

Zacks Rank & Stocks to Consider

Arista currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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