Arista Networks Inc. (ANET - Free Report) reported earnings (including stock-based compensation) of $1.10 per share in second-quarter 2017, which comfortably surpassed the Zacks Consensus Estimate of 79 cents.
Excluding stock-based compensation but including all other one-time items, non-GAAP earnings was $1.34 per share, which surged 81.1% on a year-over-year basis.
Revenues of $405.2 million soared 50.8% from the year-ago quarter. The figure was better than management’s guided range of $354–$364 million. Product revenues (87.3% of total revenue) surged 50.2% to $353.9 million. Service revenues (12.7% of total revenue) jumped 54.9% to $51.3 million.
Arista expects revenue growth in the current-quarter to moderate sequentially as expenses are likely to grow faster than revenues due to higher investments.
Management stated that gross margins can be negatively impacted due to re-design of the products affected by import ban related to the '945 case, which the company is fighting against Cisco (CSCO - Free Report) .
Arista is now using the U.S. contract manufacturer to produce these, which will further negatively impact gross margin.
The stock has gained 79.6% year to date, substantially outperforming the 21.3% rally of the industry it belongs to.
International revenues came in at $101.2 million, or 25% of total revenue, up from 21% in the previous quarter.
The company is benefiting from the expanding cloud networking market driven by strong demand for scalable infrastructure. The robust product portfolio is helping it win customers on a regular basis.
Gross margin expanded 30 basis points (bps) to 64.1% and was better than the company’s guided range of 61–64%. Product gross margin contracted 60 bps, while service margin expanded 110 bps.
Operating expenses, as percentage of revenues, declined 870 bps to 35.3%. Research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses declined 560 bps, 230 bps and 80 bps, respectively.
The lower R&D expense reflects reduced prototype and NRE spending, following the launch of Arista’s R2 products, offset by continued headcount growth.
Operating margin expanded almost 900 bps on a year-over-year basis to 28.8%.
Legal expenses associated with the ongoing lawsuits came in at $12 million for the quarter.
Balance Sheet & Cash Flow
Cash & cash equivalents and marketable securities as of Jun 30 were $1.12 billion as compared with $1.04 billion as of Mar 31. Cash flow from operating activities was $79.2 million.
Inventory increased to $363.8 million in the quarter, up from $286.8 million in the prior period.
Deferred revenue balance was $554.5 million, up from $497.2 million in the previous quarter driven by growth in services renewals.
For third-quarter 2017, management projects revenues in the range of approximately $405–$420 million, gross margin of approximately 61–64% and operating margin of approximately 30%.
Zacks Rank & Key Stocks
Arista has a Zacks Rank #2 (Buy). Better-ranked stocks in the broader technology sector include Alibaba Group (BABA - Free Report) and Lam Research (LRCX - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rates for Alibaba and Lam Research are projected to be 28.97% and 17.20%, respectively.
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