Arista Networks, Inc. (ANET - Free Report) recently settled its long-pending patent litigation with rival Cisco Systems, Inc. (CSCO - Free Report) by agreeing to pay $400 million in a binding agreement. The news cheers the investor community as Arista’s shares jumped 5.4% to $271.33 at the close of trading hours on Aug 6.
In its lawsuit filed in 2014, Cisco alleged that Arista infringed on its network equipment patents by brazenly copying software that runs switching products. Although, Arista denied the allegation as one aimed to stifle competition, the U.S. International Trade Commission ruled against it in its verdict in 2016. Consequently, the company was forced to redesign its products to comply with the ruling.
This harmed the sale of its products and businesses from most of its cloud customers like Facebook, Inc. (FB - Free Report) and Amazon.com, Inc. (AMZN - Free Report) were affected. In order to eliminate the business uncertainty and resolve the patent-related issues stuck in a legal imbroglio, Arista decided to settle the lawsuit by paying a mutually agreed compensatory fine.
As part of the settlement process, Arista has agreed to enforce “certain limited changes” to its user interface for operation that has been the bone of contention. The deal also involves binding restrictions on both the companies and prohibits them from claiming any patent or copyright infringement on products that are available in the market for about five years. In addition, both Arista and Cisco will have to resolve any copyright and patent infringement dispute relating to new products or new features in existing product in the next three years through an arbitration process only.
The strategic settlement of the case is likely to immensely benefit Arista. The company is profiting from the expanding cloud networking market primarily driven by strong demand for scalable infrastructure, which has become a necessity to support new applications and services. Apart from delivering high capacity and availability, cloud networking promises predictable performance along with programmability that enable integration with third-party applications for network, management, automation, orchestration and network services.
With a diligent execution of operational plans, Arista has gained 59.7% in the past year on an average compared with a rise of 3.8% for the industry. The company remains poised to continue its solid performance in the near term and projects revenues in the range of $540-$552 million for third-quarter 2018. This Zacks Rank #2 (Buy) stock further anticipates non-GAAP gross margin of 63-65% and operating margin of approximately 32-34%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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