A month has gone by since the last earnings report for Arista Networks (ANET - Free Report) . Shares have lost about 1% 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 its most recent earnings report in order to get a better handle on the important drivers.
Arista Surpasses Q3 Earnings and Revenue Estimates
Arista reported healthy third-quarter 2018 results with year-over-year increase in revenues and record earnings on the back of solid order trends and favorable growth dynamics. Both the top line and the bottom line surpassed the respective Zacks Consensus Estimate in the quarter.
On GAAP basis, net income increased to a record $168.4 million or $2.08 per share from $133.6 million or $1.68 per share in the year-ago quarter driven by top-line growth.
Non-GAAP net income was $171.3 million or $2.11 per share compared with $128.2 million or $1.62 per share in the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate by 26 cents.
Quarterly total revenues increased 28.7% year over year to $563.3 million led by higher product sales and strength in the Cloud Titans vertical. Also, the top line outpaced the Zacks Consensus Estimate of $547 million.
Product revenues improved to $485.5 million from $380.3 million while Service revenues rose to $77.8 million from $57.3 million. Arista is benefiting from strong demand of the ‘Cloud Titans’ vertical, which was the top revenue contributor for the quarter followed by ‘Cloud Specialized Providers’ and ‘Enterprises’ tied at the number two spot, and ‘Financials’ and ‘Service Providers’ tied at the third place.
Non-GAAP gross margin was 64.6%, up from 64.4% and was above the mid-point of management’s guidance of 63-65%, primarily driven by higher revenue mix from its non-cloud customers. Non-GAAP operating margin declined to 37.1% from 38.6% in the prior-year quarter.
Other Quarter Details
Total operating expenses were $180.8 million compared with $139.8 million in the year-ago quarter, primarily due to higher R&D expenses. Operating income came in at $180.8 million compared with $140.8 million a year ago.
Cash Flow and Liquidity
For the first nine months of 2018, Arista generated $207.3 million of cash from operating activities compared with $448 million in the prior-year period.
As of Sep 30, 2018, the company had $524.7 million of cash and cash equivalents with $211 million of non-current deferred revenue balance.
For fourth-quarter 2018, Arista projects revenues in the range of $582-$594 million. The company anticipates non-GAAP gross margin of 63-65% and non-GAAP operating margin of approximately 35%.
Arista closed acquisitions of Mojo Networks for Cognitive WiFi and Metamako for low latency based in Sydney, Australia, in the third quarter. Also, it recently introduced the new 400-gigabit fixed switches the 7060X4 Series, based on the new Broadcom merchant silicon Tomahawk 3 with significant routing and buffering improvements. Arista is likely to take a leading role in the rollout of 400-gig Ethernet in 2019 and beyond while continuing its healthy growth momentum in the future.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 7.61% due to these changes.
Currently, Arista Networks has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Arista Networks has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.