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Arista (ANET) Trumps on Q1 Earnings Despite Lower Revenues

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Arista Networks, Inc. (ANET - Free Report) reported mixed first-quarter 2020 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. However, it reported lower revenues year over year due to muted demand in the cloud business, owing to the adverse impact of the coronavirus pandemic.

Net Income

On a GAAP basis, net income declined to $138.4 million or $1.73 per share from $200.9 million or $2.47 per share in the year-ago quarter, primarily resulting from lower revenues.

Quarterly non-GAAP net income came in at $161.7 million or $2.02 per share compared with $187.7 million or $2.31 per share in the year-ago quarter. The year-over-year decrease was primarily attributable to lower revenues due to COVID-19-related adversities and recognition of approximately $83 million of deferred revenues in the first quarter of 2019. However, the bottom line beat the consensus mark by 23 cents.

Arista Networks, Inc. Price, Consensus and EPS Surprise

 

Arista Networks, Inc. Price, Consensus and EPS Surprise

Arista Networks, Inc. price-consensus-eps-surprise-chart | Arista Networks, Inc. Quote

Revenues

Quarterly total revenues decreased 12.2% year over year to $523 million and were near the lower end of the company’s guidance of $522-$532 million, due to operational challenges triggered by irregular raw-material supply and manufacturing constraints, driven by the virus outbreak. This, in turn, resulted in extended lead times and lower shipments. The decline in revenues was also due to the recognition of approximately $83 million of deferred revenues in the first quarter of 2019. The top line, however, surpassed the Zacks Consensus Estimate of $513 million.

Arista generated 77% of total revenues from the Americas and the remainder from international operations. About 40% of the revenue mix was driven by the cloud titans, followed by 35% from the enterprise sector and 25% from the service and cloud specialty provider sector. Product revenues declined to $410.9 million from $505.4 million, while Service revenues rose to $112.1 million from $90 million on healthy renewal activities.

Other Quarterly Details

Non-GAAP gross profit contracted to $343.2 million from $384.3 million, with the respective margins being 65.6% and 64.5%. The non-GAAP gross margin was above the management’s guidance of 63%. This was reflective of healthy enterprise and financial verticals with a lower impact on margin from the cloud business.

Non-GAAP operating income declined to $194 million from $223.6 million a year ago, with the respective margins being 37.1% and 37.5%.

Cash Flow and Liquidity

Arista generated $194.8 million of cash from operating activities in the quarter compared with $170.1 million a year ago. As of Mar 31, 2020, the cloud networking company had $761.3 million of cash and cash equivalents with $264.6 million of non-current deferred revenue balance. During the quarter, the company repurchased $228 million worth shares at a weighted average price of $189 per share.

Q2 Guidance

The company expects near-term volatility to continue due to the coronavirus-led pandemonium despite the underlying strength of the resilient business model and the diligent execution of operational plans. Despite uncertainty over the impact of coronavirus on long-term revenues and visibility, management offered guidance for the second quarter. For second-quarter 2020, Arista projects revenues of $520-$540 million. It anticipates non-GAAP gross margin of 63-65% and non-GAAP operating margin of approximately 35%.

Zacks Rank & Key Picks

Arista currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Acacia Communications, Inc. , Turtle Beach Corporation (HEAR - Free Report) and Airgain, Inc. (AIRG - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Acacia has a long-term earnings growth expectation of 30%. It delivered a trailing four-quarter beat of 17.7%, on average.

Turtle Beach surpassed earnings estimates in the trailing four quarters, the average positive surprise being 112.5%.

Airgain's earnings surpassed estimates in the trailing four quarters, the average positive surprise being 87.5%.

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