Arista (ANET) Tops on Q4 Earnings & Revenues, Improves Y/Y

Arista Networks Inc. ANET delivered non-GAAP earnings of $1.71 per share in fourth-quarter 2017, which comfortably surpassed the Zacks Consensus Estimate of $1.45 per share. The figure also surged 64.4% on a year-over-year basis.

Revenues of $467.9 million soared 42.7% from the year-ago quarter and surpassed the Zacks Consensus Estimate of $464 million. Further, the figure came a head of management’s guidance of $450-$464 million. Product revenues (87% of total revenues) surged 40.9% to $407.2 million. Service revenues (13% of total revenues) rose 55.7% to $60.7 million.

Arista is benefiting from strong demand for 100-gigabit routing and switching products, particularly from cloud titans. Top five customer verticals in the quarter were cloud titans, Tier 1 and 2 service providers, cloud specialty providers, high tech enterprises and financials.

The company stated that visibility around cloud titans remains strong for the next one or two quarters. Management noted that FlexRoute license (almost 150 customers) has helped it enter additional layers of the spine for routing and data-center interconnect, where Cisco Systems Inc CSCO and Juniper Networks Inc. were dominant names.

During the quarter, the company expanded cloud-grade routing with the launch of its latest Arista EOS (Extensible Operating System) and CloudVision software.

The stock has returned 158.7% year to date, substantially outperforming the 14.1% rally of the industry.

Quarter Details

International revenues were $153.8 million, or 33% of total revenues, up from 27% in the year-ago quarter.

As of Dec 31, 2017, the company acquired more than 4,900 customers, with Microsoft MSFT accounting for 16% of the total revenues for 2017.

During the quarter, the company launched Arista Any Cloud software platform, which helps in reducing operational costs as well as complexity for enterprises by simplifying integration and management of hybrid clouds across private cloud data centers and public cloud providers.

Non-GAAP gross margin expanded 150 basis points (bps) to 65.9%. Further, the figure surpassed the company’s guidance of 63-65%, primarily driven by strong revenues and favorable customer mix. Product gross margin contracted 100 bps, while service margin expanded 100 bps.

Operating expenses, as percentage of revenues, were 29.7% as compared with 34.4% in the year-ago quarter. Research & development (R&D) and sales & marketing (S&M) expenses declined 40 bps and 360 bps, respectively.

The lower R&D expenses reflect reduced prototype and NRE spending, offset by continued headcount growth.

As a result, non-GAAP operating margin expanded almost 380 bps on a year-over-year basis to 36.1%.

Legal expenses associated with the ongoing lawsuits were $9.1 million in the quarter.

Balance Sheet & Cash Flow

Cash & cash equivalents and marketable securities as of Dec 31, 2017, were $1.53 billion compared with $854.5 million in the previous quarter. Cash flow from operating activities during the quarter was $183.7 million.

Inventory declined to $306.2 million in the quarter from $333.2 million in the previous quarter.

Deferred revenue balance was $515.3 million, down from $565.1 million in the previous quarter.

Guidance

For first-quarter 2018, Arista projects revenues in the range of $450-$468 million. The Zacks Consensus Estimate is pegged at $456.9 million.

The company projects non-GAAP gross margin of 63-65% and operating margin of approximately 32%.

Management anticipates R&D spending to increase in first-quarter 2018. Moreover, Arista expects costs associated with the ongoing lawsuits to be approximately $8 million for the quarter.

Zacks Rank & Key Pick

Currently, Arista carries a Zacks Rank #3 (Hold).

A top-ranked stock in the technology sector worth considering is NVIDIA Corporation NVDA, sporting a Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for NVIDIAis currently pegged at 10.3%.

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