Arista Networks (ANET) Down 6.1% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Arista Networks, Inc. ANET. Shares have lost about 6.1% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is ANET 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.

Recent Earnings

Arista Networks delivered first-quarter 2018 non-GAAP earnings of $1.66 per share, comfortably surpassing the Zacks Consensus Estimate of $1.52 per share. The figure also soared 78.5% on a year-over-year basis.

Revenues of $472.5 million surged 40.8% from the year-ago quarter and outpaced the Zacks Consensus Estimate of $461 million. Further, the figure came ahead of management’s guidance of $450-$468 million.

Quarter Highlights

Product revenues (86.3% of total revenues) surged 39.9% to $407.6 million. Service revenues (13.7% of total revenues) rose 47.1% to $64.9 million. Arista noted that new client addition was strong and as of Mar 31, 2018, the company exceeded more than 5,000 cumulative customers.

Arista is benefiting from strong demand of the ‘Cloud Titans’ vertical which was also the top revenue contributor for the first quarter followed by ‘Enterprises’, ‘Service providers and Cloud specialized providers’ and ‘Financials’ in the second, third and fourth positions, respectively. Its existing products Flexroute and CloudVision have aided revenue growth in the first quarter.

Operating Details

Non-GAAP gross margin expanded 20 basis points (bps) to 64.4%. Further, the figure is above the mid-point of management’s guidance of 63-65%, primarily driven by strong revenues and favorable customer mix. Product gross margin contracted 100 bps, while service margin expanded 130 bps.
 
Operating expenses, as percentage of revenues, were 34.7% as compared with 42% in the year-ago quarter. Research & development (R&D) and sales & marketing (S&M) expenses declined 270 bps and 210 bps, respectively.

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

As a result, non-GAAP operating margin expanded almost 510 bps on a year-over-year basis to 35.3%.

Legal expenses associated with the ongoing lawsuits were $7.1 million in the quarter.

Balance Sheet & Cash Flow

Cash & cash equivalents, marketable securities and investments as of Mar 31, 2018, were $1.7 billion compared with $1.53 billion in the previous quarter. Cash flow from operating activities during the quarter was $195.5 million.

Inventory declined to $268.1 million in the quarter from $306.2 million in the previous quarter.

Deferred revenue balance was $456.1 million, down from $515.3 million in the previous quarter.

Guidance

For second-quarter 2018, Arista projects revenues in the range of $500-$514 million.

The company anticipates non-GAAP gross margin of 62-64% and operating margin of approximately 32-34%.

Moreover, Arista expects costs associated with the ongoing lawsuits to be approximately $6 million for the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared to two lower.

VGM Scores

At this time, ANET has a great Growth Score of A, a grade with the same score on the momentum front. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, ANET has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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