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Arista (ANET) Beats on Q4 Earnings Despite Lower Revenues

Zacks

Arista Networks, Inc. ANET reported mixed fourth-quarter 2019 results, wherein both the bottom line and the top line surpassed the respective Zacks Consensus Estimate. However, it reported lower revenues year over year due to muted demand in the cloud business.

Net Income

On a GAAP basis, net income improved to $260.7 million or $3.25 per share from $170.3 million or $2.10 per share in the year-ago quarter, primarily driven by income tax benefit.

Quarterly non-GAAP net income came in at $183.4 million or $2.29 per share compared with $182.2 million or $2.25 per share in the year-ago quarter. The bottom line beat the consensus estimate by 20 cents.

In full-year 2019, GAAP net income improved to $859.9 million or $10.63 per share from $328.1 million or $4.06 per share a year ago on higher revenues and lower operating expenses. Non-GAAP net income came in at $786.8 million or $9.73 per share compared with $643.3 million or $7.96 per share in 2018.

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 7.2% year over year to $552.5 million and were above the midpoint of the company’s guidance of $540-$560 million, due to volatility in the cloud business given a sudden shift in procurement strategy from a key cloud titan. This resulted in a material reduction in demand. The top line, however, surpassed the Zacks Consensus Estimate of $551 million. In full-year 2019, total revenues increased 12.1% year over year to $2,410.7 million.

Arista generated 75% of total revenues from the Americas and the remainder from international operations. Product revenues declined to $447.5 million from $503.2 million, while Service revenues rose to $105 million from $92.5 million on healthy renewal activities.

Other Quarterly Details

Non-GAAP gross profit decreased to $360.2 million from $382.1 million for respective margins of 65.2% and 64.1%. The non-GAAP gross margin was above the mid-point of management’s guidance of 63-65%. This was reflective of healthy enterprise and financial verticals with a lower contribution from cloud business.

Non-GAAP operating income was down to $205.8 million from $222.1 million a year ago, while non-GAAP operating margin remained flat at 37.3%.

Cash Flow and Liquidity

Arista generated $963 million of cash from operating activities in 2019 compared with $503.1 million a year ago. As of Dec 31, 2019, the cloud networking company had $1,111.3 million of cash and cash equivalents with $262.6 million of non-current deferred revenue balance compared with respective tallies of $649.9 million and $228.6 million in the prior-year period. During the quarter, the company repurchased $51.5 million worth shares at a weighted average price of $189 per share.

Q1 Guidance

The company expects near-term volatility to continue in the cloud business despite underlying strength of the resilient business model and diligent execution of operational plans. For first-quarter 2020, the company projects revenues in the range of $522-$532 million. The lower revenue projection is primarily due to the volatility in demand on account of a shift in procurement strategy from a cloud titan customer, resulting in a material reduction in demand. It anticipates non-GAAP gross margin of 63% and non-GAAP operating margin of approximately 34%.

Moving Forward

Apart from driving cloud area networking, Arista boasts the number one market position in 100-gigabit Ethernet switching share in port for the high-speed datacenter segment. The company does not expect to face significant direct impact from coronavirus outbreak due to its minimal manufacturing footprint in China, although some supply chain mechanisms are likely to be hampered.

Zacks Rank & Key Picks

Arista currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader industry include Bandwidth Inc. BAND, ATN International, Inc. ATNI and Calix, Inc CALX, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bandwidth has long-term earnings growth expectation of 12.9%. It delivered positive earnings surprise of 67.6%, on average, in the trailing four quarters, beating estimates on each occasion.

ATN International surpassed earnings estimates twice in the trailing four quarters, the positive surprise being 143.9%, on average.

Calix has long-term earnings growth expectation of 6%. It delivered positive earnings surprise of 24%, on average, in the trailing four quarters, beating estimates thrice.

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