Arista Scores More Gains in Sales and Profits

By Dan Caplinger Markets Fool.com

Arista Networks (NYSE: ANET) has been at the forefront of the key cloud networking solutions niche within the information technology sector, and with enterprise customers having realized that they can't afford to get left behind by their competitors, demand for cloud services has skyrocketed. In particular, Arista has tried to differentiate itself from its peers by emphasizing the key advantages of its platform compared to proprietary platforms of its primary competitors.

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Coming into Thursday's first-quarter financial report, Arista shareholders wanted the company to produce the same level of sales and profit growth that they've grown used to seeing in past quarters. Arista was up to the task once again, but a lack of positive response form shareholders suggests skepticism about how long the cloud revolution can keep climbing higher. Let's look more closely at Arista Networks and how its report informs what's likely to be in the company's future.

Image source: Arista Networks.

Arista climbs above the clouds

Arista Networks' first-quarter results continued the positive trends that it has enjoyed for a long time. Sales jumped 39% to $335.5 million, which was even better than the consensus forecast among those following the stock for a growth rate of about 35%. Similarly, adjusted net income was up by nearly half to $71.8 million, and the resulting $0.93 per share in adjusted earnings was $0.07 higher than most investors had expected to see.

Taking a closer look at the results, Arista hasn't done much to change its successful strategy. Growth of 37% in product-based revenue led Arista forward, and the smaller service segment saw sales climb by almost half. Gross margin eased downward by a small fraction of a percentage point, but operating expenses grew by only a third, and that kept operating income strong in year-over-year terms.

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CEO Jayshree Ullal was succinct in her discussion of Arista's results. "As we kick off 2017, I am pleased with our performance this quarter," Ullal said. "We continue to experience meaningful relevance as customers shift to cloud networking." CFO Ita Brennan added that consistent execution helped deliver strong results, and Arista foresees that customers will continue to have strong demand for the company's products.

What's next for Arista?

Arista made steps forward in its business that should have positive ramifications. The introduction of Containerized EOS should help increase flexibility in how users put Arista's key EOS platform to work for them. At the same time, the company's data analysis product adds some functionality to the EOS platform, offering visibility for cloud-based applications to work.

With respect to its work for government agencies, Arista also made progress. The company boasted that several of its platforms now appear on the Department of Defense's approved products list for unified capabilities. With the Joint Interoperability Command issuing information assurance interoperability certification for its products, Arista should now be able to take greater advantage of opportunities with military contracts.

Finally, Arista gave guidance for 2017 that looked reasonably solid. Predictions for revenue to be in a range of $354 million to $364 million would be roughly $10 million to $20 million higher than the current consensus forecast among those following the stock. Consistent gross margin and operating margin figures with past quarters signals Arista's belief in its ability to keep executing well.

Arista Networks investors didn't seem entirely satisfied with the report, but the stock fell by less than 1% in after-hours trading following the announcement. With so much attention being paid to cloud-based services, Arista's ability to stand out from the crowd and keep its customers excited about the distinctive offerings that its platform offers will play an important role in determining the future course of the business.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.