Arista Networks Defies Cloud Skeptics With Success

Image: Arista Networks.

Moving into the cloud has been a big trend among major enterprises looking to simplify their technology infrastructure, and Arista Networks has taken full advantage of that trend to deliver networking products and services to its customers. Investors have high hopes for the industry as a whole.

Coming into Thursday's first-quarter financial report, Arista shareholders believed that the networking company would be able to keep generating impressive gains on the top and bottom lines. Arista's results exceeded the expectations that investors had for the company, and its future looks even brighter. Let's look more closely at the latest from Arista Networks, and discover why many are getting even more optimistic about its prospects ahead.

Arista climbs above the cloudsArista Networks' first-quarter results maintained the company's long-term growth trajectory. Revenue jumped more than 35% from the year-ago quarter, to $242.2 million, which was better than the $235 million that most investors were looking to see.

Adjusted net income of $49.1 million represented an even more impressive 38% gain from year-earlier figures. That worked out to adjusted earnings of $0.68 per share, topping consensus forecasts by $0.08 per share.

Taking a closer look at the numbers that Arista posted, the primary sources of the company's overall gains didn't change much from previous quarters. Product-based revenue rose by nearly a third, and is still responsible for the lion's share of Arista's total sales. The services revenue segment climbed even faster, rising at a 57% rate.

However, gross margins remained under pressure, falling about one-and-three-quarters percentage points, to 64%. Operating expenses were up at a substantially slower rate than revenue, so operating margin actually rose by half a percentage point. Income-tax provisions were roughly proportional to overall pre-tax income growth.

CEO Jayshree Ullal put the results in the usual perspective. "As we kick off 2016," Ullal said, "we delivered a solid quarter. We continue to experience increased relevance and acceptance from our customers in the ongoing shift to cloud networking." CFO Ita Brennan added that the company is "pleased with our execution across all financial metrics in the first quarter," and believes that customer adoption of products is going well.

What's ahead for Arista?Arista gave guidance for the second quarter that also inspired confidence among investors. The company believes that revenue will end up between $259 million and $265 million, and that's comfortably above the $253 million in sales that investors had predicted coming into the report. Similarly, adjusted gross margins between 62% and 65%, and adjusted operating margins of 26%, give Arista some room to surprise on the upside.

In order to produce longer-term growth, however, Arista Networks will have to keep demonstrating the value of its product lines. During the quarter, Arista introduced its 7500R Series, a switching-and-routing platform that should help high-end enterprise-data centers and cloud-service providers to take full advantage of proprietary Arista architectures to develop public, private, and hybrid clouds that can handle a variety of different workloads.

In addition, the company's FlexRoute technology provides up to a million wire-speed routes with support for various protocols, and integration between Arista products. Various solutions offered by peers in the cloud realm demonstrate that Arista isn't operating in a vacuum in the industry.

Arista Networks investors were excited about the company's latest results, sending the stock up 5% in after-hours trading following the announcement. If the company can keep getting as much out of the cloud as it has in the past, then Arista investors could see even larger positive surprises from the company in the future.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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