Why Is Arista Networks (ANET) Down 25.6% Since Last Earnings Report?

It has been about a month since the last earnings report for Arista Networks (ANET). Shares have lost about 25.6% in that time frame, underperforming the S&P 500.

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

Arista Beats on Q4 Earnings Despite Lower Revenues

Arista 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.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Arista Networks has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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