It has been about a month since the last earnings report for Arista Networks (ANET). Shares have lost about 7.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Arista Q4 Earnings Beat Estimates on Higher Revenues
Arista reported solid fourth-quarter 2020 results, wherein the top and the bottom lines beat the respective Zacks Consensus Estimate, driven by a healthy momentum in the enterprise vertical and customer additions. Also, both revenues and adjusted earnings improved year over year.
Net Income
On a GAAP basis, net income in the reported quarter declined to $183 million or $2.31 per share from $260.6 million or $3.25 per share in the prior-year quarter. Despite the top-line improvement, GAAP earnings were down due to higher operating expenses in the quarter and income tax benefit in the prior year.
Excluding non-recurring items, non-GAAP net income came in at $197.7 million or $2.49 per share compared with $183.4 million or $2.29 per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 9 cents, delivering a positive surprise of 3.8%.
In full-year 2020, Arista recorded GAAP earnings of $634.6 million or $7.99 per share compared with $859.5 million or $10.63 per share in 2019. Non-GAAP earnings in 2020 were $718.4 million or $9.04 per share compared with $786.8 million or $9.73 in 2019.
Revenues
Quarterly total revenues improved 17.4% year over year to $648.5 million and was well ahead of the company’s guidance of $615-$635 million. The uptrend was primarily led by solid customer additions and growth in the enterprise vertical, partially offset by shipment constraints resulting from the COVID-19 operating environment. The top line surpassed the consensus estimate of $629 million. Total revenues in 2020 aggregated $2,317.5 million compared with $2,410.7 million in 2019.
Arista generated 74% of total revenues from the Americas and the remainder from international operations. Almost 36% of the vertical mix was driven by cloud titans, 36% from enterprise and financials, and 28% from cloud service providers. Product revenues jumped to $518.3 million from $447.5 million year over year, while Service revenues grew to $130.2 million from $105 million, supported by renewals and subscriptions.
Other Details
Non-GAAP gross profit improved to $421.6 million from $360.2 million for respective margins of 65% and 65.2%. The non-GAAP gross margin was at the high end of the company’s guidance of 63-65%, reflecting healthy software and services mix.
Total operating expenses increased to $219.9 million from $180.3 million in the prior-year quarter owing to higher R&D costs, high variable compensation and other headcount-related charges, partially offset by lower COVID-related travel and marketing expenses. Non-GAAP operating income was up to $243.5 million from $205.8 million in the year-ago quarter with corresponding margins of 37.6% and 37.3%, respectively.
Cash Flow & Liquidity
In 2020, Arista generated $735.1 million of net cash from operating activities compared with $963 million in the prior year. As of Dec 31, 2020, the cloud networking company had $893.2 million in cash and cash equivalents with $227.9 million of non-current deferred tax liabilities compared with respective tallies of $1,111.3 million and $254.7 million in the year-ago period.
Q1 Outlook
The company expects to witness continued growth within its enterprise vertical in the forthcoming quarters with customer mix remaining the key driver. For the first quarter of 2021, Arista expects revenues of $630-$650 million. It anticipates a non-GAAP gross margin of 63-65% and a non-GAAP operating margin of around 37%.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
VGM Scores
At this time, Arista Networks has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Arista Networks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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