It's been a year of solid growth for Arista Networks (NYSE:ANET) but you wouldn't know it by the company's stock price, which was essentially flat for 2018 going into its third-quarter earnings report. The cloud networking-solutions provider has generated several quarters of impressive metrics but got caught up in the recent market meltdown that was particularly harsh on tech stocks. Fundamentals again have taken the spotlight, and Arista's stock is rebounding due to another quarter of consistent growth.

Arista reported revenue of $563.3 million, an increase of 28.7% year over year, beating both analysts' consensus estimates of $549 million and the high end of the company's forecasted range, which topped out at $552 million. Adjusted net income of $171.3 million translated into adjusted earnings per share (EPS) of $2.11, an increase of 30% compared to the prior-year quarter, which soared past expectations of EPS of $1.84, marking the second consecutive quarter of record earnings. 

Cloud computing icons over a blurred background.

Image source: Getty Images.

Another quarter of solid growth

Metric

Q3 18

Q3 17

Year-Over-Year Change

Revenue

$563.3 million

$437.6 million

29%

Operating income

$180.8 million

$140.8 million

28%

Net income

$168.5 million

$133.7 million

26%

Diluted earnings per share

$2.08

$1.68

24%

Data source: Arista Networks third-quarter 2018 financial release.

Revenue growth came from both segments of Arista's business. Product revenue of $485 million grew 28% year over year, while service revenue of $78 million expanded an even more impressive 36% compared to the prior-year quarter.

Arista delivered adjusted gross margins of 64.6%, near the high end of management's targeted range and representing a slight uptick from the 64.4% achieved in the year-ago quarter. The company also kept spending in check, with operating expenses that advanced 29% year over year, in line with its revenue growth.

What's even more impressive is the breakdown of Arista's costs. General and administrative expenses declined 22% year over year, while sales and marketing expense increased just 18%. This allowed the company to pour the lion's share of its resources into research and development, which grew 48% compared to the prior-year quarter. The ability to create new and better products and services going forward helps better position the company for future growth.

Other news

A number of significant company events occurred during the quarter. Arista completed its first two acquisitions, adding cloud-managed wireless networking specialist Mojo Networks and MetaMako, a leader in low-latency field-programmable gate-array-enabled network solutions. These expand the company's reach into additional markets, which will help drive future opportunities.

Arista also introduced two new 400-gigabit platforms designed to improve the performance of cloud networks and data centers. As companies adopt cutting-edge technologies like artificial intelligence, machine learning, and serverless computing, they require platforms capable of increased performance. Arista's new products deliver four times the throughput and double the power efficiency of previous platforms. Developments like these should help Arista continue its stellar growth.

The company also achieved boasting rights during the quarter, as it was ranked No. 8 on the Fortune 100 list of Fastest Growing Companies for 2018.

"As Arista completes its first decade of customer shipments, I am proud of the many milestones we have achieved. These include our entry into the prestigious S&P 500, cumulative shipments of more than 20 million cloud networking ports and another quarter of record earnings in Q3 2018," said Jayshree Ullal, Arista President and CEO.

What the future holds

For the upcoming fourth quarter, Arista expects revenue in a range of $582 million to $594 million, which would represent year-over-year growth of between 24% and 27%. The company is targeting adjusted gross margin between 63% and 65% and an adjusted operating margin of approximately 35%.

To put that into perspective -- and while I don't place much emphasis on Wall Street's short-term thinking -- analysts' consensus estimates are calling for revenue of $586.15 million, up 25% year over year, below the midpoint of management's guidance. Analysts also are anticipating adjusted EPS of $1.94, up 13.5% compared to the prior-year quarter. Both analysts' and Arista's enthusiasm for the coming quarter is probably contributing to the stock's move higher.

Given several consecutive quarters of impressive revenue growth and back-to-back quarters of record profits, investors cheered, sending the stock up nearly 7% in the trading session following the earnings release. Arista continues to deliver on all the metrics that matter and has a long runway ahead, as more companies adopt cloud computing networks and move their legacy information to data centers. Many will require top-of-the-line capabilities, and Arista continues to deliver on what they need the most.

Danny Vena owns shares of Arista Networks. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.