Cloud computing has been a high-growth area for a long time, and companies have been jockeying for position to try to take as big a piece of the cloud pie as they can. Arista Networks (ANET 2.80%) has differentiated itself by emphasizing the value of its open-source cloud services, and those following the stock have marveled at Arista's ability to keep its growth pace strong even as the enterprise gets bigger.
Coming into Thursday's fourth-quarter financial report, Arista shareholders seemed confident that the cloud company would be able to sustain its past trajectory and keep capitalizing on its massive opportunity. Arista's numbers gave investors most of what they were expecting to see, and 2019 looks like it should continue to support the cloud-computing market as well as Arista's place in it.
Arista jumps into 2019 running
Arista Networks' fourth-quarter results kept moving higher. Revenue of $595.7 million was up 27% from the fourth quarter of 2017, and that was even faster than the 26% growth those following the stock were looking to see. Adjusted net income came in at $182.2 million, which was higher by 33% from year-ago levels. Adjusted earnings of $2.25 per share easily topped the consensus forecast among investors for $2.07 per share on the bottom line.
Arista's two main segments showed continued strength. Product-related revenue climbed 24%, slowing slightly from its pace in recent quarters but still making up the bulk of Arista's overall business. Services showed better growth rates of 52%, accelerating from recent quarters and showing the value of offering Arista's expertise to clients in this complementary way.
However, there were some interesting disparities on the margin front. Overall, gross margin weakened by about 2.7 percentage points to just below 63%, with a particularly big hit to margin levels in the product segment. There, a 38% rise in costs outpaced the product segment's revenue growth, and it took a 3.5 percentage point improvement in gross margin in the service segment to prevent even more pressure on margin levels. What saved Arista was a commitment to keeping operating expense growth low, and gains of 8% helped lift operating income by 39% and produce solid improvements in operating margin.
CEO Jayshree Ullal celebrated the news. "Arista is earning a strategic role with customers deploying transformative cloud networking," Ullal said, and the CEO noted that the company enjoyed "continued momentum across cloud titan and enterprise verticals."
Can Arista Networks keep up the pace?
Arista pointed to several achievements during the quarter that were noteworthy. The introduction of 400-gigabit fixed systems will let premium customers keep up with the rapid pace of innovation in the cloud networking sector, while the ongoing development of the Arista Cognitive Campus should help expand the use of campus architecture to link facilities in close physical proximity to each other effectively. Arista also kept making progress in integrating the acquisitions it's made over the past year, and those pick-ups are starting to pay dividends in the form of greater business opportunities.
From a financial perspective, Arista's first-quarter guidance was also pretty upbeat. The cloud company expects to report sales of $588 million to $598 million, which would give Arista some upside compared to the current consensus forecast among investors. Gross margin and operating margin figures were consistent with what Arista has predicted in the past, and the company seems confident that it can hold onto the efficiency gains that it's won recently and build on its success for the foreseeable future.
Arista shareholders were happy with the report, and the stock climbed 5% in after-hours trading following the announcement. As long as the cloud industry stays in high gear, Arista Networks has positioned itself to take maximum advantage and tap into additional growth prospects as they arise.