What happened

Shares of cloud-based network specialist Arista Networks (ANET 0.38%) fell on Wednesday, after the company reported results for the second quarter of 2020. As of 12:30 p.m. EDT, the stock was down 10%.

Arista Networks beat expectations on both the top and bottom lines, which was encouraging. But it's possible third-quarter guidance caused investors to take some short-term profits off the table. The stock was previously up 30% for 2020 and up around 70% from where it bottomed back in March.

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So what

In Q2, Arista Networks generated revenue of $541 million. This was down 11% year over year, but exceeded the high end of the company's guidance of $540 million. The company had net income of $145 million according to generally accepted accounting principles (GAAP) and non-GAAP (adjusted) net income of $167 million. These numbers were down 24% and 16% respectively from last year.

While both revenue and net income slipped, investors had expected this for Arista Networks. In fact, these numbers were all ahead of analysts' expectations. That's reason to believe investors aren't disappointed with Q2 results, just forward guidance.

For guidance, Arista Networks expects Q3 revenue of $570 million to $590 million. While that's better than Q2, this figure is down 11% at the midpoint from the third quarter of 2019.

A frustrated man places his head on a table with a down stock chart in the background.

Image source: Getty Images.

Now what

In Q2, Arista Networks' revenue decline came from its product segment, which fell 18%. The company does business with a lot of the big cloud companies, and those delayed capital expenditures while trying to understand the coronavirus's impact on business. For example, one of Arista Networks' big customers is Facebook. Facebook's capex spending was down 11% this past quarter.

Facebook plans to resume spending in the back half of 2020, and other customers for Arista Networks could, too. But whether it's in 2020 or later, at some point cloud infrastructure will be upgraded. That bodes well for this company because it remains a recognized leader in the space. Furthermore, it has a pristine balance sheet ($2.8 billion and zero debt), allowing it flexibility while it waits for the upgrade cycle.