What happened
Shares of Arista Networks (ANET 1.24%) soared on Tuesday and it had nothing to do with the U.S. presidential election. Rather, the company reported results for the third quarter of 2020. Q3 results beat expectations on both the top and bottom lines, though both numbers declined from the same quarter last year. But investors are blocking out the quarterly declines -- as of 12:15 p.m. EST, Arista Networks stock was up 16%. Instead, investors are optimistically looking toward the future, because management guided for revenue growth in the upcoming fourth quarter.
So what
For Q3, Arista Networks reported revenue of $605 million. Management was quick to note this was a 12% sequential improvement, but it was almost 8% lower than the same quarter last year. Many companies have cut back or delayed spending for their cloud networks because of the COVID-19 pandemic, which affects Arista. That said, the company was still solidly profitable with net income of $168 million, translating to $2.12 per share.
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While revenue and net income declined from the year-ago period, both numbers were better than expected. Arista Networks' management had guided for revenue of $570 million to $590 million and analysts expected revenue to be within that range. Furthermore, the company's adjusted gross margin improved slightly from last year, contributing to the bottom-line surprise.
Now what
If Arista Networks had merely delivered an upside surprise for Q3, then the stock probably would've only increased slightly. But management likes how the business is trending and guided for Q4 revenue of $615 million to $635 million. For perspective, in the fourth quarter of 2019 it reported revenue of $552.5 million. Therefore, guidance implies year-over-year growth of 11% to 15%.
Arista Networks has reported four straight quarters of year-over-year revenue declines but its revenue guidance suggests things are getting better for this technology company. And CEO Jayshree Ullal is optimistic it's just the beginning of a longer trend. In the conference call to discuss Q3 results she said, "Despite this tough reset year, we believe Arista will emerge stronger, not only returning to double-digit growth in 2021 but also aiming for consistent growth in the years beyond."
