In technology, the cloud-computing trend has many investors excited about the future of the business, with many clients taking their in-house IT infrastructure and moving it out to more easily accessible virtual locations. Arista Networks (NYSE:ANET) has been at the forefront of the cloud-computing trend for a while now, and its strategy has been to gain market share in the lucrative high-speed data center niche.
Coming into Thursday afternoon's first-quarter financial report, though, shareholders were slightly nervous about whether Arista's stock would bounce back from recent weakness. Arista's results were solid, but investors still seem uncertain about the company's longer-term prospects. Let's look more closely at Arista Networks and its most recent quarterly results to see what they say about what's ahead for the company going forward.
Arista heads into the stratosphere
Arista Networks' first-quarter results were quite impressive. Revenue jumped 53%, to $179 million, easily topping the $170 million that most investors expected from the company. Adjusted net income more than doubled from the year-ago quarter, to $35.5 million, and that produced adjusted earnings of $0.50 per share, which was a third higher than the consensus estimate among those following the stock.
A closer look at Arista's results shows broad-based strength. Product revenue, which makes up about almost 90% of Arista's total sales, jumped by half as the company continued to capitalize on high demand for data-center products. Yet service revenue climbed at an even sharper rate, with gains of more than 75% showing the ramp-up in Arista's overall efforts as the company broke out the results separately for the first time.
Arista didn't do everything perfectly, though. Adjusted gross margins fell by 3.5 percentage points, as costs of generating revenue rose at an even faster pace than its overall sales. Moreover, general and administrative costs nearly doubled from the year-ago quarter, and overall operating expenses climbed by more than a third. Without those headwinds, Arista's earnings growth would have been even more impressive.
CEO Jayshree Ullal praised the company's results. "We made strides in our top four verticals," Ullal said, and "our customer momentum in cloud networking, combined with our profitable growth and disruptive product innovations, positions us well for the year."
What's next for Arista?
Arista's guidance for the second quarter was relatively solid, although it does represent a slowdown from past growth rates. The company believes that revenue will come in between $183 million and $191 million for the quarter, which is consistent with what most investors expected. That corresponds to a growth rate of around 35% to 40%, which is slower than its current pace, but still quite respectable.
Arista also highlighted some of the initiatives it believes could help drive future results. The Arista EOS-as-a-subscription service allows users to take advantage of an extensible operating system that acts as the core of cloud networks and data centers, further cementing the company's position in the industry. At the same time, Arista has been working with other partners in the industry to boost its overall presence, including a venture with Infinera (NASDAQ:INFN) to build up high-performance cloud networks in major metropolitan areas.
Despite the relatively good news, though, not all shareholders were happy with the report. The stock lost 3.5% in the first hour-and-a-half of after-market trading following the announcement, as some wanted to see better guidance for second-quarter revenue growth. Given how far the stock has already fallen back from its highs late last year, though, Arista Networks is starting to get to the point at which even value investors could start getting interested in the high-growth technology company.
Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple, Arista Networks, and Infinera. The Motley Fool owns shares of Apple and Arista Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.