Many companies have sought to jump onto the cloud-computing bandwagon, but not all of them have found success in this highly competitive area. Arista Networks (NYSE:ANET) has done an exceptionally good job of building up its cloud business, with its focus on large data center and computing environments having led to exceptional growth.
Coming into Thursday afternoon's second-quarter financial report, Arista shareholders had high hopes that the company would maintain its upward momentum. To its credit, Arista not only delivered solid growth, but also topped most of its investors' expectations. Let's take a closer look at how Arista Networks did last quarter and what's ahead for the budding cloud-computing upstart.
The sky is no limit for Arista
Arista Networks' second-quarter performance continued its run of producing attractive results. Revenue climbed to $195.6 million, up nearly 42% from the year-ago quarter, and besting the $190.3 million in sales that most investors had expected Arista to post for the quarter. Growth in adjusted net income slowed from last quarter's breakneck pace, but still climbed 64%, to $38.8 million, working out to adjusted earnings of $0.54 per share, $0.08 higher than the consensus forecast.
Arista fired on all cylinders throughout the company during the quarter. The key product category saw revenue climb 38%, with ongoing demand for key offerings for data centers and other applications showing strength. The service category saw even faster growth, nearly doubling from year-ago levels, and while services only produce about 10% of Arista's overall sales, the gains there show the value of being able to go beyond product-based solutions to provide service support, as well.
As we've seen in past quarters, though, Arista saw pressure on its margins. Adjusted gross margin of 65.4% was down more than two percentage points, as expenses related to product revenue climbed by half, outpacing sales gains. Overhead expenses also rose at more than a 50% pace, with research and development costs and general and administrative expenses both contributing to the rising expense line.
CEO Jayshree Ullal heralded landmark achievements for Arista during the quarter. "Arista has now shipped a cumulative 5 million cloud networking ports worldwide," Ullal said. "I am pleased with this important milestone for the company combined with our continued [second quarter] customer momentum and solid profitable growth."
Can Arista keep growing this fast?
Arista gave guidance for the third quarter that once again raised the specter of slowing growth. The cloud specialist expects sales of between $208 million and $212 million for the quarter, which is above the $206 million consensus estimate, and works out to growth of roughly 34% to 36% from the year-ago quarter. Even though that's impressive, it's slower than Arista's past growth rates. However, if Arista continues its trend of outperforming its own guidance, then the company might succeed in prolonging growth similar to its past rates for at least a while longer.
As it does every quarter, the cloud company also pointed to some of its biggest achievements during the quarter. The announcement of CloudVision, which is a network-based solution to help handle workload and workflow issues more efficiently, was a favorable development for Arista, allowing its enterprise customers to take advantage of cloud-class automation.
CloudVision received endorsements from many high-profile partners, which should help extend its release outward throughout the industry. At the same time, Arista continued work on integrating its Extensive Operating System with Hewlett-Packard, with which it is partnering to build a converged cloud-networking solution.
Arista Networks investors responded favorably to the news, sending the stock up almost 2% in the first couple of hours of after-market trading following the announcement. So far, Arista has done an exceptional job of navigating the high-growth phase of its evolution, and with smart strategic moves to consolidate its growth and a commitment to keep looking for new opportunities, Arista has plenty of potential to make even bigger waves in the cloud-computing space in the years to come.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Arista Networks. The Motley Fool owns shares of 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.