Data centers are driving the future of technology, and Arista Networks (NYSE:ANET) has put itself in position to benefit from the strong potential for growth in data-center demand stemming from cloud computing. Yet as rivals like IBM (NYSE:IBM) have sought to make their own impression in meeting demand for hardware, Arista has had to distinguish itself from its peers and find ways to bolster its competitive advantage.
Coming into Thursday's third-quarter financial report, Arista shareholders hoped that the company could continue its success, and avoid some of the pitfalls that have plagued IBM and some similarly sized competing firms in the recent past. Arista succeeded in delivering better performance than most investors had expected, setting the stage for a promising future. Let's look more closely at the latest from Arista Networks, and what it says about the future of the industry.
Arista goes above the clouds
Arista Networks' third-quarter results set new records for the company. Sales jumped 40%, to $217.5 million, easily beating even the ambitious expectations of 36% growth from investors. Adjusted net income climbed by more than half, to $42.4 million, and that helped send adjusted earnings higher to $0.59 per share, beating the consensus forecast by $0.06 per share, and demonstrating Arista's ability to profit from its success.
As we've seen in past quarters, Arista didn't have any obvious weak spots in top-line growth. The critical product category enjoyed revenue growth of 37%, while services revenue grew by nearly three-quarters. Yet Arista made some progress on the gross margin front, where figures held up much better compared to year-ago results than they have recently. Operating expenses continue to grow at a much faster pace than revenue, however, and that limited the company's GAAP earnings growth, due largely to the impact of stock-based compensation and extraordinary litigation expense items during the quarter.
CEO Jayshree Ullal was pleased with Arista's performance recently. "Arista is witnessing the mainstream acceptance of open and programmable cloud networking across the globe," Ullal said. The CEO remained happy with how the company has been able to keep revenue and profits climbing while serving all of its primary customer bases.
What's ahead for Arista?
Arista's fourth-quarter guidance was also quite positive. Expectations for revenue of between $238 million and $242 million would be quite a bit higher than the current consensus estimate of $229 million, and it would represent continued growth rates in the mid-30s.
Arista's accomplishments for the quarter included some ongoing efforts on key initiatives. The Macro-Segmentation Service for the CloudVision product allows for the integration of security services within a wide range of different cloud infrastructures, and Arista has gotten support and endorsements from several of its technology alliance ecosystem partners.
New data-center switches will address demand for new upgraded switching standards, and the company made further progress on integrating with HP OneView. With all of its partnerships with other technology companies, Arista Networks has done a good job of putting together a team that deters giants like IBM from competing too closely with its offerings.
Arista Networks investors were happy with the company's results, sending the stock up 3% in after-market trading following the announcement. The company still has a long way to go before it can join the giants in the field, but Arista has made a strong effort at growing itself as quickly as possible. If it can keep moving forward aggressively, then Arista has the potential to recapture the lost ground on its share price, and reach for new highs for its stock.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.