Anet Ceo Jayshree Ullal


Arista CEO Jayshree Ullal has plenty to smile about today. Photo: Arista.

What: Shares of Arista Networks (NYSE:ANET) bounced as much as 16% higher in Friday's market action. The provider of software-based networking solutions for large data centers reported third-quarter results on Thursday night, and it was a very nice quarter.

So what: Arista's third-quarter sales soared 40% higher year over year to $217.5 million. On the bottom line, adjusted earnings rose 48% to $0.59 per diluted share. In both cases, Arista's results left analysts flat-footed.

Now what: Looking ahead, Arista also centered its fourth-quarter revenue guidance range at $240 million, some $10 million ahead of the current analyst view of this quarter.

40% revenue growth is the kind of expansion you'd typically see from a large acquisition. That's not what's going on with Arista, however. These results were as organic as that health-store yogurt in your hand. "We grew our top line 40% year over year, with continued strong profitability while funding significant product and technology innovation," said Arista CFO Ita Brennan in a press statement.

Providing further detail on the underlying business trend, Arista CEO Jayshree Ullal stepped in with a comment of her own. "Arista is witnessing the mainstream acceptance of open and programmable cloud networking across the globe," Ullal said.

In other words, Arista's newfangled networking ideas are turning the corner from crazy idea to proven mainstream technology. And why not? From a customer's point of view, software-defined networks can be easy to manage, flexible when you're making big network changes, and integrate with cloud computing platforms that often close or create entire banks on virtual systems at the drop of a hat -- and they all need network connections.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

And from Arista's standpoint, the software model lets the company sell license subscriptions with multiyear payment streams -- a much more attractive business model than selling one low-margin hardware box and waiting years for the customer to come looking for an upgrade.

It is, in fact, the emerging standard model in modern large-scale networking these days. Cisco Systems (NASDAQ:CSCO) is shifting its massive networking footprint closer to a similar model, though that industry titan must step carefully to avoid crushing its own hardware-based bread and butter.

So Cisco is getting into software networking, one small step at a time. In its latest earnings call, CFO Kelly Kramer explained that the company will "continue to be very acquisitive going forward" in its approach software and security opportunities.

Arista has no such legacy products holding it back, and can simply laser-focus on the software-based market. And if you're wondering how that bet is working out, just take another look at Arista's revenue growth figures.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days.

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