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Arista Networks Closes Out a Record Year on a High Note

By Dan Caplinger - Feb 18, 2016 at 7:08PM

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The company surprised investors positively with strong revenue and earnings gains.

Image: Arista Networks.

There's been substantial uncertainty in the technology sector lately, but despite concerns about the ability of the industry to grow, Arista Networks (ANET 2.94%) gave investors the news they wanted to hear on Thursday afternoon. Coming into Thursday's fourth-quarter financial report, Arista shareholders were hopeful that the data-center and cloud-networking solutions provider would sustain its track record of solid growth, but few investors would have expected the extent to which Arista would exceed expectations.

In the wake of big-name rival IBM's (IBM 0.64%) acquisition of Truven Health Analytics, investors hope that Arista and other players in the space can all benefit from new and growing opportunities to serve current and prospective clients. Let's take a closer look at how Arista Networks fared to finish 2015, and whether it can keep up the momentum this year.

Arista keeps soaring
Arista Networks' fourth-quarter results continued the upward streak that investors have come to expect from the company. Revenue climbed 41.5%, to $245.4 million, accelerating from previous quarters and rising nearly 13% in just the past three months alone. Adjusted net income rose by more than half, to $57.5 million, and that produce adjusted earnings of $0.80 per share, beating the consensus forecast by $0.19.

Looking more closely at Arista's numbers, the company's growth showed the same characteristics on a sector-specific basis that investors have seen before. Product-based revenue jumped 38%, making up almost 90% of Arista's overall sales. But services revenue produced stronger growth, jumping by more than 70% compared to the year-ago quarter.

One departure from past quarters is that Arista saw gross margins fall by about 3.5 percentage points, to 63.6%, and operating expenses grew at a rate consistent with overall revenue, leading to a drop in operating margins of more than two percentage points, to 20.2%. A substantial decline in income-tax provisions played a key role in ensuring healthy profit growth.

CEO Jayshree Ullal celebrated the results, noting that "Arista has delivered a spectacular 2015." In particular, Ullal pointed to "the rapid acceptance by our customers of Arista's programmable cloud networking" as an important driver of growth, and the CEO expects the ongoing move to cloud computing as inevitably helping promote gains in revenue and market share.

Can Arista keep climbing?
Arista's guidance for the first quarter was also relatively strong. Revenue guidance for between $232 million and $240 million compare favorably to the current consensus forecast near the lower-end of that range, and improvement in margins could help produce even better bottom-line gains.

Still, one big question has to do with how Arista will be able to compete against rivals in the tech space. By teaming up with HP last year, Arista expected to go up against reference architectures that IBM and other key companies in the space were offering. Now that Arista has released its latest EOS, it hopes that its infrastructure will encourage customers to use full-blown network solutions built on the extensible operating system. If that can lure customers away from IBM and other competitors, it will mark a long-term win for Arista Networks.

Arista Networks investors were pleased with the company's report, and the stock climbed more than 5% in the first hour of after-market trading following the announcement. If it keeps delivering the solid growth that we saw in the current report, then Arista has the capacity to overcome doubts about the health of the tech industry more broadly, and continue to grow on its own.

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.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$132.48 (0.64%) $0.84
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Arista Networks, Inc.
$126.68 (2.94%) $3.62

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