Arista Credits Enterprise and Edge for Earnings

Shares of Arista Networks (ANET) soared on U.S. Election Day, thanks to a solid Q3 2020 financial report, followed by encouraging guidance.

On Monday night, Arista reported revenues of $605.4 million, up 12% sequentially. Though down 7.5% year-over-year, those quarterly sales were higher than Arista’s Q2 guidance of $570 million to $590 million, and better than analyst expectations of $581 million.

And there was more good news: Next quarter, Arista expects revenues between $615 million and $635 million.

Arista Gives Positive Outlook

In earnings call remarks decidedly more upbeat than last quarter’s, CEO Jayshree Ullal cited momentum in enterprise and campus sales, recovery in European sales from last quarter, and strength in Asia. “We registered a record number of new customer logos this quarter and million dollar customers, a direct result of our momentum in the enterprise vertical and campus traction,” she said.

Ullal also invoked a positive scenario for the near term: “Despite this tough reset year, we believe Arista will emerge stronger, not only returning to double-digit growth in 2021 but also aiming for consistent growth in the years beyond.”

The results, guidance, and comments fell on ears ready to hear some encouraging news to counter fears of an ongoing slowdown in cloud. By mid-afternoon Tuesday, November 3, shares were trading at $246.96 (+30.70, 14.20%). Compare that to the ticker for competitors Cisco (CSCO), which at the same time posted a share price of $36.64 (+0.73, 2.05%); or Juniper (JNPR), trading at $20.10 (+0.43, 2.21%).

Arista Is On Campus

Arista laid out a clear picture of where its main revenues are coming from and where the company sees them headed. Significantly, a lot of references were to software, not hardware. For instance, when mentioning the company’s flagship, CEO Ullal referred to it as Arista EOS, or Extensible Operating System. And the market for routers, she said, is evolving toward routing software.

This isn’t to downplay the role of hardware. Arista execs made it clear that its 750 Series of campus switches are among its most strategic. Enterprise customers want products for secure edge computing as they return to work amid pandemic challenges. “So I think campus is back, just not the way we thought it would be,” said Ullal. “The emphasis on unified wire, wireless rather than specific smart buildings is the change we're seeing.”

At least one analyst also sees the 750 the way Arista does. “Particularly notable, in our view, is the impressive growth in ANET's revenue from the enterprise customer segment, which in turn is benefiting from strong adoption of ANET’s recently introduced campus switching solutions,” stated Fahad Najam, executive director at MKM Partners, in a client note.

Arista’s Enterprise Story

Arista’s improved financials reflect an increase in enterprise business. Enterprise sales grew from 35% of revenue mix in Q2 2020 to 37% in Q3, even as cloud titan business, Arista’s top vertical, went from 40% of the mix to 37%.

MKM’s Najam thinks the uptick in enterprise business should improve Arista’s margins: “As ANET drives deeper penetration in enterprise and tier-2 cloud customer verticals, it should enjoy 2 - 4 p.p. above corporate average gross margin as these customers do not have enough buying power to drive pricing concessions from ANET.”

Notably, the drop in cloud titan business this quarter should not impact next year’s outlook. Arista execs said they expect ongoing solid business from this vertical. And so does MKM: “[T]wo of ANET’ largest hyperscale Cloud customers — [Microsoft (MSFT) and Facebook (FB)] — will begin upgrading their significant installed base of data center switches to 400G from 100G [next year].”

Arista's Challenges

Despite this week’s happy news, there are challenges ahead. The specter of pandemic-related supply chain problems hovers, though CEO Ullal downplayed that last night. “[W]e’re still slightly supply constrained versus demand and are experiencing some shortages that will hopefully improve by the end of the year,” she said.

On another front, Arista is facing tough competition, and the same forces encouraging Arista’s growth are also beefing up these rivals, whose ranks are also shifting. Traditionally, Arista’s chief rival has been Cisco. But in light of that company’s ongoing identity crisis, a greater threat may emerge from players with strong enterprise switching expertise and a future-driven software plan in pocket. Extreme Networks (EXTR), Hewlett Packard Enterprise (HPE), Juniper, NVIDIA (NVDA), VMware (VMW), and others are bringing their own innovations to the cloud services and enterprise markets.

None of this dampened the party for Arista last night. CEO Ullal summed it up in reply to one analyst’s question: “I'll just say it feels good to be back after a tough few quarters.”