EUR 850.00 For Business Accounts Only

Morningstar | ANET Updated Forecasts and Estimates from 06 Aug 2018

Arista reported record-setting earnings during its second quarter of fiscal 2018 and we are raising our fair value estimate to $261 per share from $251. The company outperformed second-quarter guidance with $520 billion in revenue and 36% non-GAAP operating margins. Revenue was driven by hyperscale cloud provider spending and operating margins exceeded due to fixed cost leverage. Management expects strong cloud titan spending in the back half of 2018 and guides long-term non-GAAP margins of 32-34%. Services increased to 14% of revenue and all of Arista's top 15 customers completed additional purchases during the second quarter.  Arista's third-quarter guidance is expected to yield another record quarter in revenue, but a two-to-four hundred basis points decline in operating margins. Arista's shares are trading around our updated fair value estimate afterhours, and we believe the company will trend toward the high end of its third-quarter guidance.

Arista announced its acquisition of Mojo Networks, a privately held firm specializing in cloud Wi-Fi software analytics. Mojo also sells Wi-Fi access points and switching hardware; however, Arista's intent is to bolster software capabilities within CloudVision. We believe Mojo's offerings provide Arista with wide network visibility and the Wi-Fi software analytics complement Arista's existing management plane for networking services.

Operating margins are expected to decline from absorbing Mojo Networks coupled with increased sales and marketing efforts. We believe the operating margin decline is not a cause for alarm since Arista's expenditures are focused on supporting future growth. In our view, a positive sign is inventory decreasing sequentially as more customer evaluations are completed. By looking at gross margins, we believe that Arista is finding strength beyond cloud titans. The titans, which were the leading provider of income, can drag on margins but Arista is sustaining mid-60 gross margins.

Arista noted strength in its main customer pillars, and management stated enterprise was growing nicely. Breakdowns by customer group are not provided, but we believe Arista will continue to grow its enterprise base as it expands within the campus marketplace. We also note that Arista still expects to double its routing customers year over year from 200 firms in 2017. Our forecast assumes modest sequential growth in services as Arista acquires more customers and is utilized in more complex networks. In our view, Arista should experience continued organic growth and the company will look for more acquisitions to fill in gaps between the data center hardware and wireless access points.