Facts
Arista’s share price was up 19% post the company’s Q4 report, primarily due to an adjusted EPS of $1.04 versus Bloomberg consensus EPS of $0.82. Non-GAAP income from operations margins were 32.3% versus guidance of 26% while sales were $328 million, above the $310 to $320 million guidance range and above consensus estimates by 3.5%. The Q1 outlook was also strong, with mid-point revenue guidance of $325 million versus consensus expectations of $304 million and a non-GAAP operating margin of 27%. Last year, Q1 sales and operating income were both only about $2 million lower than Q4, and revenue guidance at the mid-point is expected to see similar seasonality according to Arista.
From the call, the three biggest takeaways from the quarter and conference call were:
- The company is leaving room for another adjusted EPS beat in Q1 – “Then if you look at R&D was flat dollar-to-dollar in Q4 and obviously, the revenue grew significantly. That’s not a case that we would like to continue. We intend to invest in R&D and invest in sales and marketing as we go forward. So I think Q4 had some once-off, unique attributes that drove that higher bottom line.“.
- Microsoft is expected to normalize to about 12% of revenue (from 16% in 2016), Revenue growth (35%) outpaced customer growth (15%) materially in 2016, largely driven by Microsoft sales. A reversion to the mean will negatively impact sales. More work needs to be done around the sustainability of Microsoft here.
- Lead times were said to be back to a normal 4 to 10 weeks. as the CEO stated that suppliers were caught up in supplying components for their new products. This company needs to invest in a supply chain management/simulation solution such as RapidResponse from Kinaxis.
Facts from the 10-K
Removed from the 10-K this year was the statement that “We expect our cost of service revenue to increase as our PCS revenue increases.” The company appears to be making more of an effort to mark up its services. The 61% to 64% Q1 non-GAAP gross margin guidance could be under even greater than anticipated commoditization. This is another area we need to dig a little deeper in.
Arista has officially noted that they have added Sanmina as an additional electronics manufacturer. This is more of an impact to that stock and was noted in the appendices in the Q3 filings.