It has been about a month since the last earnings report for Arista Networks (ANET). Shares have added about 0.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Arista Networks due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Arista Hits Record Q3 Earnings & Revenues, Tops Estimates

Arista reported strong third-quarter 2021 results, wherein both the bottom and the top lines hit record highs and beat the respective Zacks Consensus Estimate, driven by solid demand trends and healthy customer additions. Adjusted earnings and revenues also improved significantly year over year.

Net Income

On a GAAP basis, net income in the reported quarter improved to $224.3 million or $2.81 per share from $168.4 million or $2.12 per share in the prior-year quarter, primarily driven by top-line growth.

Excluding non-recurring items, non-GAAP net income was record high at $236.9 million or $2.96 per share compared with $192 million or $2.42 per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 23 cents.

Revenues

Quarterly total revenues jumped 23.7% year over year to $748.7 million and were well ahead of the company’s guidance of $725-$745 million. The rise was primarily led by solid customer additions and growth in the enterprise vertical, partially offset by shipment constraints resulting from the COVID-19 operating environment and supply-chain disruptions. The top line surpassed the consensus estimate of $737 million.

Arista generated 75% of total revenues from the Americas and the remainder from international operations. Product revenues surged to $604.2 million from $480.2 million while Service revenues grew to $144.5 million from $125.2 million, supported by renewals and subscriptions. In terms of the vertical mix, cloud titans were the largest vertical followed by enterprise, financials, specialty cloud providers, and service providers.

Other Details

Non-GAAP gross profit improved to $486.1 million from $390.9 million for respective margins of 64.9% and 64.6%. The non-GAAP gross margin was at the higher end of the company’s guidance of 63-65%, reflecting healthy software and services mix.

Total operating expenses increased to $245.3 million from $196.6 million in the prior-year quarter owing to higher R&D costs, high variable compensation and other headcount-related charges, partially offset by lower COVID-related travel and marketing expenses. Non-GAAP operating income increased to $293.7 million from $231.5 million in the year-ago quarter with corresponding margins of 39.2% and 38.2%, respectively.

With improved customer demand and order visibility, the company is taking decisive steps to improve inventory levels and manufacturing capacity in order to negate supply-chain headwinds that resulted in lead times of certain components to extend to 50 to 80 weeks and price hikes ranging from 15% to as high as 200% across the entire supply chain. The company is further aiming to increase its product price by about 10% to offset the escalating raw material costs. Third-quarter inventory was up to 575.7 million from 543.2 million in the prior period as it continued to maintain buffer levels for certain components and products.

Cash Flow & Liquidity

In the first nine months of 2021, Arista generated $790.6 million of net cash from operating activities compared with $548.2 million in the prior-year period. As of Sep 30, 2021, the cloud networking company had $631 million in cash and cash equivalents with $214.3 million of non-current deferred tax liabilities. Arista repurchased 134 million shares during the quarter at an average price of $357 per share. The company purchased $897 million worth of shares to date since the initiation of its $1 billion share repurchase program in second-quarter 2019. In October 2021, management increased its share repurchase program by an additional $1 billion. Furthermore, management approved a four-for-one stock split to make the stock more accessible to a broader base of investors and each shareholder at the close of business on Nov 11, 2021 received three additional shares for every share held.

Q4 Outlook

Arista is increasingly offering a software-driven, data-centric approach to help customers build their cloud architecture and augment their cloud experience. The company is increasingly gaining market traction in 100-, 200-, and 400-gig high-performance switching products and remains well-positioned for healthy growth in data-driven cloud networking business with proactive platforms and predictive operations. Arista expects to witness continued growth within its enterprise vertical in the forthcoming quarters with customer mix being the key driver. For the fourth quarter of 2021, it expects revenues of $775-$795 million. It anticipates a non-GAAP gross margin of 63-65% and a non-GAAP operating margin of around 37%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

Currently, Arista Networks has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Arista Networks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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