Story Stocks^®

Arista Networks (ANET -4%) is under pressure today despite a hefty adjusted EPS beat with its Q4 report last night. However, it makes sense when you dig into the results. First of all, Q4 benefitted from a one-time favorable tax rate, which takes some of the shine of that number. Also, Q4 revenue for this cloud networking company was just in-line with analyst expectations. ANET came into Q4 with six consecutive large revenue beats, so this was a disappointment.

• There were definitely some positives in the quarter. Margins are a closely watched metric with ANET. Non-GAAP gross margin in Q4 improved significantly to 65.4% vs 61.0% a year ago and 63.1% in Q3. The expansion was driven by improving supply chain and greater enterprise mix. This was well above prior guidance of approximately 63%. However, ANET guided to a sequential decline in Q1 at approx 62%.
• Another positive was ANET describing Q4 as one of its strongest performing international quarters in recent history at 22.3% of revs vs 21.5% in Q3, which largely reflected a healthy contribution from its in-region EMEA customers.
• By segment in 2023, what ANET describes as cloud titans accounted for 43% of revenue. Enterprise, including financials, was strong at approximately 36%, while the service providers were at 21%. Its two largest customers were Meta (META) and Microsoft (MSFT) at 21% and 18%, respectively. Also, while there is a lot of talk about AI, ANET is pleased with the momentum of its enterprise and service provider customers as well. Arista has more than doubled its enterprise revs in the last three years.
• Arista noted that AI workloads are placing greater demand on Ethernet. Basically, AI at scale needs Ethernet at scale. AI workloads cannot tolerate delays in the network because the job can only be completed after all flows are successfully delivered to the GPU clusters. All it takes is one bottleneck to throttle an entire AI workload. ANET says its packet spraying technology allows every flow to simultaneously access all parts of the destination.
• Arista Networks reiterated its prior view for 2024 revenue growth of +10-12%, which reflects its outlook for moderated cloud spending after multiple years of accelerated growth, combined with a continued growth trajectory in the enterprise business. For gross margin, Arista reiterated guidance of 62-64%, with Q1 at the lower end due to a heavier cloud mix, including some expected release of deferred revenue.

Overall, investors were disappointed with Arista Network's Q4 result and guidance. The big EPS beat was more of a tax benefit and the company came into Q4 with a series of big beats on revs, so the in-line results were a letdown. Also, ANET had guided higher in each of the past two quarters, so an in-line outlook was not great. Also, the Q1 margin guidance and 2024 commentary were not great. ANET has a good track record with earnings, so this quarter took investors by surprise.