Arista Networks reported strong fourth quarter results that closed out a robust 2017, and this week scored a legal victory in its ongoing patent battle with rival Cisco. However, expectations for 2018 left investors cold.
Arista reported a 43 percent increase in Q4 revenues compared to 2016, hitting $467.9 million in the latest quarter. For the year, revenues surged nearly 46 percent to $1.6 billion in 2017.
Arista management noted during a call with financial analysts that the latest growth was bolstered by enterprise customers that offset a softening from its cloud vertical.
That revenue surge trickled down to the bottom line. Fourth quarter net income increased 77 percent year-over-year to $103.8 million, with full-year 2017 net income more than doubling to $422.5 million.
Those good feelings were undercut by the company rolling back expectations for 2018. Arista management said it expects revenue gains in the 20 percent range for this year, with first quarter 2018 revenues flat sequentially.
Analysts noted that forecast seemed counter to Arista’s Q4 momentum and past comments for more spending from large players like Facebook.
Arista’s stock was trading down more than 18 percent early Friday at around $250 per share. That just a day after the stock hit a new 52-week high of $311.67 per share.
George Notter, equity analyst at Jefferies, attributed the downturn to a recent run-up in Arista’s stock price from investors expecting growth levels to remain at 2017 levels.
“While the company suggested that they ‘call it like they see it,’ we wouldn’t be surprised if they’re being quite conservative – not inconsistent with prior years where Arista subsequently beat numbers,” Notter wrote in a research note. “We don’t believe the company is seeing any particular share losses at meaningful customers. Also, we remain big believers in cloud workload growth.”
Rod Hall, a financial analyst at Goldman Sachs, said in his own research note that Arista’s conservative 2018 guidance could also be linked to a delay in acceptance of a patent workaround tied to its ongoing legal case with Cisco.
Arista this week scored a victory in those legal proceedings, as a federal circuit judge affirmed a previous ruling that invalidated one of Cisco’s patents. That initial ruling was granted last June and connected to Patent 668. The federal circuit has yet to rule on the validity of Patent 577, which was also part of the initial Patent 668 decision last year.
Marc Taxay, legal counsel for Arista, told financial analysts that the company is continuing to push a workaround on another patent that was referenced by Goldman Sachs’ Hall. Taxay said Arista expects full implementation of that workaround by the end of the first quarter.
The combatants are also waiting a ruling on another patent dispute that was heard last month and expected to see resolution this summer.
Cisco in late 2014 filed multiple lawsuits against Arista claiming infringement on some of its patentable technology as well as more than 500 command-line interface (CLI) commands. Cisco also claimed that Arista used a Cisco-like interface as a selling point for its switching technology.
Cisco this week reported its first quarterly revenue growth in 18 months for its recently completed second fiscal quarter.
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