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Cloud Networking Strength Lifts Arista Skyward

Data centers have become increasingly important for companies to be able to collect and analyze the information they have about their businesses. Arista Networks (NYSE: ANET) has gone up against some true giants of the technology sector, but its claim to fame has been the flexibility that its use of open-source software offers to its clients. That stands in stark contrast to some competitors, which have sought to capture customers in proprietary platforms that make it difficult to switch providers later.

Coming into Thursday's second-quarter financial report, Arista shareholders fully expected the company to keep taking advantage of the boom in cloud computing with stronger results. Yet even bullish investors were surprised at how well Arista did. Let's take a closer look at Arista Networks and what its latest results mean for the rest of the year and beyond.

Image source: Arista Network.

Arista keeps growing

Arista Networks' second-quarter results were extremely strong. Revenue climbed by more than half to $405.2 million, crushing projections among those following the stock for just $360 million in sales. Adjusted net income nearly doubled from year-ago levels, and adjusted earnings of $1.34 per share dramatically surpassed the consensus forecast among investors for $0.95 per share on the bottom line.

Looking more closely at Arista's numbers, the fundamental strength that the tech company has seen lately showed no signs of slowing. Product-based revenue rose by 50%, while services revenue was up an even stronger 55%. Gross margin moved higher by about a third of a percentage point, climbing above the 64% mark. Moreover, good control of expenses helped boost income margin figures dramatically, leading to the outsized results that Arista enjoyed.

CEO Jayshree Ullal believes that Arista has played an instrumental role in building up the cloud computing business. "As we complete our third anniversary of becoming a public company," Ullal said, "I am pleased with our record results in Q2 2017. Our substantial financial performance, customer success, and industry recognition has accelerated the migration to mainstream cloud networking." CFO Ita Brennan added quite simply that Arista put up great numbers across all of its key financial metrics.

Can Arista keep growing in the future?

Arista continues to work on products that can enhance its opportunities going forward. During the quarter, the company introduced its next-generation R2 series platforms. The platforms are based on merchant silicon that has twice the density and half the power of custom router silicon, which improves performance compared to older-generation technology. In particular, Arista said that the new platform can handle more than 150 terabits per second of switching and routing capacity, with Arista's software-driven EOS cloud technology helping to power the experience for users.

Arista also trumpeted awards that it won. The company was recognized for the third straight year as a leader by Gartner's "Magic Quadrant for Data Center Networking" report, gaining acclaim as having completeness of vision in the analyst company's eyes. Arista also got an honor from the Bay Area News Group as a top workplace for 2017.

Arista's guidance for the third quarter was equally encouraging. The company believes that sales should come in between $405 million and $420 million, which compared very well to the consensus forecast for $378 million in revenue. Adjusted gross margin of 61% to 64% and operating margin of roughly 30% would also mean continuing the strong performance that Arista has put up recently.

Arista Networks investors were quite pleased with the report, and the stock jumped 13% in after-hours trading following the announcement. As long as cloud computing remains so popular, Arista will be in the best position possible to profit as a key provider of cloud-related networking services.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.