Tag Archives: anet

Microsoft SONiC Souring Arista’s ‘Secret Sauce,’ Sending Stock Down

Arista Networks’ stock plummeted Monday after Jefferies lowered its price target, questioning the outlook for future sales to its No. 1 customer, Microsoft. Analyst George Notter, writing in a research report, reiterated Jefferies’ underperform rating on Arista ( ANET ) and sharply lowered his price target to 40.25 from 52.50. He said Microsoft’s SONiC “announcements are troubling for Arista,” referring to that company’s software for open networking in the cloud. Arista stock was down more than 10%, near 56.50, in early afternoon trading in the stock market today , 35% off of a 16-month high hit in June. Arista shares — which went public in June 2014 at 43 — touched an all-time low of 52.59 on Feb. 9 of this year. Switching rival Juniper Networks ( JNPR ) was down 1.5% Monday afternoon, and and bigger competitor Cisco Systems ( CSCO ) was off a fraction, as Notter said they have less exposure than Arista to an anticipated decline in switching revenue with Internet content provider customers, though they too are exposed. In his research note Monday, Notter said last Wednesday’s Linux-based Open Compute Project (OCP) Summit in San Jose, Calif., made Jefferies “much more concerned about Arista’s business at major customers such as Microsoft ( MSFT ), Facebook ( FB ) and Apple ( AAPL ).” That’s because Microsoft had just demonstrated SONiC, free software-defined networking (SDN) that makes high-speed switches unneeded. Cisco, Juniper and Arista all make such switches, but “in Arista’s case, the Web scale operators account for roughly 25% (or about $200 million) of the company’s revenue stream — all in switching,” said Notter. He cited Cisco as saying “several quarters ago” that about 5% of its overall switching business, or “roughly” $700 million annually, comes from Internet content providers. For Juniper, it’s about 20% (or $970 million) of total sales, Notter noted. “For us, the big ‘wow’ moment at the (OCP) show was our trip through Microsoft’s SONiC-themed booth,” Notter wrote. “We saw the operator demonstrating SONiC running on switch hardware from Arista, Juniper, Centec, Mellanox ( MLNX ) and Dell — with different ASICs (application-specific integrated circuits ) including Broadcom ( AVGO ), Barefoot Networks and Mellanox. The development of SONiC/ACS (Azure Cloud Switch) and SAI (switch abstraction interface) software now allows buyers to mix and match these components. “More pointedly, Arista is allowing Microsoft to use a hardware-only solution (i.e. without EOS, Arista’s extensible operating system). Based on all the activity at Microsoft, it’s our view that — over time — all (or nearly all) of their switch deployments will migrate to white box hardware + SONiC.” He said Microsoft accounted for 12% of Arista’s 2015 sales of $838 million. Wait, it gets worse: “Microsoft noted that they are now running SONiC in their production environment (although we presume the extent of the deployment is still small). We understand that Microsoft plans to expand the software platform quite rapidly across all of their data centers,” Jefferies’ Notter said. What’s bad for Arista may be good for Mellanox, however. “Separately, a number of industry contacts are saying that Microsoft is very interested in using Mellanox’s Spectrum switching ASIC,” Notter said. Mellanox stock was up a fraction Monday afternoon. Jefferies maintains hold ratings on Juniper and Mellanox and an underperform on Microsoft, but it rates Facebook stock a buy. Image provided by Shutterstock .

Arista Networks’ Q4 Connects With Investors; Sellers Unplug Alliance

Starting what almost surely will be its first year with revenue of $1 billion, Arista Networks ( ANET ) connected with buyers, who drove the stock up by double-digit percentages Friday, while sellers unplugged Alliance Fiber Optics ( AFOP ), its stock falling by double digits, after both companies reported Q4 earnings late Thursday. Guess which did better. Both companies compete with bigger computer networking product makers Juniper Networks ( JNPR ) and much bigger Cisco Systems ( CSCO ). Cisco stock was flat in early afternoon trading Friday, while Juniper was up 1%. Arista stock rose as much as 16% Friday and was up 11%, near 65, in early afternoon trading in the stock market toda y, still 27% off an eight-month high of 88.56 set June 24. Meanwhile, Alliance’s Q4 results were hurt by cutbacks from its top customer, Alphabet ‘s ( GOOGL ) Google. Alliance stock fell as much as 17% Friday, touching a nearly 16-month low, and was down 15% in early afternoon trading, near 12. It’s 45% off a nearly two-year high set July 24 at 22.35. Helped by Microsoft ‘s ( MSFT ) Azure public cloud, Arista said Q4 earnings jumped 51% to 80 cents per share minus items, as revenue rose 41.5% to $245.4 million. Wall Street analysts polled by Thomson Reuters expected 61 cents and $241 million. Arista provides a network operating system, data center storage and other products. Arista’s non-GAAP gross profit margin settled at 64%, near the high end of the 62%-65% range it had forecast, but that was down from the 67.4% in Q4 2014 and 69% in Q1 2014, said FBN Securities analyst Shebly Seyrafi in a research note. “Therefore, there is some downside risk on the (gross margin) line going forward,” he wrote. Still, he and other analysts said Arista had solid momentum. Arista guided the Q1 non-GAAP gross margin to 62% to 65%, and revenue at $232 million to $240 million. Analysts expect Q1 EPS to rise 14% to 57 cents, on sales up 30% to $233.48 million. Reiterating Needham’s buy rating with a 105 price target, analyst Alex Henderson said in a Friday research note that “the news should only get better over 2016. “We think the shift to (faster-bandwidth) 25G architectures will accelerate Arista’s share gains,” he wrote. “We think Arista could pick up 3-5 points of market share on a base of 12%, driving continued stronger-than-forecast growth. This company is best in breed.” Seyrafi had noted that when FBN began covering Arista in September 2014, “one of the key bear points” was that Microsoft revenue was “quite robust,” comprising 11% of total Arista sales, as Microsoft built out Azure. He thought, though, that revenue for Arista might decline after the buildout. Instead, Arista said 2015 revenue from Microsoft topped $100 million, 12% of total sales, “so sales to MSFT do not appear to be slowing down,” said Seyrafi. FBN retained its outperform rating with an 80 price target for Arista stock. So what’s happening with little Alliance Fiber Optics, where adjusted EPS crashed 80% to 5 cents in Q4, while sales fell 13% to $16.4 million? Google “plummeted from 45% of revenue to 20% in (Q4) as it sharply reduced inventory at the behest of its new (Alphabet/Google) CFO (Ruth Porat) and cut capex by 40%,” said Needham’s Henderson in a separate research note Friday. Alliance “was caught in the crossfire,” he said. “But all indications are that that’s over. Google is expected to meaningfully increase spending in 2016, and the shift to 25G architectures should strongly improve AFOP’s results. … Despite the miss in (Q4), we are maintaining our 2016 and 2017 EPS estimates and reiterating our buy rating and 20 target price.” Needham expects adjusted EPS of $1.18 for 2016, up from 95 cents in 2015. Image provided by Shutterstock .

Arista Investors Work Around Cisco ITC Patent Win, Drive Stock Up

Analysts and investors Wednesday shrugged off Arista Networks’ initial loss to Cisco Systems in patent-infringement litigation, expecting Arista to engineer “workarounds” by the time the decisions are finalized. By afternoon in the stock market today , the stock of loser Arista ( ANET ) was up almost 6% to near 61 after touching 61.79 earlier in the day, while winner Cisco ( CSCO ) stock was up marginally to near 23. Both had closed down about 2.7% after the “initial final determination” was issued Tuesday . International Trade Commission Administrative Law Judge David Shaw said Arista violated Section 337 of the Tariff Act 17 times, but declined to cite 15 other claims of violations that Cisco brought against Arista. The upheld claims involve one patent for externally managing router-configuration data with a centralized database and two patents for private virtual local area networks (VLANs). Shaw’s decision was foreshadowed by ITC attorneys in September. A parallel ITC case and two federal court lawsuits also are pending against Arista, which has filed a countersuit in one of the U.S. District Court cases and claimed an antitrust violation by Cisco in a lawsuit filed last week. “Arista expects to have workarounds ready for all of the infringing elements in a second-quarter software release,” wrote William Blair analyst Jason Ader in a research note issued Wednesday. “These workarounds will have to be approved by the ITC, but Arista management appears confident in this outcome and in minimal disruption to its business.” Likewise, Nomura analyst Jeffrey Kvaal noted that investors already had learned of Arista’s intended workarounds for Q2. “We retain our positive view on Arista shares and neutral view on Cisco shares,” he advised clients in a research note. Nomura maintains a buy rating on Arista with a 95 price target. William Blair reaffirmed a market-perform rating for Arista, akin to a hold rating. “Given the complexity of the legal arguments, the myriad suits and countersuits, and the wide range of potential outcomes, we prefer to stay on the sidelines for the time being, but we maintain a positive bias on Arista’s fundamentals, business momentum, and market position,” Ader said.