This isn’t an analysis of the company’s earnings report. Just a few random thoughts and questions for the group.
Investing in ANET hasn’t been an easy decision for me. I wrote recently that I hate legal issues, but they can provide opportunities. So far, this has been an opportunity I seized. While still somewhat troubling, I’ve become more sanguine about the legal issues surrounding ANET. I anticipate the recent ITC ruling in January will have an affect on margins as ANET is forced to use more domestic manufacturing. The margin impact won’t be devastating by any means and the company is prepared. ANET has just under $900M in cash reserves as well. Here is what the company had to say on the legal front:
Arista will provide a legal update since 2016 marks the completion of two years since Cisco Systems filed its assault of lawsuits. Despite having to weather the many baseless accusations, we at Arista have demonstrated through our actions and our results. We will continue to uphold our dignity, integrity and adhere to the law the Arista way. Clearly, we’re dealing here with a powerful competitor with enormous clout, deep financial pockets and even political lobbying capabilities often misrepresenting our intentions.
So let me take a moment to quickly review the facts. To date, Arista has prevailed or obtained favorable Administrative Law Judge, ALJ, decisions on nine out of 14 asserted patents in ITC and district court. Four of the five remaining patents primarily cover commonly standard implemented networking features used across the switching industry such as private VLANs, access list and CoPP. On December 14, 2016, Arista received a favorable jury verdict on Cisco’s Command-Line Interface copyright claims. We consider this an important moral and legal victory not only for Arista but the broader industry to have that standard networking language of communication.
Regarding customs, late evening on Friday, January 13, 2017, we were surprised to receive a letter from Customs and Border Protection, CBP, that revoked its previously issued 177 ruling on November 18, 2016. It is important to emphasize that CBP has not ruled that Arista’s products infringe. CBP currently have no stated position on that issue. Instead, CBP has set up a process to obtain input from both parties before issuing a new ruling. We do look forward to cooperating with customs in forthcoming weeks. We are in inter-party process to resolve the matter. Arista is firmly resolute and steadfast in lawful supply of our products and servicing them without disruption to our customers. As a reminder, the ITC and customs orders do not prohibit us from selling non-infringing products manufactured in the domestic USA.
So, the legal issues are, of course, still a risk, but ANET appears to be handling them well. They have a specific portion of their IR website devoted to these matters if you want to check it out.
The company continues to grow in a straight line at about a 30+% clip - incredibly steady growth. They show a very compelling chart in their investor’s presentation this quarter (I didn’t look at past presentations). They show their top 25 customers on one axis and the last 12 quarters on the other axis. The chart depicts whether the customer made additional purchases each quarter. So there are 300 (12 x 25) customer-quarters on the chart. In 286 customer-quarters, the customer made additional purchases. In only 14 cases did the customer not buy more! That is an impressive trend.
Additionally, ANET brings on roughly one new customer per day.
I have a few questions:
First question is on guidance. ANET only provides Revenue ($325M), GM (62.5%), Op Margin (27%) and tax (29%) guidance. Is there anyone out there who can help me determine how this relates to EPS?
The 2nd question is on customer concentration and is 2 part. Microsoft is their only greater than 10% customer and increased from 12% to 16% this year. I’m not sure how I feel about that and am wondering if anyone has thoughts? Also, I presume Microsoft is using ANET for their Azure Cloud architecture (but that is a presumption based on zero tech knowledge) which brings to mind the following. I wonder who AMZN and IBM, for instance, are using?
Take care all,