Market flips switch on Arista share value after 'cloud titan' turns on heel

Stock crashes by 25%+ on weaker sales outlook

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The share price for Arista Networks has crashed after the network switch maker warned of a sudden softening to its turnover due to a "cloud titan" customer cutting back on its spending plans.

The company last night outlined financials for calendar Q3 ended 30 September with revenue up 7.6 per cent to $654.4m ($555m product and $99.04m services) and a profit of $208.9m, up from $168.5m in the prior year's quarter.

The cloud vertical segment remained Arista's top client market, followed by the "modern enterprise", the finance sector, service providers and the tier two cloud slingers.

To underscore Arista's reliance on the biggest hyperscaler cloud builders, just 19 per cent of total turnover was generated from international sales in the quarter, down from 27 per cent a year ago.

Chief beancounter Ita Brennan said on a conference call with analysts "this volatility in geographical mix is largely driven by shifts toward US deployments in our cloud titan business."

With this in mind, Arista issued conservative revenue guidance for Q4 of between $540m to $560m – this represents a decline of between 9.35 to 6 per cent. The market reacted accordingly and, at the time of writing, the share price had fallen to $176, down almost 28 per cent.

Jayshree Ullal, CEO and president at Arista, said it has two customers that are "greater than 10 per cent of our revenue: Microsoft and Facebook", but didn't specify which was had skewed its outlook.

"After we experienced the pause of a specific cloud titan's orders in Q2 2019, we were expecting a recovery in the second half of 2019 for cloud titan spend. In fact, Q3 is good evidence of that.

"However, we were recently informed of a shift in procurement strategy with a material reduction in demand from a second cloud titan, reducing their forecasts dramatically from original projections for both Q4 and for calendar 2020," she said.

The word "volatility" cropped up again as the spending alteration "brings a sudden and severe impact to our Q4 guidance", the CEO added.

Later on the call, Ullal said the cloud customer was "managing cap-ex for inventory" and had started to issue "just in time forecasts at quarterly intervals" rather than providing a two- to three-quarter visibility of demand.

She added the cloud customer had "extended their server assets by more than a year… and that is significantly delaying the network spend too".

So this is where the hardware makers find themselves in 2019, vulnerable to the whims of the biggest cloud slingers. Not a great place to be. Perhaps we'll see evidence of those pipes and plumbing providers trying to take greater control of their own destiny. ®


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