AI boom boosts Arista's Q2 revenue and guidance to exceed expectations with double-digit growth, V-shaped rebound after hours | Financial Report Insights

Benefiting from strong demand for its equipment from cloud computing companies and artificial intelligence (AI) applications, Arista Networks, a leading high-speed Ethernet switch provider and a rival to NVIDIA in AI network layout, reported double-digit strong revenue growth in the second quarter, with both quarterly performance and third-quarter guidance exceeding Wall Street expectations.

After the U.S. stock market closed on Tuesday, July 30, Eastern Time, Arista, headquartered in California, announced its second-quarter financial report for the period ending June 30 this year.

1) Key Financial Data

Revenue: Revenue in the second quarter was $1.69 billion, a year-on-year increase of 15.9%, exceeding analysts' expectations of $1.65 billion and a 16.3% year-on-year increase in the first quarter.

EPS: Adjusted earnings per share (EPS) in the second quarter were $2.10, a 32.9% year-on-year increase, surpassing analysts' expectations of $1.94 and a 39.2% year-on-year increase in the first quarter.

Net Profit: Net profit in the second quarter was $672.6 million, a 34.2% year-on-year increase, and a 46% year-on-year increase in the first quarter.

Gross Margin: Adjusted gross margin in the second quarter was 65.4%, compared to 64.2% in the first quarter and 61.3% in the same period last year.

Operating Profit Margin: Adjusted operating profit margin in the second quarter was 46.5%, compared to 47.4% in the first quarter and 41.6% in the same period last year.

2) Performance Guidance

Revenue: Revenue for the third quarter is expected to be between $1.72 billion and $1.75 billion, in line with analysts' expectations of $1.72 billion.

Gross Margin: Adjusted gross margin for the third quarter is expected to be between 63% and 64%, compared to 63.1% in the same period last year.

Operating Profit Margin: Adjusted operating profit margin for the third quarter is expected to be around 44%, exceeding analysts' expectations of 43.1% and lower than 46.1% in the same period last year.

After the financial report was released, Arista's stock price, which fell nearly 2.9%, staged a V-shaped rebound in the after-hours trading of the U.S. stock market. It initially accelerated its decline, dropping more than 5% at one point, then reversed course to rise, erasing the post-market decline and turning positive. Comments indicated that after-hours, AMD raised its sales expectations for data center chips this year, reflecting the growing demand for AI chips. AMD's stock price surged after hours, driving up some technology stocks including NVIDIA.

Third-quarter Revenue Guidance Shows Growth of Up to 16%, Maintaining Over 10% Growth in the First Two Quarters

During the financial report release, Arista's CFO Chantelle Breithaupt emphasized that the company's EPS profit in the second quarter surged by about 33% year-on-year, thanks to strong revenue and gross margin performance.

Based on the third-quarter guidance range, Arista expects revenue to grow by approximately 14% to 16% in the third quarter, maintaining a growth rate of over 10% in the first two quarters of this year.

Last week, Arista's peer Juniper Networks reported second-quarter revenue and profits below analysts' expectations, affected by weak spending on network equipment by cloud computing companies However, Juniper pointed out at the time that many of the company's customers had already digested their inventory and were investing in strengthening AI infrastructure.

As a to B network switch and router manufacturer, Arista mainly serves cloud service providers including Microsoft and Meta. When announcing its first-quarter financial report, Arista unusually raised its full-year revenue guidance and noted that the high performance requirements for training large AI models boosted cloud service providers' demand for the company's hardware products.

Last month, a Citigroup report stated that accelerated Ethernet penetration is bringing opportunities to Nvidia and Arista, with both companies developing Ethernet technology at a similar pace and expected to launch high-speed Ethernet solutions in the near future. Nvidia and Arista Networks are both expected to have end-to-end 800G solutions by the end of 2024 or early 2025. Nvidia and Arista may also have a consistent roadmap for 1.6T products (based on 102.4T chips).

Citigroup emphasized that for Arista, Nvidia is a stronger Ethernet competitor than expected. Nvidia expects its Spectrum-X platform to become a multi-billion-dollar product line within a year, highlighting that many customers are willing to adopt Nvidia's bundling approach in the Ethernet field as well