Arista stock sinks on weak guidance as company cites softening business from a cloud 'titan'

Key Points
  • Microsoft represented 27% of Arista's revenue in the prior fiscal year.
  • The company also has business from Facebook.
President and CEO of Arista Networks Jayshree Ullal
Scott Mlyn | CNBC

Arista Networks shares fell as much as 25% after the data center switch maker gave quarterly revenue guidance that came in much lower than analysts expected because of declining business from a cloud customer.

Arista didn't disclose the name of the cloud customer in its statement.

"While we expect a sudden softening in Q4 with a specific cloud titan customer, we are committed to a sustainable and strong foundation of long-term growth, innovation and profitability," said Jayshree Ullal, Arista CEO, in the statement.

For all of 2019 Arista expects that Microsoft and Facebook will each represent 10% of revenue, Ullal told analysts on a conference call on Thursday. In its second-quarter earnings report, the company said Microsoft represented 27% of revenue in the 2018 fiscal year.

"After we experienced the pause of a specific cloud titan's order in Q2 2019, we were expecting a recovery in second half 2019 for cloud titan spend," Ullal said. "In fact, Q3 2019 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 forecast dramatically from original projections for both Q4 2019 and for calendar 2020." 

The cloud customer that suddenly lowered forecasts has traditionally given Arista multiple quarters' worth of visibility into its plans to buy new equipment, and it's moving to be more focused on real-time forecasting, Ullal said. The cloud customer also is delaying a refresh of servers, and there is a corresponding delay of a network refresh. 

Arista, which competes with Cisco, called for $540 million to $560 million in revenue in the fourth quarter. Analysts polled by Refinitiv had expected $686.2 million.

The Pentagon said last week that Microsoft had won a hotly contested cloud computing contract that could be worth up to $10 billion over a decade. 

"The first thing that happens with these large contracts is they get contested, and so while the award will be given, we think it will be time for us to see material benefit," Ullal said. "It may take six to 12 months."

In 2020 Microsoft should have a usual spending pattern, said Anshul Sadana, Arista's operating chief.

"We have not been given any other message," he said.

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