Arista Guidance Was Bad -- Could Microsoft Make Things Worse?

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Arista (ANET) - Get Report shares got crushed Friday because of lost business with an undisclosed cloud spender, not because of Microsoft (MSFT) - Get Report .

But Microsoft, a large customer, could represent a point of concern for Arista, the networking hardware maker.

The stock fell 28.04% to $176.01 a share after the company issued fourth quarter 2019 guidance well below analysts expectations and said 2020 is looking soft. "Wewererecentlyinformedofashiftinprocurementstrategywithamaterialreductionindemandfromasecondcloudtitan,reducingtheirforecastdramaticallyfromoriginalprojectionsforbothQ42019andforcalendar2020," said CEO Jayshree Ullal on the earnings call. Management is guiding for current quarter revenue of between $540 million and $560 million, far below analysts expectation of $595 million.

Arista doesn't provide earnings guidance, but Goldman Sachs analyst Rod Hall reduced his revenue and earnings per share forecast for 2020 by 14% and 16%, respectively. He's looking for $2.5 billion of revenue and EPS $9.44. He reduced his price target 15% from $290 to $245.

So what are the headlines about Microsoft and Arista? Here are the facts:

Microsoft is not the cloud customer Arista is losing business with. "So far we don't have a long-term guidance from Microsoft, but there is nothing different than they are on their usual spend pattern," said Chief Operating Officer Anshul Sadana.

When Cowen analyst Paul Silverstein mentioned that Microsoft had once stop spending on Arista's products "cold turkey," Ullal was quick to confirm that isn't the case currently, with one caveat. "Noblip,nopause," he said. "Not yet," he added.

This is significant. Ullal said Microsoft is expected to comprise 10% or more of Arista's revenue for the full year of 2019. Last year, Microsoft comprised 27% of the company's revenue. Microsoft is a big cloud customer of Arista's, one the company certainly would prefer not to lose.

Goldman's Hall did not mention Microsoft in his report.

MSFT. is a component of the Action Alerts Plus portfolio.

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