Arista Networks shares took a tumble after it provided fourth quarter guidance that was well below analysts' expectation.
On Thursday, Arista's stock plummeted by as much as 25% after Arista CEO Jayshree Ullal said it would experience declining revenue from an unnamed cloud provider.
“In Q3 2019 we continued to see the adoption of our cloud networking technology in more diverse environments," Ullal said in a 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."
While the data center switch vendor didn't say which cloud provider was expecting slower growth in the fourth quarter, analysts pointed to Microsoft Azure when Arista reported lower guidance its second quarter earnings. During the second quarter earnings call, Ullal said Microsoft accounted for 27% of Arista's earnings in the 2018 fiscal year. In Thursday's earnings call, Ullal indicated a different cloud provider had an impact on its lowered guidance.
Arista expects fourth quarter revenue between $540 million and $560 million, which was well short of the $686 million expected by analysts surveyed by Refinitiv. Sami Badri, a senior equity analyst at Credit Suisse, wrote in an earnings note Thursday that Arista's Q4 guidance was "well below expectations."
During the earnings call with analysts, Ullal said that Arista's fourth quarter forecast was in line with the large hyperscale cloud providers' recent earnings reports where they said their capex would be "flat to down."
"We're projecting that same flat to down trend for capex next year for the overall cloud titan spend," she said, according to a transcript by Seeking Alpha. "After we experienced the pause of a specific cloud titan’s orders in Q2 2019, we were expecting a recovery in second half 2019 for cloud titan spend. In fact, Q3 2019 is a 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 2019 and for calendar 2020."
Ullal said that many of Arista's cloud customers were reducing their capex by extending the use of their server assets, which is delaying the purchase of new equipment, or are investing in other parts of their infrastructure. Ullal said another factor going forward is that customers have pushed out their purchases of 400G gear to the second half of next year, with mainstream production starting in 2021.
While Microsoft emerged as the surprise winner of the U.S. Department of Defense's $10 billion JEDI cloud contract, Ullal didn't expect an immediate uptick for Arista. Ullal said that large contracts typically get contested, which many think Amazon Web Services will do in regards to the JEDI contract, and that it could take six to 12 months before Arista sees any material benefit.
The fallout from Arista's earnings forecast also appeared to have an impact on Cisco, which saw its shares dip 1.7% in aftermarket trading on Thursday.
At the market's open Friday morning, Arista's shares were down 28% to around $174 per share. Cisco's shares were trading at $46.71 per share, which was still close to a 2% decrease.