Shares of once high-flying Arista Networks Inc. tumbled Thursday afternoon, after the software-based networking company cited a big pause in spending by a “cloud titan,” which analysts said was Microsoft Corp.
, which has seen its stock surge 47.5% this year, tumbled more than 15% in after-hours trading following a forecast that came in $30 million to $40 million lower than the Wall Street consensus. The company said that it was expecting a “speed bump” in the second quarter, as the recent big buildup among massive cloud providers has led to a shift to much slower growth in the second quarter, led in particular by one unnamed company.
“In particular, one cloud titan has placed most orders on hold for Q2 2019,” Chief Executive Jayshree Ullal told analysts.
This one cloud titan is most likely Microsoft’s
Azure business, which Arista specified in its most recent 10K accounted for more than 10% of its revenue. When Erik Suppiger, an analyst with JMP Securities simply stated, “so you haven’t changed your expectation in terms of the contribution from Microsoft,” for the full year, Ullal responded, “we have to see the second half and then we’ll know better.”
An investor relations spokesman said Arista “did not disclose the customer’s name and that was intentional,” when asked if he would confirm that the cloud titan was Microsoft. “The question that Jayshree answered for JMP was unrelated to this topic,” said a separate spokeswoman in an email. “We advise you not to link the two discussions. We are not commenting on which customer saw softness for Q2.” A spokesperson for Microsoft was not able to immediately comment.
Suppiger said in an email that he is assuming Arista is referring to Microsoft as the main cloud titan that put its purchasing on hold.
“Arista saw less than normal order strength in March (and April), specifically from Microsoft, and further weakness with Service Providers,” said Andrew Nowinski, a Piper Jaffray analyst, in a note to clients Thursday evening.
A slowdown in spending by the fast-growing cloud companies has been seen elsewhere this quarter, including by chip giant Intel Corp.
, which derives a large part of its revenue now from sales to data centers.
Any big shifts or an overall slowdown in cloud spending, which has been a big boost to tech, is of concern to investors.
Other analysts tried to find out if other cloud companies are having issues or if the main “cloud titan” was the only issue in the quarter. The sudden halt in orders came in mid-March, Ullal said. And she said that other cloud companies also seem to be putting a bit of a pause on ordering.
“We said one particular cloud titan put most of the orders on hold in Q2, but we also said some of the cloud titans are doing well in Q2,” Ullal said. “I think one or two others are …not doing as well as we expect them to, so if you sort of balance the pluses and minuses…we had two doing well, two not doing well and one neutral, something like that.”
Analysts also tried to figure out if the hold on purchases was related to new products coming from Arista, but Ullal said she did not get any indication that it was related to the new product cycle.
Arista’s sudden shift was a big shock for some investors and analysts, and the term “cloud titans” was repeated nearly 20 times on the call. In February, after its fourth-quarter earnings and upbeat guidance, Arista was upgraded by several firms. According to Factset, 20 analysts have the equivalent of a buy rating, 10 have a hold, and one has a sell. While price targets average around $311, in recent weeks some analysts have been raising them, most notably Stifel Nicolaus, which raised its price target on Arista to $290.
Arista is just one of several hardware companies that have complained about a sudden slowdown in cloud spending, leading to fears that the cloud boom could be coming to an end. Most of the others are promising a return to form in the second half, and Arista now needs to be added to that watchlist.
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