| Wisdom Global Investment Managers                                                      Don’t miss an update, subscribe to our Telegram Channel: https://t.me/wglobal |
| 8-Jun-22 |
|
Current Price: $104.3 |
| Wisdom Global: ANET : 1QCY22 result review |
| USD Mn |
1QCY22 |
YoY |
QoQ |
Remarks |
| Revenue |
877 |
31.4% |
6.4% |
driven by cloud titans, enterprise customers, cloud specialty providers, and financials verticals. |
| Gross profit |
554 |
30.2% |
6.0% |
primarily driven by higher supply chain costs partly offset by improved product margins due to a reduced proportion of sales to larger end customers who generally receive larger discounts. |
| EBIT (Normalized) |
278 |
34.8% |
4.6% |
increased headcount and higher new product introduction costs partially offset by lower covid-related travel and marketing expenses. |
| Net profit (Normalized) |
244 |
35.1% |
1.9% |
higher other income partially offset by higher taxes |
| Gross Margin |
63.1% |
(60) bps |
(30) bps |
price increases offset by higher costs for expedited shipping of components |
| EBIT margin |
31.7% |
80 bps |
(50) bps |
lower covid-related travel costs and marketing expenses are partially offset by new product intro costs and higher headcount. |
| NPM |
27.8% |
400 bps |
200 bps |
higher other income |
|
| Major Segments Rev. (USD Mn) |
1QCY22 |
YoY |
% of Total |
Remarks |
| Product |
725 |
34.4% |
82.6% |
gained market share in the overall data center, high-performance switching, growing to approximately 19% market share. |
| Services |
152 |
18.6% |
17.4% |
volatility with global customers, including the deferral of some international cloud shipments in the period. |
| Outlook |
| – Revenues: We expect 33% YoY revenue growth in CY22 and 15% in CY23. ANET has a robust backlog of orders; consequently, ANET has increased its purchase commitments to its suppliers to 3.76x TTM COGS which has generally been below 1x. The company is in a period of significant new product introductions combined with a healthy new customer acquisition rate and expanded use cases with existing customers. These trends have resulted in increased customer-specific acceptance clauses and higher product deferred revenue amounts. ANET is one of the few hardware companies in the networking equipment space that doesn’t manufacture its own machines; ANET focuses on the software design while contracting the manufacturing to third parties. Cloud and enterprise demand is expected to remain strong while Telco demand may moderate in 2023. Moreover, a substantial price increase from November of last year is expected to begin materially benefitting revenues only in 4Q22, as the company did not reprice backlog orders. Finally, the company is contemplating a second price increase soon which if implemented will flow through revenues in H2CY23. |
| – EBIT: Higher R&D costs from new product introductions will likely eliminate any benefit from positive operating leverage. We have not seen any major operating leverage in spite of a low double-digit CAGR in revenues over the last three years. We expect this trend to continue in the near term. Moreover, covid-related travel and marketing cost savings are offset by higher inventory and supply chain costs. Any unexpected margin gains from higher price benefits from Q4CY22 onwards will be a positive surprise to our thesis. |
| – EPS: We expect 19% EPS CAGR for CY21-23. Almost all of the growth is expected from topline growth without any operating leverage benefits. We expect a slight deterioration in margins from higher costs due to supply chain issues and an increase in travel and marketing costs post covid as well as higher headcount. |
| – TAM: ANET is increasing use cases in large enterprises where network as a sales service based on CloudVision enables customers to manage data sets across client-to-cloud domains with automation and analytics. It’s also expanding into proactive, predictive, and prescriptive networking. Core cloud demand continues to remain strong and companies are planning through mid-2023 to provide good visibility to ANET. |
| Valuation |
| – ANET trades at 28x CY23 PE multiple which seems fair value for a consistent low teens earnings growth profile company in this environment compared to its peers. Don’t expect any PE expansion over here and hence most of the expected returns will be from earnings growth. A surprise gain in EBIT margins from Q4CY22 as higher prices flow through the revenue line could help expand ANET’s PE multiple. |
