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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number:
001-36468
Arista Networks, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware   20-1751121
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
5453 Great America Parkway , Santa Clara , California 95054
(Address of principal executive offices)
(Zip Code)
(408)
547-5500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.0001 par value ANET New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of October 27, 2020 was 75,661,464.



ARISTA NETWORKS, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
1
1
2
3
4
5
6
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ARISTA NETWORKS, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except par value)
September 30, 2020 December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 970,349  $ 1,111,286 
Marketable securities 1,875,552  1,613,082 
Accounts receivable, net of rebates and allowances of $4,326 and $6,160, respectively
300,217  391,987 
Inventories 438,102  243,825 
Prepaid expenses and other current assets 69,647  111,456 
Total current assets 3,653,867  3,471,636 
Property and equipment, net 32,670  39,273 
Acquisition-related intangible assets, net 77,752  45,235 
Goodwill 84,968  54,855 
Investments 4,150  4,150 
Operating lease right-of-use assets 79,929  87,770 
Deferred tax assets 443,229  452,025 
Other assets 22,807  30,346 
TOTAL ASSETS $ 4,399,372  $ 4,185,290 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 163,102  $ 92,105 
Accrued liabilities 110,348  140,249 
Deferred revenue 321,290  312,668 
Other current liabilities 70,043  52,052 
Total current liabilities 664,783  597,074 
Income taxes payable 47,918  55,485 
Operating lease liabilities, non-current 74,903  83,022 
Deferred revenue, non-current 241,014  262,620 
Deferred tax liabilities, non-current 247,712  254,710 
Other long-term liabilities 39,165  37,693 
TOTAL LIABILITIES 1,315,495  1,290,604 
Commitments and contingencies (Note 6)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.0001 par value—100,000 shares authorized and no shares issued and outstanding as of September 30, 2020 and December 31, 2019
—  — 
Common stock, $0.0001 par value—1,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 75,632 and 76,389 shares issued and outstanding as of September 30, 2020 and December 31, 2019
8
Additional paid-in capital 1,240,147 1,106,305 
Retained earnings 1,844,656 1,788,230 
Accumulated other comprehensive income (loss) (934) 143 
TOTAL STOCKHOLDERS’ EQUITY 3,083,877  2,894,686 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 4,399,372  $ 4,185,290 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,
2020 2019 2020 2019
Revenue:
Product $ 480,242  $ 555,066  $ 1,312,561  $ 1,573,652 
Service 125,189  99,349  356,469  284,508 
Total revenue 605,431  654,415  1,669,030  1,858,160 
Cost of revenue:
Product 199,465  218,220  539,526  616,906 
Service 21,004  18,921  62,202  53,219 
Total cost of revenue 220,469  237,141  601,728  670,125 
Gross profit 384,962  417,274  1,067,302  1,188,035 
Operating expenses:
Research and development 128,049  118,732  352,747  352,696 
Sales and marketing 53,372  55,279  161,695  159,372 
General and administrative 15,146  14,657  47,814  46,182 
Total operating expenses 196,567  188,668  562,256  558,250 
Income from operations 188,395  228,606  505,046  629,785 
Other income, net 13,224  19,169  33,637  45,313 
Income before income taxes 201,619  247,775  538,683  675,098 
Provision for income taxes 33,244  38,880  87,084  75,923 
Net income $ 168,375  $ 208,895  $ 451,599  $ 599,175 
Net income attributable to common stockholders:
Basic $ 168,375  $ 208,799  $ 451,599  $ 598,861 
Diluted $ 168,375  $ 208,804  $ 451,599  $ 598,880 
Net income per share attributable to common stockholders:
Basic $ 2.22  $ 2.73  $ 5.94  $ 7.85 
Diluted $ 2.12  $ 2.59  $ 5.68  $ 7.38 
Weighted-average shares used in computing net income per share attributable to common stockholders:
Basic 75,999  76,426  76,024  76,301 
Diluted 79,313  80,753  79,519  81,104 

The accompanying notes are an integral part of these condensed consolidated financial statements.


2

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net income $ 168,375  $ 208,895  $ 451,599  $ 599,175 
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,065  (1,730) (481) (1,767)
       Available-for-sale investments:
Change in net unrealized gains (losses) on available-for-sale securities (390) (104) 8,836  5,962 
Less: reclassification adjustment for net (gains) included in net income (9,432) —  (9,432) — 
Net change (9,822) (104) (596) 5,962 
Other comprehensive income (loss) (8,757) (1,834) (1,077) 4,195 
Comprehensive income $ 159,618  $ 207,061  $ 450,522  $ 603,370 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Stockholders Equity
(Unaudited, in thousands)
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Common Stock   Additional
Paid-In Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’ Equity
Common Stock   Additional
Paid-In Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance at beginning of period 75,964  $ $ 1,185,093  $ 1,843,559  $ 7,823  $ 3,036,483  76,389  $ $ 1,106,305  $ 1,788,230  $ 143  $ 2,894,686 
Net income —  —  —  168,375  —  168,375  —  —  —  451,599  —  451,599 
Other comprehensive loss, net of tax —  —  —  —  (8,757) (8,757) —  —  —  —  (1,077) (1,077)
Stock-based compensation —  —  36,469  —  —  36,469  —  —  96,947  —  —  96,947 
Issuance of common stock in connection with employee equity incentive plans 480  —  20,476  —  —  20,476  1,281  —  42,704  42,704 
Tax withholding paid for net share settlement of equity awards (9) —  (1,932) —  —  (1,932) (26) —  (5,932) —  —  (5,932)
Vesting of early-exercised stock options —  —  41  —  —  41  —  —  123  —  —  123 
Repurchase of common stock (803) —  —  (167,278) —  (167,278) (2,012) —  —  (395,173) —  (395,173)
Balance at end of period 75,632  $ $ 1,240,147  $ 1,844,656  $ (934) $ 3,083,877  75,632  $ $ 1,240,147  $ 1,844,656  $ (934) $ 3,083,877 
Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Common Stock   Additional
Paid-In Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Common Stock   Additional
Paid-In Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Shares Amount Shares Amount
Balance at beginning of period 76,555  $ $ 1,038,740  $ 1,484,777  $ 2,035  $ 2,525,560  75,668  $ $ 956,572  $ 1,190,803  $ (3,994) $ 2,143,389 
Cumulative-effect adjustment to beginning balance(1)
—  —  —  —  —  —  —  —  —  3,702  —  3,702 
Net income —  —  —  208,895  —  208,895  —  —  —  599,175  —  599,175 
Other comprehensive income (loss), net of tax —  —  —  —  (1,834) (1,834) —  —  —  —  4,195  4,195 
Stock-based compensation —  —  26,257  —  —  26,257  —  —  74,845  —  —  74,845 
Issuance of common stock in connection with employee equity incentive plans 336  —  14,073  —  —  14,073  1,648  —  52,177  52,177 
Tax withholding paid for net share settlement of equity awards (11) —  (2,407) —  —  (2,407) (29) —  (7,069) —  —  (7,069)
Vesting of early-exercised stock options —  —  69  —  —  69  —  —  207  —  —  207 
Repurchase of common stock (512) —  —  (114,609) —  (114,609) (919) —  —  (214,617) —  (214,617)
Balance at end of period 76,368  $ $ 1,076,732  $ 1,579,063  $ 201  $ 2,656,004  76,368  $ $ 1,076,732  $ 1,579,063  $ 201  $ 2,656,004 
_________________________________________
(1) On January 1, 2019, we adopted Accounting Standard Codification Topic 842 - Leases (“ASC 842”), which resulted in a cumulative-effect adjustment to the beginning balance of Retained Earnings for 2019. 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended September 30,
2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 451,599  $ 599,175 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other 31,975  24,948 
Stock-based compensation 96,947  74,845 
Noncash lease expense 12,606  12,007 
Deferred income taxes 3,261  10,945 
Gain on sale of marketable securities (9,432) — 
Gain on investments in privately-held companies —  (5,427)
Amortization (accretion) of investment premiums (discounts) 6,030  (6,032)
Changes in operating assets and liabilities:
Accounts receivable, net 98,271  (115,475)
Inventories (193,996) 24,951 
Prepaid expenses and other current assets 38,654  59,388 
Other assets 7,850  (7,009)
Accounts payable 71,803  (14,361)
Accrued liabilities (29,811) 5,731 
Deferred revenue (34,449) (58,216)
Income taxes payable (1,667) 29,808 
Other liabilities (1,451) 595 
Net cash provided by operating activities 548,190  635,873 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 1,183,601  806,519 
Purchases of marketable securities (2,216,436) (840,098)
Business acquisitions, net of cash acquired (66,317) (1,365)
Purchases of property and equipment (7,701) (13,319)
Proceeds from investments in privately-held companies 3,399  28,220 
Proceeds from sale of marketable securities 772,978  — 
Net cash used in investing activities (330,476) (20,043)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under equity plans 42,704  52,177 
Tax withholding paid on behalf of employees for net share settlement (5,932) (7,069)
Repurchase of common stock (395,173) (214,617)
Net cash provided used in financing activities (358,401) (169,509)
Effect of exchange rate changes (246) (994)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (140,933) 445,327 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period 1,115,515  654,164 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period (1)
$ 974,582  $ 1,099,491 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Right-of-use assets recognized upon the adoption of ASC 842 $ —  $ 93,207 
Right-of-use assets obtained in exchange for new operating lease liabilities 5,031  10,948 
Property and equipment included in accounts payable and accrued liabilities 456  684 
___________________________________________________
(1) See Note 4 of the accompanying notes for a reconciliation of the ending balance of cash, cash equivalents and restricted cash as shown in these condensed consolidated statements of cash flows.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

ARISTA NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.    Organization and Summary of Significant Accounting Policies
Organization
    Arista Networks, Inc. (together with our subsidiaries, “we,” “our,” "Arista," "Company" or “us”) is a supplier of cloud networking solutions that use software innovations to address the needs of large-scale Internet companies, cloud service providers and next-generation enterprise. Our cloud networking solutions consist of our Extensible Operating System ("EOS"), a set of network applications and our 1/2.5/5/10/25/40/50/100/400 Gigabit Ethernet switching and routing platforms. We are incorporated in the state of Delaware. Our corporate headquarters are located in Santa Clara, California, and we have wholly-owned subsidiaries throughout the world, including North America, Europe, Asia and Australia.
Basis of Presentation and Principles of Consolidation
    The accompanying unaudited condensed consolidated financial statements include the accounts of Arista Networks, Inc. and its wholly owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial information. The results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. All significant inter-company accounts and transactions have been eliminated.
    Our condensed consolidated financial statements and related financial information in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 14, 2020.
Use of Estimates
    The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, but are not limited to, revenue recognition and deferred revenue; allowance for doubtful accounts, sales rebates and return reserves; valuation of goodwill and acquisition-related intangible assets, accounting for income taxes, including the valuation allowance on deferred tax assets and reserves for uncertain tax positions; estimate of useful lives of long-lived assets including intangible assets; valuation of inventory and contract manufacturer/supplier liabilities; and the recognition and measurement of contingent liabilities. We evaluate our estimates and assumptions based on historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates.
Risks and Uncertainties
    The global coronavirus ("COVID-19") pandemic and resulting mitigation efforts by governments around the world to contain or slow its spread have negatively impacted the global economy, disrupted business, sales activities, global supply chains and workforce participation, including our own, and created significant volatility and disruption of financial markets.
    Our contract manufacturers and suppliers have experienced delays in the production and export of their products, which have negatively impacted our supply chain and could negatively impact our business in the future. In addition, we expect that COVID-19 related disruptions may have a negative impact on demand from our customers in future periods and contribute to an expected year-over-year decline in revenues for the year ending December 31, 2020. However, the extent of the impact of COVID-19 on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, and the impact of any initiatives and programs we may undertake to address financial and operational challenges, will depend on future developments, including the duration and spread of the pandemic and related mitigation efforts, as well as restrictions on travel and transport, all of which are uncertain and cannot be predicted. Management is actively monitoring the impact of the pandemic on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.
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Recently Adopted Accounting Pronouncements
Credit Losses of Financial Instruments 
    In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. For trade receivables, we are required to estimate lifetime expected credit losses. For available-for-sale debt securities, we are required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. We adopted the new guidance in our first quarter of 2020 under a modified retrospective approach, and there was no material impact to our financial statements upon adoption. In addition, we do not anticipate that it will have a material impact on our consolidated statement of operations or consolidated statements of cash flows going forward.

2.    Business Combinations
    On February 5, 2020, the Company completed its acquisition of Big Switch Networks, Inc. (“Big Switch”), a network monitoring and software-defined networking pioneer headquartered in Santa Clara, California. With the acquisition of Big Switch, we expect to expand our data center networking solutions and further strengthen our network monitoring and observability suite delivered through Arista’s software platform CloudVision and DANZ (DataANalyZer) capabilities.
    We paid an aggregate of $73.3 million in cash for the acquisition, of which $5.3 million in severance and other costs was accounted for as post-combination expense and was excluded from the purchase consideration. We also incurred certain acquisition-related expenses and restructuring costs of $6.6 million, which primarily consisted of retention bonuses to continuing employees, professional and consulting fees, and facilities restructuring costs. The following table summarizes the purchase consideration of $68.0 million, and the preliminary purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Preliminary Purchase Price Allocation
Tangible assets $ 13,376 
Liabilities (24,346)
Intangible assets 49,040 
Goodwill 29,926 
     Net assets acquired $ 67,996 
    We continue the process of identifying and evaluating pending escrow claims related to tax and other liabilities. Accordingly, the preliminary values reflected in the table above are subject to potential measurement period adjustments.
    The acquired intangible assets are amortized on a straight-line basis over their estimated useful lives as we believe this method most closely reflects the pattern in which the economic benefits of the assets will be consumed. The following table shows the valuation of the intangible assets acquired (in thousands) along with their estimated useful lives:
Acquisition Date Fair Value Estimated Useful Life
Developed technology $ 31,040  5 years
Customer relationships 13,150  7 years
Non-compete agreements 4,060  2 years
Trade name 790  1 year
         Total intangible assets acquired $ 49,040 
    Goodwill of $29.9 million is primarily attributable to the expected synergies created by incorporating the solutions of the acquired businesses into our technology platform, and the value of the assembled workforce. Goodwill is not deductible for income taxes purposes. In addition, the acquisition of Big Switch did not have a material impact on our revenue and net income for the current period, and therefore pro forma financial information has not been presented.
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3.    Fair Value Measurements
    Assets and liabilities recorded at fair value on a recurring basis on the accompanying condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. We use a fair value hierarchy to measure fair value, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The three-tiers of the fair value hierarchy are as follows:
    Level I - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
    Level II - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
    Level III - Unobservable inputs that are supported by little or no market data for the related assets or liabilities and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
    We measure and report our cash equivalents, restricted cash, and available-for-sale marketable securities at fair value on a recurring basis. The following tables summarize the amortized costs, unrealized gains and losses and fair value of these financial assets by significant investment category and their level within the fair value hierarchy (in thousands):
September 30, 2020
Amortized Cost Unrealized Gains Unrealized Losses Fair Value Level I Level II Level III
Financial Assets:
Cash Equivalents:
Money market funds $ 478,702  $ —  $ —  $ 478,702  $ 478,702  $ —  $ — 
U.S. Treasuries 73,656  —  —  73,656  73,656  —  — 
552,358  —  —  552,358  552,358  —  — 
Marketable Securities:
Commercial paper 51,926  —  —  51,926  —  51,926  — 
Certificate of deposits(1)
21,218  —  —  21,218  —  21,218  — 
U.S. government notes 522,044  412  (6) 522,450  522,450  —  — 
Corporate bonds 824,132  2,079  (401) 825,810  —  825,810  — 
Agency securities 453,773  387  (12) 454,148  —  454,148  — 
1,873,093  2,878  (419) 1,875,552  522,450  1,353,102  — 
Other Assets:
Money market funds - restricted 4,233  —  —  4,233  4,233  —  — 
Total Financial Assets $ 2,429,684  $ 2,878  $ (419) $ 2,432,143  $ 1,079,041  $ 1,353,102  $ — 
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December 31, 2019
Amortized Cost Unrealized Gains Unrealized Losses Fair Value Level I Level II Level III
Financial Assets:
Cash Equivalents:
Money market funds $ 562,580  $ —  $ —  $ 562,580  $ 562,580  $ —  $ — 
Certificate of deposits(1)
4,001  —  —  4,001  —  4,001  — 
566,581  —  —  566,581  562,580  4,001  — 
Marketable Securities:
Commercial paper 66,717  —  —  66,717  —  66,717  — 
Certificate of deposits(1)
3,000  —  —  3,000  —  3,000  — 
U.S. government notes 518,884  414  (20) 519,278  519,278  —  — 
Corporate bonds 787,741  2,392  (73) 790,060  —  790,060  — 
Agency securities 233,491  577  (41) 234,027  —  234,027  — 
1,609,833  3,383  (134) 1,613,082  519,278  1,093,804  — 
Other Assets:
Money market funds - restricted 4,229  —  —  4,229  4,229  —  — 
Total Financial Assets
$ 2,180,643  $ 3,383  $ (134) $ 2,183,892  $ 1,086,087  $ 1,097,805  $ — 
______________________
(1) As of September 30, 2020 and December 31, 2019, all of our certificates of deposits were domestic deposits.
    The unrealized losses associated with our marketable securities were immaterial as of September 30, 2020, and December 31, 2019. As of September 30, 2020 and December 31, 2019, we did not have any marketable securities that have been in a continuous unrealized loss position for more than twelve months. We invest in marketable securities that have maximum maturities of up to two years and are generally deemed to be low risk based on their credit ratings from the major rating agencies. We did not recognize any credit losses or non-credit-related impairments related to our available-for-sale marketable securities during the three and nine months ended September 30, 2020.
    As of September 30, 2020, the contractual maturities of our investments did not exceed 24 months. The fair values of available-for-sale marketable securities, by remaining contractual maturity, are as follows (in thousands):
September 30, 2020
Due in 1 year or less $ 1,161,664 
Due in over 1 year through 2 years 713,888 
      Total marketable securities
$ 1,875,552 
    The weighted-average remaining duration of our current marketable securities is approximately 0.9 years as of September 30, 2020. As we view these securities as available to support current operations, we classify securities with maturities beyond 12 months as current assets under the caption marketable securities on the accompanying unaudited condensed consolidated balance sheets.

4.    Financial Statements Details
Cash, Cash Equivalents and Restricted Cash
    The following table is a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying condensed consolidated balance sheets that sum to the total of the same such amounts shown in the accompanying condensed consolidated statements of cash flows (in thousands):
September 30, 2020 September 30, 2019
Cash and cash equivalents $ 970,349  $ 1,095,265 
Restricted cash included in Other assets 4,233  4,226 
    Total cash, cash equivalents and restricted cash $ 974,582  $ 1,099,491 
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    Restricted cash, which was included in "Other assets" on the accompanying condensed consolidated balance sheets as of September 30, 2020 and September 30, 2019, primarily consisted of $4.0 million pledged as collateral representing a security deposit required for a facility lease.
Accounts Receivable, Net
    Accounts receivable, net consists of the following (in thousands):
September 30, 2020 December 31, 2019
Accounts receivable $ 304,543  $ 398,147 
Allowance for doubtful accounts (541) (638)
Product sales rebate and returns reserve (3,785) (5,522)
   Accounts receivable, net $ 300,217  $ 391,987 
Inventories
    Inventories consist of the following (in thousands):
September 30, 2020 December 31, 2019
Raw materials $ 223,423  $ 96,712 
Finished goods 214,679  147,113 
   Total inventories $ 438,102  $ 243,825 
Prepaid Expenses and Other Current Assets
    Prepaid expenses and other current assets consist of the following (in thousands):
September 30, 2020 December 31, 2019
Prepaid income taxes $ 564  $ 20,153 
Inventory deposit 10,024  13,716 
Other current assets 43,311  64,464 
Other prepaid expenses and deposits 15,748  13,123 
   Total prepaid expenses and other current assets $ 69,647  $ 111,456 
Property and Equipment, Net
    Property and equipment, net consists of the following (in thousands):
September 30, 2020 December 31, 2019
Equipment and machinery $ 67,978  $ 64,748 
Computer hardware and software 39,335  36,627 
Leasehold improvements
31,309  31,235 
Furniture and fixtures 3,754  3,774 
Construction-in-process 308  265 
    Property and equipment, gross 142,684  136,649 
Less: accumulated depreciation (110,014) (97,376)
    Property and equipment, net $ 32,670  $ 39,273 
    Depreciation expense was $4.9 million and $4.8 million for the three months ended September 30, 2020 and 2019, respectively, and $15.1 million and $14.3 million for the nine months ended September 30, 2020 and 2019, respectively.
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Accrued Liabilities
    Accrued liabilities consist of the following (in thousands):
September 30, 2020 December 31, 2019
Accrued payroll related costs $ 44,920  $ 80,133 
Accrued manufacturing costs 30,154  31,920 
Accrued product development costs 16,983  11,410 
Accrued professional fees 5,152  6,335 
Accrued warranty costs 6,732  6,742 
Accrued taxes 1,866  1,716 
Other 4,541  1,993 
   Total accrued liabilities $ 110,348  $ 140,249 
Warranty Accrual
    The following table summarizes the activity related to our accrued liability for estimated future warranty costs (in thousands):
Nine Months Ended September 30,
2020 2019
Warranty accrual, beginning of period $ 6,742  $ 5,362 
Liabilities accrued for warranties issued during the period 4,507  3,887 
Warranty costs incurred during the period (4,517) (3,841)
Warranty accrual, end of period $ 6,732  $ 5,408 
Contract Balances
    The following table summarizes the balances of our contract assets included in "Prepaid and other current assets" on the accompanying condensed consolidated balance sheets (in thousands):
Nine Months Ended September 30,
2020
Contract assets, beginning balance $ 25,565 
Contract assets, ending balance 6,004 
    The following table summarizes the activity related to our contract liabilities (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Contract liabilities, beginning balance $ 67,268  $ 42,026  $ 61,050  $ 32,595 
Less: Revenue recognized from beginning balance (6,525) (3,700) (17,946) (10,134)
Less: Beginning balance reclassified to deferred revenue (2,828) (1,689) (1,942) (967)
Add: Contract liabilities recognized 12,362  13,506  29,115  28,649 
Contract liabilities, ending balance $ 70,277  $ 50,143  $ 70,277  $ 50,143 
    As of September 30, 2020 and December 31, 2019, $31.1 million and $23.4 million of our contract liabilities, respectively, were included in "Other current liabilities" with the remaining balances included in "Other long-term liabilities" on the accompanying condensed consolidated balance sheets.
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Deferred Revenue and Performance Obligations
    Deferred revenue is comprised primarily of unearned revenue related to multi-year post contract support, or PCS, contracts, services and product deferrals related to acceptance clauses. The following table summarizes the activity related to our deferred revenue (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Deferred revenue, beginning balance
$ 577,511  $ 502,218  $ 575,288  $ 587,227 
Less: Revenue recognized from beginning balance (103,889) (84,277) (243,422) (306,909)
Add: Deferral of revenue in current period, excluding amounts recognized during the period 88,682  111,071  230,438  248,694 
Deferred revenue, ending balance $ 562,304  $ 529,012  $ 562,304  $ 529,012 
Revenue from Remaining Performance Obligations
    Revenue from remaining performance obligations represents contracted revenue that has not yet been recognized. This consists of contract liabilities, deferred revenue and amounts that will be invoiced in future periods. As of September 30, 2020, approximately $676.4 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 81% of these remaining performance obligations over the next two years and 19% during the third to the fifth year.
Other Income, Net
    Other income, net consists of the following (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Interest income $ 4,319  $ 13,446  $ 24,649  $ 38,451 
Gain on sale of marketable securities 9,432  —  9,432  — 
Gain on investment in privately-held companies —  4,277  —  5,427 
Other income (expense), net (527) 1,446  (444) 1,435 
    Total $ 13,224  $ 19,169  $ 33,637  $ 45,313 
    
5.    Investments
Investments in Privately-Held Companies    
    Our investments are in the equity of privately-held companies, which do not have readily determinable fair values. These non-marketable equity securities are initially recorded at cost, and subsequently remeasured to fair value on a non-recurring basis based on observable price changes in orderly transactions for similar investments of the same issuer, or for impairment. These investments are classified within Level III of the fair value hierarchy as we estimate the value based on valuation methods using the observable transaction price at the transaction date and other significant unobservable inputs, such as volatility, rights, and obligations related to those investments. In addition, the valuation requires management judgment due to the absence of market price and inherent lack of liquidity. The following table summarizes the activity related to our investments in privately-held companies held as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020 December 31, 2019
Cost of investment $ 3,000  $ 3,000 
Cumulative impairment —  — 
Cumulative upward adjustment 1,150  1,150 
Carrying amount of investment $ 4,150  $ 4,150 
    During the three and nine months ended September 30, 2020, there were no realized or unrealized gains or losses recorded on investments. During the three months ended September 30, 2019, the Company recorded a realized gain of $4.3 million upon the sale of one of our investments. The realized gains were classified in "Other income, net" in the
12

accompanying condensed consolidated statements of operations. During the three months ended September 30, 2019, there were no realized or unrealized gains or losses recorded on our remaining investments. During the nine months ended September 30, 2019, we recorded $1.2 million of unrealized gain on investments held as of September 30, 2020. The unrealized gain was recorded on an investment that was remeasured to fair value as of the date an observable transaction occurred.

6.    Commitments and Contingencies
Purchase Commitments
    We outsource most of our manufacturing and supply chain management operations to third-party contract manufacturers, who procure components and assemble products on our behalf based on our forecasts in order to reduce manufacturing lead times and ensure adequate component supply. We issue purchase orders to our contract manufacturers for finished products and a significant portion of these orders consists of firm non-cancellable commitments. In addition, we purchase strategic component inventory from certain suppliers under purchase commitments that in some cases are non-cancellable, including integrated circuits, which are consigned to our contract manufacturers. As of September 30, 2020, we had non-cancellable purchase commitments of $501.5 million, of which $484.8 million were to our contract manufacturers and suppliers. In addition, we have provided suppliers with inventory deposits to secure our obligations to purchase inventory and the amount of these deposits may increase in future periods as we work to reduce product lead times and ensure adequate component supply to meet future demand. We had $12.8 million and $16.5 million in deposits as of September 30, 2020 and December 31, 2019, respectively. These deposits are included in “Prepaid expenses and other current assets” and “Other assets” on the accompanying condensed consolidated balance sheets.
Guarantees
    We have entered into agreements with some of our direct customers and channel partners that contain indemnification provisions relating to potential situations where claims could be alleged that our products infringe on the intellectual property rights of a third party. We have, at our option and expense, the ability to repair any infringement, replace product with a non-infringing equivalent-in-function product or refund our customers all or a portion of the value of the product. Other guarantees or indemnification agreements include guarantees of product and service performance and standby letters of credit for leased facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions and our guarantee and indemnification arrangements have not had a significant impact on our consolidated financial statements to date.
Legal Proceedings
    In the ordinary course of business, we are a party to other claims and legal proceedings including matters relating to commercial, employee relations, business practices and intellectual property.
    We record a provision for contingent losses when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of September 30, 2020, provisions recorded for contingent losses related to other claims and matters have not been significant. Based on currently available information, management does not believe that any additional liabilities relating to other unresolved matters are probable or that the amount of any resulting loss is estimable, and believes these other matters are not likely, individually and in the aggregate, to have a material adverse effect on our financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position, results of operations or cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods.

7.    Stockholders’ Equity
Stock Repurchase Program
    In April 2019, our board of directors authorized a $1.0 billion stock repurchase program (the “Repurchase Program”). This authorization allows us to repurchase shares of our common stock opportunistically and will be funded from working capital. Repurchases may be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchases, trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or a combination of the foregoing. The Repurchase Program, which expires in April 2022, does not obligate us to acquire any of our common stock, and may be suspended or discontinued by us at any time without prior notice. As of September 30, 2020, the remaining authorized amount for stock repurchases under this program was approximately $338.7 million.
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    A summary of the stock repurchase activity under the Repurchase Program for the three and nine months ended September 30, 2020 is as follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, 2020 September 30, 2020
Aggregate purchase price $ 167,278  $ 395,173 
Shares repurchased 803  2,012 
Average price paid per share $ 208.19  $ 196.43 
    The aggregate purchase price of repurchased shares of our common stock is recorded as a reduction to retained earnings. All shares repurchased under the Repurchase Program have been retired.
Equity Award Plan Activities
2014 Equity Incentive Plan
    Effective January 1, 2020, the Company's board of directors authorized an increase of 2,291,660 shares to the shares available for issuance under the 2014 Equity Incentive Plan (the “2014 Plan”). Pursuant to the 2014 Plan, the 2020 share increase is determined based on 3% of the total shares of common stock outstanding as of December 31, 2019, but not to exceed 12,500,000 shares, unless the board of directors, in its discretion, determines to make a smaller increase. As of September 30, 2020, there remained approximately 21.9 million shares available for issuance under the 2014 Plan.
2014 Employee Stock Purchase Plan
    Effective January 1, 2020, our board of directors authorized an increase of 763,886 shares to the shares available for issuance under our 2014 Employee Stock Purchase Plan (the “ESPP”). Pursuant to the ESPP, the 2020 share increase was determined based on the least of 1% of the total shares of common stock outstanding on December 31, 2019, 2,500,000 shares, or such amount as determined by our board of directors. During the nine months ended September 30, 2020, we issued 105,667 shares at a weighted-average purchase price of $183.45 per share under the ESPP. As of September 30, 2020, there remained 3,850,993 shares available for issuance under the ESPP.
Stock Option Activities
    The following table summarizes the option activity under our stock plans and related information (in thousands, except years and per share amounts):
Options Outstanding
Number of
Shares
Underlying
Outstanding Options
Weighted-
Average
Exercise
Price per Share
Weighted-
Average
Remaining
Contractual
Term (Years) of
Stock Options
Aggregate
Intrinsic
Value
of Stock
Options
Outstanding
Balance—December 31, 2019 4,564  $ 42.50  4.4 $ 740,387 
       Options granted —  — 
       Options exercised (800) 29.15 
       Options canceled (31) 121.24 
Balance—September 30, 2020 3,733  $ 44.71  3.7 $ 610,580 
Vested and exercisable—September 30, 2020 2,489  $ 31.62  3.3 $ 436,617 
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Restricted Stock Unit (RSU) Activities
    A summary of the RSU activity under the 2014 Plan and related information are presented below (in thousands, except years and per share amounts):
Number of
Shares
Weighted-
Average Grant
Date Fair Value Per Share
Weighted-Average
Remaining
Contractual Term (in years)
Aggregate Intrinsic Value
Unvested balance—December 31, 2019 1,070  $ 190.35  1.5 $ 217,701 
              RSUs granted 1,208  213.75 
              RSUs vested (375) 158.18 
              RSUs forfeited/canceled (81) 222.27 
Unvested balance—September 30, 2020 1,822  $ 211.07  1.9 $ 377,024 
Shares Available for Grant
    The following table presents the stock activity and the total number of shares available for grant under the 2014 Plan as of September 30, 2020 (in thousands):
Number of Shares
Balance—December 31, 2019 15,146 
       Authorized 2,292 
       Options granted — 
       RSUs granted (1,208)
       Options canceled 31 
       RSUs forfeited 81 
       Shares traded for taxes 26 
Balance—September 30, 2020 16,368 
Stock-Based Compensation Expense
    Total stock-based compensation expenses related to options, restricted stock units, restricted stock, and employee stock purchase rights granted were allocated as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Cost of revenue $ 1,806  $ 1,258  $ 4,718  $ 3,384 
Research and development 21,423  13,472  56,729  39,171 
Sales and marketing
9,083  7,832  23,756  21,463 
General and administrative 4,157  3,695  11,744  10,827 
              Total stock-based compensation $ 36,469  $ 26,257  $ 96,947  $ 74,845 
    As of September 30, 2020, unrecognized stock-based compensation expenses by award type and their expected weighted-average recognition periods are summarized in the following table (in thousands, except years):
September 30, 2020
Stock Option RSU ESPP Restricted Stock
Unrecognized stock-based compensation expense $ 31,114  $ 338,561  $ 12,641  $ 2,839 
Weighted-average amortization period 2.7 years 3.4 years 1.4 years 2.0 years

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8.    Net Income Per Share Available to Common Stock
    The following table sets forth the computation of our basic and diluted net income per share attributable to common stockholders (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Numerator:
Basic:
Net income $ 168,375  $ 208,895  $ 451,599  $ 599,175 
Less: undistributed earnings allocated to participating securities —  (96) —  (314)
    Net income available to common stockholders, basic $ 168,375  $ 208,799  $ 451,599  $ 598,861 
Diluted:
Net income attributable to common stockholders, basic $ 168,375  $ 208,799  $ 451,599  $ 598,861 
Add: undistributed earnings allocated to participating securities —  —  19 
    Net income attributable to common stockholders, diluted $ 168,375  $ 208,804  $ 451,599  $ 598,880 
Denominator:
Basic:
Weighted-average shares used in computing net income per share available to common stockholders, basic 75,999  76,426  76,024  76,301 
Diluted:
Weighted-average shares used in computing net income per share available to common stockholders, basic 75,999  76,426  76,024  76,301 
Add weighted-average effect of dilutive securities:
    Stock options and RSUs 3,308  4,308  3,489  4,784 
    Employee stock purchase plan 19  19 
Weighted-average shares used in computing net income per share available to common stockholders, diluted 79,313  80,753  79,519  81,104 
Net income per share attributable to common stockholders:
         Basic $ 2.22  $ 2.73  $ 5.94  $ 7.85 
         Diluted $ 2.12  $ 2.59  $ 5.68  $ 7.38 
    The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Stock options and RSUs to purchase common stock 251  277  395  211 
Employee stock purchase plan 17  41  84  59 
       Total 268  318  479  270 

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9.    Income Taxes
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
(in thousands, except percentages) (in thousands, except percentages)
Income before income taxes $ 201,619  $ 247,775  $ 538,683  $ 675,098 
Provision for income taxes 33,244  38,880  87,084  75,923 
Effective tax rate 16.5  % 15.7  % 16.2  % 11.2  %
     The effective tax rates reflect tax expense recorded on pre-tax income in the three and nine months ended September 30, 2020 and September 30, 2019, respectively. The change in the effective tax rates in the three and nine months ended September 30, 2020, as compared to the same periods in 2019, was primarily due to a decrease in tax benefits attributable to stock-based compensation.

10.    Segment Information
    We operate in one reportable segment. The following table represents revenue based on the customer’s location, as determined by the customer’s shipping address (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Americas $ 452,693  $ 532,318  $ 1,289,182  $ 1,418,325 
Europe, Middle East and Africa 89,588  75,439  226,189  298,768 
Asia-Pacific 63,150  46,658  153,659  141,067 
   Total revenue $ 605,431  $ 654,415  $ 1,669,030  $ 1,858,160 
    Long-lived assets, net, excluding intercompany receivables, investments in subsidiaries, privately-held equity investments and deferred tax assets, by location, are summarized as follows (in thousands):
September 30, 2020 December 31, 2019
United States $ 24,469  $ 32,565 
International 8,201  6,708 
   Total $ 32,670  $ 39,273 

11.    Subsequent Events
    On September 21, 2020, the Company entered into a Merger Agreement to acquire Awake Security, Inc. (“Awake Security”), a network detection and response (“NDR”) platform provider headquartered in Santa Clara, California, and on October 7, 2020, we completed the acquisition of Awake Security.
    The acquisition will be included in our consolidated financial statements beginning in the fourth quarter of 2020, and will be financed from our existing cash balance.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K filed with the SEC on February 14, 2020. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.
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Overview
    Arista Networks pioneered software-driven, cognitive cloud networking for large-scale data center and campus environments. Our cloud networking solutions consist of our EOS, a set of network applications and our Ethernet switching and routing platforms. Our cloud networking solutions deliver industry-leading performance, scalability, availability, programmability, automation and visibility. At the core of our cloud networking platform is EOS, which was purpose-built to be fully programmable, highly modular and reliable. The programmability of EOS has allowed us to create a set of software applications that address the requirements of cloud networking, including workflow automation, network visibility and analytics, and has also allowed us to rapidly integrate with a wide range of third-party applications for virtualization, management, automation, orchestration and network services.
    We believe that cloud networking will continue to replace legacy network technologies across data center and campus environments. Our cloud networking platforms are well positioned to address the growing cloud networking market, and to address increasing performance requirements driven by the growing number of connected devices, as well as the need for constant connectivity and access to data and applications.
    We generate revenue primarily from sales of our switching and routing products which incorporate our EOS software. We generate the majority of our services revenue from post contract support, or PCS, which end customers typically purchase in conjunction with our products. Our end customers span a range of industries and include large Internet companies, service providers, financial services organizations, government agencies, media and entertainment companies and others. As we have grown the functionality of our EOS software, expanded the range of our product portfolio and increased the size of our sales force, our revenue has grown rapidly. We have also been profitable and operating cash flow positive for each year since 2010.
    We believe our future success is dependent upon our ability to continue to develop market leading products and features that address the needs of our end customers and our ability to sell these products to new and existing customers, including an increase in sales in the enterprise data center switching, campus and WiFi networking markets. We intend to continue to invest in our sales activities in key geographies, as well as in our relationships with channel, technology and system-level partners in order to reach new end customers more effectively, increase sales to existing customers, and provide services and support. In addition, we intend to continue to invest in our research and development organization to enhance the functionality of our existing cloud networking platform, introduce new products and features, and build upon our technology leadership. We believe one of our greatest strengths lies in our rapid development of new features and applications.
    Our development model is focused on the development of new products based on our EOS software and enhancements to EOS. We engineer our products to be agnostic to the underlying merchant silicon architecture. Today, we combine our EOS software with merchant silicon into a family of switching and routing products. This enables us to focus our research and development resources on our software core competencies and to leverage the investments made by merchant silicon vendors to achieve cost-effective solutions. We work closely with third-party contract manufacturers to manufacture our products. Our contract manufacturers deliver our products to our third-party direct fulfillment facilities. We and our fulfillment partners then perform labeling, final configuration, quality assurance testing and shipment to our customers.
    Historically, large purchases by a relatively limited number of end customers have accounted for a significant portion of our revenue. We have experienced unpredictability in the timing of orders from these large end customers primarily due to changes in demand patterns specific to these customers, the time it takes these end customers to evaluate, test, qualify and accept our products, and the overall complexity of these large orders. We expect continued variability in our customer concentration and timing of sales on a quarterly and annual basis. For example, our sales to Microsoft and Facebook as end users in fiscal 2019 collectively represented 40% of our revenue, and benefited from certain factors that are not expected to repeat in fiscal 2020. Consequently, the percentage of our revenue from these customers in fiscal 2020 is expected to decline, which will contribute to an expected year-over-year decline in our revenue for fiscal 2020. In addition, we have provided, and may in the future provide, pricing discounts to large end customers, which may result in lower margins for the period in which such sales occur.
Recent Developments
    The global coronavirus (“COVID-19”) pandemic and related shelter in place, travel and social distancing restrictions imposed by governments around the world in an effort to contain or slow its spread have negatively impacted the global economy, disrupted business, sales activities, supply chains and workforce participation, including our own, and created significant volatility and disruption of financial markets, and we expect that the global health crisis caused by COVID-19 will continue to negatively impact business activity for the foreseeable future.
    We have taken numerous steps, and will continue to take further actions, in our approach to address COVID-19. We have prioritized the protection of our employees during this pandemic and, as a result, have closed our offices across the globe (including our corporate headquarters) limiting access to only those employees providing essential activities, instructed employees to work from home, and implemented travel restrictions. We continue to work closely with our contract
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manufacturers and supply chain partners who have experienced delays in component sourcing, workforce disruptions and governmental restrictions on the production and export of their products. Although we have worked diligently to drive improvements in these areas, including funding additional working capital and incremental purchase commitments, these delays have negatively impacted our ability to supply products to our customers on a timely basis. We expect to continue to invest in working capital as supply availability improves in order to address the risk of future COVID-19 related supply chain disruptions, but we cannot be certain that such disruptions will not occur.
    The extent of the impact of COVID-19 on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic, the breadth and duration of governmental containment measures such as shelter in place, travel and social distancing restrictions as well as the reauthorization of or increase in such measures in the event of spikes in COVID-19 infection rates, and the impact on our customers, partners, contract manufacturers and supply chain, all of which are uncertain and cannot be predicted. However, any continued or renewed disruption in manufacturing and supply resulting from the COVID-19 pandemic or related containment measures would negatively impact our business. We also believe that any extended or renewed COVID-19 related economic disruption could have a negative impact on demand from our customers in future periods. While we have experienced some incremental improvement in demand from our cloud titan customers and some stabilization in sales activity in our campus and enterprise markets in the period, we continue to expect a year-over-year decline in total revenue for the year ending December 31, 2020. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
    In response to potential future COVID-19 related disruptions to our business, we have continued to carefully review our investment and spending plans, cautiously reintroducing some incremental spending beginning in the third quarter as overall customer demand began to stabilize. Although management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce, the full impact of the pandemic continues to evolve as of the date of this report. As such, the Company is unable to estimate the effects of COVID-19 on its future results of operations, financial condition, or liquidity.
Acquisitions
    On February 5, 2020, we acquired Big Switch Networks, Inc. (“Big Switch”), a network monitoring and software-defined networking pioneer headquartered in Santa Clara, California. With the acquisition of Big Switch, we expect to expand our data center networking solutions and further strengthen our network monitoring and observability suite delivered through Arista’s software platform CloudVision and DANZ (DataANalyZer) capabilities. In addition, on October 7, 2020, we completed the acquisition of Awake Security Inc. (“Awake Security”), a network detection and response (“NDR”) platform provider headquartered in Santa Clara, California. With the acquisition of Awake Security, we are adding an NDR platform to our product portfolio that combines artificial intelligence (AI) with human expertise to autonomously hunt for and respond to insider and external threats.

Results of Operations
Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019
Revenue, Cost of Revenue and Gross Profit (in thousands, except percentages)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 Change in 2020 2019 Change in
$ $ $ % $ $ $ %
Revenue
Product $ 480,242  $ 555,066  $ (74,824) (13.5) % $ 1,312,561  $ 1,573,652  $ (261,091) (16.6) %
Service 125,189  99,349  25,840  26.0  356,469  284,508  71,961  25.3 
Total revenue 605,431  654,415  (48,984) (7.5) 1,669,030  1,858,160  (189,130) (10.2)
Cost of revenue
Product 199,465  218,220  (18,755) (8.6) 539,526  616,906  (77,380) (12.5)
Service 21,004  18,921  2,083  11.0  62,202  53,219  8,983  16.9 
Total cost of revenue 220,469  237,141  (16,672) (7.0) 601,728  670,125  (68,397) (10.2)
Gross profit $ 384,962  $ 417,274  $ (32,312) (7.7) % $ 1,067,302  $ 1,188,035  $ (120,733) (10.2) %
Gross margin 63.6  % 63.8  % 63.9  % 63.9  %

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Revenue by Geography (in thousands, except percentages)
Three Months Ended September 30, Nine Months Ended September 30,
2020 % of Total 2019 % of Total 2020 % of Total 2019 % of Total
Americas $ 452,693  74.8   % $ 532,318  81.4   % $ 1,289,182  77.2   % $ 1,418,325  76.3   %
Europe, Middle East and Africa 89,588  14.8  75,439  11.5  226,189  13.6  298,768  16.1 
Asia-Pacific 63,150  10.4  46,658  7.1  153,659  9.2  141,067  7.6 
Total revenue $ 605,431  100.0  % $ 654,415  100.0  % $ 1,669,030  100.0  % $ 1,858,160  100.0  %
Revenue
    We generate revenue primarily from sales of our products. We also derive a portion of our revenue from sales of PCS, which is typically purchased in conjunction with our products, and subsequent renewals of those contracts. We expect our revenue may vary from period to period based on, among other things, the timing, size and complexity of orders, especially with respect to our large end customers.
    Product revenue decreased $74.8 million, or 13.5%, and $261.1 million, or 16.6%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The decrease of $74.8 million was primarily driven by reduced sales on a year-over-year basis to our larger customers, combined with some COVID-19 related supply constraints in fiscal 2020. The decrease of $261.1 million was primarily the result of the recognition of $116.8 million of deferred revenue related to customer acceptance of prior period sales transactions in the nine months ended September 30, 2019 combined with some reduction in sales to our larger customers in the period, and the impact of COVID-19 related supply constraints. Service revenue increased $25.8 million, or 26.0%, and $72.0 million, or 25.3%, in the three and nine months ended September 30, 2020, compared to the same periods in 2019, as a result of continued growth in support contracts as our customer installed base has continued to expand. International revenues represented 25.2% and 22.8% of total revenues in the three and nine months ended September 30, 2020, respectively, an increase from 18.6% and a decrease from 23.7% compared to the same periods in the prior year. International revenues generally fluctuate based on the timing of deployments by certain of our large end customers. In addition, the increase in the current quarter was mainly due to an increase in demand in both our EMEA and Asia-Pacific regions. We continued to experience competitive pricing pressure on our products and services.
Cost of Revenue and Gross Margin
    Cost of revenue primarily consists of amounts paid for inventory to our third-party contract manufacturers and merchant silicon vendors, overhead costs in our manufacturing operations department, and other manufacturing-related costs associated with manufacturing our products and managing our inventory. Costs of providing PCS and other services primarily consist of personnel costs for our global customer support organization.
    Cost of revenue decreased $16.7 million, or 7.0%, and $68.4 million, or 10.2%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. These decreases were primarily driven by a corresponding decrease in revenue.
    Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including sales to large end customers who generally receive lower pricing, manufacturing-related costs including costs associated with supply chain sourcing activities, merchant silicon costs, the mix of products sold, and excess and obsolete inventory write-downs, including charges for excess and obsolete component inventory held by our contract manufacturers. We expect our gross margins to fluctuate over time, depending on the factors described above.
    Gross margin remained consistent for the three and nine months ended September 30, 2020, compared to the same periods in 2019. Gross margin in each period was unfavorably impacted by incremental COVID-19 related supply chain costs combined with some relatively fixed overhead costs on a lower revenue base.
Operating Expenses (in thousands, except percentages)
    Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation and travel expenses.
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Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 Change in 2020 2019 Change in
  $ $ $ % $ $ $ %
Operating expenses:
Research and development $ 128,049  $ 118,732  $ 9,317  7.8  % $ 352,747  $ 352,696  $ 51  —  %
Sales and marketing 53,372  55,279  (1,907) (3.4) 161,695  159,372  2,323  1.5 
General and administrative 15,146  14,657  489  3.3  47,814  46,182  1,632  3.5 
Total operating expenses $ 196,567  $ 188,668  $ 7,899  4.2  % $ 562,256  $ 558,250  $ 4,006  0.7  %
Research and development
    Research and development expenses consist primarily of personnel costs, prototype expenses, third-party engineering and contractor support costs, and an allocated portion of facility and IT costs including depreciation. Our research and development efforts are focused on maintaining and developing additional functionality for our existing products and on new product development, including new releases and upgrades to our EOS software and applications. We plan to continue to expand the capabilities of our cloud networking platform, introduce new products and features and build upon our technology leadership.
    Research and development expenses increased $9.3 million, or 7.8% in the three months ended September 30, 2020 compared to the same period in 2019. The increase was primarily due to an increase of $3.7 million in new product introduction costs in the current period combined with an increase of $5.6 million in personnel costs, which included an increase in stock-based compensation costs of $8.0 million, partially offset by a decrease in corporate bonus expense. For the nine months ended September 30, 2020, research and development expenses remained relatively constant compared to the same period in 2019, resulting from an increase of $5.6 million in personnel costs, an increase of $7.3 million in acquisition-related costs, and an offsetting decrease of $12.8 million in new product introduction costs in the nine months ended September 30, 2020.
Sales and marketing
    Sales and marketing expenses consist primarily of personnel costs, marketing, trade shows, and other promotional activities, and an allocated portion of facility and IT costs, including depreciation. We continue to prudently manage our sales and marketing spend in fiscal 2020 with some targeted investment in strategic sales activities and, accordingly, expect a marginal increase in sales and marketing expenses in fiscal 2020 compared to fiscal 2019.
    Sales and marketing expenses decreased $1.9 million, or 3.4%, for the three months ended September 30, 2020 compared to the same period in 2019. The decrease primarily resulted from COVID-19 related reductions in marketing and travel expenses, partially offset by increased salaries and stock-based compensation due to increased headcount. The increase of $2.3 million, or 1.5%, in the nine months ended September 30, 2020 compared to the same period in 2019, was primarily driven by an increase in salaries and stock-based compensation due to increased headcount, and an increase of $3.7 million in acquisition-related expenses. This increase was partially offset by a reduction in travel expenses and other sales and marketing activities due to COVID-19.
General and administrative
    General and administrative expenses consist primarily of personnel costs and professional services fees. General and administrative personnel costs include those for our executive, finance, human resources and legal functions. Our professional services fees are primarily due to external legal, accounting and tax services.
    General and administrative expenses increased $0.5 million, or 3.3%, in the three months ended September 30, 2020, and $1.6 million, or 3.5%, in the nine months ended September 30, 2020 compared to the same periods in 2019. The increase in each period was primarily due to acquisition-related expenses, partially offset by lower personnel costs. In addition, litigation-related costs decreased in the three and nine months ended September 30, 2020 due to the settlement of our litigation with Optumsoft in December 2019.
Other Income, Net (in thousands, except percentages)
    Other income consists primarily of interest income from our cash, cash equivalents and marketable securities, gains and losses on our investments in privately-held companies, and foreign currency transaction gains and losses. We expect that interest income from our fixed-income marketable securities will decline for the year ending December 31, 2020 as a result of lower interest rates in 2020 compared to 2019 and the sale of marketable securities in the three months ended September 30,
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2020. In addition, we expect other income may fluctuate in the future as a result of the re-measurement of our private company equity investments upon the occurrence of observable price changes and/or impairments, changes in returns on our cash and cash equivalents and marketable securities, and foreign currency exchange rate fluctuations.
Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 Change in 2020 2019 Change in
  $ $ $ % $ $ $ %
Other income, net:
Interest income $ 4,319  $ 13,446  $ (9,127) (67.9) % $ 24,649  $ 38,451  $ (13,802) (35.9) %
Gain on sale of marketable securities
9,432  —  9,432  100.0  9,432  —  9,432  100.0 
Gain on investments in privately-held companies —  4,277  (4,277) (100.0) —  5,427  (5,427) (100.0)
Other income (expense), net (527) 1,446  (1,973) (136.4) (444) 1,435  (1,879) (130.9)
Total other income, net $ 13,224  $ 19,169  $ (5,945) (31.0) % $ 33,637  $ 45,313  $ (11,676) (25.8) %
    The unfavorable change in Other income, net, during the three and nine months ended September 30, 2020 as compared to the same periods in 2019 was primarily driven by a decrease in interest income from our fixed-income marketable securities caused by reduced interest rates. In addition, we recorded a gain on our investments in privately-held companies in the nine months ended September 30, 2019, which did not recur in the current period. The decrease in each period was partially offset by a realized gain of $9.4 million from the sale of our marketable securities in the three months ended September 30, 2020.
Provision for Income Taxes (in thousands, except percentages)
    We operate in a number of tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may also be subject to U.S. income tax. Generally, our U.S. tax obligations are reduced by a credit for foreign income taxes paid on these foreign earnings which avoids double taxation. Our tax expense to date consists of federal, state and foreign current and deferred income taxes.
Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 Change in 2020 2019 Change in
  $ $ $ % $ $ $ %
Income before income taxes $ 201,619  $ 247,775  $ (46,156) (18.6) % $ 538,683  $ 675,098  $ (136,415) (20.2) %
Provision for income taxes 33,244  38,880  (5,636) (14.5) % 87,084  75,923  11,161  14.7  %
Effective tax rate 16.5  % 15.7  % 16.2  % 11.2  %
    For the three and nine months ended September 30, 2020, we recorded expenses of $33.2 million and $87.1 million for income taxes, respectively. For the three and nine months ended September 30, 2019, we recorded expenses of $38.9 million and $75.9 million, respectively. Income taxes for the three and nine months ended September 30, 2020 were attributable to the overall decrease in worldwide earnings offset by lower tax benefits realized from stock-based compensation.

Liquidity and Capital Resources
    Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As of September 30, 2020, our total balance of cash, cash equivalents and marketable securities was approximately $2.8 billion, of which approximately $409.5 million was held outside the U.S. in our foreign subsidiaries. 
    Our cash, cash equivalents and marketable securities are held for working capital purposes. Our marketable securities investment portfolio is primarily invested in highly rated securities with the primary objective of minimizing the potential risk of principal loss. We plan to continue to invest for long-term growth. We believe that our existing balances of cash, cash
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equivalents and marketable securities together with cash generated from operations will be sufficient to meet our working capital requirements and our growth strategies for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales a