000159653212/312022Q3FALSE305,572,616On 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. 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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, 2022
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, a 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 26, 2022 was 305,572,616.



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, 2022 December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 716,253  $ 620,813 
Marketable securities 2,263,818  2,787,502 
Accounts receivable, net 651,512  516,509 
Inventories 1,100,550  650,117 
Prepaid expenses and other current assets 299,545  237,735 
Total current assets 5,031,678  4,812,676 
Property and equipment, net 96,449  78,634 
Acquisition-related intangible assets, net 131,520  93,555 
Goodwill 271,018  188,397 
Investments 39,677  20,247 
Operating lease right-of-use assets 58,205  65,182 
Deferred tax assets 473,808  442,295 
Other assets 59,655  33,443 
TOTAL ASSETS $ 6,162,010  $ 5,734,429 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 278,469  $ 202,636 
Accrued liabilities 240,609  226,643 
Deferred revenue 607,189  593,578 
Other current liabilities 128,645  86,972 
Total current liabilities 1,254,912  1,109,829 
Income taxes payable 82,167  69,916 
Operating lease liabilities, non-current 47,067  56,527 
Deferred revenue, non-current 333,855  335,734 
Deferred tax liabilities, non-current —  129,074 
Other long-term liabilities 58,791  54,749 
TOTAL LIABILITIES 1,776,792  1,755,829 
Commitments and contingencies (Note 5)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.0001 par value—100,000 shares authorized and no shares issued and outstanding as of September 30, 2022 and December 31, 2021
—  — 
Common stock, $0.0001 par value—1,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 305,515 and 307,681 shares issued and outstanding as of September 30, 2022 and December 31, 2021
31 31 
Additional paid-in capital 1,717,605 1,530,046 
Retained earnings 2,714,711 2,456,823 
Accumulated other comprehensive income (loss) (47,129) (8,300)
TOTAL STOCKHOLDERS’ EQUITY 4,385,218  3,978,600 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 6,162,010  $ 5,734,429 
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
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,
2022 2021 2022 2021
Revenue:
Product $ 1,008,689  $ 604,160  $ 2,619,213  $ 1,709,772 
Service 168,112  144,537  486,545  413,806 
Total revenue 1,176,801  748,697  3,105,758  2,123,578 
Cost of revenue:
Product 432,569  243,342  1,102,012  687,554 
Service 34,252  26,740  96,656  77,959 
Total cost of revenue 466,821  270,082  1,198,668  765,513 
Gross profit 709,980  478,615  1,907,090  1,358,065 
Operating expenses:
Research and development 187,807  153,093  537,971  428,873 
Sales and marketing 81,401  69,740  241,512  211,385 
General and administrative 23,425  22,488  69,420  58,856 
Total operating expenses 292,633  245,321  848,903  699,114 
Income from operations 417,347  233,294  1,058,187  658,951 
Other income (expense), net 6,817  1,346  37,764  4,640 
Income before income taxes 424,164  234,640  1,095,951  663,591 
Provision for income taxes 70,165  10,335  170,594  62,032 
Net income $ 353,999  $ 224,305  $ 925,357  $ 601,559 
Net income per share (1):
Basic $ 1.16  $ 0.73  $ 3.02  $ 1.96 
Diluted $ 1.13  $ 0.70  $ 2.92  $ 1.89 
Weighted-average shares used in computing net income per share (1):
Basic 304,931  307,456  306,576  306,176 
Diluted 314,401  319,636  316,745  318,976 
(1) Prior periods have been adjusted to reflect the four-for-one stock split effected in the form of a stock dividend in November 2021.

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


2

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 353,999  $ 224,305  $ 925,357  $ 601,559 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (2,574) (747) (5,306) (1,097)
Net change in unrealized gains (losses) on available-for-sale securities (3,236) (118) (33,523) (1,145)
Other comprehensive income (loss) (5,810) (865) (38,829) (2,242)
Comprehensive income $ 348,189  $ 223,440  $ 886,528  $ 599,317 

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

3

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Stockholders Equity
(Unaudited, in thousands)
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
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 304,455  $ 30  $ 1,638,787  $ 2,408,294  $ (41,319) $ 4,005,792  307,681  $ 31  $ 1,530,046  $ 2,456,823  $ (8,300) $ 3,978,600 
Net income —  —  —  353,999  —  353,999  —  —  —  925,357  —  925,357 
Other comprehensive loss, net of tax —  —  —  —  (5,810) (5,810) —  —  —  —  (38,829) (38,829)
Stock-based compensation —  —  65,477  —  —  65,477  —  —  165,980  —  —  165,980 
Issuance of common stock in connection with employee equity incentive plans 1,593  20,081  —  —  20,082  4,451  43,072  —  —  43,073 
Repurchase of common stock (479) —  —  (47,582) —  (47,582) (6,433) (1) —  (667,469) —  (667,470)
Tax withholding paid for net share settlement of equity awards (54) —  (6,740) —  —  (6,740) (217) —  (25,542) —  —  (25,542)
Common stock issued for business acquisition —  —  —  —  —  —  33  —  4,049  —  —  4,049 
Balance at end of period 305,515  $ 31  $ 1,717,605  $ 2,714,711  $ (47,129) $ 4,385,218  305,515  $ 31  $ 1,717,605  $ 2,714,711  $ (47,129) $ 4,385,218 

Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Common Stock   Additional
Paid-In Capital (1)
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Common Stock   Additional
Paid-In Capital (1)
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Shares (1) Amount (1) Shares (1) Amount (1)
Balance at beginning of period 306,660  $ 31  $ 1,395,436  $ 2,303,513  $ (1,139) $ 3,697,841  304,696  $ 30  $ 1,292,409  $ 2,027,614  $ 238  $ 3,320,291 
Net income —  —  —  224,305  —  224,305  —  —  —  601,559  —  601,559 
Other comprehensive loss, net of tax —  —  —  —  (865) (865) —  —  —  —  (2,242) (2,242)
Stock-based compensation —  —  53,135  —  —  53,135  —  —  135,632  —  —  135,632 
Issuance of common stock in connection with employee equity incentive plans 2,436  —  29,270  —  —  29,270  5,948  56,153  —  —  56,154 
Repurchase of common stock (1,504) —  —  (134,157) —  (134,157) (2,972) —  —  (235,512) —  (235,512)
Tax withholding paid for net share settlement of equity awards (48) —  (4,269) —  —  (4,269) (128) —  (10,622) —  —  (10,622)
Balance at end of period 307,544  $ 31  $ 1,473,572  $ 2,393,661  $ (2,004) $ 3,865,260  307,544  $ 31  $ 1,473,572  $ 2,393,661  $ (2,004) $ 3,865,260 
(1) Prior periods have been adjusted to reflect the four-for-one stock split effected in the form of a stock dividend in November 2021.

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
4

ARISTA NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended September 30,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 925,357  $ 601,559 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other 45,169  37,864 
Stock-based compensation 165,980  135,632 
Noncash lease expense 13,837  12,738 
Deferred income taxes (148,355) (573)
Unrealized gain on equity investments (24,121) — 
Amortization of investment premiums 14,167  19,193 
Changes in operating assets and liabilities:
Accounts receivable, net (129,947) (6,050)
Inventories (449,792) (95,997)
Prepaid expenses and other current assets (68,996) (71,300)
Other assets (17,899) (2,915)
Accounts payable 73,480  (1,075)
Accrued liabilities 14,690  31,316 
Deferred revenue (1,245) 149,613 
Income taxes payable 41,074  (3,565)
Other liabilities (1,059) (15,820)
Net cash provided by operating activities 452,340  790,620 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 1,277,821  1,158,723 
Purchases of marketable securities (973,489) (1,974,853)
Purchases of property and equipment (34,184) (55,455)
Business acquisitions, net of cash acquired (145,087) — 
Escrow receipts from past business acquisitions —  1,299 
Investments and notes receivable in privately-held companies (12,691) (10,684)
Proceeds from sale of marketable securities 186,782  19,607 
Net cash provided by (used in) investing activities 299,152  (861,363)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under equity plans 43,073  56,154 
Tax withholdings paid on behalf of employees for net share settlement (25,542) (10,622)
Repurchases of common stock (667,470) (235,512)
Net cash used in financing activities (649,939) (189,980)
Effect of exchange rate changes (6,090) (1,513)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
95,463  (262,236)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period 625,050  897,454 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period $ 720,513  $ 635,218 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Right-of-use assets obtained in exchange for new operating lease liabilities $ 7,300  $ 4,824 
Property and equipment included in accounts payable and accrued liabilities 5,704  3,849 
Common stock issued for business acquisition 4,049  — 
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
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 enterprises. Our cloud networking solutions consist of our Extensible Operating System ("EOS"), a set of network applications and our 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, 2022, are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of December 31, 2021 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, 2021, filed with the SEC on February 15, 2022.
Use of Estimates
    The preparation of the accompanying 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, valuation of inventory and contract manufacturer/supplier liabilities, accounting for income taxes, including the recognition of deferred tax assets and liabilities, valuation allowance on deferred tax assets and reserves for uncertain tax positions, revenue recognition and deferred revenue, allowance for doubtful accounts, sales rebates and return reserves, valuation of goodwill and acquisition-related intangible assets, estimate of useful lives of long-lived assets including intangible assets, and the recognition and measurement of contingent liabilities. We evaluate our estimates and assumptions based on historical experience and other factors and adjust these estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from these estimates.
Risks and Uncertainties
    Global economic and business activities continue to face widespread macroeconomic uncertainties, including supply chain and labor shortages, inflation and monetary policy shifts, recession risks, the ongoing global coronavirus ("COVID-19") pandemic and potential disruptions from the Russia-Ukraine conflict and the U.S. trade war with China.
    Our contract manufacturers and suppliers have experienced workforce disruptions, delays in component sourcing, production and export of their products and component shortages and increased component costs, which have disrupted our supply chain and have impacted and will likely continue to impact our ability to supply products to our customers on a timely basis. While overall demand remains strong across our customers base, we believe ongoing supply disruptions combined with other supply chain related constraints could impact our ability to fulfill this increased demand and as a result could negatively impact our business in future periods. In addition, inflation pressure in our supply chain and scarcity of some materials needed to build our products have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin. Our operating cash flows have also been and may continue to be negatively impacted by increased component inventories on hand or at our contract manufacturers, awaiting supply of a limited number of scarce components necessary to build and ship the completed product. The extent of the impact 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, the impact to
6

our customers, partners, employees, contract manufacturers and supply chain, all of which continue to evolve and are unpredictable. Management continues to actively monitor the impact of these macroeconomic factors 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 these factors may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.
Recently Adopted Accounting Pronouncements
    In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires companies to recognize and measure contract assets and contract liabilities relating to contracts with customers that are acquired in a business combination in accordance with ASC 606. Under previous GAAP, an acquirer generally recognized assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 results in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this ASU as of January 1, 2022 on a prospective basis and the adoption impact was immaterial to the condensed consolidated financial statements. The standard did not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date.
2.    Fair Value Measurements
    Assets measured at fair values on a recurring basis
    We measure and report our cash equivalents, restricted cash, marketable equity securities and available-for-sale debt securities at fair value on a recurring basis. The following tables summarize the fair value of these financial assets by significant investment category and their levels within the fair value hierarchy (in thousands):
7

September 30, 2022 December 31, 2021
Level I Level II Level III Total Level I Level II Level III Total
Financial Assets:
Cash Equivalents:
Money market funds $ 353,987  $ —  $ —  $ 353,987  $ 221,382  $ —  $ —  $ 221,382 
Certificate of deposits(1)
—  14,556  —  14,556  —  —  —  — 
U.S. government notes 23,368  —  —  23,368  —  —  —  — 
Agency securities —  46,000  —  46,000  —  —  —  — 
377,355  60,556  —  437,911  221,382  —  —  221,382 
Marketable Securities:
Commercial paper —  3,487  —  3,487  —  141,274  —  141,274 
Certificate of deposits(1)
—  11,422  —  11,422  —  44,931  —  44,931 
U.S. government notes 1,169,899  —  —  1,169,899  1,057,810  —  —  1,057,810 
Corporate bonds —  883,784  —  883,784  —  1,252,226  —  1,252,226 
Agency securities —  179,473  —  179,473  —  291,261  —  291,261 
Marketable equity securities(2)
15,753  —  —  15,753  —  —  —  — 
1,185,652  1,078,166  —  2,263,818  1,057,810  1,729,692  —  2,787,502 
Other Assets:
Money market funds - restricted 4,260  —  —  4,260  4,237  —  —  4,237 
Total Financial Assets $ 1,567,267  $ 1,138,722  $ —  $ 2,705,989  $ 1,283,429  $ 1,729,692  $ —  $ 3,013,121 
______________________________________
(1) As of September 30, 2022 and December 31, 2021, all of our certificates of deposits were domestic deposits.
(2) The $15.8 million represents the fair value of marketable equity securities as of September 30, 2022. This amount includes $8.3 million that was reclassified from Investments on our condensed consolidated balance sheet following the commencement of public market trading of the issuer in January 2022. This publicly-traded equity investment generated an unrealized gain of $7.5 million for the nine months ended September 30, 2022, and an unrealized loss of $0.9 million for the three months ended September 30, 2022. The unrealized gains and losses are included in Other income (expense), net on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 3. Financial Statements Details.
    During the three and nine months ended on September 30, 2022, the Company did not make any transfers between the levels of the fair value hierarchy.
    Marketable debt securities
    The following table summarizes the amortized cost, unrealized gains and losses, and fair value of our debt securities measured at fair value on a recurring basis (in thousands):
8

September 30, 2022 December 31, 2021
Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Commercial paper $ 3,487  $ —  $ —  $ 3,487  $ 141,274  $ —  $ —  $ 141,274 
U.S. government 1,187,901  —  (18,002) 1,169,899  1,060,716  (2,909) 1,057,810 
Corporate bonds 902,133  —  (18,349) 883,784  1,255,149  105  (3,028) 1,252,226 
Agency securities 182,771  —  (3,298) 179,473  291,558  36  (333) 291,261 
Total $ 2,276,292  $ —  $ (39,649) $ 2,236,643  $ 2,748,697  $ 144  $ (6,270) $ 2,742,571 
    For debt securities in unrealized loss positions, it is not likely that we will be required to sell such securities before recovery of their amortized cost basis nor do we have the intent to sell such securities before maturity; we invest in debt securities that have maximum maturities of two years and are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these marketable securities, the more susceptible they are to changes in market interest rates and bond yields. Given the short-term and conservative nature of our portfolio, the unrealized losses are not related to credit risk; therefore, we did not recognize any credit losses or non-credit-related impairments related to our available-for-sale marketable debt securities for the three and nine months ended September 30, 2022. All unrealized losses were recognized in other comprehensive income (loss). Realized losses were immaterial for the three and nine months ended September 30, 2022.
    The following table is an analysis of our marketable debt securities in unrealized loss positions (in thousands):
September 30, 2022
Unrealized Losses within 12 months Unrealized Losses 12 months or greater Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. government notes $ 877,442  $ (13,026) $ 292,554  $ (4,976) $ 1,169,996  $ (18,002)
Corporate bonds 625,577  (13,314) 258,208  (5,035) 883,785  (18,349)
Agency securities 155,296  (2,807) 24,176  (491) 179,472  (3,298)
Total $ 1,658,315  $ (29,147) $ 574,938  $ (10,502) $ 2,233,253  $ (39,649)
     As of September 30, 2022, we had no marketable debt securities with contractual maturities that exceed 24 months. The fair values of marketable debt securities, by remaining contractual maturities, are as follows (in thousands):
September 30, 2022
Fair Value
Due in 1 year or less $ 1,773,158 
Due in 1 to 2 years 463,485 
Total debt securities $ 2,236,643 
    The weighted-average remaining duration of our marketable debt securities is approximately 0.6 years as of September 30, 2022. As we view these marketable debt securities as available to support current operations, we classify marketable debt securities with maturities beyond 12 months as current assets under the caption "Marketable securities" on the condensed consolidated balance sheets.
Assets measured at fair value on a non-recurring basis
    Non-Marketable Equity Securities
    We have non-marketable equity securities in privately-held companies that do not have readily-determinable fair values. These equity securities are included in Investments on the condensed consolidated balance sheets. Their initial cost is adjusted to fair value on a non-recurring basis based on observable price changes from orderly transactions of identical or similar securities 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 these securities. In addition, the valuation requires management judgment due to the absence of market price and lack of liquidity.
9

    We did not record any realized gains or losses for our non-marketable equity securities measured at fair value on a non-recurring basis during the three and nine months ended September 30, 2022 and September 30, 2021. We recorded unrealized gains of $1.7 million and $16.7 million on non-marketable equity securities based on observable price changes from orderly transactions of identical or similar securities in three and the nine months ended September 30, 2022. We recorded immaterial unrealized losses in the three and nine months ended September 30, 2022. We evaluate our non-marketable equity securities for impairment at each reporting period via a qualitative assessment with various potential impairment indicators, including, but not limited to, an assessment of a significant adverse change in the economic environment, significant adverse changes in the general market condition of the geographies and industries in which our investees operate, and other publicly-available information that affected the value of the its non-marketable equity securities.
    The following table summarizes the activity related to our non-marketable equity securities as of September 30, 2022 and December 31, 2021 (in thousands):
September 30, 2022 December 31, 2021
Cost of investments (1) $ 23,625  $ 14,933 
Cumulative impairment and downward adjustment (629) — 
Cumulative upward adjustment (1) 16,681  5,314 
Carrying amount of investments $ 39,677  $ 20,247 
(1) During the nine months ended September 30, 2022, $3.0 million previously included in the Cost of investments and $5.3 million previously included in the Cumulative upward adjustment, or $8.3 million in aggregate, were reclassified from Investments to Marketable securities on our condensed consolidated balance sheet following the commencement of public market trading of the issuer. There was no such activity in the three months ended September 30, 2022.
3.    Financial Statements Details
Cash, Cash Equivalents and Restricted Cash
    The reconciliation of cash, cash equivalents and restricted cash reported on the unaudited condensed consolidated balance sheets to the total of the same such amounts in the unaudited condensed consolidated statements of cash flows is as follows (in thousands):
September 30, 2022 December 31, 2021
Cash and cash equivalents $ 716,253  $ 620,813 
Restricted cash included in other assets 4,260  4,237 
 Total cash, cash equivalents and restricted cash $ 720,513  $ 625,050 
Accounts Receivable, net
    Accounts receivable, net consists of the following (in thousands):
September 30, 2022 December 31, 2021
Accounts receivable $ 660,108  $ 521,597 
Allowance for doubtful accounts (215) (132)
Product sales rebate and returns reserve (8,381) (4,956)
   Accounts receivable, net $ 651,512  $ 516,509 
Inventories
    Inventories consist of the following (in thousands):
September 30, 2022 December 31, 2021
Raw materials $ 629,058  $ 316,737 
Finished goods 471,492  333,380 
   Total inventories $ 1,100,550  $ 650,117 
10

Prepaid Expenses and Other Current Assets
    Prepaid expenses and other current assets consist of the following (in thousands):
September 30, 2022 December 31, 2021
Inventory deposits $ 121,916  $ 46,311 
Prepaid income taxes 1,409  8,977 
Other current assets 142,627  163,916 
Other prepaid expenses and deposits 33,593  18,531 
   Total prepaid expenses and other current assets $ 299,545  $ 237,735 
Property and Equipment, net
    Property and equipment, net consists of the following (in thousands):
September 30, 2022 December 31, 2021
Land $ 40,601  $ 40,145 
Equipment and machinery 119,379  90,915 
Computer hardware and software 51,254  44,083 
Leasehold improvements
30,060  30,502 
Furniture and fixtures 3,573  3,634 
Construction-in-process 1,997  2,378 
    Property and equipment, gross 246,864  211,657 
Less: accumulated depreciation (150,415) (133,023)
    Property and equipment, net $ 96,449  $ 78,634 
    Depreciation expense was $6.9 million and $4.9 million for the three months ended September 30, 2022 and 2021, respectively, and $18.7 million and $14.6 million for the nine months ended September 30, 2022 and 2021, respectively.
Accrued Liabilities
    Accrued liabilities consist of the following (in thousands):
September 30, 2022 December 31, 2021
Accrued payroll related costs $ 82,791  $ 99,571 
Accrued manufacturing costs 103,098  80,213 
Accrued product development costs 25,282  22,188 
Accrued warranty costs 14,314  10,414 
Other 15,124  14,257 
   Total accrued liabilities $ 240,609  $ 226,643 
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,
2022 2021
Warranty accrual, beginning of period $ 10,414  $ 9,314 
Liabilities accrued for warranties issued during the period 13,887  8,643 
Warranty costs incurred during the period (9,987) (8,429)
Warranty accrual, end of period $ 14,314  $ 9,528 
11

Contract Assets
    The following table summarizes the beginning and ending balances of our contract assets included in "Prepaid and other current assets" on the condensed consolidated balance sheets (in thousands):
Nine Months Ended September 30,
2022
Contract assets, beginning balance $ 24,388 
Contract assets, ending balance 13,525 
Contract Liabilities, Deferred Revenue and Other Performance Obligations    
Contract Liabilities
    A contract liability is recognized when we have received customer payments in advance of our satisfaction of a performance obligation under a cancellable contract. The following table summarizes the activity related to our contract liabilities (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Contract liabilities, beginning balance $ 101,600  $ 83,354  $ 93,382  $ 85,957 
Less: Revenue recognized from beginning balance (9,173) (8,763) (29,296) (27,251)
Less: Beginning balance reclassified to deferred revenue (9,898) (3,996) (2,998) (2,443)
Add: Contract liabilities recognized 18,247  16,976  39,688  31,308 
Contract liabilities, ending balance $ 100,776  $ 87,571  $ 100,776  $ 87,571 
    As of September 30, 2022 and December 31, 2021, $42.2 million and $38.7 million of our contract liabilities, respectively, were included in "Other current liabilities" with the remaining balances included in "Other long-term liabilities" on the condensed consolidated balance sheets.
Deferred Revenue
    Deferred revenue is comprised mainly of unearned revenue related to multi-year post-contract support ("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,
2022 2021 2022 2021
Deferred revenue, beginning balance
$ 1,033,490  $ 746,090  $ 929,312  $ 650,827 
Less: Revenue recognized from beginning balance (234,515) (164,188) (457,309) (327,300)
Add: Deferral of revenue in current period, excluding amounts recognized during the period 142,069  218,538  469,041  476,913 
Deferred revenue, ending balance $ 941,044  $ 800,440  $ 941,044  $ 800,440 
Other Performance Obligations
    Other performance obligations include unbilled contract revenue for services and products that will be recognized in future periods. As of September 30, 2022, other performance obligations of $178.6 million were comprised mainly of unbilled multi-year PCS contract amounts that will be recognized as revenue in future periods. In addition, as of September 30, 2022 the company had entered into $844.2 million of binding contractual agreements with certain customers that are primarily related to future product shipments.
Revenue from Total Remaining Performance Obligations
    Revenue from total remaining performance obligations represents contract liabilities, deferred revenue and unbilled contract revenue that will be recognized in future periods. As of September 30, 2022, approximately $1,220.5 million of revenue is expected to be recognized from remaining performance obligations, of which approximately 82% is expected to be
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recognized over the next two years and approximately 18% is expected to be recognized during the third to the fifth year. These amounts do not include the $844.2 million of binding contractual agreements related primarily to future product shipments outlined above. As of September 30, 2022, it is expected that the majority of the amounts allocated to these specific performance obligations will be recognized as revenue upon product shipment over the next two years; however, given the current uncertain supply chain environment and industry wide supply constraints, we may experience manufacturing and shipment delays or cancellations related to these performance obligations, which could impact revenue recognition.
Other Income (Expense), net
    Other income (expense), net consists of the following (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Interest income $ 6,929  $ 1,636  $ 13,783  $ 5,553 
Unrealized gain on equity investments 708  —  24,121  — 
Other income (expense), net (820) (290) (140) (913)
    Total $ 6,817  $ 1,346  $ 37,764  $ 4,640 
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4.    Acquisition, Goodwill and Acquisition-Related Intangible Assets
Acquisitions
    During the nine months ended September 30, 2022, we completed two acquisitions of private companies for total consideration of $158.9 million including $4.0 million in common stock and the remainder in cash. The purchase prices included $62.3 million of intangible assets, $82.6 million of goodwill and $14.0 million of net tangible assets acquired. We also incurred certain acquisition-related expenses of $4.7 million, which primarily consisted of retention bonuses to continuing employees as well as professional and consulting fees.
    The 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 sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands, except years):
Acquisition Date Fair Value Weighted Average Estimated Useful Life (in years)
Developed technology $ 30,200  5.7
Customer relationships 28,700  7.0
Trade name 3,400  3.0
Total intangible assets acquired $ 62,300 
Goodwill
    The changes in the carrying values of goodwill for the three and nine months ended September 30, 2022 are as follows (in thousands):
Amount
Balance at December 31, 2021 $ 188,397 
Additions related to the acquisition completed in January 2022 28,518 
Balance at March 31, 2022 $ 216,915 
Additions related to the acquisition completed in June 2022 56,530 
Measurement-period adjustments 49 
Balance at June 30, 2022 $ 273,494 
Measurement-period adjustments (2,476)
Balance at September 30, 2022 $ 271,018 
Acquisition-Related Intangible Assets
    Acquisition-related intangible assets were as follows (in thousands, except years):
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life (in years)
December 31, 2021
Additions September 30, 2022
December 31, 2021
Amortization September 30, 2022
December 31, 2021
September 30, 2022
Developed technology $ 124,730  $ 30,200  $ 154,930  $ (53,663) $ (18,553) $ (72,216) $ 71,067  $ 82,714  4.5
Customer relationships 25,920  28,700  54,620  (7,899) (4,272) (12,171) 18,021  42,449  5.9
Trade name 8,990  3,400  12,390  (4,693) (1,340) (6,033) 4,297  6,357  2.8
Others 5,720  —  5,720  (5,550) (170) (5,720) 170  —  0.0
Total $ 165,360  $ 62,300  $ 227,660  $ (71,805) $ (24,335) $ (96,140) $ 93,555  $ 131,520  4.9
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    Amortization expense related to acquisition-related intangible assets was $9.3 million, and $7.3 million for the three months ended September 30, 2022 and 2021, and $24.3 million and $22.1 million for the nine months ended September 30, 2022 and 2021, respectively.
    As of September 30, 2022, future estimated amortization expense related to the acquisition-related intangible assets is as follows (in thousands):
Future Amortization Expense
Remainder of 2022 $ 9,315 
2023 33,438 
2024 26,759 
2025 19,642 
2026 17,260 
Thereafter 25,106 
Total $ 131,520 
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5.    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. A significant portion of our purchase orders to our contract manufacturers for finished products consists of non-cancellable purchase commitments. In addition, we purchase strategic component inventory from certain suppliers under non-cancellable purchase commitments, including integrated circuits, which are consigned to our contract manufacturers. As of September 30, 2022, we had non-cancellable purchase commitments of $4.3 billion, of which $3.1 billion have confirmed receipt dates within 12 months, and $1.2 billion have confirmed receipt dates greater than 12 months. These open purchase orders are considered enforceable and legally binding, and while we may have some limited ability to reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, this can only occur with the agreement of the related supplier.
    We also had deposits to our contract manufacturers to secure our purchase commitments in the amount of $124.7 million and $49.1 million as of September 30, 2022 and December 31, 2021, respectively, which were recorded within prepaid expenses and other current assets, as well as other assets in the 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 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
    WSOU Investments, LLC
    On November 25, 2020, WSOU Investments LLC ("WSOU") filed a lawsuit against us in the Western District of Texas asserting that certain of our products infringe three WSOU patents. WSOU's allegations are directed to certain features of our wireless and switching products. WSOU seeks remedies including monetary damages, attorney's fees and costs. On February 4, 2021, we filed an answer denying WSOU's allegations. On November 5, 2021, the case was transferred to the Northern District of California. On March 30, 2022, WSOU dismissed one of the patents with prejudice, removing Arista wireless products from those accused of infringement. On July 1, 2022, the court stayed the case pending the resolution of an inter partes review of one of the patents-in-suit.
    We intend to vigorously defend against the claims brought against us by WSOU; however, we cannot be certain that any of WSOU's claims will be resolved in our favor, regardless of the merits of those claims. Any adverse litigation ruling could result in a significant damages award against us and injunctive relief.
    With respect to the legal proceedings described above, it is our belief that while a loss is not probable, it may be reasonably possible. Further, at this stage in the litigation, any possible loss or range of loss cannot be estimated; however, the outcome of litigation is inherently uncertain. Therefore, if this legal matter were resolved against us in a reporting period for a material amount, our consolidated financial statements for that reporting period could be materially adversely affected.
    Other matters
    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 both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of September 30, 2022, 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.
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6.    Stockholders’ Equity and Stock-Based Compensation
Stock Repurchase Program
    In April 2019, our board of directors authorized a $1.0 billion stock repurchase program (the "Repurchase Program"). This authorization allowed us to repurchase shares of our common stock over three years, and we completed our repurchases under the Repurchase Program during the fourth quarter of 2021. In the fourth quarter of 2021, our board of directors authorized an additional $1.0 billion stock repurchase program (the “New Repurchase Program”), which allows us to repurchase shares of our common stock to 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 Exchange Act, or a combination of the foregoing. The New Repurchase Program commenced in November 2021 and expires on the three-year anniversary thereof. The New Repurchase Program 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, 2022, the remaining authorized amount for stock repurchases under this program was approximately $259.6 million.
    A summary of the stock repurchase activity under the New Repurchase Program for the nine months ended September 30, 2022 is as follows (in thousands, except per share amounts):
Nine Months Ended
September 30, 2022
Aggregate purchase price $ 667,470 
Shares repurchased 6,433 
Average price paid per share $ 103.75 
    The aggregate purchase price of repurchased shares of our common stock is recorded as a reduction to retained earnings in our unaudited condensed consolidated statements of stockholders' equity. All shares repurchased have been retired.
Equity Award Plan Activities
2014 Equity Incentive Plan
    In April 2014, our board of directors and stockholders approved the 2014 Equity Incentive Plan (the “2014 Plan”), effective on the first day that our common stock was publicly traded, and simultaneously terminated the 2004 and 2011 equity plans as to future grants; however, these plans will continue to govern the terms and conditions of the outstanding options previously granted thereunder.
    Awards granted under the 2014 Plan could be in the form of Incentive Stock Options (“ISOs”), Nonstatutory Stock Options (“NSOs”), Restricted Stock Units (“RSUs”), Restricted Stock Awards (“RSAs”) or Stock Appreciation Rights (“SARs”). The number of shares available for grant and issuance under the 2014 Plan increases automatically on January 1 of each year commencing with 2016 by the number of shares equal to 3% of the outstanding shares of our common stock on the immediately preceding December 31, but not to exceed 50,000,000 shares (the “2014 Plan Evergreen Increase”), unless our board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2022, our board of directors authorized an increase of 9,230,434 shares to the shares available for issuance under the 2014 Plan. As of September 30, 2022, there remained approximately 93.4 million shares available for issuance under the 2014 Plan.
2014 Employee Stock Purchase Plan
    In April 2014, our board of directors and stockholders approved the 2014 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective on the first day that our common stock was publicly traded. The number of shares reserved for issuance under the ESPP increases automatically on January 1 of each year by the number of shares equal to 1% of our shares outstanding on the immediately preceding December 31, but not to exceed 10,000,000 shares, unless our board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2022, our board of directors authorized an increase of 3,076,811 shares to the shares available for issuance under the ESPP. During the nine months ended September 30, 2022, we issued 485,303 shares at a weighted-average purchase price of $50.37 per share under the ESPP. As of September 30, 2022, there remained approximately 20.6 million shares available for issuance under the ESPP.
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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):
Number of
Shares
Underlying
Outstanding Options
Weighted-
Average
Exercise
Price per Share
Weighted-
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
Balance—December 31, 2021 8,685  $ 12.45  2.8 $ 1,140,369 
       Options granted —  — 
       Options exercised (1,938) 9.61 
       Options canceled (177) 15.68 
Balance—September 30, 2022 6,570  $ 13.19  2.1 $ 654,987 
Vested and exercisable—September 30, 2022 5,759  $ 10.91  1.8 $ 587,246 
Restricted Stock Unit (RSU) Activities
    A summary of the RSU activity is 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, 2021 7,821  $ 70.98  1.7 $ 1,124,229 
              RSUs granted 3,469  100.56 
              RSUs vested (2,006) 64.50 
              RSUs forfeited/canceled (389) 76.53 
Unvested balance—September 30, 2022 8,895  $ 83.91  1.8 $ 1,004,214 
Stock-Based Compensation Expense
    The following table summarizes the stock-based compensation expense related to our equity awards (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Cost of revenue $ 2,992  $ 2,002  $ 6,613  $ 5,198 
Research and development 37,698  27,552  93,723  72,673 
Sales and marketing
16,103  12,680  42,039  34,133 
General and administrative 8,684  10,901  23,605  23,628 
              Total stock-based compensation $ 65,477  $ 53,135  $ 165,980  $ 135,632 
    As of September 30, 2022, there were $667.1 million of unamortized compensation costs related to all unvested awards. The unamortized compensation costs are expected to be recognized over a weighted-average period of approximately 3.4 years.
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7.    Net Income Per Share
    The following table sets forth the computation of our basic and diluted net income per share (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 (1) 2022 2021 (1)
Numerator:
Net income $ 353,999  $ 224,305  $ 925,357  $ 601,559 
Denominator:
Weighted-average shares used in computing net income per share, basic 304,931  307,456  306,576  306,176 
Add weighted-average effect of dilutive securities:
    Employee equity awards 9,470  12,180  10,169  12,800 
Weighted-average shares used in computing net income per share, diluted 314,401  319,636  316,745  318,976 
Net income per share:
         Basic $ 1.16  $ 0.73  $ 3.02  $ 1.96 
         Diluted $ 1.13  $ 0.70  $ 2.92  $ 1.89 
(1) Prior periods have been adjusted to reflect the four-for-one stock split effected in the form of a stock dividend in November 2021.
    The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share for the periods presented because their effect would have been anti-dilutive for the periods presented (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 (1) 2022 2021 (1)
Stock options and RSUs 292  36  379  320 
Employee stock purchase plan 295  24  104  48 
       Total 587  60  483  368 
(1) Prior periods have been adjusted to reflect the four-for-one stock split effected in the form of a stock dividend in November 2021.
8.    Income Taxes (in thousands, except percentages)
  Three Months Ended September 30, Nine Months Ended September 30,
  2022 2021 2022 2021
Income before income taxes $ 424,164  $ 234,640  $ 1,095,951 $ 663,591 
Provision for income taxes 70,165  10,335  $ 170,594 62,032 
Effective tax rate 16.5  % 4.4  % 15.6  % 9.3  %
    The increase in the effective tax rates in the three and nine months ended September 30, 2022, as compared to the same periods in 2021, was primarily due to a decrease in the proportion of tax benefits attributable to stock-based compensation versus total pre-tax income.
9.    Geographical Information
    We operate in one reportable segment. The following table represents revenue based on customers’ shipping addresses (in thousands):
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Americas $ 977,674  $ 557,814  $ 2,487,106  $ 1,573,835 
Europe, Middle East and Africa 110,793  121,722  350,136  330,044 
Asia-Pacific 88,334  69,161  268,516  219,699 
   Total revenue $ 1,176,801  $ 748,697  $ 3,105,758  $ 2,123,578 
    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, 2022 December 31, 2021
United States $ 76,578  $ 62,163 
International 19,871  16,471 
   Total $ 96,449  $ 78,634 
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 15, 2022. 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.
Overview
    Arista Networks pioneered data-driven, cognitive cloud networking for large-scale data center and campus workspace environments. Our cloud networking solutions consist of our Extensible Operating System ("EOS"), a set of network applications and our Ethernet switching and routing platforms. We are a leader in cloud networking solutions delivering high performance, scalability, availability, programmability, workload orchestration, automation and visibility. In recent years, we have sought to bring the operational consistency and principles of cloud networking to the broader enterprise and campus markets with our cognitive cloud networking approach, extending EOS across the enterprise data center and campus wired and wireless workspaces.
    We generate revenue primarily from sales of our switching and routing platforms, which incorporate our EOS software, and related network applications. We also generate revenue from post-contract support ("PCS"), which end customers typically purchase in conjunction with our products, and renewals of PCS. We sell our products through both our direct sales force and our channel partners. As of December 31, 2021, we had delivered our cloud networking solutions to over 8,000 end customers worldwide. 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.    
    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. For example, sales to our end customers Microsoft and Meta Platforms in fiscal 2019 collectively represented 40% of our total revenue, whereas sales to our end customer Microsoft in fiscal 2020 and 2021 amounted to 21.5% and 15.0% of our revenues, respectively, with our end customer Meta Platforms representing less than 10% of our revenues in both fiscal 2020 and 2021. In addition, we have experienced and expect the collective revenue contribution from these same customers to return to more elevated levels during fiscal 2022 as they broadly adopt our newer 400 GbE and related networking products. This variability in customer concentration has been linked to the timing of new product deployments and spending cycles with these customers, and we expect continued variability in our customer concentration and timing of sales on a quarterly and annual basis. Furthermore, we typically provide pricing discounts to large end customers, which may result in lower margins for the period in which such sales occur.
    We believe that cloud computing represents a fundamental shift from traditional legacy network architectures. As organizations of all sizes have moved workloads to the cloud, spending on cloud and next-generation data centers has increased rapidly, while traditional legacy IT spending has grown more slowly. 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.
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    The markets for cloud networking solutions are highly competitive and characterized by rapidly changing technology, changing end-customer needs, evolving industry standards, frequent introductions of new products and services, and industry consolidation. We expect competition to intensify in the future as the market for cloud networking expands and existing competitors and new market entrants introduce new products or enhance existing products. Our future success is dependent upon our ability to continue to evolve and adapt to our rapidly changing environment. We must also continue to develop market-leading products and features that address the needs of our existing and new customers, and increase sales in the enterprise data center switching, and campus workspace markets. We intend to continue expanding our sales force and marketing activities in key geographies, as well as 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 ability to rapidly develop 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 with respect to the underlying merchant silicon architecture. The programmability of EOS has allowed us to expand our software applications to address the ever-increasing demands of cloud networking, including workflow automation, network visibility, analytics and network detection and response, and has further allowed us to integrate rapidly with a wide range of third-party applications for virtualization, management, automation, orchestration and network services. 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.
Macroeconomic Update
    Global economic and business activities continue to face widespread macroeconomic uncertainties, including supply chain and labor shortages, inflation and monetary supply shifts, recession risks, the ongoing global coronavirus ("COVID-19") pandemic, and potential disruptions from the Russia-Ukraine conflict and U.S. trade war with China.
    Our manufacturing and supply chain operations continue to experience significant constraints, with component shortages, increased component and supply chain costs and delays broadly impacting the industry as a whole. We continue to work closely with our contract 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 have extended our demand planning horizon, increased our purchase commitments and expect to continue to invest in working capital to address delays in component sourcing and the risk of future supply chain disruptions, but we cannot be certain that such delays or disruptions will not occur. In addition, inflation pressure in our supply chain and scarcity of some materials needed to build our products have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin. Our operating cash-flows have also been and may continue to be negatively impacted by increased component inventories on hand or at our contract manufacturers, awaiting supply of a limited number of scarce components necessary to build and ship the completed product. While overall demand remains strong across our customers base, we believe ongoing supply disruptions combined with other supply chain related constraints, could impact our ability to fulfill this increased demand and as a result could negatively impact our business in future periods. In addition, although our business has experienced limited disruption as a result of the Russia-Ukraine conflict, continued escalation of the conflict may negatively impact the global economy and our future operating results and financial condition.
    Management continues to actively monitor the impact of these macroeconomic factors on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce. The extent of the impact of these factors 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, the impact on our customers, partners, employees, 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 these factors could negatively impact our business. We also believe that any extended or renewed economic disruptions or deterioration in the global economy could have a negative impact on demand from our customers in future periods. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
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Results of Operations
Three and Nine Months Ended September 30, 2022 Compared to Three and Nine Months Ended September 30, 2021
Revenue, Cost of Revenue and Gross Margin (in thousands, except percentages)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 Change in 2022 2021 Change in
$ $ $ % $ $ $ %
Revenue
Product $ 1,008,689  $ 604,160  $ 404,529  67.0  % $ 2,619,213  $ 1,709,772  $ 909,441  53.2  %
Service 168,112  144,537  23,575  16.3  486,545  413,806  72,739  17.6 
Total revenue 1,176,801  748,697  428,104  57.2  3,105,758  2,123,578  982,180  46.3 
Cost of revenue
Product 432,569  243,342  189,227  77.8  1,102,012  687,554  414,458  60.3 
Service 34,252  26,740  7,512  28.1  96,656  77,959  18,697  24.0 
Total cost of revenue 466,821  270,082  196,739  72.8  1,198,668  765,513  433,155  56.6 
Gross profit $ 709,980  $ 478,615  $ 231,365  48.3  % $ 1,907,090  $ 1,358,065  $ 549,025  40.4  %
Gross margin 60.3  % 63.9  % 61.4  % 64.0  %

Revenue by Geography (in thousands, except percentages)
Three Months Ended September 30, Nine Months Ended September 30,
2022 % of Total 2021 % of Total 2022 % of Total 2021 % of Total
Americas $ 977,674  83.1   % $ 557,814  74.5   % $ 2,487,106  80.1   % $ 1,573,835  74.2   %
Europe, Middle East and Africa 110,793  9.4  121,722  16.3  350,136  11.3  330,044  15.5 
Asia-Pacific 88,334  7.5  69,161  9.2  268,516  8.6  219,699  10.3 
Total revenue $ 1,176,801  100.0  % $ 748,697  100.0  % $ 3,105,758  100.0  % $ 2,123,578  100.0  %
Revenue
    Product revenue primarily consists of sales of our switching and routing products, and related network applications. Service revenue is primarily derived from sales of PCS contracts, which are 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 increased $404.5 million, or 67.0%, and $909.4 million, or 53.2%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. These increases reflect strong demand for our switching and routing platforms from across our customer base, including healthy contributions from our large cloud customers. Supply chain constraints continued to impact our revenue performance in these periods and while changes in product deferred revenue impacted the timing of revenue recognition on a quarterly basis, it was not a net contributor to revenue for the nine-month period ended September 30, 2022. In addition, service revenue increased $23.6 million, or 16.3%, and $72.7 million, or 17.6%, in the three and nine months ended September 30, 2022, compared to the same periods in 2021, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand. International revenues represented 16.9% and 19.9% of total revenues in the three and nine months ended September 30, 2022, respectively, decreasing from 25.5% and 25.8% for the same periods in the prior year, which was primarily driven by increased purchases from large global customers in our Americas region. We continued to experience competitive pricing pressure on our products and services.
Cost of Revenue and Gross Margin
    Cost of product revenue primarily consists of amounts paid for inventory to our third-party contract manufacturers and merchant silicon vendors, overhead costs of our manufacturing operations, including freight, and other costs associated with manufacturing our products and managing our inventory and supply chain. Cost of service revenue primarily consists of personnel and other costs associated with our global customer support and services organizations.
    Cost of revenue increased $196.7 million, or 72.8%, and $433.2 million, or 56.6%, for the three and nine months
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ended September 30, 2022, respectively, compared to the same periods in 2021. These increases were primarily driven by a corresponding increase in product and service revenues, combined with an increase in material and logistics costs to mitigate supply chain constraints and to meet customer demand.
    Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including pricing pressure on our products and services due to competition, the mix of sales to large end customers who generally receive lower pricing, the mix of products sold, manufacturing-related costs, including costs associated with supply chain sourcing activities, merchant silicon costs, and excess/obsolete inventory write-downs, including charges for excess/obsolete component inventory held by our contract manufacturers. We expect our gross margin to fluctuate over time, depending on the factors described above.
    Gross margin decreased from 63.9% to 60.3% for the three months ended September 30, 2022, and decreased from 64.0% to 61.4% for the nine months ended September 30, 2022, compared to the same periods in 2021. The decrease in each period was primarily driven by an increased proportion of our sales to larger end customers who generally receive larger discounts and, increased material and logistics costs to mitigate supply chain constraints, partly offset by the impact of fixed overhead costs on a higher 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.
Three Months Ended September 30, Nine Months Ended September 30,
  2022 2021 Change in 2022 2021 Change in
  $ $ $ % $ $ $ %
Operating expenses:
Research and development $ 187,807  $ 153,093  $ 34,714  22.7  % $ 537,971  $ 428,873  $ 109,098  25.4  %
Sales and marketing 81,401  69,740  11,661  16.7  241,512  211,385  30,127  14.3 
General and administrative 23,425  22,488  937  4.2  69,420  58,856  10,564  17.9 
Total operating expenses $ 292,633  $ 245,321  $ 47,312  19.3  % $ 848,903  $ 699,114  $ 149,789  21.4  %
Research and development
    Research and development expenses consist primarily of personnel costs, prototype expenses, third-party engineering costs, and an allocated portion of facility and IT costs. Our research and development efforts are focused on new product development and maintaining and developing additional functionality for our existing products, including new releases and upgrades to our EOS software and applications. We expect our research and development expenses to increase in absolute dollars as we continue to invest in software development in order to expand the capabilities of our cloud networking platform, introduce new products and features, and continue to invest in our technology.
    Research and development expenses increased $34.7 million, or 22.7%, and $109.1 million, or 25.4%, in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases were primarily driven by an increase in personnel costs of $25.1 million and $50.5 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 due to headcount growth. In addition, new product introduction costs increased by $5.5 million and $37.5 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.
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. We expect our sales and marketing expenses to increase in absolute dollars as we continue to expand our sales and marketing efforts worldwide.
    Sales and marketing expenses increased $11.7 million, or 16.7%, and $30.1 million, or 14.3%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, which was primarily caused by increased personnel costs driven by headcount growth.
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General and administrative
    General and administrative expenses consist primarily of personnel costs and professional services costs. General and administrative personnel costs include those for certain executive functions, as well as finance, human resources and legal functions. Our professional services costs are primarily related to external legal, accounting and tax services.
    General and administrative expenses increased $0.9 million, or 4.2%, and $10.6 million, or 17.9%, in the three and nine months ended September 30, 2022 compared to the same periods in 2021. The increase in the nine months ended September 30, 2022 included an increase in personnel costs, and increased legal and professional fees, primarily driven by acquisitions during the first half of 2022.
Other Income (Expense), Net (in thousands, except percentages)
    Other income (expense), net consists primarily of interest income from our cash, cash equivalents and marketable securities, gains and losses on our equity investments in privately-held companies and marketable securities, and foreign currency transaction gains and losses. We expect other income (expense), net may fluctuate in the future as a result of the re-measurement of our equity investments upon the occurrence of observable price changes and/or impairments, changes in interest rates or 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,
  2022 2021 Change in 2022 2021 Change in
  $ $ $ % $ $ $ %
Other income (expense), net:
Interest income $ 6,929  $ 1,636  $ 5,293  323.5  % $ 13,783  $ 5,553  $ 8,230  148.2  %
Unrealized gain (loss) on equity investments 708  —  708  100.0  24,121  —  24,121  100.0 
Other income (expense), net (820) (290) (530) 182.8  (140) (913) 773  (84.7)
Total other income (expense), net $ 6,817  $ 1,346  $ 5,471  406.5  % $ 37,764  $ 4,640  $ 33,124  713.9  %
    The movements in other income (expense), net, during the three and nine months ended September 30, 2022 as compared to the same periods in 2021 were driven by an increase in interest income due to higher interest rates. In addition, we had unrealized gains of $24.1 million in the nine months ended September 30, 2022 related to our equity investments.
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,
  2022 2021 Change in 2022 2021 Change in
  $ $ $ % $ $ $ %
Income before income taxes $ 424,164  $ 234,640  $ 189,524  80.8  % $ 1,095,951  $ 663,591  $ 432,360  65.2  %
Provision for income taxes 70,165  10,335  59,830  578.9  % 170,594  62,032  108,562 </