Arista Networks, Inc. 10-Q

Item 1. Financial Statements (Unaudited) ARISTA NETWORKS, INC. Condensed Consolidated Balance Sheets (Unaudited, in thousands, except par value) March 31, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 635,025 $ 620,813 Marketable securities 2,788,889 2,787,502 Accounts receivable, net of rebates and allowances of $ 3,923 and $ 5,088 , respectively 648,606 516,509 Inventories 694,217 650,117 Prepaid expenses and other current assets 338,437 237,735 Total current assets 5,105,174 4,812,676 Property and equipment, net 87,391 78,634 Acquisition-related intangible assets, net 105,244 93,555 Goodwill 216,915 188,397 Investments 38,625 20,247 Operating lease right-of-use assets 66,671 65,182 Deferred tax assets 446,347 442,295 Other assets 41,819 33,443 TOTAL ASSETS $ 6,108,186 $ 5,734,429 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 204,675 $ 202,636 Accrued liabilities 197,063 226,643 Deferred revenue 778,436 593,578 Other current liabilities 188,831 86,972 Total current liabilities 1,369,005 1,109,829 Income taxes payable 74,497 69,916 Operating lease liabilities, non-current 57,474 56,527 Deferred revenue, non-current 345,310 335,734 Deferred tax liabilities, non-current 51,051 129,074 Other long-term liabilities 57,672 54,749 TOTAL LIABILITIES 1,955,009 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 March 31, 2022 and December 31, 2021 — — Common stock, $ 0.0001 par value— 1,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 308,165 and 307,681 shares issued and outstanding as of March 31, 2022 and December 31, 2021 31 31 Additional paid-in capital 1,590,793 1,530,046 Retained earnings 2,592,854 2,456,823 Accumulated other comprehensive income (loss) ( 30,501 ) ( 8,300 ) TOTAL STOCKHOLDERS’ EQUITY 4,153,177 3,978,600 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 6,108,186 $ 5,734,429 The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited). 1 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share amounts) Three Months Ended March 31, 2022 2021 Revenue: Product $ 724,718 $ 539,145 Service 152,348 128,417 Total revenue 877,066 667,562 Cost of revenue: Product 293,809 218,433 Service 29,412 23,857 Total cost of revenue 323,221 242,290 Gross profit 553,845 425,272 Operating expenses: Research and development 172,006 132,487 Sales and marketing 80,739 71,020 General and administrative 23,113 15,473 Total operating expenses 275,858 218,980 Income from operations 277,987 206,292 Other income, net 31,480 1,575 Income before income taxes 309,467 207,867 Provision for income taxes 37,208 27,501 Net income $ 272,259 $ 180,366 Net income per share (1): Basic $ 0.88 $ 0.59 Diluted $ 0.85 $ 0.57 Weighted-average shares used in computing net income per share (1): Basic 308,045 305,224 Diluted 319,652 318,492 (1) Prior period results 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 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited, in thousands) Three Months Ended March 31, 2022 2021 Net income $ 272,259 $ 180,366 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ( 373 ) ( 541 ) Net change in unrealized gains (losses) on available-for-sale securities ( 21,828 ) ( 561 ) Other comprehensive income (loss) ( 22,201 ) ( 1,102 ) Comprehensive income $ 250,058 $ 179,264 The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited). 3 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Stockholders ’ Equity (Unaudited, in thousands) Three Months Ended March 31, 2022 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance at beginning of period 307,681 $ 31 $ 1,530,046 $ 2,456,823 $ ( 8,300 ) $ 3,978,600 Net income — — — 272,259 — 272,259 Other comprehensive loss, net of tax — — — — ( 22,201 ) ( 22,201 ) Stock-based compensation — — 50,279 — — 50,279 Issuance of common stock in connection with employee equity incentive plans 1,727 — 19,160 — — 19,160 Tax withholding paid for net share settlement of equity awards ( 105 ) — ( 12,741 ) — — ( 12,741 ) Repurchase of common stock ( 1,171 ) — — ( 136,228 ) — ( 136,228 ) Common stock issued for business acquisition 33 — 4,049 — — 4,049 Balance at end of period 308,165 $ 31 $ 1,590,793 $ 2,592,854 $ ( 30,501 ) $ 4,153,177 Three Months Ended March 31, 2021 Common Stock Additional Paid-In Capital (1) Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares (1) Amount (1) Balance at beginning of period 304,696 $ 30 $ 1,292,409 $ 2,027,614 $ 238 $ 3,320,291 Net Income — — — 180,366 — 180,366 Other comprehensive loss, net of tax — — — — ( 1,102 ) ( 1,102 ) Stock-based compensation — — 37,553 — — 37,553 Issuance of common stock in connection with employee equity incentive plans 1,836 — 18,081 — — 18,081 Tax withholding paid for net share settlement of equity awards ( 36 ) — ( 2,496 ) — — ( 2,496 ) Repurchase of common stock ( 1,468 ) — — ( 101,355 ) — ( 101,355 ) Balance at end of period 305,028 $ 30 $ 1,345,547 $ 2,106,625 $ ( 864 ) $ 3,451,338 (1) Prior period results 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 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 272,259 $ 180,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other 13,091 12,658 Stock-based compensation 50,279 37,553 Noncash lease expense 4,532 4,243 Deferred income taxes ( 81,822 ) 1,425 Unrealized gain on equity investments ( 28,497 ) — Amortization of investment premiums 7,033 5,446 Changes in operating assets and liabilities: Accounts receivable, net ( 131,861 ) 9,074 Inventories ( 43,531 ) ( 3,500 ) Prepaid expenses and other current assets ( 107,999 ) ( 15,272 ) Other assets ( 640 ) ( 3,499 ) Accounts payable 2,478 2,833 Accrued liabilities ( 29,666 ) ( 20,759 ) Deferred revenue 187,194 69,204 Income taxes payable 106,992 ( 10,436 ) Other liabilities ( 2,704 ) ( 14,661 ) Net cash provided by operating activities 217,138 254,675 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of marketable securities 404,176 379,605 Purchases of marketable securities ( 412,614 ) ( 590,476 ) Business acquisitions, net of cash acquired ( 37,610 ) 18 Purchases of property and equipment ( 14,876 ) ( 5,096 ) Purchases of investments in privately-held companies ( 11,691 ) ( 2,000 ) Net cash used in investing activities ( 72,615 ) ( 217,949 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock under equity plans 19,160 18,081 Tax withholding paid on behalf of employees for net share settlement ( 12,741 ) ( 2,496 ) Repurchase of common stock ( 136,228 ) ( 101,355 ) Net cash used in financing activities ( 129,809 ) ( 85,770 ) Effect of exchange rate changes ( 481 ) ( 838 ) NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 14,233 ( 49,882 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period 625,050 897,454 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period $ 639,283 $ 847,572 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: Right-of-use assets obtained in exchange for new operating lease liabilities $ 6,022 $ — Property and equipment included in accounts payable and accrued liabilities 2,759 1,529 Common stock issued for business acquisition 4,049 — The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited). 5 Table of Contents 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 of a normal recurring nature necessary for the fair presentation of our financial information. The results for the three months ended March 31, 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 The global coronavirus ("COVID-19") pandemic as well as the Russian-Ukrainian conflict continue to evolve and have widespread and unpredictable impacts on the global economy and business activities. Our contract manufacturers and suppliers have experienced workforce disruptions, delays in component sourcing, production and export of their products as well as component shortages and increased component costs, which have disrupted our supply chain and has impacted and will likely continue to impact our ability to supply products to our customers on a timely basis. While we have experienced improvements in overall demand from customers in recent quarters, 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 may negatively impact our gross margin. Although the overall economy continues to recover, several issues including inflation risk, supply chain bottlenecks, and COVID-19 variants have and may continue to impact the pace of the recovery. 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 our customers, partners, employees, contract manufacturers and supply chain, as well as restrictions on travel and transport, all of which continue to evolve and are unpredictable. Management 6 Table of Contents continues to actively monitor 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. 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 current GAAP, an acquirer generally recognizes 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 will 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): As of March 31, 2022 As of December 31, 2021 Level I Level II Level III Total Level I Level II Level III Total Financial Assets: Cash Equivalents: Money market funds $ 201,922 $ — $ — $ 201,922 $ 221,382 $ — $ — $ 221,382 Marketable Securities: Commercial paper — 95,239 — 95,239 — 141,274 — 141,274 Certificate of deposits (1) — 37,330 — 37,330 — 44,931 — 44,931 U.S. government notes 1,093,921 — — 1,093,921 1,057,810 — — 1,057,810 Corporate bonds — 1,265,406 — 1,265,406 — 1,252,226 — 1,252,226 Agency securities — 275,182 — 275,182 — 291,261 — 291,261 Marketable equity securities (2) 21,811 — — 21,811 — — — — 1,115,732 1,673,157 — 2,788,889 1,057,810 1,729,692 — 2,787,502 Other Assets: Money market funds - restricted 4,258 — — 4,258 4,237 — — 4,237 Total Financial Assets $ 1,321,912 $ 1,673,157 $ — $ 2,995,069 $ 1,283,429 $ 1,729,692 $ — $ 3,013,121 ______________________________________ (1) As of March 31, 2022 and December 31, 2021, all of our certificates of deposits were domestic deposits. (2) The $ 21.8 million represents the fair value of marketable equity securities as of March 31, 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 the current quarter, in addition to unrealized gains of $ 13.5 million recorded during the current quarter. The unrealized gains are included in Other income, net on the Condensed Consolidated Statements of Operations. Refer to Note 3. Financial Statement Details. 7 Table of Contents During the three months ended on March 31, 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 at fair value on a recurring basis (in thousands): As of March 31, 2022 As of December 31, 2021 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Commercial paper $ 95,239 $ — $ — $ 95,239 $ 141,274 $ — $ — $ 141,274 U.S. government notes 1,106,454 16 ( 12,549 ) 1,093,921 1,060,716 3 ( 2,909 ) 1,057,810 Corporate bonds 1,278,474 20 ( 13,088 ) 1,265,406 1,255,149 105 ( 3,028 ) 1,252,226 Agency securities 277,535 2 ( 2,355 ) 275,182 291,558 36 ( 333 ) 291,261 Total $ 2,757,702 $ 38 $ ( 27,992 ) $ 2,729,748 $ 2,748,697 $ 144 $ ( 6,270 ) $ 2,742,571 We invest in marketable 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. We expect to realize the full value of these investments upon maturity and do not expect to sell the debt securities prior to maturity; therefore, we do not consider any of our marketable securities to be impaired as of March 31, 2022. We did not recognize any credit losses or non-credit-related impairments related to our available-for-sale marketable securities for the three months ended March 31, 2022. The following is an analysis of our marketable securities in unrealized loss positions for a period of less than twelve months. As of March 31, 2022, there are no unrealized loss positions with a duration equal to or greater than twelve months (in thousands): As of March 31, 2022 Unrealized Losses within 12 months Fair Value Unrealized Losses U.S. government notes $ 1,080,225 $ ( 12,549 ) Corporate bonds 1,223,546 ( 13,088 ) Agency securities 262,329 ( 2,355 ) Total $ 2,566,100 $ ( 27,992 ) As of March 31, 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): As of March 31, 2022 Fair Values Due in 1 year or less $ 1,765,710 Due in 1 year through 2 years 964,038 Total debt securities $ 2,729,748 The weighted-average remaining duration of our marketable debt securities is approximately 0.8 years as of March 31, 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 8 Table of Contents 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. 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 months ended March 31, 2022 and March 31, 2021. We recorded an unrealized gain of $ 15.0 million on non-marketable equity securities based on observable price changes from orderly transactions of identical or similar securities of the same issuer in the three months ended March 31, 2022, but did not record any unrealized losses or further unrealized gains in the three months ended March 31, 2022 and March 31, 2021. 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 March 31, 2022 and December 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Cost of investments (1) $ 23,625 $ 14,933 Cumulative impairment — — Cumulative upward adjustment (1) 15,000 5,314 Carrying amount of investments $ 38,625 $ 20,247 (1) During the three months ended March 31, 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. 3. Financial Statements Details Cash, Cash Equivalents and Restricted Cash The reconciliation of cash, cash equivalents and restricted cash reported in the accompanying unaudited condensed consolidated balance sheets to the total of the same such amounts in the accompanying unaudited condensed consolidated statements of cash flows is as follows (in thousands): March 31, 2022 December 31, 2021 Cash and cash equivalents $ 635,025 $ 620,813 Restricted cash included in other assets 4,258 4,237 Total cash, cash equivalents and restricted cash $ 639,283 $ 625,050 Accounts Receivable, net Accounts receivable, net consists of the following (in thousands): March 31, 2022 December 31, 2021 Accounts receivable $ 652,529 $ 521,597 Allowance for doubtful accounts ( 392 ) ( 132 ) Product sales rebate and returns reserve ( 3,531 ) ( 4,956 ) Accounts receivable, net $ 648,606 $ 516,509 9 Table of Contents Inventories Inventories consist of the following (in thousands): March 31, 2022 December 31, 2021 Raw materials $ 367,811 $ 316,737 Finished goods 326,406 333,380 Total inventories $ 694,217 $ 650,117 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): March 31, 2022 December 31, 2021 Inventory deposits $ 95,608 $ 46,311 Prepaid income taxes 692 8,977 Other current assets 217,363 163,916 Other prepaid expenses and deposits 24,774 18,531 Total prepaid expenses and other current assets $ 338,437 $ 237,735 Property and Equipment, net Property and equipment, net consists of the following (in thousands): March 31, 2022 December 31, 2021 Land $ 40,336 $ 40,145 Equipment and machinery 104,096 90,915 Computer hardware and software 44,792 44,083 Furniture and fixtures 3,638 3,634 Leasehold improvements 30,512 30,502 Construction-in-process 2,354 2,378 Property and equipment, gross 225,728 211,657 Less: accumulated depreciation ( 138,337 ) ( 133,023 ) Property and equipment, net $ 87,391 $ 78,634 Depreciation expense was $ 5.6 million and $ 4.9 million for the three months ended March 31, 2022 and 2021, respectively. Accrued Liabilities Accrued liabilities consist of the following (in thousands): March 31, 2022 December 31, 2021 Accrued payroll-related costs $ 47,799 $ 99,571 Accrued manufacturing costs 92,197 80,213 Accrued product development costs 28,897 22,188 Accrued warranty costs 12,325 10,414 Other 15,845 14,257 Total accrued liabilities $ 197,063 $ 226,643 10 Table of Contents Warranty Accrual The following table summarizes the activity related to our accrued liability for estimated future warranty costs (in thousands): Three Months Ended March 31, 2022 2021 Warranty accrual, beginning of period $ 10,414 $ 9,314 Liabilities accrued for warranties issued during the period 4,392 3,456 Warranty costs incurred during the period ( 2,481 ) ( 2,727 ) Warranty accrual, end of period $ 12,325 $ 10,043 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): Three Months Ended March 31, 2022 2021 Contract assets, beginning balance $ 24,388 $ 16,380 Contract assets, ending balance 14,051 9,762 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 March 31, 2022 2021 Contract liabilities, beginning balance $ 93,382 $ 85,957 Less: Revenue recognized from beginning balance ( 8,248 ) ( 7,913 ) Less: Beginning balance reclassified to deferred revenue ( 3,837 ) ( 12,492 ) Add: Contract liabilities recognized 17,125 14,913 Contract liabilities, ending balance $ 98,422 $ 80,465 As of March 31, 2022 and December 31, 2021, $ 40.8 million and $ 38.7 million of our contract liabilities, respectively, were included in "Other current liabilities" with the remaining balances 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 March 31, 2022 2021 Deferred revenue, beginning balance $ 929,312 $ 650,827 Less: Revenue recognized from beginning balance ( 128,136 ) ( 107,442 ) Add: Deferral of revenue in current period, excluding amounts recognized during the period 322,570 176,646 Deferred revenue, ending balance $ 1,123,746 $ 720,031 11 Table of Contents Other Performance Obligations Other performance obligations include unbilled contract revenue for services and product that will be recognized in future periods. As of March 31, 2022, other performance obligations of $ 180.0 million were comprised mainly of unbilled multi-year PCS contract amounts. Revenue from Total Remaining Performance Obligations Revenue from total remaining performance obligations represents contract liabilities, deferred revenue and other performance obligations. As of March 31, 2022, approximately $ 1,402.2 million of revenue is expected to be recognized from remaining performance obligations, of which approximately 83 % is expected to be recognized over the next two years and approximately 17 % is expected to be recognized during the third to the fifth year. Other Income, net Other income, net consists of the following (in thousands): Three Months Ended March 31, 2022 2021 Interest income $ 2,428 $ 2,045 Unrealized gain on equity investments 28,497 — Other income (expense), net 555 ( 470 ) Total $ 31,480 $ 1,575 4. Acquisition, Goodwill and Acquisition-Related Intangible Assets Acquisition and Goodwill In January 2022, we completed an acquisition of a privately-held technology company in the United States for a total consideration of $ 47.0 million with both cash and common stock. The purchase price included $ 19.0 million of intangible assets, $ 28.5 million of goodwill and $ 0.5 million of net liabilities assumed. The changes in the carrying values of goodwill for the three months ended March 31, 2022 are as follows (in thousands): Amount Balance at December 31, 2021 $ 188,397 Additions related to one acquisition 28,518 Balance at March 31, 2022 $ 216,915 Acquisition-Related Intangible Assets The following table presents details of our acquisition-related intangible assets as of March 31, 2022 and December 31, 2021 (in thousands, except for years): March 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life (In Years) Developed technology $ 135,530 $ ( 59,384 ) $ 76,146 4.7 Customer relationships 32,920 ( 8,966 ) 23,954 5.5 Trade name 10,190 ( 5,046 ) 5,144 3.4 Others 5,720 ( 5,720 ) — 0.0 Total $ 184,360 $ ( 79,116 ) $ 105,244 4.8 12 Table of Contents December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life (In Years) Developed technology $ 124,730 $ ( 53,663 ) $ 71,067 4.5 Customer relationships 25,920 ( 7,899 ) 18,021 5.2 Trade name 8,990 ( 4,693 ) 4,297 3.8 Others 5,720 ( 5,550 ) 170 0.1 Total $ 165,360 $ ( 71,805 ) $ 93,555 4.6 For intangible assets acquired and purchased during the three months ended March 31, 2022, developed technology has a weighted-average useful life of 7.0 years, customer relationships has a weighted-average useful life of 7.0 years, and trade name has a weighted-average useful life of 3.0 years. Amortization expense related to acquisition-related intangible assets was $ 7.3 million, and $ 7.4 million for the three months ended March 31, 2022, and 2021, respectively. As of March 31, 2022, future estimated amortization expense related to the acquired-related intangible assets is as follows (in thousands): Future Amortization Expense Remainder of 2022 $ 22,161 2023 25,724 2024 19,046 2025 12,326 2026 10,280 Thereafter 15,707 Total $ 105,244 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. 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 March 31, 2022, we had non-cancellable purchase commitments of $ 4,318.9 million, with $ 2,427.7 million with confirmed receipt dates within 12 months, $ 850.2 million with confirmed receipt dates greater than 12 months and the remaining $ 1,041 million with the receipt dates to be confirmed. 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 $ 98.4 million and $ 49.1 million as of March 31, 2022 and December 31, 2021, respectively, which were recorded within prepaid expenses and other current assets, as well as other assets in the accompanying 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. 13 Table of Contents 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; trial has been set for October 23, 2023. On March 30, 2022, WSOU dismissed one of the patents with prejudice, removing Arista wireless products from those accused of infringement. 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 March 31, 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 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. 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 March 31, 2022, the remaining authorized amount for stock repurchases under this program was approximately $ 790.8 million. A summary of the stock repurchase activity under the New Repurchase Program is as follows (in thousands, except per share amounts): Three Months Ended March 31, 2022 Aggregate purchase price $ 136,228 Shares repurchased 1,171 Average price paid per share $ 116.30 The aggregate purchase price of repurchased shares of our common stock is recorded as a reduction to retained earnings. All shares repurchased have been retired. 14 Table of Contents 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 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 March 31, 2022, there remained approximately 95.7 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 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 our 2014 Employee Stock Purchase Plan (the “ESPP”). During the three months ended March 31, 2022, we issued 240,394 shares at a weighted-average purchase price of $ 48.75 per share under the ESPP. As of March 31, 2022, there remained 20.8 million 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): Number of Shares Underlying Outstanding Options Weighted- Average Exercise Price per Share Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value of Stock Options Outstanding Balance—December 31, 2021 8,685 $ 12.45 2.8 $ 1,140,369 Options granted — — Options exercised ( 737 ) 10.09 Options canceled ( 121 ) 18.11 Balance—March 31, 2022 7,827 $ 12.58 2.6 $ 989,294 Vested and exercisable—March 31, 2022 6,304 $ 10.07 2.2 $ 812,692 15 Table of Contents 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 758 107.79 RSUs vested ( 742 ) 64.21 RSUs forfeited/canceled ( 108 ) 70.81 Unvested balance—March 31, 2022 7,729 $ 75.24 1.6 $ 1,074,204 Stock-Based Compensation Expense The following table summarizes the stock-based compensation expense related to our equity awards (in thousands): Three Months Ended March 31, 2022 2021 Cost of revenue $ 1,309 $ 1,400 Research and development 27,576 21,982 Sales and marketing 13,109 10,085 General and administrative 8,285 4,086 Total stock-based compensation $ 50,279 $ 37,553 As of March 31, 2022, there were $ 501.4 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 3.2 years. 16 Table of Contents 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 March 31, 2022 2021 (1) Numerator: Net income $ 272,259 $ 180,366 Denominator: Weighted-average shares used in computing net income per share, basic 308,045 305,224 Add weighted-average effect of dilutive securities: Stock options and RSUs 11,322 13,116 Employee stock purchase plan 285 152 Weighted-average shares used in computing net income per share, diluted 319,652 318,492 Net income per share: Basic $ 0.88 $ 0.59 Diluted $ 0.85 $ 0.57 (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 March 31, 2022 2021 (1) Stock options and RSUs 64 520 Employee stock purchase plan 16 40 Total 80 560 (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 Three Months Ended March 31, 2022 2021 (in thousands, except percentages) Income before income taxes $ 309,467 $ 207,867 Provision for income taxes 37,208 27,501 Effective tax rate 12.0 % 13.2 % The effective tax rates above reflect tax expense recorded on pre-tax income in the three months ended March 31, 2022 and March 31, 2021. The change in effective tax rate in the three months ended March 31, 2022, as compared to the same period in 2021, was primarily due to a favorable change in jurisdictional mix in earnings. 9. Geographical Information We operate as one reportable segment. The following table represents revenue based on customers’ shipping addresses (in thousands): Three Months Ended March 31, 2022 2021 Americas $ 664,377 $ 501,872 Europe, Middle East and Africa 134,805 96,274 Asia-Pacific 77,884 69,416 Total revenue $ 877,066 $ 667,562 17 Table of Contents Long-lived assets, excluding intercompany receivables, investments in subsidiaries, privately-held equity investments and deferred tax assets, net by location are summarized as follows (in thousands): March 31, 2022 December 31, 2021 United States $ 68,252 $ 62,163 International 19,139 16,471 Total $ 87,391 $ 78,634