Arista Networks, Inc. 10-Q

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 Table of Contents 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 Table of Contents 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 Table of Contents 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 1 20,081 — — 20,082 4,451 1 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 1 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 Table of Contents 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 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, 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 3 ( 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 Table of Contents 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 Table of Contents 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 Table of Contents 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 12 Table of Contents 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 13 Table of Contents 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 14 Table of Contents 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 15 Table of Contents 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. 16 Table of Contents 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. 17 Table of Contents 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. 18 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 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): 19 Table of Contents 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