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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-10-31 · 109 added, 104 removed, 126 unchanged (63% of the section changed)

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Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

Arista Networks is an industry leader in data-driven, cognitive cloud networking for next-generation data center and campus workspace environments.

At the core of Arista's platform is our EOS software, combined with a set of network applications and our Ethernet switching and routing products using merchant silicon, delivering a cloud networking solution with high performance scale and availability, and enabling network automation, visibility, and security.

This flexible EOS-based platform provides customers with improved price/performance and accelerated time to market.

We generate revenue primarily from sales of our switching and routing platforms, which incorporate our EOS software, and related network applications.

We also generate revenue from post-contract support ("PCS"), which end customers typically purchase in conjunction with our products, and renewals of PCS.

Arista Networks is an industry leader in data-driven, client to cloud networking for large data center, campus and routing environments.

Arista's platforms deliver availability, agility, automation, analytics and security through an advanced network operating stack.

Since Arista’s inception, our founders have reimagined cloud networks for performance, scale and

programmability with a focus on differentiating in three ways:

uncompromising quality, advanced open and standards-based technology and a robust quality assurance capability built on a suite of automated diagnostics.

At the core of Arista’s platform is Arista’s EOS, a modernized publish-subscribe state-sharing networking operating system.

Arista EOS, combined with a set of network applications and our Ethernet switching and routing platforms using best of breed merchant silicon, provides customers with a highly competitive and diversified portfolio of products with improved price/performance and time to market.

We generate revenue primarily from sales of our switching and routing platforms, which incorporate Arista's EOS software, and related network applications.

We also generate revenue from post-contract support ("PCS"), which customers typically purchase in conjunction with our products, and renewals of PCS.

We sell our products through both our direct sales force and our channel partners.

As of December 31, 2022, we had delivered our cloud networking solutions to over 9,000 end customers worldwide.

Our end customers span a range of industries and include large internet companies, service providers, financial services organizations, government agencies, media and entertainment companies, telecommunication service providers and other cloud service providers.

Historically, large purchases by a relatively limited number of end customers have accounted for a significant portion of our revenue.

We have experienced unpredictability in the timing of or ders from these large end customers primarily due to the time it takes these end customers to evaluate, test, qualify and accept our newer products, the overall complexity of these large orders and changes in demand patterns specific to these customers, including reductions in capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers.

For example, sales to our end customers Microsoft and Meta Platforms in fiscal 2022 represented 16% and 26% of our total revenue, respectively, whereas sales to our end customer Microsoft in fiscal 2020 and 2021 amounted to 22% and 15% of our total revenue, respectively, with our end customer Meta Platforms representing less than 10% of our total revenue in both fiscal 2020 and 2021.

Our customers span a range of industries and geographies including large cloud customers or hyperscalers, other internet providers, service providers, financial services organizations, government agencies and a cross section of enterprise customers.

Over the past five years, we have diversified the types of enterprise customers we sell to and have continued to expand our presence across a wide spectrum of industries including media and entertainment, healthcare, oil and gas, education, manufacturing, industrial, and more.

Historically, large purchases by a relatively limited number of customers have accounted for a significant portion of our revenue.

We have experienced unpredictability in the timing of orders from these large customers primarily due to the time it takes these customers to evaluate, test, qualify and accept our newer products, the overall complexity of these large orders and changes in demand patterns specific to these customers, including reductions in capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers.

For example, sales to our end customers Microsoft and Meta Platforms represented 18% and 21% of our total revenue, respectively, in fiscal 2023, 16% and 26% of our total revenue, respectively, in fiscal 2022 and, 15% and less than 10% of our total revenue, respectively in fiscal 2021.

This variability in customer concentration has been linked to the timing of new product deployments and spending cycles with these customers, and we expect continued variability in our customer concentration and timing of sales on a quarterly and annual basis.

In addition, some of our large customers have announced various cost reduction measures, including optimization and increased efficiency in their capital expenditures.

In some instances, such measures have had, or may have, an impact on certain current or future projects and have reduced our visibility to customer demand, which may result in reductions in future demand and negatively impact our revenue.

Furthermore, we typically provide pricing discounts to large end customers, which reduces gross margins for the period in which such sales occur.

I n addition, an increased focus on the deployment of AI enabled solutions by these customers has accelerated the need for advanced technology offerings including some offerings from potential new market entrants.

This prioritization of AI related infrastructure investment has come in conjunction with the announcement of various cost reduction measures, including optimization and increased efficiency in non-AI related capital expenditures.

In some instances, such measures have had, and may continue to have, an impact on certain current or future projects and have reduced our visibility to customer demand, increased our risk of excess and obsolescence charges on existing products, and may result in reductions in future demand and negatively impact our revenue, financial condition, business or prospects.

Furthermore, we typically provide pricing discounts to large customers, which reduces gross margins for the period in which such sales occur.

We believe that cloud computing represents a fundamental shift from traditional legacy network architectures.

As organizations of all sizes have moved workloads to the cloud, spending on cloud and next-generation data centers has increased rapidly, while traditional legacy IT spending has grown more slowly.

As organizations of all sizes have moved workloads to the cloud, spending on cloud and next-generation data centers has increased rapidly, while traditional legacy IT spending has grown at a slower rate.

Our cloud networking platforms are well positioned to address the growing cloud networking market, and to address increasing performance requirements driven by the growing number of connected devices, as well as the need for constant connectivity and access to data and applications.

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We must also continue to develop market-leading products and features that address the needs of our existing and new customers, and increase sales in the enterprise data center switching, and campus workspace markets.

We intend to continue expanding our sales force and marketing activities in key geographies, as well as our relationships with channel, technology and system-level partners in order to reach new end customers more effectively, increase sales to existing customers, and provide services and support.

We intend to continue expanding our sales force and marketing activities in key geographies, as well as our relationships with channel, technology and system-level partners in order to reach new customers more effectively, increase sales to existing customers, and provide services and support.

In addition, we intend to continue to invest in our research and development organization to enhance the functionality of our existing cloud networking platform, introduce new products and features, and build upon our technology leadership.

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We work closely with third-party contract manufacturers to manufacture our products.

Our contract manufacturers deliver our products to our third-party direct fulfillment facilities.

Our contract manufacturers deliver our products to

our third-party direct fulfillment facilities.

We and our fulfillment partners then perform labeling, final configuration, quality assurance testing and shipment to our customers.

Macroeconomic Update

Global economic and business activities continue to face widespread macroeconomic uncertainties, including inflation, monetary policy shifts, the recent banking crisis, recession risks, and potential supply chain and other disruptions from the Russia-Ukraine and Israel-Hamas conflicts, and the U.S.

Global economic and business activities continue to face widespread macroeconomic uncertainties, including inflation, monetary policy shifts, recession risks, and potential supply chain and other disruptions such as the Russia-Ukraine and Israel-Hamas conflicts, the Houthi attacks on marine vessels in the Red Sea, and the U.S.

trade war with China.

Our business is emerging from a period of unprecedented global supply chain disruptions.

Throughout this period, we made significant supply chain investments, including funding additional working capital and incremental purchase commitments in response to extended visibility to deployment plans from our customers.

We have worked closely with our contract manufacturers and supply chain partners to ramp production following a period of delayed component sourcing and workforce disruptions.

We have worked diligently to drive improvements in these areas, including funding additional working capital and incremental purchase commitments, and have begun to see some reduction in customer lead times on certain products.

Over time, the recovery of capacity should allow us to ship products against previously committed deployment plans and accelerate some deployments where needed, while trying to limit building customer inventory.

On this basis, we expect some shipments against these deployment plans to extend into 2024.

As customer lead times reduce more broadly, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand and a gradual return to somewhat shorter demand-planning horizons which has resulted in lower demand levels.

Given the shipment and order patterns described above, near term revenue trends may not be reflective of current demand levels, but will benefit from deployment plans that had been previously committed.

While inventory and working capital levels may continue to increase and remain elevated in the near term, we expect that purchase commitments will continue to decline as supplier lead times shorten.

Although these elevated inventory positions and purchase commitments are largely related to relatively early life cycle products, the larger magnitude of these balances, combined with a reduction in customer demand-planning horizons, has resulted in increased risk that we may not be able to sell all of this inventory, which in turn has resulted, and may in the future result, in the need for us to incur excess and obsolete inventory-related charges..

Increased capacity has allowed us to ship products against previously committed demand/deployment plans and accelerate some deployments where needed, while trying to limit building customer inventory, and to some extent balancing customer lead times with those currently experienced from our key suppliers.

As a result, some shipments against these previously committed demand/deployment plans have extended into 2024.

As the global supply chain has experienced some improvements and as customer lead times have been reduced from their peak, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand and a gradual return to shorter demand-planning horizons resulting in lower demand levels.

Given these shipment and order patterns, near term revenue trends may not be solely reflective of current demand levels, but as discussed above will benefit from demand/deployment plans that had been previously committed.

While inventory and working capital levels may remain elevated in the near term, we expect that purchase commitments will begin to level off as supplier lead times shorten, but will remain volatile as we ramp new product introductions.

The larger magnitude of these balances, combined with a reduction in customer demand-planning horizons and shifting customer product priorities, has resulted in increased risk that we may not be able to sell all of this inventory, which in turn has resulted, and may in the future result, in additional excess and obsolete inventory and supplier liability charges.

In addition, inflation pressure in our supply chain, scarcity of some materials needed to build our products and disruptions to our manufacturing process have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin.

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While we have seen improvements in our supply chain and manufacturing operations, any remaining or new supply chain and manufacturing related constraints could negatively impact our business in future periods.

In addition, although our business has experienced limited disruption as a result of the recent Russia-Ukraine conflict, continued escalation of this conflict as well as the Israeli-Hamas conflict may negatively impact the global economy and our future operating results and financial condition.

In addition, although our business has experienced limited disruption as a result of the Russia-Ukraine conflict, continued escalation of this conflict as well as the Israeli-Hamas conflict and Houthi movement in the Red Sea may negatively impact the global economy and our future operating results and financial condition.

Management continues to actively monitor the impact of macroeconomic factors on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce.

The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, the impact on our customers, partners, employees, contract manufacturers and supply chain, all of which continue to evolve and are unpredictable.

however, any continued or renewed disruption in manufacturing and supply resulting from these factors could negatively impact our business.

We also believe that some of our customers, following a year of elevated purchases, must now consider changing technology roadmaps and priorities, including the need for the rapid deployment of AI and related technologies, resulting in some uncertainty as to future investment plans and a more constrained approach to some forecasts and orders in the near term.

In addition, any continued or renewed disruption in manufacturing and supply resulting from these factors could negatively impact our business.

We also believe that some of our customers, following a year of elevated purchases, must now consider changing technology roadmaps and priorities, including the need for the deployment of AI and related technologies, resulting in some uncertainty as to future investment plans and a more constrained approach to some forecasts and orders in the near term.

In addition, any prolonged economic disruptions or further deterioration in the global economy could have a negative impact on demand from our customers in future periods, particularly in the enterprise market where we are continuing to expand our penetration.

Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.

Accordingly, current results and financial conditions discussed herein may not be indicative of future operating results and trends.

Results of Operations

Three and Nine Months Ended September 30, 2023 Compared to Three and Nine Months Ended September 30, 2022

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Revenue, Cost of Revenue and Gross Margin (in thousands, except percentages)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change in 2023 2022 Change in

$ $ $ % $ $ $ %

Three Months Ended March 31,

2024 2023 Change in

Product $ 1,328,845 $ 1,172,094 $ 156,751 13.4 %

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Revenue by Geography (in thousands, except percentages)

Three Months Ended September 30, Nine Months Ended September 30,

2023 % of Total 2022 % of Total 2023 % of Total 2022 % of Total

Three Months Ended March 31,

2024 % of Total 2023 % of Total

Americas $ 1,255,391 79.9 % $ 1,115,011 82.5 %

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Service revenue is primarily derived from sales of PCS contracts, which are typically purchased in conjunction with our products, and subsequent renewals of those contracts.

We expect our revenue may vary from period to period based on, among other things, the timing, size, and complexity of orders, especially with respect to our large end customers.

Product revenue increased $276.9 million, or 27.4%, and $1,100.0 million, or 42.0% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

These increases reflect increased shipments of our switching and routing platforms across our customer base, including improved supply availability for our enterprise customers.

In addition, service revenue increased $55.8 million, or 33.2%, and $114.0 million, or 23.4% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, as a result of continued growth in

initial and renewal support contracts as our customer installed base has continued to expand.

International revenue represented 21.5% and 20.1% of total revenue for the three and nine months ended September 30, 2023, respectively, changing from 16.9% and 19.9% for the same periods in the prior year, which was primarily driven by changes in the geographic mix of sales to our large global customers.

We expect our revenue may vary from period to period based on, among other things, the timing, size, and complexity of orders, especially with respect to our large customers.

Product revenue increased by $156.8 million, or 13.4% for the three months ended March 31, 2024, compared to the same period in 2023.

This increase reflects higher demand and shipments of our switching and routing platforms across our customer base, in particular a strong contribution from our enterprise customers.

In addition, service revenue increased by $63.3 million, or 35.3% for the three months ended March 31, 2024, compared to the same period in 2023, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand.

International revenue represented 20.1% of total revenue for the three months ended March 31, 2024, increasing from 17.5% for the same period in the prior year, which was primarily driven by a reduction in the mix of sales to our large global customers in the Americas region.

Cost of Revenue and Gross Margin

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Cost of service revenue primarily consists of personnel and other costs associated with our global customer support and services organizations.

Cost of revenue increased by $100.2 million, or 21.5%, and $490.0 million, or 40.9% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

These increases were primarily driven by a corresponding increase in product and service revenues, combined with an increase in excess/obsolete inventory-related charges.

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including pricing pressure on our products and services due to competition, the mix of sales to large end customers who generally receive lower pricing, the mix of products sold, manufacturing-related costs, including costs associated with supply chain sourcing activities, merchant silicon costs, and excess/obsolete inventory charges, including charges for excess/obsolete component inventory held by our contract manufacturers.

Cost of revenue increased by $23.2 million, or 4.2% for the three months ended March 31, 2024, compared to the same period in 2023.

These increases were primarily driven by a corresponding increase in product and service revenues, partially offset by a decrease in logistics costs and excess/obsolete inventory and supplier liability charges.

chain sourcing activities, merchant silicon costs, and excess/obsolete inventory charges, including charges for excess/obsolete component inventory held by our contract manufacturers and suppliers.

We expect our gross margin to fluctuate over time, depending on the factors described above.

Gross margin increased from 60.3% to 62.4% for the three months ended September 30, 2023, compared to the same period in 2022, and decreased from 61.4% to 60.9% for the nine months ended September 30, 2023, compared to the same period in 2022.

These changes reflect an improvement in product margins driven by a lower mix of revenue from our larger customers, offset by an increase in excess/obsolete inventory-related charges.

Gross margin increased from 59.5% to 63.7% for the three months ended March 31, 2024, compared to the same period in 2023.

These changes reflect an improvement in product margins driven by a decrease in logistics costs and excess/obsolete inventory and supplier liability charges, combined with the leverage of fixed overhead costs on a higher revenue base, and a lower mix of revenue from our larger customers.

Operating Expenses (in thousands, except percentages)

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Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions.

Personnel costs also include stock-based compensation and travel expenses.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change in 2023 2022 Change in

$ $ $ % $ $ $ %

Personnel costs also include stock-based compensation and travel-related expenses.

Three Months Ended March 31,

2024 2023 Change in

Operating expenses:

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We expect our research and development expenses to increase in absolute dollars as we continue to invest in software development in order to expand the capabilities of our cloud networking platform, introduce new products and features, and continue to invest in our technology.

Research and development expenses increased $24.5 million, or 13.1%, and $105.5 million, or 19.6% in the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

The increases were primarily driven by an increase in personnel co sts of $21.8 million and $71.9 million fo r the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to headcount growth.

In addition, new product introduction costs increased by $29.2 million for the nine months ended September 30, 2023, respectively, compared to the

same period in 2022, which was primarily driven by increased non-recurring engineering costs and prototype expenses as we expand our product portfolio.

Research and development expenses increased by $7.0 million, or 3.5% for the three months ended March 31, 2024, compared to the same period in 2023.

The increase was primarily driven by an increase in personnel costs due to headcount growth, and partially offset by a decrease in new product introduction costs primarily due to timing of third-party engineering projects and deliverables.

Sales and marketing

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We expect our sales and marketing expenses to increase in absolute dollars as we continue to expand our sales and marketing efforts worldwide.

Sales and marketing expenses increased $20.6 million, or 25.3%, and $52.0 million, or 21.5% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, which was primarily caused by increased personnel costs largely driven by headcount growth, in addition to increased sales and marketing events and field demonstration costs.

Sales and marketing expenses increased by $11.6 million, or 12.4% for the three months ended March 31, 2024, compared to the same period in 2023, which was primarily driven by increased personnel costs due to headcount growth.

General and administrative

General and administrative expenses consist primarily of personnel costs and professional services costs.

General and administrative personnel costs include those for certain executive functions, as well as finance, human resources and legal functions.

General and administrative expenses consist primarily of personnel costs and professional services costs for our finance, human resources, legal and certain executive functions.

Our professional services costs are primarily related to external legal, accounting and tax services.

General and administrative expenses increased $1.9 million, or 8.2%, and $7.4 million, or 10.6% in the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, which was primarily attributable to an increase in personnel costs.

General and administrative expenses increased by $2.7 million, or 10.9% for the three months ended March 31, 2024, compared to the same period in 2023, which was primarily attributable to an increase in personnel costs, in particular stock-based compensation.

Other Income (Expense), Net (in thousands, except percentages)

Other income (expense), net consists primarily of interest income from our cash, cash equivalents and marketable securities, gains and losses on our equity investments in privately-held companies and marketable equity securities, and foreign currency transaction gains and losses.

We expect other income (expense), net may fluctuate in the future as a result of the re-measurement of our equity investments upon the occurrence of observable price changes and/or impairments, changes in interest rates or returns on our cash and cash equivalents and marketable securities, and foreign currency exchange rate fluctuations.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change in 2023 2022 Change in

$ $ $ % $ $ $ %

Other income (expense), net consists primarily of interest income from our cash, cash equivalents and marketable securities, gains and losses on our marketable equity securities and strategic investments, and foreign currency transaction gains and losses.

We expect other income (expense), net may fluctuate in the future as a result of the re-measurement of our equity investments upon the occurrence of either observable price changes or impairments, changes in interest rates or returns on our

cash and cash equivalents and marketable securities, and foreign currency exchange rate fluctuations.

Three Months Ended March 31,

2024 2023 Change in

Other income (expense), net:

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Total other income (expense), net $ 62,620 $ 12,146 $ 50,474 415.6 %

The favorable movements in other income (expense), net, were driven by interest income increases of $36.7 million and $84.6 million in the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to higher interest rates.

The favorable movement in other income (expense), net, during the three months ended March 31, 2024 compared to the same period in 2023 was primarily driven by increased interest income of $41.3 million due to an increase in our cash and investment balances, coupled with higher interest rates.

Provision for Income Taxes (in thousands, except percentages)

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Our tax expense to date consists of federal, state and foreign current and deferred income taxes.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change in 2023 2022 Change in

$ $ $ % $ $ $ %

Three Months Ended March 31,

2024 2023 Change in

Income before income taxes $ 722,761 $ 496,724 $ 226,037 45.5 %

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Effective tax rate 11.8 % 12.1 %

The decrease in the effective tax rates in the three and nine months ended September 30, 2023, as compared to the same periods in 2022, was primarily due to an increase in tax benefits attributable to stock-based compensation.

The decrease in the effective tax rates for the three months ended March 31, 2024, as compared to the same period in 2023, was primarily due to a favorable change in the jurisdictional mix of earnings.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations.

As of September 30, 2023, our total balance of cash, cash equivalents and marketable securities was approximately $4.5 billion, of which approximately $608.1 million was held outside the U.S.

As of March 31, 2024, our total balance of cash, cash equivalents and marketable securities was approximately $5.45 billion, of which approximately $801.1 million was held outside the U.S.

in our foreign subsidiaries.

Our cash, cash equivalents and marketable securities are held for general business purposes, including the funding of working capital.

The investment portfolio of our marketable securities is primarily invested in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss.

Our marketable securities investment portfolio is primarily invested in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss.

We plan to continue to invest for long-term growth.

We believe that our existing balances of cash, cash equivalents and marketable securities, together with cash generated from operations, will be sufficient to meet our working capital requirements and our growth strategies for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced product and service offerings, our costs associated with supply chain activities, including access to outsourced manufacturing, our costs related to investing in or acquiring complementary or strategic businesses and technologies, the continued market acceptance of our products, and stock repurchases.

If we require or elect to seek additional capital through debt or equity financing in the future, we may not be able to raise capital on terms acceptable to us or at all.

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Cash Flows (in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash provided by operating activities $ 513,805 $ 374,483

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Cash Flows from Operating Activities

During the nine months ended September 30, 2023, cash provided by operating activities was $1,507.6 million, primarily from net income of $1,473.7 million, non-cash adjustments to net income of $26.7 million and a net decrease of $7.2 million in working capital requirements.

During the three months ended March 31, 2024, cash provided by operating activities was $513.8 million, consisting of net income of $637.7 million, non-cash adjustments to net income of $7.2 million and offset by a net increase of $131.1 million in working capital requirements.

The non-cash adjustments to net income were driven by stock-based compensation and depreciation and amortization, largely offset by an increase in deferred taxes primarily due to the capitalization of research and development costs under Section 174 of the Internal Revenue Code ("IRC").

This decrease in working capital requirements primarily consisted of a $346.2 million increase in income tax payables largely related to an extension by the Internal Revenue Service ("IRS") of the due dates for estimated tax payments until October 2023, a $151.2 million increase in accounts payable and accrued liabilities due to an increase in business volume and timing of payments, a decrease in accounts receivable of $89.7 million driven by strong collections, and an increase in deferred revenue of $153.5 million primarily resulting from an increase in customer PCS contracts.

These operating cash inflows were largely offset by a $603.8 million increase in inventory and a $118.6 million increase in prepaid and other assets.

During the nine months ended September 30, 2022, cash provided by operating activities was $452.3 million, primarily from net income of $925.4 million and non-cash adjustments to net income of $66.7 million driven by stock-based compensation and depreciation and amortization, and partly offset by a net increase of $539.7 million in working capital requirements.

The increase in working capital requirements primarily consisted of a $449.8 million increase in inventory, a $69.0 million increase in prepaid expenses and other current assets, and a $17.9 million in other assets, which reflected increased inventory purchases and inventory deposits to contract manufacturers to mitigate supply chain constraints and meet customer demand.

In addition, accounts receivable increased by $129.9 million due to increased product and service billings.

These operating cash outflows were partially offset by a $73.5 million increase in accounts payable, and a $41.1 million increase in income tax payables.

The increase in working capital requirements primarily consisted of a $343.8 million decrease in accounts payable and accrued liabilities primarily due to timing of inventory-related receipts and payments, an $80.0 million increase in inventory and an increase in accounts receivable of $65.5 million.

These cash outflows were partly offset by a $157.5 million increase in income tax payables related to timing of payments, and an increase in deferred revenue of $157.0 million primarily resulting from an increase in customer PCS contracts, partly offset by a reduction in product deferred revenue related to customer contracts with acceptance terms, and a $38.1 million decrease in prepaid and other assets.

During the three months ended March 31, 2023, cash provided by operating activities was $374.5 million, primarily from net income of $436.5 million and non-cash adjustments to net income of $18.6 million driven by stock-based compensation and depreciation and amortization, largely offset by an increase in deferred taxes associated with the capitalization of research and development costs under IRC Section 174.

These increases were partly offset by a net increase of $80.6 million in working capital requirements, which primarily consisted of a $393.0 million increase in inventory and an $81.9 million increase in inventory deposits to our contract manufacturers in response to a significant increase in business volume and increased product lead times.

These operating cash outflows were largely offset by cash inflows from a $153.2 million increase in accounts payable and accrued liabilities and a $108.2 million increase in income tax payables related to significant business volume and timing of payments.

In addition, we had cash inflows resulting from a decrease in accounts receivable of $60.2 million driven by strong collections, and an increase in deferred revenue of $51.0 million primarily resulting from an increase in customer PCS contracts.

Cash Flows from Investing Activities

During the nine months ended September 30, 2023, cash used in investing activities was $350.5 million, consisting of purchases of available-for-sale securities of $1,934.2 million, and purchases of property and equipment of $28.4 million.

During the three months ended March 31, 2024, cash used in investing activities was $295.7 million, consisting of purchases of available-for-sale securities of $912.4 million, and purchases of property and equipment of $9.4 million.

These amounts were partially offset by proceeds from maturities and sales of marketable securities of $627.2 million.

During the nine months ended September 30, 2022, cash provided by investing activities was $299.2 million, consisting of proceeds from sales and maturities of marketable securities of $1,464.6 million.

These amounts were partially offset by purchases of available-for-sale securities of $973.5 million, and purchases of property and equipment of $34.2 million.

During the three months ended March 31, 2023, cash used in investing activities was $21.7 million, consisting of purchases of available-for-sale securities of $861.6 million, and purchases of property and equipment of $5.6 million.

These amounts were partially offset by proceeds from maturities and sales of marketable securities of $845.7 million.

Cash Flows from Financing Activities

During the nine months ended September 30, 2023, cash used in financing activities was $82.4 million, consisting of payments for repurchases of our common stock from the open market of $112.3 million, and employee taxes withheld and paid of $23.9 million upon vesting of restricted stock units, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $53.8 million.

During the nine months ended September 30, 2022, cash used in financing activities was $649.9 million, consisting of payments for repurchases of our common stock from the open market of $667.5 million, and employee taxes withheld and paid of $25.5 million upon vesting of restricted stock units, offset partially by proceeds from the issuance of common stock under employee equity incentive plans of $43.1 million.

Stock Repurchase Program

In October 2021, our board of directors authorized a $1.0 billion stock repurchase program (the “Repurchase Program”).

This authorization allows us to repurchase shares of our common stock that will be funded from working capital and expires in the fourth quarter of 2024.

The Repurchase Program does not obligate us to acquire any of our common stock and may be suspended or discontinued by the company at any time without prior notice.

During the three months ended September 30, 2023, we did not repurchase any shares.

As of September 30, 2023, the remaining authorized amount for repurchases under the Repurchase Program was $144.5 million.

During the three months ended March 31, 2024, cash used in financing activities was $63.1 million, consisting of payments for repurchases of our common stock from the open market of $62.7 million, and employee taxes withheld and paid of $25.5 million upon vesting of restricted stock units, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $25.1 million.

During the three months ended March 31, 2023, cash used in financing activities was $68.4 million, consisting of payments for repurchases of our common stock from the open market of $82.3 million, and employee taxes withheld and paid of $9.2 million upon vesting of restricted stock units, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $23.1 million.

Stock Repurchase Programs

From time to time, we repurchase shares of our common stock pursuant to our Repurchase Programs that are funded from working capital.

The Existing Repurchase Program allowed for stock repurchases of up to $1.0 billion through October 2024 and was completed in April 2024, and the New Repurchase Program will allow for repurchases of an additional $1.2

billion through May 2027.

The New Repurchase Program does not obligate us to acquire any of our common stock and may be suspended or discontinued by the company at any time without prior notice.

During the three months ended March 31, 2024, we repurchase d a total of $62.7 million of our common stock under our Existing Repurchase Program and no repurchases have been made under our New Repurchase Program.

As of March 31, 2024, the remaining authorized amount for repurchases under the Existing Repurchase Program was $82.0 million.

In April 2024, we repurchased the remaining $82.0 million of our common stock authorized under the Existing Repurchase Program.

Refer to Note 6.

Stockholders' Equity and Stock-Based Compensation of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q for further discussion.

Stockholders' Equity and Stock-Based Compensation and Note 10.

Subsequent Events of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q for further discussion.

Material Cash Requirements

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Our material cash requirements include the following contractual and other obligations:

We have operating lease arrangements for office space, data center, equipment and other corporate assets.

As of September 30, 2023, we had lease payment obligations, net of immaterial sublease income, of $74.2 million, with $22.0 million payable within one year.

Purchase Obligations

Purchase obligations represent an estimate of all non-cancellable open purchase orders and contractual obligations, made either directly by Arista or by our c ontract manufacturers on our behalf, in the ordinary course of business for which we have not received the goods or services.

As of September 30, 2023, we had $2.0 billion of such purchase obligations, of which $1.7 billion are expected to be received within one year, and $0.3 billion are expected to be received after one year.

Purchase obligations not recorded on our balance sheet represent an estimate of all non-cancellable open purchase orders and contractual obligations, made either directly by Arista or by our contract manufacturers on our behalf, in the ordinary course of business for which we have not received the goods or services.

As of March 31, 2024, we had $1,457.7 million of such purchase obligations, of which $1,425.1 million are expected to be received within one year, and $32.6 million are expected to be received after one year.

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 have operating lease arrangements for office space, data center, equipment and other corporate assets.

As of March 31, 2024, we had lease payment obligations, net of immaterial sublease income, of $65.9 million, with $23.7 million payable within one year.

Property project

During the year ended December 31, 2021, we purchased land and the improvements thereon in Santa Clara, California to construct a building for office and lab space.

The estimated capital expenditures related to this project is estimated to be approximately $80.0 to $100.0 million for the year ending 2024, with construction expected to commence in the second half of 2024.

Accrued Income Taxes

As of September 30, 2023, we have recorded long-term tax liabilities of $104.7 million related to uncertain tax positions;

As of March 31, 2024, we have recorded long-term tax liabilities of $107.2 million related to uncertain tax positions;

however, we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

In connection with the Tax Cuts and Jobs Act of 2017 (“TCJA”), effective from January 1, 2022, the TCJA eliminated the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years pursuant to IRC Section 174.

We estimate the incremental cash tax impact resulting from these

regulations to be approximately $200.0 million for 2023.

No material change to our effective tax rate has resulted from this new legislation.

During 2023, following a period of natural disasters that occurred throughout California, the IRS postponed estimated tax payments for certain taxpayers headquartered in designated countries in California until October 2023.

As a result, we did not make estimated U.S.

federal tax payments during the nine months ended September 30, 2023, and on October 16, 2023 we made an estimated income tax payment to the IRS of $352.0 million.

In connection with the Tax Cuts and Jobs Act of 2017 (“TCJA”), effective January 1, 2022, the TCJA eliminated the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years pursuant to IRC Section 174.

We estimate the incremental cash tax impact resulting from these regulations to be approximately $200.0 million for 2024.

It is anticipated that IRC Section 174 will result in cash tax outlays exceeding our income tax expense over the next two years unless the current legislation is changed.

There has been no material change to our effective tax rate as a result of this legislation.

Off-balance Sheet Arrangements

As of September 30, 2023, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of March 31, 2024, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Estimates

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The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

We base our estimates on historical experience and on

various other assumptions that we believe are reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis