Arista Networks, Inc. 10-Q

Item 1. Financial Statements (Unaudited) ARISTA NETWORKS, INC. Condensed Consolidated Balance Sheets (In thousands, except par value) September 30, 2024 December 31, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,175,139 $ 1,938,606 Marketable securities 4,253,249 3,069,362 Accounts receivable, net 1,130,897 1,034,398 Inventories 1,769,962 1,945,180 Prepaid expenses and other current assets 548,693 412,518 Total current assets 10,877,940 8,400,064 Property and equipment, net 93,034 101,580 Goodwill and acquisition-related intangible assets, net 337,230 357,299 Deferred tax assets 1,318,224 945,792 Other assets 220,295 151,900 TOTAL ASSETS $ 12,846,723 $ 9,956,635 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 289,161 $ 435,059 Accrued liabilities 323,990 407,302 Deferred revenue 1,599,590 915,204 Other current liabilities 221,633 161,870 Total current liabilities 2,434,374 1,919,435 Income taxes payable 116,604 95,751 Deferred revenue, non-current 907,741 591,000 Other long-term liabilities 142,115 131,390 TOTAL LIABILITIES 3,600,834 2,737,576 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, 2024 and December 31, 2023 — — Common stock, $ 0.0001 par value— 1,000,000 shares authorized as of September 30, 2024 and December 31, 2023; 314,847 and 312,245 shares issued and outstanding as of September 30, 2024 and December 31, 2023 31 31 Additional paid-in capital 2,371,010 2,108,331 Retained earnings 6,865,260 5,114,025 Accumulated other comprehensive income (loss) 9,588 ( 3,328 ) TOTAL STOCKHOLDERS’ EQUITY 9,245,889 7,219,059 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 12,846,723 $ 9,956,635 The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited). 1 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Income Statements (Unaudited, in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue: Product $ 1,523,807 $ 1,285,548 $ 4,275,923 $ 3,719,179 Service 287,129 223,908 796,787 600,552 Total revenue 1,810,936 1,509,456 5,072,710 4,319,731 Cost of revenue: Product 593,343 522,866 1,655,415 1,565,341 Service 55,876 44,171 156,986 123,335 Total cost of revenue 649,219 567,037 1,812,401 1,688,676 Gross profit 1,161,717 942,419 3,260,309 2,631,055 Operating expenses: Research and development 235,824 212,353 711,701 643,437 Sales and marketing 106,832 102,033 316,315 293,496 General and administrative 33,811 25,338 87,329 76,787 Total operating expenses 376,467 339,724 1,115,345 1,013,720 Income from operations 785,250 602,695 2,144,964 1,617,335 Other income (expense), net 97,660 41,815 231,143 110,300 Income before income taxes 882,910 644,510 2,376,107 1,727,635 Provision for income taxes 134,972 99,183 325,049 253,950 Net income $ 747,938 $ 545,327 $ 2,051,058 $ 1,473,685 Net income per share: Basic $ 2.38 $ 1.76 $ 6.54 $ 4.78 Diluted $ 2.33 $ 1.72 $ 6.41 $ 4.66 Weighted-average shares used in computing net income per share : Basic 314,482 310,185 313,742 308,602 Diluted 320,448 317,631 320,078 316,564 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 (Unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net income $ 747,938 $ 545,327 $ 2,051,058 $ 1,473,685 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 1,541 ( 1,378 ) ( 836 ) ( 1,045 ) Available-for-sale investments: Change in net unrealized gains (losses) on available-for-sale securities 23,126 3,446 13,779 7,955 Reclassification adjustment included in net income ( 21 ) ( 26 ) ( 27 ) 3,832 Other comprehensive income (loss) 24,646 2,042 12,916 10,742 Comprehensive income $ 772,584 $ 547,369 $ 2,063,974 $ 1,484,427 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, 2024 Nine Months Ended September 30, 2024 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 314,086 $ 31 $ 2,263,356 $ 6,182,479 $ ( 15,058 ) $ 8,430,808 312,245 $ 31 $ 2,108,331 $ 5,114,025 $ ( 3,328 ) $ 7,219,059 Net income — — — 747,938 — 747,938 — — — 2,051,058 — 2,051,058 Other comprehensive income, net of tax — — — — 24,646 24,646 — — — — 12,916 12,916 Stock-based compensation — — 98,123 — — 98,123 — — 254,630 — — 254,630 Issuance of common stock in connection with employee equity incentive plans 998 — 20,984 — — 20,984 3,812 — 55,501 — — 55,501 Repurchase of common stock ( 205 ) — — ( 65,157 ) — ( 65,157 ) ( 1,047 ) — — ( 299,823 ) — ( 299,823 ) Tax withholding paid for net share settlement of equity awards ( 32 ) — ( 11,453 ) — — ( 11,453 ) ( 163 ) — ( 47,452 ) — — ( 47,452 ) Balance at end of period 314,847 $ 31 $ 2,371,010 $ 6,865,260 $ 9,588 $ 9,245,889 314,847 $ 31 $ 2,371,010 $ 6,865,260 $ 9,588 $ 9,245,889 4 Table of Contents Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 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 309,355 $ 31 $ 1,927,697 $ 3,955,062 $ ( 25,208 ) $ 5,857,582 306,890 $ 31 $ 1,780,714 $ 3,138,983 $ ( 33,908 ) $ 4,885,820 Net income — — — 545,327 — 545,327 — — — 1,473,685 — 1,473,685 Other comprehensive income, net of tax — — — — 2,042 2,042 — — — — 10,742 10,742 Stock-based compensation — — 85,390 — — 85,390 — — 215,398 — — 215,398 Issuance of common stock in connection with employee equity incentive plans 1,662 — 23,387 — — 23,387 5,162 — 53,797 — — 53,797 Repurchase of common stock — — — — — — ( 954 ) — — ( 112,279 ) — ( 112,279 ) Tax withholding paid for net share settlement of equity awards ( 45 ) — ( 8,173 ) — — ( 8,173 ) ( 158 ) — ( 23,939 ) — — ( 23,939 ) Common stock issued for business acquisition — $ — $ — $ — $ — — 32 $ — $ 2,331 $ — $ — 2,331 Balance at end of period 310,972 $ 31 $ 2,028,301 $ 4,500,389 $ ( 23,166 ) $ 6,505,555 310,972 $ 31 $ 2,028,301 $ 4,500,389 $ ( 23,166 ) $ 6,505,555 The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited). 5 Table of Contents ARISTA NETWORKS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,051,058 $ 1,473,685 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 46,650 56,233 Stock-based compensation 254,630 215,398 Deferred income taxes ( 376,726 ) ( 217,489 ) Amortization (accretion) of investment premiums (discounts) ( 44,609 ) ( 22,389 ) Other 1,921 ( 5,084 ) Changes in operating assets and liabilities: Accounts receivable, net ( 96,499 ) 84,379 Inventories 175,218 ( 603,832 ) Other assets ( 173,119 ) ( 118,622 ) Accounts payable ( 142,005 ) 33,740 Accrued liabilities ( 84,565 ) 117,481 Deferred revenue 1,001,127 153,505 Income taxes, net 59,763 346,170 Other liabilities 4,428 ( 5,625 ) Net cash provided by operating activities 2,677,272 1,507,550 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of marketable securities 1,427,348 1,564,950 Proceeds from sales of marketable securities 44,865 49,584 Purchases of marketable securities ( 2,593,418 ) ( 1,934,156 ) Purchases of property and equipment ( 19,580 ) ( 28,424 ) Other investing activities ( 6,628 ) ( 2,451 ) Net cash used in investing activities ( 1,147,413 ) ( 350,497 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock under equity plans 55,501 53,797 Tax withholding paid on behalf of employees for net share settlement ( 47,452 ) ( 23,939 ) Repurchases of common stock ( 299,823 ) ( 112,279 ) Net cash used in financing activities ( 291,774 ) ( 82,421 ) Effect of exchange rate changes ( 1,011 ) ( 934 ) NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 1,237,074 1,073,698 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period 1,939,464 675,978 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period $ 3,176,538 $ 1,749,676 The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited). 6 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 next generation data center, campus and routing environments. Our cloud networking solutions consist of our Extensible Operating System ("EOS"), a set of network applications and our Ethernet switching and routing platforms. We are 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 have been 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, 2024, are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of December 31, 2023 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, 2023, filed with the SEC on February 12, 2024. 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, 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 the effects of, among other things, inflation, monetary policy shifts, recession risks, potential supply chain disruptions, and geopolitical pressures. 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. Increased capacity has allowed us to ship products against previously committed demand/deployment plans and accelerate some deployments where needed, while trying to minimize 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. 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 7 Table of Contents previously committed. We expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions. The 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 in additional excess and obsolete inventory and supplier liability charges. 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. 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. 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. In addition, any continued or renewed disruption in manufacturing and supply resulting from these factors could negatively impact our business. Recent technologies, such as generative AI models, have emerged, and while they have driven increased demand for networking, the long-term trajectory is unknown. As such, demand estimates for our new products may be inaccurate and create volatility in our revenue and inventory levels. Furthermore, 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 conditions discussed herein may not be indicative of future operating results and trends. Recent Accounting Pronouncements Not Yet Effective In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740)-Improvements to Income Tax Disclosures. The ASU requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, the ASU requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. As of September 30, 2024 , we have not early adopted ASU 2023-09 and we are currently evaluating the impact of future adoption on our financial disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280)-Improvements to Reportable Segment Disclosures. The ASU requires that an entity disclose significant segment expenses impacting profit and loss that are regularly provided to the chief operating decision maker. The update is required to be applied retrospectively to prior periods presented, based on the significant segment expense categories identified and disclosed in the period of adoption. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. As of September 30, 2024, we have not early adopted ASU 2023-07 and we are currently evaluating the impact of future adoption on our financial disclosures. 2. Fair Value Measurements Assets measured at fair values on a recurring basis We measure and report our cash equivalents, restricted cash, and available-for-sale marketable securities at fair value on a recurring basis. The following tables summarize the fair value of these financial assets by significant investment category and their levels within the fair value hierarchy (in thousands): 8 Table of Contents September 30, 2024 December 31, 2023 Level I Level II Level III Total Level I Level II Level III Total Financial Assets: Cash Equivalents: Money market funds $ 1,372,386 $ — $ — $ 1,372,386 $ 1,015,705 $ — $ — $ 1,015,705 Commercial paper — 2,994 — 2,994 — 1,999 — 1,999 U.S. government notes 54,889 — — 54,889 — — — — Agency securities — 24,997 — 24,997 — — — — 1,427,275 27,991 — 1,455,266 1,015,705 1,999 — 1,017,704 Marketable Securities: Commercial paper — 25,058 — 25,058 — — — — Certificates of deposits (1) — — — — — 5,000 — 5,000 U.S. government notes 1,506,033 — — 1,506,033 1,044,859 — — 1,044,859 Corporate bonds — 1,968,281 — 1,968,281 — 1,362,124 — 1,362,124 Agency securities — 753,877 — 753,877 — 657,379 — 657,379 1,506,033 2,747,216 — 4,253,249 1,044,859 2,024,503 — 3,069,362 Other Assets: Money market funds - restricted 1,399 — — 1,399 858 — — 858 Total Financial Assets $ 2,934,707 $ 2,775,207 $ — $ 5,709,914 $ 2,061,422 $ 2,026,502 $ — $ 4,087,924 ______________________________________ (1) As of December 31, 2023, all of our certificates of deposits were domestic deposits. During the three and nine months ended September 30, 2024, the Company did not make any transfers between the levels of the fair value hierarchy. 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): September 30, 2024 December 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value Commercial paper $ 28,052 $ — $ — $ 28,052 $ 1,999 $ — $ — $ 1,999 U.S. government 1,554,054 7,088 ( 220 ) 1,560,922 1,043,445 2,874 ( 1,460 ) 1,044,859 Corporate bonds 1,957,674 10,854 ( 247 ) 1,968,281 1,361,132 2,810 ( 1,818 ) 1,362,124 Agency securities 775,636 3,468 ( 230 ) 778,874 657,118 1,143 ( 882 ) 657,379 Total $ 4,315,416 $ 21,410 $ ( 697 ) $ 4,336,129 $ 3,063,694 $ 6,827 $ ( 4,160 ) $ 3,066,361 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, our debt securities are generally not subject to credit risk; therefore, we did not recognize any credit losses or non-credit-related impairments related to such securities for the three and nine months ended September 30, 2024. All unrealized losses were recognized in other 9 Table of Contents comprehensive income (loss). Realized gains or losses were immaterial for the three and nine months ended September 30, 2024. The following table is an analysis of our debt securities in unrealized loss positions (in thousands): September 30, 2024 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 $ 62,724 $ ( 74 ) $ 127,869 $ ( 146 ) $ 190,593 $ ( 220 ) Corporate bonds 221,914 ( 133 ) 101,990 ( 114 ) 323,904 ( 247 ) Agency securities 129,773 ( 189 ) 102,796 ( 41 ) 232,569 ( 230 ) Total $ 414,411 $ ( 396 ) $ 332,655 $ ( 301 ) $ 747,066 $ ( 697 ) As of September 30, 2024, we had no marketable securities with contractual maturities that exceeded 24 months. The fair values of marketable securities by remaining contractual maturities, are as follows (in thousands): September 30, 2024 Fair Value Due in 1 year or less $ 2,591,487 Due in 1 to 2 years 1,661,762 Total debt securities $ 4,253,249 The weighted-average remaining duration of our marketable securities is approximately 0.9 years as of September 30, 2024. As we view these marketable securities as available to support current operations, we classify marketable 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 Other Assets on the condensed consolidated balance sheets. Their initial cost is adjusted to fair value on a non-recurring basis based on observable price changes from orderly transactions of identical or similar securities of the same issuer, or for impairment. These investments are classified within Level III of the fair value hierarchy as we estimate the value based on valuation methods using the observable transaction price at the transaction date and other significant unobservable inputs, such as volatility, rights, and obligations related to these securities. In addition, the valuation requires management judgment due to the absence of market price and lack of liquidity. We did not record any realized gains or losses on our non-marketable equity securities during the three and nine months ended September 30, 2024 and September 30, 2023, and w e recorded immaterial amounts of unrealized gains or losses for the three and nine months ended September 30, 2024 and September 30, 2023, respectively . 10 Table of Contents 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 non-marketable equity securities . The following table summarizes the activity related to our non-marketable equity securities as of September 30, 2024 and December 31, 2023 (in thousands): September 30, 2024 December 31, 2023 Cost of investments $ 38,284 $ 31,656 Cumulative impairment and downward adjustment — — Cumulative upward adjustment 43,032 30,632 Carrying amount of investments $ 81,316 $ 62,288 3. Financial Statements Details Inventories Inventories consist of the following (in thousands): September 30, 2024 December 31, 2023 Raw materials $ 652,213 $ 930,777 Finished goods 1,117,749 1,014,403 Total inventories $ 1,769,962 $ 1,945,180 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): September 30, 2024 December 31, 2023 Inventory deposits $ 113,705 $ 130,509 Other current assets 434,988 282,009 Total prepaid expenses and other current assets $ 548,693 $ 412,518 Property and Equipment, net Property and equipment, net consists of the following (in thousands): September 30, 2024 December 31, 2023 Land $ 46,866 $ 44,645 Equipment and machinery 157,626 149,092 Computer hardware and software 62,321 57,761 Leasehold improvements 34,781 34,584 Furniture and fixtures 3,563 3,576 Property and equipment, gross 305,157 289,658 Less: accumulated depreciation ( 212,123 ) ( 188,078 ) Property and equipment, net $ 93,034 $ 101,580 11 Table of Contents Accrued Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2024 December 31, 2023 Accrued compensation-related costs $ 107,545 $ 134,225 Accrued supplier liability 90,053 167,878 Accrued manufacturing and product development costs 77,574 62,532 Other 48,818 42,667 Total accrued liabilities $ 323,990 $ 407,302 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, 2024 2023 2024 2023 Contract liabilities, beginning balance $ 144,130 $ 110,097 $ 133,239 $ 103,448 Less: Revenue recognized from beginning balance ( 12,693 ) ( 10,222 ) ( 44,678 ) ( 33,466 ) Less: Beginning balance reclassified to deferred revenue ( 6,757 ) ( 5,306 ) ( 4,954 ) ( 5,228 ) Add: Contract liabilities recognized 22,280 25,712 63,353 55,527 Contract liabilities, ending balance $ 146,960 $ 120,281 $ 146,960 $ 120,281 As of September 30, 2024 and December 31, 2023, contract liabilities included in "Other current liabilities" were $ 60.0 million for each period, 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 contracts with 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, 2024 2023 2024 2023 Deferred revenue, beginning balance $ 2,118,786 $ 1,084,904 $ 1,506,204 $ 1,041,246 Less: Revenue recognized from beginning balance ( 249,328 ) ( 173,494 ) ( 616,321 ) ( 506,859 ) Add: Deferral of revenue in current period, excluding amounts recognized during the period 637,873 283,341 1,617,448 660,364 Deferred revenue, ending balance $ 2,507,331 $ 1,194,751 $ 2,507,331 $ 1,194,751 Other Performance Obligations Other performance obligations totaling $ 626.3 million as of September 30, 2024 include unbilled multi-year PCS and service contract amounts of $ 514.0 million and $ 112.3 million of binding contractual agreements with certain customers that are primarily related to future product shipments. Revenue from Total Remaining Performance Obligations T otal revenue from our contract liabilities, deferred revenue and other performance obligations that is expected to be recognized in future periods was $ 3.3 billion as of September 30, 2024 . A pproximately 83 % of this future revenue is expected to be recognized over the next two years and the remaining 17 % is expected to be recognized during the third to the fifth year. 12 Table of Contents Other Income (Expense), net Other income (expense), net consists of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest income $ 85,374 $ 43,676 $ 220,645 $ 98,391 Gain (loss) on strategic investments 12,400 ( 473 ) 12,400 18,699 Other income (expense), net ( 114 ) ( 1,388 ) ( 1,902 ) ( 6,790 ) Total $ 97,660 $ 41,815 $ 231,143 $ 110,300 13 Table of Contents 4. Goodwill and Acquisition-Related Intangible Assets Acquisition-Related Intangible Assets Acquisition-related intangible assets, excluding those that are fully amortized, were as follows (in thousands, except years): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life (in years) December 31, 2023 Additions September 30, 2024 December 31, 2023 Amortization September 30, 2024 December 31, 2023 September 30, 2024 Developed technology $ 154,930 $ — $ 154,930 $ ( 102,493 ) $ ( 12,583 ) $ ( 115,076 ) $ 52,437 $ 39,854 3.5 Customer relationships 54,620 — 54,620 ( 21,797 ) ( 5,777 ) ( 27,574 ) 32,823 27,046 4.1 Trade name 12,390 — 12,390 ( 8,882 ) ( 1,710 ) ( 10,592 ) 3,508 1,798 0.9 Total $ 221,940 $ — $ 221,940 $ ( 133,172 ) $ ( 20,070 ) $ ( 153,242 ) $ 88,768 $ 68,698 3.7 Amortization expense related to acquisition-related intangible assets was $ 6.7 million and $ 8.1 million for the three months ended September 30, 2024 and 2023, respectively, and $ 20.1 million and $ 26.7 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, future estimated amortization expense related to acquisition-related intangible assets is as follows (in thousands): Future Amortization Expense Remainder of 2024 $ 6,690 2025 19,642 2026 17,260 2027 13,436 2028 10,037 Thereafter 1,633 Total $ 68,698 Goodwill There was no change to goodwill for the three and nine months ended September 30, 2024. 14 Table of Contents 5. Commitments and Contingencies Leases We have operating lease arrangements for office space, data center, equipment and other corporate assets. As of September 30, 2024, we had lease payment obligations, net of immaterial sublease income, of $ 69.8 million, with $ 24.1 million payable within one year. Purchase Commitments We outsource most o f 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, 2024, we had non-cancellable purchase commitments not recorded on our balance sheet of $ 2.4 billion, of which $ 2.0 billion have expected receipt dates within 12 months, and $ 0.4 billion have expected 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 $ 116.5 million and $ 133.3 million as of September 30, 2024 and December 31, 2023, 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. On May 30, 2023, the US Patent Trial and Appeal Board (“PTAB”) ruled all challenged claims in the inter partes review unpatentable. The district court case remains stayed pending appeal and/or final resolution of the PTAB ruling. 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, 2024, provisions recorded for contingent losses related to other 15 Table of Contents 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. 6. Stockholders’ Equity and Stock-Based Compensation Stock Repurchase Program In April 2024, we completed repurchases under our previous $ 1.0 billion stock repurchase program (the “Prior Repurchase Program”). In May 2024, our board of directors authorized a new $ 1.2 billion stock repurchase program (the “New Repurchase Program” and together with the Prior Repurchase Program, the "Repurchase Programs"), which commenced in May 2024 and expires in May 2027. This authorization allows us to repurchase shares of our common stock that will be funded from working capital. Repurchases may be made at management's discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchases, trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a combination of the foregoing. The Repurchase Programs do 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, 2024 , we repurchase d a total of $ 65.2 million of our common stock under our New Repurchase Program. D uring the nine months ended September 30, 2024 , we repurchase d a total of $ 155.2 million of our common stock under our New Repurchase Program and $ 144.6 million of our common stock under our Prior Repurchase Program. As of September 30, 2024, the remaining authorized amount for stock repurchases under the New Repurchase Program was approximately $ 1.0 billion. A summary of the stock repurchase activity for the three and nine months ended September 30, 2024 is as follows (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, 2024 September 30, 2024 Aggregate purchase price $ 65,157 $ 299,823 Shares repurchased 205 1,047 Average price paid per share $ 318.14 $ 286.47 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 On April 16, 2024, our board of directors adopted an amended and restated Arista Networks, Inc. 2014 Equity Plan (the "Restated Plan"), effective April 17, 2024 (the "Effective Date") subject to the approval of our stockholders, which wa s approved at the 2024 Annual Meeting of Stockholders on June 7, 2024. The Restated Plan provides for the grant of equity-based awards, including stock options, restricted stock units, restricted stock, stock appreciation rights, and performance awards. The share pool available under the prior version of the Company's 2014 Equity Incentive Plan (the "Prior Plan") was extinguished, and the Restated Plan provides for a new share pool not to exceed (i) 13,200,000 shares of our Common Stock (“Shares”), plus (ii) any Shares subject to awards under the Prior Plan that, on or after the Effective Date, expired or otherwise terminated without having been exercised in full, or that were forfeited to or repurchased by us, including net settlement of Shares subject to restricted stock units, with the maximum number of Shares to be added to the Restated Plan as a result of clause (ii) equal to 10,039,657 Shares. The Restated Plan’s terms are substantially similar to the Prior Plan’s terms, including with respect to treatment of equity awards in the event of a “change in control” as defined under the Restated Plan, but with certain modifications, including the elimination of the automatic “evergreen” share reserve increase provided for under the Prior Plan. As of September 30, 2024, there remained approximately 13.1 million shares available for grant under the Restated 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 16 Table of Contents our shares outstanding on the immediately preceding December 31, but not to exceed 10 million shares, unless our board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2024, our board of directors authorized an increase of 3.1 million shares to the shares available for issuance under the ESPP. During the nine months ended September 30, 2024, we issued 280,843 shares at a weighted-average purchase price of $ 116.31 per share under the ESPP. As of September 30, 2024, there remained approximately 26.2 million shares available for issuance under the ESPP. Stock Option Activities The following table summarizes the option activity under our stock plans and related information (in thousands, except 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, 2023 2,457 $ 19.83 1.7 $ 529,931 Options granted — — Options exercised ( 1,391 ) 16.41 Options canceled ( 24 ) 20.07 Balance—September 30, 2024 1,042 $ 24.39 1.5 $ 374,471 Vested and exercisable—September 30, 2024 997 $ 23.26 1.4 $ 359,633 Restricted Stock Unit (RSU) Activities A summary of the RSU activity is presented below (in thousands, except per share amounts): Number of Shares Weighted- Average Grant Date Fair Value Per Share Unvested balance—December 31, 2023 7,900 $ 112.76 RSUs and PRSUs granted 2,307 277.30 RSUs and PRSUs vested ( 2,117 ) 93.59 RSUs and PRSUs forfeited/canceled ( 412 ) 134.80 Unvested balance—September 30, 2024 7,678 $ 168.28 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, 2024 2023 2024 2023 Cost of revenue $ 4,098 $ 3,717 $ 11,531 $ 9,516 Research and development 58,340 47,965 152,897 125,671 Sales and marketing 20,960 20,490 56,630 51,461 General and administrative 14,725 13,218 33,572 28,750 Total stock-based compensation $ 98,123 $ 85,390 $ 254,630 $ 215,398 As of September 30, 2024, there were $ 1.1 billion 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 4.5 years. 7. Net Income Per Share Basic net income per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding during the period, including potential common shares assuming the dilutive effect of outstanding stock options, 17 Table of Contents restricted stock units, and the employee stock purchase plan using the treasury stock method. Potential common shares whose effect would have been antidilutive are excluded from the computation of diluted 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, 2024 2023 2024 2023 Numerator: Net income $ 747,938 $ 545,327 $ 2,051,058 $ 1,473,685 Denominator: Basic weighted-average shares outstanding 314,482 310,185 313,742 308,602 Add weighted-average effect of dilutive securities: Employee equity awards 5,966 7,446 6,336 7,962 Diluted weighted-average shares outstanding 320,448 317,631 320,078 316,564 Net income per share: Basic $ 2.38 $ 1.76 $ 6.54 $ 4.78 Diluted $ 2.33 $ 1.72 $ 6.41 $ 4.66 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, 2024 2023 2024 2023 Employee equity awards 54 29 82 341 8. Income Taxes (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Income before income taxes $ 882,910 $ 644,510 $ 2,376,107 $ 1,727,635 Provision for income taxes 134,972 99,183 $ 325,049 253,950 Effective tax rate 15.3 % 15.4 % 13.7 % 14.7 % The decrease in the effective tax rates in the three and nine months ended September 30, 2024, as compared to the same periods in 2023, was primarily due to a change in the jurisdictional mix of earnings. 9. Geographical Information We operate in one reportable segment. The following table represents revenue based on customers’ shipping addresses (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Americas (1) $ 1,480,071 $ 1,184,717 $ 4,109,719 $ 3,454,237 Europe, Middle East and Africa 191,189 173,175 511,543 469,114 Asia-Pacific 139,676 151,564 451,448 396,380 Total revenue $ 1,810,936 $ 1,509,456 $ 5,072,710 $ 4,319,731 (1) Includes $ 1,465.3 million and $ 1,150.5 million revenue generated from the U.S. for the three months ended September 30, 2024 and September 30, 2023, respectively, and $ 4,060.8 million and $ 3,366.8 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. 18 Table of Contents 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, 2024 December 31, 2023 United States $ 75,556 $ 79,728 International 17,478 21,852 Total $ 93,034 $ 101,580 10. Subsequent event Arista’s board of directors has approved a four -for-one forward stock split to make Arista’s common stock more accessible to a broader base of investors. The four -for-one forward stock split will be effected through the filing of an amendment to Arista’s Amended and Restated Certificate of Incorporation that will proportionately increase the authorized shares of common stock. Our stockholders will receive an additional three shares of common stock for each share held as of the effective time of the filing of the amendment on December 3, 2024. Prior to market open on December 4, 2024, trading is expected to commence on a split-adjusted basis. The following table reflects basic and diluted weighted average shares and net income per share on an unaudited pro forma basis giving effect to the stock split as if it had been effective for all periods presented (in thousands, except per share amounts). Pro Forma (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Numerator: Net income $ 747,938 $ 545,327 $ 2,051,058 $ 1,473,685 Denominator: Basic weighted-average shares outstanding 1,257,928 1,240,740 1,254,968 1,234,408 Add weighted-average effect of dilutive securities: Employee equity awards 23,864 29,784 25,344 31,848 Diluted weighted-average shares outstanding 1,281,792 1,270,524 1,280,312 1,266,256 Net income per share: Basic $ 0.59 $ 0.44 $ 1.63 $ 1.19 Diluted $ 0.58 $ 0.43 $ 1.60 $ 1.16