What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-07 compared with 2024-11-08 · 107 added, 125 removed, 113 unchanged (67% 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, client to cloud networking for large data center, campus and routing environments.

Arista Networks is an industry leader in data-driven, client to cloud networking for large AI, 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.

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

We believe an increased focus on the deployment of AI enabled solutions by our large 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 at times 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 and may result in a reduction or uncertainty in the timing of orders from these large customers and increase the risk of excess and obsolescence charges on our products.

In addition, fiscal 2024 continues to be a year of new product introductions and expanded use cases, particularly in the AI Ethernet market, resulting in increased customer trials and contracts with acceptance periods, and an increase in the volatility and magnitude of our product deferred revenue balances, which in turn may create variability in our revenue results on a quarterly and annual basis.

In addition, if we are not able to satisfy the requirements under customer trials and contracts with acceptance periods, we may be required to accept product returns from our customers, which would reduce our deferred revenue balances and prevent us from recognizing revenue on such transactions and may result in the write-down of inventory.

uncompromising reliability built on the foundation of robust quality assurance capabilities with a suite of automated diagnostics, advanced open and standards-based technology and intelligent automation to decrease the manual workload on the operator.

At the core of Arista’s platform is Arista 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 believe that cloud computing represents a fundamental shift from traditional legacy network architectures.

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Our future success is dependent upon our ability to continue to evolve and adapt to our rapidly changing environment.

We must also continue to develop market-leading products and software features that address the changing needs of our existing and new customers, and increase sales in the cloud, AI and 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 customers more effectively, increase sales to existing customers, and provide services and support.

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

We believe one of our greatest strengths lies in our ability to rapidly develop new features and applications.

Our development model is focused on the development of new products based on our EOS software and enhancements to EOS.

We engineer our products to be agnostic with respect to the underlying merchant silicon architecture.

The programmability of EOS has allowed us to expand our software applications to address the ever-increasing demands of cloud networking, including workflow automation, network visibility, analytics and network detection and response, and has further allowed us to integrate rapidly with a wide range of third-party applications for virtualization, management, automation, orchestration and network services.

This enables us to focus our research and development resources on our software core competencies and to leverage the investments made by merchant silicon vendors to achieve cost-effective solutions.

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

Our contract manufacturers deliver our products to

our third-party direct fulfillment facilities.

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

In addition, 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.

Furthermore, we expect to continue to make substantial investments to introduce new products and services and enhance the functionality of our existing cloud networking platform through investments in our research and development organization, and investments in or acquisitions of complementary companies, products and technologies to expand our product offerings and build upon our technology leadership.

The expansion of generative AI computing and distributed applications is further pushing the boundary of predictable scale and performance in the network.

A common characteristic of these AI workloads is that they are both data and compute intensive.

A typical AI workload involves large sparse matrix computations, distributed across hundreds or thousands of processors (CPU, GPU, TPU, etc.) with intense computations for a period of time and requires a high-bandwidth, scalable, lossless network in order to service these workloads.

With the exponential growth of AI applications, the need for standardized transport like Ethernet becomes paramount, enabling a power-efficient interconnect while overcoming the complexities of traditional approaches.

Our AI strategy is based on achieving two key objectives:

(1) deliver network switching products intended to provide a robust interconnect that seamlessly links GPUs, compute and storage to deliver fast job completion time for training and generative AI workloads;

and (2) offer customers the Arista Autonomous Virtual Assist ("AVA TM" ) which uses natural processing language to provide AI-assisted outcomes for network operations, security and observability.

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 or changes in mix of capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers.

For example, sales to our end customer Microsoft represented 20%, 18% and 16% of our total revenue for the years ended 2024, 2023 and 2022 respectively.

And sales to our end customer Meta Platforms represented 15%, 21% and 26% of our total revenue, respectively for the years ended 2024, 2023 and 2022.

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

This prioritization and acceleration of AI related infrastructure investment has at times come in conjunction with a reduction or changes in the mix of previously planned purchases and various cost reduction measures by these customers, including optimization and increased efficiency in non-AI related capital expenditures.

In addition, although the focus on deployment of AI enabled solutions has driven increased demand for networking, the long-term trajectory is unknown.

As such, demand estimates for our new products are difficult to forecast and can create volatility in our revenue.

We remain in a period of new product introductions and expanded use cases, particularly in the AI Ethernet market.

This has resulted in increased customer trials and contracts with acceptance periods, and an increase in the volatility and magnitude of our product deferred revenue balances, which in turn may create variability in our revenue results on a quarterly and annual basis.

In addition, if we are not able to satisfy the requirements under customer trials or contracts with

acceptance periods, we may be required to accept product returns from our customers, which would prevent us from recognizing revenue on such transactions and may result in the write-down of inventory.

Macroeconomic Update

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.

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, changes in government administration policy positions, and geopolitical pressures, including escalating international trade measures and tariff uncertainty.

We are working closely with our contract manufacturers and suppliers to optimize our supply chain and production efforts in response to the uncertainty around international trade policy and tariff rates.

While our supply chain has currently not experienced a significant disruption as a result of the recent trade measures, the extent of such policies and tariffs that will ultimately be implemented is unknown at this time, and the future impact to our supply chain and cost of our products is uncertain.

We continue to ship products against previously committed demand/deployment plans and accelerate some deployments where needed, while trying to balance our customers' requirements and lead times with the availability of key components and products and lead times of our key suppliers and contract manufacturers.

As a result, some shipments against these previously committed demand/deployment plans have extended into 2025.

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 previously committed.

Given the timing and prioritization of customer orders and shipment patterns, as well as the timing and outcome of customer trials and contracts with acceptance periods, near term revenue trends may not be reflective of current demand levels, and as discussed above will also benefit from demand/deployment plans that have been 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.

The magnitude of these balances, combined with a reduction in customer demand-planning horizons and shifting customer product priorities, has resulted in an 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.

These cost pressures may be increased if escalating tariff and non-tariff international trade measures continue to affect our supply chain.

We also may not be able to fully mitigate the cost impacts of escalating tariff and non-tariff international trade measures or be able to pass on the full burden of the increase in trade-related costs to our customers, which could further 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.

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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, inventory and purchase commitment levels.

In addition, any continued or renewed disruption in manufacturing and supply and uncertainty about international trade policy and tariff rates could negatively impact our business, and as a result we may face challenges in implementing countermeasures and responding to these changing trading conditions.

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.

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Results of Operations

Three and Nine Months Ended September 30, 2024 Compared to Three and Nine Months Ended September 30, 2023

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

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

2024 2023 Change in 2024 2023 Change in

$ $ $ % $ $ $ %

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

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

Three Months Ended March 31,

2025 2024 Change in

Product $ 1,692.5 $ 1,328.8 $ 363.7 27.4 %

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Gross margin 63.7 % 63.7 %

Revenue by Geography (in thousands, except percentages)

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

2024 % of Total 2023 % of Total 2024 % of Total 2023 % of Total

Revenue by Geography (in millions, except percentages)

Three Months Ended March 31,

2025 % of Total 2024 % of Total

Americas $ 1,598.5 79.7 % $ 1,255.4 79.9 %

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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 $238.3 million, or 18.5%, and $556.7 million, or 15.0% for the three and nine months ended September 30, 2024, compared to the same periods in 2023.

This increase reflects healthy customer demand and higher shipments of our switching and routing platforms, in particular strong contributions from our large cloud and enterprise customers.

In addition, service revenue increased by $63.2 million, or 28.2%, and $196.2 million, or 32.7% for the three and nine months ended September 30, 2024, compared to the same periods 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 18.3% and 19.0% of total revenue for the three and nine months ended September 30, 2024, changing from 21.5% and 20.1% 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.

Product revenue increased by $363.7 million, or 27.4% for the three months ended March 31, 2025, compared to the same period in 2024.

This increase reflects increased demand for our switching and routing platforms across our customer base.

In addition, service revenue increased by $69.7 million, or 28.7% for the three months ended March 31, 2025, compared to the same period in 2024, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand.

International revenue represented 20.3% of total revenue for the three months ended March 31, 2025, increasing from 20.1% for the same period in the prior year, which was primarily influenced by changes in the geographic mix of sales to our large global customers.

Cost of Revenue and Gross Margin

Cost of product revenue primarily consists of amounts paid for inventory to our third-party contract manufacturers and merchant silicon vendors, overhead costs of our manufacturing operations, including freight, and other costs associated with manufacturing our products and managing our inventory and supply chain.

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

Cost of revenue increased by $82.2 million, or 14.5%, and $123.7 million, or 7.3% for the three months and nine months ended September 30, 2024, compared to the same periods in 2023.

These increases were driven by a corresponding increase in product and service revenues, partially offset by reductions of $40.3 million and $111.4 million in net excess/obsolete inventory and supplier liability charges for the three months and nine months ended September 30, 2024, compared to the same periods in 2023 respectively.

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 and suppliers.

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

Gross margin increased from 62.4% to 64.2% for the three months ended September 30, 2024, and increased from 60.9% to 64.3% for the nine months ended September 30, 2024, compared to the same periods in 2023.

These changes reflect an improvement in product margins of 61.1% compared to 59.3%, and 61.3% compared to 57.9%, for the three and nine months ended September 30, 2024, compared to the same periods in 2023 respectively.

The improvement in product margins was driven largely by a reduction of $40.3 million and $111.4 million in net excess/obsolete inventory and supplier liability charges for the three months and nine months ended September 30, 2024, compared to the same periods in 2023 respectively.

Operating Expenses (in thousands, except percentages)

Cost of revenue increased by $158.7 million, or 27.8% for the three months ended March 31, 2025, compared to the same period in 2024.

These increases were primarily driven by a corresponding increase in product and service revenues.

component inventory held by our contract manufacturers and suppliers.

We expect our gross margin to fluctuate over time depending on the factors described above and may be adversely impacted by unpredictable international trade policy and tariff rates.

Gross margin was 63.7% for the three months ended March 31, 2025, consistent with the amount in the same period in 2024.

Operating Expenses (in millions, except percentages)

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

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

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

2024 2023 Change in 2024 2023 Change in

$ $ $ % $ $ $ %

Three Months Ended March 31,

2025 2024 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 by $23.5 million, or 11.1%, and $68.3 million, or 10.6% for the three and nine months ended September 30, 2024, compared to the same periods in 2023.

The increase was mainly driven by an increase in personnel costs due to headcount growth.

Research and development expenses increased by $58.0 million, or 27.8% for the three months ended March 31, 2025, compared to the same period in 2024.

The increase was primarily driven by a $25.1 million increase in personnel costs due to headcount growth, and a $19.3 million increase in new product introduction costs, including non-recurring engineering costs as we expand our product portfolio.

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 by $4.8 million, or 4.7%, and $22.8 million, or 7.8% for the three and nine months ended September 30, 2024, compared to the same periods in 2023.

Sales and marketing expenses increased by $11.5 million, or 10.9% for the three months ended March 31, 2025, compared to the same period in 2024, which was primarily driven by increased personnel costs due to headcount growth.

General and administrative

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

General and administrative expenses increased by $8.5 million, or 33.4% for the three months ended September 30, 2024 and increased by $10.5 million, or 13.7% for the nine months ended September 30, 2024, compared to the same periods in

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 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 September 30, Nine Months Ended September 30,

2024 2023 Change in 2024 2023 Change in

$ $ $ % $ $ $ %

General and administrative expenses increased by $6.6 million, or 23.8% for the three months ended March 31, 2025, compared to the same period in 2024, impacted by an increase in personnel costs.

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

Other income (expense), net consists primarily of interest income from our cash, cash equivalents and marketable securities.

We expect other income (expense), net may fluctuate in the future as a result of changes in interest rates and changes in our cash, cash equivalents and marketable securities balances.

Three Months Ended March 31,

2025 2024 Change in

Other income (expense), net:

Interest income $ 90.2 $ 63.8 $ 26.4 41.4 %

Gain (loss) on strategic investments 12,400 (473) 12,873 2,721.6 12,400 18,699 (6,299) (33.7)

Other income (expense), net 6.0 (1.2) 7.2 600.0

Total other income (expense), net $ 96.2 $ 62.6 $ 33.6 53.7 %

The improvement in other income during the three and nine months ended September 30, 2024 compared to the same periods in 2023 was primarily driven by increased interest income of $41.7 million and $122.3 million due to an increase in our cash and investment balances coupled with higher investment yields.

Provision for Income Taxes (in thousands, except percentages)

The favorable movement in other income (expense), net, during the three months ended March 31, 2025 compared to the same period in 2024 was primarily driven by increased interest income of $26.4 million due to an increase in our cash and marketable securities balances.

Provision for Income Taxes (in millions, except percentages)

We operate in a number of tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business.

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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,

2024 2023 Change in 2024 2023 Change in

$ $ $ % $ $ $ %

Three Months Ended March 31,

2025 2024 Change in

Income before income taxes $ 955.0 $ 722.8 $ 232.2 32.1 %

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Effective tax rate 14.8 % 11.8 %

The decrease in the effective tax rates for the three and nine months ended September 30, 2024, as compared to the same periods in 2023, was due to a change in the jurisdictional mix of earnings.

The increase in the effective tax rates in the three months ended March 31, 2025, as compared to the same period in 2024, was primarily due to a decrease in the proportion of tax benefits attributable to equity-based compensation versus total pre-tax income.

Liquidity and Capital Resources

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

As of September 30, 2024, our total balance of cash, cash equivalents and marketable securities was approximately $7.4 billion, of which approximately $1.1 billion was held outside the U.S.

As of March 31, 2025, our total balance of cash, cash equivalents and marketable securities was approximately $8.1 billion, of which approximately $796.4 million was held outside the U.S.

in our foreign subsidiaries.

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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, stock repurchases, and capital expenditures, including the planned construction of an office and lab space.

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.

In addition, we expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions.

In particular, we have increased our purchase commitments to respond to the rapid deployment of AI networks and reduce overall lead times which may increase our working capital requirements.

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.

If we are required and unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.

Cash Flows (in thousands)

Nine Months Ended September 30,

Cash Flows (in millions)

Three Months Ended March 31,

Cash provided by operating activities $ 641.7 $ 513.8

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Effect of exchange rate changes 0.7 (1.6)

Net increase in cash, cash equivalents and restricted cash $ 1,237,074 $ 1,073,698

Net increase (decrease) in cash, cash equivalents and restricted cash $ (917.3) $ 153.5

Cash Flows from Operating Activities

During the nine months ended September 30, 2024, cash provided by operating activities was $2.7 billion, consisting of net income of $2.1 billion along with a net decrease in working capital requirements of $744.3 million, offset partially by non-cash adjustments to net income of $118.1 million.

The decrease in working capital requirements primarily consisted of an increase in deferred revenue of $1,001.1 million resulting from an increase in customer PCS contracts and an increase in product deferred revenue related to customer contracts with acceptance terms, a $175.2 million decrease in inventory resulting from strong product shipments, and a $59.8 million increase in income tax payables, net related to timing of payments.

These cash inflows were partially offset by a $226.6 million decrease in accounts payable and accrued liabilities primarily due to timing of inventory-related receipts and payments, as well as a reduction in supplier liabilities, an increase in accounts receivable of $96.5 million due to increased product and service billings, and a $173.1 million increase in other assets driven by increased deferred cost of sales associated with higher product revenue deferrals.

The non-cash adjustments to net income were driven by a $376.7 million increase in deferred taxes primarily due to the increase in deferred revenue and the capitalization of research and development costs under Section 174 of the Internal Revenue Code ("IRC"), largely offset by stock-based compensation of $254.6 million and depreciation and amortization.

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.

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 IRC.

This decrease in working capital requirements primarily consisted of a $346.2 million increase in income tax payables largely related to the tax relief issued by the Internal Revenue Service ("IRS") to extend the due date for the 2022 tax return filing, and 2023 estimated tax payments to October 16, 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 $84.4 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 three months ended March 31, 2025, cash provided by operating activities was $641.7 million, consisting of net income of $813.8 million, offset by a net increase of $159.7 million in working capital requirements.

The increase in working capital requirements primarily consisted of an increase in accounts receivable of $295.4 million due to increased product and service billings, a $173.3 million decrease in other liabilities primarily due to timing of inventory-related receipts and payments, a $122.7 million increase in inventory and $113.7 million increase in other assets driven by increased deferred cost of sales associated with higher product revenue deferrals.

These cash outflows were partly offset by a $241.3 million increase in income tax payables related to timing of payments, and an increase in deferred revenue of $297.4 million primarily resulting from an increase in customer PCS contracts and an increase in product deferred revenue related to customer contracts with acceptance terms.

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 increase in working capital requirements primarily consisted of a $207.2 million decrease in accounts payable primarily due to timing of 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.

Cash Flows from Investing Activities

During the nine months ended September 30, 2024, cash used in investing activities was $1.1 billion, consisting of purchases of available-for-sale securities of $2.6 billion, partially offset by proceeds from maturities and sales of marketable securities of $1.5 billion.

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, 2025, cash used in investing activities was $765.9 million, consisting of purchases of marketable securities of $1,545.5 million.

These amounts were partially offset by proceeds from maturities and sales of marketable securities of $808.0 million.

During the three months ended March 31, 2024, cash used in investing activities was $295.6 million, consisting of purchases of marketable 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.

Cash Flows from Financing Activities

During the nine months ended September 30, 2024, cash used in financing activities was $291.8 million, consisting of payments for repurchases of our common stock from the open market of $299.8 million, and employee taxes withheld and paid of $47.5 million upon vesting of restricted stock units, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $55.5 million.

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 three months ended March 31, 2025, cash used in financing activities was $793.8 million, consisting of payments for repurchases of our common stock from the open market of $787.1 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.

Stock Repurchase Programs

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

The New Repurchase Program allows for repurchases of $1.2 billion through May 2027, but 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, 2024, we repurchase d a total of $65.2 million worth of shares under our New Repurchase Program.

As of September 30, 2024, the remaining authorized amount for repurchases under the New Repurchase Program was $1.0 billion.

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

Our current repurchase program (the "Existing Repurchase Program") allows for stock repurchases of up to $1.2 billion through May 2027.

In May 2025, our board of directors authorized and announced a new $1.5 billion stock repurchase program (the “New Repurchase Program” and together with the Existing Repurchase Program, the "Repurchase Programs").

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 March 31, 2025, we repurchase d a total of $787.1 million of our common stock under our Existing Repurchase Program .

As of March 31, 2025, the remaining authorized amount for repurchases under the Existing Repurchase Program was $133.9 millio n.

In April 2025, we repurchased

an additional $100.0 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.

Common Stock Split

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.

Material Cash Requirements

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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 September 30, 2024, we had $2.4 billion of such purchase obligations, of which $2.0 billion are expected to be received within one year, and $0.4 billion are expected to be received after one year.

As of March 31, 2025, we had $3.5 billion of such purchase obligations, of which $3.0 billion are expected to be received within one year, and $0.5 billion 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 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.

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 $15.0 million for the remainder of 2024, and $227.0 million to $252.0 million for the next two years, with construction expected to commence at the end of 2024.

Accrued Income Taxes

As of September 30, 2024, we have recorded long-term tax liabilities of $116.6 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 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 full year incremental cash tax impact resulting from these regulations to be approximately $210.0 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.

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

The estimated remaining capital expenditures related to this project are expected to be approximately $215.0 million to $240.0 million for the next two years, with construction expected to be completed by the end of fiscal 2026.

Off-balance Sheet Arrangements

As of September 30, 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.

As of March 31, 2025, 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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Recent Accounting Pronouncements

Refer to the subheading titled “ Recently Adopted Accounting Pronouncements” in Note 1.

Refer to the subheading titled “ Recent Accounting Pronouncements Not Yet Effective” in Note 1.

Organization and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis