What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-05 compared with 2025-08-06 · 58 added, 51 removed, 173 unchanged (39% of the section changed)

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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.

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.

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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.

During the current quarter we completed the acquisition of the VeloCloud business from Broadcom .

In June 2025, we completed the acquisition of the VeloCloud business from Broadcom .

VeloCloud’s secure, AI-optimized cloud WAN portfolio provides seamless connectivity to customer sites of any type, complementing Arista’s leading data center and campus wired/wireless portfolio.

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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.

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.

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.

We have experienced unpredictability in t he timing of orders from these large customers primarily due to the overall complexity of these large orders and changes in demand specific to these customers, including reductions in or changes in the mix of capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers.

In addition, the variability in customer concentration is linked to the timing of new product deployments, and spending cycles with these customers, as well as the time it takes these customers to evaluate, test, qualify and accept our products and services, 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.

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

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 charges for excess and obsolete inventory.

In some instances, such factors have had, and may continue to have, an impact on certain current or future projects and reduce 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 charges for excess and obsolete

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

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Results of Operations

Three and Six Months Ended June 30, 2025 Compared to Three and Six Months Ended June 30, 2024

Three and Nine Months Ended September 30, 2025 Compared to Three and Nine Months Ended September 30, 2024

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

Three Months Ended June 30, Six Months Ended June 30,

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

2025 2024 Change in 2025 2024 Change in

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Revenue by Geography (in millions, except percentages)

Three Months Ended June 30, Six Months Ended June 30,

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

2025 % of Total 2024 % of Total 2025 % of Total 2024 % of Total

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Service revenue is primarily derived from sales of post-contract support ("PCS"), which are typically purchased in conjunction with our products, and subsequent renewals of those contracts.

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

Product revenue increased by $453.7 million, or 31.9%, and $817.4 million, or 29.7% for the three and six months ended June 30, 2025, compared to the same periods in 2024.

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

Product revenue increased by $387.9 million, or 25.5%, and $1,205.3 million, or 28.2% for the three and nine months ended September 30, 2025, compared to the same periods in 2024.

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

In addition, service revenue increased by $60.7 million, or 22.7%, and $130.4 million, or 25.6% for the three and six months ended June 30, 2025, compared to the same periods 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 21.8% and 21.0% of total revenue for the three and six months ended June 30, 2025, increasing from 18.7% and 19.4% for the same periods in the prior year, which was primarily influenced by changes in the geographic mix of sales to our large global customers.

In addition, service revenue increased by $109.5 million, or 38.1%, and $239.9 million, or 30.1% for the three and nine months ended September 30, 2025, compared to the same periods 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 20.2% and 20.8% of total revenue for the three and nine months ended September 30, 2025, increasing from 18.3% and 19.0% for the same periods 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

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

Cost of revenue increased by $173.0 million, or 29.2%, and $331.7 million, or 28.5% for the three and six months ended June 30, 2025, compared to the same periods in 2024.

Cost of revenue increased by $168.9 million, or 26.0%, and $500.6 million, or 27.6% for the three and nine months ended September 30, 2025, compared to the same periods in 2024.

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

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 managing our inventory and supply chain, merchant silicon costs, and excess/obsolete inventory and supplier liability charges.

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of

factors, including pricing pressure on our products and services due to competition, the mix of sales to large end customers who generally receive lower pricing, the mix of products sold, manufacturing-related costs, including costs associated with managing our inventory and supply chain, merchant silicon costs, and excess/obsolete inventory and supplier liability charges.

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 increased from 64.9% to 65.2% for the three months ended June 30, 2025 , and increased from 64.3% to 64.5% for the six months ended June 30, 2025 , compared to the same periods in 2024.

These changes are primarily driven by improved inventory management resulting in lower excess and obsolescence charges.

Gross margin increased from 64.2% to 64.6% for the three months ended September 30, 2025 , and increased from 64.3% to 64.5% for the nine months ended September 30, 2025 , compared to the same periods in 2024.

Operating Expenses (in millions, except percentages)

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

Three Months Ended June 30, Six Months Ended June 30,

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

2025 2024 Change in 2025 2024 Change in

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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 $29.0 million, or 10.8%, and $87.0 million, or 18.3% for the three and six months ended June 30, 2025, compared to the same periods in 2024.

The increase for the six months period was primarily driven by a $33.9 million increase in personnel costs due to headcount growth, and a $37.0 million increase in new product introduction costs, including non-recurring engineering costs as we expand our product portfolio.

Research and development expenses increased by $90.2 million, or 38.3%, and $177.2 million, or 24.9% for the three and nine months ended September 30, 2025, compared to the same periods in 2024.

The increase for the three and nine months periods was primarily driven by $32.9 million and $70.9 million increases in personnel costs due to headcount growth, and $47.5 million and $78.6 million increases 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 $22.1 million, or 21.2%, and $33.6 million, or 16.0% for the three and six months ended June 30, 2025, compared to the same periods in 2024, which was primarily driven by increased personnel costs due to headcount growth.

Sales and marketing expenses increased by $44.4 million, or 41.6%, and $78.0 million, or 24.7% for the three and nine months ended September 30, 2025, compared to the same periods 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 $3.7 million, or 14.4%, and $10.2 million, or 19.1% for the three and six months ended June 30, 2025, compared to the same periods in 2024, which was primarily driven by increased personnel costs.

General and administrative expenses increased by $1.0 million, or 3.0%, and $11.2 million, or 12.8% for the three and nine months ended September 30, 2025, compared to the same periods in 2024, which was primarily driven by increased professional services and personnel costs.

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

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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 June 30, Six Months Ended June 30,

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

2025 2024 Change in 2025 2024 Change in

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Total other income (expense), net $ 98.9 $ 97.6 $ 1.3 1.3 % $ 289.1 $ 231.1 $ 58.0 25.1 %

The favorable movement in other income (expense), net, during the three and six months ended June 30, 2025 compared to the same periods in 2024 was primarily driven by increased interest income of $19.0 million and $45.3 million due to an increase in our cash and marketable securities balances.

The favorable movement in other income (expense), net, during the nine months ended September 30, 2025, compared to the same periods in 2024 was primarily driven by increased interest income of $59.8 million due to an increase in our cash and marketable securities balances.

Provision for Income Taxes (in millions, except percentages)

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

Three Months Ended June 30, Six Months Ended June 30,

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

2025 2024 Change in 2025 2024 Change in

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Effective tax rate 20.8 % 15.3 % 17.9 % 13.7 %

The increase in the effective tax rates in the three and six months ended June 30, 2025, as compared to the same periods in 2024, was primarily due to a decrease in tax benefits attributable to equity-based compensation.

On July 4, 2025, the OBBB Act was signed into law in the U.S.

This legislation provides for significant tax law changes and modifications including changes to the U.S.

effective tax rates on certain foreign earnings and permanently repeals the domestic research and development capitalization requirement.

The increase in the effective tax rates in the three and nine months ended September 30, 2025, as compared to the same periods in 2024, was primarily associated with a one-time deferred tax provision arising from the remeasurement of our basis difference associated with the U.S.

tax effect of foreign deferred tax assets resulting from the enactment of the OBBB Act, and a decrease in tax benefits attributable to equity-based compensation.

While some specific provisions of the OBBB Act are not effective until our fiscal 2026 period, our deferred method of accounting policy with respect to U.S.

tax on foreign earnings, known as global intangible low tax income, requires us to account for these changes in the period of enactment.

In addition, we do not anticipate a material impact to our effective tax rate in future periods as a result of the OBBB Act.

Liquidity and Capital Resources

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

As of June 30, 2025, our total balance of cash, cash equivalents and marketable securities was approximately $8.8 billion, of which approximately $371.8 million was held outside the U.S.

As of September 30, 2025, our total balance of cash, cash equivalents and marketable securities was approximately $10.1 billion, of which approximately $496.9 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 ongoing construction of a building for office, lab and data center space.

technologies, the continued market acceptance of our products, stock repurchases, and capital expenditures, including the ongoing construction of a building for office, lab and data center space.

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 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 millions)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash provided by operating activities $ 3,110.0 $ 2,677.3

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Cash Flows from Operating Activities

During the six months ended June 30, 2025, cash provided by operating activities was $1.8 billion, consisting of net income of $1.7 billion along with a net decrease of $293.3 million in working capital requirements, offset by non-cash adjustments to net income of $154.1 million.

The decrease in working capital requirements primarily consisted of an increase in deferred revenue of $1.1 billion primarily resulting from an increase in customer PCS contracts and an increase in product deferred revenue related to customer contracts with acceptance terms, a $152.4 million increase in income tax payables related to timing of payments, and a $110.3 million increase in accounts payable and other liabilities primarily due to timing of inventory-related receipts and payments.

These cash inflows were partially offset by an increase in accounts receivable of $483.1 million due to increased product and service billings, a $224.5 million increase in inventory and a $403.2 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 $337.9 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 $178.2 million.

During the six months ended June 30, 2024, cash provided by operating activities was $1.5 billion, consisting of net income of $1.3 billion along with a net decrease in working capital requirements of $259.1 million, offset partially by non-cash adjustments to net income of $59.4 million.

The decrease in working capital requirements primarily consisted of an increase in deferred revenue of $612.6 million resulting from an increase in customer PCS contracts and an increase in product deferred revenue related to customer contracts with acceptance terms, a $91.4 million decrease in inventory resulting from strong product shipments, and a $74.1 million increase in income tax payables, net related to timing of payments.

These cash inflows were partially offset by a $223.3 million decrease in accounts payable and accrued liabilities primarily due to timing of inventory-related receipts and payments, as well as a reduction in other accrued liabilities, an increase in accounts receivable of $202.2 million due to increased product and service billings, and a $92.6 million increase in other assets driven by increased deferred cost of sales associated with higher product revenue deferrals and an increase in contract assets and other miscellaneous receivables.

The non-cash adjustments to net income were driven by a $228.5 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 $156.5 million.

During the nine months ended September 30, 2025, cash provided by operating activities was $3.1 billion, consisting of net income of $2.6 billion, a net decrease of $424.5 million in working capital requirements, and non-cash adjustments to net income of $129.9 million.

The decrease in working capital requirements primarily consisted of an increase in deferred revenue of $1.8 billion primarily resulting from an increase in customer PCS contracts and an increase in product deferred revenue related to customer contracts with acceptance terms and a $117.7 million increase in accounts payable and other liabilities primarily due to timing of inventory-related receipts and payments.

These cash inflows were partially offset by an increase in accounts receivable of $348.9 million due to increased product and service billings, a $321.1 million increase in inventory, a $683.7 million increase in other assets driven by increased deferred cost of sales associated with higher product revenue deferrals, and a $105.2 million decrease in income tax payables related to timing of payments.

The non-cash adjustments to net income were driven by stock-based compensation of $306.1 million, and offset by a $202.5 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").

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 $1.0 billion 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 IRC, largely offset by stock-based compensation of $254.6 million and depreciation and amortization.

Cash Flows from Investing Activities

During the six months ended June 30, 2025, cash used in investing activities was $1.4 billion, consisting of purchases of marketable securities of $2.7 billion and $300.0 million for the business acquisition of VeloCloud.

During the nine months ended September 30, 2025, cash used in investing activities was $2.6 billion, consisting of purchases of marketable securities of $4.8 billion and $300.0 million for the acquisition of VeloCloud.

These amounts were partially offset by proceeds from maturities and sales of marketable securities of $2.6 billion.

During the six months ended June 30, 2024, cash used in investing activities was $773.5 million, primarily consisting of purchases of available-for-sale securities of $1.7 billion, partly offset by proceeds from maturities and sales of marketable securities of $989.3 million.

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.

Cash Flows from Financing Activities

During the six months ended June 30, 2025, cash used in financing activities was $991.0 million, consisting of payments for repurchases of our common stock from the open market of $983.0 million.

During the six months ended June 30, 2024, cash used in financing activities was $236.2 million, consisting of payments for repurchases of our common stock from the open market of $234.7 million, and employee taxes withheld and paid of $36.0 million upon vesting of restricted stock units, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $34.5 million.

During the nine months ended September 30, 2025, cash used in financing activities was $970.4 million, consisting of payments for repurchases of our common stock from the open market of $983.0 million.

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.

Stock Repurchase Programs

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

During the three months ended June 30, 2025, we repurchased a total of $133.9 million of our common stock under our Prior Repurchase Program and $62.0 million of our common stock under our New Repurchase Program.

During the six months ended June 30, 2025, we repurchased a total of $921.0 million of our common stock under our Prior Repurchase Program and $62.0 million of our common stock under our New Repurchase Program.

As of June 30, 2025, the remaining authorized amount for repurchases under the New Repurchase Program was $1.4 billion.

We did not repurchase any shares during the three months ended September 30, 2025.

During the nine months ended September 30, 2025, we repurchased a total of $921.0 million of our common stock under our Prior Repurchase Program and $62.0 million of our common stock under our New Repurchase Program.

As of September 30, 2025, the remaining authorized amount for repurchases under the New Repurchase Program was $1.4 billion.

Refer to Note 6.

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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 June 30, 2025, we had $3.6 billion of such purchase obligations, of which $3.1 billion are expected to be received within one year, and $0.5 billion are expected to be received after one year.

As of September 30, 2025, we had $4.8 billion of such purchase obligations, of which $4.3 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.

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, lab and data center space.

The estimated remaining capital expenditures related to this project are expected to be approximately $190.0 million to $215.0 million through the end of fiscal 2026 when construction is expected to be completed.

In July 2021, we purchased land and the improvements thereon in Santa Clara, California to construct a building for office, lab and data center space.

As of September 30, 2025, the estimated remaining capital expenditures related to this project are expected to be approximately $170.0 million to $200.0 million through the end of fiscal 2026 when construction is expected to be completed.

Off-balance Sheet Arrangements

As of June 30, 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.

As of September 30, 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis