Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

						Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42)						65
Consolidated Balance Sheets						68
Consolidated Statements of Operations						69
Consolidated Statements of Comprehensive Income						70
Consolidated Statements of Stockholders' Equity						71
Consolidated Statements of Cash Flows						72
Notes to the Consolidated Financial Statements						73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Arista Networks, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Arista Networks, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 13, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

			Inventory Valuation & Contract Manufacturer/Supplier Liabilities
Description of the Matter			As discussed in Note 1 of the consolidated financial statements, the Company’s inventories are stated at the lower of cost (computed using the first-in, first-out method) and net realizable value. The Company’s inventory balance totaled $1.3 billion on December 31, 2022. The Company records a provision when inventory is determined to be in excess of anticipated demand, or obsolete, to adjust inventory to its estimated realizable value. The Company records a contract manufacturer/supplier liability and a corresponding charge for non-cancellable, non-returnable purchase commitments with contract manufacturers or suppliers for quantities in excess of the Company’s demand forecasts, or that are considered obsolete. Auditing management’s assessment of net realizable value for inventory and contract manufacturer/supplier liabilities was complex and highly judgmental due to the assessment of management’s estimates of forecasted product demand, which can be impacted by changes in overall customer demand, changes in the timing of the introduction and customer adoption of new products, adjustments to manufacturing and engineering schedules, and overall general economic and market conditions.
How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s determination of the net realizable value of inventory and the contract manufacturer/supplier liability. This included controls over the preparation of the demand and production forecasts, and the evaluation of the accuracy and completeness of the inventory provision and contract manufacturer/supplier liability. To test the inventory provision and contract manufacturer/supplier liability, we performed audit procedures that included, among others, assessing the Company’s methodology over the computation of the provision and liability, testing the significant assumptions and the underlying inputs used by the Company in its analysis including historical sales trends, expectations regarding future sales, changes in the Company’s business, customer base and other relevant factors.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2008.

San Jose, California

February 13, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Arista Networks, Inc.

Opinion on Internal Control Over Financial Reporting

We have audited Arista Networks, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Arista Networks, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 13, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

San Jose, California

February 13, 2023

ARISTA NETWORKS, INC.

Consolidated Balance Sheets

(In thousands, except par value)

						December 31,
						2022						2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents						$	671,707					$	620,813
Marketable securities						2,352,022						2,787,502
Accounts receivable, net						923,096						516,509
Inventories						1,289,706						650,117
Prepaid expenses and other current assets						314,217						237,735
Total current assets						5,550,748						4,812,676
Property and equipment, net						95,009						78,634
Acquisition-related intangible assets, net						122,205						93,555
Goodwill						265,924						188,397
Investments						39,468						20,247
Operating lease right-of-use assets						53,390						65,182
Deferred tax assets						574,912						442,295
Other assets						73,754						33,443
TOTAL ASSETS						$	6,775,410					$	5,734,429
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable						$	232,572					$	202,636
Accrued liabilities						292,487						226,643
Deferred revenue						637,432						593,578
Other current liabilities						131,040						86,972
Total current liabilities						1,293,531						1,109,829
Income taxes payable						89,839						69,916
Operating lease liabilities, non-current						43,964						56,527
Deferred revenue, non-current						403,814						335,734
Deferred tax liabilities, non-current						42						129,074
Other long-term liabilities						58,400						54,749
TOTAL LIABILITIES						1,889,590						1,755,829
Commitments and contingencies (Note 5)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.0001 par value—100,000 shares authorized and no shares issued and outstanding as of December 31, 2022 and 2021						—						—
Common stock, $0.0001 par value—1,000,000 shares authorized as of December 31, 2022 and 2021; 306,890 and 307,681 shares issued and outstanding as of December 31, 2022 and 2021						31						31
Additional paid-in capital						1,780,714						1,530,046
Retained earnings						3,138,983						2,456,823
Accumulated other comprehensive income (loss)						(33,908)						(8,300)
TOTAL STOCKHOLDERS’ EQUITY						4,885,820						3,978,600
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY						$	6,775,410					$	5,734,429

The accompanying notes are an integral part of these consolidated financial statements.

ARISTA NETWORKS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

						Year Ended December 31,
						2022						2021						2020
Revenue:
Product						$	3,716,079					$	2,377,727					$	1,830,842
Service						665,231						570,310						486,670
Total revenue						4,381,310						2,948,037						2,317,512
Cost of revenue:
Product						1,573,629						958,363						749,962
Service						131,985						108,895						85,664
Total cost of revenue						1,705,614						1,067,258						835,626
Gross profit						2,675,696						1,880,779						1,481,886
Operating expenses:
Research and development						728,394						586,752						486,594
Sales and marketing						326,955						286,171						229,366
General and administrative						93,241						83,117						66,242
Total operating expenses						1,148,590						956,040						782,202
Income from operations						1,527,106						924,739						699,684
Other income, net						54,690						6,140						39,179
Income before income taxes						1,581,796						930,879						738,863
Provision for income taxes						229,350						90,025						104,306
Net income						$	1,352,446					$	840,854					$	634,557
Earnings per share:
Basic						$	4.41					$	2.74					$	2.09
Diluted						$	4.27					$	2.63					$	2.00
Weighted-average common shares outstanding:
Basic						306,473						306,512						303,936
Diluted						316,459						319,238						317,860

The accompanying notes are an integral part of these consolidated financial statements.

ARISTA NETWORKS, INC.

Consolidated Statements of Comprehensive Income

(In thousands)

						Year Ended December 31,
						2022						2021						2020
Net income						$	1,352,446					$	840,854					$	634,557
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments						(3,215)						(1,381)						1,514
Available-for-sale investments:
Changes in net unrealized gains (losses) on available-for-sale securities						(23,025)						(7,157)						8,013
Less: reclassification adjustment for net (gains) losses included in net income						632						—						(9,432)
Other comprehensive income (loss)						(25,608)						(8,538)						95
Comprehensive income						$	1,326,838					$	832,316					$	634,652

The accompanying notes are an integral part of these consolidated financial statements.

ARISTA NETWORKS, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands)

						Common Stock												Additional Paid-						Retained						Accumulated Other						Total Stockholders’
						Shares						Amount						In Capital			Earnings						Comprehensive Income (Loss)			Equity
Balance — December 31, 2019						305,556						$	30					$	1,106,283					$	1,788,230					$	143					$	2,894,686
Net income						—						—						—						634,557						—						634,557
Other comprehensive income, net of tax						—						—						—						—						95						95
Stock-based compensation						—						—						137,128						—						—						137,128
Issuance of common stock in connection with employee equity incentive plans						7,336						—						57,556						—						—						57,556
Repurchase of common stock						(8,048)						—						—						(395,173)						—						(395,173)
Tax withholding paid for net share settlement of equity awards						(148)						—						(8,722)						—						—						(8,722)
Vesting of early-exercised stock options						—						—						164						—						—						164
Balance — December 31, 2020						304,696						30						1,292,409						2,027,614						238						3,320,291
Net income						—						—						—						840,854						—						840,854
Other comprehensive loss, net of tax						—						—						—						—						(8,538)						(8,538)
Stock-based compensation						—						—						186,875						—						—						186,875
Issuance of common stock in connection with employee equity incentive plans						7,693						1						67,244						—						—						67,245
Repurchase of common stock						(4,537)						—						—						(411,645)						—						(411,645)
Tax withholding paid for net share settlement of equity awards						(171)						—						(16,482)						—						—						(16,482)
Balance — December 31, 2021						307,681						31						1,530,046						2,456,823						(8,300)						3,978,600
Net income						—						—						—						1,352,446						—						1,352,446
Other comprehensive loss, net of tax						—						—						—						—						(25,608)						(25,608)
Stock-based compensation						—						—						230,934						—						—						230,934
Issuance of common stock in connection with employee equity incentive plans						5,908						1						48,410						—						—						48,411
Repurchase of common stock						(6,461)						(1)						—						(670,286)						—						(670,287)
Tax withholding paid for net share settlement of equity awards						(271)						—						(32,725)						—						—						(32,725)
Common stock issued for business acquisition						33						—						4,049						—						—						4,049
Balance — December 31, 2022						306,890						$	31					$	1,780,714					$	3,138,983					$	(33,908)					$	4,885,820

The accompanying notes are an integral part of these consolidated financial statements.

ARISTA NETWORKS, INC.

Consolidated Statements of Cash Flows

(In thousands)

						Year Ended December 31,
						2022						2021						2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income						$	1,352,446					$	840,854					$	634,557
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other						62,700						50,334						35,158
Noncash lease expense						18,648						17,112						16,970
Stock-based compensation						230,934						186,875						137,042
Deferred income taxes						(244,382)						(99,290)						(9,144)
Unrealized gain on equity investments						(27,479)						—						(4,164)
Amortization (accretion) of investment premiums (discount)						12,767						26,847						10,381
Changes in operating assets and liabilities:
Accounts receivable, net						(401,531)						(126,969)						10,673
Inventories						(638,948)						(170,449)						(235,318)
Prepaid expenses and other current assets						(85,166)						(126,002)						(5,966)
Other assets						(32,299)						(4,220)						4,965
Accounts payable						31,436						66,681						41,161
Accrued liabilities						66,586						83,524						2,728
Deferred revenue						98,957						278,485						50,352
Income taxes, net						44,026						(2,589)						28,617
Other liabilities						4,118						(5,337)						17,102
Net cash provided by operating activities						492,813						1,015,856						735,114
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities						1,643,824						1,455,465						1,545,689
Purchases of marketable securities						(1,418,857)						(2,317,264)						(2,688,064)
Business acquisition, net of cash acquired						(145,087)						—						(227,420)
Purchases of property, equipment and intangible assets						(44,644)						(64,736)						(15,384)
Escrow receipts from past business acquisitions						—						1,299						—
Investments and notes receivable in privately-held companies						(12,691)						(19,933)						3,399
Proceeds from sale of marketable securities						193,782						19,607						772,978
Net cash provided by (used in) investing activities						216,327						(925,562)						(608,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under equity plans						48,411						67,245						57,556
Tax withholding paid on behalf of employees for net share settlement						(32,725)						(16,482)						(8,722)
Repurchase of common stock						(670,287)						(411,645)						(395,173)
Net cash used in financing activities						(654,601)						(360,882)						(346,339)
Effect of exchange rate changes						(3,611)						(1,816)						1,966
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH						50,928						(272,404)						(218,061)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period						625,050						897,454						1,115,515
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period						$	675,978					$	625,050					$	897,454
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds						$	427,846					$	189,774					$	82,601
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Right-of-use assets obtained in exchange for new operating lease liabilities						$	7,300					$	5,005					$	6,627
Property and equipment included in accounts payable and accrued liabilities						1,411						3,497						1,565
Vesting of early exercised stock options and restricted stock awards						—						—						164
Common stock issued for business acquisition						4,049						—						—

The accompanying notes are an integral part of these consolidated financial statements.

ARISTA NETWORKS, INC.

Notes to Consolidated Financial Statements

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 and campus workspace environments. Our cloud networking solutions consist of our EOS, a set of network applications and our Gigabit Ethernet switching and routing platforms. We are incorporated in the state of Delaware. Our corporate headquarters are located in Santa Clara, California, and we have wholly-owned subsidiaries throughout the world, including North America, Europe, Asia and Australia.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Arista Networks, Inc. and its wholly-owned subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). All significant intercompany accounts and transactions have been eliminated.

On November 1, 2021, we announced a four-for-one split of the Company’s common stock effected in the form of a stock dividend (the “Stock Split”). Each stockholder of record on November 11, 2021 received three additional shares of common stock for each then-held share, and such shares were distributed after close of trading on November 17, 2021. All share and per share amounts presented herein have been retroactively adjusted to reflect the impact of the Stock Split.

Certain reclassifications of prior period amounts were made in the current year to conform to the current period presentation.

Risk and Uncertainties

Global economic and business activities continue to face widespread macroeconomic uncertainties, including supply chain constraints, inflation and monetary policy shifts, recession risks, the global coronavirus ("COVID-19") pandemic, and potential disruptions from the Russia-Ukraine conflict and U.S. trade war with China.

Although we saw some improvement in our manufacturing and supply chain operations in the latter part of 2022, we continue to experience constraints, with some lingering component shortages, extended lead times, and elevated component and supply chain costs. We continue to work closely with our contract manufacturers and supply chain partners to ramp production following a period of delayed component sourcing and workforce disruptions. Although we have worked diligently to drive improvements in these areas, including funding additional working capital and incremental purchase commitments, these delays have negatively impacted our ability to supply products to our customers on a timely basis. Our demand planning horizon remains extended with high levels of purchase commitments and increased investments in working capital to address delays in component sourcing and the risk of future supply chain disruptions, but we cannot be certain that such delays or disruptions will not occur, or that our extended demand planning horizon will adequately address these disruptions should they occur. In addition, inflation pressure in our supply chain, scarcity of some materials needed to build our products and disruptions to our manufacturing process have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin. Our operating cash-flows have also been and may continue to be negatively impacted by increased component inventories on hand or at our contract manufacturers, awaiting supply of a limited number of scarce components necessary to build and ship the completed product. While overall demand remains stable, supply chain and manufacturing related constraints could impact our ability to fulfill this demand, and as a result could negatively impact our business in future periods. In addition, although our business has experienced limited disruption as a result of the Russia-Ukraine conflict, continued escalation of the conflict may negatively impact the global economy and our future operating results and financial condition.

Management continues to actively monitor the impact of these macroeconomic factors on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce. The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, the impact on our customers, partners, employees, contract manufacturers and supply chain, all of which continue to evolve and are unpredictable; however, any continued or renewed disruption in manufacturing and supply resulting from these factors could negatively impact our business. We also believe that any extended or renewed economic disruptions or deterioration in the global economy could have a negative impact on demand from our customers in future periods. Accordingly, current results and financial condition discussed herein may not be indicative of future operating

results and trends, and as of the date of issuance of these consolidated financial statements, the extent to which these factors may materially impact the Company's financial condition, liquidity, or results of operations in the future is uncertain.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, but are not limited to, valuation of inventory and contract manufacturer/supplier liabilities, accounting for income taxes, including the recognition of deferred tax assets and liabilities, valuation allowance on deferred tax assets and reserves for uncertain tax positions, revenue recognition and deferred revenue, allowance for doubtful accounts, sales rebates and return reserves, valuation of goodwill and acquisition-related intangible assets, estimate of useful lives of long-lived assets including intangible assets, and the recognition and measurement of contingent liabilities. We evaluate our estimates and assumptions based on historical experience and other factors and adjust these estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from these estimates.

Concentrations of Business and Credit Risk

We work closely with third-party contract manufacturers to manufacture our products. As of December 31, 2022, we had four primary contract manufacturing partners, who provided the vast majority of our electronic manufacturing services. Our contract manufacturing partners 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. Our products rely on key components, including certain integrated circuit components and power supplies, some of which our contract manufacturing partners purchase on our behalf from a limited number of suppliers, including certain sole-source providers. We generally do not have guaranteed supply contracts with our component suppliers, and our manufacturing partners could delay shipments or cease manufacturing such products or selling them to us at any time. If we are unable to obtain a sufficient quantity of these components on commercially reasonable terms or in a timely manner, or if we are unable to obtain alternative sources for these components, sales of our products could be delayed or halted entirely, or we may be required to redesign our products. Quality or performance failures of our products or changes in our contractors’ or vendors’ financial or business condition could disrupt our ability to supply quality products to our customers. Any of these events could result in lost sales and damage to our end-customer relationships, which would adversely impact our business, financial condition and results of operations.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash, and accounts receivable. Our cash equivalents, restricted cash and marketable securities are invested in high quality financial instruments with banks and financial institutions. Such deposits may be in excess of insured limits provided on such deposits.

Our accounts receivable are unsecured and represent amounts due to us based on contractual obligations of our customers. We mitigate credit risk with respect to accounts receivable by performing ongoing credit evaluations of our customers to assess the probability of collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, the credit limits extended, review of the invoicing terms of the arrangement, and current economic conditions that may affect a customer’s ability to pay. In situations where a customer may be thinly capitalized and we have limited payment history with it, we will either establish a small credit limit or require it to prepay its purchases. We generally do not require our customers to provide collateral to support accounts receivable. We have recorded an allowance for doubtful accounts for accounts receivables that we have determined to be uncollectible. We mitigate credit risk with respect to accounts receivables by performing ongoing credit evaluations of the borrower to assess the probability of collecting all amounts due to us under the existing contractual terms.

We market and sell our products through both our direct sales force and our channel partners, including distributors, value-added resellers, system integrators and OEM partners, and in conjunction with various technology partners. Significant customers are those that represent more than 10% of our total net revenue during the period or net accounts receivable balance at each respective balance sheet date. As of December 31, 2022, we had two customers who represented 28% and 16% of total accounts receivable. As of December 31, 2021, we had three customers who represented 37%, 13% and 12% of total accounts receivable. For the year ended December 31, 2022, there were two customers who represented 26% and 16% of our total revenue. For the years ended December 31, 2021 and 2020, there was one customer who represented 15% and 22% of our total revenue, respectively.

Cash and Cash Equivalents

We consider all highly liquid investments with original or remaining maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with various financial institutions and highly liquid investments in money market funds. Interest is accrued as earned. As of December 31, 2022 and 2021, we had restricted cash of $4.3 million and $4.2 million respectively, and that primarily included $4.0 million pledged as collateral representing a security deposit required for a facility lease. Our restricted cash is classified as other assets in the accompanying consolidated balance sheets.

Marketable Securities

We classify all highly liquid investments in debt securities with maturities of greater than three months at the date of purchase as marketable securities. We have classified and accounted for our marketable debt and equity securities as available-for-sale. We determine the appropriate classification of these investments at the time of purchase and reevaluate such designation at each balance sheet date. We may or may not hold securities with stated maturities greater than 12 months until maturity. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these securities prior to their stated maturities. As we view these securities as available to support current operations, we classify securities with maturities beyond 12 months as current assets under the caption marketable securities in the accompanying consolidated balance sheets. We carry these securities at fair value. For marketable debt securities, we report the unrealized gains and losses, net of taxes, as a component of stockholders’ equity. For marketable equity securities, we report the unrealized gains and losses in other income (expense), net on the Consolidated Statements of Operations. We determine the cost of the debt investment sold based on an average cost basis at the individual security level, and record the interest income in other income, net in the accompanying consolidated statements of operations. We determine any realized gains or losses on the sale of marketable securities using the specific identification method, and record such gains and losses in other income, net in the accompanying consolidated statements of operations.

For our debt securities in an unrealized loss position, we determine whether a credit loss exists by considering information about the collectability of the instrument and current market conditions. We recognize an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and write down the amortized cost basis of the investment if it is more likely than not we will be required to sell or we intend to sell the investment before recovery of its amortized cost basis.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts, sales rebates and returns reserves. We estimate our allowance for doubtful accounts based upon the collectability of the receivables in light of historical trends, reasonable and supportable information of our customers' economic conditions that may affect our customers’ ability to pay, and prevailing economic conditions. This evaluation is done in order to identify issues that may impact the collectability of receivables and related estimated required allowance. Revisions to the allowance are recorded as an adjustment to bad debt expense. After appropriate collection efforts are exhausted, specific accounts receivable deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded as credits to bad debt expense. We primarily estimate our sales rebates and returns reserves based on historical rates applied against current period billings. Specific customer returns, rebates and allowances are considered when determining our estimates. Revisions to sales rebate and return reserves are recorded as adjustments to revenue.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We apply fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. These assets and liabilities include cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued liabilities. Cash equivalents, accounts receivable, accounts payable and accrued liabilities are stated at carrying values in our consolidated financial statements, which approximate their fair value due to the short-term nature of these instruments.

Assets and liabilities recorded at fair value on a recurring basis in the accompanying consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. We use a fair value

hierarchy to measure fair value, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The three-tiers of the fair value hierarchy are as follows:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level II—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III—Unobservable inputs that are supported by little or no market data for the related assets or liabilities and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

Foreign Currency

The functional currency of our foreign subsidiaries is either the U.S. dollar or their local currency depending on the nature of the subsidiaries’ activities.

Transaction re-measurement - Assets and liabilities denominated in a currency other than a subsidiary’s functional currency are re-measured into the subsidiary's functional currency using exchange rates in effect at the end of the reporting period, with gains and losses recorded in other income, net in the consolidated statements of operations. To date, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements.

Translation - Assets and liabilities of subsidiaries denominated in foreign functional currencies are translated into U.S. dollars at the closing exchange rate on the balance sheet date and equity-related balances are translated at historical exchange rates. Revenues, costs and expenses in foreign functional currencies are translated using average exchange rates that approximate those in effect during the period. Translation adjustments are recorded within accumulated other comprehensive income, a separate component of total stockholders’ equity.

Inventory Valuation and Contract Manufacturer/Supplier Liabilities

Inventories primarily consist of finished goods and strategic components, primarily integrated circuits. Inventories are stated at the lower of cost (computed using the first-in, first-out method) and net realizable value. Manufacturing overhead costs and inbound shipping costs are included in the cost of inventory. We record a provision when inventory is determined to be in excess of anticipated demand, or obsolete, to adjust inventory to its estimated realizable value. For the years ended December 31, 2022, 2021 and 2020, we recorded charges of $71.4 million, $61.8 million and $50.5 million, respectively, within cost of product revenue for inventory write-downs.

Our contract manufacturers procure components and assemble products on our behalf based on our forecasts. We record a liability and a corresponding charge for non-cancellable, non-returnable purchase commitments with our contract manufacturers or suppliers for quantities in excess of our demand forecasts or that are considered obsolete due to manufacturing and engineering change orders resulting from design changes. For the years ended December 31, 2022 and 2020, we recorded charges of $43.7 million and $14.9 million, respectively, within cost of product revenue for such liabilities with our contract manufacturers and suppliers. For the year ended December 31, 2021, we did not incur any losses on such liabilities.

We use significant judgment in establishing our forecasts of future demand and obsolete material exposures. These estimates depend on our assessment of current and expected orders from our customers, product development plans and current sales levels. In addition, industry-wide supply chain shortages have resulted in extended lead times for components and have required us to extend the time horizon of our demand forecasts and increase our purchase commitments for long lead time components. If actual market conditions are less favorable than those projected by management, which may be caused by factors within and/or outside of our control, we may be required to increase our inventory write-downs and liabilities to our contract manufacturers and suppliers, which could have an adverse impact on our gross margins and profitability. We regularly evaluate our exposure for inventory write-downs and adequacy of our contract manufacturer and supplier liabilities.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation, except for land which is not depreciated. We capitalize any additions and improvements and expense maintenance and repairs as incurred. Depreciation is calculated using

the straight-line method over the estimated useful lives of the related assets, generally three years. Our leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the remaining lease term.

Leases

We lease office space, data centers, and equipment under non-cancellable operating leases with various expiration dates through 2028. We determine if an arrangement contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities, non-current in our consolidated balance sheets. We do not have any finance leases in any of the periods presented.

ROU assets and lease liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term. The interest rate implicit in our operating leases is not readily available, and therefore, an incremental borrowing rate is estimated based on a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. Operating lease right-of-use assets also include any prepaid lease payments and lease incentives.

Our operating lease agreements may contain rent concession, rent escalation, and option to renew provisions. Lease expense is recognized on a straight-line basis over the lease term commencing on the date we have the right to use the leased property. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. In addition, certain of our operating lease agreements contain tenant improvement allowances from landlords. These allowances are accounted for as lease incentives and decrease our right-of-use asset and reduce lease expense over the lease term.

Our lease agreements may contain lease and non-lease components, which are combined and accounted for as a single lease component. We also have elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with terms of 12 months or less.

Business Combinations

We use the acquisition method to account for our business combinations in accordance with Accounting Standards Codification ("ASC") 805 - Business Combinations. We allocate the total fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the acquired businesses are included in our consolidated financial statements from the date of acquisition. Acquisition-related transaction and restructuring costs are expensed as incurred.

During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the acquired assets and liabilities assumed, with a corresponding offset to goodwill or the preliminary purchase price, to reflect new information obtained about facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Goodwill and Acquired Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company has one reporting unit and tests goodwill for impairment at least annually in the fourth quarter or more frequently if indicators of potential impairment exist. We first perform a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If the reporting unit does not pass the qualitative assessment, a quantitative test is performed by comparing the fair value of our reporting unit with its carrying amount. We would recognize an impairment loss for the amount by which the carrying amount exceeds the fair value. There were no impairment charges in any of the periods presented in the consolidated financial statements. See Note 4. Acquisition, Goodwill and Acquisition-Related Intangible Assets for additional information.

Acquired intangible assets are carried at cost less accumulated amortization. All acquired intangible assets have been determined to have definite lives and are amortized on a straight-line basis over their estimated useful lives, ranging from one to eight years. Acquired intangible assets are reviewed for impairment under the long-lived asset model described below. There were no impairment charges in any of the periods presented in the consolidated financial statements. See Note 4. Acquisition, Goodwill and Acquisition-Related Intangible Assets for additional information.

Investments in Privately-Held Companies

Our equity investments in privately-held companies without readily determinable fair values are measured using the measurement alternative, defined by ASC 321 - Investments-Equity Securities as cost, less impairments, and remeasured based on observable price changes from orderly transactions of identical or similar securities of the same issuer. Any adjustments resulting from impairments and/or observable price changes are recorded within other income, net in our consolidated statements of operations. This election is reassessed each reporting period to determine whether investments in privately-held companies have a readily determinable fair value, in which case they would no longer be eligible for this election. The Company did not hold investments in privately-held companies whose fair value was readily determinable as of December 31, 2022 and 2021.

Impairment of Long-Lived Assets and Investments in Privately-Held Companies

The carrying amounts of our long-lived assets, including property and equipment, intangible assets, ROU assets and investments in privately-held companies, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. No impairment of any other long-lived assets was identified for any of the periods presented in the consolidated financial statements.

Loss Contingencies

In the ordinary course of business, we are a party to claims and legal proceedings including matters relating to commercial, employee relations, business practices and intellectual property. In assessing loss contingencies, we use significant judgments and assumptions to estimate the likelihood of loss, impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss. We record a provision for contingent losses when it is both probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We record a charge equal to the minimum estimated liability for litigation costs or a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of our consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Revenue Recognition

We generate revenue from sales of our products, which incorporate our EOS software and accessories such as cables and optics, to direct customers and channel partners together with post-contract customer support (“PCS”). We typically sell products and PCS in a single contract. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services. We apply the following five-step revenue recognition model:

• Identification of the contract, or contracts, with a customer

• Identification of the performance obligations in the contract

• Determination of the transaction price

• Allocation of the transaction price to the performance obligations in the contract

• Recognition of revenue when (or as) we satisfy the performance obligation

Post-Contract Customer Support ("PCS")

PCS, which includes technical support, hardware repair and replacement parts beyond standard warranty, bug fixes, patches and unspecified upgrades on a when-and-if-available basis, is offered under renewable, fee-based contracts. We initially defer PCS revenue and recognize it ratably over the life of the PCS contract as there is no discernible pattern of delivery related to these promises. We do not provide unspecified upgrades on a set schedule and address customer requests for technical support if and when they arise, with the related expenses recognized as incurred. PCS contracts generally have a term of one to three years. We include billed but unearned PCS revenue in deferred revenue.

Contracts with Multiple Performance Obligations

Most of our contracts with customers, other than renewals of PCS, contain multiple performance obligations with a combination of products and PCS. Products and PCS generally qualify as distinct performance obligations. Our hardware includes EOS software, which together deliver the essential functionality of our products. For contracts that contain multiple performance obligations, we allocate revenue to each distinct performance obligation based on the standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP for products and PCS sold together in a contract to determine whether there is a discount to be allocated based on the relative SSP of the various products and PCS.

If we do not have an observable SSP, such as when we do not sell a product or service separately, then SSP is estimated using judgment and considering all reasonably available information such as market conditions and information about the size and/or purchase volume of the customer. We generally use a range of amounts to estimate SSP for individual products and services based on multiple factors including, but not limited to, the sales channel (reseller, distributor or end customer), the geographies in which our products and services are sold, and the size of the end customer.

We limit the amount of revenue recognition for contracts containing forms of variable consideration, such as future performance obligations, customer-specific returns, and acceptance or refund obligations. We include some or all of an estimate of the related at-risk consideration in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recorded under each contract will not occur when the uncertainties surrounding the variable consideration are resolved.

Most of our contracts with customers have payment terms of 30 days with some large high-volume customers having terms of up to 90 days. We have determined our contracts generally do not include a significant financing component because the Company and the customer have specific business reasons other than financing for entering into such contracts. Specifically, both we and our customers seek to ensure the customer has a simplified way of purchasing Arista products and services.

We account for multiple contracts with a single partner as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract.

We may occasionally accept returns to address customer satisfaction issues even though there is generally no contractual provision for such returns. We estimate returns for sales to customers based on historical return rates applied against current-period shipments. Specific customer returns and allowances are considered when determining our sales return reserve estimate.

Our policy applies to the accounting for individual contracts. However, we have elected a practical expedient to apply the guidance to a portfolio of contracts or performance obligations with similar characteristics so long as such application would not differ materially from applying the guidance to the individual contracts (or performance obligations) within that portfolio. Consequently, we have chosen to apply the portfolio approach when possible, which we do not believe will happen frequently. Additionally, we will evaluate a portfolio of data, when possible, in various situations, including accounting for commissions, rights of return and transactions with variable consideration.

We report revenue net of sales taxes. We include shipping charges billed to customers in revenue and the related shipping costs are included in cost of product revenue.

Contract Balances

A contract asset is recognized when we have a contractual right to consideration for both completed and partially completed performance obligations that have not yet been invoiced. Contract assets are included in other current assets in the accompanying consolidated balance sheets.

A contract liability is recognized when we have received customer payments in advance of our satisfaction of a performance obligation under a contract that is cancellable. Contract liabilities are included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Assets Recognized from Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commissions earned by our sales force meet the requirements for capitalization. These costs are deferred and then amortized over a period of benefit that we have determined to be five years. Total capitalized costs to obtain a contract are included in other current and long-term assets on our consolidated balance sheets. As of December 31, 2022 and 2021, total capitalized costs to obtain contracts were $13.1 million and $11.5 million, respectively.

Research and Development Expenses

Costs related to the research, design and development of our products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when the product is available for general release to customers. Generally, our products are released soon after technological feasibility has been established. As a result, costs incurred subsequent to achieving technological feasibility have not been significant and accordingly, all software development costs have been expensed as incurred.

Warranty

We generally offer a one-year warranty on all of our hardware products and a 90-day warranty against defects in the software embedded in the products. We use judgment and estimates when determining warranty costs based on historical costs to replace product returns within the warranty period at the time we recognize revenue. We accrue for potential warranty claims at the time of shipment as a component of cost of revenues based on historical experience and other relevant information. We reserve for specifically identified products if and when we determine we have a systemic product failure. Although we engage in extensive product quality programs, if actual product failure rates or use of materials differ from estimates, additional warranty costs may be incurred, which could reduce our gross margin. The accrued warranty liability is recorded in accrued liabilities in the accompanying consolidated balance sheets.

Segment Reporting

We develop, market and sell cloud networking solutions, which primarily consist of our switching and routing platforms and related network applications, and there are no segment managers who are held accountable for operations or operating results below the Company level. Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have determined that we operate as one reportable segment.

Stock-Based Compensation

Stock-based compensation cost for equity awards is measured at the grant-date fair value using appropriate valuation techniques and recognized as expense over the requisite service or performance period. We account for forfeitures when they occur.

Stock-based compensation costs for stock options and restricted stock units ("RSUs") are recognized on a straight-line basis over the requisite service period, which is generally two to five years. The Company has granted RSUs that vest upon the satisfaction of both service-based and performance-based conditions ("PRSUs"). The service-based condition for these awards is generally satisfied over four years. The performance-based conditions are satisfied upon achieving specified performance targets, such as financial or operating metrics. We record stock-based compensation expense for performance-based equity awards on an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable to be satisfied.

See Note 6. Stockholders' Equity and Stock-Based Compensation for a detailed discussion of the Company’s stock plans, assumptions to the valuation techniques, and stock-based compensation expense.

Income Taxes

Income tax expense is an estimate of current income taxes payable in the current fiscal year based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences and carryforwards that we recognize for financial reporting and income tax purposes.

We account for income taxes under the liability approach for deferred income taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements, but have not been reflected in our taxable income. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that our deferred income tax assets will be realized based on the positive and negative evidence available. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more likely than not to realize.

We believe that we have adequately reserved for our uncertain tax positions, although we can provide no assurance that the final tax outcome of these matters will not be materially different. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations. The provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest and penalties.

We regularly review our tax positions and benefits to be realized. We recognize tax liabilities based upon our estimate of whether, and to the extent to which, additional taxes will be due when such estimates are more likely than not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. We recognize interest and penalties related to income tax matters as income tax expense.

The U.S. tax rules require U.S. tax on foreign earnings, known as global intangible low taxed income (“GILTI”). Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). We selected the deferred method of accounting and recorded the associated basis differences anticipated to influence prospective GILTI calculations.

Recently Adopted Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires companies to recognize and measure contract assets and contract liabilities relating to contracts with customers that are acquired in a business combination in accordance with ASC 606. Under previous GAAP, an acquirer generally recognized assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 results in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this ASU as of January 1, 2022 on a prospective basis and the adoption impact was immaterial to the consolidated financial statements.

Recent Accounting Pronouncements Not Yet Effective

We believe that all recently issued accounting pronouncements from the FASB will not have a material impact on its Consolidated Financial Statements or do not apply to its operations.

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):

						December 31, 2022																								December 31, 2021
						Level I						Level II						Level III						Total						Level I						Level II						Level III						Total
Financial Assets:
Cash Equivalents:
Money market funds						$	322,294					$	—					$	—					$	322,294					$	221,382					$	—					$	—					$	221,382
Commercial paper						—						5,422						—						5,422						—						—						—						—
Agency securities						—						17,559						—						17,559						—						—						—						—
U.S. government notes						51,986						—						—						51,986						—						—						—						—
						374,280						22,981						—						397,261						221,382						—						—						221,382
Marketable Securities:
Commercial paper						—						—						—						—						—						141,274						—						141,274
Certificates of deposits (1)						—						10,492						—						10,492						—						44,931						—						44,931
U.S. government notes						993,955						—						—						993,955						1,057,810						—						—						1,057,810
Corporate bonds						—						1,113,134						—						1,113,134						—						1,252,226						—						1,252,226
Agency securities						—						215,380						—						215,380						—						291,261						—						291,261
Marketable equity securities(2)						19,061						—						—						19,061						—						—						—						—
						1,013,016						1,339,006						—						2,352,022						1,057,810						1,729,692						—						2,787,502
Other Assets:
Money market funds - restricted						4,271						—						—						4,271						4,237						—						—						4,237
Total Financial Assets						$	1,391,567					$	1,361,987					$	—					$	2,753,554					$	1,283,429					$	1,729,692					$	—					$	3,013,121

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(1) As of December 31, 2022 and 2021, all of our certificates of deposits were domestic deposits.

(2) The $19.1 million represents the fair value of marketable equity securities as of December 31, 2022. This amount includes $8.3 million that was reclassified from Investments on our consolidated balance sheet following the commencement of public market trading of the issuer in January 2022. This publicly-traded equity investment generated an unrealized gain of $10.7 million for the year ended December 31, 2022. The unrealized gains and losses are included in Other income (expense), net on the Consolidated Statements of Operations. Refer to Note 3. Financial Statements Details.

During the year ended on December 31, 2022, the Company did not make any transfers between the levels of the fair value hierarchy.

Marketable debt secur**ities

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):

						December 31, 2022																								December 31, 2021
						Amortized Cost						Unrealized Gains						Unrealized Losses						Fair Value						Amortized Cost						Unrealized Gains						Unrealized Losses						Fair Value
Commercial paper						$	—					$	—					$	—					$	—					$	141,274					$	—					$	—					$	141,274
U.S. government						1,007,175						3						(13,223)						993,955						1,060,716						3						(2,909)						1,057,810
Corporate bonds						1,125,920						271						(13,057)						1,113,134						1,255,149						105						(3,028)						1,252,226
Agency securities						217,893						83						(2,596)						215,380						291,558						36						(333)						291,261
Total						$	2,350,988					$	357					$	(28,876)					$	2,322,469					$	2,748,697					$	144					$	(6,270)					$	2,742,571

For debt securities in unrealized loss positions, it is not likely that we will be required to sell such securities before recovery of their amortized cost basis nor do we have the intent to sell such securities before maturity; we invest in debt securities that have maximum maturities of two years and are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these marketable securities, the more susceptible they are to changes in market interest rates and bond yields. Given the short-term and conservative nature of our portfolio, the unrealized losses are not subject to credit risk; therefore, we did not recognize any credit losses or non-credit-related impairments related to our available-for-sale marketable debt securities for the years ended December 31, 2022, December 31, 2021 and December 31, 2020. All unrealized losses were recognized in other comprehensive income (loss). Realized losses were immaterial for the years ended December 31, 2022, December 31, 2021 and December 31, 2020.

The following table is an analysis of our marketable debt securities in unrealized loss positions (in thousands):

						December 31, 2022
						Unrealized Losses within 12 months												Unrealized Losses 12 months or greater												Total
						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
U.S. government notes						$	245,588					$	(5,603)					$	413,112					$	(7,620)					$	658,700					$	(13,223)
Corporate bonds						510,603						(7,137)						479,727						(5,920)						990,330						(13,057)
Agency securities						55,687						(804)						78,548						(1,792)						134,235						(2,596)
Total						$	811,878					$	(13,544)					$	971,387					$	(15,332)					$	1,783,265					$	(28,876)

As of December 31, 2022, we had no marketable debt securities with contractual maturities that exceed 24 months. The fair values of marketable debt securities, by remaining contractual maturities, are as follows (in thousands):

						December 31, 2022
Due in 1 year or less						$	1,664,174
Due in 1 year through 2 years						658,295
Total marketable securities						$	2,322,469

The weighted-average remaining duration of our marketable debt securities is approximately 0.6 years as of December 31, 2022.

Assets measured at fair value on a non-recurring basis

Non-Marketable Equity Securities

We have non-marketable equity securities in privately-held companies that do not have readily-determinable fair values. These equity securities are included in Investments on the 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 for our non-marketable equity securities during the years ended December 31, 2022 and December 31, 2021. We recorded unrealized gains of $16.7 million on non-marketable equity securities based on observable price changes from orderly transactions of identical or similar securities in the year ended December 31, 2022. We recorded immaterial unrealized losses in the year ended December 31, 2022. We did not record any unrealized gains or losses on non-marketable equity securities in the year ended December 31, 2021. 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 December 31, 2022 and December 31, 2021 (in thousands):

						December 31, 2022						December 31, 2021
Cost of investments (1)						$	23,625					$	14,933
Cumulative impairment and downward adjustments						(888)						—
Cumulative upward adjustments (1)						16,731						5,314
Carrying amount of investments						$	39,468					$	20,247

(1) During the year ended December 31, 2022, $3.0 million previously included in the Cost of investments and $5.3 million previously included in the Cumulative upward adjustment, or $8.3 million in aggregate, were reclassified from Investments to Marketable securities on our consolidated balance sheet following the commencement of public market trading of the issuer. There was no such activity in the year ended December 31, 2021.

3. Financial Statements Details

Cash, Cash Equivalents and Restricted Cash

The reconciliation of cash, cash equivalents and restricted cash reported in the accompanying consolidated balance sheets to the total of the same such amounts in the accompanying consolidated statements of cash flows is as follows (in thousands):

						December 31,
						2022						2021
Cash and cash equivalents						$	671,707					$	620,813
Restricted cash included in other assets						4,271						4,237
Total cash, cash equivalents and restricted cash						$	675,978					$	625,050

Accounts Receivable, net

Accounts receivable, net consists of the following (in thousands):

						December 31,
						2022						2021
Accounts receivable						$	928,490					$	521,597
Allowance for doubtful accounts						(19)						(132)
Product sales rebate and returns reserve						(5,375)						(4,956)
Accounts receivable, net						$	923,096					$	516,509

Product Sales Rebate and Returns Reserve

Activities in the product sales rebate and returns reserve consist of the following (in thousands):

						Year Ended December 31,
						2022						2021						2020
Balance at the beginning of year						$	4,956					$	3,838					$	5,522
Additions charged against revenue						4,060						7,104						9,454
Consumption						(3,641)						(5,986)						(11,138)
Balance at the end of year						$	5,375					$	4,956					$	3,838

Inventories

Inventories consist of the following (in thousands):

						December 31,
						2022						2021
Raw materials						$	759,519					$	316,737
Finished goods						530,187						333,380
Total inventories						$	1,289,706					$	650,117

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

						December 31,
						2022						2021
Inventory deposits						$	162,047					$	46,311
Other current assets						124,357						172,893
Other prepaid expenses and deposits						27,813						18,531
Total prepaid expenses and other current assets						$	314,217					$	237,735

Property and Equipment, net

Property and equipment, net consists of the following (in thousands):

						December 31,
						2022						2021
Land						$	41,500					$	40,145
Equipment and machinery						122,407						90,915
Computer hardware and software						52,148						44,083
Furniture and fixtures						3,575						3,634
Leasehold improvements						30,102						30,502
Construction-in-process						2,124						2,378
Property and equipment, gross						251,856						211,657
Less: accumulated depreciation						(156,847)						(133,023)
Property and equipment, net						$	95,009					$	78,634

Depreciation expense was $25.6 million, $19.5 million and $20.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

						December 31,
						2022						2021
Accrued compensation-related costs						$	117,053					$	99,571
Supplier Liability						71,481						28,203
Accrued manufacturing costs						45,379						52,010
Accrued product development costs						27,380						22,188
Accrued warranty costs						15,510						10,414
Other						15,684						14,257
Total accrued liabilities						$	292,487					$	226,643

Warranty Accrual

The following table summarizes the activity related to our accrued liability for estimated future warranty costs (in thousands):

						Year Ended December 31,
						2022						2021
Warranty accrual, beginning of year						$	10,414					$	9,314
Liabilities accrued for warranties issued during the year						19,437						12,659
Warranty costs incurred during the year						(14,341)						(11,559)
Warranty accrual, end of year						$	15,510					$	10,414

Contract Assets

The following table summarizes the beginning and ending balances of our contract assets (in thousands):

						Year Ended December 31,
						2022						2021
Contract assets, beginning balance						$	24,388					$	16,380
Contract assets, ending balance						11,055						24,388

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):

						Year Ended December 31,
						2022						2021
Contract liabilities, beginning balance						$	93,382					$	85,957
Less: Revenue recognized from beginning balance						(37,680)						(34,177)
Less: Beginning balance reclassified to deferred revenue						(2,693)						(1,945)
Add: Contract liabilities recognized						50,439						43,547
Contract liabilities, ending balance						$	103,448					$	93,382

As of December 31, 2022 and 2021, $45.2 million and $38.7 million, respectively, of our contract liabilities were recorded within other current liabilities with the remaining balance recorded within other long-term liabilities in the accompanying consolidated balance sheets.

Deferred Revenue

Deferred revenue is comprised mainly of unearned revenue related to multi-year PCS contracts, services and product deferrals related to acceptance clauses. The following table summarizes the activity related to our deferred revenue (in thousands):

						Year Ended December 31, 2022
Deferred revenue, beginning balance						$	929,312
Less: Revenue recognized from beginning balance						(583,787)
Add: Deferral of revenue in current period, excluding amounts recognized during the period						695,721
Deferred revenue, ending balance						$	1,041,246

Other Performance Obligations

Other performance obligations totaling $1.1 billion include unbilled contract revenue for services and products that will be recognized in future periods. As of December 31, 2022, other performance obligations included $117.6 million of unbilled multi-year PCS contract amounts that will be recognized as revenue in future periods. In addition, as of December 31, 2022 the company had entered into $961.0 million of binding contractual agreements with certain customers that are primarily related to future product shipments.

Revenue from Remaining Performance Obligations

Revenue from remaining performance obligations of $2.2 billion represents contract liabilities, deferred revenue and other performance obligations that will be recognized in future periods. As of December 31, 2022, approximately $1.3 billion of revenue is expected to be recognized from remaining performance obligations, of which approximately 81% is expected to be recognized over the next two years and approximately 19% is expected to be recognized during the third to the fifth year. These amounts do not include the $961.0 million of binding contractual agreements related primarily to future product shipments outlined above. As of December 31, 2022, it is expected that the majority of the amounts allocated to these specific performance obligations will be recognized as revenue upon product shipment over the next two years; however, given the current uncertain supply chain environment, we may experience manufacturing and shipment delays or cancellations related to these performance obligations, which could impact revenue recognition.

Other Income, Net

Other income, net consists of the following (in thousands):

						Year Ended December 31,
						2022						2021						2020
Other income (expense), net:
Interest income						$	27,556					$	7,215					$	27,139
Unrealized gain on equity investments						27,479						—						4,164
Other income (expense)						(345)						(1,075)						7,876
Total other income, net						$	54,690					$	6,140					$	39,179

4. Acquisition, Goodwill and Acquisition-Related Intangible Assets

Acquisitions

During the year ended December 31, 2022, we completed two acquisitions of private companies for total consideration of $158.9 million, including $4.0 million in common stock and the remainder in cash. The purchase prices included $62.3 million of intangible assets, $77.5 million of goodwill and $19.1 million of net tangible assets acquired. We also incurred certain acquisition-related expenses of $4.7 million, which primarily consisted of retention bonuses to continuing employees as well as professional and consulting fees.

The intangible assets are amortized on a straight-line basis over their estimated useful lives, as we believe this method most closely reflects the pattern in which the economic benefits of the assets will be consumed. The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands, except years):

						Acquisition Date Fair Value						Weighted Average Estimated Useful Life (in years)
Developed technology						$	30,200					5.7
Customer relationships						28,700						7.0
Trade name						3,400						3.0
Total intangible assets acquired						$	62,300

Goodwill

The changes in the carrying values of goodwill for the years ended December 31, 2022 and 2021 are as follows (in thousands):

						Amount
Balance at December 31, 2020						$	189,696
Escrow receipts from past acquisitions						(1,299)
Balance at December 31, 2021						188,397
Additions related to current year acquisitions						85,048
Measurement-period adjustments						(7,521)
Balance at December 31, 2022						$	265,924

The Company performed an annual test for goodwill impairment in the fourth quarter of the fiscal years ended December 31, 2022 and 2021 and determined that goodwill was not impaired.

Acquisition-Related Intangible Assets

The following table presents details of our acquisition-related intangible assets as of December 31, 2022 and 2021 (in thousands, except for years):

			Gross Carrying Amount																		Accumulated Amortization																		Net Carrying Amount												Weighted Average Remaining Useful Life (in years)
			December 31, 2021						Additions						December 31, 2022						December 31, 2021						Amortization						December 31, 2022						December 31, 2021						December 31, 2022
Developed technology			$	124,730					$	30,200					$	154,930					$	(53,663)					$	(25,373)					$	(79,036)					$	71,067					$	75,894					4.4
Customer relationships			25,920						28,700						54,620						(7,899)						(6,198)						(14,097)						18,021						40,523						5.7
Trade name			8,990						3,400						12,390						(4,693)						(1,909)						(6,602)						4,297						5,788						2.6
Others			5,720						—						5,720						(5,550)						(170)						(5,720)						170						—						0.0
Total			$	165,360					$	62,300					$	227,660					$	(71,805)					$	(33,650)					$	(105,455)					$	93,555					$	122,205					4.7

Amortization expense related to acquisition-related intangible assets was $33.7 million, $29.2 million and $24.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, future estimated amortization expense related to the acquired-related intangible assets is as follows (in thousands):

Years Ending December 31,						Future Amortization Expense
2023						$	33,438
2024						26,759
2025						19,642
2026						17,260
2027						13,436
Thereafter						11,670
Total						$	122,205

5. Commitments and Contingencies

Operating Leases

We lease various offices and data centers in North America, Europe, Asia and Australia under non-cancellable operating lease arrangements that expire on various dates through 2028. Some of our leases include options to extend the term of such leases for a period from three months to up to 10 years and/or options to early terminate the leases. As of December 31, 2022, we did not include any such options in determining the lease terms because we were not reasonably certain that we would exercise these options.

The following table summarizes the supplemental balance sheet information related to our operating leases (in thousands):

						December 31, 2022						December 31, 2021
Right-of-use assets:
Operating lease right-of-use assets						$	53,390					$	65,182
Lease liabilities:
Operating lease liabilities, current (included in other current liabilities)						19,878						20,298
Operating lease liabilities, non-current						43,964						56,527
Total operating lease liabilities						$	63,842					$	76,825

The following table summarizes our lease costs (in thousands):

						Year Ended December 31,
						2022						2021
Operating lease costs:
Fixed lease costs						$	24,134					$	23,230
Variable lease costs						8,682						7,781
Total operating lease costs						$	32,816					$	31,011

The operating lease costs in the table above include costs for long-term and short-term leases. Total short-term lease costs were immaterial. Fixed lease costs include expenses recognized for base rent payments on a straight-line basis. Variable lease costs primarily include maintenance, utilities and operating expenses that are incremental to the fixed base rent payments, and are excluded from the calculation of operating lease liabilities and ROU assets. For the years ended December 31, 2022 and 2021, cash paid for amounts associated with our operating lease liabilities were approximately $23.9 million and $22.3 million, respectively, which were classified as operating activities in the accompanying consolidated statements of cash flows.

Maturities of operating lease liabilities as of December 31, 2022 are presented in the table below (in thousands):

Years ending December 31,						Amount
2023						$	22,541
2024						14,760
2025						11,682
2026						9,555
2027						8,101
2028 and thereafter						4,757
Total undiscounted operating lease payments (excluding non-lease components)						71,396
Less: imputed interest						(7,554)
Present value of operating lease payments as of December 31, 2022						$	63,842

						December 31, 2022						December 31, 2021
Other information:
Weighted-average remaining lease term — operating leases						4.2 years						4.6 years
Weighted-average discount rate — operating leases						5.1%						5.0%

Purchase Commitments

We outsource most of our manufacturing and supply chain management operations to third-party contract manufacturers, who procure components and assemble products on our behalf. A significant portion of our purchase orders to our contract manufacturers for finished products consists of non-cancellable purchase commitments. In addition, we purchase strategic component inventory from certain suppliers under non-cancellable purchase commitments, including integrated circuits, which are consigned to our contract manufacturers. As of December 31, 2022, we had non-cancellable purchase commitments of $3.7 billion, of which $2.9 billion have confirmed receipt dates within 12 months, and $0.8 billion have confirmed receipt dates greater than 12 months. These open purchase orders are considered enforceable and legally binding, and while we may have some limited ability to reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, this can only occur with the agreement of the related supplier.

We also had deposits to our contract manufacturers to secure our purchase commitments in the amount of $192.5 million and $49.1 million as of December 31, 2022 and 2021, respectively, which were recorded within prepaid expenses and other current assets, as well as other assets in the 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 any material impact on our consolidated financial statements to date.

Legal Proceedings

WSOU Investments, LLC

On November 25, 2020, WSOU Investments LLC ("WSOU") filed a lawsuit against us in the Western District of Texas asserting that certain of our products infringe three WSOU patents. WSOU's allegations are directed to certain features of our wireless and switching products. WSOU seeks remedies including monetary damages, attorney's fees and costs. On February 4, 2021, we filed an answer denying WSOU's allegations. On November 5, 2021, the case was transferred to the Northern District of California. On March 30, 2022, WSOU dismissed one of the patents with prejudice, removing Arista wireless products from those accused of infringement. On July 1, 2022, the court stayed the case pending the resolution of an inter partes review of one of the patents-in-suit.

We intend to vigorously defend against the claims brought against us by WSOU; however, we cannot be certain that any of WSOU's claims will be resolved in our favor, regardless of the merits of those claims. Any adverse litigation ruling could result in a significant damages award against us and injunctive relief.

With respect to the legal proceedings described above, it is our belief that while a loss is not probable, it may be reasonably possible. Further, at this stage in the litigation, any possible loss or range of loss cannot be estimated; however, the outcome of litigation is inherently uncertain. Therefore, if this legal matter were resolved against us in a reporting period for a material amount, our consolidated financial statements for that reporting period could be materially adversely affected.

Other matters

In the ordinary course of business, we are a party to other claims and legal proceedings including matters relating to commercial, employee relations, business practices and intellectual property.

We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of December 31, 2022, provisions recorded for contingent losses related to other claims and matters have not been significant. Based on currently-available information, management does not believe that any additional liabilities relating to other unresolved matters are probable or that the amount of any resulting loss is estimable, and believes these other matters are not likely, individually and in the aggregate, to have a material adverse effect on our financial position, results of operations or cash flows; however, litigation is subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position, results of operations or cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods.

6. Stockholders' Equity and Stock-Based Compensation

Stock Repurchase Programs

In April 2019, our board of directors authorized a $1.0 billion stock repurchase program (the "Repurchase Program"). This authorization allowed us to repurchase shares of our common stock over three years, and we completed our repurchases under the Repurchase Program during the fourth quarter of 2021. In the fourth quarter of 2021, our board of directors authorized an additional $1.0 billion stock repurchase program (the “New Repurchase Program”). This authorization allows us to repurchase shares of our common stock and 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, 10b5-1 trading plans, or a combination of the foregoing. The New Repurchase Program commenced in fourth quarter of 2021, and expires on the three-year anniversary thereof. The New Repurchase Program does not obligate us to acquire any of our common stock and may be suspended or discontinued by us at any time without prior notice. As of December 31, 2022, the remaining authorized amount for stock repurchases under this program was approximately $256.8 million.

A summary of the stock repurchase activities for the years ended December 31, 2022 and 2021 is as follows as adjusted to give effect to the Stock Split (in thousands, except per share amounts):

						Year Ended December 31,
						2022						2021
Aggregate purchase price						$	670,287					$	411,645
Shares repurchased						6,461						4,537
Average price paid per share						$	103.74					$	90.73

The aggregate purchase price of repurchased shares of our common stock is recorded as a reduction to retained earnings in our consolidated statements of stockholders' equity. All shares repurchased have been retired.

2014 Equity Incentive Plan

In April 2014, our board of directors and stockholders approved the 2014 Equity Incentive Plan (the “2014 Plan”), effective on the first day that our common stock was publicly traded, and simultaneously terminated the 2004 and 2011 equity plans as to future grants. However, these plans will continue to govern the terms and conditions of the outstanding options previously granted thereunder.

Awards granted under the 2014 Plan could be in the form of Incentive Stock Options (“ISOs”), Nonstatutory Stock Options (“NSOs”), Restricted Stock Units (“RSUs”), Restricted Stock Awards (“RSAs”) or Stock Appreciation Rights (“SARs”). The number of shares available for grant and issuance under the 2014 Plan increases automatically on January 1 of each year commencing with 2016 by the number of shares equal to 3% of the outstanding shares of our common stock on the immediately preceding December 31, but not to exceed 50,000,000 shares (the “2014 Plan Evergreen Increase”), unless the board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2022, our board of directors authorized an increase of 9.2 million shares for future issuance under the 2014 Plan. As of December 31, 2022, there remained approximately 92.0 million shares available for issuance under the 2014 Plan. Furthermore, in February, 2023, our board of directors authorized an increase of 9.2 million shares for future issuance under the 2014 Plan effective January 1, 2023.

2014 Employee Stock Purchase Plan

In April 2014, the board of directors and stockholders approved the 2014 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective on the first day that our common stock was publicly traded. The number of shares reserved for issuance under the ESPP increases automatically on January 1 of each year by the number of shares equal to 1% of our shares outstanding immediately preceding December 31, but not to exceed 10,000,000 shares, unless the board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2022, our board of directors authorized an increase of 3.1 million shares for future issuance under the ESPP. As of December 31, 2022, there remained 20.6 million shares available for issuance under the ESPP. Furthermore, in February, 2023, our board of directors authorized an increase of 3.1 million shares for future issuance under the ESPP effective January 1, 2023.

Under our ESPP, eligible employees are permitted to acquire shares of our common stock at 85% of the lower of the fair market value of our common stock on the first trading day of each offering period or on the exercise date. Each offering period lasts approximately two years starting on the first trading date after February 15 and August 15 of each year, and includes purchase dates every six months on or after February 15 and August 15 of each year. Participants may purchase shares of common stock through payroll deductions up to 10% of their eligible compensation, subject to Internal Revenue Service mandated purchase limits.

During the year ended December 31, 2022, we issued 485,303 shares at an average purchase price of $50.37 under our ESPP.

Stock Option Activities

The following table summarizes the option activities and related information (in thousands, except years and per share amounts):

						Number of Shares Underlying Outstanding Options						Weighted- Average Exercise Price per Share						Weighted- Average Remaining Contractual Term (In Years)						Aggregate Intrinsic Value
Balance—December 31, 2021						8,685						$	12.45					2.8						$	1,140,369
Options granted						—						—
Options exercised						(2,736)						8.76
Options canceled						(180)						15.70
Balance—December 31, 2022						5,769						$	14.09					2.0						$	618,774
Vested and exercisable—December 31, 2022						5,276						$	11.88					1.7						$	577,583

We did not grant any stock options during the years ended December 31, 2022 and 2021. The weighted-average grant-date fair value of options granted during the year ended December 31, 2020 was $46.24 per share. The aggregate intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $311.7 million, $410.9 million and $245.9 million, respectively. The total fair value of options vested for the years ended December 31, 2022, 2021 and 2020 was approximately $16.6 million, $25.3 million and $20.0 million, respectively.

Restricted Stock Unit (RSU) Activities

The following table summarizes the RSU activities and related information (in thousands, except per share amounts):

						Number of Shares						Weighted- Average Grant Date Fair Value Per Share
Unvested balance—December 31, 2021						7,821						$	70.98
RSUs and PRSUs granted						3,668						101.35
RSUs and PRSUs vested						(2,658)						65.51
RSUs and PRSUs forfeited/canceled						(471)						78.28
Unvested balance—December 31, 2022						8,360						$	85.83

The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2022, 2021 and 2020 was $101.35, $93.18 and $54.11 per share, respectively. The total fair value of RSUs vested for the years ended December 31, 2022, 2021 and 2020 was approximately $174.0 million, $120.4 million, and $85.4 million, respectively.

Stock-Based Compensation Expense

The following table summarizes the stock-based compensation expense related to our equity awards (in thousands):

						Year Ended December 31,
						2022						2021						2020
Cost of revenue						$	9,688					$	7,444					$	6,272
Research and development						130,897						99,770						79,913
Sales and marketing						57,571						46,521						34,944
General and administrative						32,778						33,140						15,913
Total stock-based compensation						$	230,934					$	186,875					$	137,042

Determination of Fair Value

We record stock-based compensation awards based on fair value as of the grant date. We value RSUs at the market close price of our common stock on the grant date. For option awards and ESPP offerings, we use the Black-Scholes option pricing model to determine fair value. We recognize such costs as compensation expense generally on a straight-line basis over the requisite service period of the award.

Stock Options

We did not grant any stock options in the year ended December 31, 2022 and 2021. For the year ended December 31, 2020, the fair value of each stock option granted under our plans was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

						Year Ended December 31,
						2020
Expected term (in years)						5.0
Risk-free interest rate						0.4		%
Expected volatility						43.5		%
Dividend rate						—		%

ESPP

The following table summarizes the assumptions relating to our ESPP:

						Year Ended December 31,
						2022						2021						2020
Expected term (in years)						1.3						1.2						1.6
Risk-free interest rate						3.0		%				0.1		%				0.4		%
Expected volatility						43.5		%				40.2		%				45.1		%
Dividend rate						—		%				—		%				—		%

As of December 31, 2022, there were $616.0 million of unrecognized compensation costs related to all unvested awards. The unamortized compensation costs are expected to be recognized over a weighted-average period of approximately 3.3 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, 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 attributable to common stockholders, as adjusted to give effect to the Stock Split (in thousands, except per share amounts):

						Year Ended December 31,
						2022						2021						2020
Net income						$	1,352,446					$	840,854					$	634,557
Basic weighted-average shares outstanding						306,473						306,512						303,936
Add weighted-average effects of dilutive securities:
Stock options and RSUs						9,876						12,464						13,848
Employee stock purchase plan						110						262						76
Diluted weighted-average shares outstanding						316,459						319,238						317,860
Net income per share:
Basic						$	4.41					$	2.74					$	2.09
Diluted						$	4.27					$	2.63					$	2.00

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share attributable to common stockholders because their effects would have been anti-dilutive for the periods presented, as adjusted to give effect to the Stock Split (in thousands):

						Year Ended December 31,
						2022						2021						2020
Stock options and RSUs						302						298						1,380
Employee stock purchase plan						200						37						332
Total						502						335						1,712

8. Income Taxes

The components of income before provision for income taxes are as follows (in thousands):

						Year Ended December 31,
						2022						2021						2020
Domestic						$	1,260,614					$	737,620					$	621,838
Foreign						321,182						193,259						117,025
Income before income taxes						$	1,581,796					$	930,879					$	738,863

The components of the provision for income taxes are as follows (in thousands):

						Year Ended December 31,
						2022						2021						2020
Current provision for income taxes:
Federal						$	359,158					$	137,203					$	78,843
State						76,321						38,478						21,135
Foreign						38,250						13,391						12,891
Total current						473,729						189,072						112,869
Deferred tax expense (benefit):
Federal						(219,568)						(98,534)						(17,592)
State						(34,689)						(16,289)						(849)
Foreign						9,878						15,776						9,878
Total deferred tax expense (benefit)						(244,379)						(99,047)						(8,563)
Total provision for income taxes						$	229,350					$	90,025					$	104,306

The reconciliation of the statutory federal income tax rate and our effective income tax rate is as follows (in percentages):

						Year Ended December 31,
						2022						2021						2020
U.S. federal statutory income tax rate						21.00		%				21.00		%				21.00		%
State tax, net of federal benefit						2.09						1.89						2.23
Taxes on foreign earnings differential						(2.24)						(2.13)						(0.92)
Tax credits						(2.24)						(2.70)						(2.64)
Change in valuation allowance						—						0.01						(0.18)
Stock-based compensation						(4.07)						(8.32)						(5.65)
Acquisition and integration costs						0.05						0.03						0.27
Other, net						(0.09)						(0.11)						0.01
Effective tax rate						14.50		%				9.67		%				14.12		%

The change in our effective tax rate was largely attributable to a decrease in the proportion of tax benefits attributable to stock-based compensation versus total pre-tax income. Excess tax benefits resulting from stock awards were $93.5 million, $105.8 million and $58.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are as follows (in thousands):

						December 31,
						2022						2021
Deferred tax assets:
Intangible assets						$	355,521					$	385,291
Reserves and accruals not currently deductible						63,517						34,648
Deferred revenue						182,594						146,745
Tax credits						100,284						85,390
Lease financing obligation						15,072						17,845
Capitalized research and development expenses						228,946						28,012
Stock-based compensation						25,480						19,760
Net operating losses						29,469						21,284
Other						8,721						3,430
Gross deferred tax assets						1,009,604						742,405
Valuation allowance						(132,689)						(109,985)
Total deferred tax assets						876,915						632,420
Deferred tax liabilities:
US tax on foreign earnings						(286,625)						(302,746)
Right of use asset						(12,383)						(14,892)
Other						(3,037)						(1,561)
Total deferred tax liabilities						(302,045)						(319,199)
Net deferred tax assets						$	574,870					$	313,221

The following table presents the breakdown between non-current deferred tax assets and liabilities (in thousands):

						December 31,
						2022						2021
Deferred tax assets, non-current						$	574,912					$	442,295
Deferred tax liabilities, non-current						(42)						(129,074)
Total net deferred tax assets						$	574,870					$	313,221

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. We believe, more likely than not, that we will have sufficient taxable income after deductions related to share-based awards to utilize our remaining deferred tax assets, with the exception of California, Canada, and U.K. deferred tax assets. In 2022, we increased our R&D tax credit carryforwards and capitalization in California and Canada, and increased our NOL carryforward in the U.K., which resulted in an increase of our valuation allowance on our deferred tax assets by $22.7 million. Therefore, we recorded a valuation allowance of $132.7 million and $110.0 million as of December 31, 2022 and 2021, respectively, against California, Canada, and U.K. deferred tax assets, since it is more likely than not that these assets will not be recognized.

As of December 31, 2022, we had $264.5 million and $134.7 million of net operating loss carryforwards for federal and state income tax purposes, respectively, from acquisitions, including Untangle Holdings, and Pluribus Networks, which were acquired in 2022. These federal and state losses will begin to expire in 2028 and 2029, respectively. For foreign jurisdictions, we had combined foreign net operating loss carryforwards of $14.8 million, which do not expire.

We had a federal credit of $2.8 million from acquisitions, which will begin to expire in 2037, and a California state credit of $180.7 million, which can be carried over indefinitely. For foreign jurisdictions, we had $0.6 million of Canadian scientific research and experimental development tax credit carry-forwards, which will begin to expire in 2034.

Utilization of the net operating losses and tax credit carryforwards may be subject to limitations due to ownership change limitations provided in the Internal Revenue code and similar state or foreign provisions.

The Tax Cuts and Jobs Act enacted on December 22, 2017 requires a Transition Tax on previously untaxed accumulated and current foreign earnings. Correspondingly, all undistributed earnings are deemed to be taxed and distributions of the unremitted earnings do not have any significant U.S. federal income tax impact. We have not provided for any remaining tax effect, if any, of limited outside basis differences of our foreign subsidiaries based upon plans of future reinvestment. The determination of the future tax consequences of the remittance of these earnings is not practicable.

Uncertain Tax Positions

We recognize uncertain tax positions only to the extent that management believes that it is more likely than not that the position will be sustained. The reconciliation of the beginning and ending amount of gross unrecognized tax benefits as of December 31, 2022, 2021 and 2020 is as follows (in thousands):

						Year Ended December 31,
						2022						2021						2020
Gross unrecognized tax benefits—beginning balance						$	114,813					$	92,500					$	93,806
Increases related to tax positions taken in a prior year						1,566						2,476						3,103
Increases related to tax positions taken during current year						25,355						21,104						20,274
Decreases related to tax positions taken in a prior year						(3,781)						(853)						(18,029)
Decreases related to lapse of statute of limitations						(596)						(414)						(6,654)
Gross unrecognized tax benefits—ending balance						$	137,357					$	114,813					$	92,500

As of December 31, 2022, 2021 and 2020, the total amount of gross unrecognized tax benefits was $137.4 million, $114.8 million and $92.5 million, respectively, of which $79.3 million, $60.9 million and $44.7 million would affect our effective tax rate if recognized.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2022 and 2021, the net expense for interest and penalties and the recognized liability for interest and penalties were not material. As of December 31, 2022 and 2021, we recognized a liability for interest and penalties of $6.4 million and $3.6 million, respectively.

The statute of limitations for Federal and most states remains open for 2017 and forward. Some states have net operating loss and tax credit carryforwards, and therefore remain open to examination. The majority of our foreign tax returns are open to audit under the statute of limitations of the respective foreign countries, where the subsidiaries are located. It is possible that the amount of existing gross unrecognized tax benefits may decrease within the next 12 months by up to $17.9 million as a result of statute of limitation lapses or payments to tax authorities in certain jurisdictions.

9. Geographical Information

We operate as one reportable segment. The following table represents revenue based on customers' shipping addresses (in thousands):

						Year Ended December 31,
						2022						2021						2020
Americas						$	3,462,621					$	2,156,183					$	1,771,992
Europe, Middle East and Africa						529,800						486,836						326,729
Asia Pacific						388,889						305,018						218,791
Total revenue						$	4,381,310					$	2,948,037					$	2,317,512

Long-lived assets, excluding intercompany receivables, investments in subsidiaries, investments in privately-held companies and deferred tax assets, net by location are summarized as follows (in thousands):

						December 31,
						2022						2021
United States						$	71,540					$	62,163
International						23,469						16,471
Total						$	95,009					$	78,634

10. Post-Employment Benefits

We have a 401(k) Plan that covers substantially all of our employees in the U.S. Effective January 1, 2017, we have elected to match 100% of employees' contributions up to a maximum of 3% of an employee's annual salary. Matching contributions are immediately vested. For the years ended December 31, 2022, 2021 and 2020, we contributed approximately $12.4 million, $9.8 million and $7.4 million for the matching contributions, respectively.