Arista Networks 10-Q 2022-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2022

or

For the transition period from to

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of July 27, 2022 was 304,280,458.

ARISTA NETWORKS, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except par value)

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except per share amounts)

(1) Prior periods have been adjusted to reflect the four-for-one stock split effected in the form of a stock dividend in November 2021.

*The accompanying notes are an integral part of these condensed consolidated

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You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K filed with the SEC on February 15, 2022. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

Overview

Arista Networks pioneered data-driven, cognitive cloud networking for large-scale data center and campus workspace environments. Our cloud networking solutions consist of our Extensible Operating System ("EOS"), a set of network applications and our Ethernet switching and routing platforms. We are a leader in cloud networking solutions delivering high performance, scalability, availability, programmability, workload orchestration, automation and visibility. In recent years, we have sought to bring the operational consistency and principles of cloud networking to the broader enterprise and campus markets with our Cognitive Cloud Networking, extending EOS across the enterprise data center and campus wired and wireless workspaces.

We generate revenue primarily from sales of our switching and routing platforms, which incorporate our EOS software, and related network applications. We also generate revenue from post-contract support ("PCS"), which end customers typically purchase in conjunction with our products, and renewals of PCS. We sell our products through both our direct sales force and our channel partners. As of December 31, 2021, we had delivered our cloud networking solutions to over 8,000 end customers worldwide. Our end customers span a range of industries and include large internet companies, service providers, financial services organizations, government agencies, media and entertainment companies, and others.

Historically, large purchases by a relatively limited number of end customers have accounted for a significant portion of our revenue. We have experienced unpredictability in the timing of orders from these large end customers primarily due to changes in demand patterns specific to these customers, the time it takes these end customers to evaluate, test, qualify and accept our products, and the overall complexity of these large orders. We expect continued variability in our customer concentration and timing of sales on a quarterly and annual basis. For example, sales to our end customers Microsoft and Meta Platforms in fiscal 2019 collectively represented 40% of our total revenue, whereas sales to our end customer Microsoft in fiscal 2020 and 2021 amounted to 21.5% and 15.0% of our revenues, respectively, with our end customer Meta Platforms representing less than 10% of our revenues in both fiscal 2020 and 2021. This variability in customer concentration has been linked to the timing of new product deployments and spending cycles with these customers, and we expect their contributions to return to more elevated levels during fiscal 2022. We expect customer concentration with these large end customers to be cyclical and linked to new product introductions and customer investment cycles. Furthermore, we typically provide pricing discounts to large end customers, which may result in lower margins for the period in which such sales occur.

We believe that cloud computing represents a fundamental shift from traditional legacy network architectures. As organizations of all sizes have moved workloads to the cloud, spending on cloud and next-generation data centers has increased rapidly, while traditional legacy IT spending has grown more slowly. Our cloud networking platforms are well positioned to address the growing cloud networking market, and to address increasing performance requirements driven by the growing number of connected devices, as well as the need for constant connectivity and access to data and applications.

The markets for cloud networking solutions are highly competitive and characterized by rapidly changing technology, changing end-customer needs, evolving industry standards, frequent introductions of new products and services, and industry consolidation. We expect competition to intensify in the future as the market for cloud networking expands and existing competitors and new market entrants introduce new products or enhance existing products. Our future success is dependent upon our ability to continue to evolve and adapt to our rapidly changing environment. We must also continue to develop market-leading products and features that address the needs of our existing and new customers, and increase sales in the enterprise data center switching, and campus workspace markets. We intend to continue expanding our sales force and marketing activities in key geographies, as well as our relationships with channel, technology and system-level partners in order to reach new end customers more effectively, increase sales to existing customers, and provide services and support. In addition, we intend to continue to invest in our research and development organization to enhance the functionality of our existing cloud networking platform, introduce new products and features, and build upon our technology leadership. We believe one of our greatest strengths lies in our ability to rapidly develop new features and applications.

Our development model is focused on the development of new products based on our EOS software and enhancements to EOS. We engineer our products to be agnostic with respect to the underlying merchant silicon architecture. The programmability of EOS has allowed us to expand our software applications to address the ever-increasing demands of cloud networking, including workflow automation, network visibility, analytics and network detection and response, and has further allowed us to integrate rapidly with a wide range of third-party applications for virtualization, management, automation, orchestration and network services. This enables us to focus our research and development resources on our software core competencies and to leverage the investments made by merchant silicon vendors to achieve cost-effective solutions. We work closely with third-party contract manufacturers to manufacture our products. Our contract manufacturers deliver our products to our third-party direct fulfillment facilities. We and our fulfillment partners then perform labeling, final configuration, quality assurance testing and shipment to our customers.

Macroeconomic Update

Global economic and business activities continue to face widespread macroeconomic uncertainties, including supply chain and labor shortages, inflation and monetary supply shifts, recession risks, the ongoing global coronavirus ("COVID-19") pandemic, and potential disruptions from the Russia-Ukraine conflict.

Our manufacturing and supply chain operations continue to experience significant constraints, with component shortages, increased component and supply chain costs and delays broadly impacting the industry as a whole. We continue to work closely with our contract manufacturers and supply chain partners who have experienced delays in component sourcing, workforce disruptions and governmental restrictions on the production and export of their products. 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. We have extended our demand planning horizon, increased our purchase commitments and expect to continue to invest 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. In addition, inflation pressure in our supply chain and scarcity of some materials needed to build our products have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin. While we continue to experience strong overall demand from customers, we believe ongoing supply disruptions combined with other supply chain related constraints, could impact our ability to fulfill this increased 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 are uncertain and cannot be predicted; 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.

Results of Operations

Three and Six Months Ended June 30, 2022 Compared to Three and Six Months Ended June 30, 2021

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

Revenue by Geography (in thousands, except percentages)

Revenue

Product revenue primarily consists of sales of our switching and routing products, and software licenses. Service revenue is primarily derived from sales of PCS contracts, which are typically purchased in conjunction with our products, and subsequent renewals of those contracts. We expect our revenue may vary from period to period based on, among other things, the timing, size, and complexity of orders, especially with respect to our large end customers.

Product revenue increased $319.3 million, or 56.4%, and $504.9 million, or 45.7%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. These increases reflect strong demand for our switching and routing platforms from across our customer base, including healthy contributions from our large cloud customers. Supply chain constraints continued to impact our revenue performance in these periods and while changes in product deferred revenue impacted the timing of revenue recognition on a quarterly basis, it was not a net contributor to revenue growth for the six-month period ended June 30, 2022. In addition, service revenue increased $25.2 million, or 17.9%, and $49.2 million, or 18.3%, in the three and six months ended June 30, 2022, compared to the same periods in 2021, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand. International revenues represented 19.6% and 21.7% of total revenues in the three and six months ended June 30, 2022, respectively, decreasing from 27.3% and 26.1% for the same periods in the prior year, which was primarily driven by increased purchases from large global customers in our Americas region. We continued to experience competitive pricing pressure on our products and services.

Cost of Revenue and Gross Margin

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

Cost of revenue increased $155.5 million, or 61.4%, and $236.4 million, or 47.7%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. These increases were primarily driven by a corresponding

increase in product and service revenues, combined with an increase in material and logistics costs to mitigate supply chain constraints and to meet customer demand.

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

Gross margin decreased from 64.2% to 61.2% for the three months ended June 30, 2022, and decreased from 64.0% to 62.1% for the six months ended June 30, 2022, compared to the same periods in 2021. The decrease in each period was primarily driven by an increased proportion of our sales to larger end customers who generally receive larger discounts and, increased material and logistics costs to mitigate supply chain constraints, partly offset by the impact of fixed overhead costs on a higher revenue base.

Operating Expenses (in thousands, except percentages)

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation and travel expenses.

Research and development

Research and development expenses consist primarily of personnel costs, prototype expenses, third-party engineering costs, and an allocated portion of facility and IT costs. Our research and development efforts are focused on new product development and maintaining and developing additional functionality for our existing products, including new releases and upgrades to our EOS software and applications. We expect our research and development expenses to increase in absolute dollars as we continue to invest in software development in order to expand the capabilities of our cloud networking platform, introduce new products and features, and continue to invest in our technology.

Research and development expenses increased $34.9 million, or 24.3%, and $74.4 million, or 27.0%, in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The increases were primarily driven by an increase in personnel costs of $16.4 million and $25.3 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to headcount growth. In addition, new product introduction costs increased by $10.7 million and $32.0 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Sales and marketing

Sales and marketing expenses consist primarily of personnel costs, marketing, trade shows, and other promotional activities, and an allocated portion of facility and IT costs. We expect our sales and marketing expenses to increase in absolute dollars as we continue to expand our sales and marketing efforts worldwide.

Sales and marketing expenses increased $8.7 million, or 12.4%, and $18.5 million, or 13.0%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, which was primarily caused by increased personnel costs driven by headcount growth.

General and administrative

General and administrative expenses consist primarily of personnel costs and professional services costs. General and administrative personnel costs include those for certain executive functions, as well as finance, human resources and legal functions. Our professional services costs are primarily related to external legal, accounting and tax services.

General and administrative expenses increased $2.0 million, or 9.5%, and $9.6 million, or 26.5%, in the three and six months ended June 30, 2022 compared to the same periods in 2021. The increase in the three and six months ended June 30, 2022 included increased legal and professional fees, primarily driven by acquisitions during the first half of 2022. The increase in the six months ended June 30, 2022 was also driven by an increase in personnel costs, including stock-based compensation.

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

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

The movements in other income (expense), net, during the three and six months ended June 30, 2022 as compared to the same periods in 2021 were primarily driven by the movements of the stock prices of our publicly-traded equity investment after its initial public offering in January 2022. In addition, our interest income has increased as we gradually replace lower-coupon-rate fixed-income marketable debt securities upon maturity with those with higher coupon rates. We expect our interest income to continue to increase for the remainder of 2022 as a result of higher interest rates.

Provision for Income Taxes (in thousands, except percentages)

We operate in a number of tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may also be subject to U.S. income tax. Generally, our U.S. tax obligations are reduced by a credit for foreign income taxes paid on these foreign earnings, which avoids double taxation. Our tax expense to date consists of federal, state and foreign current and deferred income taxes.

The increase in the effective tax rates in the three and six months ended June 30, 2022, as compared to the same periods in 2021, was primarily due to a decrease in the proportion of tax benefits attributable to stock-based compensation versus total pre-tax income.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As of June 30, 2022, our total balance of cash, cash equivalents and marketable securities was approximately $2.9 billion, of which approximately $381.3 million was held outside the U.S. in our foreign subsidiaries.

Our cash, cash equivalents and marketable securities are held for general business purposes, including the funding of working capital. The investment portfolio of our marketable securities is primarily invested in highly-rated securities, with the primary objective of minimizing the potential risk of principal loss. We plan to continue to invest for long-term growth. We believe that our existing balances of cash, cash equivalents and marketable securities, together with cash generated from operations, will be sufficient to meet our working capital requirements and our growth strategies for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the introduction of new and enhanced product and service offerings, our costs associated with supply chain activities, including access to outsourced manufacturing, our costs related to investing in or acquiring complementary or strategic businesses and technologies, the continued market acceptance of our products, and stock repurchases. If we require or elect to seek additional capital through debt or equity financing in the future, we may not be able to raise capital on terms acceptable to us or at all. If we are required and unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.

Cash Flows (in thousands)

Cash Flows from Operating Activities

During the six months ended June 30, 2022, cash provided by operating activities was $318.2 million, primarily from net income of $571.4 million and non-cash adjustments to net income of $19.8 million driven by stock-based compensation and depreciation and amortization, and partly offset by a net increase of $272.9 million in working capital requirements. The increase in working capital requirements primarily consisted of a $202.1 million increase in inventory and a $158.1 million increase in prepaid expenses and other current assets, which reflected increased inventory purchases and inventory deposits to contract manufacturers to mitigate supply chain constraints and meet customer demand. The increase in other current assets also reflected increased deferred product cost of sales due to a corresponding increase in deferred product revenue, as well as an increase in contract assets and other miscellaneous receivables. In addition, accounts receivable increased by $64.3 million due to increased product and service billings. These operating cash outflows were partially offset by a $91.2 million increase in product and service deferred revenue driven by customer contracts with acceptance terms and PCS contracts, a $71.2 million increase in accounts payable, and a $10.8 million increase in income tax payables.

During the six months ended June 30, 2021, cash provided by operating activities was $518.0 million, primarily from net income of $377.3 million and non-cash adjustments to net income of $125.2 million driven by stock-based compensation and depreciation and amortization, and a net decrease of $15.5 million in working capital requirements. The decrease in working capital requirements primarily consisted of a $95.3 million increase in product and service deferred revenue driven by customer contracts with acceptance terms and growth in PCS contracts, a $25.3 million decrease in accounts receivable due to strong collections, and a $20.0 million increase in accrued liabilities due to additional supply chain related obligations. These cash inflows were partially offset by a $63.5 million increase in inventory and a $44.4 million increase in prepaid expenses primarily due to prepaid income taxes and deferred product cost of revenue.

Cash Flows from Investing Activities

During the six months ended June 30, 2022, cash provided by investing activities was $173.0 million, consisting of proceeds from maturities of marketable securities of $829.7 million and proceeds from sale of marketable securities of $165.7 million, which was used to fund the business acquisitions and to repurchase our common stock. These amounts were partially offset by purchases of available-for-sale securities of $642.0 million, and purchases of property and equipment of $23.7 million.

During the six months ended June 30, 2021, cash used in investing activities was $436.1 million, consisting of purchases of available-for-sale securities of $1,241.7 million, and purchases of property and equipment of $9.6 million, partially offset by proceeds from maturities of marketable securities of $819.8 million.

Cash Flows from Financing Activities

During the six months ended June 30, 2022, cash used in financing activities was $615.7 million, consisting of payments for repurchases of our common stock from the open market of $619.9 million, and employee taxes withheld and paid of $18.8 million upon vesting of restricted stock units, offset partially by proceeds from the issuance of common stock under employee equity incentive plans of $23.0 million.

During the six months ended June 30, 2021, cash used in financing activities was $80.8 million, consisting of payments for repurchases of our common stock from the open market of $101.4 million, and employee taxes withheld and paid of $6.4 million upon vesting of restricted stock units, offset partially by proceeds from the issuance of common stock under employee equity incentive plans of $26.9 million.

Stock Repurchase Program

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. The New Repurchase Program commenced in the 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 the company at any time without prior notice. During the quarter ended June 30, 2022, we repurchased a total of $483.7 million of our common stock. As of June 30, 2022, the remaining authorized amount for repurchases under the New Repurchase Program was $307.2 million. Refer to Note 6. Stockholders' Equity and Stock-Based Compensation of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of the Quarterly Report on Form 10-Q for further discussion.

Material Cash Requirements

Our material cash requirements will have an impact on our future liquidity. Our material cash requirements represent material expected or contractually committed future payment obligations. We believe that we will be able to fund these obligations through cash generated from operations and from our existing balances of cash, cash equivalents and marketable securities.

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

Leases

We have operating lease arrangements for office space, data center, equipment and other corporate assets. As of June 30, 2022, we had lease payment obligations, net of immaterial sublease income, of $82.1 million, with $11.9 million payable within 12 months.

Purchase Obligations

Purchase obligations represent an estimate of all non-cancellable open purchase orders and contractual obligations, made either directly by Arista or by our contract manufacturers on our behalf, in the ordinary course of business for which we have not received the goods or services. As of June 30, 2022, we had $4.47 billion of such purchase obligations, out of which $2.94 billion are expected to be received within 12 months, and $1.53 billion are expected to be received after one year. These open purchase orders are considered enforceable and legally binding, and while we may have some limited ability to reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, this can only occur with the agreement of the related supplier.

Accrued Income Taxes

In connection with the Tax Cuts and Jobs Act of 2017("TCJA"), we recorded a federal income tax payable for transition tax on the mandatory deemed repatriation of foreign earnings that will be payable over an eight-year period. As of June 30, 2022, $6.3 million of long-term transition tax payable represents the remaining federal income tax payable due between one and three years. In addition to the long-term transition tax payable, as of June 30, 2022, we have recorded long-term tax liabilities of $73.1 million related to uncertain tax positions; however, we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

In addition, beginning in 2022, the TCJA eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years pursuant to IRC Section 174.

Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. Consequently, we estimate the incremental cash tax impact resulting from the new regulations to be approximately $184.0 million for the year, of which the liability for the first six months of 2022 has been paid as of June 30, 2022; however, we do not anticipate any material change to our effective tax rate.

Off-balance Sheet Arrangements

As of June 30, 2022, we did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Estimates

Our management’s discussion and analysis of financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. We believe the critical accounting estimates in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K filed with the SEC on February 15, 2022 reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no significant changes to our critical accounting estimates as disclosed in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

Refer to the subheading titled “Recently Adopted Accounting Pronouncements” in Note 1. Organization and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

We are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates and equity investment risks. Our exposure to market risk has not changed materially since December 31, 2021. For quantitative and qualitative disclosures about market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2021.

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act, that occurred during the quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our CEO and CFO, do not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the

realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under the “Legal Proceedings” subheading in Note 5. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q is incorporated herein by reference.

You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition, results of operations and prospects. The risks described below are not the only risks facing us. Risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially affect our business, financial condition, results of operations and prospects.

Risk Factors Summary

Our business is subject to numerous risks and uncertainties, including those highlighted in Part I, Item 1A titled “Risk Factors.” These risks include, but are not limited to, the following:

Risks Related to Our Business and Industry

• shipment delays could cause revenue to fall;

• some key components in our products come from sole or limited sources of supply and increases the risk of supply shortages, delays, extended lead times or costs, particularly in the current industry-wide supply constrained environment;

• adverse economic and geopolitical conditions including inflationary pressures, the impact of the Russia-Ukraine conflict and reduced information technology and network infrastructure spending may adversely affect our business;

• the COVID-19 pandemic which has led, among other things, to manufacturing disruptions, prolonged supply chain shortages, increased component and other supply chain costs, and unpredictable product demand and supply, increased lead times, extended demand planning horizons and increased purchase commitments, all of which, in turn, could materially adversely affect our business;

• large purchases by a limited number of customers represent a substantial portion of our revenue;

• the networking market is rapidly evolving;

• failure to successfully pursue new products and services and expand into adjacent markets could adversely affect our business;

• our revenue and revenue growth may decline;

• our results of operations may vary significantly from period to period;

• our gross margins vary and may be adversely affected by an increase in costs including component, shipping and other product costs;

• we face intense competition and industry consolidation;

• we are subject to risks associated with international sales and operations;

• we face risks associated with the acquisition and integration of complementary companies, products or technologies;

• seasonal fluctuations impact revenue;

• fluctuations in currency exchange rates could adversely affect our business;

• failure to raise any needed capital on favorable terms could harm our business.

Risks Related to Customers and Sales

• if we are unable to attract new large customers or sell additional products and services to our existing customers, our revenue growth will be adversely affected;

• if we are unable to increase market awareness of our products, our revenue may not continue to grow or may decline;

• some large customers require more favorable terms;

• sales of our switches generate most of our product revenue;

• sales prices of our products and services may decrease;

• sales cycle can be long and unpredictable;

• inability to offer high quality support and services could adversely affect our business;

• declines in maintenance renewals by customers could harm our business;

• indemnification provisions under sales contracts could expose us to losses;

• we rely on distributors, systems integrators and resellers to sell our products;

• sales to government entities are subject to a number of risks and challenges;

• we are exposed to credit risk of channel partners and customers.

Risks Related to Products and Services

• product quality problems, defects, errors or vulnerabilities could harm our business;

• failure to anticipate technological shifts could harm our business;

• our products must interoperate with operating systems, software and hardware developed by others.

Risks Related to Supply Chain and Manufacturing

• managing the supply of our products and product components is complex;

• we depend on third-party manufacturers to build our products;

• future sales forecasts may be materially inaccurate which could result in incorrect levels of inventory and purchase commitments.

Risks Related to Intellectual Property and Other Proprietary Rights

• assertions by third parties of intellectual property infringement could harm our business;

• failure to protect our intellectual property rights could harm our competitive position;

• we rely on the availability of licenses to third-party software and other intellectual property;

• failure to comply with open-source software licenses could restrict our ability to sell our products;

• risk that our competitors could develop products that are similar to or better than ours because we provide access to our software and selected source code to certain partners, which creates additional risks.

Risks Related to Litigation

• we may become involved in litigation that may materially adversely affect us.

Risks Related to Cybersecurity and Data Privacy

• defects, errors or vulnerabilities in our security network products, failure of our products to detect security breaches or incidents, misuse of our products or risks of product liability could harm our business;

• breaches of our cybersecurity systems or other security breaches or incidents could harm our business and our products and result in regulatory fines, required changes to our data handling processes or systems, and liability for damages to affected data subjects.

Risks Related to Accounting, Compliance, Regulation and Tax

• failure to maintain effective internal control over financial reporting could adversely affect the accuracy and timing of our financial reporting;

• if our critical accounting estimates are based on incorrect assumptions, our results of operations could fall below analyst and investor expectations and result in a decline in the market price of our common stock;

• enhanced U.S. tax, tariff, import/export restrictions or other trade barriers may negatively affect our business;

• changes in our effective tax rate or new tax laws could adversely affect our results;

• failure to comply with government laws and regulations could harm our business;

• we are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability for violations.

Risks Related to Ownership of Our Common Stock

• the trading price of our common stock is volatile and the value of your investment could decline;

• any reduction or discontinuance of our stock repurchase programs could cause the market price of our common stock to decline;

• sales of substantial amounts of our common stock could reduce the market price of our common stock;

• insiders have substantial control over us;

• our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

General Risks

• if we are unable to hire, retain and train personnel and senior management, our business could suffer;

• natural disasters, terrorism and other catastrophic events could harm our business;

• we have not paid dividends and do not intend to pay dividends for the foreseeable future.

Risks Related to Our Business and Industry

Interruptions or delays in shipments could cause our revenue for the applicable period to fall below expected levels.

We have been and could continue to be subject to manufacturing disruptions and supply chain delays. This places significant pressure on supply chain management, manufacturing, inventory and quality control management, shipping and trade compliance to ensure that we have properly forecasted supply purchasing, manufacturing capacity, inventory and quality compliance and logistics. A significant interruption in these critical fun

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None.

______________________

***** The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Arista Networks, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.