Item 1. Financial Statements (Unaudited)

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Item 1. Financial Statements (Unaudited)

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except par value)


	September 30, 2022		December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	716,253	$	620,813
Marketable securities	2,263,818		2,787,502
Accounts receivable, net	651,512		516,509
Inventories	1,100,550		650,117
Prepaid expenses and other current assets	299,545		237,735
Total current assets	5,031,678		4,812,676
Property and equipment, net	96,449		78,634
Acquisition-related intangible assets, net	131,520		93,555
Goodwill	271,018		188,397
Investments	39,677		20,247
Operating lease right-of-use assets	58,205		65,182
Deferred tax assets	473,808		442,295
Other assets	59,655		33,443
TOTAL ASSETS	$	6,162,010	$	5,734,429
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	278,469	$	202,636
Accrued liabilities	240,609		226,643

Deferred revenue	607,189		593,578
Other current liabilities	128,645		86,972
Total current liabilities	1,254,912		1,109,829
Income taxes payable	82,167		69,916
Operating lease liabilities, non-current	47,067		56,527

Deferred revenue, non-current	333,855		335,734
Deferred tax liabilities, non-current	—		129,074
Other long-term liabilities	58,791		54,749
TOTAL LIABILITIES	1,776,792		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 September 30, 2022 and December 31, 2021	—		—
Common stock, $0.0001 par value—1,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 305,515 and 307,681 shares issued and outstanding as of September 30, 2022 and December 31, 2021	31		31
Additional paid-in capital	1,717,605		1,530,046
Retained earnings	2,714,711		2,456,823
Accumulated other comprehensive income (loss)	(47,129)		(8,300)
TOTAL STOCKHOLDERS’ EQUITY	4,385,218		3,978,600
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,162,010	$	5,734,429

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)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue:
Product	$	1,008,689	$	604,160	$	2,619,213	$	1,709,772
Service	168,112		144,537		486,545		413,806
Total revenue	1,176,801		748,697		3,105,758		2,123,578
Cost of revenue:
Product	432,569		243,342		1,102,012		687,554
Service	34,252		26,740		96,656		77,959
Total cost of revenue	466,821		270,082		1,198,668		765,513
Gross profit	709,980		478,615		1,907,090		1,358,065
Operating expenses:
Research and development	187,807		153,093		537,971		428,873
Sales and marketing	81,401		69,740		241,512		211,385
General and administrative	23,425		22,488		69,420		58,856

Total operating expenses	292,633		245,321		848,903		699,114
Income from operations	417,347		233,294		1,058,187		658,951
Other income (expense), net	6,817		1,346		37,764		4,640
Income before income taxes	424,164		234,640		1,095,951		663,591
Provision for income taxes	70,165		10,335		170,594		62,032
Net income	$	353,999	$	224,305	$	925,357	$	601,559
Net income per share (1):
Basic	$	1.16	$	0.73	$	3.02	$	1.96
Diluted	$	1.13	$	0.70	$	2.92	$	1.89
Weighted-average shares used in computing net income per share (1):
Basic	304,931		307,456		306,576		306,176
Diluted	314,401		319,636		316,745		318,976

(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 financial statements (unaudited).

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	353,999	$	224,305	$	925,357	$	601,559
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(2,574)		(747)		(5,306)		(1,097)
Net change in unrealized gains (losses) on available-for-sale securities	(3,236)		(118)		(33,523)		(1,145)
Other comprehensive income (loss)	(5,810)		(865)		(38,829)		(2,242)
Comprehensive income	$	348,189	$	223,440	$	886,528	$	599,317

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

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Stockholders**’** Equity

(Unaudited, in thousands)


	Three Months Ended September 30, 2022													Nine Months Ended September 30, 2022
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity		Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount				Shares			Amount
Balance at beginning of period	304,455	$	30	$	1,638,787		$	2,408,294		$	(41,319)	$	4,005,792	307,681	$	31	$	1,530,046	$	2,456,823	$	(8,300)	$	3,978,600

Net income	—	—		—			353,999			—		353,999		—	—		—		925,357		—		925,357
Other comprehensive loss, net of tax	—	—		—			—			(5,810)		(5,810)		—	—		—		—		(38,829)		(38,829)
Stock-based compensation	—	—		65,477			—			—		65,477		—	—		165,980		—		—		165,980
Issuance of common stock in connection with employee equity incentive plans	1,593	1		20,081			—			—		20,082		4,451	1		43,072		—		—		43,073
Repurchase of common stock	(479)	—		—			(47,582)			—		(47,582)		(6,433)	(1)		—		(667,469)		—		(667,470)
Tax withholding paid for net share settlement of equity awards	(54)	—		(6,740)			—			—		(6,740)		(217)	—		(25,542)		—		—		(25,542)
Common stock issued for business acquisition	—	—		—			—			—		—		33	—		4,049		—		—		4,049
Balance at end of period	305,515	$	31	$	1,717,605		$	2,714,711		$	(47,129)	$	4,385,218	305,515	$	31	$	1,717,605	$	2,714,711	$	(47,129)	$	4,385,218


	Three Months Ended September 30, 2021											Nine Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital (1)		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity		Common Stock			Additional Paid-In Capital (1)		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares (1)	Amount (1)		Shares (1)		Amount (1)
Balance at beginning of period	306,660	$	31	$	1,395,436	$	2,303,513	$	(1,139)	$	3,697,841	304,696	$	30	$	1,292,409	$	2,027,614	$	238	$	3,320,291

Net income	—	—		—		224,305		—		224,305		—	—		—		601,559		—		601,559
Other comprehensive loss, net of tax	—	—		—		—		(865)		(865)		—	—		—		—		(2,242)		(2,242)
Stock-based compensation	—	—		53,135		—		—		53,135		—	—		135,632		—		—		135,632
Issuance of common stock in connection with employee equity incentive plans	2,436	—		29,270		—		—		29,270		5,948	1		56,153		—		—		56,154
Repurchase of common stock	(1,504)	—		—		(134,157)		—		(134,157)		(2,972)	—		—		(235,512)		—		(235,512)
Tax withholding paid for net share settlement of equity awards	(48)	—		(4,269)		—		—		(4,269)		(128)	—		(10,622)		—		—		(10,622)
Balance at end of period	307,544	$	31	$	1,473,572	$	2,393,661	$	(2,004)	$	3,865,260	307,544	$	31	$	1,473,572	$	2,393,661	$	(2,004)	$	3,865,260

(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 financial statements (unaudited).

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	925,357	$	601,559
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other	45,169		37,864
Stock-based compensation	165,980		135,632
Noncash lease expense	13,837		12,738
Deferred income taxes	(148,355)		(573)
Unrealized gain on equity investments	(24,121)		—
Amortization of investment premiums	14,167		19,193
Changes in operating assets and liabilities:
Accounts receivable, net	(129,947)		(6,050)
Inventories	(449,792)		(95,997)
Prepaid expenses and other current assets	(68,996)		(71,300)
Other assets	(17,899)		(2,915)
Accounts payable	73,480		(1,075)
Accrued liabilities	14,690		31,316

Deferred revenue	(1,245)		149,613
Income taxes payable	41,074		(3,565)
Other liabilities	(1,059)		(15,820)
Net cash provided by operating activities	452,340		790,620
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities	1,277,821		1,158,723
Purchases of marketable securities	(973,489)		(1,974,853)
Purchases of property and equipment	(34,184)		(55,455)
Business acquisitions, net of cash acquired	(145,087)		—
Escrow receipts from past business acquisitions	—		1,299
Investments and notes receivable in privately-held companies	(12,691)		(10,684)
Proceeds from sale of marketable securities	186,782		19,607
Net cash provided by (used in) investing activities	299,152		(861,363)
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock under equity plans	43,073		56,154
Tax withholdings paid on behalf of employees for net share settlement	(25,542)		(10,622)
Repurchases of common stock	(667,470)		(235,512)
Net cash used in financing activities	(649,939)		(189,980)
Effect of exchange rate changes	(6,090)		(1,513)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	95,463		(262,236)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period	625,050		897,454
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period	$	720,513	$	635,218

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	7,300	$	4,824
Property and equipment included in accounts payable and accrued liabilities	5,704		3,849
Common stock issued for business acquisition	4,049		—

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

ARISTA NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

Arista Networks, Inc. (together with our subsidiaries, “we,” “our,” "Arista," "Company" or “us”) is a supplier of cloud networking solutions that use software innovations to address the needs of large-scale internet companies, cloud service providers and next-generation enterprises. Our cloud networking solutions consist of our Extensible Operating System ("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 unaudited condensed consolidated financial statements include the accounts of Arista Networks, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial information. The results for the three and nine months ended September 30, 2022, are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. All significant inter-company accounts and transactions have been eliminated.

Our condensed consolidated financial statements and related financial information in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 15, 2022.

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.

Risks and Uncertainties

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

Our contract manufacturers and suppliers have experienced workforce disruptions, delays in component sourcing, production and export of their products and component shortages and increased component costs, which have disrupted our supply chain and have impacted and will likely continue to impact our ability to supply products to our customers on a timely basis. While overall demand remains strong across our customers base, 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, 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. 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. The extent of the impact on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, and the impact of any initiatives and programs we may undertake to address financial and operational challenges, will depend on future developments, the impact to

our customers, partners, employees, contract manufacturers and supply chain, all of which continue to evolve and are unpredictable. Management continues to actively monitor the impact of these macroeconomic factors on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce. As of the date of issuance of these condensed consolidated financial statements, the extent to which these factors may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

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 condensed consolidated financial statements. The standard did not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date.

2. Fair Value Measurements

Assets measured at fair values on a recurring basis

We measure and report our cash equivalents, restricted cash, marketable equity securities and available-for-sale debt 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):


	September 30, 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	$	353,987	$	—	$	—	$	353,987	$	221,382	$	—	$	—	$	221,382

Certificate of deposits(1)	—		14,556		—		14,556		—		—		—		—
U.S. government notes	23,368		—		—		23,368		—		—		—		—
Agency securities	—		46,000		—		46,000		—		—		—		—

	377,355		60,556		—		437,911		221,382		—		—		221,382
Marketable Securities:
Commercial paper	—		3,487		—		3,487		—		141,274		—		141,274
Certificate of deposits(1)	—		11,422		—		11,422		—		44,931		—		44,931
U.S. government notes	1,169,899		—		—		1,169,899		1,057,810		—		—		1,057,810
Corporate bonds	—		883,784		—		883,784		—		1,252,226		—		1,252,226
Agency securities	—		179,473		—		179,473		—		291,261		—		291,261
Marketable equity securities(2)	15,753		—		—		15,753		—		—		—		—
	1,185,652		1,078,166		—		2,263,818		1,057,810		1,729,692		—		2,787,502
Other Assets:
Money market funds - restricted	4,260		—		—		4,260		4,237		—		—		4,237
Total Financial Assets	$	1,567,267	$	1,138,722	$	—	$	2,705,989	$	1,283,429	$	1,729,692	$	—	$	3,013,121

(1) As of September 30, 2022 and December 31, 2021, all of our certificates of deposits were domestic deposits.

(2) The $15.8 million represents the fair value of marketable equity securities as of September 30, 2022. This amount includes $8.3 million that was reclassified from Investments on our condensed 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 $7.5 million for the nine months ended September 30, 2022, and an unrealized loss of $0.9 million for the three months ended September 30, 2022. The unrealized gains and losses are included in Other income (expense), net on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 3. Financial Statements Details.

During the three and nine months ended on September 30, 2022, the Company did not make any transfers between the levels of the fair value hierarchy.

Marketable debt securities

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of our debt securities measured at fair value on a recurring basis (in thousands):


	September 30, 2022								December 31, 2021
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value



Commercial paper	$	3,487	$	—	$	—	$	3,487	$	141,274	$	—	$	—	$	141,274
U.S. government	1,187,901		—		(18,002)		1,169,899		1,060,716		3		(2,909)		1,057,810
Corporate bonds	902,133		—		(18,349)		883,784		1,255,149		105		(3,028)		1,252,226
Agency securities	182,771		—		(3,298)		179,473		291,558		36		(333)		291,261
Total	$	2,276,292	$	—	$	(39,649)	$	2,236,643	$	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 related 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 three and nine months ended September 30, 2022. All unrealized losses were recognized in other comprehensive income (loss). Realized losses were immaterial for the three and nine months ended September 30, 2022.

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


	September 30, 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	$	877,442	$	(13,026)	$	292,554	$	(4,976)	$	1,169,996	$	(18,002)
Corporate bonds	625,577		(13,314)		258,208		(5,035)		883,785		(18,349)
Agency securities	155,296		(2,807)		24,176		(491)		179,472		(3,298)
Total	$	1,658,315	$	(29,147)	$	574,938	$	(10,502)	$	2,233,253	$	(39,649)

As of September 30, 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):


	September 30, 2022
	Fair Value
Due in 1 year or less	$	1,773,158
Due in 1 to 2 years	463,485
Total debt securities	$	2,236,643

The weighted-average remaining duration of our marketable debt securities is approximately 0.6 years as of September 30, 2022. As we view these marketable debt securities as available to support current operations, we classify marketable debt securities with maturities beyond 12 months as current assets under the caption "Marketable securities" on the condensed consolidated balance sheets.

Assets measured at fair value on a non-recurring basis

Non-Marketable Equity Securities

We have non-marketable equity securities in privately-held companies that do not have readily-determinable fair values. These equity securities are included in Investments on the condensed consolidated balance sheets. Their initial cost is adjusted to fair value on a non-recurring basis based on observable price changes from orderly transactions of identical or similar securities of the same issuer, or for impairment. These investments are classified within Level III of the fair value hierarchy as we estimate the value based on valuation methods using the observable transaction price at the transaction date and other significant unobservable inputs, such as volatility, rights, and obligations related to these securities. In addition, the valuation requires management judgment due to the absence of market price and lack of liquidity.

We did not record any realized gains or losses for our non-marketable equity securities measured at fair value on a non-recurring basis during the three and nine months ended September 30, 2022 and September 30, 2021. We recorded unrealized gains of $1.7 million and $16.7 million on non-marketable equity securities based on observable price changes from orderly transactions of identical or similar securities in three and the nine months ended September 30, 2022. We recorded immaterial unrealized losses in the three and nine months ended September 30, 2022. 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 its non-marketable equity securities.

The following table summarizes the activity related to our non-marketable equity securities as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022		December 31, 2021
Cost of investments (1)	$	23,625	$	14,933
Cumulative impairment and downward adjustment	(629)		—
Cumulative upward adjustment (1)	16,681		5,314
Carrying amount of investments	$	39,677	$	20,247

(1) During the nine months ended September 30, 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 condensed consolidated balance sheet following the commencement of public market trading of the issuer. There was no such activity in the three months ended September 30, 2022.

3. Financial Statements Details

Cash, Cash Equivalents and Restricted Cash

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


	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	716,253	$	620,813
Restricted cash included in other assets	4,260		4,237
Total cash, cash equivalents and restricted cash	$	720,513	$	625,050

Accounts Receivable, net

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


	September 30, 2022		December 31, 2021
Accounts receivable	$	660,108	$	521,597
Allowance for doubtful accounts	(215)		(132)
Product sales rebate and returns reserve	(8,381)		(4,956)
Accounts receivable, net	$	651,512	$	516,509

Inventories

Inventories consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Raw materials	$	629,058	$	316,737
Finished goods	471,492		333,380
Total inventories	$	1,100,550	$	650,117

Prepaid Expenses and Other Current Assets

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


	September 30, 2022		December 31, 2021
Inventory deposits	$	121,916	$	46,311
Prepaid income taxes	1,409		8,977
Other current assets	142,627		163,916
Other prepaid expenses and deposits	33,593		18,531
Total prepaid expenses and other current assets	$	299,545	$	237,735

Property and Equipment, net

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


	September 30, 2022		December 31, 2021
Land	$	40,601	$	40,145
Equipment and machinery	119,379		90,915
Computer hardware and software	51,254		44,083
Leasehold improvements	30,060		30,502
Furniture and fixtures	3,573		3,634
Construction-in-process	1,997		2,378
Property and equipment, gross	246,864		211,657
Less: accumulated depreciation	(150,415)		(133,023)
Property and equipment, net	$	96,449	$	78,634

Depreciation expense was $6.9 million and $4.9 million for the three months ended September 30, 2022 and 2021, respectively, and $18.7 million and $14.6 million for the nine months ended September 30, 2022 and 2021, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Accrued payroll related costs	$	82,791	$	99,571
Accrued manufacturing costs	103,098		80,213
Accrued product development costs	25,282		22,188
Accrued warranty costs	14,314		10,414
Other	15,124		14,257
Total accrued liabilities	$	240,609	$	226,643

Warranty Accrual

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


	Nine Months Ended September 30,
	2022		2021
Warranty accrual, beginning of period	$	10,414	$	9,314
Liabilities accrued for warranties issued during the period	13,887		8,643
Warranty costs incurred during the period	(9,987)		(8,429)
Warranty accrual, end of period	$	14,314	$	9,528

Contract Assets

The following table summarizes the beginning and ending balances of our contract assets included in "Prepaid and other current assets" on the condensed consolidated balance sheets (in thousands):


	Nine Months Ended September 30,
	2022
Contract assets, beginning balance	$	24,388
Contract assets, ending balance	13,525

Contract Liabilities, Deferred Revenue and Other Performance Obligations

Contract Liabilities

A contract liability is recognized when we have received customer payments in advance of our satisfaction of a performance obligation under a cancellable contract. The following table summarizes the activity related to our contract liabilities (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Contract liabilities, beginning balance	$	101,600	$	83,354	$	93,382	$	85,957
Less: Revenue recognized from beginning balance	(9,173)		(8,763)		(29,296)		(27,251)
Less: Beginning balance reclassified to deferred revenue	(9,898)		(3,996)		(2,998)		(2,443)
Add: Contract liabilities recognized	18,247		16,976		39,688		31,308
Contract liabilities, ending balance	$	100,776	$	87,571	$	100,776	$	87,571

As of September 30, 2022 and December 31, 2021, $42.2 million and $38.7 million of our contract liabilities, respectively, were included in "Other current liabilities" with the remaining balances included in "Other long-term liabilities" on the condensed consolidated balance sheets.

Deferred Revenue

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Deferred revenue, beginning balance	$	1,033,490	$	746,090	$	929,312	$	650,827
Less: Revenue recognized from beginning balance	(234,515)		(164,188)		(457,309)		(327,300)
Add: Deferral of revenue in current period, excluding amounts recognized during the period	142,069		218,538		469,041		476,913
Deferred revenue, ending balance	$	941,044	$	800,440	$	941,044	$	800,440

Other Performance Obligations

Other performance obligations include unbilled contract revenue for services and products that will be recognized in future periods. As of September 30, 2022, other performance obligations of $178.6 million were comprised mainly of unbilled multi-year PCS contract amounts that will be recognized as revenue in future periods. In addition, as of September 30, 2022 the company had entered into $844.2 million of binding contractual agreements with certain customers that are primarily related to future product shipments.

Revenue from Total Remaining Performance Obligations

Revenue from total remaining performance obligations represents contract liabilities, deferred revenue and unbilled contract revenue that will be recognized in future periods. As of September 30, 2022, approximately $1,220.5 million of revenue is expected to be recognized from remaining performance obligations, of which approximately 82% is expected to be

recognized over the next two years and approximately 18% is expected to be recognized during the third to the fifth year. These amounts do not include the $844.2 million of binding contractual agreements related primarily to future product shipments outlined above. As of September 30, 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 and industry wide supply constraints, we may experience manufacturing and shipment delays or cancellations related to these performance obligations, which could impact revenue recognition.

Other Income (Expense), net

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income	$	6,929	$	1,636	$	13,783	$	5,553
Unrealized gain on equity investments	708		—		24,121		—
Other income (expense), net	(820)		(290)		(140)		(913)
Total	$	6,817	$	1,346	$	37,764	$	4,640

4. Acquisition, Goodwill and Acquisition-Related Intangible Assets

Acquisitions

During the nine months ended September 30, 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, $82.6 million of goodwill and $14.0 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 three and nine months ended September 30, 2022 are as follows (in thousands):


	Amount
Balance at December 31, 2021	$	188,397
Additions related to the acquisition completed in January 2022	28,518
Balance at March 31, 2022	$	216,915
Additions related to the acquisition completed in June 2022	56,530
Measurement-period adjustments	49
Balance at June 30, 2022	$	273,494
Measurement-period adjustments	(2,476)
Balance at September 30, 2022	$	271,018

Acquisition-Related Intangible Assets

Acquisition-related intangible assets were as follows (in thousands, except years):


	Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount				Weighted Average Remaining Useful Life (in years)
	December 31, 2021		Additions		September 30, 2022		December 31, 2021		Amortization		September 30, 2022		December 31, 2021		September 30, 2022
Developed technology	$	124,730	$	30,200	$	154,930	$	(53,663)	$	(18,553)	$	(72,216)	$	71,067	$	82,714	4.5
Customer relationships	25,920		28,700		54,620		(7,899)		(4,272)		(12,171)		18,021		42,449		5.9
Trade name	8,990		3,400		12,390		(4,693)		(1,340)		(6,033)		4,297		6,357		2.8
Others	5,720		—		5,720		(5,550)		(170)		(5,720)		170		—		0.0
Total	$	165,360	$	62,300	$	227,660	$	(71,805)	$	(24,335)	$	(96,140)	$	93,555	$	131,520	4.9

Amortization expense related to acquisition-related intangible assets was $9.3 million, and $7.3 million for the three months ended September 30, 2022 and 2021, and $24.3 million and $22.1 million for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, future estimated amortization expense related to the acquisition-related intangible assets is as follows (in thousands):


	Future Amortization Expense
Remainder of 2022	$	9,315
2023	33,438
2024	26,759
2025	19,642
2026	17,260
Thereafter	25,106
Total	$	131,520

5. Commitments and Contingencies

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 September 30, 2022, we had non-cancellable purchase commitments of $4.3 billion, of which $3.1 billion have confirmed receipt dates within 12 months, and $1.2 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 $124.7 million and $49.1 million as of September 30, 2022 and December 31, 2021, respectively, which were recorded within prepaid expenses and other current assets, as well as other assets in the condensed consolidated balance sheets.

Guarantees

We have entered into agreements with some of our direct customers and channel partners that contain indemnification provisions relating to potential situations where claims could be alleged that our products infringe the intellectual property rights of a third party. We have, at our option and expense, the ability to repair any infringement, replace product with a non-infringing equivalent-in-function product or refund our customers all or a portion of the value of the product. Other guarantees or indemnification agreements include guarantees of product and service performance and standby letters of credit for leased facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions and our guarantee and indemnification arrangements have not had a significant impact on our consolidated financial statements to date.

Legal Proceedings

WSOU Investments, LLC

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

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

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

Other matters

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

We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of September 30, 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 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”), which allows us to repurchase shares of our common stock to be funded from working capital. Repurchases may be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchases, trading plans under Rule 10b5-1 of the Exchange Act, or a combination of the foregoing. The New Repurchase Program commenced in November 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 September 30, 2022, the remaining authorized amount for stock repurchases under this program was approximately $259.6 million.

A summary of the stock repurchase activity under the New Repurchase Program for the nine months ended September 30, 2022 is as follows (in thousands, except per share amounts):


	Nine Months Ended
	September 30, 2022
Aggregate purchase price	$	667,470
Shares repurchased	6,433
Average price paid per share	$	103.75

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

Equity Award Plan Activities

2014 Equity Incentive Plan

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 our board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2022, our board of directors authorized an increase of 9,230,434 shares to the shares available for issuance under the 2014 Plan. As of September 30, 2022, there remained approximately 93.4 million shares available for issuance under the 2014 Plan.

2014 Employee Stock Purchase Plan

In April 2014, our board of directors and stockholders approved the 2014 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective on the first day that our common stock was publicly traded. The number of shares reserved for issuance under the ESPP increases automatically on January 1 of each year by the number of shares equal to 1% of our shares outstanding on the immediately preceding December 31, but not to exceed 10,000,000 shares, unless our board of directors, in its discretion, determines to make a smaller increase. Effective January 1, 2022, our board of directors authorized an increase of 3,076,811 shares to the shares available for issuance under the ESPP. During the nine months ended September 30, 2022, we issued 485,303 shares at a weighted-average purchase price of $50.37 per share under the ESPP. As of September 30, 2022, there remained approximately 20.6 million shares available for issuance under the ESPP.

Stock Option Activities

The following table summarizes the option activity under our stock plans and related information (in thousands, except 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	(1,938)	9.61
Options canceled	(177)	15.68
Balance—September 30, 2022	6,570	$	13.19	2.1	$	654,987
Vested and exercisable—September 30, 2022	5,759	$	10.91	1.8	$	587,246

Restricted Stock Unit (RSU) Activities

A summary of the RSU activity is presented below (in thousands, except years and per share amounts):


	Number of Shares	Weighted- Average Grant Date Fair Value Per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Unvested balance—December 31, 2021	7,821	$	70.98	1.7	$	1,124,229
RSUs granted	3,469	100.56
RSUs vested	(2,006)	64.50
RSUs forfeited/canceled	(389)	76.53
Unvested balance—September 30, 2022	8,895	$	83.91	1.8	$	1,004,214

Stock-Based Compensation Expense

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	2,992	$	2,002	$	6,613	$	5,198
Research and development	37,698		27,552		93,723		72,673
Sales and marketing	16,103		12,680		42,039		34,133
General and administrative	8,684		10,901		23,605		23,628
Total stock-based compensation	$	65,477	$	53,135	$	165,980	$	135,632

As of September 30, 2022, there were $667.1 million of unamortized compensation costs related to all unvested awards. The unamortized compensation costs are expected to be recognized over a weighted-average period of approximately 3.4 years.

7. Net Income Per Share

The following table sets forth the computation of our basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021 (1)		2022		2021 (1)
Numerator:
Net income	$	353,999	$	224,305	$	925,357	$	601,559
Denominator:
Weighted-average shares used in computing net income per share, basic	304,931		307,456		306,576		306,176
Add weighted-average effect of dilutive securities:
Employee equity awards	9,470		12,180		10,169		12,800
Weighted-average shares used in computing net income per share, diluted	314,401		319,636		316,745		318,976
Net income per share:
Basic	$	1.16	$	0.73	$	3.02	$	1.96
Diluted	$	1.13	$	0.70	$	2.92	$	1.89

(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 following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share for the periods presented because their effect would have been anti-dilutive for the periods presented (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021 (1)	2022	2021 (1)
Stock options and RSUs	292	36	379	320
Employee stock purchase plan	295	24	104	48
Total	587	60	483	368

(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.

8. Income Taxes (in thousands, except percentages)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Income before income taxes	$	424,164		$	234,640		$	1,095,951		$	663,591
Provision for income taxes	70,165			10,335			$	170,594		62,032
Effective tax rate	16.5		%	4.4		%	15.6		%	9.3		%

The increase in the effective tax rates in the three and nine months ended September 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.

9. Geographical Information

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Americas	$	977,674	$	557,814	$	2,487,106	$	1,573,835
Europe, Middle East and Africa	110,793		121,722		350,136		330,044
Asia-Pacific	88,334		69,161		268,516		219,699
Total revenue	$	1,176,801	$	748,697	$	3,105,758	$	2,123,578

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


	September 30, 2022		December 31, 2021
United States	$	76,578	$	62,163
International	19,871		16,471
Total	$	96,449	$	78,634

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