Arista Networks 10-Q 2023-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2023

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 April 26, 2023 was 308,282,799.

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 Income Statements

(Unaudited, in thousands, except per share amounts)

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

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

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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 14, 2023. 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 is an industry leader in data-driven, cognitive cloud networking for next-generation data center and campus workspace environments. At the core of Arista's platform is our EOS software, combined with a set of network applications and our Ethernet switching and routing products using merchant silicon, delivering a cloud networking solution with high performance scale and availability, and enabling network automation, visibility, and security. This flexible EOS-based platform provides customers with improved price/performance and accelerated time to market.

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, 2022, we had delivered our cloud networking solutions to over 9,000 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, telecommunication service providers and other cloud service providers.

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 the time it takes these end customers to evaluate, test, qualify and accept our newer products, the overall complexity of these large orders and changes in demand patterns specific to these customers, including reductions in capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers. For example, sales to our end customers Microsoft and Meta Platforms in fiscal 2022 represented 16% and 26% of our total revenue, respectively, whereas sales to our end customer Microsoft in fiscal 2020 and 2021 amounted to 22% and 15% of our total revenue, respectively, with our end customer Meta Platforms representing less than 10% of our total revenue 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 continued variability in our customer concentration and timing of sales on a quarterly and annual basis. In addition, some of our large customers have announced various cost reduction measures, including optimization and increased efficiency in their capital expenditures. In some instances, such measures have had, or may have, an impact on certain current or future projects and have reduced our visibility to customer demand, which may result in reductions in future demand and negatively impact our revenue. Furthermore, we typically provide pricing discounts to large end customers, which reduces gross 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 inflation, monetary policy shifts, the recent banking crisis, recession risks, and potential supply chain and other disruptions from the Russia-Ukraine conflict and the U.S. trade war with China.

We have continued to work closely with our contract manufacturers and supply chain partners to ramp production following a period of delayed component sourcing and workforce disruptions. We have worked diligently to drive improvements in these areas, including funding additional working capital and incremental purchase commitments, and have begun to see some reduction in customer lead times on certain products. As customer lead times improve more broadly, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand and a gradual return to a somewhat shorter demand-planning horizon. While inventory and working capital levels may continue to increase and remain elevated in the near term, we expect that purchase commitments will continue to decline as supplier lead times begin to shorten. Although these elevated inventory positions largely relate to early life cycle products, we cannot be certain that we will be able to sell this inventory which may result in excess and obsolete inventory charges in the future.

In addition, inflation pressure in our supply chain, scarcity of some materials needed to build our products and disruptions to our manufacturing process have increased our cost of revenue and have impacted, and may continue to negatively impact our gross margin. Our operating cash-flows have also been and may continue to be negatively impacted by significant component inventories on hand or at our contract manufacturers. While we have seen some improvements in our supply chain and manufacturing operations, any remaining or new supply chain and manufacturing related constraints could negatively impact our business in future periods. In addition, although our business has experienced limited disruption as a result of the Russia-Ukraine conflict, continued escalation of the conflict may negatively impact the global economy and our future operating results and financial condition.

Management continues to actively monitor the impact of these macroeconomic factors on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce. The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, the impact on our customers, partners, employees, contract manufacturers and supply chain, all of which continue to evolve and are unpredictable; however, any continued or renewed disruption in manufacturing and supply resulting from these factors could negatively impact our business. We also believe that our customers continue to grapple with the impact of these macroeconomic factors on their businesses and future investment plans, resulting in business

uncertainty and a more constrained approach to forecasts and orders. In addition, any prolonged economic disruptions or further 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 Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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 related network applications. 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 $447.4 million, or 61.7%, for the three months ended March 31, 2023 compared to the same period in 2022. The increase reflects strong demand for our switching and routing platforms from across our customer base, in particular healthy contributions from our large cloud customers. In addition, service revenue increased $26.9 million, or 17.7% for the three months ended March 31, 2023, compared to the same period in 2022, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand. International revenue represented 17.5% of total revenue for the three months ended March 31, 2023, decreasing from 24.3% for the same period in the prior year, which was primarily driven by increased purchases from large global customers in our Americas region.

Cost of Revenue and Gross Margin

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

Cost of revenue increased by $223.6 million, or 69.2% for the three months ended March 31, 2023 compared to the same period in 2022. These increases were primarily driven by a corresponding increase in product and service revenues,

combined with an increase in provisions for excess/obsolete inventory.

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

Gross margin decreased from 63.1% to 59.5% for the three months ended March 31, 2023 compared to the same periods in 2022. The decrease was primarily driven by an increased proportion of our sales to large end customers who generally receive higher discounts and an increase in provisions for excess/obsolete inventory, partly offset by the leverage of fixed overhead costs on a higher revenue base. In addition, our gross margins continue to be negatively impacted by significant material and logistics costs.

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 $29.4 million, or 17.1% in the three months ended March 31, 2023 compared to the same period in 2022. The increases were primarily driven by an increase in personnel costs of $22.1 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to headcount growth. In addition, new product introduction costs increased by $7.0 million for the three months ended March 31, 2023 compared to the same period in 2022.

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 $12.8 million, or 15.8% for the three months ended March 31, 2023 compared to the same period in 2022, which was primarily caused by increased personnel costs largely 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 $1.9 million, or 8.3% in the three months ended March 31, 2023

compared to the same period in 2022.

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, were driven by an unrealized loss on equity investments of $5.6 million in the three months ended March 31, 2023 compared to an unrealized gain of $28.5 million in the same period in 2022. This decrease in income was partly offset by an increase in interest income of $20.1 million in the three months ended March 31, 2023 due to 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.

Our provision for income taxes increased in the three months ended March 31, 2023, as compared to the same period in 2022, due to a corresponding increase in income before taxes, while our effective tax rate remained relatively stable over those same periods.

Liquidity and Capital Resources

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As of March 31, 2023, our total balance of cash, cash equivalents and marketable securities was approximately $3.3 billion, of which approximately $426.7 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 three months ended March 31, 2023, cash provided by operating activities was $374.5 million, primarily from net income of $436.5 million and non-cash adjustments to net income of $18.6 million driven by stock-based compensation and depreciation and amortization, largely offset by an increase in deferred taxes associated with the capitalization of research and development costs under IRC Section 174. These increases were partly offset by a net increase of $80.6 million in working capital requirements, which primarily consisted of a $393.0 million increase in inventory and an $81.9 million increase in inventory deposits to our contract manufacturers in response to a significant increase in business volume and increased product lead times. These operating cash outflows were largely offset by cash inflows from a $153.2 million increase in accounts payable and accrued liabilities and a $108.2 million increase in income tax payables related to significant business volume and timing of payments. In addition, we had cash inflows resulting from a decrease in accounts receivable of $60.2 million driven by strong collections, and an increase in deferred revenue of $51.0 million primarily resulting from an increase in customer PCS contracts.

During the three months ended March 31, 2022, cash provided by operating activities was $217.1 million, primarily from net income of $272.3 million, reduced by non-cash adjustments to net income of $35.4 million, and a net increase of $19.7 million in working capital requirements. Cash outflows from the increase in working capital requirements primarily consisted of a $131.9 million increase in accounts receivables due to increased product and service billings, a $108.0 million increase in prepaid and other current assets primarily driven by increased inventory deposits to our contract manufacturers and product deferred cost of sales driven by higher product revenue deferrals, and a $43.5 million increase in inventory to help mitigate the impact of supply chain disruptions. These operating cash outflows were largely offset by a $187.2 million increase in deferred revenue reflecting ongoing growth from PCS contracts, and increased product deferred revenue related to contracts with acceptance terms, and a $107.0 million increase in income taxes payable due to timing of payments, the impact of IRC Section 174 and an increase in pre-tax income.

Cash Flows from Investing Activities

During the three months ended March 31, 2023, cash used in investing activities was $21.7 million, consisting of purchases of available-for-sale securities of $861.6 million, and purchases of property and equipment of $5.6 million. These amounts were partially offset by proceeds from maturities and sales of marketable securities of $845.7 million.

During the three months ended March 31, 2022, cash used in investing activities was $72.6 million, primarily consisting of purchases of available-for-sale securities of $412.6 million, a business acquisition of $37.6 million, purchases of non-marketable equity investments of $11.7 million, and purchases of property and equipment of $14.9 million, partially offset by proceeds from maturities of marketable securities of $404.2 million.

Cash Flows from Financing Activities

During the three months ended March 31, 2023, cash used in financing activities was $68.4 million, consisting of payments for repurchases of our common stock from the open market of $82.3 million, and employee taxes withheld and paid of $9.2 million upon vesting of restricted stock units, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $23.1 million.

During the three months ended March 31, 2022, cash used in financing activities was $129.8 million, primarily consisting of payments for repurchases of our common stock from the open market of $136.2 million, partially offset by proceeds from the issuance of common stock under employee equity incentive plans of $19.2 million.

Stock Repurchase Program

Our board of directors has authorized a $1.0 billion stock repurchase program (the “Repurchase Program”). This authorization allows us to repurchase shares of our common stock that will be funded from working capital and expires in the fourth quarter of 2024. The Repurchase Program does not obligate us to acquire any of our common stock and may be suspended or discontinued by the company at any time without prior notice. During the three months ended March 31, 2023, we repurchased a total of $82.3 million of our common stock. As of March 31, 2023, the remaining authorized amount for repurchases under the Repurchase Program was $174.5 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 March 31, 2023, we had lease payment obligations, net of immaterial sublease income, of $81.2 million, with $21.6 million payable within one year.

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 March 31, 2023, we had $2.9 billion of such purchase obligations, of which $2.4 billion are expected to be received within one year, and $0.5 billion are expected to be received after one year. These open purchase orders are considered enforceable and legally binding, and while we may have some limited ability to reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, this can only occur with the agreement of the related supplier.

Accrued Income Taxes

As of March 31, 2023, we have recorded long-term tax liabilities of $90.8 million related to uncertain tax positions; however, we are unable to make a reasonably reliable estimate of the timing of settlement, if any, of these future payments.

In connection with the Tax Cuts and Jobs Act of 2017 (“TCJA”), effective from January 1st 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. We estimate the incremental cash tax impact resulting from these regulations to be approximately $190.0 million for 2023. No material change to our effective tax rate has resulted from this new legislation.

Off-balance Sheet Arrangements

As of March 31, 2023, 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 14, 2023 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, 2022. 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, 2022.

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 March 31, 2023, 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 March 31, 2023 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. These risks include, but are not limited to, the following:

Risks Related to Our Business and Industry

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

• adverse economic and geopolitical conditions and reduced information technology and network infrastructure spending may adversely affect our business;

• 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 a supply constrained environment;

• our revenue and revenue growth may decline;

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

• 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 gross margins vary and may be adversely affected by an increase in 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;

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

• some large customers require more favorable terms;

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

• 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 could harm our business and our products and result in regulatory fines, required changes to our data handling processes, 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 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.

• failure to comply with anti-bribery and anti-corruption laws and anti-money laundering laws, and similar laws, could subject us to penalties and other adverse consequences.

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 program 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

We expect large purchases by a limited number of end customers to continue to represent a substantial p****ortion of our revenue, and any loss, delay, decline or other change in expected purchases could result in material quarter-to-quarter fluctuations of our revenue or otherwise adversely affect our results of operations.

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 the time it takes these end customers to evaluate, test, qualify and accept our products, the overall complexity of these large orders and changes in demand patterns specific to these customers, including reductions in capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers. For example, sales to our end customers Microsoft and Meta Platforms in fiscal 2022 collectively represented 42% of our

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None.

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***** 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.