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)


	March 31, 2023		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	956,341	$	671,707
Marketable securities	2,374,789		2,352,022
Accounts receivable, net	862,875		923,096
Inventories	1,682,703		1,289,706
Prepaid expenses and other current assets	393,825		314,217
Total current assets	6,270,533		5,550,748
Property and equipment, net	97,157		95,009
Acquisition-related intangible assets, net	112,890		122,205
Goodwill	265,924		265,924
Investments	39,401		39,468
Operating lease right-of-use assets	64,003		53,390
Deferred tax assets	646,066		574,912
Other assets	47,092		73,754
TOTAL ASSETS	$	7,543,066	$	6,775,410
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	330,171	$	232,572
Accrued liabilities	351,764		292,487

Deferred revenue	671,700		637,432
Other current liabilities	231,274		131,040
Total current liabilities	1,584,909		1,293,531
Income taxes payable	94,733		89,839
Operating lease liabilities, non-current	55,291		43,964

Deferred revenue, non-current	420,574		403,814

Other long-term liabilities	58,385		58,442
TOTAL LIABILITIES	2,213,892		1,889,590
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 March 31, 2023 and December 31, 2022	—		—
Common stock, $0.0001 par value—1,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 308,098 and 306,890 shares issued and outstanding as of March 31, 2023 and December 31, 2022	31		31
Additional paid-in capital	1,857,467		1,780,714
Retained earnings	3,493,181		3,138,983
Accumulated other comprehensive income (loss)	(21,505)		(33,908)
TOTAL STOCKHOLDERS’ EQUITY	5,329,174		4,885,820
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,543,066	$	6,775,410

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)


	Three Months Ended March 31,
	2023		2022
Revenue:
Product	$	1,172,094	$	724,718
Service	179,257		152,348
Total revenue	1,351,351		877,066
Cost of revenue:
Product	508,862		293,809
Service	37,982		29,412
Total cost of revenue	546,844		323,221
Gross profit	804,507		553,845
Operating expenses:
Research and development	201,408		172,006
Sales and marketing	93,492		80,739
General and administrative	25,029		23,113

Total operating expenses	319,929		275,858
Income from operations	484,578		277,987
Other income (expense), net	12,146		31,480
Income before income taxes	496,724		309,467
Provision for income taxes	60,251		37,208
Net income	$	436,473	$	272,259
Net income per share:
Basic	$	1.42	$	0.88
Diluted	$	1.38	$	0.85
Weighted-average shares used in computing net income per share:
Basic	306,985		308,045
Diluted	315,578		319,652

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)


	Three Months Ended March 31,
	2023		2022
Net income	$	436,473	$	272,259
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	292		(373)
Available-for-sale investments:
Change in net unrealized gains (losses) on available-for-sale securities	8,253		(21,828)
Reclassification adjustment included in net income	3,858		—
Other comprehensive income (loss)	12,403		(22,201)
Comprehensive income	$	448,876	$	250,058

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 March 31, 2023
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance at beginning of period	306,890	$	31	$	1,780,714	$	3,138,983	$	(33,908)	$	4,885,820

Net income	—	—		—		436,473		—		436,473
Other comprehensive income, net of tax	—	—		—		—		12,403		12,403
Stock-based compensation	—	—		62,881		—		—		62,881
Issuance of common stock in connection with employee equity incentive plans	2,012	—		23,096		—		—		23,096
Repurchase of common stock	(735)	—		—		(82,275)		—		(82,275)
Tax withholding paid for net share settlement of equity awards	(69)	—		(9,224)		—		—		(9,224)

Balance at end of period	308,098	$	31	$	1,857,467	$	3,493,181	$	(21,505)	$	5,329,174


	Three Months Ended March 31, 2022
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance at beginning of period	307,681	$	31	$	1,530,046	$	2,456,823	$	(8,300)	$	3,978,600

Net income	—	—		—		272,259		—		272,259
Other comprehensive loss, net of tax	—	—		—		—		(22,201)		(22,201)
Stock-based compensation	—	—		50,279		—		—		50,279
Issuance of common stock in connection with employee equity incentive plans	1,727	—		19,160		—		—		19,160
Repurchase of common stock	(1,171)	—		—		(136,228)		—		(136,228)
Tax withholding paid for net share settlement of equity awards	(105)	—		(12,741)		—		—		(12,741)
Common stock issued for business acquisition	33	$	—	$	4,049	$	—	$	—	4,049
Balance at end of period	308,165	$	31	$	1,590,793	$	2,592,854	$	(30,501)	$	4,153,177

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)


	Three Months Ended March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	436,473	$	272,259
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other	20,905		13,091
Stock-based compensation	62,881		50,279
Noncash lease expense	4,633		4,532
Deferred income taxes	(71,153)		(81,822)
Unrealized loss (gain) on equity investments	5,571		(28,497)
Amortization (accretion) of investment premiums (discounts)	(4,220)		7,033
Changes in operating assets and liabilities:
Accounts receivable, net	60,221		(131,861)
Inventories	(392,997)		(43,531)
Prepaid expenses and other current assets	(82,278)		(107,999)
Other assets	26,361		(640)
Accounts payable	94,564		2,478
Accrued liabilities	58,655		(29,666)

Deferred revenue	51,028		187,194
Income taxes, net	108,200		106,992
Other liabilities	(4,361)		(2,704)
Net cash provided by operating activities	374,483		217,138
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities	824,021		404,176
Proceeds from sale of marketable securities	21,725		—
Purchases of marketable securities	(861,612)		(412,614)
Purchases of property and equipment	(5,631)		(14,876)
Business acquisitions, net of cash acquired	—		(37,610)

Investments and notes receivable in privately-held companies	(250)		(11,691)
Net cash used in investing activities	(21,747)		(72,615)
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock under equity plans	23,096		19,160
Tax withholding paid on behalf of employees for net share settlement	(9,224)		(12,741)
Repurchases of common stock	(82,275)		(136,228)
Net cash used in financing activities	(68,403)		(129,809)
Effect of exchange rate changes	314		(481)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	284,647		14,233
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period	675,978		625,050
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period	$	960,625	$	639,283

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Right-of-use assets obtained in exchange for lease obligations	$	15,229	$	6,022
Property and equipment included in accounts payable and accrued liabilities	4,926		2,759
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 next generation data center and campus workspace environments. 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 months ended March 31, 2023, are not necessarily indicative of the results expected for the full fiscal year. The condensed consolidated balance sheet as of December 31, 2022 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, 2022, filed with the SEC on February 14, 2023.

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 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.

Recent Accounting Pronouncements Not Yet Effective

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

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):


	March 31, 2023								December 31, 2022
	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Financial Assets:
Cash Equivalents:
Money market funds	$	315,895	$	—	$	—	$	315,895	$	322,294	$	—	$	—	$	322,294
Commercial paper	—		—		—		—		—		5,422		—		5,422

U.S. government notes	47,678		—		—		47,678		51,986		—		—		51,986
Agency securities	—		—		—		—		—		17,559		—		17,559

	363,573		—		—		363,573		374,280		22,981		—		397,261
Marketable Securities:
Commercial paper	—		87,825		—		87,825		—		—		—		—
Certificate of deposits(1)	—		14,496		—		14,496		—		10,492		—		10,492
U.S. government notes	839,675		—		—		839,675		993,955		—		—		993,955
Corporate bonds	—		1,040,610		—		1,040,610		—		1,113,134		—		1,113,134
Agency securities	—		378,693		—		378,693		—		215,380		—		215,380

Marketable equity securities(2)	13,490		—		—		13,490		19,061		—		—		19,061
	853,165		1,521,624		—		2,374,789		1,013,016		1,339,006		—		2,352,022
Other Assets:
Money market funds - restricted	4,284		—		—		4,284		4,271		—		—		4,271
Total Financial Assets	$	1,221,022	$	1,521,624	$	—	$	2,742,646	$	1,391,567	$	1,361,987	$	—	$	2,753,554

(1) As of March 31, 2023 and December 31, 2022, all of our certificates of deposits were domestic deposits.

(2) The $13.5 million represents the fair value of marketable equity securities as of March 31, 2023. This publicly-traded equity investment generated an unrealized loss of $5.6 million for the three months ended March 31, 2023, and an unrealized gain of $13.5 million for the three months ended March 31, 2022. Total initial cost for this investment was $3.0 million with no changes since our initial investment. 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 months ended on March 31, 2023, 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):


	March 31, 2023								December 31, 2022
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Commercial paper	$	87,825	$	—	$	—	$	87,825	$	—	$	—	$	—	$	—
U.S. government	847,523		122		(7,970)		839,675		1,007,175		3		(13,223)		993,955
Corporate bonds	1,048,045		865		(8,300)		1,040,610		1,125,920		271		(13,057)		1,113,134
Agency securities	379,818		613		(1,738)		378,693		217,893		83		(2,596)		215,380

Total	$	2,363,211	$	1,600	$	(18,008)	$	2,346,803	$	2,350,988	$	357	$	(28,876)	$	2,322,469

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 months ended March 31, 2023. All unrealized losses were recognized in other comprehensive income (loss). Realized losses were immaterial for the three months ended March 31, 2023.

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


	March 31, 2023
	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	$	274,507	$	(1,144)	$	439,448	$	(6,826)	$	713,955	$	(7,970)
Corporate bonds	457,708		(2,677)		370,215		(5,623)		827,923		(8,300)
Agency securities	82,404		(383)		62,217		(1,355)		144,621		(1,738)
Total	$	814,619	$	(4,204)	$	871,880	$	(13,804)	$	1,686,499	$	(18,008)

As of March 31, 2023, 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):


	March 31, 2023
	Fair Value
Due in 1 year or less	$	1,608,879
Due in 1 to 2 years	737,924
Total debt securities	$	2,346,803

The weighted-average remaining duration of our marketable debt securities is approximately 0.8 years as of March 31, 2023. 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 months ended March 31, 2023 and March 31, 2022. We recorded unrealized gains of nil and $15.0 million on non-marketable equity securities based on observable price changes from orderly transactions of identical or similar securities in the three months ended March 31, 2023 and March 31, 2022, respectively. We recorded immaterial unrealized losses in the three months ended March 31, 2023. 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 March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Cost of investments	$	23,875	$	23,625
Cumulative impairment and downward adjustment	(1,205)		(888)
Cumulative upward adjustment	16,731		16,731
Carrying amount of investments	$	39,401	$	39,468

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):


	March 31, 2023		December 31, 2022
Cash and cash equivalents	$	956,341	$	671,707
Restricted cash included in other assets	4,284		4,271
Total cash, cash equivalents and restricted cash	$	960,625	$	675,978

Accounts Receivable, net

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


	March 31, 2023		December 31, 2022
Accounts receivable	$	871,282	$	928,490
Allowance for doubtful accounts	(1,264)		(19)
Product sales rebate and returns reserve	(7,143)		(5,375)
Accounts receivable, net	$	862,875	$	923,096

Inventories

Inventories consist of the following (in thousands):


	March 31, 2023		December 31, 2022
Raw materials	$	1,060,261	$	759,519
Finished goods	622,442		530,187
Total inventories	$	1,682,703	$	1,289,706

Prepaid Expenses and Other Current Assets

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


	March 31, 2023		December 31, 2022
Inventory deposits	$	243,923	$	162,047

Other current assets	125,353		124,357
Other prepaid expenses and deposits	24,549		27,813
Total prepaid expenses and other current assets	$	393,825	$	314,217

Property and Equipment, net

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


	March 31, 2023		December 31, 2022
Land	$	42,337	$	41,500
Equipment and machinery	128,883		122,407
Computer hardware and software	50,892		52,148
Leasehold improvements	30,204		30,102
Furniture and fixtures	3,577		3,575
Construction-in-process	5,634		2,124
Property and equipment, gross	261,527		251,856
Less: accumulated depreciation	(164,370)		(156,847)
Property and equipment, net	$	97,157	$	95,009

Depreciation expense was $7.1 million and $5.6 million for the three months ended March 31, 2023 and 2022, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	March 31, 2023		December 31, 2022
Accrued compensation-related costs	$	57,776	$	117,053
Accrued Supplier liability	78,168		71,481
Accrued manufacturing costs	138,530		45,379
Accrued product development costs	44,551		27,380

Other	32,739		31,194
Total accrued liabilities	$	351,764	$	292,487

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 March 31,
	2023		2022
Contract liabilities, beginning balance	$	103,448	$	93,382
Less: Revenue recognized from beginning balance	(9,243)		(8,248)
Less: Beginning balance reclassified to deferred revenue	(4,382)		(3,837)
Add: Contract liabilities recognized	15,224		17,125
Contract liabilities, ending balance	$	105,047	$	98,422

As of March 31, 2023 and December 31, 2022, $46.9 million and $45.2 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 March 31,
	2023		2022
Deferred revenue, beginning balance	$	1,041,246	$	929,312
Less: Revenue recognized from beginning balance	(214,450)		(128,136)
Add: Deferral of revenue in current period, excluding amounts recognized during the period	265,478		322,570
Deferred revenue, ending balance	$	1,092,274	$	1,123,746

Other Performance Obligations

Other performance obligations totaling $1.0 billion as of March 31, 2023 include unbilled multi-year PCS and service contract amounts of $120.1 million and $908.6 million of binding contractual agreements with certain customers that are primarily related to future product shipments.

Revenue from Total Remaining Performance Obligations

Total revenue from our contract liabilities, deferred revenue and other performance obligations that will be recognized in future periods amounts to $2.2 billion. Included in this amount is the $908.6 million of binding contractual agreements related primarily to future product shipments. As of March 31, 2023, 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. In addition, as of March 31, 2023, approximately 82% of the remaining $1.3 billion of this future revenue 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.

Other Income (Expense), net

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


	Three Months Ended March 31,
	2023		2022
Interest income	$	22,509	$	2,428
Unrealized gain (loss) on equity investments	(5,571)		28,497
Other income (expense), net	(4,792)		555
Total	$	12,146	$	31,480

4. Acquisition, Goodwill and Acquisition-Related Intangible Assets

Acquisitions

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

The purchase price allocation for one of the acquisitions has been finalized, while for the other acquisition it is still subject to continuing management analysis. No changes were made to the purchase price allocation for the three months ended March 31, 2023.

Goodwill

No changes were made to the carrying values of goodwill for the three months ended March 31, 2023.

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, 2022		Additions		March 31, 2023		December 31, 2022		Amortization		March 31, 2023		December 31, 2022		March 31, 2023
Developed technology	$	154,930	$	—	$	154,930	$	(79,036)	$	(6,820)	$	(85,856)	$	75,894	$	69,074	4.3
Customer relationships	54,620		—		54,620		(14,097)		(1,925)		(16,022)		40,523		38,598		5.4
Trade name	12,390		—		12,390		(6,602)		(570)		(7,172)		5,788		5,218		2.3
Others	5,720		—		5,720		(5,720)		—		(5,720)		—		—		0.0
Total	$	227,660	$	—	$	227,660	$	(105,455)	$	(9,315)	$	(114,770)	$	122,205	$	112,890	4.6

Amortization expense related to acquisition-related intangible assets was $9.3 million, and $7.3 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, future estimated amortization expense related to the acquisition-related intangible assets is as follows (in thousands):


	Future Amortization Expense
Remainder of 2023	$	24,123
2024	26,759
2025	19,642
2026	17,260
2027	13,436
Thereafter	11,670
Total	$	112,890

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 March 31, 2023, we had non-cancellable purchase commitments of $2.9 billion, of which $2.4 billion have confirmed receipt dates within 12 months, and $0.5 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 $246.7 million and $192.5 million as of March 31, 2023 and December 31, 2022, 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 March 31, 2023, 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

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. 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a combination of the foregoing. 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. As of March 31, 2023, the remaining authorized amount for stock repurchases under the Repurchase Program was approximately $174.5 million.

A summary of the stock repurchase activity under the New Repurchase Program for the three months ended March 31, 2023 is as follows (in thousands, except per share amounts):


	Three Months Ended
	March 31, 2023
Aggregate purchase price	$	82,275
Shares repurchased	735
Average price paid per share	$	111.90

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, 2023, our board of directors authorized an increase of 9.2 million shares to the shares available for issuance under the 2014 Plan. As of March 31, 2023, there remained approximately 99.4 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, 2023, our board of directors authorized an increase of 3.1 million shares to the shares available for issuance under the ESPP. During the three months ended March 31, 2023, we issued 139,758 shares at a weighted-average purchase price of $102.66 per share under the ESPP. As of March 31, 2023, there remained approximately 23.5 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, 2022	5,769	$	14.09	2.0	$	618,774
Options granted	—	—
Options exercised	(1,132)	7.72
Options canceled	(1)	9.26
Balance—March 31, 2023	4,636	$	15.65	1.9	$	705,637
Vested and exercisable—March 31, 2023	4,225	$	13.43	1.6	$	652,547

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, 2022	8,360	$	85.83	1.7	$	1,014,431
RSUs granted	577	132.83
RSUs vested	(733)	77.09
RSUs forfeited/canceled	(86)	94.48
Unvested balance—March 31, 2023	8,118	$	89.89	1.7	$	1,362,671

Stock-Based Compensation Expense

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


	Three Months Ended March 31,
	2023		2022
Cost of revenue	$	2,975	$	1,309
Research and development	36,569		27,576
Sales and marketing	15,138		13,109
General and administrative	8,199		8,285
Total stock-based compensation	$	62,881	$	50,279

As of March 31, 2023, there were $602.9 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 3.2 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 March 31,
	2023		2022
Numerator:
Net income	$	436,473	$	272,259
Denominator:
Weighted-average shares used in computing net income per share, basic	306,985		308,045
Add weighted-average effect of dilutive securities:
Employee equity awards	8,593		11,607
Weighted-average shares used in computing net income per share, diluted	315,578		319,652
Net income per share:
Basic	$	1.42	$	0.88
Diluted	$	1.38	$	0.85

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 March 31,
	2023	2022
Stock options and RSUs	21	64
Employee stock purchase plan	353	16
Total	374	80

8. Income Taxes (in thousands, except percentages)


	Three Months Ended March 31,
	2023			2022
Income before income taxes	$	496,724		$	309,467
Provision for income taxes	60,251			37,208
Effective tax rate	12.1		%	12.0		%

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.

9. Geographical Information

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


	Three Months Ended March 31,
	2023		2022
Americas(1)	$	1,115,011	$	664,377
Europe, Middle East and Africa	128,316		134,805
Asia-Pacific	108,024		77,884
Total revenue	$	1,351,351	$	877,066

(1) Includes $1.1 billion and $648.9 million revenue generated from the U.S. for the three months ended March 31, 2023 and March 31, 2022, respectively.

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):


	March 31, 2023		December 31, 2022
United States	$	74,239	$	71,540
International	22,918		23,469
Total	$	97,157	$	95,009

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