What changed in Arista Networks,'s 10-K for the fiscal year ended December 31, 2025

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

No corresponding language in the FY2024 10-K.

In order to reduce manufacturing lead times and plan for adequate component supply, we have issued and expect to continue to issue purchase orders for components and products that are non-cancellable and non-returnable, including purchase commitments for semiconductors as disclosed in Note 5. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K. Our business is emerging from a period of unprecedented global supply chain disruptions. Throughout this period, we made significant supply chain investments, including incremental purchase commitments for long lead time components in response to extended visibility to deployment plans from our customers. Although the global supply chain has shown improvement, we have had to invest in inventory to address forecast uncertainty and expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions. In particular, we have increased our purchase commitments to respond to the rapid deployment of AI networks and reduce overall lead times which will increase our working capital requirements. There is no guarantee that suppliers will meet their commitments or that actual customer demand will not be lower than our demand forecasts. 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. Additionally, certain customers have and may continue to engage in cost reduction measures including reductions in capital expenditures and other efficiency efforts which may result in a cancellation of orders or reduce demand for our products. [removed] We establish a liability for non-cancellable, non-returnable purchase commitments with our component inventory suppliers for quantities in excess of our demand forecasts, or for products that are considered obsolete. In addition, we establish a liability and reimburse our contract manufacturer for component inventory purchased on our behalf that has been rendered excess or obsolete due to manufacturing and engineering change orders, or in cases where inventory levels greatly exceed our demand forecasts. The magnitude of these balances, combined with a reduction in customer demand-planning horizons and shifting product priorities, has resulted in increased risk that we may not be able to sell all of this inventory, which in turn has resulted, and may in the future result, in additional excess and obsolete inventory-related charges. Our non-cancellable commitments and the cash deposits to secure our purchases with our contract manufacturers are disclosed in Note 5. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K. If we ultimately determine that we have excess or obsolete inventory, we may have to reduce our prices and write down inventory to its estimated realizable value, which in turn could result in lower gross margins. If we are unable to effectively manage our supply and inventory, our business, financial condition, results of operations and prospects could be adversely affected.

Our business depends on the overall demand for information technology, network connectivity and access to data and applications. Weak domestic or global economic conditions and continuing economic uncertainty, fear or anticipation of such conditions, a recession, geopolitical pressures, including international trade disputes, global pandemics such as the COVID-19 pandemic, or a reduction in information technology and network infrastructure spending or a deterioration of the financial performance, condition or prospects of our customers, could adversely affect our business, financial condition, results of operations and prospects in a number of ways, including longer sales cycles, reduced demand or lower prices for our products and services, higher default rates among our channel partners, reduced unit sales and lower or no growth. [removed] In addition, the global macroeconomic environment has been negatively affected by, among other things, the uncertainty in the global banking and financial services markets, epidemics, instability in global economic markets, the new U.S. presidential administration, increased uncertainty associated with recent and scheduled increases in U.S. trade tariffs in the context of escalated and unresolved trade disputes and tensions between the U.S., China, Mexico, Canada and other countries, inflationary pressures, higher interest rates, instability in the global credit markets, the impact and uncertainty regarding global central bank monetary policy, instability in the geopolitical environment, the Russia-Ukraine and Israel-Hamas conflicts, political tensions between Taiwan and China, political demonstrations, and foreign governmental debt concerns which have caused, and are likely to continue to cause, uncertainty and instability in local economies and in global financial markets. While some of our customers may be adversely affected by negative macroeconomic conditions, the impact may be particularly significant in our enterprise market where we are seeking to increase our penetration into this market. A government shutdown or a default by the U.S. government on its debt obligations, or related credit-rating downgrades could also have adverse effects on the broader global economy and contribute to, or worsen, an economic recession. We believe that any extended or renewed economic disruptions or deterioration in the global economy could have an adverse impact to our liquidity or to our current and projected business operations, financial condition or results of operations. For example, if banks or other financial institutions with whom we have banking relationships or whose corporate bonds are held in our marketable securities investment portfolio, enter receivership or become insolvent in the future, we may be unable to access, and we may lose some of our existing cash, cash equivalents and investments to the extent those funds are not insured or otherwise protected by the FDIC. In addition, in such circumstances we might not be able to timely pay key vendors and others. We regularly maintain cash balances that are not insured or are in excess of the FDIC's insurance limit. Any delay in our ability to access our cash, cash equivalents and investments (or the loss of such funds) or to timely pay key vendors and others could have a material adverse effect on our operations and cause us to need to seek additional capital sooner than planned.

We have made substantial investments to develop new products and services and enhancements to existing products through our acquisitions and internal research and development efforts to expand our product offerings and maintain our revenue growth. If we are unable to anticipate technological changes in our industry by introducing new or enhanced products and services in a timely and cost-effective manner or if we fail to introduce products and services that meet market demand, we may lose our competitive position, our products may become obsolete, and our business, financial condition or results of operations could be adversely affected. For example, with our most recently introduced 800 GbE and AI focused Ethernet [removed] products, our ability to continue to maintain our competitive position with our customers will depend on our ability to deliver these new products in a timely manner, our customers' acceptance of these products and the growth of the markets that these products serve. In addition, the evaluation, testing and qualification of our new products by our customers may be lengthy and may require increased customer trials and contracts with acceptance clauses, which delay revenue recognition may negatively impact our revenue.

[removed] As of December 31, 2024, we have recorded long-term tax liabilities of $110.0 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.

[removed] In connection with the 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 Internal Revenue Code ("IRC") Section 174. As of December 31, 2024, the incremental cash tax impact resulting from the regulation was approximately $210.2 million for the year, of which substantially all the liability has been paid. It is anticipated that IRC Section 174 will result in cash tax outlays exceeding our income tax expense over the next three years unless the current legislation is changed. There is no material change to our effective tax rate as a result of this regulation.

[removed] It also is possible that the Chinese government will retaliate in ways that could impact our business. For example, China has announced controls on both the use of Micron products and export [removed] license requirements on certain materials used, among other things, in the production of semiconductors, optical components, and other electronic devices including germanium and gallium. [removed] China also has announced a new export control regime. Additionally, these restrictions could disrupt the ability of China to produce semiconductors and other electronics and impact our ability to source components from China. China has also announced plans to implement retaliatory countermeasures in response to the additional 10% tariffs imposed by the United States in February 2025, including new tariffs on certain U.S. origin goods, and has implemented export controls on various critical metal materials. These restrictions could impact the cost of components or inputs used to produce our products.

In order to reduce [removed] manufacturing lead times and plan for adequate component supply, we have issued and expect to continue to issue purchase orders for components and products that are non-cancellable and non-returnable, including purchase commitments for semiconductors as disclosed in Note 5. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K. [removed] Our business is emerging from a period of unprecedented global supply chain disruptions. Throughout this period, we made significant supply chain investments, including incremental purchase commitments for long lead time components in response to extended visibility to deployment plans from our customers. Although the global supply chain has shown improvement, we have had to invest in inventory to address forecast uncertainty and expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions. In particular, we have increased our purchase commitments to respond to the rapid deployment of AI networks and reduce overall lead times which will increase our working capital requirements. [removed] There is no guarantee that suppliers will meet their commitments or that actual customer demand will not be lower than our demand forecasts. As customer lead times improve more broadly, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand [removed] and a gradual return to a somewhat shorter demand-planning horizon. Additionally, certain customers have and may continue to engage in cost reduction measures including reductions in capital expenditures and other efficiency [removed] efforts which may result in a cancellation of orders or reduce demand for our products. We establish a liability for non-cancellable, non-returnable purchase commitments with our component inventory suppliers for quantities in excess of our demand forecasts, or for products that are considered obsolete. In addition, we establish a liability and reimburse our contract manufacturer for component inventory purchased on our behalf that has been rendered excess or obsolete due to manufacturing and engineering change orders, or in cases where inventory levels greatly exceed our demand forecasts. The magnitude of these balances, combined with a reduction in customer demand-planning horizons and shifting product priorities, has resulted in increased risk that we may not be able to sell all of this inventory, which in turn has resulted, and may in the future result, in additional excess and obsolete inventory-related charges. Our non-cancellable commitments and the cash deposits to secure our purchases with our contract manufacturers are disclosed in Note 5. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K. If we ultimately determine that we have excess or obsolete inventory, we may have to reduce our prices and write down inventory to its estimated realizable value, which in turn could result in lower gross margins. If we are unable to effectively manage our supply and inventory, our business, financial condition, results of operations and prospects could be adversely affected.

We establish a liability for non-cancellable, non-returnable purchase commitments with our component inventory suppliers for quantities in excess of our demand forecasts, or for products that are considered obsolete. In addition, we establish a liability and reimburse our contract manufacturer for component inventory purchased on our behalf that has been rendered excess or obsolete due to manufacturing and engineering change orders, or in cases where inventory levels greatly exceed our demand forecasts. The magnitude of these balances, combined with a reduction in customer demand-planning horizons and shifting product priorities, has resulted in increased risk that we may not be able to sell all of this inventory, which in turn has resulted, and may in the future result, in additional excess and obsolete inventory-related charges. Our non-cancellable commitments and the cash deposits to secure our purchases with our contract manufacturers are disclosed in Note 5. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K. If we ultimately determine that we have excess or obsolete inventory, we may have to reduce our prices and write down inventory to[removed] its estimated realizable value, which in turn could result in lower gross margins. If we are unable to effectively manage our supply and inventory, our business, financial condition, results of operations and prospects could be adversely affected.

[removed] Purchase obligations not recorded on our balance sheet 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 December 31, [removed] 2024, we had [removed] $3.1 billion of such purchase obligations, of which [removed] $2.8 billion are expected to be received within 12 months, and [removed] $0.3 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.

Our cash, cash equivalents and marketable securities are held for general business purposes, including the funding of working capital. Our marketable securities investment portfolio 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, stock repurchases, and capital expenditures, including the construction of a new building in Santa Clara, California. In addition, although the global supply chain has shown improvement, we have had to invest in inventory to address forecast uncertainty and expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions. In particular, we have increased our purchase commitments to respond to the rapid deployment of AI networks and reduce overall lead times which will increase our working capital requirements. 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.

During the year ended December 31, [removed] 2023, cash used in financing activities was [removed] $83.7 million, consisting primarily of common stock repurchases of [removed] $112.3 million and taxes paid of $33.6 million upon vesting of restricted stock units, offset partially by proceeds from the [removed] issuance of common stock under employee equity incentive plans of $62.1 million.

Our principal sources of liquidity are cash, cash equivalents, marketable securities, and cash generated from operations. As of December 31, [removed] 2024, our total balance of cash, cash equivalents and marketable securities was [removed] $8.3 billion, of which approximately [removed] $1.4 billion was held outside the U.S. in our foreign subsidiaries.

During the year ended December 31, [removed] 2023, cash used in investing activities was [removed] $687.5 million, consisting of purchases of available-for-sale securities of [removed] $2.6 billion, and purchases of property, equipment and intangible assets of [removed] $34.4 million, partially offset by proceeds of [removed] $1.9 billion from maturities [removed] of marketable securities, and proceeds from the sale of marketable [removed] securities of $67.3 million,

From time to time, we repurchase shares of our common stock pursuant to [removed] the Repurchase Programs that are funded from working capital. In [removed] April 2024, we completed repurchases under [removed] our previous $1.0 billion stock repurchase program ("Prior Repurchase Program"). In May 2024, our board of directors authorized [removed] a new $1.2 billion stock repurchase program ("New Repurchase Program" and together with the Prior Repurchase Program, the "Repurchase Programs"), which expires in May 2027. The Repurchase Programs do not obligate us to acquire any of our common [removed] stock, and may be suspended or discontinued by the [removed] company at any time without prior notice. During the year ended December 31, [removed] 2024, we repurchased a total of [removed] $279.0 million of our common stock under our [removed] New Repurchase Program and [removed] $144.6 million of our common stock under our [removed] Prior Repurchase Program. As of December 31, [removed] 2024, the remaining authorized amount for stock repurchases under the New Repurchase Program was approximately [removed] $921.0 million. Refer to Note 6. Stockholders' Equity and Stock-Based Compensation of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K for further discussion.

We use significant judgment in establishing our forecasts of future demand and obsolete material exposures. These estimates depend on our assessment of current and expected orders from our customers, product development plans and current sales levels. [removed] In addition, industry-wide supply chain shortages in prior years have resulted in extended lead times [removed] for some components, and consequently we were required to extend the time horizon of our demand forecasts. We have experienced some improvements in the supply chain throughout the year, and as customer lead times reduce more broadly, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand and a gradual return to shorter demand-planning horizons. In addition, we expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions. There is however no guarantee that all suppliers will meet their commitments in the time frame committed or that actual customer demand will directly match our demand forecasts. If actual market demand conditions or supplier execution on commitments are less favorable than those projected by management, which may be caused by factors within and/or outside of our control, we may be required to increase our inventory write-downs and liabilities to our contract manufacturers and suppliers, which could have an adverse impact on our gross margins and profitability. We regularly evaluate our exposure for inventory write-downs and adequacy of our contract manufacturer and supplier liabilities.

We believe an increased focus on the deployment of [removed] AI enabled solutions by our large customers has accelerated the need for advanced technology [removed] offerings including some offerings from potential new market entrants. This prioritization and acceleration of AI related infrastructure investment [removed] has at times come in conjunction with a reduction or changes in the mix of previously planned purchases and various cost reduction measures by these customers, including optimization and increased efficiency in non-AI related capital expenditures. In addition, although the focus on deployment of [removed] AI enabled solutions has driven increased demand for networking, the long-term trajectory is unknown. As such, demand estimates for our new products are difficult to forecast and can create volatility in our revenue. [removed] In some instances, such measures have had, and may continue to have, an impact on certain current or future projects and have reduced our visibility to customer demand and may result in a [removed] reduction or uncertainty in the timing of orders from these large customers and increase the risk of charges for excess and obsolete inventory. Fiscal 2024 was marked by a year of new product introductions and expanded use cases, particularly in the AI Ethernet [removed] market, and we expect this to continue into fiscal 2025. This has resulted in increased customer trials and contracts with acceptance periods, and an increase in the volatility and magnitude of our product deferred revenue balances, which in turn may create variability in our revenue results on a quarterly and annual basis.[removed] In addition, if we are not able to satisfy the requirements under customer trials or contracts with acceptance periods, we may be required to accept product returns from our customers, which would prevent us from recognizing revenue on such transactions and may result in the write-down of inventory.

[removed] Arista Networks is an industry leader in data-driven, client to cloud networking for large AI, data center, campus and routing environments. Arista's platforms deliver availability, agility, automation, analytics and security through an advanced network operating stack. Since Arista's inception, our founders have reimagined cloud networks for performance, scale and programmability with a focus on differentiating in three ways: uncompromising reliability built on the foundation of robust quality assurance capabilities with a suite of automated diagnostics, advanced open and standards-based technology and intelligent automation to decrease the manual workload on the operator. At the core of Arista's platform is Arista EOS, a modernized publish-subscribe state-sharing networking operating system. Arista EOS, combined with a set of network applications and our Ethernet switching and routing platforms using best of breed merchant silicon, provides customers with a highly competitive and diversified portfolio of products with improved price/performance and time to market.

Gross margin [removed] increased from 61.1% for the year ended December 31, 2022 to 61.9% for the [removed] year ended December 31, [removed] 2023. These changes reflect an improvement in product margins driven by a lower mix of revenue from our larger customers, partly offset by an increase in excess/obsolete inventory-related charges. In addition, our gross margin benefited in 2023 from the leverage of relatively fixed overhead costs on a higher revenue base.

Our provision for income taxes [removed] increased in 2023, as compared to [removed] 2022, and our effective tax rate decreased in 2023 as compared to 2022. The increase in our income taxes [removed] was largely due to an increase in pre-tax income, partly offset by an increase in tax benefits attributable to stock-based compensation. The decrease in our effective tax rate was primarily due to a reduction of unrecognized tax benefits on uncertain tax positions due to the expiration of the statute of limitations. For further information regarding income taxes and the impact on our results of operations and financial position, refer to Note 8. Income Taxes of the Notes to Consolidated Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K.

[removed] The Company's current portfolio of products, services and technologies are grouped into the following categories: Core (Data Center, Cloud and AI Networking), Cognitive Adjacencies (Campus and Routing), and Cognitive Network (Software and Services). The percentage of revenue derived from these product categories during the current fiscal year was approximately 65% from Core, 18% from Cognitive Adjacencies, and 17% from Networking software and services. Our customers include companies of all sizes and span a range of industries and geographies and are grouped into the following categories: Cloud and AI Titans, Enterprise and Providers. The percentage of revenue derived from these customers during the current fiscal year was approximately 48% from Cloud and AI Titans, [removed] 35% from Enterprise and [removed] 17% from Providers.

[removed] Our contract manufacturers procure components and assemble products on our behalf and we procure strategic components from suppliers based on our forecasts. We record a liability and a corresponding charge for non-cancellable, non-returnable purchase commitments with our [removed] contract manufacturers and suppliers for quantities in excess of our demand forecasts or that are considered [removed] obsolete due to manufacturing and engineering change orders resulting from design changes.

[removed] Our business is emerging from a period of unprecedented global supply chain disruptions. Throughout this period, we made significant supply chain [removed] investments, including funding additional working capital and incremental purchase commitments in response to extended visibility to deployment plans from our customers. We have worked closely with our contract manufacturers and supply chain partners to ramp production following a period of delayed component sourcing and workforce disruptions. Increased capacity has allowed us to ship products against previously committed demand/deployment plans and [removed] accelerate some deployments [removed] where needed, while trying to balance our customers' requirements and lead times [removed] with the availability of key components and products [removed] and lead times of our key suppliers and contract manufacturers. As a result, some shipments against these previously committed demand/deployment plans [removed] have extended into 2025.

[removed] As the global supply chain has experienced some improvements and as customer lead times have been reduced from their peak, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand and a gradual return to shorter demand-planning horizons. Given the timing and prioritization of customer orders and shipment patterns, as well as the timing and outcome of customer trials and contracts with acceptance periods, near term revenue trends may not be reflective of current demand levels, and as discussed above will also benefit from demand/deployment plans that have been previously committed. We expect that our inventory and purchase commitments [removed] will remain volatile as we ramp new product [removed] introductions. The magnitude of these balances, combined with a reduction in customer [removed] demand-planning horizons and shifting customer product priorities, has resulted in increased risk that we may not be able to sell all of this inventory, which in turn has resulted in additional excess and obsolete inventory and supplier liability charges. [removed] In addition, inflation pressure in our supply chain [removed] 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. [removed] These cost pressures may be increased if escalating tariff and non-tariff international trade measures continue to proliferate in or affect our supply chain. We also may not be able to pass on the full burden of the increase in trade-related costs to our customers, which could further negatively impact our gross margin. While we have seen 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.

Historically, [removed] large purchases by a relatively limited number of customers have accounted for a significant portion of our revenue. [removed] We have experienced unpredictability in the timing of orders from these large customers primarily due to the time it takes these 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 or changes in mix of capital expenditures by these customers and the impact of cost reduction and other efficiency efforts by these customers. For example, sales to our end customer Microsoft represented 20%, 18% and 16% of our total revenue for the years ended 2024, 2023 and 2022 respectively. And sales to our end customer Meta Platforms represented 15%, 21% and 26% of our total revenue, respectively for the years ended 2024, 2023 and 2022. This variability in customer concentration [removed] has been linked to the timing of new product [removed] deployments and spending cycles with these customers, and we expect continued variability in [removed] our customer concentration and [removed] timing of sales on a quarterly and annual basis.[removed] In addition, we typically provide pricing discounts to large customers, which reduces gross margins for the period in which such sales occur.

The [removed] markets for cloud networking [removed] solutions are highly competitive and characterized by [removed] 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 [removed] our rapidly changing environment. We must also continue to develop market-leading products and software features that address the changing needs of our existing and new customers, and increase sales in [removed] the cloud, AI and enterprise data center [removed] ethernet switching/routing markets, and campus workspace [removed] 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 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 [removed] organization to enhance the functionality of our existing cloud networking platform, [removed] introduce new products and features, and build upon our technology leadership. [removed] We believe one of our greatest strengths lies in our ability to rapidly develop new features and applications.

We use significant judgment in establishing our forecasts of future demand and obsolete material exposures. These estimates depend on our assessment of current and expected orders from our customers, product development plans and current sales levels. In addition, industry-wide supply chain shortages in prior years have resulted in extended lead times for some [removed] components, and consequently we were required to extend the time horizon of our demand forecasts. We have experienced some improvements in the supply chain throughout the year, and as customer lead times reduce more broadly, we have seen and expect to continue to see a commensurate reduction in visibility to customer demand and a gradual return to shorter demand-planning horizons. In addition, we expect that our inventory and purchase commitments will remain volatile as we ramp new product introductions. There is however no guarantee that all suppliers will meet their commitments in the time frame committed or that actual customer demand will directly match our demand forecasts. If actual market demand conditions or supplier execution on commitments are less favorable than those projected by management, which may be caused by factors within and/or outside of our control, we may be required to increase our inventory write-downs and liabilities to our [removed] contract manufacturers and suppliers, which could have an adverse impact on our gross margins and profitability. We regularly evaluate our exposure for inventory write-downs and adequacy of our contract manufacturer and supplier liabilities.

During the year ended December 31, [removed] 2023, cash provided by operating activities was [removed] $2.0 billion, primarily from net income of [removed] $2.1 billion, offset by net non-cash adjustments to net income of $37.4 million, and [removed] a net change of $15.9 million in working capital requirements. Net non-cash adjustments primarily consisted of an increase in deferred [removed] income taxes of $370.8 million primarily resulting from [removed] increased deferred tax assets associated with the capitalization of research and development costs under IRC Section 174, which were largely offset by $296.8 million of stock-based compensation expenses and $70.6 million of depreciation, amortization and other expenses. The change in working capital requirements primarily consisted of a $655.5 million increase in inventory in response to [removed] a significant increase in business volume, a [removed] $101.5 million increase in [removed] accounts receivable due to the larger business volume and timing of shipments in the fourth quarter of 2023, as well as a $66.4 million increase in other assets [removed] primarily driven by increased deferred cost of [removed] sales associated with higher product revenue [removed] deferrals. These cash outflows were largely offset by a $465.0 million increase in [removed] deferred revenue driven by a growth in PCS contracts and increased product [removed] deferred revenue related to customer contracts with acceptance terms, a $322.3 million increase in accounts payable and other liabilities related to significant business volume, timing of payments, and increased supplier and contract manufacturer liability reserves and a $20.2 million increase in [removed] income taxes, net, due to timing of payments.

Cost of revenue increased by [removed] $524.3 million, or [removed] 30.7% for the year ended December 31, [removed] 2023 compared to [removed] 2022. These increases were [removed] primarily driven by a corresponding increase in product and service [removed] revenues, combined with an increase in provisions for excess/obsolete inventory and supplier liability charges.

General and administrative expenses increased by [removed] $25.8 million, or [removed] 27.7%, for the year ended December 31, [removed] 2023 compared to [removed] 2022. The increase was primarily caused by an increase in [removed] personnel costs driven by increased stock-based compensation, and increased legal and professional fees.

Sales and marketing expenses increased by [removed] $72.1 million, or [removed] 22.0%, for the year ended December 31, [removed] 2023 compared to [removed] 2022. The increase was primarily caused by increased personnel costs driven by [removed] headcount growth, in addition to increased sales and marketing events and field demonstration costs.

Product revenue increased by [removed] $1.3 billion, or [removed] 35.3%, for the year ended December 31, [removed] 2023 compared to [removed] 2022. These increases reflect increased shipments of our switching and routing [removed] products across our customer base, including improved supply availability for our enterprise customers. In addition, service revenue increased by [removed] $165.4 million, or [removed] 24.9%, in the year ended December 31, [removed] 2023 compared to [removed] 2022, as a result of continued growth in initial and renewal support contracts as our customer installed base has continued to expand. [removed] International revenues as a percentage of our total revenues [removed] decreased from 21.0% in 2022 to 20.6% in 2023, which was primarily driven by changes in the geographic mix of sales to our large global customers.

The favorable movement in other income (expense), net, during the year ended December 31, [removed] 2023 as compared to [removed] 2022 was driven by an increase in interest income of [removed] $124.9 million due to an increase in our cash and [removed] investments balances and higher interest rates.

Gross margin increased from 61.9% for the year ended December 31, 2023 to 64.1% for the year ended December 31, 2024. These changes reflect an improvement in product margins of 60.9% in 2024 compared to 59.0% in 2023, driven by a reduction of $180.4 million in net excess/obsolete inventory-related charges.[removed] In addition, our gross margin benefited in 2024 from the leverage of relatively fixed manufacturing overhead costs on a higher revenue base of $7.0 billion in 2024 compared to $5.9 billion in 2023.

Other income (expense), net consists primarily of interest income from our cash, cash equivalents and marketable [removed] securities, and gains and losses on our strategic investments. We expect other income (expense), net may fluctuate in the future as a result of changes in interest rates, changes in our cash, cash equivalents and marketable securities [removed] balances, and the re-measurement of our equity investments upon the occurrence of either observable price changes or impairments.

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 [removed] commissions. Personnel costs also include stock-based compensation and travel-related expenses.

Our cash, cash equivalents and marketable securities are held for general business purposes, including the funding of working capital. Our marketable securities investment portfolio 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, stock repurchases, and capital expenditures, including the construction of a new building in Santa Clara, California. In addition, although the global supply chain has shown improvement, we have had to invest in inventory [removed] to address forecast uncertainty and expect that our inventory and purchase commitments [removed] will remain volatile as we ramp new product introductions. In particular, we have increased our purchase commitments to respond to the rapid deployment of AI networks and reduce overall lead times which will increase our working capital requirements. 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.

Global economic and business activities continue to face widespread macroeconomic uncertainties, including the effects of, among other things, inflation, monetary policy shifts, recession risks, potential supply chain disruptions, changes in [removed] the U.S. administration, geopolitical pressures and escalating international trade [removed] measures.

Research and development expenses increased by [removed] $126.5 million, or [removed] 17.4%, for the year ended December 31, [removed] 2023 compared to [removed] 2022. The increase was primarily due to a [removed] $84.1 million increase in personnel costs driven by an increase in headcount, and a [removed] $40.7 million increase in new product introduction costs, including [removed] non-recurring engineering costs and prototype expenses as we expand our product portfolio.

During the year ended December 31, 2021, we purchased land and the improvements thereon in Santa Clara, California to construct a building for office, lab and data center space. The estimated capital expenditures related to this project is expected to be approximately [removed] $235.0 million to [removed] $260.0 million for the next two years, with construction expected to be [removed] completed by the end of fiscal 2026.

Research and development expenses consist primarily of personnel costs, [removed] 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 [removed] 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.

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 [removed] customers.

Research and development expenses increased by $141.8 million, or 16.6%, for the year ended December 31, 2024 compared to 2023. The increase was primarily due to a $64.9 million increase in personnel costs driven by an increase in headcount, and a $52.3 million increase in new product introduction costs, including [removed] non-recurring engineering costs and prototype expenses as we expand our product portfolio.

We have operating lease arrangements for office space, data center, equipment and other corporate assets. As of December 31, [removed] 2024, we had lease payment obligations, net of immaterial sublease [removed] income, of $65.3 million, with [removed] $24.7 million payable within 12 months.

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 customers who generally receive lower pricing, the mix of products sold, manufacturing-related costs, including costs associated with [removed] supply chain sourcing activities, merchant silicon costs, and excess/obsolete inventory and supplier liability charges. For example, in order to meet customer lead times, we have, and may continue to expedite the supply of components and make incremental investments in our supply [removed] chain to increase our capacity for manufacturing products, which increases our product costs and negatively impacts our gross margin. We expect our gross margin to fluctuate over time, depending on the factors described above.