# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2015

# TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

# ARISTA	NETWORKS,	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	or	other	jurisdiction	of incorporation	or	organization)

(I.R.S.	Employer

Identification	Number)

5453	Great	America	Parkway

Santa	Clara,	California	95054

(Address	of	principal	executive	offices)

(Registrant's	telephone	number,	including	area	code)

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

# Title	of	each	class

# Name	of	each	exchange	on	which	registered

New	York	Stock	Exchange

# Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes	 ý				No		o

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Exchange	Act.				Yes o				No		ý

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		ý				No		o

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be	submitted	and	posted	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	and	post	such	files).				Yes		ý				No		o Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	registrant's	knowledge,	in definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		o

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer,	or	a	smaller	reporting	company.	See	definitions	of	"large	accelerated	filer," "accelerated	filer,"	and	"smaller	reporting	company"	in	Rule	12b-2	of	the	Exchange	Act.	(Check	one):

Large	accelerated	filer		x

Non-accelerated	filer		o (Do	not	check	if	a	smaller	reporting	company)

Accelerated	filer		o

Smaller	reporting	company		o

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

The	aggregate	market	value	of	the	registrant's	common	stock	held	by	non-affiliates	of	the	registrant	was	$2,981,581,590	as	of	June	30,	2015	based	on	the	closing	sale	price	of	the	registrant's common	stock	on	the	New	York	Stock	Exchange	on	such	date.	Shares	held	by	persons	who	may	be	deemed	affiliates	have	been	excluded.	This	determination	of	affiliate	status	is	not	necessarily	a conclusive	determination	for	other	purposes.

On	February	19,	2016,	68,273,930	shares	of	the	registrant's	common	stock	were	outstanding.	Portions	of	the	registrant's	definitive	Proxy	Statement	relating	to	its	2016	Annual	Stockholders' Meeting	to	be	filed	pursuant	to	Regulation	14A	within	120	days	after	the	registrant's	fiscal	year	end	of	December	31,	2015	are	incorporated	by	reference	into	Part	III	of	this	Annual	Report	on Form	10-K.

# TABLE	OF	CONTENTS

# SPECIAL	NOTE	REGARDING	FORWARD-LOOKING	STATEMENTS

This	Annual	Report	on	Form	10-K,	including	the	sections	entitled	"Business,"	"Risk	Factors,"	"Use	of	Proceeds,"	and	"Management's	Discussion	and	Analysis of	Financial	Condition	and	Results	of	Operations,"	contains	forward-looking	statements	within	the	meaning	of	Section	27A	of	the	Securities	Act	of	1933,	as	amended,	as Section	21E	of	the	Securities	Exchange	Act	of	1934,	as	amended,	which	statements	involve	substantial	risks	and	uncertainties.	The	words	"believe,"	"may,"	"will," "potentially,"	"estimate,"	"continue,"	"anticipate,"	"intend,"	"could,"	"would,"	"project,"	"plan,"	"predict,"	"expect"	and	similar	expressions	that	convey	uncertainty	of future	events	or	outcomes	are	intended	to	identify	forward-looking	statements.

These	forward-looking	statements	include,	but	are	not	limited	to,	statements	concerning	the	following:

•our	ability	to	maintain	an	adequate	rate	of	revenue	growth	and	our	future	financial	performance,	including	our	expectations	regarding	our	cost	of	revenue,	gross profit	or	gross	margin	and	operating	expenses;

•our	belief	that	the	cloud	networking	market	is	still	in	the	early	stages	of	adoption	and	has	a	significant	potential	opportunity	for growth;

•our	business	plan	and	our	ability	to	effectively	manage	our	growth,	including	the	reporting	requirements	and	compliance	obligations	of	a	public company;

•costs	associated	with	defending	intellectual	property	infringement	and	other	claims	and	the	potential	outcomes	of	such	disputes,	such	as	those	claims	discussed in	"Legal	Proceedings,"	including	the	Cisco	and	Optumsoft	litigation	matters;

•our	ability	to	satisfy	the	requirements	for	cloud	networking	solutions	and	to	successfully	anticipate	technological	shifts	and	market	needs,	innovate	new products	and	bring	them	to	market	in	a	timely	manner;

•the	budgeting	cycles	and	purchasing	practices	of	end	customers,	including	large	end	customers	who	may	receive	lower	pricing	terms	due	to	volume discounts;

•the	deferral	or	cancellation	of	orders	by	end	customers,	warranty	returns	or	delays	in	acceptance	of	our products;

•our	ability	to	attract	and	retain	end customers;

•our	ability	to	further	penetrate	our	existing	customer	base	and	sell	more	complex	and	higher-performance	configurations	of	our products;

•our	ability	to	displace	existing	products	in	established	markets;

•our	belief	that	increasing	channel	leverage	will	extend	and	improve	our	engagement	with	a	broad	set	of customers;

•our	ability	to	expand	our	leadership	position	in	the	network	switch	industry,	including	the	areas	of	mobility,	virtualization,	cloud	computing	and	cloud networks;

•our	ability	to	timely	and	effectively	scale	and	adapt	our	existing technology;

•the	benefits	realized	by	our	customers	in	their	use	of	our	products	and	services	including	lower	total	cost	of ownership;

•our	ability	to	expand	our	business	domestically	and internationally;

•the	effects	of	increased	competition	in	our	market	and	our	ability	to	compete effectively;

•the	effects	of	seasonal	and	cyclical	trends	on	our	results	of operations;

•our	expectations	concerning	relationships	with	third parties;

•the	attraction	and	retention	of	qualified	employees	and	key	personnel;

•our	ability	to	maintain,	protect	and	enhance	our	brand	and	intellectual property;

•economic	and	industry trends;

•estimates	and	estimate	methodologies	used	in	preparing	our	financial statements;

•future	trading	prices	of	our	common stock;

•our	belief	that	we	have	adequately	reserved	for	uncertain	tax positions;

•our	belief	that	our	existing	cash	and	cash	equivalents	together	with	cash	flow	from	operations	will	be	sufficient	to	meet	our	working	capital	requirements	and our	growth	strategies	for	the	foreseeable	future;	and

•future	acquisitions	of	or	investments	in	complementary	companies,	products,	services	or technologies;

These	forward-looking	statements	are	subject	to	a	number	of	risks,	uncertainties	and	assumptions,	including	those	described	in	the	section	titled	"Risk	Factors" and	elsewhere	in	this	Annual	Report	on	Form	10-K.	Moreover,	we	operate	in	a	very	competitive	and	rapidly	changing	environment,	and	new	risks	emerge	from	time	to time.	It	is	not	possible	for	our	management	to	predict	all	risks,	nor	can	we	assess	the	impact	of	all	factors	on	our	business	or	the	extent	to	which	any	factor,	or combination	of	factors,	may	cause	actual	results	to	differ	materially	from	those	contained	in	any	forward-looking	statements	we	may	make.	In	light	of	these	risks, uncertainties	and	assumptions,	the	forward-looking	events	and	circumstances	discussed	in	this	Annual	Report	on	Form	10-K	may	not	occur	and	actual	results	could differ	materially	and	adversely	from	those	anticipated	or	implied	in	the	forward-looking	statements.	You	should	not	rely	upon	forward-looking	statements	as	predictions of	future	events.

The	forward-looking	statements	made	in	this	Annual	Report	on	Form	10-K	relate	only	to	events	as	of	the	date	on	which	the	statements	are	made.	We	undertake no	obligation	to	update	any	forward-looking	statements	made	in	this	Annual	Report	on	Form	10-K	to	reflect	events	or	circumstances	after	the	date	of	this	Annual	Report on	Form	10-K	or	to	reflect	new	information	or	the	occurrence	of	unanticipated	events,	except	as	required	by	law.	We	may	not	actually	achieve	the	plans,	intentions	or expectations	disclosed	in	our	forward-looking	statements	and	you	should	not	place	undue	reliance	on	our	forward-looking	statements.	Our	forward-looking	statements do	not	reflect	the	potential	impact	of	any	future	acquisitions,	mergers,	dispositions,	joint	ventures	or	investments	we	may	make.

# PART	I

# Item	1.	Business

We	are	a	leading	supplier	of	cloud	networking	solutions	that	use	software	innovations	to	address	the	needs	of	large-scale	Internet	companies,	cloud	service providers	and	next-generation	data	centers	for	enterprises,	based	on	market	share.	Our	cloud	networking	solutions	consist	of	our	Extensible	Operating	System,	or	EOS,	a set	of	network	applications	and	our	10/25/40/50/100	Gigabit	Ethernet	switches.	Our	cloud	networking	solutions	deliver	industry-leading	performance,	scalability, availability,	programmability,	automation	and	visibility.	Since	we	began	shipping	our	products,	we	have	grown	rapidly,	and,	according	to	Crehan	Research,	we	have achieved	the	second	largest	market	share	in	data	center	10/25/40/50/100	Gigabit	Ethernet	switch	ports,	excluding	blade	switching,	sold	in	2015.

At	the	core	of	our	cloud	networking	platform	is	EOS,	which	was	purpose-built	to	be	fully	programmable	and	highly	modular.	The	programmability	of	EOS	has allowed	us	to	create	a	set	of	software	applications	that	address	the	requirements	of	cloud	networking,	including	workflow	automation,	network	visibility	and	analytics, and	has	also	allowed	us	to	rapidly	integrate	with	a	wide	range	of	third-party	applications	for	virtualization,	management,	automation,	orchestration	and	network	services.

EOS	 supports	 leading	 cloud	 and	 virtualization	 solutions,	 including	 VMware	 NSX,	 Microsoft	 System	 Center,	 OpenStack	 and	 other	 cloud	 management frameworks.	We	have	worked	with	industry	leaders	to	define	new	open	protocols	for	the	virtualized	data	center.	We	co-authored	the	VXLAN	protocol	specification	with VMware	and	were	the	first	to	demonstrate	VXLAN	integration.	We	also	co-authored	the	NVGRE	protocol	specification	with	Microsoft	and	support	integration	with Microsoft's	System	Center.

We	use	standard	Linux	as	our	underlying	operating	system,	providing	customers	with	access	to	all	Linux	operating	system	facilities.	This	allows	customers	to extend	our	EOS	software	with	off-the-shelf	Linux	applications	and	a	growing	number	of	open	source	management	tools.

EOS	has	a	highly	modular	architecture,	which	allows	us	to	prevent	network	outages	in	deployments	of	our	cloud	networking	solutions.	This	architecture	also allows	us	to	rapidly	develop	new	features	and	protocols	without	compromising	the	quality	of	the	existing	code	base.	Because	all	of	our	switching	products	are	powered by	the	same	binary	image	of	EOS,	we	are	able	to	deliver	these	new	innovations	to	our	entire	installed	base	with	minimal	disruption.

EOS+,	 a	 software	 platform	 for	 network	 programmability	 and	 automation,	 provides	 an	 advanced	 level	 of	 programmability,	 allowing	 customers to take advantage	of	pre-built	and	custom	EOS	applications	as	well	as	integration	with	a	wide	range	of	technology	partner	solutions.

In	2015,	we	introduced	CloudVision,	a	network-wide	approach	for	workload	orchestration	and	workflow	automation	delivering	a	turnkey	solution	for	cloud networking.	We	believe	CloudVision's	abstraction	of	the	physical	network	to	this	broader,	network-wide	perspective	allows	for	a	more	efficient	approach	for	several operational	use-cases	related	to	automation,	visibility,	management,	security	and	3rd	party	controller	integration.

We	sell	our	products	through	both	our	direct	sales	force	and	our	channel	partners.	Since	shipping	our	first	products	in	2008,	our	cumulative	end-customer	base has	grown	rapidly.	Between	December	31,	2011	and	December	31,	2015,	our	cumulative	end-customer	base	grew	from	approximately	1,100	to	over	3,700.	Our	end customers	 span	 a	 range	 of	 industries	 and	 include	 large	 Internet	 companies,	 service	 providers,	 financial	 services	 organizations,	 government	 agencies,	 media	 and entertainment	companies	and	others.	Our	customers	include	six	of	the	largest	cloud	services	providers	based	on	annual	revenue.

We	were	incorporated	in	the	State	of	California	as	Arastra,	Inc.	in	October	2004.	We	reincorporated	in	the	State	of	Nevada	in	March	2008,	and	we	changed	our name	to	Arista	Networks,	Inc.	in	October	2008.	We	reincorporated	in	the	State	of	Delaware	in	March	2014.	Our	principal	executive	offices	are	located	at	5453	Great America	Parkway,	Santa	Clara,	California	95054.	Our	main	telephone	number	is	(408)	547-5500.	Our	website	address	is	www.arista.com.	Information	contained	on,	or that	can	be	accessed	through,	our	website	is	not	incorporated	by	reference	into	this	report,	and	you	should	not	consider	information	on	our	website	to	be	part	of	this report.

# Industry	Background

Cloud	computing	 is	fundamentally	changing	 the	way	IT	 infrastructure	 is	built	and	how	applications	are	delivered.	In	cloud	computing,	applications	are distributed	across	thousands	of	servers.	These	servers	are	connected	with	high-speed	network	switches	that,	together,	form	a	pool	of	resources	that	allows	applications	to be	rapidly	deployed	and	cost-effectively	updated.	Cloud	computing	enables	ubiquitous	and	on-demand	network	access	to	these	applications	from	Internet-connected devices	including	personal	computers,	tablets	and	smartphones.

Nearly	all	consumer	applications	today	are	delivered	as	cloud	services.	Enterprise	applications	are	rapidly	moving	to	the	cloud	as	well,	since	cloud	services	are easier	and	more	cost	effective	to	deploy,	scale	and	operate	than	traditional	applications.	Internet	leaders	like	Amazon,	eBay,	Facebook,	Google,	Microsoft	and	Yahoo! pioneered	the	development	of	large-scale	cloud	data	centers	in	order	to	meet	the	growing	demands	of	their	users,	including	business	customers.	Enterprises	and	service providers	around	the	world	are	adopting	cloud	computing	technologies	in	order	to	achieve	similar	performance	improvements	and	cost	reductions.

The	aggregate	network	bandwidth	in	the	cloud	can	be	orders	of	magnitude	higher	than	typical	legacy	data	center	networks.	Therefore,	the	networks	in	such cloud	environments	must	be	architected	and	built	in	a	new	way.	We	refer	to	these	next-generation	data	center	networks	as	cloud	networks.	Cloud	networks	must	deliver high	capacity,	high	availability	and	predictable	performance	and	must	be	programmable	to	allow	integration	with	third-party	applications	for	network,	management, automation,	orchestration	and	network	services.

# Limitations	of	Traditional	Data	Center	Networks

In	our	view,	cloud	networks	and	legacy	networks	are	fundamentally	different.	In	a	traditional	data	center,	specific	applications	are	installed	on	a	small	number of	servers,	and	most	network	traffic	is	server-to-client,	or	"north-south"	traffic,	which	results	in	perhaps	a	few	terabits/second	of	aggregate	network	bandwidth.	In	the cloud,	most	network	traffic	is	server-to-server,	or	"east-west"	traffic.	The	aggregate	network	bandwidth	in	the	cloud	can	exceed	1	petabit/second,	orders	of	magnitude higher	than	that	of	typical	legacy	data	center	networks.

The	much	larger	scale	of	cloud	networks	requires	much	higher	network	availability	since	network	outages	in	the	cloud	are	very	expensive	in	terms	of	customer impact.	Traditional	network	switches	have	evolved,	and	the	features	and	capabilities	of	their	operating	system	have	expanded	over	many	years	without	addressing	the structural	deficiencies	of	their	underlying	software	architectures,	making	it	difficult	to	achieve	high	network	switch	reliability.

Some	networking	vendors	have	built	products	that	use	proprietary	protocols	to	address	the	scaling	needs	of	next-generation	data	centers.	However,	proprietary protocols	are	generally	not	acceptable	to	Internet	companies	or	cloud	service	providers	because	they	create	vendor	lock-in.

Legacy	networks	are	not	programmable	and,	as	a	result,	are	extremely	difficult	to	integrate	with	third-party	applications	for	network	management,	automation, orchestration	and	network	services.	This	lack	of	integration	forces	customers	to	continue	to	rely	on	time	consuming,	error-prone	manual	processes	that	may	be	cost- prohibitive.

# Requirements	for	Cloud	Networking

Cloud	networks	differ	in	many	aspects	from	legacy	networks,	including	capacity,	performance,	scale,	availability,	programmability,	automation,	visibility, security	and	cost	performance.	The	requirements	for	cloud	networking	include	the	following:

•Capacity,	Performance	and	Scalability.	Cloud	networks	must	have	sufficient	capacity	to	interconnect	large	numbers	of	servers,	up	to	hundreds	of	thousands, with	predictable	network	bandwidth.

•High	Availability.	Cloud	networks	must	overcome	hardware	and	software	failures	for	customers	in	order	to	avoid	network	outages	that	can	result	in	lost	revenue, dissatisfied	customers	and	increased	operational	cost.

•Open	and	Programmable.	Cloud	networks	must	be	based	on	open	protocols	and	be	programmable	to	enable	integration	with	leading	network	applications	and management	and	data	analysis	tools.

•Workflow	Automation.	Cloud	networks	must	offer	automated	provisioning	and	configuration	to	enable	fast	service	delivery	and	to	minimize	operational	costs, avoiding	time-consuming	and	error-prone	manual	processes	for	configuring,	provisioning,	monitoring	and	managing	the	network.

•Network	Visibility.	Cloud	networks	must	provide	IT	administrators	with	real-time	in-depth	visibility	of	network	status	to	proactively	monitor,	detect	and	notify when	issues	arise.

# •Security.	Cloud	networks	require	dynamic	security	and	services	from	physical-to-physical	and	physical-to-virtual	workloads.

•Cost	Performance.	Cloud	networks	must	deliver	high	performance	while	lowering	overall	cost	of	ownership,	including	capital	and	operational costs.

# Our	Cloud	Networking	Solutions

We	are	a	leading	supplier	of	cloud	networking	solutions	that	use	software	innovations	to	address	the	needs	of	large-scale	Internet	companies,	cloud	service providers	and	next-generation	enterprise	data	centers.	Our	cloud	networking	platform	was	purpose-built	to	address	the	functional	and	performance	requirements	for cloud	networks.	We	deliver	our	solutions	via	our	industry-leading	10/25/40/50/100	Gigabit	Ethernet	switches	optimized	for	next-generation	data	center	networks.

Our	cloud	networking	solutions	consist	of	EOS,	our	Extensible	Operating	System,	a	set	of	networking	applications	and	our	10/25/40/50/100	Gigabit	Ethernet switches.	At	the	core	of	our	cloud	networking	platform	is	EOS,	which	was	architected	to	be	fully	programmable	and	highly	modular.

The	programmability	of	EOS	has	allowed	us	 to	create	a	set	of	software	applications	and	application	programming	 interfaces,	or	APIs,	 that	address	 the requirements	of	cloud	networking,	including	workflow	automation,	network	visibility	and	analytics,	and	has	further	allowed	us	to	integrate	rapidly	with	a	wide	range	of third-party	applications	for	virtualization,	management,	automation,	orchestration	and	network	services.

The	key	benefits	of	our	cloud	networking	solutions	are	as	follows:

# Capacity,	Performance	and	Scalability

Our	cloud	networking	platform	enables	data	center	networks	to	scale	to	hundreds	of	thousands	of	physical	servers	and	millions	of	virtual	machines	with	the least	number	of	switching	tiers.	We	achieve	this	by	leveraging	standard	protocols	to	meet	the	scale	requirements	of	cloud	computing.	We	have	used	active-active	Layer 2	and	Layer	3	network	topologies	to	enable	customers	to	build	extremely	large	and	resilient	networks.

# High	Availability

Our	highly	modular	EOS	software	architecture	was	designed	to	be	fault-isolating	and	self-healing	in	order	to	deliver	higher	stability	compared	to	legacy network	operating	systems.	In	addition,	our	customers	can	non-disruptively	upgrade	our	switches	running	in	the	network	using	our	Smart	System	Upgrade,	or	SSU, application.

# Open	and	Programmable

Our	EOS	software	was	purpose-built	to	offer	programmable	interfaces	throughout	all	levels	of	our	software.	This	has	allowed	us	to	integrate	our	cloud networking	platform	with	a	wide	range	of	leading	third-party	applications.	For	example,	we	support	VMware	NSX,	OpenStack	and	Microsoft	System	Center	for orchestration	and	fast	provisioning,	enabling	 true	workload	mobility	and	automatic	provisioning	of	physical	switches.	We	enable	customers,	 through	application programming	 interfaces,	 to	write	 their	own	scripts	 to	customize	and	optimize	 their	networks.	In	addition,	we	support	a	wide	range	of	software-defined	network controllers	via	our	OpenFlow	and	DirectFlow	interfaces.

# Workflow	Automation

Our	EOS	software	enables	enterprises	to	provision	networking	resources	in	minutes	with	no	manual	intervention	through	our	Zero	Touch	Provisioning.	We	also natively	support	Ansible,	CFEngine,	Chef,	Puppet,	virtual	network	orchestration	applications	and	third-party	management	tools.	CloudVision,	a	network-wide	approach for	workload	orchestration	and	workflow	automation	delivering	a	turnkey	solution	for	cloud	networking.	CloudVision	extends	the	same	EOS	architectural	approach across	 the	network	for	state,	 topology,	monitoring	and	visibility.	This	enables	enterprises	 to	move	 to	cloud-class	automation	without	needing	significant	 internal development.	Finally,	EOS	embraces	the	DevOps	model,	which	is	a	software	development	method	that	combines	development	and	operations,	to	provision	and	monitor servers,	storage	and	network	resources	in	a	unified	fashion.

# Network	Visibility

Our	EOS	software	provides	a	set	of	tools	and	applications	that	proactively	monitor,	detect	and	notify	network	managers	when	network	issues	arise,	delivering real-time	 data	 to	 third-party	 management	 applications	 including	 Corvil,	 ExtraHop,	 Riverbed	 and	 Splunk	 to	 provide	 detailed	 application	 visibility.	 Our	 telemetry applications	include	VM	Tracer,	which	provides	visibility	down	to	the	virtual	machine	level,	Path	Tracer,	which	detects	errors	in	provisioned	network	paths,	MapReduce Tracer,	which	monitors	and	optimizes	the	performance	of	Hadoop	workloads,	and	Health	Tracer,	which	monitors	infrastructure	resiliency.	Our	network	visibility applications	provide	real-time	 insight	 into	 the	status	of	 the	network.	They	 include	LANZ,	which	monitors	 latency,	and	DANZ,	which	provides	advanced	 traffic monitoring	with	flow	analysis	and	timestamps,	plus	the	ability	to	perform	tap	aggregation	for	reporting	and	analysis.

# Security

Macro-Segmentation	Services	(MSS™)	is	one	of	the	services	enabled	via	Arista	CloudVision.	Since	CloudVision	maintains	a	network-wide	database	of	all	state	within the	network,	as	well	as	direct	integration	with	hypervisor	resources	like	VMware	vSphere	and	NSX,	it	is	aware	of	where	every	workload	is	within	the	network	and	it learns	in	real	time	about	new	devices	or	workloads	that	are	added	to	the	network,	removed	from	the	network,	or	moved	across	ports	or	servers.	Macro-segmentation extends	the	concept	of	fine-grained	inter-hypervisor	security	to	cloud	networks	by	enabling	dynamic	security	and	services	of	physical	to	virtual	workloads.	Macro- segmentation	security	is	a	complement	to	fine-grained	security	delivered	via	micro-segmentation	that	is	implemented	in	the	virtual	switch	of	the	physical	host	on	which	a VM	is	running.

# Lower	Total	Cost	of	Ownership

Our	cloud	networking	platform	offers	architectural	and	system	advantages	that	provide	our	customers	with	cost-effective	and	highly	available	cloud	networking solutions.	Our	programmable,	scalable	leaf-spine	architectures,	combined	with	industry-leading	applications,	significantly	reduce	networking	costs	when	compared	to legacy	network	designs,	enabling	faster	time	to	service	and	improved	availability.	Our	automation	tools	reduce	the	operational	costs	of	provisioning,	managing	and monitoring	a	data	center	network	and	speed	up	service	delivery.	Our	visibility	tools	provide	high	levels	of	visibility	into	complex	network	environments	without	the need	for	additional	data	collection	equipment.	As	a	result,	fewer	network	engineers	are	needed	to	operate	large	networks.

# Our	Market	Opportunity

We	compete	primarily	in	the	data	center	switching	market	for	10	Gigabit	Ethernet	and	above,	excluding	blade	switches.

We	believe	that	cloud	computing	represents	a	fundamental	shift	from	traditional	legacy	data	centers	and	that	cloud	networking	is	the	fastest	growing	segment within	the	data	center	switching	market.	As	organizations	of	all	sizes	are	adopting	cloud	architectures,	spending	on	cloud	and	next-generation	data	centers	has	increased rapidly	over	the	last	several	years,	while	traditional	legacy	IT	spending	has	been	growing	more	slowly.

# Our	Customers

As	of	December	31,	2015,	we	had	delivered	our	cloud	networking	solutions	to	approximately	3,700	end	customers	worldwide	in	over	70	countries.	Our	end customers	 span	 a	 range	 of	 industries	 and	 include	 large	 Internet	 companies,	 service	 providers,	 financial	 services	 organizations,	 government	 agencies,	 media	 and entertainment	companies	and	others.	For	each	of	the	years	ended	December	31,	2015,	2014,	and	2013,	Microsoft	purchases,	through	our	channel	partner	World	Wide Technology,	Inc.,	accounted	for	more	than	10%	of	our	total	revenue.

# Our	Competitive	Strengths

We	believe	the	following	strengths	will	allow	us	to	maintain	and	extend	our	technology	leadership	position	in	cloud	networking	and	next-generation	data	center Ethernet	switching:

•Purpose-Built	Cloud	Networking	Platform.	We	have	developed	a	highly	scalable	cloud	networking	platform	that	uses	software	to	address	the	needs	of	large- scale	Internet	companies,	cloud	service	providers,	financial	services	organizations,	government	agencies	and	media	and	entertainment	companies,	including virtualization,	big	data	and	low-latency	applications.	As	a	result,	our	cloud	networking	platform	does	not	have	the	inherent	limitations	of	legacy	network architectures.

•Broad	and	Differentiated	Switch	Portfolio.	Using	multiple	silicon	architectures,	we	deliver	switches	with	industry-leading	capacity,	low	latency,	port	density and	power	efficiency	and	have	innovated	in	areas	such	as	deep	packet	buffers,	embedded	optics	and	reversible	cooling.	Our	broad	switching	portfolio	has allowed	us	to	offer	customers	products	that	best	match	their	specific	requirements.

•Single	Binary	Image	Software.	The	single	binary	image	of	EOS	software	allows	us	to	maintain	feature	consistency	across	our	entire	product	portfolio	and enables	us	to	introduce	new	software	innovations	into	the	market	that	become	available	to	our	entire	installed	base	without	a	"forklift	upgrade"	(i.e.,	a	broad upgrade	of	the	data	center	infrastructure).

•Rapid	Development	of	New	Features	and	Applications.	Our	highly	modular	EOS	software	has	allowed	us	to	rapidly	deliver	new	features	and	applications	while preserving	the	structural	integrity	and	quality	of	our	network	operating	system.	We	believe	our	ability	to	deliver	new	features	and	capabilities	more	quickly	than possible	with	legacy	switch	operating	systems	provides	us	with	a	strategic	advantage	given	that	the	requirements	in	cloud	and	next-generation	data	center networking	continue	to	evolve	rapidly.

•Deep	Understanding	of	Customer	Requirements.	We	have	developed	close	working	relationships	with	many	of	our	largest	customers	that	provide	us	with insights	about	their	needs	and	future	requirements.	This	has	allowed	us	to	develop	and	deliver	products	to	market	that	meet	customer	demands	and	expectations as	well	as	to	rapidly	grow	sales	to	existing	customers.

•Strong	 Management	 and	 Engineering	 Team	 with	 Significant	 Data	 Center	 Networking	 Expertise.	 Our	 management	 and	 engineering team	 consists	 of networking	veterans	with	extensive	data	center	networking	expertise.	Our	President	and	Chief	Executive	Officer,	Jayshree	Ullal,	previously	served	as	SVP	and general	manager	of	Cisco's	Data	Center	Business.	Andy	Bechtolsheim,	our	founder	and	Chief	Development	Officer,	was	previously	a	founder	and	chief	system architect	at	Sun

Microsystems	and	from	1996	to	2003	served	as	VP/GM	of	the	Gigabit	Systems	Business	Unit	at	Cisco.	Kenneth	Duda,	our	founder,	Chief	Technology	Officer and	SVP	Software	Engineering,	led	the	software	development	effort	of	the	Gigabit	Systems	Business	Unit	at	Cisco	from	1996	to	2000.

•Significant	Technology	Lead.	We	believe	that	our	networking	technology	represents	a	fundamental	advance	in	networking	software.	Our	EOS	software	is	the result	of	more	than	1,000	man-years	of	research	and	development	investment	over	a	ten-year	period.

# Our	Growth	Strategy

We	intend	to	grow	our	revenue	and	market	share	in	cloud	and	next-generation	data	center	Ethernet	switching.	Key	elements	of	our	growth	strategy	include:

•Continue	to	Innovate	and	Extend	our	Technology	Leadership.	We	plan	to	increase	our	investment	in	research	and	development	to	expand	and	enhance	the features	and	capabilities	of	our	cloud	networking	solutions,	including	our	EOS	software	and	our	switching	products.	We	believe	that	continued	software	and hardware	innovation	is	critical	to	addressing	the	complex	and	changing	requirements	of	cloud	networks	and	that	our	approach	will	enable	us	to	continue	to innovate	rapidly	and	bring	new	offerings	to	market.

•Expand	 our	 Sales	 Organization	 and	 our	 Channel	 Partners.	 We intend	 to	 continue	 to	 invest	 in	 our	 sales	 organization	 around	 the	 globe	 as	 we	 pursue relationships	with	new	large	enterprise,	service	provider	and	government	customers	that	are	deploying	data	centers.	We	believe	our	channel	partner	network serves	a	critical	role	in	growing	our	sales,	and	we	intend	to	continue	to	expand	our	channel	partner	network	and	enhance	our	sales	efficiency	through	sales	and support	training.	We	designed	our	Arista	Partner	Program,	targeted	at	resellers	and	systems	integrators,	to	engage	partners	who	provide	value-added	services	and extend	our	reach	into	the	marketplace.

•Increase	Penetration	with	our	Existing	Customer	Base.	Our	customers	often	deploy	our	products	initially	for	a	specific	application,	which	may	account	for	only a	portion	of	their	networking	needs.	As	we	successfully	demonstrate	the	benefits	of	our	solutions,	we	see	a	significant	opportunity	to	sell	additional	products	and services	 to	 our	 existing	 customers	 to	 migrate	 additional	 workloads	 and	 applications	 onto	 our	 cloud	 networking	 platform.	 For	 example,	 the	 information technology	department	of	a	global	financial	services	institution,	which	is	associated	with	one	of	our	underwriters,	initially	purchased	our	products	for	a	trading application,	then	for	an	IP	storage	application	and	is	now	using	our	products	in	the	core	of	its	data	center.

•Expand Strategic	 Relationships.	 We have	 developed	 strategic	 relationships	 with	 a	 number	 of	 technology	 ecosystem	 participants	 including	 A10 Networks,	Ansible,	Aruba	Networks,	Cloudera,	F5	Networks,	Hewlett	Packard	Enterprises,	Microsoft,	Nuage,	Palo	Alto	Networks,	Puppet	Labs,	Pure	Storage, RedHat,	Riverbed,	Splunk,	VMTurbo,	VMware	and	Zscaler,	to	allow	integration	of	our	cloud	networking	solutions	with	their	offerings	and	enable	an	integrated experience	for	our	customers.	This	is	a	key	differentiating	point	of	our	solutions	as	it	allows	customers	to	improve	performance	by	integrating	with	leading solutions.	We	intend	to	continue	building	upon	these	relationships	to	provide	our	customers	with	the	ability	to	more	easily	integrate	our	networking	products with	their	existing	and	planned	IT	infrastructures.

# Our	Products	and	Technology

We	offer	one	of	the	broadest	product	lines	of	data	center	10/25/40/50/100	Gigabit	Ethernet	switches	in	the	industry,	comprising	our	7050X	Series,	7060X Series,	7150	Series,	7260	Series,	7280	leaf	switches,	7300X	Series	Spline	switches	and	our	7500E	Series	spine	switches.

We	deliver	switches	with	industry-leading	capacity,	low	latency,	port	density	and	power	efficiency.	We	have	also	innovated	in	areas	such	as	deep	packet buffers,	embedded	optics	and	reversible	cooling.	Our	products	have	been	recognized	with	a	number	of	awards,	including	the	Best	of	Interop	Grand	Prize	that	was	given to	our	industry-leading	spine	switch,	the	Arista	7500	Series,	in	2010	and	again,	to	the	Arista	7500E	Series,	in	2013.	An	overview	of	our	switching	portfolio	is	shown	in the	figure	below.

We	use	multiple	silicon	architectures	across	our	products,	which	allows	us	to	build	a	broader	range	of	switching	products	optimized	for	different	functions	in the	network	than	competitors	that	utilize	fewer	silicon	architectures.	While	we	use	multiple	silicon	architectures,	all	of	our	switches	are	powered	with	the	same	binary EOS	image,	which	significantly	simplifies	deployment	and	ensures	the	same	rich	feature	set	and	consistent	operation	across	all	our	products.

# Our	Extensible	Operating	System

The	core	of	our	cloud	networking	platform	is	our	Extensible	Operating	System,	or	EOS,	which	runs	on	top	of	standard	Linux	and	offers	programmability	at	all layers	of	the	stack.	All	of	our	10/25/40/50/100	Gigabit	Ethernet	switches	run	our	EOS	software.

EOS	is	based	on	a	new	and	innovative	architecture	that	cleanly	separates	protocol	processing	from	system	state.	Our	EOS	software	is	highly	modular	and consists	of	more	than	100	separate	processes	that	we	call	agents,	each	one	handling	specific	protocol	processing,	device	driver	or	system	management	functions.	Each agent	runs	in	user	space	as	a	separate	Linux	process	and	is	completely	protected	and	isolated	from	all	other	agents.	Communication	between	agents	only	occurs	through a	central	in-memory	database	called	SysDB,	which	provides	a	central	repository	for	all	system	state.	Any	update	posted	by	an	agent	to	SysDB	is	automatically forwarded	to	all	other	processes	that	need	to	be	notified	of	such	an	update	to	perform	the	appropriate	processing.	The	exchange	of	state	through	a	central	state	repository is	far	more	reliable	than	the	conventional	approach	of	direct	inter-process	communication	between	a	large	number	of	processes.

As	illustrated	below,	all	agents	are	isolated	from	each	other	and	interact	directly	through	SysDB,	thereby	ensuring	fault	containment	and	availability.

# EOS	Attributes

The	modular	and	programmable	architecture	of	EOS	enables	us	to	offer	a	set	of	attributes,	capabilities	and	features	that	are	essential	for	cloud	networking	and next-generation	data	centers.

EOS	is	self-healing	in	the	sense	that	individual	processes	can	be	restarted	without	impacting	application	traffic.	The	same	attribute	allows	in-service	software upgrades	of	individual	EOS	processes.	The	capability	to	recover	from	software	faults	and	upgrade	processes	in	a	running	system	is	not	available	in	legacy	network operating	systems.

# Programmable	at	All	Layers

EOS	is	programmable	at	all	layers	from	the	Linux	kernel	to	switch	configuration,	provisioning,	automation	and	detailed	monitoring	of	the	network.

# Complete	Network	Visibility

Through	EOS,	we	have	developed	a	wide	range	of	applications	available	to	our	customers	for	purchase	as	additional	licenses	that	enable	enhanced	network monitoring	and	visibility	without	requiring	additional	external	monitoring	devices.

# Network	Automation

EOS	supports	Puppet,	Chef	and	Ansible,	which	enables	automatic	network	configuration	in	the	same	manner	as	servers	and	storage.	In	addition,	EOS	provides tools	that	greatly	reduce	network	operational	costs.

# CloudVision

CloudVision's	abstraction	of	the	physical	network	to	this	broader,	network-wide	perspective	allows	for	a	more	efficient	approach	for	several	operational	use-cases, including	the	following	highlights:

•Centralized representation	 of	 distributed	 network state,	 allowing for	 a single	 point	 of integration	 and	 network-wide	 visibility	 and analytics;

•Controller	agnostic	support for	physical	and	virtual	workload	orchestration through	open	APIs	such	as	OVSDB,	JSON	and	Openstack plugins;

•Turn-key automation for zero touch provisioning, configuration	 management and network-wide upgrades and rollback;

# •Compliance Dashboard for Security, Audit and patch management;

•Real-time	 Streaming for	 Telemetry	 and	 Network	Analytics,	 a	 modern	 approach to	 replace legacy	 polling	 per device;

•Provides	 visibility	 and troubleshooting for	 underlay	 and	 overlay	 networks; and

•Enables	Macro-Segmentation	Services	which	provides	a	dynamic	and	scalable	network	service	to	logically	insert	security	devices	into	the	path	of	traffic, regardless	of	whether	the	security	device	or	workload	is	physical	or	virtual	and	with	complete	flexibility	on	placement	of	security	devices	and	workloads.

# Leaf-Spine	Network	Designs

Our	customers	typically	deploy	leaf-spine	network	topologies	consisting	of	leaf	switches	or	top-of-rack	switches,	located	in	the	server	rack	connected	with uplinks	to	multiple	load-sharing	spine	switches	that	provide	the	backbone.	Our	leaf-spine	network	designs	scale	up	to	more	than	300,000	physical	servers	and	millions	of virtual	 machines	 using	 Equal	 Cost	 Multiple	 Path,	 or	 ECMP,	 to	 load	 balance	 Layer	 3	 network	 traffic	 across	 multiple	 spine	 switches.	 With	 Multi-Chassis	 Link Aggregation,	or	MLAG,	we	can	build	an	active-active	Layer	2	network	that	can	connect	more	than	25,000	physical	servers.	Examples	of	our	leaf-spine	MLAG	and ECMP	architectures	are	illustrated	below.

Our	leaf-spine	network	designs	have	been	widely	deployed	and	provide	predictable	network	bandwidth	and	latency.	A	key	advantage	of	predictable	network performance	is	that	it	eliminates	the	need	to	optimize	the	network	for	specific	applications,	which	means	a	single	network	design	works	equally	well	for	all	applications.

# Customer	Support	and	Services

We	have	designed	our	customer	support	offerings	to	provide	our	customers	with	high	levels	of	support.	Our	global	team	of	support	engineers	engages	directly with	client	IT	teams	and	is	available	at	all	times	over	e-mail,	by	phone	or	through	our	website.

We	offer	multiple	service	options	that	allow	our	customers	to	select	the	product	replacement	service	level	that	best	meets	their	needs.	We	stock	spare	parts	in over	100	locations	around	the	world	through	our	third-party	logistics	suppliers.	All	of	our	service	options	include	unlimited	access	to	bug-fixes,	new	feature-releases, online	case	management	and	our	community	forums.

# Sales	and	Marketing

We	market	and	sell	our	products	through	our	direct	sales	force	and	in	partnership	with	our	channel	partners,	including	distributors,	value-added	resellers, systems	integrators	and	OEM	partners.	We	also	sell	in	conjunction	with	various	technology	partners.	To	facilitate	channel	coordination	and	increase	productivity,	we have	created	a	partner	program,	the	Arista	Partner	Program,	to	engage	partners	who	provide	value-added	services	and	extend	our	reach	into	the	marketplace.	Authorized training	partners	perform	technical	training	of	our	channel	partners	and	end	customers.	Our	partners	commonly	receive	an	order	from	an	end	customer	prior	to	placing an	order	with	us,	and	we	confirm	the	identification	of	the	end	customer	prior	to	accepting	such	orders.	Our	partners	generally	do	not	stock	inventory	received	from	us.

Our	 sales	 organization	 is	 supported	 by	 systems	 engineers	 with	 deep	 technical	 expertise	 and	 responsibility	 for	 pre-sales	 technical	 support	 and	 solutions engineering	for	our	end	customers,	systems	integrators,	original	equipment	manufacturers,	or	OEMs,	and	channel	partners.	A	pool	of	shared	channel	sales	and	marketing representatives	also	supports	these	teams.	Each	sales	team	is	responsible	for	a	geographical	territory,	has	responsibility	for	a	number	of	major	direct	end-customer accounts	or	has	assigned	accounts	in	a	specific	vertical	market.	We	have	field	sales	teams	operating	in	over	70	countries.	During	2015	and	2014,	77.3%	and	79.7%	of our	revenue	was	generated	from	the	Americas,	substantially	all	from	the	U.S.,	15.3%	and	12.8%	from	Europe,	the	Middle	East	and	Africa	and	7.4%	and	7.5%	from	the Asia-Pacific	region,	respectively.

Our	marketing	activities	consist	primarily	of	 technology	conferences,	web	marketing,	 trade	shows,	product	demonstrations,	seminars	and	events,	public relations,	analyst	relations,	demand	generation	and	direct	marketing	to	build	our	brand,	increase	end-customer	awareness,	communicate	our	product	advantages	and generate	qualified	leads	for	our	field	sales	force	and	channel	partners.

# Research	and	Development

We	believe	our	future	success	depends	on	our	ability	 to	develop	new	products	and	features	 that	address	 the	needs	of	our	end	customers.	Our	 in-house engineering	personnel	are	responsible	for	the	development,	quality,	documentation,	support	and	release	of	our	products.	We	plan	to	continue	to	invest	significantly	in resources	to	conduct	our	research	and	development	efforts.

# Manufacturing

We	subcontract	the	manufacturing	of	all	of	our	products	to	various	contract	manufacturers.	Our	primary	manufacturing	partners	are	Jabil	Circuit	and	Foxconn. We	also	work	with	Flextronics	International	Ltd.	to	provide	logistics	and	final	configuration	services	in	North	America.	This	approach	allows	us	to	reduce	our	costs, manufacturing	overhead	and	inventory	position	and	allows	us	to	adjust	more	quickly	to	changing	end-customer	demand.	We	require	all	of	our	manufacturing	locations	to be	ISO-9001	certified.	Our	EOS	software	is	installed	on	our	products	at	one	of	three	direct	fulfillment	facilities.

Our	contract	manufacturing	partners	procure	the	majority	of	the	components	needed	to	build	our	products	and	assemble	our	products	according	to	our	design specifications.	This	allows	us	to	leverage	the	purchasing	power	of	our	contract	manufacturing	partners.	We	retain	complete	control	over	the	bill	of	material,	test procedures	and	quality	assurance	programs.	Our	on-site	personnel	work	closely	with	our	partners	and	review	on	an	ongoing	basis	forecasts,	inventory	levels,	processes, capacity,	yields	and	overall	quality.	Our	contract	manufacturing	partners	procure	components	and	assemble	our	products	based	on	our	demand	forecasts.	These	forecasts represent	our	estimates	of	future	demand	for	our	products	based	upon	historical	trends	and	analyses	from	our	sales	and	product	management	functions	as	adjusted	for overall	market	conditions.	We	update	these	forecasts	monthly.

Our	products	rely	on	key	components,	including	merchant	silicon,	integrated	circuit	components	and	power	supplies	purchased	from	a	limited	number	of suppliers,	including	certain	sole	source	providers.	Generally,	neither	our	contract	manufacturers	nor	we	have	a	written	agreement	with	any	of	these	component	providers to	guarantee	the	supply	of	the	key	components	used	in	our	products	nor	do	we	have	exclusive	rights	to	such	key	components.	Our	product	development	efforts	also depend	upon	continued	collaboration	with	our	key	suppliers,	including	our	merchant	silicon	vendors	such	as	Broadcom	and	Intel.	As	we	develop	our	product	roadmap and	continue	to	expand	our	relationships	with	these	and	other	merchant	silicon	vendors,	it	is	critical	that	we	work	in	tandem	with	our	key	merchant	silicon	vendors	to ensure	 that	 their	silicon	 includes	 improved	features	and	 that	our	products	 take	advantage	of	such	 improved	features.	This	enables	us	 to	focus	our	research	and development	resources	on	software	core	competencies	and	to	leverage	the	investments	made	by	merchant	silicon	vendors	to	achieve	cost-effective	solutions.

Once	the	completed	products	are	manufactured	and	tested,	our	contract	manufacturing	partners	ship	them	to	various	theatre	direct	fulfillment	facilities	in California,	the	Netherlands	and	Singapore	for	final	configuration,	quality	control	inspection	and	shipment	to	our	distribution	partners	and	end	customers.	After	the products	are	shipped	to	our	end	customers,	our	products	are	installed	by	the	end	customers	or	by	third-party	service	providers	such	as	system	integrators	or	value	added resellers	on	their	behalf.

# Backlog

We	do	not	have	any	long-term	purchase	commitments	from	customers.	Customers	generally	order	products	on	an	as-needed	basis	with	short	lead	and	delivery times	on	a	per-purchase-order	basis.	We	maintain	substantial	finished	goods	inventory	to	ensure	that	products	can	generally	be	shipped	shortly	after	receipt	of	an	order. A	significant	portion	of	our	customer	shipments	in	any	fiscal	year	relate	to	orders	received	and	shipped	in	that	fiscal	year,	resulting	in	low	product	backlog	relative	to total	shipments.	Because	our	customers	utilize	purchase	orders	containing	non-binding	purchase	commitments	and	we	allow	customers	to	cancel,	change	or	reschedule orders	without	penalty	at	any	time	prior	to	shipment,	we	also	do	not	believe	backlog	is	firm.	As	a	result	of	the	foregoing	factors,	backlog	is	not	material	and	not	a meaningful	indicator	in	any	given	period	of	our	ability	to	achieve	any	particular	level	of	overall	revenue	or	financial	performance.

# Competition

The	markets	in	which	we	compete	are	highly	competitive	and	characterized	by	rapidly	changing	technology,	changing	end-customer	needs,	evolving	industry standards	and	frequent	introductions	of	new	products	and	services.	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.

The	data	center	networking	market	has	been	historically	dominated	by	Cisco	Systems,	with	competition	also	coming	from	other	large	network	equipment	and system	vendors	including	Brocade	Communications	Systems,	Dell,	Hewlett-Packard	and	Juniper	Networks.	We	also	face	competition	from	other	companies	and	new market	entrants,	including	"whitebox"	switch	vendors	as	well	as	current	technology	partners	and	end	customers	who	may	develop	network	switches	and	cloud	service solutions	for	internal	use	and/or	to	broaden	their	portfolio	of	products.

The	principle	competitive	factors	applicable	to	our	products	include:

•breadth	of	product	offerings	and	features;

•reliability	and	product	quality;

•ease	of	use;

•total	cost	of	ownership,	including	automation,	monitoring	and	integration costs;

•performance	and	scale;

•programmability	and	extensibility;

•interoperability	with	other products;

•ability	to	be	bundled	with	other	vendor	offerings; and

•quality	of	service,	support	and	fulfillment.

We	believe	our	products	compete	favorably	with	respect	to	these	factors.	Our	EOS	software	offers	high	reliability,	integrates	with	existing	network	protocols and	is	open	and	programmable.	We	believe	the	combination	of	EOS,	a	set	of	network	applications	and	our	10/25/40/50/100	Gigabit	Ethernet	Switch	makes	our	offering highly	competitive	for	both	cloud	and	enterprise	data	centers.	However,	many	of	our	competitors	have	greater	name	recognition,	longer	operating	histories,	larger	sales and	marketing	budgets	and	resources,	broader	distribution	and	established	relationships	with	channel	partners	and	end	customers,	greater	access	to	larger	end-customer bases,	greater	end-customer	support	resources,	greater	manufacturing	resources,	the	ability	to	leverage	their	sales	efforts	across	a	broader	portfolio	of	products,	the	ability to	leverage	purchasing	power	when	purchasing	subcomponents,	the	ability	to	bundle	competitive	offerings	with	other	products	and	services,	the	ability	to	develop	their own	silicon	chips,	the	ability	to	set	more	aggressive	pricing	policies,	lower	labor	and	development	costs,	greater	resources	to	make	acquisitions,	larger	intellectual property	portfolios	and	substantially	greater	financial,	technical,	research	and	development	or	other	resources.

# Intellectual	Property

Our	success	and	ability	to	compete	depend	substantially	upon	our	core	technology	and	intellectual	property.	We	rely	on	patent,	trademark	and	copyright	laws, trade	secret	protection	and	confidentiality	agreements	with	our	employees,	end	customers,	resellers,	systems	integrators	and	others	to	protect	our	intellectual	property rights.	As	of	December	31,	2015,	we	had	63	U.S.	patent	applications,12	foreign	patent	applications,	and	5	U.S.	patents,	which	have	expiration	dates	between	2028	and 2035.

We	cannot	assure	you	that	any	of	our	patent	applications	will	result	in	the	issuance	of	a	patent	or	whether	the	examination	process	will	result	in	patents	of valuable	breadth	or	applicability.	In	addition,	any	patents	that	may	be	issued	may	be	contested,	circumvented,

found	unenforceable	or	invalidated,	and	we	may	not	be	able	to	prevent	third	parties	from	infringing	them.	We	also	license	software	from	third	parties	for	integration	into our	products,	including	open	source	software	and	other	software	available	on	commercially	reasonable	terms.	We	also	own	a	number	of	trademarks	in	the	U.S.	and	other jurisdictions,	including	Arista	(which	mark	is	not	registered	in	the	U.S.),	EOS,	CloudVision,	Health	Tracer,	MapReduce	Tracer,	Path	Tracer,	MXP,	RAIL	and	SPLINE.

We	control	access	to	and	use	of	our	software,	technology	and	other	proprietary	information	through	internal	and	external	controls,	including	contractual protections	with	employees,	contractors,	end	customers	and	partners.	Our	software	is	protected	by	U.S.	and	international	copyright,	patent	and	trade	secret	laws.	Despite our	efforts	 to	protect	our	software,	 technology	and	other	proprietary	 information,	unauthorized	parties	may	still	copy	or	otherwise	obtain	and	use	our	software, technology	and	other	proprietary	information.	In	addition,	we	intend	to	expand	our	international	operations,	and	effective	patent,	copyright,	trademark	and	trade	secret protection	may	not	be	available	or	may	be	limited	in	foreign	countries.

Our	industry	is	characterized	by	the	existence	of	a	large	number	of	patents	and	frequent	claims	and	related	litigation	regarding	patent	and	other	intellectual property	rights.	If	we	become	more	successful,	we	believe	that	competitors	will	be	more	likely	to	try	to	develop	products	that	are	similar	to	ours	and	that	may	infringe our	proprietary	rights.	It	may	also	be	more	likely	that	competitors	or	other	third	parties	will	claim	that	our	products	infringe	their	proprietary	rights.	In	particular,	large and	established	companies	in	our	industry	have	extensive	patent	portfolios	and	are	regularly	involved	in	both	offensive	and	defensive	litigation.	From	time	to	time,	third parties,	including	certain	of	these	large	companies	and	non-practicing	entities,	may	assert	patent,	copyright,	trademark	and	other	intellectual	property	rights	against	us, our	channel	partners	or	our	end	customers,	whom	our	standard	license	and	other	agreements	obligate	us	to	indemnify	against	such	claims.	For	example,	in	December 2014,	Cisco	Systems	filed	two	lawsuits	against	us	in	the	Northern	District	of	California	for	alleged	patent	and	copyright	infringement.	Additionally,	Cisco	Systems	filed to	complaints	against	us	in	the	International	Trade	Commission	(ITC)	for	patent	infringement,	and	the	ITC	has	initiated	an	investigation.	Please	see	"Legal	Proceedings" included	in	Part	I,	Item	3	of	this	Annual	Report	on	Form	10-K,	for	a	description	of	this	litigation.	Successful	claims	of	infringement	by	a	third	party,	if	any,	could prevent	us	from	distributing	certain	products	or	performing	certain	services,	require	us	to	expend	time	and	money	to	develop	non-infringing	solutions	or	force	us	to	pay substantial	damages,	royalties	or	other	fees.	We	cannot	assure	you	that	we	do	not	currently	infringe,	or	that	we	will	not	in	the	future	infringe,	upon	any	third-party patents	or	other	proprietary	rights.

# Employees

As	of	December	31,	2015	we	employed	over	1,200	full-time	employees.	None	of	our	employees	are	represented	by	unions.	We	consider	our	relationship	with our	employees	to	be	good	and	have	not	experienced	significant	interruptions	of	operations	due	to	labor	disagreements.

# Available	Information

Our	website	is	located	at	www.arista.com	and	our	investor	relations	website	is	located	at	www.	investors.arista.com.	Our	Annual	Reports	on	Form	10-K, Quarterly	Reports	on	Form	10-Q,	Current	Reports	on	Form	8-K	and	amendments	to	reports	filed	or	furnished	pursuant	to	Sections	13(a)	and	15(d)	of	the	Securities Exchange	Act	of	1934,	as	amended	(the	"Exchange	Act"),	are	available	free	of	charge	on	the	Investors	portion	of	our	web	site	as	soon	as	reasonably	practicable	after	we electronically	file	such	material	with,	or	furnish	it	to,	the	Securities	and	Exchange	Commission	(SEC).	Further,	a	copy	of	this	Annual	Report	on	Form	10-K	is	located	at the	SEC's	Public	Reference	Room	at	100	F	Street,	NE,	Washington,	D.C.	20549.	Information	on	the	operation	of	the	Public	Reference	Room	can	be	obtained	by	calling the	SEC	at	1-800-SEC-0330.

Webcasts	of	our	earnings	calls	and	certain	events	we	participate	in	or	host	with	members	of	the	investment	community	are	on	our	investor	relations	website. Additionally,	we	announce	investor	information,	including	news	and	commentary	about	our	business	and	financial	performance,	SEC	filings,	notices	of	investor	events, and	our	press	and	earnings	releases,	on	our	investor	relations	website.	Investors	and	others	can	receive	notifications	of	new	information	posted	on	our	investor	relations website	in	real	time	by	signing	up	for	email	alerts	and	RSS	feeds.	Further	corporate	governance	information,	including	our	corporate	governance	guidelines,	board committee	charters,	and	code	of	conduct,	is	also	available	on	our	investor	relations	website	under	the	heading	"Corporate	Governance."	The	contents	of	our	websites	are not	incorporated	by	reference	into	this	Annual	Report	on	Form	10-K	or	in	any	other	report	or	document	we	file	with	the	SEC,	and	any	references	to	our	websites	are intended	to	be	inactive	textual	references	only.

# Item	1A.	Risk	Factors

You	should	consider	carefully	the	risks	and	uncertainties	described	below,	together	with	all	of	the	other	information	in	this	Annual	Report	on	Form	10-K,	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	also	may	materially	affect	our	business,	financial	condition,	results	of	operations	and prospects.

# Risks	Related	to	Our	Business	and	Our	Industry

# Our	business	and	operations	have	experienced	rapid	growth,	and	if	we	do	not	appropriately	manage	any	future	growth	or	are	unable	to	improve	our	systems and	processes,	our	business,	financial	condition,	results	of	operations	and	prospects	will	be	adversely	affected.

We	 have	 experienced	 rapid	 growth	 and	 increased	 demand	 for	 our	 products	 over	 the	 last	 several	 years,	 which	 has	 placed	 a	 strain	 on	 our	 management, administrative,	operational	and	financial	infrastructure.	Our	employee	headcount	and	number	of	end	customers	have	increased	significantly.	To	handle	the	increase	in end	customers,	we	expect	to	continue	to	grow	our	headcount	significantly	over	the	next	12	months.	For	example,	as	of	December	31,	2011	and	December	31,	2015,	our cumulative	number	of	end	customers	increased	from	approximately	1,100	to	over	3,700.	As	we	have	grown,	we	have	had	to	manage	an	increasingly	larger	and	more complex	array	of	internal	systems	and	processes	to	scale	with	all	aspects	of	our	business,	including	our	hardware	and	software	development,	contract	manufacturing	and purchasing,	logistics	and	fulfillment	and	maintenance	and	support.	Our	success	will	depend	in	part	upon	our	ability	to	manage	our	growth	effectively.	To	do	so,	we	must continue	to	increase	the	productivity	of	our	existing	employees	and	continue	to	hire,	train	and	manage	new	employees	as	needed.	To	manage	domestic	and	international growth	of	our	operations	and	personnel,	we	will	need	to	continue	to	improve	our	operational,	financial	and	management	controls	and	our	reporting	processes	and procedures	and	implement	more	extensive	and	integrated	financial	and	business	information	systems.	We	may	not	be	able	to	successfully	implement	these	or	other improvements	to	our	systems	and	processes	in	an	efficient	or	timely	manner,	and	we	may	discover	deficiencies	in	their	capabilities	or	effectiveness.	We	may	experience difficulties	in	managing	improvements	to	our	systems	and	processes	or	in	connection	with	third-party	technology.	In	addition,	our	systems	and	processes	may	not prevent	or	detect	all	errors,	omissions	or	fraud.	Our	failure	to	improve	our	systems	and	processes,	or	their	failure	to	operate	effectively	and	in	the	intended	manner,	may result	in	disruption	of	our	current	operations	and	end-customer	relationships,	our	inability	to	manage	the	growth	of	our	business	and	our	inability	to	accurately	forecast our	revenue,	expenses	and	earnings	and	prevent	certain	losses.

# Our	 limited	 operating	 history	 makes it	 difficult	 to	 evaluate	 our	 current	 business	 and	 future	 prospects	 and	 may increase	 the	 risk	 associated	 with	 your investment.

We	were	founded	in	2004	and	shipped	our	first	products	in	2008.	The	majority	of	our	revenue	growth	has	occurred	since	the	beginning	of	2010.	Our	limited operating	history	makes	it	difficult	to	evaluate	our	current	business	and	our	future	prospects,	including	our	ability	to	plan	for	and	model	future	growth.	We	have encountered	and	will	continue	to	encounter	risks	and	difficulties	frequently	experienced	by	rapidly	growing	companies	in	constantly	evolving	industries,	including	the risks	described	elsewhere	in	this	Annual	Report	on	Form	10-K.	If	we	do	not	address	these	risks	successfully,	our	business,	financial	condition,	results	of	operations	and prospects	will	be	adversely	affected,	and	the	market	price	of	our	common	stock	could	decline.	Further,	we	have	limited	historical	financial	data,	and	we	operate	in	a rapidly	evolving	market.	As	such,	any	predictions	about	our	future	revenue	and	expenses	may	not	be	as	accurate	as	they	would	be	if	we	had	a	longer	operating	history	or operated	in	a	more	predictable	market.

Our	results	of	operations	are	likely	to	vary	significantly	from	period	to	period	and	be	unpredictable	and	if	we	fail	to	meet	the	expectations	of	analysts	or investors	or	our	previously	issued	financial	guidance,	or	if	any	forward-looking	financial	guidance	does	not	meet	the	expectation	of	analysts	or	investors,	the market	price	of	our	common	stock	could	decline	substantially

Our	results	of	operations	have	historically	varied	from	period	to	period,	and	we	expect	that	this	trend	will	continue.	As	a	result,	you	should	not	rely	upon	our past	financial	results	for	any	period	as	indicators	of	future	performance.	Our	results	of	operations	in	any	given	period	can	be	influenced	by	a	number	of	factors,	many	of which	are	outside	of	our	control	and	may	be	difficult	to	predict,	including:

•our	 ability to retain	 and increase sales to	 existing	 customer	 and	 attract	 new	 end	 customers, including large	 end customers;

•the	buying	patterns	of	our	large	end	customers	in	which	large	bulk	purchases	may	or	may	not	occur	in	certain quarters;

•the	 cost	 and	 potential	 outcomes	 of	 existing	 and future litigation, including	 Cisco	 and	 Optumsoft litigation matters;

•the	 rate	 of expansion and	 productivity	 of	 our sales force;

•changes	 in our pricing policies,	 whether initiated by us or as a result of competition;

•the	 amount	 and timing	 of	 operating	 costs	 and	 capital	 expenditures related to the	 operation	 and	 expansion	 of	 our business;

•changes	in	end-customer,	distributor	or	reseller	requirements	or	market	needs;

•deferral	or	cancellation	of	orders	from	end	customers,	including	in	anticipation	of	new	products	or	product	enhancements	announced	by	us	or	our	competitors, or	warranty	returns;

•the	 inclusion	 of	 any	 acceptance	 provisions in	 our	 customer	 contracts	 or	 any	 delays in	 acceptance	 of those products;

•changes in the growth rate of the networking

market;

•the	actual	or	rumored	timing	and	success	of	new	product	and	service	introductions	by	us	or	our	competitors	or	any	other	change	in	the	competitive	landscape	of our	industry,	including	consolidation	among	our	competitors	or	end	customers;

•our	 ability	 to	 successfully	 expand	 our	 business	 domestically	 and internationally;

•our	 ability	 to increase the size of our distribution channel;

•decisions	by	potential	end	customers	to	purchase	cloud	networking	solutions	from	larger,	more	established	vendors,	white	box	vendors	or	their	primary	network equipment	vendors;

•price	competition;

•insolvency	or	credit	difficulties	confronting	our	end	customers,	which	could	adversely	affect	their	ability	to	purchase	or	pay	for	our	products	and	services,	or confronting	our	key	suppliers,	including	our	sole	source	suppliers,	which	could	disrupt	our	supply	chain;

•any	 disruption	 in	 our	 sales	 channel	 or	 termination	 of	 our	 relationship	 with	 important	 channel

partners;

•our	inability	to	fulfill	our	end	customers'	orders	due	to	supply	chain	delays,	access	to	key	commodities	or	technologies	or	events	that	impact	our	manufacturers or	their	suppliers;

•seasonality	 or cyclical fluctuations in our markets;

•future accounting pronouncements or changes in our accounting policies;

•stock-based compensation expense;

•our	overall	effective	tax	rate,	including	impacts	caused	by	any	reorganization	in	our	corporate	structure,	any	changes	in	our	valuation	allowance	for	domestic deferred	tax	assets	and	any	new	legislation	or	regulatory	developments;

•increases	or	decreases	in	our	expenses	caused	by	fluctuations	in	foreign	currency	exchange	rates,	as	an	increasing	portion	of	our	expenses	are	incurred	and	paid in	currencies	other	than	the	U.S.	dollar;

•general	economic	conditions,	both	domestically	and in	foreign	markets; and

•other	risk	factors	described	in	this	Annual	Report	on	Form	10-

Any	one	of	the	factors	above	or	the	cumulative	effect	of	several	of	the	factors	described	above	may	result	in	significant	fluctuations	in	our	financial	and	other results	of	operations.	This	variability	and	unpredictability	could	result	in	our	failure	to	meet	our	revenue,	gross	margins,	results	of	operations	or	other	expectations contained	in	any	forward	looking	financial	guidance	we	have	issued	or	the	expectations	of	securities	analysts	or	investors	for	a	particular	period.	If	we	fail	to	meet	or exceed	such	guidance	or	expectations	for	these	or	any	other	reasons,	the	market	price	of	our	common	stock	could	decline	substantially,	and	we	could	face	costly lawsuits,	including	securities	class	action	suits.

# We	expect	large	purchases	by	a	limited	number	of	end	customers	to	continue	to	represent	a	substantial	portion	of	our	revenue,	and	any	loss	or	delay	of 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.	Many	of	these	end customers	make	large	purchases	to	complete	or	upgrade	specific	data	center	installations	and	are	typically	made	on	a	purchase-order	basis	rather	than	pursuant	to	long- term	contracts.	Revenue	from	sales	to	Microsoft,	through	our	channel	partner,	World	Wide	Technology,	Inc.,	accounted	for	12.0%	of	our	revenue	for	the	year	ended December	31,	2015,	14.9%	of	our	revenue	for	the	year	ended	December	31,	2014,	and	21.9%	of	our	revenue	for	the	year	ended	December	31,	2013.

As	a	consequence	of	the	concentrated	nature	of	our	customer	base	and	their	purchasing	behavior,	our	quarterly	revenue	and	results	of	operations	may	fluctuate from	quarter	to	quarter	and	are	difficult	to	estimate.	For	example,	any	cancellation	of	orders	or	any	acceleration	or	delay	in	anticipated	product	purchases	or	the acceptance	of	shipped	products	by	our	larger	end	customers	could	materially	affect	our	revenue	and	results	of	operations	in	any	quarterly	period.	We	may	be	unable	to sustain	or	increase	our	revenue	from	our	large	end	customers	or	offset	the	discontinuation	of	concentrated	purchases	by	our	larger	end	customers	with	purchases	by	new or	existing	end	customers.	We	expect	that	such	concentrated	purchases	will	continue	to	contribute	materially	to	our	revenue	for	the	foreseeable	future	and	that	our	results of	operations	may	fluctuate	materially	as	a	result	of	such	larger	end	customers'	buying	patterns.	In	addition,	we	may	see	consolidation	of	our	customer	base,	such	as among	Internet	companies	and	cloud	service	providers,	which	could	result	in	loss	of	end	customers.	The	loss	of	such	end	customers,	or	a	significant	delay	or	reduction	in their	purchases,	could	materially	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

# Our	revenue	growth	rate	in	recent	periods	may	not	be	indicative	of	our	future	performance.

Our	revenue	growth	rate	in	recent	periods	may	not	be	indicative	of	our	future	performance.	We	experienced	annual	revenue	growth	rates	of	43.4%,	61.7%,	and 86.8%	in	2015,	2014,	and	2013,	respectively.	We	may	not	achieve	similar	revenue	growth	rates	in	future	periods,	especially	as	we	enter	and	expand	into	the	cloud services	and	application	services	provider	markets.	You	should	not	rely	on	our	revenue	for	any	prior	quarterly	or	annual	period	as	any	indication	of	our	future	revenue	or revenue	growth.	If	we	are	unable	to	maintain	consistent	revenue	or	revenue	growth,	our	business,	financial	condition,	results	of	operations	and	prospects	could	be materially	adversely	affected.

# We	face intense	competition,	especially	from larger,	well-established	companies,	and	we	may lack	sufficient	financial	or	other	resources	to	maintain	or improve	our	competitive	position.

The	market	for	data	center	networking,	including	the	market	for	cloud	networking,	is	intensely	competitive,	and	we	expect	competition	to	increase	in	the	future from	established	competitors	and	new	market	entrants.	This	competition	could	result	in	increased	pricing	pressure,	reduced	profit	margins,	increased	sales	and	marketing expenses	and	our	failure	to	increase,	or	the	loss	of,	market	share,	any	of	which	would	likely	seriously	harm	our	business,	financial	condition,	results	of	operations	and prospects.

The	data	center	networking	market	has	been	historically	dominated	by	Cisco	Systems,	with	competition	also	coming	from	other	large	network	equipment	and system	vendors,	including	Juniper	Networks,	Brocade	Communications	Systems,	Hewlett-Packard	and	Dell.	We	also	face	competition	from	other	companies	and	new market	entrants,	including	"whitebox"	switch	vendors	as	well	as	current	technology	partners	and	end	customers.	Many	of	our	existing	and	potential	competitors	enjoy substantial	competitive	advantages,	such	as:

•greater	name	recognition	and	longer	operating	histories;

•larger	 sales	 and	 marketing	 budgets	 and

resources;

•broader distribution and established relationships with channel partners and end customers;

•greater	 access to larger end-customer bases;

•greater	end-customer	support	resources;

•greater	manufacturing	resources;

•the	 ability	 to	 leverage	 their	 sales efforts across a broader portfolio of products;

•the ability to leverage purchasing power with vendor subcomponents;

•the	 ability	 to bundle competitive offerings	 with other products and services;

•the	 ability to develop their own silicon chips;

•the	 ability to set more aggressive pricing policies;

•lower	labor	and	development	costs;

•greater	resources	to	make	acquisitions;

•larger	intellectual	property	portfolios;	and

•substantially	 greater	 financial,	 technical, research and development or other resources.

Our	competitors	also	may	be	able	to	provide	end	customers	with	capabilities	or	benefits	different	from	or	greater	than	those	we	can	provide	in	areas	such	as technical	qualifications	or	geographic	presence	or	may	be	able	to	provide	end	customers	a	broader	range	of	products,	services	and	prices.	In	addition,	large	competitors may	have	more	extensive	relationships	with	and	within	existing	and	potential	end	customers	that	provide	them	with	an	advantage	in	competing	for	business	with	those end	customers.	For	example,	certain	large	competitors	encourage	end	customers	of	their	other	products	and	services	to	adopt	their	data	networking	solutions	through discounted	bundled	product	packages.	Our	ability	to	compete	will	depend	upon	our	ability	to	provide	a	better	solution	than	our	competitors	at	a	more	competitive	price. We	may	be	required	to	make	substantial	additional	investments	in	research,	development,	marketing	and	sales	in	order	to	respond	to	competition,	and	we	cannot	assure you	that	these	investments	will	achieve	any	returns	for	us	or	that	we	will	be	able	to	compete	successfully	in	the	future.

We	also	expect	increased	competition	if	our	market	continues	to	expand.	Conditions	in	our	market	could	change	rapidly	and	significantly	as	a	result	of technological	advancements	or	other	factors.	Current	or	potential	competitors	may	be	acquired	by	third	parties	that	have	greater	resources	available	than	we	do.	Our current	or	potential	competitors	might	take	advantage	of	the	greater	resources	of	the	larger	organization	resulting	from	these	acquisitions	to	compete	more	vigorously	or broadly	with	us.	In	addition,	continued	industry	consolidation	might	adversely	affect	end	customers'	perceptions	of	the	viability	of	smaller	and	even	medium-sized networking	companies	and,	consequently,	end	customers'	willingness	to	purchase	from	those	companies.	Further,	certain	large	end	customers	may	develop	network switches	and	cloud	service	solutions	for	internal	use	and/or	to	broaden	their	portfolio	of	products,	which	could	allow	these	end	customers	to	become	new	competitors	in the	market.

# If	we	do	not	successfully	anticipate	technological	shifts,	market	needs	and	opportunities,	and	develop	products	and	product	enhancements	that	meet	those technological	shifts,	needs	and	opportunities,	or	if	those	products	are	not	made	available	in	a	timely	manner	or	do	not	gain	market	acceptance,	we	may	not	be able	to	compete	effectively,	and	our	ability	to	generate	revenue	will	suffer.

The	cloud	networking	market	can	be	characterized	by	rapid	technological	shifts	and	increasingly	complex	end-customer	requirements	to	achieve	scalable	and more	programmable	networks	that	facilitate	virtualization,	big	data,	public/private	cloud	and	web	scale	computing.	We	must	continue	to	develop	new	technologies	and products	that	address	emerging	technological	trends	and	changing	end-customer	needs.	The	process	of	developing	new	technology	is	complex	and	uncertain,	and	new offerings	requires	significant	upfront	investment	that	may	not	result	in	material	design	improvements	to	existing	products	or	result	in	marketable	new	products	or	costs savings	or	revenue	for	an	extended	period	of	time,	if	at	all.	The	success	of	new	products	depends	on	several	factors,	including	appropriate	new	product	definition, component	costs,	timely	completion	and	introduction	of	these	products,	differentiation	of	new	products	from	those	of	our	competitors	and	market	acceptance	of	these products.

In	addition,	new	technologies	could	render	our	existing	products	obsolete	or	less	attractive	to	end	customers,	and	our	business,	financial	condition,	results	of operations	and	prospects	could	be	materially	adversely	affected	if	such	technologies	are	widely	adopted.	For	example,	end	customers	may	prefer	to	address	their network	switch	requirements	by	 licensing	software	operating	systems	separately	and	placing	 them	on	 industry-standard	servers	or	develop	 their	own	networking products	rather	than	purchasing	integrated	hardware	products	as	has	occurred	in	the	server	industry.

We	may	not	be	able	to	successfully	anticipate	or	adapt	to	changing	technology	or	end-customer	requirements	on	a	timely	basis,	or	at	all.	If	we	fail	to	keep	up with	technology	changes	or	to	convince	our	end	customers	and	potential	end	customers	of	the	value	of	our	solutions	even	in	light	of	new	technologies,	our	business, financial	condition,	results	of	operations	and	prospects	could	be	materially	adversely	affected.

# We	are	currently	involved	in	litigation	with	Cisco	Systems,	Inc.

On	December	5,	2014,	Cisco	filed	two	complaints	against	us	in	District	Court	for	the	Northern	District	of	California,	which	are	proceeding	as	Case	No.	4:14- cv-05343	("'43	Case")	and	Case	No.	5:14-cv-05344	("'44	Case").	In	the	'43	Case,	Cisco	alleges	that	we	infringe	U.S.	Patent	Nos.	6,377,577;	6,741,592;	7,023,853; 7,061,875;	7,162,537;	7,200,145;	7,224,668;	7,290,164;	7,340,597;	7,460,492;	8,051,211;	and	8,356,296	(respectively,	"the	'577	patent,"	"the	'592	patent,"	"the	'853 patent,"	"the	875	patent,"	"the	'537	patent,"	"the	'145	patent,"	"the	'668	patent,"	"the	'164	patent,"	"the	'597	patent,"	"the	'492	patent,"	"the	'211	patent,"	and	"the	'296 patent").	Cisco	seeks,	as	relief	for	our	alleged	infringement	in	the	'43	Case,	lost	profits	and/or	reasonable	royalty	damages	in	an	unspecified	amount,	including	treble damages,	attorney's	fees,	and	associated	costs.	Cisco	also	seeks	injunctive	relief	in	the	'43	Case.	On	February	10,	2015,	the	court	granted	our	unopposed	motion	to	stay the	'43	Case	until	the	proceedings	before	the	United	States	International	Trade	Commission	("USITC")	pertaining	to	the	same	patents	(as	discussed	below)	become final.	In	the	'44	Case,	Cisco's	complaint	alleges	that	we	infringe	U.S.	Patent	Nos.	7,047,526	and	7,953,886	(respectively,	"the	'526	patent"	and	"the	'886	patent"),	and further	alleges	that	we	infringe	numerous	copyrights	pertaining	to	Cisco's	"Command	Line	Interface"	or	"CLI."	As	relief	for	our	alleged	patent	infringement	in	the	'44 Case,	Cisco	seeks	lost	profits	and/or	reasonable	royalty	damages	in	an	unspecified	amount	including	treble	damages,	attorney's	fees,	and	associated	costs	as	well	as injunctive	relief.	As	relief	for	our	alleged	copyright	infringement,	Cisco	seeks	damages	in	an	unspecified	amount	in	the	form	of	alleged	lost	profits,	profits	from	our alleged	infringement,	statutory	damages,	attorney's	fees	and	associated	costs.	Cisco	also	seeks	injunctive	relief	against	our	alleged	copyright	infringement.	On	February 13,	2015,	we	answered	the	complaint	in	the	'44	Case,	denying	the	patent	and	copyright	infringement	allegations	and	also	raising	numerous	affirmative	defenses.	On March	6,	2015,	Cisco	filed	an	amended	complaint	against	us	the	'44	Case.	In	response,	we	moved	to	dismiss	Cisco's	allegations	of	willful	patent	infringement	pre-suit indirect	patent	infringement.	The	Court	granted	the	motion	with	leave	to	amend	on	July	2,	2015.	On	July	23,	2015,	Cisco	filed	an	amended	complaint.	On	January	25, 2016,	we	sought	leave	to	file	counterclaims	against	Cisco	in	the	'44	case	for	antitrust	and	unfair	competition.	Trial	has	been	set	for	November	21,	2016	in	the	'44	Case. Trial	has	not	been	scheduled	in	the	'43	Case.

On	December	19,	2014,	Cisco	filed	two	complaints	against	us	in	the	USITC,	alleging	that	Arista	has	violated	Section	337	of	the	Tariff	Act	of	1930,	as amended.	The	complaints	have	been	instituted	as	ITC	Inv.	Nos.	337-TA-944	("944	Investigation")	and	337-TA-945	("945	Investigation").	 In	the	944	Investigation, Cisco	initially	alleged	that	certain	Arista	switching	products	infringe	the	'592,	'537,	'145,	'164,	'597,	and	'296	patents.	Cisco	has	subsequently	dropped	the	'296	patent from	the	944	Investigation.	In	the	945	Investigation,	Cisco	alleges	that	certain	Arista	switching	products	infringe	the	'577,	'853,	'875,	'668,	'492,	and	'211	patents.	In both	the	944	and	945	Investigations,	Cisco	seeks,	among	other	things,	a	limited	exclusion	order	barring	entry	into	the	United	States	of	accused	switch	products (including	7000	Series	of	switches)	and	a	cease	and	desist	order	against	us	restricting	our	activities	with	respect	to	our	imported	accused	switch	products.	On	February 11,	2015,	we	responded	to	the	notices	of	investigation	and	complaints	in	the	944	and	945	Investigations	by,	among	other	things,	denying	the	patent	infringement allegations	and	raising	numerous	affirmative	defenses.

The	Administrative	Law	Judge	assigned	to	the	944	Investigation	issued	a	procedural	schedule	calling	for,	among	other	events:	an	evidentiary	hearing	on	Sept. 9-11	&	15-17,	2015;	issuance	of	an	initial	determination	regarding	our	alleged	violations	on	January	27,	2016;	and	the	target	date	for	completion	on	May	27,	2016.	On January	27,	2016	the	Administrative	Law	Judge	issued	a	revised	procedural	schedule	extending	the	date	for	issuance	an	initial	determination	to	February	2,	2016	and	the target	date	to	June	2,	2016.	The	final	determination	in	the	944	Investigation	is	then	subject	to	Presidential	review.	The	hearing	has	been	completed	and	all	post	trial briefs	have

been	submitted	to	the	USITC.	On	February	2,	2016,	the	Administrative	Law	Judge	issued	his	initial	determination	finding	a	violation	of	section	337	of	the	Tariff	Act. More	specifically,	it	was	found	that	a	violation	has	occurred	in	the	importation	into	the	United	States,	the	sale	for	importation,	or	the	sale	within	the	United	States	after importation,	of	certain	network	devices,	related	software,	and	components	thereof	that	the	ALJ	found	infringe	asserted	claims	1,	2,	8-11,	and	17-19	of	the	'537	patent; asserted	claims	6,	7,	20,	and	21	of	the	'592	patent;	and	asserted	claims	5,	7,	45,	and	46	of	the	'145	patent.	A	violation	of	section	337	was	not	found	with	respect	to	any asserted	claims	of	the	'597	and	'164	patents.	On	February	17,	2016,	we	filed	a	request	for	the	Commission	to	review	certain	issues,	including	the	infringement	findings in	the	initial	determination,	and	the	Commission	must	decide	whether	to	grant	the	review	no	later	than	60	days	from	the	date	of	the	initial	determination	(February	2, 2016).

The	Administrative	Law	Judge	assigned	to	the	945	Investigation	issued	a	procedural	schedule	calling	for,	among	other	events:	an	evidentiary	hearing	on November	9-20,	2015;	issuance	of	an	initial	determination	regarding	our	alleged	violations	on	April	26,	2016;	and	the	target	date	for	completion	on	August	26,	2016. The	evidentiary	hearing	was	conducted	 in	November	2015	and	all	post-hearing	briefing	has	been	completed.	We	are	awaiting	 the	 initial	determination	from	 the Administrative	Law	Judge.	The	initial	determination	will	be	subject	to	review	by	the	Commission,	which	will	then	issue	a	final	determination	and	any	remedial	orders	on August	26,	2016.	If	the	final	determination	finds	a	violation,	it	will	be	subject	to	Presidential	review.

On	April	1,	2015,	we	filed	petitions	for	Inter	Partes	Review	with	the	United	States	Patent	Trial	and	Appeal	Board	("PTAB")	seeking	to	invalidate	Cisco's	'597, '211,	and	'668	patents.		On	April	10,	2015,	we	filed	petitions	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'853	and	'577	patents.		On	April	16, 2015,	we	filed	additional	petitions	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'853	and	'577	patents.		On	August	11,	2015,	we	filed	a	second petition	for	Inter	Partes	Review	of	Cisco's	'668	patent.		On	October	6,	2015	we	filed	a	second	petition	for	Inter	Partes	Review	of	Cisco's	'211	patent.		On	October	6, 2015,	the	PTAB	granted	our	petition	for	Inter	Partes	Review	of	Cisco's	'597	patent	and	our	first	petition	for	Inter	Partes	review	of	Cisco's	'211	patents,	but	denied	one of	our	petitions	for	Inter	Partes	Review	of	Cisco's	'668	patent.	On	October	19,	2015	and	October	22,	2015,	the	PTAB	denied	four	petitions	relating	to	the	'853	and	'577 patents.	On	November	18,	2015,	we	filed	a	request	for	rehearing	on	one	of	the	denied	petitions	related	to	the	'577	patent	and	we	are	awaiting	a	decision	on	the	request. On	December	9,	2015,	we	filed	a	petition	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'537	patent,	and	additional	petitions	for	Inter	Partes Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'853,	'577,	and	'668	patents.		On	February	16,	2016,	the	PTAB	denied	our	second	petition	for	Inter	Partes	review of	the	'668	patent.	We	are	awaiting	decisions	by	the	PTAB	on	our	remaining	petitions	for	Inter	Partes	Review	of	the	'537,	'853,	'577,	and	'668	patents.		For	those petitions	that	the	PTAB	grants,	the	PTAB	must	issue	its	final	written	decision	on	validity	within	twelve	months	of	its	institution	decision.

We	intend	to	vigorously	defend	against	Cisco's	lawsuits,	as	summarized	in	the	preceding	paragraphs.	Whether	or	not	we	prevail	in	the	lawsuit,	we	expect	that the	litigation	will	be	expensive,	time-consuming	and	a	distraction	to	management	in	operating	our	business.	Moreover,	we	cannot	be	certain	that	any	claims	by	Cisco would	be	resolved	in	our	favor	regardless	of	the	merit	of	the	claims.	For	example,	an	adverse	litigation	ruling	could	result	in	a	significant	damages	award	against	us, could	further	result	in	the	above	described	injunctive	relief,	could	result	in	a	requirement	that	we	make	substantial	royalty	payments	to	Cisco,	and/or	could	require	that we	modify	our	products	to	the	extent	that	we	are	found	to	infringe	any	valid	claims	asserted	against	us	Cisco.	Any	such	adverse	ruling	could	materially	adversely	affect our	business,	prospects,	results	of	operation	and	financial	condition.

In	particular,	with	respect	to	the	944	and	945	Investigations,	if	our	products	are	found	to	infringe	any	patents	that	are	the	subject	of	those	investigations,	the USITC	would	likely	issue	a	limited	exclusion	order	barring	entry	into	the	United	States	of	our	products	(including	7000	Series	of	switches)	and	a	cease	and	desist	order restricting	 our	 activities	 with	 respect	 to	 our	 imported	 products.	 If	 we	 become	 subject	 to	 a	 limited	 exclusion	 order	 and	 it	 is	 not	 disapproved	 by	 the	 US	 Trade Representative,	we	will	need	to	remove	features	or	develop	technical	design-arounds	in	order	to	take	the	products	outside	of	the	scope	of	any	patent	found	to	have	been infringed	and	the	subject	of	a	violation.	We	may	not	be	successful	in	developing	technical	design-arounds	that	do	not	infringe	the	patents	or	that	are	acceptable	to	our customers.	 Our	 development	 efforts	 could	 be	 extremely	 costly	 and	 time	 consuming	 as	 well	 as	 disruptive	 to	 our	 other	 development	 activities	 and	 distracting	 to management.	Moreover,	we	may	seek	to	obtain	clearance	for	any	such	technical	design-arounds	from	U.S.	Customs	and	Border	Patrol	("CBP")	in	order	to	continue	the importation	of	our	products,	and	we	may	be	unable	to	do	so	in	a	timely	manner,	if	at	all.	In	the	case	that	we	attempt	to	change	our	manufacturing,	importation	processes and	shipping	workflows	to	comply	with	any	limited	exclusion	order	or	cease	and	desist	order,	such	changes	may	be	extremely	costly,	time	consuming	and	we	may	not be	able	to	implement	such	changes	successfully.	Any	failure	to	develop	effective	technical	design-arounds,	obtain	timely	clearance	of	such	technical	design-arounds	or successfully	change	our	manufacturing,	importation	processes	or	shipping	workflows	may	cause	a	disruption	in	our	shipments	and	impact	our	revenues,	business	and reputation.

In	the	event	that	the	USITC	issues	a	limited	exclusion	order	and	cease	and	desist	order,	Cisco	may	also	seek	to	enforce	any	limited	exclusion	order	or	cease	and desist	order	by	filing	for	an	enforcement	action	at	the	USITC.		In	such	a	proceeding,	we	would	need	to	demonstrate	that	our	technical	design-arounds	render	our products	non-infringing	or	otherwise	outside	the	scope	of	the	limited	exclusion	order	or	cease	and	desist	order.		If	we	are	unable	to	do	so	then	any	product	shipments after	the	effective	date	of	the	limited	exclusion	order	or	cease	and	desist	order	(whether	from	existing	imported	inventory	or	from	products	assembled	from	foreign sourced	components)	could	be	subject	to	significant	civil	penalties,	potential	seizure	of	that	inventory	which	was	found	to	have	an	ineffective	technical	design-around, and	an	injunction	from	importing	further	products	until	we	implement	additional	technical	design-arounds.

Additionally,	the	existence	of	this	lawsuit	could	cause	concern	among	our	customers	and	partners	and	could	adversely	affect	our	business	and	results	of operations.	Many	of	our	customers	and	partners	require	us	to	indemnify	and	defend	them	against	third	party	infringement	claims	and	pay	damages	in	the	case	of	adverse rulings.	These	claims	could	harm	our	relationships	with	our	customers	or	channel	partners	and	might	deter	them	from	doing	business	with	us.	From	time	to	time,	we	may also	be	required	to	provide	additional	assurances	beyond	our	standard	terms.	Whether	or	not	we	prevail	in	the	lawsuit,	our	satisfaction	of	these	obligations	may	be expensive,	time-consuming	and	a	distraction	to	management	in	operating	our	business.

# We	are	currently	involved	in	a	license	dispute	with	OptumSoft,	Inc.

On	April	4,	2014,	OptumSoft	filed	a	lawsuit	against	us	in	the	Superior	Court	of	California,	Santa	Clara	County	titled	OptumSoft,	Inc.	v.	Arista	Networks,	Inc., in	which	it	asserts	(i)	ownership	of	certain	components	of	our	EOS	network	operating	system	pursuant	to	the	terms	of	a	2004	agreement	between	the	companies	and (ii)	breaches	of	certain	confidentiality	and	use	restrictions	in	that	agreement.	Under	the	terms	of	the	2004	agreement,	OptumSoft	provided	us	with	a	non-exclusive, irrevocable,	royalty-free	license	to	software	delivered	by	OptumSoft	comprising	a	software	tool	used	to	develop	certain	components	of	EOS	and	a	runtime	library	that	is incorporated	 into	EOS.	The	2004	agreement	places	certain	restrictions	on	our	use	and	disclosure	of	 the	OptumSoft	software	and	gives	OptumSoft	ownership	of improvements,	modifications	and	corrections	to,	and	derivative	works	of,	the	OptumSoft	software	that	we	develop.

In	its	lawsuit,	OptumSoft	has	asked	the	Court	to	order	us	to	(i)	give	OptumSoft	copies	of	certain	components	of	our	software	for	evaluation	by	OptumSoft, (ii)	cease	all	conduct	constituting	the	alleged	confidentiality	and	use	restriction	breaches,	(iii)	secure	the	return	or	deletion	of	OptumSoft's	alleged	intellectual	property provided	to	third	parties,	including	our	customers,	(iv)	assign	ownership	to	OptumSoft	of	OptumSoft's	alleged	intellectual	property	currently	owned	by	us,	and	(v)	pay OptumSoft's	alleged	damages,	attorney's	fees,	and	costs	of	the	lawsuit.	David	Cheriton,	one	of	our	founders	and	a	former	member	of	our	board	of	directors	who resigned	from	our	board	of	directors	on	March	1,	2014	and	has	no	continuing	role	with	us,	is	a	founder	and,	we	believe,	the	largest	stockholder	and	director	of OptumSoft.	The	2010	David	R.	Cheriton	Irrevocable	Trust	dtd	July	27,	2010,	a	trust	for	the	benefit	of	the	minor	children	of	Mr.	Cheriton,	is	one	of	our	largest stockholders.

OptumSoft	has	identified	in	confidential	documents	certain	software	components	it	claims	to	own,	which	are	generally	applicable	tools	and	utility	subroutines and	not	networking	specific	code.	We	cannot	assure	which	software	components	OptumSoft	may	ultimately	claim	to	own	in	the	litigation	or	whether	such	claimed components	are	material.

On	April	14,	2014,	we	filed	a	cross-complaint	against	OptumSoft,	in	which	we	assert	our	ownership	of	the	software	components	at	issue	and	our	interpretation of	the	2004	agreement.	Among	other	things,	we	assert	that	the	language	of	the	2004	agreement	and	the	parties'	long	course	of	conduct	support	our	ownership	of	the disputed	software	components.	We	asked	the	Court	to	declare	our	ownership	of	those	software	components,	all	similarly-situated	software	components	developed	in	the future	and	all	related	intellectual	property.	We	also	assert	that,	even	if	we	are	found	not	to	own	any	particular	components	at	issue,	such	components	are	licensed	to	us under	the	terms	of	the	2004	agreement.	However,	there	can	be	no	assurance	that	our	assertions	will	ultimately	prevail	in	litigation.	On	the	same	day,	we	also	filed	an answer	to	OptumSoft's	claims,	as	well	as	affirmative	defenses	based	in	part	on	OptumSoft's	failure	to	maintain	the	confidentiality	of	its	claimed	trade	secrets,	its authorization	of	the	disclosures	it	asserts	and	its	delay	in	claiming	ownership	of	the	software	components	at	issue.	We	have	also	taken	additional	steps	to	respond	to OptumSoft's	allegations	 that	we	 improperly	used	and/or	disclosed	OptumSoft	confidential	 information.	While	we	believe	we	have	meritorious	defenses	 to	 these allegations,	we	believe	we	have	(i)	revised	our	software	to	remove	the	elements	we	understand	to	be	the	subject	of	the	claims	relating	to	improper	use	and	disclosure	of OptumSoft	confidential	information	and	made	the	revised	software	available	to	our	customers	and	(ii)	removed	information	from	our	website	that	OptumSoft	asserted disclosed	OptumSoft	confidential	information.

The	parties	tried	the	case	for	Phase	I	of	the	proceedings,	relating	to	contract	interpretation	and	application	of	the	contract	to	certain	claimed	source	code	in September	2015.	On	December	16,	2015,	the	Court	issued	a	Proposed	Statement	of	Decision	Following	Phase	1	Trial.	In	that	Proposed	Statement,	the	Court	agreed with	and	adopted	our	interpretation	of	the	2004	agreement,	and	held	that	we,	and	not	OptumSoft,	own	all	of	the	software	that	was	put	at	issue	in	Phase	1.	On	January	8, 2016,	OptumSoft	filed	its	objections	to	the	Court's	Proposed	Statement	of	Decision.	The	Court	has	not	ruled	on	those	objections	to	date,	and	we	anticipate	a	ruling	in	the first	calendar	quarter	of	2016.	The	remaining	issues	that	were	not	addressed	in	the	Phase	I	Trial	are	currently	scheduled	to	be	tried	in	April	2016.

We	intend	to	vigorously	defend	against	OptumSoft's	lawsuit.	However,	we	cannot	be	certain	that,	if	litigated,	any	claims	by	OptumSoft	would	be	resolved	in our	favor.	For	example,	if	it	were	determined	that	OptumSoft	owned	components	of	our	EOS	network	operating	system,	we	would	be	required	to	transfer	ownership	of those	 components	 and	 any	 related	 intellectual	 property	 to	 OptumSoft.	 If	 OptumSoft	 were	 the	 owner	 of	 those	 components,	 it	 could	 make	 them	 available	 to	 our competitors,	such	as	through	a	sale	or	license.	In	addition,	OptumSoft	could	assert	additional	or	different	claims	against	us,	including	claims	that	our	license	from OptumSoft	is	invalid.

Additionally,	the	existence	of	this	lawsuit	could	cause	concern	among	our	customers	and	potential	customers	and	could	adversely	affect	our	business	and results	of	operations.	An	adverse	litigation	ruling	could	also	result	in	a	significant	damages	award	against	us	and	the	injunctive	relief	described	above.	In	addition,	if	our license	was	ruled	to	have	been	terminated,	and	we	were	not	able	to	negotiate	a	new	license	from	OptumSoft	on	reasonable	terms,	we	could	be	required	to	pay	substantial royalties	to	OptumSoft	or	be	prohibited	from	selling	products	that	incorporate	OptumSoft	intellectual	property.	Any	such	adverse	ruling	could	materially	adversely

affect	our	business,	prospects,	results	of	operation	and	financial	condition.	Whether	or	not	we	prevail	in	the	lawsuit,	we	expect	that	the	litigation	will	be	expensive,	time- consuming	and	a	distraction	to	management	in	operating	our	business.

# Product	quality	problems,	defects,	errors	or	vulnerabilities	in	our	products	or	services	could	harm	our	reputation	and	adversely	affect	our	business,	financial condition,	results	of	operations	and	prospects.

We	produce	highly	complex	products	that	incorporate	advanced	technologies,	including	both	hardware	and	software	technologies.	Despite	testing	prior	to	their release,	our	products	may	contain	undetected	defects	or	errors,	especially	when	first	introduced	or	when	new	versions	are	released.	Product	defects	or	errors	could	affect the	performance	of	our	products	and	could	delay	the	development	or	release	of	new	products	or	new	versions	of	products.	Allegations	of	unsatisfactory	performance could	cause	us	to	lose	revenue	or	market	share,	increase	our	service	costs,	cause	us	to	incur	substantial	costs	in	analyzing,	correcting	or	redesigning	the	products,	cause us	to	lose	significant	end	customers,	subject	us	to	liability	for	damages	and	divert	our	resources	from	other	tasks,	any	one	of	which	could	materially	adversely	affect	our business,	financial	condition,	results	of	operations	and	prospects.

From	time	to	time,	we	have	had	to	replace	certain	components	of	products	that	we	had	shipped	and	provide	remediation	in	response	to	the	discovery	of	defects or	bugs,	including	failures	in	software	protocols	or	defective	component	batches	resulting	in	reliability	issues,	in	such	products,	and	we	may	be	required	to	do	so	in	the future.	We	may	also	be	required	to	provide	full	replacements	or	refunds	for	such	defective	products.	We	cannot	assure	you	that	such	remediation	would	not	have	a material	effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.	Please	see	"—Our	business	is	subject	to	the	risks	of	warranty	claims,	product returns,	product	liability	and	product	defects."

The	cloud	networking	market	is	still	in	its	early	stages	and	is	rapidly	evolving.	If	this	market	does	not	evolve	as	we	anticipate	or	our	target	end	customers	do not	adopt	our	cloud	networking	solutions,	we	may	not	be	able	to	compete	effectively,	and	our	ability	to	generate	revenue	will	suffer.

The	cloud	networking	market	is	still	in	its	early	stages.	The	market	demand	for	cloud	networking	solutions	has	increased	in	recent	years	as	end	customers	have deployed	larger	networks	and	have	increased	the	use	of	virtualization	and	cloud	computing.	Our	success	depends	upon	our	ability	to	provide	cloud	networking	solutions that	address	the	needs	of	end	customers	more	effectively	and	economically	than	those	of	other	competitors	or	existing	technologies.

If	the	cloud	networking	solutions	market	does	not	develop	in	the	way	we	anticipate,	if	our	solutions	do	not	offer	benefits	compared	to	competing	network switching	products	or	if	end	customers	do	not	recognize	the	benefits	that	our	solutions	provide,	then	our	business,	financial	condition,	results	of	operations	and	prospects could	be	materially	adversely	affected.

# The	requirements	of	being	a	public	company	may	strain	our	resources,	divert	management's	attention	and	affect	our	ability	to	attract	and	retain	qualified board	members.

As	a	public	company,	we	are	subject	to	the	reporting	and	corporate	governance	requirements	of	the	Securities	Exchange	Act	of	1934,	as	amended,	or	the Exchange	Act,	the	listing	requirements	of	the	New	York	Stock	Exchange	and	other	applicable	securities	rules	and	regulations,	including	the	Sarbanes-Oxley	Act	and	the Dodd-Frank	Act.	Compliance	with	these	rules	and	regulations	and	the	attendant	responsibilities	of	management	and	the	board,	may	make	it	more	difficult	to	attract	and retain	executive	officers	and	members	of	our	board	of	directors,	particularly	to	serve	on	our	Audit	Committee	and	Compensation	Committee,	has	increased	our	legal	and financial	compliance	costs,	made	some	activities	more	difficult,	time-consuming	or	costly	and	increased	demand	on	our	systems	and	resources.	Among	other	things,	the Exchange	Act	requires	that	we	file	annual,	quarterly	and	current	reports	with	respect	to	our	business	and	results	of	operations	and	maintain	effective	disclosure	controls and	procedures	and	internal	control	over	financial	reporting.	In	order	to	maintain	and,	if	required,	improve	our	disclosure	controls	and	procedures	and	internal	control over	financial	reporting	to	meet	this	standard,	significant	resources	and	management	oversight	may	be	required.	As	a	result,	management's	attention	may	be	diverted from	other	business	concerns,	which	could	harm	our	business,	financial	condition,	results	of	operations	and	prospects.	Although	we	have	already	hired	additional employees	to	help	comply	with	these	requirements,	we	may	need	to	further	expand	our	legal	and	finance	departments	in	the	future,	which	will	increase	our	costs	and expenses.

We	are	also	subject	to	the	independent	auditor	attestation	requirements	of	Section	404	of	the	Sarbanes-Oxley	Act	("Section	404"),	enhanced	disclosure obligations	regarding	executive	compensation	in	our	periodic	reports	and	proxy	statements,	and	the	requirements	of	holding	a	nonbinding	advisory	vote	on	executive compensation	and	stockholder	approval	of	any	golden	parachute	payments	not	previously	approved.	While	we	were	able	to	determine	in	our	management's	report	for fiscal	2015	that	our	internal	control	over	financial	reporting	is	effective,	as	well	as	provide	an	unqualified	attestation	report	from	our	independent	registered	public accounting	firm	to	that	effect,	we	have	and	will	continue	to	consume	management	resources	and	incur	significant	expenses	for	Section	404	compliance	on	an	ongoing basis.	In	the	event	that	our	chief	executive	officer,	chief	financial	officer,	or	independent	registered	public	accounting	firm	determines	in	the	future	that	our	internal control	over	financial	reporting	is	not	effective	as	defined	under	Section	404,	we	could	be	subject	to	one	or	more	investigations	or	enforcement	actions	by	state	or	federal regulatory	 agencies,	 stockholder	 lawsuits	 or	 other	 adverse	 actions	 requiring	 us	 to	 incur	 defense	 costs,	 pay	 fines,	 settlements	 or	 judgments	 and	 causing	 investor perceptions	to	be	adversely	affected	and	potentially	resulting	in	a	decline	in	the	market	price	of	our	stock.

In	addition,	changing	laws,	regulations,	and	standards	relating	to	corporate	governance	and	public	disclosure,	such	as	continued	rulemaking	pursuant	to	the Dodd-Frank	Act	of	2010	and	related	rules	and	regulations	regarding	 the	disclosure	of	conflict	minerals	 that	are	mandated	by	 the	 Dodd-Frank	Act,	 are	 creating uncertainty	for	public	companies,	increasing	legal	and	financial	compliance	costs	and	making	some	activities	more	time	consuming.	These	laws,	regulations	and standards	are	subject	to	varying	interpretations,	in	many	cases	due	to	their	lack	of	specificity,	and,	as	a	result,	their	application	in	practice	may	evolve	over	time	as	new guidance	is	provided	by	regulatory	and	governing	bodies.	This	could	result	in	continuing	uncertainty	regarding	compliance	matters	and	higher	costs	necessitated	by ongoing	revisions	to	disclosure	and	governance	practices.	We	intend	to	invest	resources	to	comply	with	evolving	laws,	regulations,	and	standards,	and	this	investment may	result	in	increased	general	and	administrative	expense	and	a	diversion	of	management's	time	and	attention	from	revenue-generating	activities	to	compliance activities.	If	our	efforts	to	comply	with	new	laws,	regulations	and	standards	differ	from	the	activities	intended	by	regulatory	or	governing	bodies,	regulatory	authorities may	initiate	legal	proceedings	against	us	and	our	business	and	prospects	may	be	harmed.	As	a	result	of	disclosure	of	information	in	the	filings	required	of	a	public company,	our	business	and	financial	condition	will	become	more	visible,	which	may	result	in	threatened	or	actual	litigation,	including	by	competitors	and	other	third parties.	If	such	claims	are	successful,	our	business,	financial	condition,	results	of	operations	and	prospects	could	be	harmed,	and	even	if	the	claims	do	not	result	in litigation	or	are	resolved	in	our	favor,	these	claims,	and	the	time	and	resources	necessary	to	resolve	them,	could	divert	the	resources	of	our	management	and	harm	our business,	financial	condition,	results	of	operations	and	prospects.

In	addition,	as	a	result	of	our	disclosure	obligations	as	a	public	company,	we	will	have	reduced	strategic	flexibility	and	will	be	under	pressure	to	focus	on	short- term	results,	which	may	adversely	affect	our	ability	to	achieve	long-term	profitability.

# If	we	fail	to	maintain	effective	internal	control	over	financial	reporting	in	the	future,	the	accuracy	and	timing	of	our	financial	reporting	may	be	adversely affected.

Assessing	our	processes,	procedures	and	staffing	in	order	to	improve	our	internal	control	over	financial	reporting	is	an	ongoing	process.	For	the	year	ended December	31,	2015,	management	became	obligated	to	comply	for	the	first	time	with	Section	404	of	the	Sarbanes-Oxley	Act	of	2002	and	has	issued	a	report	that	assesses the	effectiveness	of	our	internal	control	over	financial	reporting.

Also,	for	the	year	ended	December	31,	2015,	an	attestation	report	concerning	the	effectiveness	of	our	internal	control	over	financial	reporting	has	been	issued	for the	first	time	by	Ernst	&	Young,	LLP,	Independent	Registered	Public	Accounting	Firm.

Preparing	our	financial	statements	involves	a	number	of	complex	processes,	many	of	which	are	done	manually	and	are	dependent	upon	individual	data	input	or review.	These	processes	include,	but	are	not	limited	to,	calculating	revenue,	inventory	costs	and	the	preparation	of	our	statement	of	cash	flows.		While	we	continue	to automate	our	processes	and	enhance	our	review	controls	to	reduce	the	likelihood	for	errors,	we	expect	that	for	the	foreseeable	future	many	of	our	processes	will	remain manually	intensive	and	thus	subject	to	human	error.

In	the	past,	we	have	identified	material	weaknesses	in	our	internal	control	over	financial	reporting.	We	have	remediated	these	identified	material	weaknesses,	but we	cannot	give	assurance	that	additional	material	weaknesses	will	not	be	identified	in	the	future	in	connection	with	our	compliance	with	the	provisions	of	Section	404	of the	Sarbanes-Oxley	Act	of	2002.	The	existence	of	one	or	more	material	weaknesses	could	preclude	a	conclusion	by	management	that	we	maintained	effective	internal control	over	financial	reporting.	The	existence	or	disclosure	of	any	such	material	weakness	could	adversely	affect	our	stock	price.

# If	we	are	unable	to	attract	new	large	end	customers	or	to	sell	additional	products	to	our	existing	end	customers,	our	revenue	growth	will	be	adversely	affected and	our	revenue	could	decrease.

To	increase	our	revenue,	we	must	add	new	end	customers	and	large	end	customers	and	sell	additional	products	to	existing	end	customers.	For	example,	one	of our	sales	strategies	is	to	target	specific	projects	at	our	current	end	customers	because	they	are	familiar	with	the	operational	and	economic	benefits	of	our	solutions, thereby	reducing	the	sales	cycle	into	these	customers.	We	believe	this	opportunity	with	current	end	customers	to	be	significant	given	their	existing	infrastructure	and expected	future	spend.	If	we	fail	to	attract	new	large	end	customers	or	sell	additional	products	to	our	existing	end	customers,	our	business,	financial	condition,	results	of operations	and	prospects	will	be	harmed.

Some	of	our	large	end	customers	require	more	favorable	terms	and	conditions	from	their	vendors	and	may	request	price	concessions.	As	we	seek	to	sell	more products	to	these	end	customers,	we	may	be	required	to	agree	to	terms	and	conditions	that	may	have	an	adverse	effect	on	our	business	or	ability	to	recognize revenue.

Our	large	end	customers	have	significant	purchasing	power	and,	as	a	result,	may	receive	more	favorable	terms	and	conditions	than	we	typically	provide	to	other end	 customers,	 including	 lower	 prices,	 bundled	 upgrades,	 extended	 warranties,	 acceptance	 terms,	 indemnification	 terms	 and	 extended	 return	 policies	 and	 other contractual	rights.	As	we	seek	to	sell	more	products	to	these	large	end	customers,	an	increased	mix	of	our	shipments	may	be	subject	to	such	terms	and	conditions,	which may	reduce	our	margins	or	affect	the	timing	of	our	revenue	recognition	and	thus	may	have	an	adverse	effect	on	our	business,	financial	condition,	results	of	operations and	prospects.

# Reliance	on	shipments	at	the	end	of	the	quarter	could	cause	our	revenue	for	the	applicable	period	to	fall	below	expected	levels.

As	a	result	of	end-customer	buying	patterns	and	the	efforts	of	our	sales	force	and	channel	partners	to	meet	or	exceed	their	sales	objectives,	we	have	historically received	a	substantial	portion	of	sales	orders	and	generated	a	substantial	portion	of	revenue	during	the	second	half	of	each	quarter.	This	places	significant	pressure	on order	review	and	processing,	supply	chain	management,	manufacturing,	inventory	and	quality	control	management,	shipping	and	trade	compliance	to	ensure	that	we have	properly	forecasted	supply	purchasing,	manufacturing	capacity,	inventory	and	quality	compliance	and	logistics.	If	there	is	any	significant	interruption	in	these critical	functions,	it	could	result	in	delayed	order	fulfillment,	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects	and	result	in	a	decline in	the	market	price	of	our	common	stock.

# We	base	our	inventory	requirements	on	our	forecasts	of	future	sales.	If	these	forecasts	are	materially	inaccurate,	we	may	procure	inventory	that	we	may	be unable	to	use	in	a	timely	manner	or	at	all.

We	and	our	contract	manufacturers	procure	components	and	build	our	products	based	on	our	forecasts.	These	forecasts	are	based	on	estimates	of	future	demand for	our	products,	which	are	in	turn	based	on	historical	trends	and	analyses	from	our	sales	and	marketing	organizations,	adjusted	for	overall	market	conditions.	To	the extent	our	forecasts	are	materially	inaccurate	or	if	we	otherwise	do	not	need	such	inventory,	we	may	under-	or	over-procure	inventory,	and	such	inaccuracies	in	our forecasts	could	materially	adversely	affect	our	business,	financial	condition	and	results	of	operations.

# Managing	the	supply	of	our	products	and	product	components	is	complex.	Insufficient	supply	and	inventory	may	result	in	lost	sales	opportunities	or	delayed revenue,	while	excess	inventory	may	harm	our	gross	margins.

Managing	the	supply	of	our	products	and	product	components	is	complex,	and	our	inventory	management	systems	and	related	supply-chain	visibility	tools	may not	enable	us	to	forecast	accurately	and	manage	effectively	the	supply	of	our	products	and	product	components.	Furthermore,	ongoing	Cisco	litigation	before	the	USTIC and	any	adverse	ruling	that	results	from	such	litigation	could	cause	disruption	to	our	supply-chain	or	with	our	suppliers,	which	may	impact	our	revenues,	business	and reputation.

Insufficient	supply	and	inventory	may	result	in	lost	sales	opportunities	or	delayed	revenue,	while	excess	inventory	may	harm	our	gross	margins.	In	order	to reduce	manufacturing	lead	times	and	plan	for	adequate	component	supply,	from	time	to	time	we	may	issue	purchase	orders	for	components	and	products	that	are	non- cancelable	 and	 non-returnable.	We	 establish	 a	 liability	 for	 non-cancelable,	 non-returnable	 purchase	 commitments	 with	 our	 third-party	 contract	 manufacturers	 for quantities	in	excess	of	our	demand	forecasts,	or	obsolete	material	charges.

Supply	management	remains	an	increased	area	of	focus	as	we	balance	the	need	to	maintain	sufficient	supply	levels	to	ensure	competitive	lead	times	against	the risk	of	obsolescence	or	the	end	of	life	of	certain	products.	If	we	ultimately	determine	that	we	have	excess	supply,	we	may	have	to	reduce	our	prices	and	write	down inventory,	which	in	turn	could	result	in	lower	gross	margins.	We	record	a	provision	when	inventory	is	determined	to	be	in	excess	of	anticipated	demand	or	obsolete	to adjust	inventory	to	its	estimated	realizable	value.

Alternatively,	insufficient	supply	levels	may	lead	to	shortages	that	result	in	delayed	revenue	or	loss	of	sales	opportunities	altogether	as	potential	end	customers turn	to	competitors'	products	that	are	readily	available.	Additionally,	any	increases	in	the	time	required	to	manufacture	our	products	or	ship	products	could	result	in supply	shortfalls.	If	we	are	unable	to	effectively	manage	our	supply	and	inventory,	our	business,	financial	condition,	results	of	operations	and	prospects	could	be adversely	affected.

# Because	some	of	the	key	components	in	our	products	come	from	sole	limited	sources	of	supply,	we	are	susceptible	to	supply	shortages	or	supply	changes,	which could	disrupt	or	delay	our	scheduled	product	deliveries	to	our	end	customers	and	may	result	in	the	loss	of	sales	and	end	customers.

Our	products	rely	on	key	components,	including	integrated	circuit	components	and	power	supplies	that	our	contract	manufacturers	purchase	on	our	behalf	from a	limited	number	of	suppliers,	including	certain	sole	source	providers.	We	do	not	have	guaranteed	supply	contracts	with	any	of	our	component	suppliers,	and	our suppliers	could	delay	shipments	or	cease	manufacturing	such	products	or	selling	them	to	us	at	any	time.	For	example,	in	the	past	we	have	experienced	shortages	in inventory	for	dynamic	random	access	memory	integrated	circuits	and	delayed	releases	of	the	next	generation	of	chipset,	which	delayed	our	production	and/or	the	release of	our	new	products.	The	development	of	alternate	sources	for	those	components	is	time-consuming,	difficult	and	costly.	If	we	are	unable	to	obtain	a	sufficient	quantity of	these	components	on	commercially	reasonable	terms	or	in	a	timely	manner,	sales	of	our	products	could	be	delayed	or	halted	entirely	or	we	may	be	required	to redesign	our	products.	Any	of	these	events	could	result	in	lost	sales	and	damage	to	our	end-customer	relationships,	which	would	adversely	impact	our	business,	financial condition,	results	of	operations	and	prospects.

Our	reliance	on	component	suppliers	also	yields	the	potential	for	their	infringement	or	misappropriation	of	third	party	intellectual	property	rights	with	respect	to components	which	may	be	incorporated	into	our	products.	We	may	not	be	indemnified	by	such	component	suppliers	for	such	infringement	or	misappropriation	claims. Any	litigation	for	which	we	do	not	receive	indemnification	could	require	us	to	incur	significant	legal	expenses	in	defending	against	such	claims	or	require	us	to	pay substantial	royalty	payments	or	settlement	amounts	that	would	not	be	reimbursed	by	our	component	suppliers.

Our	product	development	efforts	are	also	dependent	upon	our	continued	collaboration	with	our	key	merchant	silicon	vendors	such	as	Broadcom	and	Intel.	As we	develop	our	product	roadmap	and	continue	to	expand	our	relationships	with	these	and	other	merchant	silicon	vendors,	it	is	critical	that	we	work	in	tandem	with	our key	merchant	silicon	vendors	to	ensure	that	their	silicon	includes	improved	features	and	that	our	products	take	advantage	of	such	improved	features.	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.

If	our	key	merchant	silicon	vendors	do	not	continue	to	collaborate	in	such	a	fashion,	if	they	do	not	continue	to	innovate	or	if	there	are	delays	in	the	release	of their	products,	our	own	product	launches	could	be	delayed,	which	could	have	a	material	effect	on	revenue	and	business,	financial	condition,	results	of	operations	and prospects.

In	the	event	of	a	shortage	or	supply	interruption	from	our	component	suppliers,	we	may	not	be	able	to	develop	alternate	or	second	sources	in	a	timely	manner. Further,	long-term	supply	and	maintenance	obligations	to	end	customers	increase	the	duration	for	which	specific	components	are	required,	which	may	increase	the	risk of	component	shortages	or	the	cost	of	carrying	inventory.	In	addition,	our	component	suppliers	change	their	selling	prices	frequently	in	response	to	market	trends, including	industry-wide	increases	in	demand,	and	because	we	do	not	have	contracts	with	these	suppliers,	we	are	susceptible	to	price	fluctuations	related	to	raw	materials and	components.	If	we	are	unable	to	pass	component	price	increases	along	to	our	end	customers	or	maintain	stable	pricing,	our	gross	margins	could	be	adversely affected	and	our	business,	financial	condition,	results	of	operations	and	prospects	could	suffer.

Because	we	depend	on	third-party	manufacturers	to	build	our	products,	we	are	susceptible	to	manufacturing	delays	and	pricing	fluctuations	that	could prevent	us	from	shipping	end-customer	orders	on	time,	if	at	all,	or	on	a	cost-effective	basis,	which	may	result	in	the	loss	of	sales	and	end	customers.

We	depend	on	third-party	contract	manufacturers	to	manufacture	our	product	lines.	A	significant	portion	of	our	cost	of	revenue	consists	of	payments	to	these third-party	contract	manufacturers.	Our	reliance	on	these	third-party	contract	manufacturers	reduces	our	control	over	the	manufacturing	process,	quality	assurance, product	costs	and	product	supply	and	timing,	which	exposes	us	to	risk.	To	the	extent	that	our	products	are	manufactured	at	facilities	in	foreign	countries,	we	may	be subject	to	additional	risks	associated	with	complying	with	local	rules	and	regulations	in	those	jurisdictions.	If	we	fail	to	manage	our	relationships	with	our	third-party manufacturers	effectively,	or	if	these	third-party	manufacturers	experience	delays,	disruptions	or	quality	control	problems	in	their	operations,	this	could	severely	impair our	ability	to	fulfill	orders	on	time,	if	at	all,	or	on	a	cost-effective	basis.

Our	reliance	on	contract	manufacturers	also	yields	the	potential	for	their	infringement	of	third	party	intellectual	property	rights	in	the	manufacturing	of	our products	or	misappropriation	of	our	intellectual	property	rights	in	the	manufacturing	of	other	customers'	products.	If	we	are	unable	to	manage	our	relationships	with	our third-party	contract	manufacturers	effectively,	or	if	these	third-party	manufacturers	suffer	delays	or	disruptions	for	any	reason,	experience	increased	manufacturing	lead times,	capacity	constraints	or	quality	control	problems	in	their	manufacturing	operations	or	fail	to	meet	our	future	requirements	for	timely	delivery,	our	ability	to	ship products	to	our	end	customers	would	be	severely	impaired,	and	our	business,	financial	condition,	results	of	operations	and	prospects	would	be	seriously	harmed.

Our	contract	manufacturers	typically	fulfill	our	supply	requirements	on	the	basis	of	individual	orders.	We	do	not	have	long-term	contracts	with	our	third-party manufacturers	that	guarantee	capacity,	the	continuation	of	particular	pricing	terms	or	the	extension	of	credit

limits.	Accordingly,	they	are	not	obligated	to	continue	to	fulfill	our	supply	requirements,	which	could	result	in	supply	shortages,	and	the	prices	we	are	charged	for manufacturing	services	could	be	increased	on	short	notice.	For	example,	a	competitor	could	place	large	orders	with	the	third-party	manufacturer,	thereby	utilizing	all	or substantially	all	of	such	third-party	manufacturer's	capacity	and	leaving	the	manufacturer	little	or	no	capacity	to	fulfill	our	individual	orders	without	price	increases	or delays,	or	at	all.	Our	contract	with	one	of	our	contract	manufacturers	permits	it	to	terminate	the	agreement	for	convenience,	subject	to	prior	notice	requirements.	We	may not	be	able	to	develop	alternate	or	second	contract	manufacturers	in	a	timely	manner.

If	we	add	or	change	contract	manufacturers,	or	change	any	manufacturing	plant	locations	within	a	contract	manufacturer	network,	we	would	add	additional complexity	and	risk	to	our	supply	chain	management.	Ensuring	a	new	contract	manufacturer	or	new	plant	location	is	qualified	to	manufacture	our	products	to	our standards	and	industry	requirements	could	take	significant	effort	and	be	time	consuming	and	expensive.	For	example	if	we	suffer	an	adverse	ruling	with	respect	to certain	ongoing	Cisco	litigation	we	are	involved	in	before	the	USTIC	we	may	be	required	to	add	or	change	our	manufacturers	in	order	to	comply	with	the	ruling.	Any such	addition	or	change	in	manufacturers	may	be	extremely	costly,	time	consuming	and	we	may	not	be	able	to	do	so	successfully.

In	addition,	we	may	be	subject	to	additional	significant	challenges	in	ensuring	that	quality,	processes	and	costs,	among	other	issues,	are	consistent	with	our expectations	and	those	of	our	customers.	A	new	contract	manufacturer	or	manufacturing	location	may	not	be	able	to	scale	its	production	of	our	products	at	the	volumes or	quality	we	require.	This	could	also	adversely	affect	our	ability	to	meet	our	scheduled	product	deliveries	to	our	end	customers,	which	could	damage	our	customer relationships	and	cause	the	loss	of	sales	to	existing	or	potential	end	customers,	late	delivery	penalties,	delayed	revenue	or	an	increase	in	our	costs	which	could	adversely affect	our	gross	margins.	This	could	also	result	in	increased	levels	of	inventory	subjecting	us	to	increased	excess	and	obsolete	charges	that	could	have	a	negative	impact on	our	operating	results.

Any	production	interruptions	or	disruptions	for	any	reason,	such	as	a	natural	disaster,	epidemic,	capacity	shortages,	adverse	results	from	intellectual	property litigation	or	quality	problems,	at	one	of	our	manufacturing	partners	would	adversely	affect	sales	of	our	product	lines	manufactured	by	that	manufacturing	partner	and adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

# If	we	are	unable	to	increase	market	awareness	of	our	company	and	our	products,	our	revenue	may	not	continue	to	grow	or	may	decline.

We	have	not	yet	established	broad	market	awareness	of	our	products	and	services.	Market	awareness	of	our	value	proposition	and	products	and	services	will	be essential	to	our	continued	growth	and	our	success,	particularly	for	the	service	provider	and	large	enterprise	markets.	If	our	marketing	efforts	are	unsuccessful	in	creating market	awareness	of	our	company	and	our	products	and	services,	then	our	business,	financial	condition,	results	of	operations	and	prospects	will	be	adversely	affected, and	we	will	not	be	able	to	achieve	sustained	growth.

# The	sales	prices	of	our	products	and	services	may	decrease,	which	may	reduce	our	gross	profits	and	adversely	affect	our	results	of	operations.

The	sales	prices	for	our	products	and	services	may	decline	for	a	variety	of	reasons,	including	competitive	pricing	pressures,	discounts,	a	change	in	our	mix	of products	and	services,	the	introduction	of	new	products	and	services	by	us	or	by	our	competitors,	promotional	programs,	product	and	related	warranty	costs	or	broader macroeconomic	factors.	In	addition,	we	have	provided,	and	may	in	the	future	provide,	pricing	discounts	to	large	end	customers,	which	may	result	in	lower	margins	for the	period	in	which	such	sales	occur.	Our	gross	margins	may	also	fluctuate	as	a	result	of	the	timing	of	such	sales	to	large	end	customers.

We	have	experienced	declines	in	sales	prices	for	our	products,	including	our	10	Gigabit	Ethernet	modular	and	fixed	switches.	Competition	continues	to	increase in	the	market	segments	in	which	we	participate,	and	we	expect	competition	to	further	increase	in	the	future,	thereby	leading	to	increased	pricing	pressures.	Larger competitors	with	more	diverse	product	and	service	offerings	may	reduce	the	price	of	products	and	services	that	compete	with	ours	or	may	bundle	them	with	other products	and	services.	Additionally,	although	we	generally	price	our	products	worldwide	in	U.S.	dollars,	currency	fluctuations	in	certain	countries	and	regions	may adversely	affect	actual	prices	that	partners	and	end	customers	are	willing	to	pay	in	those	countries	and	regions.	Furthermore,	we	anticipate	that	the	sales	prices	and	gross profits	for	our	products	will	decrease	over	product	life	cycles.	Decreased	sales	prices	for	any	reason	may	reduce	our	gross	profits	and	adversely	affect	our	result	of operations.

# Seasonality	may	cause	fluctuations	in	our	revenue	and	results	of	operations.

We	operate	on	a	December	31	year	end	and	believe	that	there	are	significant	seasonal	factors	which	may	cause	sequential	product	revenue	growth	to	be	greater for	 the	second	and	fourth	quarters	of	our	year	 than	our	first	and	 third	quarters.	We	believe	 that	 this	seasonality	results	from	a	number	of	factors,	 including	 the procurement,	budgeting	and	deployment	cycles	of	many	of	our	end	customers.	Our	rapid	historical	growth	may	have	reduced	the	impact	of	seasonal	or	cyclical	factors that	might	have	influenced	our	business	to	date.	As	our	increasing	size	causes	our	growth	rate	to	slow,	seasonal	or	cyclical	variations	in	our	operations	may	become more	pronounced	over	time	and	may	materially	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

# If	we	are	unable	to	hire,	retain,	train	and	motivate	qualified	personnel	and	senior	management,	our	business,	financial	condition,	results	of	operations	and prospects	could	suffer.

Our	future	success	depends,	in	part,	on	our	ability	to	continue	to	attract	and	retain	highly	skilled	personnel,	particularly	software	engineering	and	sales personnel.	Competition	for	highly	skilled	personnel	is	often	intense,	especially	in	the	San	Francisco	Bay	Area	where	we	have	a	substantial	presence	and	need	for	highly skilled	 personnel.	 Many	 of	 the	 companies	 with	 which	 we	 compete	 for	 experienced	 personnel	 have	 greater	 resources	 than	 we	 have	 to	 provide	 more	 attractive compensation	packages	and	other	amenities.	Research	and	development	personnel	are	aggressively	recruited	by	startup	and	growth	companies,	which	are	especially active	in	many	of	the	technical	areas	and	geographic	regions	in	which	we	conduct	product	development.	In	addition,	in	making	employment	decisions,	particularly	in	the high-technology	industry,	job	candidates	often	consider	the	value	of	the	stock-based	compensation	they	are	to	receive	in	connection	with	their	employment.	Declines	in the	market	price	of	our	stock	could	adversely	affect	our	ability	to	attract,	motivate	or	retain	key	employees.	If	we	are	unable	to	attract	or	retain	qualified	personnel,	or	if there	are	delays	in	hiring	required	personnel,	our	business,	financial	condition,	results	of	operations	and	prospects	may	be	seriously	harmed.

Also,	to	the	extent	we	hire	personnel	from	competitors,	we	may	be	subject	to	allegations	that	such	personnel	has	been	improperly	solicited,	that	such	personnel has	divulged	proprietary	or	other	confidential	information	or	that	former	employers	own	certain	inventions	or	other	work	product.	Such	claims	could	result	in	litigation. Please	see	"—We	may	become	involved	in	litigation	that	may	materially	adversely	affect	us."

Our	future	performance	also	depends	on	the	continued	services	and	continuing	contributions	of	our	senior	management	to	execute	our	business	plan	and	to identify	and	pursue	new	opportunities	and	product	innovations.	Our	employment	arrangements	with	our	employees	do	not	require	that	they	continue	to	work	for	us	for any	specified	period,	and	therefore,	they	could	terminate	their	employment	with	us	at	any	time.	The	loss	of	our	key	personnel,	including	Jayshree	Ullal,	our	Chief Executive	Officer,	Andy	Bechtolsheim,	our	Founder	and	Chief	Development	Officer,	and	Kenneth	Duda,	our	Founder,	Chief	Technology	Officer	and	SVP	Software Engineering	or	other	members	of	our	senior	management	team,	sales	and	marketing	team	or	engineering	team,	or	any	difficulty	attracting	or	retaining	other	highly qualified	personnel	in	the	future,	could	significantly	delay	or	prevent	the	achievement	of	our	development	and	strategic	objectives,	which	could	adversely	affect	our business,	financial	condition,	results	of	operations	and	prospects.

# We	are	subject	to	a	number	of	risks	associated	with	the	expansion	of	our	international	sales	and	operations.

Our	ability	to	grow	our	business	and	our	future	success	will	depend	to	a	significant	extent	on	our	ability	to	expand	our	operations	and	customer	base	worldwide. We	have	a	limited	history	of	marketing,	selling	and	supporting	our	products	and	services	internationally.	Operating	in	a	global	marketplace,	we	are	subject	to	risks associated	with	having	an	international	reach	and	requirements	such	as	compliance	with	applicable	anti-corruption	laws.

One	such	applicable	anti-corruption	law	is	the	U.S.	Foreign	Corrupt	Practices	Act,	or	FCPA,	which	generally	prohibits	U.S.	companies	and	its	employees	and intermediaries	from	making	corrupt	payments	to	foreign	officials	for	the	purpose	of	obtaining	or	keeping	business,	securing	an	advantage	and	directing	business	to another,	and	requires	companies	to	maintain	accurate	books	and	records	and	a	system	of	internal	accounting	controls.	Under	the	FCPA,	U.S.	companies	may	be	held liable	for	the	corrupt	actions	taken	by	directors,	officers,	employees,	agents,	or	other	strategic	or	local	partners	or	representatives.	As	such,	if	we	or	our	intermediaries fail	to	comply	with	the	requirements	of	the	FCPA	or	similar	legislation,	governmental	authorities	in	the	U.S.	and	elsewhere	could	seek	to	impose	civil	and/or	criminal fines	and	penalties	which	could	have	a	material	adverse	effect	on	our	business,	results	of	operations	and	financial	conditions.	Failure	to	comply	with	anti-corruption	and anti-bribery	laws,	such	as	the	FCPA	and	the	United	Kingdom	Bribery	Act	of	2010,	or	the	United	Kingdom	Bribery	Act,	and	similar	laws	associated	with	our	activities outside	the	U.S.,	could	subject	us	to	penalties	and	other	adverse	consequences.	We	intend	to	increase	our	international	sales	and	business	and,	as	such,	the	risk	of violating	laws	such	as	the	FCPA	and	United	Kingdom	Bribery	Act	increases.

Additionally,	as	a	result	of	our	international	reach,	we	must	hire	and	train	experienced	personnel	to	staff	and	manage	our	foreign	operations.	To	the	extent	that we	experience	difficulties	in	recruiting,	training,	managing	and	retaining	an	international	staff,	and	specifically	staff	related	to	sales	management	and	sales	personnel,	we may	 experience	 difficulties	 in	 sales	 productivity	 in	 foreign	 markets.	We	 also	 enter	 into	 strategic	 distributor	 and	 reseller	 relationships	 with	 companies	 in	 certain international	markets	where	we	do	not	have	a	local	presence.	If	we	are	not	able	to	maintain	successful	strategic	distributor	relationships	internationally	or	to	recruit additional	companies	 to	enter	 into	strategic	distributor	relationships,	our	future	success	 in	 these	 international	markets	could	be	 limited.	Business	practices	 in	 the international	markets	that	we	serve	may	differ	from	those	in	the	U.S.	and	may	require	us	in	the	future	to	include	terms	other	than	our	standard	terms	in	end-customer contracts,	although	to	date	we	generally	have	not	done	so.	To	the	extent	that	we	may	enter	into	end-

customer	contracts	in	the	future	that	include	non-standard	terms	related	to	payment,	warranties	or	performance	obligations,	our	results	of	operations	may	be	adversely affected.

Additionally,	our	international	sales	and	operations	are	subject	to	a	number	of	risks,	including	the	following:

•greater	 difficulty in enforcing contracts and accounts receivable collection and longer collection periods;

•increased expenses incurred in establishing and maintaining our international operations;

•fluctuations in	 exchange rates	 between the	 U.S.	 dollar	 and foreign currencies	 where	 we	 do business;

•greater difficulty and costs in recruiting local experienced personnel;

•wage inflation in certain growing economies;

•general	economic	and	political	conditions	in	these	foreign	markets;

•economic	 uncertainty	 around	 the	 world	 as	 a	 result	 of	 sovereign	 debt issues;

•communication and integration problems resulting from cultural and geographic dispersion;

•limitations on our ability to access cash resources in our international operations;

•ability	 to establish necessary business relationships and to comply with local business requirements;

•risks	associated	with	trade	restrictions	and	foreign	legal	requirements,	including	the	importation,	certification	and	localization	of	our	products	required	in foreign	countries;

•greater	 risk	 of	 unexpected	 changes in regulatory	 practices, tariffs	 and tax laws	 and treaties;

•the	 uncertainty of protection for intellectual property rights in some countries;

•greater	risk	of	a	failure	of	foreign	employees	to	comply	with	both	U.S.	and	foreign	laws,	including	antitrust	regulations,	the	FCPA	and	any	trade	regulations ensuring	fair	trade	practices;	and

•heightened	risk	of	unfair	or	corrupt	business	practices	in	certain	geographies	and	of	improper	or	fraudulent	sales	arrangements	that	may	impact	financial	results and	result	in	restatements	of,	or	irregularities	in,	financial	statements.

These	and	other	factors	could	harm	our	ability	to	gain	future	international	revenue	and,	consequently,	materially	affect	our	business,	financial	condition,	results of	operations	and	prospects.	Expanding	our	existing	international	operations	and	entering	into	additional	international	markets	will	require	significant	management attention	and	financial	commitments.	Our	failure	to	successfully	manage	our	international	operations	and	the	associated	risks	effectively	could	limit	our	future	growth	or materially	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

Our	ability	to	sell	our	products	is	highly	dependent	on	the	quality	of	our	support	and	services	offerings,	and	our	failure	to	offer	high-quality	support	and services	could	have	a	material	adverse	effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.

Once	our	products	are	deployed	within	our	end	customers'	networks,	our	end	customers	depend	on	our	support	organization	and	our	channel	partners	to	resolve any	issues	relating	to	our	products.	High-quality	support	is	critical	for	the	successful	marketing	and	sale	of	our	products.	If	we	or	our	channel	partners	do	not	assist	our end	customers	in	deploying	our	products	effectively,	do	not	succeed	in	helping	our	end	customers	resolve	post-deployment	issues	quickly	or	do	not	provide	adequate ongoing	support,	it	could	adversely	affect	our	ability	to	sell	our	products	to	existing	end	customers	and	could	harm	our	reputation	with	potential	end	customers.	In addition,	as	we	expand	our	operations	internationally,	our	support	organization	will	face	additional	challenges,	including	those	associated	with	delivering	support, training	and	documentation	in	languages	other	than	English.	Our	failure	or	the	failure	of	our	channel	partners	to	maintain	high-quality	support	and	services	could	have	a material	adverse	effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.

# We	may	become	involved	in	litigation	that	may	materially	adversely	affect	us.

From	time	to	time,	we	may	become	involved	in	various	legal	proceedings	relating	to	matters	incidental	to	the	ordinary	course	of	our	business,	including	patent, copyright,	commercial,	product	liability,	employment,	class	action,	whistleblower	and	other	litigation	and	claims,	in	addition	to	governmental	and	other	regulatory investigations	and	proceedings.	Such	matters	can	be	time-consuming,	divert	management's	attention	and	resources,	cause	us	to	incur	significant	expenses	or	liability and/or	require	us	to	change	our	business	practices.	Because	of	the	potential	risks,	expenses	and	uncertainties	of	litigation,	we	may,	from	time	to	time,	settle	disputes, even	where	we	have	meritorious	claims	or	defenses,	by	agreeing	to	settlement	agreements.	Because	litigation	is	inherently	unpredictable,	we	cannot	assure	you	that	the results	of	any	of	these	actions	will	not	have	a	material	adverse	effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.

For	more	information	regarding	the	litigation	in	which	we	are	currently	involved,	see	the	"Legal	Proceedings"	subheading	in	Note	5.	Commitments	and Contingencies	of	Notes	to	Condensed	Consolidated	Financial	Statements	in	Part	II,	Item	8,	of	this	Annual	Report	on	Form	10-K.

# Adverse	economic	conditions	or	reduced	information	technology	and	network	infrastructure	spending	may	adversely	affect	our	business,	financial	condition, results	of	operations	and	prospects.

Our	business	depends	on	the	overall	demand	for	information	technology,	network	connectivity	and	access	to	data	and	applications.	Weak	domestic	or	global economic	conditions,	fear	or	anticipation	of	such	conditions	or	a	reduction	in	information	technology	and	network	infrastructure	spending	even	if	economic	conditions improve,	could	adversely	affect	our	business,	financial	condition,	results

of	operations	and	prospects	in	a	number	of	ways,	including	longer	sales	cycles,	lower	prices	for	our	products	and	services,	higher	default	rates	among	our	distributors, reduced	unit	sales	and	lower	or	no	growth.	For	example,	the	ongoing	debt	concerns	in	many	countries	in	Europe	have	caused,	and	are	likely	to	continue	to	cause, uncertainty	and	instability	in	local	economies	and	in	global	financial	markets,	particularly	if	any	future	sovereign	debt	defaults	or	significant	bank	failures	or	defaults occur.	Market	uncertainty	and	instability	in	Europe	could	intensify	or	spread	further,	particularly	if	ongoing	stabilization	efforts	prove	insufficient.	Concerns	have	been raised	as	to	the	financial,	political	and	legal	ineffectiveness	of	measures	taken	to	date.	Continuing	or	worsening	economic	instability	in	Europe	and	elsewhere	could adversely	affect	spending	for	IT,	network	infrastructure,	systems	and	tools.	Continued	turmoil	in	the	geopolitical	environment	in	many	parts	of	the	world	may	also	affect the	overall	demand	for	our	products.	Although	we	do	not	believe	that	our	business,	financial	condition,	results	of	operations	and	prospects	have	been	significantly adversely	affected	by	economic	and	political	uncertainty	in	Europe	and	other	countries,	deterioration	of	such	conditions	may	harm	our	business,	financial	condition, results	of	operations	and	prospects	in	the	future.	A	prolonged	period	of	economic	uncertainty	or	a	downturn	may	also	significantly	affect	financing	markets,	the availability	of	capital	and	the	terms	and	conditions	of	financing	arrangements,	including	the	overall	cost	of	financing	as	well	as	the	financial	health	or	creditworthiness	of our	end	customers.	Circumstances	may	arise	in	which	we	need,	or	desire,	to	raise	additional	capital,	and	such	capital	may	not	be	available	on	commercially	reasonable terms,	or	at	all.

# Assertions	by	third	parties	of	infringement	or	other	violations	by	us	of	their	intellectual	property	rights,	or	other	lawsuits	asserted	against	us,	could	result	in significant	costs	and	substantially	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

Patent	and	other	intellectual	property	disputes	are	common	in	the	network	infrastructure	industry	and	have	resulted	in	protracted	and	expensive	litigation	for many	companies.	Many	companies	in	the	network	infrastructure	industry,	including	our	competitors	and	other	third	parties,	as	well	as	non-practicing	entities,	own	large numbers	of	patents,	copyrights,	trademarks	and	trade	secrets,	which	they	may	use	to	assert	claims	of	patent	infringement,	misappropriation	or	other	violations	of intellectual	property	rights	against	us.	From	time	to	time,	they	have	or	may	in	the	future	also	assert	such	claims	against	us,	our	end	customers	or	channel	partners	whom we	typically	indemnify	against	claims	that	our	products	infringe,	misappropriate	or	otherwise	violate	the	intellectual	property	rights	of	third	parties.

As	the	number	of	products	and	competitors	in	our	market	increases	and	overlaps	occur,	claims	of	infringement,	misappropriation	and	other	violations	of intellectual	property	rights	may	increase.	Any	claim	of	infringement,	misappropriation	or	other	violations	of	intellectual	property	rights	by	a	third	party,	even	those without	merit,	could	cause	us	to	incur	substantial	costs	defending	against	the	claim,	distract	our	management	from	our	business	and	require	us	to	cease	use	of	such intellectual	property.	In	addition,	some	claims	for	patent	infringement	may	relate	to	subcomponents	that	we	purchase	from	third	parties.	If	these	third	parties	are	unable or	unwilling	to	indemnify	us	for	these	claims,	we	could	be	substantially	harmed.

The	patent	portfolios	of	most	of	our	competitors	are	 larger	 than	ours.	This	disparity	may	 increase	 the	risk	 that	our	competitors	may	sue	us	for	patent infringement	and	may	limit	our	ability	to	counterclaim	for	patent	infringement	or	settle	through	patent	cross-licenses.	In	addition,	future	assertions	of	patent	rights	by third	parties,	and	any	resulting	litigation,	may	involve	patent	holding	companies	or	other	adverse	patent	owners	who	have	no	relevant	product	revenue	and	against	whom our	own	patents	may	therefore	provide	little	or	no	deterrence	or	protection.	We	cannot	assure	you	that	we	are	not	infringing	or	otherwise	violating	any	third-party intellectual	property	rights.

The	third-party	asserters	of	intellectual	property	claims	may	be	unreasonable	in	their	demands,	or	may	simply	refuse	to	settle,	which	could	lead	to	expensive settlement	payments,	prolonged	periods	of	litigation	and	related	expenses,	additional	burdens	on	employees	or	other	resources,	distraction	from	our	business,	supply stoppages	and	lost	sales.

An	adverse	outcome	of	a	dispute	(including	those	lawsuits	described	under	the	"Legal	Proceedings"	subheading	in	Note	5.	Commitments	and	Contingencies	of Notes	to	Condensed	Consolidated	Financial	Statements	in	Part	II,	Item	8,	of	this	Annual	Report	on	Form	10-K)	may	require	us	to	pay	substantial	damages	including treble	damages	if	we	are	found	to	have	willfully	infringed	a	third	party's	patents;	cease	making,	licensing	or	using	solutions	that	are	alleged	to	infringe	or	misappropriate the	intellectual	property	of	others;	expend	additional	development	resources	to	attempt	to	redesign	our	products	or	services	or	otherwise	to	develop	non-infringing technology,	which	may	not	be	successful;	enter	into	potentially	unfavorable	royalty	or	license	agreements	in	order	to	obtain	the	right	to	use	necessary	technologies	or intellectual	property	rights;	and	indemnify	our	partners	and	other	third	parties.	Any	damages	or	royalty	obligations	we	may	become	subject	to	as	a	result	of	an	adverse outcome,	and	any	third-party	indemnity	we	may	need	to	provide,	could	harm	our	business,	financial	condition,	results	of	operations	and	prospects.	Royalty	or	licensing agreements,	if	required	or	desirable,	may	be	unavailable	on	terms	acceptable	to	us,	or	at	all,	and	may	require	significant	royalty	payments	and	other	expenditures. Further,	there	is	little	or	no	information	publicly	available	concerning	market	or	fair	values	for	license	fees,	which	can	lead	to	overpayment	of	license	or	settlement	fees. In	addition,	some	licenses	may	be	non-exclusive,	and	therefore	our	competitors	may	have	access	to	the	same	technology	licensed	to	us.	Suppliers	subject	to	third-party intellectual	property	claims	also	may	choose	or	be	forced	to	discontinue	or	alter	their	arrangements	with	us,	with	little	or	no	advance	notice	to	us.	Any	of	these	events could	seriously	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

# Our	standard	sales	contracts	contain	 indemnification	provisions	requiring	us	to	defend	our	end	customers	against	third-party	claims,	 including	against infringement	of	certain	intellectual	property	rights,	that	could	expose	us	to	losses	which	could	seriously	harm	our	business,	financial	conditions,	results	of operations	and	prospects.

Under	the	indemnification	provisions	of	our	standard	sales	contracts,	we	agree	to	defend	our	end	customers	against	third-party	claims	asserting	infringement	of certain	intellectual	property	rights,	which	may	include	patents,	copyrights,	trademarks	or	trade	secrets,	and	to	pay	judgments	entered	on	such	claims.	For	example,	we	are currently	involved	in	ongoing	Cisco	litigation	claims	before	the	USTIC.	An	adverse	ruling	in	such	litigation	may	potentially	expose	us	to	claims	in	the	event	that	claims are	brought	against	our	customers	based	on	the	ruling	and	we	are	required	to	indemnify	such	customers.

Our	exposure	under	these	indemnification	provisions	is	frequently	limited	to	the	total	amount	paid	by	our	end	customer	under	the	agreement.	However,	certain agreements	include	indemnification	provisions	that	could	potentially	expose	us	to	losses	in	excess	of	the	amount	received	under	the	agreement.	Any	of	these	events, including	claims	for	indemnification,	could	seriously	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

# If	we	are	unable	to	protect	our	intellectual	property	rights,	our	competitive	position	could	be	harmed	or	we	could	be	required	to	incur	significant	expenses	to enforce	our	rights.

We	depend	on	our	ability	to	protect	our	proprietary	technology.	We	rely	on	trade	secret,	patent,	copyright	and	trademark	laws	and	confidentiality	agreements with	employees	and	third	parties,	all	of	which	offer	only	limited	protection.

The	process	of	obtaining	patent	protection	is	expensive	and	time-consuming,	and	we	may	not	be	able	to	prosecute	all	necessary	or	desirable	patent	applications at	a	reasonable	cost	or	in	a	timely	manner.	We	may	choose	not	to	seek	patent	protection	for	certain	innovations	and	may	choose	not	to	pursue	patent	protection	in	certain jurisdictions.	Further,	we	do	not	know	whether	any	of	our	pending	patent	applications	will	result	in	the	issuance	of	patents	or	whether	the	examination	process	will require	us	to	narrow	our	claims.	To	the	extent	that	additional	patents	are	issued	from	our	patent	applications,	which	is	not	certain,	they	may	be	contested,	circumvented or	invalidated	in	the	future.	Moreover,	the	rights	granted	under	any	issued	patents	may	not	provide	us	with	proprietary	protection	or	competitive	advantages,	and,	as	with any	technology,	competitors	may	be	able	to	develop	similar	or	superior	technologies	to	our	own	now	or	in	the	future.	In	addition,	we	rely	on	confidentiality	or	license agreements	with	third	parties	in	connection	with	their	use	of	our	products	and	technology.	There	is	no	guarantee	that	such	parties	will	abide	by	the	terms	of	such agreements	or	that	we	will	be	able	to	adequately	enforce	our	rights,	in	part	because	we	rely	on	"shrink-wrap"	licenses	in	some	instances.

We	have	not	registered	our	trademarks	in	all	geographic	markets.	Failure	to	secure	those	registrations	could	adversely	affect	our	ability	to	enforce	and	defend our	trademark	rights	and	result	in	indemnification	claims.	Further,	any	claim	of	infringement	by	a	third	party,	even	those	claims	without	merit,	could	cause	us	to	incur substantial	costs	defending	against	such	claim,	could	divert	management	attention	from	our	business	and	could	require	us	to	cease	use	of	such	intellectual	property	in certain	geographic	markets.

Despite	our	efforts,	the	steps	we	have	taken	to	protect	our	proprietary	rights	may	not	be	adequate	to	preclude	misappropriation	of	our	proprietary	information	or infringement	of	our	intellectual	property	rights,	and	our	ability	to	police	such	misappropriation	or	infringement	is	uncertain,	particularly	in	countries	outside	of	the United	States.

Detecting	and	protecting	against	the	unauthorized	use	of	our	products,	technology	and	proprietary	rights	is	expensive,	difficult	and,	in	some	cases,	impossible. Litigation	may	be	necessary	in	the	future	to	enforce	or	defend	our	intellectual	property	rights,	to	protect	our	trade	secrets	or	to	determine	the	validity	and	scope	of	the proprietary	rights	of	others.	Such	litigation	could	result	in	substantial	costs	and	diversion	of	management	resources,	either	of	which	could	harm	our	business,	financial condition,	results	of	operations	and	prospects,	and	there	is	no	guarantee	that	we	would	be	successful.	Furthermore,	many	of	our	current	and	potential	competitors	have the	ability	to	dedicate	substantially	greater	resources	to	protecting	their	technology	or	intellectual	property	rights	than	we	do.	Accordingly,	despite	our	efforts,	we	may not	be	able	to	prevent	third	parties	from	infringing	upon	or	misappropriating	our	intellectual	property,	which	could	result	in	a	substantial	loss	of	our	market	share.

# We	rely	on	the	availability	of	licenses	to	third-party	software	and	other	intellectual	property.

Many	of	our	products	and	services	 include	software	or	other	 intellectual	property	 licensed	from	 third	parties,	and	we	otherwise	use	software	and	other intellectual	property	licensed	from	third	parties	in	our	business.	This	exposes	us	to	risks	over	which	we	may	have	little	or	no	control.	For	example,	a	licensor	may	have difficulties	keeping	up	with	technological	changes	or	may	stop	supporting	the	software	or	other	intellectual	property	that	it	licenses	to	us.	Also,	it	will	be	necessary	in	the future	to	renew	licenses,	expand	the	scope	of	existing	licenses	or	seek	new	licenses,	relating	to	various	aspects	of	these	products	and	services	or	otherwise	relating	to	our business,	which	may	result	in	increased	license	fees.	These	licenses	may	not	be	available	on	acceptable	terms,	if	at	all.	In	addition,	a	third	party	may	assert	that	we	or	our end	customers	are	in	breach	of	the	terms	of	a	license,	which	could,	among	other	things,	give	such	third	party	the	right	to	terminate	a	license	or	seek	damages	from	us,	or both.	The	inability	to	obtain	or	maintain	certain	licenses	or	other	rights	or	to	obtain	or	maintain	such	licenses	or	rights	on	favorable	terms,	or	the	need	to	engage	in litigation	regarding	these	matters,	could	result	in	delays	in	releases	of	products	and	services	and	could	otherwise	disrupt	our	business,	until	equivalent	technology	can	be identified,	licensed	or	developed,	if	at	all,	and	integrated	into	our	products	and	services	or	otherwise	in	the	conduct	of	our	business.	Moreover,	the	inclusion	in	our products	and	services	of	software	or	other	intellectual	property	licensed	from	third	parties	on	a	nonexclusive	basis	may	limit	our

ability	to	differentiate	our	products	from	those	of	our	competitors.	Any	of	these	events	could	have	a	material	adverse	effect	on	our	business,	financial	condition,	results of	operations	and	prospects.

# Our	products	contain	third-party	open	source	software	components,	and	failure	to	comply	with	the	terms	of	the	underlying	open	source	software	licenses could	restrict	our	ability	to	sell	our	products.

Our	products	contain	software	modules	licensed	to	us	by	third-party	authors	under	"open	source"	licenses.	Use	and	distribution	of	open	source	software	may entail	greater	risks	than	use	of	third-party	commercial	software,	as	open	source	licensors	generally	do	not	provide	warranties	or	other	contractual	protections	regarding infringement	claims	or	the	quality	of	the	code.	Some	open	source	licenses	contain	requirements	that	we	make	available	source	code	for	modifications	or	derivative	works we	create	based	upon	the	type	of	open	source	software	that	we	use.	If	we	combine	our	software	with	open	source	software	in	a	certain	manner,	we	could,	under	certain open	source	licenses,	be	required	to	release	portions	of	the	source	code	of	our	software	to	the	public.	This	would	allow	our	competitors	to	create	similar	products	with lower	development	effort	and	time	and	ultimately	could	result	in	a	loss	of	product	sales	for	us.

Although	we	monitor	our	use	of	open	source	software	to	avoid	subjecting	our	products	to	conditions	we	do	not	intend,	the	terms	of	many	open	source	licenses have	not	been	interpreted	by	U.S.	courts,	and	these	licenses	could	be	construed	in	a	way	that	could	impose	unanticipated	conditions	or	restrictions	on	our	ability	to commercialize	our	products.	Moreover,	we	cannot	assure	you	that	our	processes	for	controlling	our	use	of	open	source	software	in	our	products	will	be	effective.	If	we are	held	to	have	breached	the	terms	of	an	open	source	software	license,	we	could	be	required	to	seek	licenses	from	third	parties	to	continue	offering	our	products	on terms	that	are	not	economically	feasible,	to	re-engineer	our	products,	to	discontinue	the	sale	of	our	products	if	re-engineering	could	not	be	accomplished	on	a	timely basis	or	to	make	generally	available,	in	source	code	form,	our	proprietary	code,	any	of	which	could	adversely	affect	our	business,	financial	condition,	results	of operations	and	prospects.

# Sales	of	our	7000	Series	of	switches	generate	most	of	our	product	revenue,	and	if	we	are	unable	to	continue	to	grow	sales	of	these	products,	our	business, financial	condition,	results	of	operations	and	prospects	will	suffer.

Historically,	we	have	derived	substantially	all	of	our	product	revenue	from	sales	of	our	7000	Series	of	switches,	and	we	expect	to	continue	to	do	so	for	the foreseeable	future.	A	decline	in	the	price	of	these	products	and	related	services,	or	our	inability	to	increase	sales	of	these	products,	would	harm	our	business,	financial condition,	results	of	operations	and	prospects	more	seriously	than	if	we	derived	significant	revenue	from	a	larger	variety	of	product	lines	and	services.	Our	future financial	performance	will	also	depend	upon	successfully	developing	and	selling	next-generation	versions	of	our	7000	Series	of	switches.	If	we	fail	to	deliver	new products,	new	features,	or	new	releases	that	end	customers	want	and	that	allow	us	to	maintain	leadership	in	what	will	continue	to	be	a	competitive	market	environment, our	business,	financial	condition,	results	of	operations	and	prospects	will	be	harmed.

# We	expect	our	gross	margins	to	vary	over	time	and	to	be	adversely	affected	by	numerous	factors.

We	expect	our	gross	margins	to	vary	over	time	and	to	be	affected	by	numerous	factors,	including:

•changes in	 end-customer	 or	 product	 mix, including	 mix	 of	 configurations	 within	 each	 product group;

•introduction of new products, including products with price-performance advantages;

•our	 ability to reduce production costs;

•entry	into	new	markets	or	growth	in	lower	margin	markets;

•entry	in	markets	with	different	pricing	and	cost	structures; •pricing	discounts;

•increases	 in	 material, labor	 or	 other	 manufacturing-related costs,	 which could	 be significant especially	 during	 periods	 of supply constraints;

•excess inventory and inventory holding charges;

•obsolescence

charges;

•changes	in	shipment	volume;

•the	timing	of	revenue	recognition	and	revenue	deferrals;

•increased	cost,	loss	of	cost	savings	or	dilution	of	savings	due	to	changes	in	component	pricing	or	charges	incurred	due	to	inventory	holding	periods	if	parts ordering	does	not	correctly	anticipate	product	demand	or	if	the	financial	health	of	either	contract	manufacturers	or	suppliers	deteriorates;

•lower than expected benefits from value engineering;

•increased	price	competition;

•changes	in	distribution	channels;

•increased	warranty	costs;	and

•how	 well	 we	 execute	 our strategy and operating plans.

# To	remain	competitive,	we	must	successfully	manage	product	introductions	and	transitions.

The	success	of	new	product	introductions	depends	on	a	number	of	factors	including,	but	not	limited	to,	timely	and	successful	product	development,	market acceptance,	our	ability	to	manage	the	risks	associated	with	new	product	production	ramp-up	issues,	the

availability	of	new	merchant	silicon	chips,	the	effective	management	of	purchase	commitments	and	inventory	in	line	with	anticipated	product	demand,	the	availability	of products	in	appropriate	quantities	and	costs	to	meet	anticipated	demand,	and	the	risk	that	new	products	may	have	quality	or	other	defects	or	deficiencies	in	the	early stages	of	introduction.	Accordingly,	we	cannot	determine	in	advance	the	ultimate	effect	of	new	product	introductions	and	transitions	on	our	business	and	results	of operations.

# Our	sales	cycles	can	be	long	and	unpredictable,	and	our	sales	efforts	require	considerable	time	and	expense.	As	a	result,	our	sales	and	revenue	are	difficult	to predict	and	may	vary	substantially	from	period	to	period,	which	may	cause	our	results	of	operations	to	fluctuate	significantly.

The	timing	of	our	sales	and	revenue	recognition	is	difficult	to	predict	because	of	the	length	and	unpredictability	of	our	products'	sales	cycles.	A	sales	cycle	is the	period	between	initial	contact	with	a	prospective	end	customer	and	any	sale	of	our	products.	End-customer	orders	often	involve	the	purchase	of	multiple	products. These	orders	are	complex	and	difficult	to	complete	because	prospective	end	customers	generally	consider	a	number	of	factors	over	an	extended	period	of	time	before committing	to	purchase	the	products	and	solutions	we	sell.	End	customers,	especially	in	the	case	of	our	large	end	customers,	often	view	the	purchase	of	our	products	as	a significant	and	strategic	decision	and	require	considerable	time	to	evaluate,	test	and	qualify	our	products	prior	to	making	a	purchase	decision	and	placing	an	order.	The length	of	time	that	end	customers	devote	to	their	evaluation,	contract	negotiation	and	budgeting	processes	varies	significantly.	Our	products'	sales	cycles	can	be	lengthy in	certain	cases,	especially	with	respect	to	our	prospective	large	end	customers.	During	the	sales	cycle,	we	expend	significant	time	and	money	on	sales	and	marketing activities	and	make	investments	in	evaluation	equipment,	all	of	which	lower	our	operating	margins,	particularly	if	no	sale	occurs.	Even	if	an	end	customer	decides	to purchase	our	products,	there	are	many	factors	affecting	the	timing	of	our	recognition	of	revenue,	which	makes	our	revenue	difficult	to	forecast.	For	example,	there	may be	unexpected	delays	in	an	end	customer's	internal	procurement	processes,	particularly	for	some	of	our	larger	end	customers	for	which	our	products	represent	a	very small	percentage	of	their	total	procurement	activity.	There	are	many	other	factors	specific	to	end	customers	that	contribute	to	the	timing	of	their	purchases	and	the variability	of	our	revenue	recognition,	including	the	strategic	importance	of	a	particular	project	to	an	end	customer,	budgetary	constraints	and	changes	in	their	personnel.

Even	after	an	end	customer	makes	a	purchase,	there	may	be	circumstances	or	terms	relating	to	the	purchase	that	delay	our	ability	to	recognize	revenue	from that	purchase.	For	example,	the	sale	of	our	products	may	be	subject	to	acceptance	testing.	In	addition,	the	significance	and	timing	of	our	product	enhancements,	and	the introduction	of	new	products	by	our	competitors,	may	also	affect	end	customers'	purchases.	For	all	of	these	reasons,	it	is	difficult	to	predict	whether	a	sale	will	be completed,	the	particular	period	in	which	a	sale	will	be	completed	or	the	period	in	which	revenue	from	a	sale	will	be	recognized.	If	our	sales	cycles	lengthen,	our	revenue could	be	lower	than	expected,	which	would	have	an	adverse	effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.

# Our	business	depends	on	end	customers	renewing	their	maintenance	and	support	contracts.	Any	decline	in	maintenance	renewals	could	harm	our	future business,	financial	condition,	results	of	operations	and	prospects.

We	typically	sell	our	products	with	maintenance	and	support	as	part	of	the	initial	purchase,	and	a	portion	of	our	annual	revenue	comes	from	renewals	of maintenance	and	support	contracts.	Our	end	customers	have	no	obligation	to	renew	their	maintenance	and	support	contracts	after	the	expiration	of	the	initial	period,	and they	may	elect	not	to	renew	their	maintenance	and	support	contracts,	to	renew	their	maintenance	and	support	contracts	at	lower	prices	through	alternative	channel partners	or	to	reduce	the	product	quantity	under	their	maintenance	and	support	contracts,	thereby	reducing	our	future	revenue	from	maintenance	and	support	contracts.	If our	end	customers,	especially	our	large	end	customers,	do	not	renew	their	maintenance	and	support	contracts	or	if	they	renew	them	on	terms	that	are	less	favorable	to	us, our	revenue	may	decline	and	our	business,	financial	condition,	results	of	operations	and	prospects	will	suffer.

# Industry	consolidation	may	lead	to	increased	competition	and	may	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

Most	of	our	competitors	have	made	acquisitions	and/or	have	entered	into	or	extended	partnerships	or	other	strategic	relationships	to	offer	more	comprehensive product	lines,	including	cloud	networking	solutions.	For	example,	in	the	last	few	years	alone	Dell	acquired	Force10,	IBM	acquired	Blade	Network	Technology,	Hewlett Packard	acquired	3Com,	Brocade	acquired	Foundry	Networks,	Juniper	acquired	Contrail	and	VMware	acquired	Nicira.

Moreover,	large	system	vendors	are	increasingly	seeking	to	deliver	top-to-bottom	cloud	networking	solutions	to	end	customers	that	combine	cloud-focused hardware	and	software	solutions	to	provide	an	alternative	to	our	products.

We	expect	this	trend	to	continue	as	companies	attempt	to	strengthen	their	market	positions	in	an	evolving	industry	and	as	companies	are	acquired	or	are	unable to	continue	operations.	Companies	that	are	strategic	alliance	partners	in	some	areas	of	our	business	may	acquire	or	form	alliances	with	our	competitors,	thereby	reducing their	business	with	us.	Industry	consolidation	may	result	in	stronger	competitors	that	are	better	able	to	compete	with	us,	including	any	competitors	that	seek	to	become sole	source	vendors	for	end	customers.	This	could	lead	to	more	variability	in	our	results	of	operations	and	could	have	a	material	adverse	effect	on	our	business,	financial condition,	results	of	operations	and	prospects.

# Our	business	is	subject	to	the	risks	of	warranty	claims,	product	returns,	product	liability	and	product	defects.

Our	products	are	very	complex	and	despite	testing	prior	to	their	release,	they	have	contained	and	may	contain	undetected	defects	or	errors,	especially	when	first introduced	or	when	new	versions	are	released.	Product	defects	or	errors	could	affect	the	performance	of

our	products	and	could	delay	the	development	or	release	of	new	products	or	new	versions	of	products,	adversely	affect	our	reputation	and	our	end	customers'	willingness to	buy	products	from	us	and	adversely	affect	market	acceptance	or	perception	of	our	products.	Real	or	perceived	errors,	failures	or	bugs	in	our	products	could	cause	us	to lose	revenue	or	market	share,	increase	our	service	costs,	cause	us	to	incur	substantial	costs	in	redesigning	the	products,	cause	us	to	lose	significant	end-customers,	subject us	to	liability	for	damages	and	divert	our	resources	from	other	tasks,	any	one	of	which	could	materially	and	adversely	affect	our	business,	results	of	operations	and financial	condition.

Additionally,	real	or	perceived	errors,	failures	or	bugs	in	our	products	could	result	in	claims	by	end	customers	for	losses	that	they	sustain.	If	end	customers make	these	types	of	claims,	we	may	be	required,	or	may	choose,	for	end-customer	relations	or	other	reasons,	to	expend	additional	resources	in	order	to	address	the problem.	We	may	also	be	required	to	repair	or	replace	such	products	or	provide	a	refund	for	the	purchase	price	for	such	products.	Liability	provisions	in	our	standard terms	and	conditions	of	sale,	and	those	of	our	resellers	and	distributors,	may	not	be	enforceable	under	some	circumstances	or	may	not	fully	or	effectively	protect	us from	end-customer	claims	and	related	liabilities	and	costs,	including	indemnification	obligations	under	our	agreements	with	end	customers,	resellers	and	distributors. The	sale	and	support	of	our	products	also	entail	the	risk	of	product	liability	claims.	We	maintain	insurance	to	protect	against	certain	types	of	claims	associated	with	the use	of	our	products,	but	our	insurance	coverage	may	not	adequately	cover	any	such	claims.	In	addition,	even	claims	that	ultimately	are	unsuccessful	could	result	in expenditures	of	funds	in	connection	with	litigation	and	divert	management's	time	and	other	resources.

# In	addition	to	our	own	direct	sales	force,	we	rely	on	distributors,	systems	integrators	and	value-added	resellers	to	sell	our	products,	and	our	failure	to effectively	develop,	manage	or	prevent	disruptions	to	our	distribution	channels	and	the	processes	and	procedures	that	support	them	could	cause	a	reduction	in the	number	of	end	customers	of	our	products.

Our	future	success	is	highly	dependent	upon	maintaining	our	relationships	with	distributors,	systems	integrators	and	value-added	resellers	and	establishing additional	sales	channel	relationships.	We	anticipate	that	sales	of	our	products	to	a	limited	number	of	channel	partners	will	continue	to	account	for	a	material	portion	of our	total	product	revenue	for	the	foreseeable	future.	We	provide	our	channel	partners	with	specific	training	and	programs	to	assist	them	in	selling	our	products,	but	these steps	may	not	be	effective.	In	addition,	our	channel	partners	may	be	unsuccessful	in	marketing,	selling	and	supporting	our	products	and	services.	If	we	are	unable	to develop	and	maintain	effective	sales	incentive	programs	for	our	channel	partners,	we	may	not	be	able	to	incentivize	these	partners	to	sell	our	products	to	end	customers. These	partners	may	have	incentives	to	promote	our	competitors'	products	to	the	detriment	of	our	own	or	may	cease	selling	our	products	altogether.	One	of	our	channel partners	could	elect	to	consolidate	or	enter	into	a	strategic	partnership	with	one	of	our	competitors,	which	could	reduce	or	eliminate	our	future	opportunities	with	that channel	partner.	Our	agreements	with	our	channel	partners	may	generally	be	terminated	for	any	reason	by	either	party	with	advance	notice.	We	may	be	unable	to	retain these	channel	partners	or	secure	additional	or	replacement	channel	partners.	The	loss	of	one	or	more	of	our	significant	channel	partners	requires	extensive	training,	and any	new	or	expanded	relationship	with	a	channel	partner	may	take	several	months	or	more	to	achieve	productivity.

Where	we	rely	on	the	channel	partners	for	sales	of	our	products,	we	may	have	little	or	no	contact	with	the	ultimate	users	of	our	products	that	purchase	through such	channel	partners,	thereby	making	it	more	difficult	for	us	to	establish	brand	awareness,	ensure	proper	delivery	and	installation	of	our	products,	service	ongoing	end- customer	requirements,	estimate	end-customer	demand	and	respond	to	evolving	end-customer	needs.	In	addition,	our	channel	partner	sales	structure	could	subject	us	to lawsuits,	potential	liability	and	reputational	harm	if,	for	example,	any	of	our	channel	partners	misrepresent	the	functionality	of	our	products	or	services	to	end	customers, fail	to	comply	with	their	contractual	obligations	or	violate	laws	or	our	corporate	policies.	If	we	fail	to	effectively	manage	our	existing	sales	channels,	or	if	our	channel partners	are	unsuccessful	in	fulfilling	the	orders	for	our	products,	if	we	are	unable	to	enter	into	arrangements	with,	and	retain	a	sufficient	number	of,	high-quality	channel partners	in	each	of	the	regions	in	which	we	sell	products	and	keep	them	motivated	to	sell	our	products,	our	ability	to	sell	our	products	and	our	business,	financial condition,	results	of	operations	and	prospects	will	be	harmed.

# A	portion	of	our	revenue	is	generated	by	sales	to	government	entities,	which	are	subject	to	a	number	of	challenges	and	risks.

We	anticipate	increasing	our	sales	efforts	to	U.S.	and	foreign,	federal,	state	and	local	governmental	end	customers	in	the	future.	Sales	to	government	entities are	subject	to	a	number	of	risks.	Selling	to	government	entities	can	be	highly	competitive,	expensive	and	time	consuming,	often	requiring	significant	upfront	time	and expense	without	any	assurance	that	these	efforts	will	generate	a	sale.	The	substantial	majority	of	our	sales	to	date	to	government	entities	have	been	made	indirectly through	our	channel	partners.	Government	certification	requirements	for	products	like	ours	may	change	and,	in	doing	so,	restrict	our	ability	to	sell	into	the	government sector	until	we	have	attained	revised	certifications.	Government	demand	and	payment	for	our	products	and	services	may	be	affected	by	public	sector	budgetary	cycles and	funding	authorizations,	with	funding	reductions	or	delays	adversely	affecting	public	sector	demand	for	our	products	and	services.	Government	entities	may	have statutory,	contractual	or	other	legal	rights	to	terminate	contracts	with	our	distributors	and	resellers	for	convenience	or	due	to	a	default,	and	any	such	termination	may adversely	impact	our	future	business,	financial	condition,	results	of	operations	and	prospects.	Selling	to	government	entities	may	also	require	us	to	comply	with	various regulations	that	are	not	applicable	to	sales	to	non-government	entities,	including	regulations	that	may	relate	to	pricing,	classified	material	and	other	matters.	Complying with	such	regulations	may	also	require	us	to	put	in	place	controls	and	procedures	to	monitor	compliance	with	the	applicable	regulations	that	may	be	costly	or	not possible.	We	are	not	currently	certified	to	perform	work	under	classified	contracts	with	government	entities.	Failure	to	comply	with	any	such	regulations	could	adversely affect	 our	 business,	 prospects,	 results	 of	 operations	 and	 financial	 condition.	 Governments	 routinely	 investigate	 and	 audit	 government	 contractors'	 administrative processes,	and	any	unfavorable	audit

could	result	in	the	government	ceasing	to	buy	our	products	and	services,	a	reduction	of	revenue,	fines	or	civil	or	criminal	liability	if	the	audit	uncovers	improper	or illegal	activities,	any	of	which	could	materially	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.	The	U.S.	government	may	require certain	products	that	it	purchases	to	be	manufactured	in	the	U.S.	and	other	relatively	high-cost	manufacturing	locations,	and	we	may	not	manufacture	all	products	in locations	that	meet	these	requirements.	Any	of	these	and	other	circumstances	could	have	a	material	adverse	effect	on	our	business,	financial	condition,	results	of operations	and	prospects.

# Our	products	must	interoperate	with	operating	systems,	software	applications	and	hardware	that	is	developed	by	others,	and	if	we	are	unable	to	devote	the necessary	resources	to	ensure	that	our	products	interoperate	with	such	software	and	hardware,	we	may	lose	or	fail	to	increase	market	share	and	experience	a weakening	demand	for	our	products.

Generally,	our	products	comprise	only	a	part	of	 the	data	center	and	must	 interoperate	with	our	end	customers'	existing	 infrastructure,	specifically	 their networks,	servers,	software	and	operating	systems,	which	may	be	manufactured	by	a	wide	variety	of	vendors	and	original	equipment	manufacturers,	or	OEMs.	Our products	must	comply	with	established	industry	standards	in	order	to	interoperate	with	the	servers,	storage,	software	and	other	networking	equipment	in	the	data	center such	that	all	systems	function	efficiently	together.	We	depend	on	the	vendors	of	servers	and	systems	in	a	data	center	to	support	prevailing	industry	standards.	Often, these	vendors	are	significantly	larger	and	more	influential	in	driving	industry	standards	than	we	are.	Also,	some	industry	standards	may	not	be	widely	adopted	or implemented	uniformly,	and	competing	standards	may	emerge	that	may	be	preferred	by	our	end	customers.

In	addition,	when	new	or	updated	versions	of	these	software	operating	systems	or	applications	are	introduced,	we	must	sometimes	develop	updated	versions	of our	software	so	that	our	products	will	interoperate	properly.	We	may	not	accomplish	these	development	efforts	quickly,	cost-effectively	or	at	all.	These	development efforts	require	capital	investment	and	the	devotion	of	engineering	resources.	If	we	fail	to	maintain	compatibility	with	these	systems	and	applications,	our	end	customers may	not	be	able	to	adequately	utilize	our	products,	and	we	may	lose	or	fail	to	increase	market	share	and	experience	a	weakening	in	demand	for	our	products,	among other	consequences,	which	would	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

# We	are	subject	to	governmental	export	and	import	controls	that	could	impair	our	ability	to	compete	in	international	markets	or	subject	us	to	liability	if	we violate	these	controls.

Our	products	may	be	subject	to	various	export	controls	and	because	we	incorporate	encryption	technology	into	certain	of	our	products,	certain	of	our	products may	be	exported	from	various	countries	only	with	the	required	export	license	or	through	an	export	license	exception.	If	we	were	to	fail	to	comply	with	the	applicable export	control	laws,	customs	regulations,	economic	sanctions	or	other	applicable	laws,	we	could	be	subject	to	monetary	damages	or	the	imposition	of	restrictions	which could	be	material	to	our	business,	operating	results	and	prospects	and	could	also	harm	our	reputation.	Further,	there	could	be	criminal	penalties	for	knowing	or	willful violations,	including	incarceration	for	culpable	employees	and	managers.	Obtaining	the	necessary	export	license	or	other	authorization	for	a	particular	sale	may	be	time- consuming	and	may	result	in	the	delay	or	loss	of	sales	opportunities.	Furthermore,	certain	export	control	and	economic	sanctions	laws	prohibit	the	shipment	of	certain products,	technology,	software	and	services	to	embargoed	countries	and	sanctioned	governments,	entities,	and	persons.	Even	though	we	take	precautions	to	ensure	that our	channel	partners	comply	with	all	relevant	regulations,	any	failure	by	our	channel	partners	to	comply	with	such	regulations	could	have	negative	consequences, including	reputational	harm,	government	investigations	and	penalties.

As	our	company	grows	we	also	continue	developing	procedures	and	controls	to	comply	with	export	control	and	other	applicable	laws.	Historically,	we	have	had some	instances	where	we	inadvertently	have	not	fully	complied	with	certain	export	control	laws,	but	we	have	disclosed	them	to,	and	implemented	corrective	actions with,	the	appropriate	government	agencies.

In	addition,	various	countries	regulate	the	import	of	certain	encryption	technology,	including	through	import	permit	and	license	requirements,	and	have	enacted laws	that	could	limit	our	ability	to	distribute	our	products	or	could	limit	our	end	customers'	ability	to	implement	our	products	in	those	countries.	Any	change	in	export	or import	regulations,	economic	sanctions	or	related	legislation,	shift	in	the	enforcement	or	scope	of	existing	regulations	or	change	in	the	countries,	governments,	persons or	technologies	targeted	by	such	regulations	could	result	in	decreased	use	of	our	products	by,	or	in	our	decreased	ability	to	export	or	sell	our	products	to,	existing	or potential	end	customers	with	international	operations	or	create	delays	in	the	introduction	of	our	products	into	international	markets.	Any	decreased	use	of	our	products	or limitation	on	our	ability	to	export	or	sell	our	products	could	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

# Failure	to	comply	with	governmental	laws	and	regulations	could	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

Our	business	is	subject	to	regulation	by	various	federal,	state,	local	and	foreign	governmental	agencies,	including	agencies	responsible	for	monitoring	and enforcing	employment	and	labor	laws,	workplace	safety,	product	safety,	environmental	laws,	consumer	protection	laws,	anti-bribery	laws,	import/export	controls, federal	securities	laws	and	tax	laws	and	regulations.	In	certain	jurisdictions,	these	regulatory	requirements	may	be	more	stringent	than	those	in	the	United	States.	From time	to	time,	we	may	receive	inquiries	from	such	governmental	agencies	or	we	may	make	voluntary	disclosures	regarding	our	compliance	with	applicable	governmental regulations	 or	 requirements	 relating	 to	 import/export	 controls,	 federal	 securities	 laws	 and	 tax	 laws	 and	 regulations	 which	 could	 lead	 to	 formal	 investigations. Noncompliance	with	applicable	government	regulations	or	requirements	could	subject	us	to	sanctions,	mandatory	product

recalls,	enforcement	actions,	disgorgement	of	profits,	fines,	damages,	civil	and	criminal	penalties	or	injunctions.	If	any	governmental	sanctions	are	imposed,	or	if	we	do not	prevail	in	any	possible	civil	or	criminal	litigation,	our	business,	financial	condition,	results	of	operations	and	prospects	could	be	materially	adversely	affected.	In addition,	responding	to	any	action	will	likely	result	in	a	significant	diversion	of	management's	attention	and	resources	and	an	increase	in	professional	fees.	Enforcement actions	and	sanctions	could	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

# We	may	invest	in	or	acquire	other	businesses	which	could	require	significant	management	attention,	disrupt	our	business,	dilute	stockholder	value	and adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

As	part	of	our	business	strategy,	we	have	and	may	continue	to	make	investments	in	complementary	companies,	products	or	technologies	which	could	involve licenses,	additional	channels	of	distribution,	discount	pricing	or	investments	in	or	acquisitions	of	other	companies.	However,	we	do	not	have	significant	experience	in making	investments	in	other	companies	nor	have	we	made	any	acquisitions	to	date,	and	as	a	result,	our	ability	as	an	organization	to	evaluate	and/or	complete	investments or	acquire	and	integrate	other	companies,	products	or	technologies	in	a	successful	manner	is	unproven.	We	may	not	be	able	to	find	suitable	investment	or	acquisition candidates,	and	we	may	not	be	able	to	complete	such	investments	or	acquisitions	on	favorable	terms,	if	at	all.	If	we	do	complete	investments	or	acquisitions,	we	may	not ultimately	strengthen	our	competitive	position	or	achieve	our	goals,	and	any	investments	or	acquisitions	we	complete	could	be	viewed	negatively	by	our	end	customers, investors	and	securities	analysts.

In	addition,	investments	and	acquisitions	may	result	in	unforeseen	operating	difficulties	and	expenditures.	For	example,	if	we	are	unsuccessful	at	integrating any	acquisitions	or	retaining	key	 talent	from	 those	acquisitions,	or	 the	 technologies	associated	with	such	acquisitions,	 into	our	company,	 the	business,	financial condition,	results	of	operations	and	prospects	of	the	combined	company	could	be	adversely	affected.	Any	integration	process	may	require	significant	time	and	resources, and	we	may	not	be	able	to	manage	the	process	successfully.	We	may	not	successfully	evaluate	or	utilize	the	acquired	technology	or	personnel	or	accurately	forecast	the financial	effects	of	an	acquisition	transaction,	including	accounting	charges.	We	may	have	to	pay	cash,	incur	debt	or	issue	equity	securities	to	pay	for	any	such investment	or	acquisition,	each	of	which	could	adversely	affect	our	financial	condition	or	the	market	price	of	our	common	stock.	The	sale	of	equity	or	issuance	of	debt	to finance	any	such	acquisitions	could	result	in	dilution	to	our	stockholders.	The	incurrence	of	indebtedness	would	result	in	increased	fixed	obligations	and	could	also include	covenants	or	other	restrictions	that	would	impede	our	ability	to	manage	our	operations.	Moreover,	if	the	investment	or	acquisition	becomes	impaired,	we	may	be required	to	take	an	impairment	charge,	which	could	adversely	affect	our	financial	condition	or	the	market	price	of	our	common	stock.

# If	we	needed	to	raise	additional	capital	to	expand	our	operations	and	invest	in	new	products,	our	failure	to	do	so	on	favorable	terms	could	reduce	our	ability to	compete	and	could	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

We	expect	that	our	existing	cash	and	cash	equivalents,	will	be	sufficient	to	meet	our	anticipated	cash	needs	for	the	foreseeable	future.	If	we	did	need	to	raise additional	funds	to	expand	our	operations	and	invest	in	new	products,	we	may	not	be	able	to	obtain	additional	debt	or	equity	financing	on	favorable	terms,	if	at	all.	If	we raise	additional	equity	financing,	our	stockholders	may	experience	significant	dilution	of	their	ownership	interests,	and	the	market	price	of	our	common	stock	could decline.	Furthermore,	if	we	engage	in	debt	financing,	the	holders	of	such	debt	would	have	priority	over	the	holders	of	common	stock,	and	we	may	be	required	to	accept terms	that	restrict	our	ability	to	incur	additional	indebtedness	or	impose	other	restrictions	on	our	business.	We	may	also	be	required	to	take	other	actions	that	would otherwise	be	in	the	interests	of	the	debt	holders,	including	maintaining	specified	liquidity	or	other	ratios,	any	of	which	could	harm	our	business,	financial	condition, results	of	operations	and	prospects.	If	we	need	additional	capital	and	cannot	raise	it	on	acceptable	terms,	if	at	all,	we	may	not	be	able	to,	among	other	things:

•evolve or enhance our products and services;

•continue	 to expand our sales and marketing and research and development organizations;

•acquire complementary technologies, products or businesses;

•expand operations, in the U.S. or internationally;

•hire,	train	and	retain	employees;	or

•respond	 to	 competitive	 pressures or unanticipated working capital requirements.

Our	failure	to	do	any	of	these	things	could	seriously	harm	our	business,	financial	condition,	results	of	operations	and	prospects.

If	our	estimates	or	judgments	relating	to	our	critical	accounting	policies	are	based	on	assumptions	that	change	or	prove	to	be	incorrect,	our	results	of operations	could	fall	below	expectations	of	securities	analysts	and	investors,	resulting	in	a	decline	in	the	market	price	of	our	common	stock.

The	preparation	of	financial	statements	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America,	requires	management	to make	estimates	and	assumptions	that	affect	the	amounts	reported	in	the	consolidated	financial	statements	and	accompanying	notes.	We	base	our	estimates	on	historical experience	and	on	various	other	assumptions	that	we	believe	to	be	reasonable	under	the	circumstances,	as	described	in	Part	II	Item	7	of	"Management's	Discussion	and Analysis	of	Financial	Condition	and	Results	of	Operations,"	the	results	of	which	form	the	basis	for	making	judgments	about	the	carrying	values	of	assets,	liabilities, equity,	revenue	and	expenses	that	are	not	readily	apparent	from	other	sources.	Significant	assumptions	and	estimates	used	in	preparing	our	consolidated	financial statements	include	those	related	to	revenue	recognition,	stock-based	compensation,	contract	manufacturing	liabilities	and	income	taxes.	If	our	assumptions	change	or	if actual	circumstances	differ	from	those	in	our	assumptions,	our	results	of	operations	may	be	adversely

affected	and	may	fall	below	the	expectations	of	securities	analysts	and	investors,	resulting	in	a	decline	in	the	market	price	of	our	common	stock.

# We	are	exposed	to	the	credit	risk	of	our	channel	partners	and	some	of	our	end	customers,	which	could	result	in	material	losses.

Most	of	our	sales	are	on	an	open	credit	basis,	with	standard	payment	terms	of	30	days	in	the	United	States	and,	because	of	local	customs	or	conditions,	longer	in some	markets	outside	the	U.S.	We	monitor	individual	end-customer	payment	capability	in	granting	such	open	credit	arrangements,	seek	to	limit	such	open	credit	to amounts	we	believe	the	end	customers	can	pay	and	maintain	reserves	we	believe	are	adequate	to	cover	exposure	for	doubtful	accounts.	We	are	unable	to	recognize revenue	from	shipments	until	the	collection	of	those	amounts	becomes	reasonably	assured.	Any	significant	delay	or	default	in	the	collection	of	significant	accounts receivable	could	result	in	an	increased	need	for	us	to	obtain	working	capital	from	other	sources,	possibly	on	worse	terms	than	we	could	have	negotiated	if	we	had established	such	working	capital	resources	prior	to	such	delays	or	defaults.	Any	significant	default	could	adversely	affect	our	results	of	operations	and	delay	our	ability to	recognize	revenue.

A	material	portion	of	our	sales	is	derived	through	our	distributors,	systems	integrators	and	value-added	resellers.	Some	of	our	distributors,	systems	integrators and	value-added	resellers	may	experience	financial	difficulties,	which	could	adversely	affect	our	collection	of	accounts	receivable.	Distributors	tend	to	have	more limited	financial	resources	than	other	systems	integrators,	value-added	resellers	and	end	customers.	Distributors	represent	potential	sources	of	increased	credit	risk because	they	may	be	less	likely	to	have	the	reserve	resources	required	to	meet	payment	obligations.	Our	exposure	to	credit	risks	of	our	channel	partners	may	increase	if our	channel	partners	and	their	end	customers	are	adversely	affected	by	global	or	regional	economic	conditions.	One	or	more	of	these	channel	partners	could	delay payments	or	default	on	credit	extended	to	them,	either	of	which	could	materially	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

# If	we	or	our	partners	fail	to	comply	with	environmental	requirements,	our	business,	financial	condition,	results	of	operations,	prospects	and	reputation	could be	adversely	affected.

We	and	our	partners,	including	our	contract	manufacturers,	are	subject	to	various	local,	state,	federal	and	international	environmental	laws	and	regulations, including	 laws	 governing	 the	 hazardous	 material	 content	 of	 our	 products	 and	 laws	 relating	 to	 the	 collection,	 recycling	 and	 disposal	 of	 electrical	 and	 electronic equipment.	Examples	of	these	laws	and	regulations	include	the	European	Union,	or	EU,	Restrictions	on	the	use	of	Hazardous	Substances	Directive,	or	RoHS	Directive, and	the	EU	Waste	Electrical	and	Electronic	Equipment	Directive,	or	WEEE	Directive,	as	well	as	the	implementing	legislation	of	the	EU	member	states.	Similar	laws and	regulations	have	been	passed	or	are	pending	in	China,	South	Korea,	Norway	and	Japan	and	may	be	enacted	in	other	regions,	including	in	the	U.S.,	and	we	or	our partners,	including	our	contract	manufacturers,	are,	or	may	in	the	future	be,	subject	to	these	laws	and	regulations.

The	EU	RoHS	Directive	and	the	similar	laws	of	other	jurisdictions	limit	the	content	of	certain	hazardous	materials	such	as	lead,	mercury	and	cadmium	in	the manufacture	of	electrical	equipment,	including	our	products.	Our	products	currently	comply	with	the	RoHS	Directive;	however,	if	there	are	future	changes	to	this directive,	we	may	be	required	to	re-engineer	our	products	to	use	components	compatible	with	these	regulations.	This	re-engineering	and	component	substitution	could result	in	additional	costs	to	us	or	disrupt	our	operations	or	logistics.

We	are	also	subject	to	environmental	laws	and	regulations	governing	the	management	and	disposal	of	hazardous	materials	and	wastes.	Our	failure,	or	the	failure of	our	partners,	including	our	contract	manufacturers,	to	comply	with	past,	present	and	future	environmental	laws	could	result	in	fines,	penalties,	third-party	claims, reduced	sales	of	our	products,	substantial	product	inventory	write-offs	and	reputational	damage,	any	of	which	could	harm	our	business,	financial	condition,	results	of operations	and	prospects.	We	also	expect	that	our	business	will	be	affected	by	new	environmental	laws	and	regulations	on	an	ongoing	basis	applicable	to	us	and	our partners,	including	our	contract	manufacturers.	To	date,	our	expenditures	for	environmental	compliance	have	not	had	a	material	effect	on	our	results	of	operations	or cash	flows.	Although	we	cannot	predict	the	future	effect	of	such	laws	or	regulations,	they	will	likely	result	in	additional	costs	or	require	us	to	change	the	content	or manufacturing	of	our	products,	which	could	have	a	material	adverse	effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.

# We	are	exposed	to	fluctuations	in	currency	exchange	rates,	which	could	adversely	affect	our	business,	financial	condition,	results	of	operations	and	prospects.

Our	sales	contracts	are	primarily	denominated	in	U.S.	dollars,	and	therefore	substantially	all	of	our	revenue	is	not	subject	to	foreign	currency	risk.	However,	a strengthening	U.S.	dollar	could	increase	the	real	cost	of	our	products	to	our	end	customers	outside	of	the	U.S.,	which	could	adversely	affect	our	business,	financial condition,	results	of	operations	and	prospects.	In	addition,	a	decrease	in	the	value	of	the	U.S.	dollar	relative	to	foreign	currencies	could	increase	our	product	and operating	costs	in	foreign	locations.	Further,	an	increasing	portion	of	our	operating	expenses	is	incurred	outside	the	U.S.,	is	denominated	in	foreign	currencies	and	is subject	to	fluctuations	due	to	changes	in	foreign	currency	exchange	rates.	If	we	are	not	able	to	successfully	hedge	against	the	risks	associated	with	the	currency fluctuations,	our	business,	financial	condition,	results	of	operations	and	prospects	could	be	adversely	affected.

# Our	business	is	subject	to	the	risks	of	earthquakes,	fire,	power	outages,	floods	and	other	catastrophic	events	and	to	interruption	by	manmade	problems	such	as terrorism.

Our	corporate	headquarters	and	the	operations	of	our	key	manufacturing	vendors,	logistics	providers	and	partners,	as	well	as	many	of	our	customers,	are located	in	areas	exposed	to	risks	of	natural	disasters	such	as	earthquakes	and	tsunamis,	including	the	San	Francisco	Bay	area,	Japan	and	Taiwan.	A	significant	natural disaster,	such	as	an	earthquake,	tsunami,	fire	or	a	flood,	or	other	catastrophic	event	such	as	a	disease	outbreak,	could	have	a	material	adverse	effect	on	our	or	their business,	which	could	in	turn	materially	affect	our	financial	condition,	results	of	operations	and	prospects.	For	example,	in	the	event	our	service	providers'	information technology	systems	or	manufacturing	or	logistics	abilities	are	hindered	by	any	of	the	events	discussed	above,	shipments	could	be	delayed,	which	could	result	in	missed financial	targets,	such	as	revenue	and	shipment	targets,	for	a	particular	quarter.	Further,	if	a	natural	disaster	occurs	in	a	region	from	which	we	derive	a	significant	portion of	our	revenue,	end	customers	in	that	region	may	delay	or	forego	purchases	of	our	products,	which	may	materially	and	adversely	affect	our	business,	financial	condition, results	of	operations	and	prospects.	In	addition,	acts	of	terrorism	could	cause	disruptions	in	our	business	or	the	business	of	our	manufacturer,	logistics	providers,	partners or	end	customers	or	the	economy	as	a	whole.	Given	our	typical	concentration	of	sales	at	each	quarter	end,	any	disruption	in	the	business	of	our	manufacturer,	logistics providers,	partners	or	end	customers	that	affects	sales	at	the	end	of	our	quarter	could	have	a	particularly	significant	adverse	effect	on	our	quarterly	results.	All	of	the aforementioned	risks	may	be	augmented	if	our	disaster	recovery	plans	and	those	of	our	manufacturers,	logistics	providers	or	partners	prove	to	be	inadequate.	To	the extent	that	any	of	the	above	results	in	delays	or	cancellations	of	end-customer	orders,	or	delays	in	the	manufacture,	deployment	or	shipment	of	our	products,	our business,	financial	condition,	results	of	operations	and	prospects	would	be	adversely	affected.

Breaches	of	our	cybersecurity	systems	could	degrade	our	ability	to	conduct	our	business	operations	and	deliver	products	and	services	to	our	customers,	delay our	ability	to	recognize	revenue,	compromise	the	integrity	of	our	software	products,	result	in	significant	data	losses	and	the	theft	of	our	intellectual	property, damage	our	reputation,	expose	us	to	liability	to	third	parties	and	require	us	to	incur	significant	additional	costs	to	maintain	the	security	of	our	networks	and data.

We	increasingly	depend	upon	our	IT	systems	to	conduct	virtually	all	of	our	business	operations,	ranging	from	our	internal	operations	and	product	development activities	to	our	marketing	and	sales	efforts	and	communications	with	our	customers	and	business	partners.	Computer	programmers	may	attempt	to	penetrate	our network	security,	or	that	of	our	website,	and	misappropriate	our	proprietary	information	or	cause	interruptions	of	our	service.	Because	the	techniques	used	by	such computer	programmers	to	access	or	sabotage	networks	change	frequently	and	may	not	be	recognized	until	launched	against	a	target,	we	may	be	unable	to	anticipate these	techniques.	In	addition,	sophisticated	hardware	and	operating	system	software	and	applications	that	we	produce	or	procure	from	third	parties	may	contain	defects in	design	or	manufacture,	including	"bugs"	and	other	problems	that	could	unexpectedly	interfere	with	the	operation	of	the	system.	We	have	also	outsourced	a	number	of our	business	functions	to	third-parties,	including	our	manufacturers,	logistics	providers,	and	cloud	service	providers,	and	our	business	operations	also	depend,	in	part,	on the	success	of	these	third	parties'	own	cybersecurity	measures.	Similarly,	we	rely	upon	distributors,	resellers	and	system	integrators	to	sell	our	products	and	our	sales operations	depend,	in	part,	on	the	reliability	of	their	cybersecurity	measures.	Additionally,	we	depend	upon	our	employees	to	appropriately	handle	confidential	data	and deploy	our	IT	resources	in	safe	and	secure	fashion	that	does	not	expose	our	network	systems	to	security	breaches	and	the	loss	of	data.	Accordingly,	if	our	cybersecurity systems	and	 those	of	our	contractors	fail	 to	protect	against	unauthorized	access,	sophisticated	cyber	attacks	and	 the	mishandling	of	data	 by	 our	 employees	 and contractors,	our	ability	to	conduct	our	business	effectively	could	be	damaged	in	a	number	of	ways,	including:

•sensitive	 data	 regarding	 our	 business, including intellectual	 property	 and	 other	 proprietary	 data,	 could	 be stolen;

•our	electronic	communications	systems,	including	email	and	other	methods,	could	be	disrupted,	and	our	ability	to	conduct	our	business	operations	could	be seriously	damaged	until	such	systems	can	be	restored;

•our	ability	to	process	customer	orders	and	electronically	deliver	products	and	services	could	be	degraded,	and	our	distribution	channels	could	be	disrupted, resulting	in	delays	in	revenue	recognition;

•defects	and	security	vulnerabilities	could	be	 introduced	 into	our	software,	 thereby	damaging	 the	reputation	and	perceived	reliability	and	security	of	our products	and	potentially	making	the	data	systems	of	our	customers	vulnerable	to	further	data	loss	and	cyber	incidents;	and

•personally	 identifiable	 data	 of	 our	 customers,	 employees	 and	 business	 partners	 could	 be

compromised.

Should	any	of	the	above	events	occur,	we	could	be	subject	to	significant	claims	for	liability	from	our	customers	and	regulatory	actions	from	governmental agencies.	In	addition,	our	ability	to	protect	our	intellectual	property	rights	could	be	compromised	and	our	reputation	and	competitive	position	could	be	significantly harmed.	Also,	the	regulatory	and	contractual	actions,	litigations,	investigations,	fines,	penalties	and	liabilities	relating	to	data	breaches	that	result	in	losses	of	personally identifiable	or	credit	card	information	of	users	of	our	services	can	be	significant	in	terms	of	fines	and	reputational	impact	and	necessitate	changes	to	our	business operations	 that	 may	 be	 disruptive	 to	 us.	Additionally,	 we	 could	 incur	 significant	 costs	 in	 order	 to	 upgrade	 our	 cybersecurity	 systems	 and	 remediate	 damages. Consequently,	our	financial	performance	and	results	of	operations	could	be	adversely	affected.

# We	believe	our	long-term	value	as	a	company	will	be	greater	if	we	focus	primarily	on	growth	instead	of	profitability.

Our	business	strategy	is	to	focus	primarily	on	our	long-term	growth.	As	a	result,	our	profitability	in	any	given	period	may	be	lower	than	it	would	be	if	our strategy	was	to	maximize	short-term	profitability.	Expenditures	on	research	and	development,	sales	and

marketing,	infrastructure	and	other	such	investments	may	not	ultimately	grow	our	business,	prospects	or	cause	long	term	profitability.	For	example,	in	order	to	support our	strong	growth,	we	have	accelerated	our	investment	in	infrastructure,	such	as	enterprise	resource	planning	software	and	other	technologies	to	improve	the	efficiency of	our	operations.	As	a	result,	we	expect	our	levels	of	operating	profit	could	decline	in	the	short	to	medium	term.	If	we	are	ultimately	unable	to	achieve	profitability	at the	level	anticipated	by	analysts	and	our	stockholders,	the	market	price	of	our	common	stock	may	decline.

# We	may	not	generate	positive	returns	on	our	research	and	development	investments.

Developing	our	products	is	expensive,	and	the	investment	in	product	development	may	involve	a	long	payback	cycle.	In	2015,	2014	and	2013,	our	research	and development	expenses	were	$209.4	million,	or	approximately	25.0%	of	our	revenue,	$148.9	million,	or	approximately	25.5%	of	our	revenue,	and	$98.6	million,	or approximately	27.3%	of	our	revenue,	respectively.	We	expect	to	continue	to	invest	heavily	in	software	development	in	order	to	expand	the	capabilities	of	our	cloud networking	platform,	introduce	new	products	and	features	and	build	upon	our	technology	leadership.	We	believe	one	of	our	greatest	strengths	lies	in	the	speed	of	our product	development	efforts.	By	investing	in	research	and	development,	we	believe	we	will	be	well	positioned	to	continue	our	rapid	growth	and	take	advantage	of	our large	market	opportunity.	We	expect	that	our	results	of	operations	will	be	impacted	by	the	timing	and	size	of	these	investments.	These	investments	may	take	several years	to	generate	positive	returns,	if	ever.

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

Our	success	and	ability	to	compete	depend	substantially	upon	our	internally	developed	technology,	which	is	incorporated	in	the	source	code	for	our	products. We	seek	to	protect	the	source	code,	design	code,	documentation	and	other	information	relating	to	our	software,	under	trade	secret,	patent	and	copyright	laws.	However, we	have	chosen	to	provide	access	to	selected	source	code	of	our	software	to	several	of	our	partners	for	co-development,	as	well	as	for	open	application	programming interfaces,	or	APIs,	formats	and	protocols.	Though	we	generally	control	access	to	our	source	code	and	other	intellectual	property	and	enter	into	confidentiality	or	license agreements	with	such	partners	as	well	as	with	our	employees	and	consultants,	this	combination	of	procedural	and	contractual	safeguards	may	be	insufficient	to	protect our	trade	secrets	and	other	rights	to	our	technology.	Our	protective	measures	may	be	inadequate,	especially	because	we	may	not	be	able	to	prevent	our	partners, employees	or	consultants	from	violating	any	agreements	or	licenses	we	may	have	in	place	or	abusing	their	access	granted	to	our	source	code.	Improper	disclosure	or	use of	our	source	code	could	help	competitors	develop	products	similar	to	or	better	than	ours.

# Changes	in	our	provision	for	income	taxes	or	our	effective	tax	rate,	the	enactment	of	new	tax	laws	or	changes	in	the	application	of	existing	tax	laws	of	various jurisdictions	or	adverse	outcomes	resulting	from	examination	of	our	income	tax	returns	could	adversely	affect	our	results.

Our	provision	for	income	taxes	is	subject	to	volatility	and	could	be	adversely	affected	by	several	factors,	many	of	which	are	outside	of	our	control,	including earnings	that	are	lower	than	anticipated	in	countries	that	have	lower	tax	rates	and	higher	than	anticipated	in	countries	that	have	higher	tax	rates;	our	ability	to	generate and	use	tax	attributes;	changes	in	the	valuation	of	our	deferred	tax	assets	and	liabilities;	expiration	of	or	lapses	in	the	federal	research	and	development	("R&D")	tax credit	laws;	transfer	pricing	adjustments,	including	the	effect	of	acquisitions	on	our	inter-company	R&D	cost	sharing	arrangement	and	legal	structure;	tax	effects	of nondeductible	compensation,	including	certain	stock-based	compensation;	tax	costs	related	to	inter-company	realignments;	changes	in	accounting	principles;	adverse	tax consequences,	including	imposition	of	withholding	or	other	taxes	on	payments	by	subsidiaries	or	customers;	a	change	in	our	decision	to	indefinitely	reinvest	foreign earnings	or	changes	in	tax	laws	and	regulations,	including	possible	U.S.	changes	to	the	taxation	of	earnings	of	our	foreign	subsidiaries,	the	deductibility	of	expenses attributable	to	foreign	income	or	the	foreign	tax	credit	rules.

Significant	judgment	is	required	to	evaluate	our	tax	positions	and	determine	our	provision	for	income	taxes.	The	accounting	guidance	for	uncertainty	in	income taxes	applies	to	all	income	tax	positions,	including	the	potential	recovery	of	previously	paid	taxes,	which	if	settled	unfavorably	could	adversely	affect	our	provision	for income	taxes	or	additional	paid-in	capital.	In	addition,	tax	laws	are	dynamic	and	subject	to	change	as	new	laws	are	passed	and	new	interpretations	of	the	law	are	issued or	applied.	Recent	changes	to	U.S.	tax	laws,	including	limitations	on	the	ability	of	taxpayers	to	claim	and	utilize	foreign	tax	credits	and	the	deferral	of	certain	tax deductions	until	earnings	outside	of	the	U.S.	are	repatriated	to	the	U.S.,	as	well	as	changes	to	U.S.	tax	laws	that	may	be	enacted	in	the	future,	could	impact	the	tax treatment	of	our	foreign	earnings,	as	well	as	cash	and	cash	equivalent	balances	we	currently	maintain	outside	of	the	U.S.

Further,	we	are	subject	to	the	examination	of	our	income	tax	returns	by	the	Internal	Revenue	Service	and	other	tax	authorities.	Audits	by	the	Internal	Revenue Service	or	other	tax	authorities	are	subject	to	inherent	uncertainties	and	could	result	in	unfavorable	outcomes,	including	potential	fines	or	penalties.	As	we	operate	in numerous	taxing	jurisdictions,	the	application	of	tax	laws	can	be	subject	to	diverging	and	sometimes	conflicting	interpretations	by	tax	authorities	of	these	jurisdictions. The	expense	of	defending	and	resolving	such	an	audit	may	be	significant.	The	amount	of	time	to	resolve	an	audit	is	also	unpredictable	and	may	divert	management's attention	from	our	business	operations.	We	regularly	assess	the	likelihood	of	adverse	outcomes	resulting	from	these	examinations	to	determine	the	adequacy	of	our provision	for	income	taxes.	We	cannot	assure	you	that	fluctuations	in	our	provision	for	income	taxes	or	our	effective	tax	rate,	the	enactment	of	new	tax	laws	or	changes in	the	application	or	interpretation	of	existing	tax	laws	or	adverse	outcomes	resulting	from	examination	of	our	tax	returns	by	tax	authorities	will	not	have	an	adverse effect	on	our	business,	financial	condition,	results	of	operations	and	prospects.

# If	we	do	not	effectively	expand	and	train	our	direct	sales	force,	we	may	be	unable	to	add	new	end	customers	or	increase	sales	to	our	existing	end	customers, and	our	business	will	be	adversely	affected.

We	depend	on	our	direct	sales	force	to	obtain	new	end	customers	and	increase	sales	with	existing	end	customers.	As	such,	we	have	invested	and	will	continue to	invest	substantially	in	our	sales	organization.	In	recent	periods,	we	have	been	adding	personnel	and	other	resources	to	our	sales	function	as	we	focus	on	growing	our business,	entering	new	markets	and	increasing	our	market	share,	and	we	expect	to	incur	significant	additional	expenses	in	expanding	our	sales	personnel	in	order	to achieve	revenue	growth.	There	is	significant	competition	for	sales	personnel	with	the	skills	and	technical	knowledge	that	we	require.	Our	ability	to	achieve	significant revenue	growth	will	depend,	in	large	part,	on	our	success	in	recruiting,	training,	retaining	and	integrating	sufficient	numbers	of	sales	personnel	to	support	our	growth, particularly	in	international	markets.	New	hires	require	significant	training	and	may	take	significant	time	before	they	achieve	full	productivity.	Our	recent	hires	and planned	hires	may	not	become	productive	as	quickly	as	we	expect,	and	we	may	be	unable	to	hire,	retain	or	integrate	into	our	corporate	culture	sufficient	numbers	of qualified	individuals	in	the	markets	where	we	do	business	or	plan	to	do	business.	In	addition,	because	we	continue	to	grow	rapidly,	a	large	percentage	of	our	sales	force is	new	to	our	company.	If	we	are	unable	to	hire,	integrate	and	train	a	sufficient	number	of	effective	sales	personnel,	or	the	sales	personnel	we	hire	are	not	successful	in obtaining	new	end	customers	or	increasing	sales	to	our	existing	end-customer	base,	our	business,	financial	condition,	results	of	operations	and	prospects	will	be adversely	affected.

# New	regulations	related	to	conflict	minerals	may	cause	us	to	incur	additional	expenses	and	could	limit	the	supply	and	increase	the	costs	of	certain	metals	used in	the	manufacturing	of	our	products.

As	a	public	company,	we	are	subject	to	requirements	under	the	Dodd-Frank	Wall	Street	Reform	and	Consumer	Protection	Act	of	2010,	or	the	Dodd-Frank	Act, that	will	require	us	to	perform	diligence,	and	disclose	and	report	whether	or	not	our	products	contain	conflict	minerals.	The	implementation	of	these	new	requirements could	adversely	affect	the	sourcing,	availability	and	pricing	of	the	materials	used	in	the	manufacture	of	components	used	in	our	products.	In	addition,	we	will	incur additional	costs	 to	comply	with	 these	disclosure	requirements,	 including	costs	related	 to	conducting	diligence	procedures	and,	 if	applicable,	potential	changes	 to products,	processes	or	sources	of	supply	as	a	consequence	of	such	verification	activities.	We	may	also	face	reputational	harm	if	we	determine	that	certain	of	our	products contain	minerals	not	determined	to	be	conflict-free	or	if	we	are	unable	to	alter	our	products,	processes	or	sources	of	supply	to	avoid	such	materials.

# Risks	Related	to	the	Securities	Markets	and	Ownership	of	Our	Common	Stock

# The	market	price	of	our	common	stock	has	been	and	may	continue	to	be	volatile,	and	the	value	of	your	investment	could	decline.

Technology	stocks	have	historically	experienced	high	levels	of	volatility.	Since	shares	of	our	common	stock	were	sold	in	our	initial	public	offering	in	June 2014	at	the	price	of	$43.00	per	share,	our	stock	price	has	ranged	from	$43.00	per	share	to	$94.84	per	share	through	December	31,	2015.	The	trading	price	of	our common	stock	has	historically	been	and	is	likely	to	be	volatile	and	could	be	subject	to	wide	fluctuations	in	response	to	various	factors,	some	of	which	are	beyond	our control.	These	fluctuations	could	cause	you	to	lose	all	or	part	of	your	investment	in	our	common	stock.	Factors	that	could	cause	fluctuations	in	the	market	price	of	our common	stock	include	the	following:

•actual	or	anticipated	announcements	of	new	products,	services	or	technologies,	commercial	relationships,	acquisitions	or	other	events	by	us	or	our competitors;

•forward	 looking	 statements related to future revenue,	 gross	 margins	 and	 earnings	 per share;

•price	and	volume	fluctuations in the	overall	stock	market	from time to time;

•litigation involving	 us,	 our industry,	 or	 both including	 events	 occurring in	 our litigation	 with	 Cisco	 Systems	 and Optumsoft;

•significant	volatility	in	the	market	price	and	trading	volume	of	technology	companies	in	general	and	of	companies	in	the	IT	security	industry	in particular;

•fluctuations	in	the	trading	volume	of	our	shares	or	the	size	of	our	public float;

•sales by our officers, directors or significant stockholders;

•actual	 or anticipated changes or fluctuations in our results of operations;

•adverse	 changes to our relationships	 with any of our channel partners;

•manufacturing,	supply	or	distribution	shortages;

•whether	 our	 results	 of	 operations	 or	 our	 financial	 outlook	 for	 future	 fiscal	 periods	 meet the	 expectations	 of	 securities	 analysts	 or investors;

•actual	 or anticipated changes in the expectations of investors or securities analysts;

•regulatory	 developments in the	 U.S., foreign countries	 or both;

•general economic conditions and trends;

•major	catastrophic	events;

•sales	of	large	blocks	of	our	common	stock;

•departures	of	key	personnel.

In	addition,	if	the	market	for	technology	stocks	or	the	stock	market	in	general	experiences	a	loss	of	investor	confidence,	the	market	price	of	our	common	stock could	decline	for	reasons	unrelated	to	our	business,	financial	condition,	results	of	operations	and

prospects.	The	market	price	of	our	common	stock	might	also	decline	in	reaction	to	events	that	affect	other	companies	in	our	industry	even	if	these	events	do	not	directly affect	us.	In	the	past,	following	periods	of	volatility	in	the	market	price	of	a	company's	securities,	securities	class	action	litigation	has	often	been	brought	against	that company.	If	the	market	price	of	our	common	stock	is	volatile,	we	may	become	the	target	of	securities	litigation.	Securities	litigation	could	result	in	substantial	costs	and divert	our	management's	attention	and	resources	from	our	business	and	prospects.	This	could	have	a	material	adverse	effect	on	our	business,	financial	condition,	results of	operations	and	prospects.

# Sales	of	substantial	amounts	of	our	common	stock	in	the	public	markets,	or	the	perception	that	such	sales	might	occur,	could	reduce	the	market	price	that	our common	stock	might	otherwise	attain	and	may	dilute	your	voting	power	and	your	ownership	interest	in	us.

Sales	of	a	substantial	number	of	shares	of	our	common	stock	in	the	public	market,	or	the	perception	that	such	sales	could	occur,	could	adversely	affect	the market	price	of	our	common	stock	and	may	make	it	more	difficult	for	you	to	sell	your	common	stock	at	a	time	and	price	that	you	deem	appropriate.

Based	on	shares	outstanding	as	of	December	31,	2015,	holders	of	up	to	approximately	21,270,434	shares,	or	31.2%,	of	our	common	stock	have	rights,	subject to	some	conditions,	to	require	us	to	file	registration	statements	covering	the	sale	of	their	shares	or	to	include	their	shares	in	registration	statements	that	we	may	file	for ourselves	or	other	stockholders.	In	addition,	we	have	registered	the	offer	and	sale	of	all	shares	of	common	stock	that	we	may	issue	under	our	equity	compensation	plans. If	holders,	by	exercising	their	registration	rights,	sell	large	numbers	of	shares,	it	could	adversely	affect	our	market	price.

We	may	also	issue	shares	of	common	stock	or	securities	convertible	into	our	common	stock	from	time	to	time	in	connection	with	a	financing,	acquisition, investments	or	otherwise.	Any	such	issuances	would	result	in	dilution	to	our	existing	stockholders	and	could	cause	the	trading	price	of	our	common	stock	to	decline.

# Insiders	have	substantial	control	over	us,	which	could	limit	your	ability	to	influence	the	outcome	of	key	transactions,	including	a	change	of	control.

Our	directors,	executive	officers	and	each	of	our	stockholders	who	own	greater	than	5%	of	our	outstanding	common	stock	together	with	their	affiliates,	in	the aggregate,	beneficially	own	approximately	43.8%	of	the	outstanding	shares	of	our	common	stock,	based	on	shares	outstanding	as	of	December	31,	2015.	As	a	result, these	stockholders,	if	acting	together,	could	exercise	a	significant	level	of	influence	over	matters	requiring	approval	by	our	stockholders,	including	the	election	of directors	and	the	approval	of	mergers,	acquisitions	or	other	extraordinary	transactions.	They	may	also	have	interests	that	differ	from	yours	and	may	vote	in	a	way	with which	you	disagree	and	which	may	be	adverse	to	your	interests.	This	concentration	of	ownership	may	also	discourage	a	potential	investor	from	acquiring	our	common stock	due	to	the	limited	voting	power	of	such	stock	or	otherwise	may	have	the	effect	of	delaying,	preventing	or	deterring	a	change	of	control	of	our	company,	could deprive	our	stockholders	of	an	opportunity	to	receive	a	premium	for	their	common	stock	as	part	of	a	sale	of	our	company	and	might	ultimately	affect	the	market	price	of our	common	stock.

# We	do	not	intend	to	pay	dividends	for	the	foreseeable	future.

We	have	never	declared	nor	paid	any	dividends	on	our	common	stock.	We	intend	to	retain	any	earnings	to	finance	the	operation	and	expansion	of	our	business and	prospects,	and	we	do	not	anticipate	paying	any	cash	dividends	in	the	future.	As	a	result,	you	may	only	receive	a	return	on	your	investment	in	our	common	stock	if the	market	price	of	our	common	stock	increases.

# If	securities	or	industry	analysts	publish	inaccurate	or	unfavorable	research	reports	about	our	business	or	prospects,	the	market	price	of	our	common	stock and	trading	volume	could	decline.

The	trading	market	for	our	common	stock,	to	some	extent,	depends	on	the	research	and	reports	that	securities	or	industry	analysts	publish	about	us	or	our business	or	prospects.	We	do	not	have	any	control	over	these	analysts.	If	one	or	more	of	the	analysts	who	cover	us	should	downgrade	our	shares	or	change	their	opinion of	our	shares,	the	market	price	of	our	common	stock	would	likely	decline.	If	one	or	more	of	these	analysts	should	cease	coverage	of	our	company	or	fail	to	regularly publish	reports	on	us,	we	could	lose	visibility	in	the	financial	markets,	which	could	cause	the	market	price	of	our	common	stock	or	trading	volume	to	decline.

# Our	charter	documents	and	Delaware	law	could	discourage	takeover	attempts	and	lead	to	management	entrenchment.

Our	amended	and	restated	certificate	of	incorporation	and	amended	and	restated	bylaws	contain	provisions	that	could	delay	or	prevent	a	change	in	control	of our	company.	These	provisions	could	also	make	it	difficult	for	stockholders	to	elect	directors	that	are	not	nominated	by	the	current	members	of	our	board	of	directors	or take	other	corporate	actions,	including	effecting	changes	in	our	management.	These	provisions	include:

•a	classified	board	of	directors	with	three-year	staggered	terms,	which	could	delay	the	ability	of	stockholders	to	change	the	membership	of	a	majority	of	our board	of	directors;

•the	ability	of	our	board	of	directors	to	issue	shares	of	preferred	stock	and	to	determine	the	price	and	other	terms	of	those	shares,	including	preferences	and voting	rights,	without	stockholder	approval,	which	could	be	used	to	significantly	dilute	the	ownership	of	a	hostile	acquirer;

•the	exclusive	right	of	our	board	of	directors	to	elect	a	director	to	fill	a	vacancy	created	by	the	expansion	of	our	board	of	directors	or	the	resignation,	death	or removal	of	a	director,	which	prevents	stockholders	from	being	able	to	fill	vacancies	on	our	board	of	directors;

•a	 prohibition	 on	 stockholder	 action	 by	 written	 consent,	 which	 forces	 stockholder	 action	 to	 be taken	 at	 an	 annual	 or	 special	 meeting	 of	 our stockholders;

•the	requirement	that	a	special	meeting	of	stockholders	may	be	called	only	by	the	chairman	of	our	board	of	directors,	our	president,	our	secretary	or	a	majority vote	of	our	board	of	directors,	which	could	delay	the	ability	of	our	stockholders	to	force	consideration	of	a	proposal	or	to	take	action,	including	the	removal	of directors;

•the	requirement	for	the	affirmative	vote	of	holders	of	at	least	66	2/3%	of	the	voting	power	of	all	of	the	then	outstanding	shares	of	the	voting	stock,	voting together	as	a	single	class,	to	amend	the	provisions	of	our	amended	and	restated	certificate	of	incorporation	relating	to	the	issuance	of	preferred	stock	and management	of	our	business	or	our	amended	and	restated	bylaws,	which	may	inhibit	the	ability	of	an	acquirer	to	effect	such	amendments	to	facilitate	an unsolicited	takeover	attempt;

•the	ability	of	our	board	of	directors,	by	majority	vote,	to	amend	the	bylaws,	which	may	allow	our	board	of	directors	to	take	additional	actions	to	prevent	an unsolicited	takeover	and	inhibit	the	ability	of	an	acquirer	to	amend	the	bylaws	to	facilitate	an	unsolicited	takeover	attempt;	and

•advance	notice	procedures	with	which	stockholders	must	comply	to	nominate	candidates	to	our	board	of	directors	or	to	propose	matters	to	be	acted	upon	at	a stockholders'	meeting,	which	may	discourage	or	deter	a	potential	acquirer	from	conducting	a	solicitation	of	proxies	to	elect	the	acquirer's	own	slate	of directors	or	otherwise	attempting	to	obtain	control	of	us.

In	 addition,	 as	 a	 Delaware	 corporation,	 we	 are	 subject	 to	 Section	 203	 of	 the	 Delaware	 General	 Corporation	 Law.	These	 provisions	 may	 prohibit large stockholders,	in	particular	those	owning	15%	or	more	of	our	outstanding	voting	stock,	from	merging	or	combining	with	us	for	a	certain	period	of	time.

# The issuance	 of	 additional stock in	 connection	 with financings,	 acquisitions, investments,	 our stock incentive	 plans	 or	 otherwise	 will	 dilute	 all	 other stockholders.

Our	amended	and	restated	certificate	of	incorporation	authorizes	us	to	issue	up	to	1,000,000,000	shares	of	common	stock	and	up	to	100,000,000	shares	of preferred	stock	with	such	rights	and	preferences	as	may	be	determined	by	our	board	of	directors.	Subject	to	compliance	with	applicable	rules	and	regulations,	we	may issue	our	shares	of	common	stock	or	securities	convertible	into	our	common	stock	from	time	to	time	in	connection	with	a	financing,	acquisition,	investment,	our	stock incentive	plans	or	otherwise.	We	may	from	time	to	time	issue	additional	shares	of	common	stock	at	a	discount	from	the	then	market	price	of	our	common	stock.	Any issuance	of	stock	could	result	in	substantial	dilution	to	our	existing	stockholders	and	cause	the	market	price	of	our	common	stock	to	decline.

# Item	1B.	Unresolved	Staff	Comments

# Item	2.	Properties

Our	corporate	headquarters	is	located	in	Santa	Clara,	California	where	we	currently	lease	approximately	210,000	square	feet	of	space	under	a	lease	agreement that	expires	in	September	2023.

We	also	lease	space	for	operations,	sales	personnel	and	research	and	development	in	locations	throughout	the	U.S.	and	various	international	locations,	including Ireland,	Canada,	China,	India,	Malaysia,	Singapore,	the	United	Kingdom,	Japan,	Korea,	and	Taiwan.	We	believe	that	our	current	facilities	are	adequate	to	meet	our current	needs.	We	intend	to	expand	our	facilities	or	add	new	facilities	as	we	add	employees	and	enter	new	geographic	markets,	and	we	believe	that	suitable	additional	or alternative	space	will	be	available	as	needed	to	accommodate	ongoing	operations	and	any	such	growth.	We	expect	to	incur	additional	expenses	in	connection	with	such new	or	expanded	facilities.

# Item	3.	Legal	Proceedings

The	information	set	forth	under	the	"Legal	Proceedings"	in	Note	5	contained	in	the	"Notes	to	Consolidated	Financial	Statements"	in	Item	8	of	Part	II	of	this Annual	Report	on	Form	10-K	is	incorporated	herein	by	reference.

# Item	4.	Mine	Safety	Disclosures

Not	applicable

# PART	II

# Item	5.	Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters,	and	Issuer	Purchases	of	Equity	Securities

# Market	Information

Our	common	stock	has	been	listed	on	the	NYSE	under	the	symbol	"ANET"	since	June	6,	2014,	the	date	of	our	initial	public	offering.	Prior	to	that	date,	there was	no	public	trading	market	for	our	common	stock.	The	following	table	sets	forth	for	the	periods	indicated	the	high	and	low	sales	prices	of	our	common	stock	as reported	on	the	New	York	Stock	Exchange.

|  | High | Low |
| :--- | :--- | :--- |
| Fiscal\t2014\tQuarters |  |  |
| Second\tquarter\t(from\tJune\t6,\t2014) | $72.63 | $55.00 |
| Third\tquarter | $94.84 | $62.51 |
| Fourth\tquarter | $90.25 | $59.16 |
| Fiscal\t2015\tQuarters |  |  |
| First\tquarter | $74.52 | $56.11 |
| Second\tquarter | $88.56 | $63.16 |
| Third\tquarter | $88.25 | $60.10 |
| Fourth\tquarter | $79.44 | $58.77 |

# Holders	of	Record

As	of	February	19,	2016,	there	were	159	holders	of	record	of	our	common	stock.	Because	many	of	our	shares	of	common	stock	are	held	by	brokers	and	other institutions	on	behalf	of	stockholders,	we	are	unable	to	estimate	the	total	number	of	stockholders	represented	by	these	record	holders.

# Dividend	Policy

We	have	never	declared	or	paid	any	cash	dividends	on	our	capital	stock.	We	intend	to	retain	any	future	earnings	and	do	not	expect	to	pay	any	dividends	in	the foreseeable	future.	Any	future	determination	to	declare	cash	dividends	will	be	made	at	the	discretion	of	our	board	of	directors,	subject	to	applicable	laws,	and	will depend	on	a	number	of	factors,	including	our	financial	condition,	results	of	operations,	capital	requirements,	contractual	restrictions,	general	business	conditions	and other	factors	that	our	board	of	directors	may	deem	relevant.

# Stock	Performance	Graph

The	following	shall	not	be	deemed	"filed"	for	purposes	of	Section	18	of	the	Exchange	Act,	or	incorporated	by	reference	into	any	of	our	other	filings	under	the Exchange	Act	or	the	Securities	Act,	except	to	the	extent	we	specifically	incorporate	it	by	reference	into	such	filing.

The	following	graph	compares	the	cumulative	total	return	of	our	common	stock	with	the	total	return	for	the	NYSE	Composite	Index	and	the	Standard	&	Poor's 500	Index	(the	"S&P	500")	from	June	6,	2014	(the	date	of	our	initial	public	offering)	through	December	31,	2015.	The	graph	assumes	that	$100	was	invested	on	June	6, 2014's	closing	price	in	our	common	stock,	the	NYSE	Composite	Index	and	the	S&P	500,	and	assumes	reinvestment	of	any	dividends.	The	stock	price	performance	on the	following	graph	is	not	necessarily	indicative	of	future	stock	price	performance.

# Securities	Authorized	for	Issuance	Under	Equity	Compensation	Plans

See	Item	12	of	Part	III	of	this	report	regarding	information	about	securities	authorized	for	issuance	under	our	equity	compensation	plans.

# Recent	Sales	of	Unregistered	Equity	Securities

There	were	no	sales	of	unregistered	securities	during	fiscal	2015	or	2014	other	than	those	transactions	previously	reported	to	the	SEC	on	our	Current	Reports	on

# Issuer	Repurchases	of	Equity	Securities

The	table	below	provides	information	with	respect	to	repurchases	of	unvested	shares	of	our	common	stock	made	pursuant	our	equity	incentive	plans.

(1)Under	our	equity	incentive	plans,	certain	participants	may	exercise	options	prior	to	vesting,	subject	to	a	right	of	a	repurchase	by	us.	All	shares	in	the	above	table	were shares	repurchased	as	a	result	of	us	exercising	this	right	and	not	pursuant	to	a	publicly	announced	plan	or	program.

# Item	6.	Selected	Consolidated	Financial	Data

The	selected	consolidated	statements	of	operations	data	for	fiscal	2015,	2014	and	2013	and	the	consolidated	balance	sheet	data	as	of	December	31,	2015	and 2014	are	derived	from	our	audited	financial	statements	appearing	in	Item	8,	"Financial	Statements	and	Supplementary	Data,"	of	this	Annual	Report	on	Form	10-K.	The selected	consolidated	statements	of	operations	data	for	fiscal	2012	and	2011	and	the	consolidated	balance	sheet	data	as	of	December	31,	2013,	2012	and	2011	are derived	from	audited	financial	statements	not	included	in	this	Annual	Report	on	Form	10-K.	Our	historical	results	are	not	necessarily	indicative	of	the	results	to	be expected	in	the	future.

The	following	selected	consolidated	financial	data	below	should	be	read	in	conjunction	with	Item	7,	"Management's	Discussion	and	Analysis	of	Financial Condition	and	Results	of	Operations,"	our	consolidated	financial	statements,	and	the	accompanying	notes	appearing	in	Item	8,	"Financial	Statements	and	Supplementary Data,"	of	this	Annual	Report	on	Form	10-K	to	fully	understand	factors	that	may	affect	the	comparability	of	the	information	presented	below.

|  | 2015 | 2014 | 2013 | 2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tthousands,\texcept\tper\tshare\tdata) | (in\tthousands,\texcept\tper\tshare\tdata) | (in\tthousands,\texcept\tper\tshare\tdata) |  |
| Selected\tConsolidated\tStatements\tof\tOperations\tData: |  |  |  |  |  |
| Revenue | $837,591 | $584,106 | $361,224 | $193,408 | $139,848 |
| Cost\tof\trevenue\t(1) | 294,031 | 192,015 | 122,686 | 61,252 | 43,366 |
| Total\tgross\tprofit | 543,560 | 392,091 | 238,538 | 132,156 | 96,482 |
| Operating\texpenses\t(1): |  |  |  |  |  |
| Research\tand\tdevelopment | 209,448 | 148,909 | 98,587 | 55,155 | 26,408 |
| Sales\tand\tmarketing | 109,084 | 85,338 | 55,115 | 28,603 | 19,450 |
| General\tand\tadministrative | 75,720 | 32,331 | 18,688 | 8,501 | 6,224 |
| Total\toperating\texpenses | 394,252 | 266,578 | 172,390 | 92,259 | 52,082 |
| Income\tfrom\toperations | 149,308 | 125,513 | 66,148 | 39,897 | 44,400 |
| Other\tincome\t(expense),\tnet: |  |  |  |  |  |
| Interest\texpense | (3,152) | (6,280) | (7,119) | (7,057) | (6,417) |
| Other\tincome\t(expense),\tnet | (147) | 2,275 | (754) | 135 | (357) |
| Total\tother\tincome\t(expense),\tnet | (3,299) | (4,005) | (7,873) | (6,922) | (6,774) |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 146,009 | 121,508 | 58,275 | 32,975 | 37,626 |
| Provision\tfor\tincome\ttaxes | 24,907 | 34,658 | 15,815 | 11,626 | 3,591 |
| Net\tincome | $121,102 | $86,850 | $42,460 | $21,349 | $34,035 |
| Net\tincome\tattributable\tto\tcommon\tstockholders: |  |  |  |  |  |
| Basic | $119,115 | $68,889 | $20,777 | $9,622 | $13,789 |
| Diluted | $119,264 | $70,524 | $21,780 | $9,662 | $13,854 |
| Net\tincome\tper\tshare\tattributable\tto\tcommon\tstockholders: |  |  |  |  |  |
| Basic | $1.81 | $1.42 | $0.76 | $0.39 | $0.65 |
| Diluted | $1.67 | $1.29 | $0.72 | $0.39 | $0.65 |
| Weighted-average\tshares\tused\tin\tcomputing\tnet\tincome\tper\tshare |  |  |  |  |  |
| attributable\tto\tcommon\tstockholders: |  |  |  |  |  |
| Basic | 65,964 | 48,427 | 27,320 | 24,711 | 21,176 |
| Diluted | 71,411 | 54,590 | 30,051 | 24,901 | 21,346 |

(1)	Includes	stock-based	compensation	expense	as	follows:

|  | 2015 | 2014 | 2013 | 2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (in\tthousands) |  |  |
| Cost\tof\trevenue | $3,048 | $1,535 | $408 | $270 | $94 |
| Research\tand\tdevelopment | 25,515 | 14,986 | 5,464 | 2,590 | 992 |
| Sales\tand\tmarketing | 11,454 | 7,643 | 2,985 | 1,078 | 554 |
| General\tand\tadministrative | 5,286 | 3,455 | 1,302 | 765 | 334 |
| \t\t\t\t\t\t\t\t\t\t\tTotal\tstock-based\tcompensation | $45,303 | $27,619 | $10,159 | $4,703 | $1,974 |

|  | 2015 | 2014 | 2013 | 2012 | 2011 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (in\tthousands) |  |  |
| Consolidated\tBalance\tSheet\tData: |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $687,326 | $240,031 | $113,664 | $88,655 | $70,725 |
| Working\tcapital | 739,317 | 535,106 | 73,422 | 130,808 | 98,282 |
| Total\tassets | 1,159,890 | 811,023 | 364,520 | 220,168 | 127,642 |
| Total\tindebtedness(1) | 42,546 | 43,634 | 160,213 | 134,277 | 102,068 |
| Total\tdeferred\trevenue | 196,808 | 106,468 | 58,904 | 24,777 | 11,326 |
| Total\tstockholders'\tequity\t(deficit) | 788,152 | 555,658 | 77,732 | 18,910 | (8,194) |

(1)Total	indebtedness	includes	our	subordinated	convertible	promissory	notes	payable	to	related	parties,	subordinated	convertible	promissory	notes	payable	to	third	parties,	accrued	interest	payable	on the	notes	and	our	lease	financing	obligations.

# Item	7.	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

You	should	read	the	following	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	together	with	the	consolidated	financial	statements and	related	notes	that	are	included	elsewhere	in	this	Annual	Report	on	Form	10-K.	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	Annual	Report	on	Form	10-K.

# Overview

We	are	a	leading	supplier	of	cloud	networking	solutions	that	use	software	innovations	to	address	the	needs	of	large-scale	Internet	companies,	cloud	service providers	and	next-generation	data	centers	for	enterprise	support.	Our	cloud	networking	solutions	consist	of	our	Extensible	Operating	System,	or	EOS,	a	set	of	network applications	and	our	Ethernet	switches.	Our	cloud	networking	solutions	deliver	industry-leading	performance,	scalability,	availability,	programmability,	automation	and visibility.	At	the	core	of	our	cloud	networking	platform	is	EOS,	which	was	purpose-built	to	be	fully	programmable	and	highly	modular.	The	programmability	of	EOS has	allowed	us	to	create	a	set	of	software	applications	that	address	the	requirements	of	cloud	networking,	including	workflow	automation,	network	visibility	and analytics,	and	has	also	allowed	us	to	rapidly	integrate	with	a	wide	range	of	third-party	applications	for	virtualization,	management,	automation,	orchestration	and network	services.

We	were	founded	in	2004	to	address	the	limitations	of	legacy	networking	products	and	to	create	a	cloud	networking	platform	that	is	open	and	programmable. From	2004	to	2008,	our	activities	were	focused	on	the	development	of	our	software,	which	resulted	in	the	commercial	release	of	our	first	product,	the	7100	Series switches	based	on	our	EOS	software,	in	2008.	Since	then,	we	have	continued	to	introduce	new	products	utilizing	EOS,	including	our	7500	Series	switch	and	our	7050 Series	switch	in	2010,	the	second	generation	of	our	7500	Series	switch,	called	the	7500E	modular	switch,	in	May	2013,	our	7300	Series	switch	in	November	2013,	our 7280E	in	July	2014.	In	December	2014,	we	introduced	our	EOS+	software	platform	for	networking	programmability	and	automation,	and	in	June	2015	we	introduced CloudVision,	a	network-wide	approach	for	workload	orchestration	and	workflow	automation.	In	September	2015,	we	introduced	our	Macro	Segmentation	Services ("MSS")	to	provide	automated	insertion	of	security	and	other	in-line	layer	4-7	services	within	any	software	driven	cloud	networking	infrastructure.	MSS	has	been endorsed	by	many	of	our	technology	alliance	ecosystem	partners	with	whom	we	are	currently	partnering	with	to	deliver	MSS	platform	support.	We	also	introduced	our first	10/25/40/50/100G	switches	with	our	7060,	7260	and	7320	series	switches.

As	of	December	31,	2015,	we	have	shipped	more	than	five	million	switch	ports.	We	have	experienced	rapid	revenue	growth	over	the	last	several	years, increasing	our	revenue	at	a	compound	annual	growth	rate	of	56.4%	from	2011	to	2015.	As	we	have	grown	the	functionality	of	our	EOS	software,	expanded	the	range	of our	switching	portfolio	and	increased	the	size	of	our	sales	force,	our	revenue	has	continued	to	grow	rapidly.	To	support	our	customers	and	revenue	growth,	we	have expanded	our	international	presence	to	include	20	foreign	subsidiaries	as	of	December	31,	2015	including	for	example	Australia,	Canada,	France,	Germany,	India, Ireland,	Japan,	South	Korea	and	the	United	Kingdom.	Our	revenue	for	the	year	ended	December	31,	2015	was	$837.6	million	an	increase	of	43.4%,	compared	to	the same	period	in	2014.	We	have	been	profitable	and	cash	flow	positive	for	each	year	since	2010.

We	believe	that	our	cloud	networking	platform	addresses	the	large	and	growing	cloud	networking	segment	of	data	center	switching,	which	remains	in	the	early stage	of	adoption.	We	expect	to	continue	rapidly	growing	our	organization	to	meet	the	needs	of	new	and	existing	customers	as	they	increasingly	realize	the	performance and	cost	benefits	of	our	cloud	networking	solutions	and	as	 they	expand	 their	cloud	networks.	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	rapid	development	of	new	features	and	applications.	We	intend	to	continue	expanding	our	sales	and	marketing	teams	and programs	and	carrying	out	associated	marketing	activities	in	key	geographies.	In	order	to	support	our	strong	growth,	we	have	and	may	continue	to	accelerate	our investment	in	infrastructure,	such	as	enterprise	resource	planning	software	and	other	technologies	to	improve	the	efficiency	of	our	operations.	As	a	result,	our	levels	of operating	profit	as	a	percentage	of	revenue	could	decline	in	the	short	to	medium	term.	For	a	description	of	factors	that	may	impact	our	future	performance,	see	the disclosure	in	the	section	titled	"Factors	Affecting	Our	Performance"	below.

# Our	Business	Model

We	derive	revenue	from	sales	of	products	and	services.	We	generate	revenue	primarily	from	sales	of	our	switching	products	which	incorporate	our	EOS software.	We	generate	the	majority	of	our	services	revenue	from	post	contract	support,	or	PCS,	which	end	customers	typically	purchase	in	conjunction	with	our products.

Since	shipping	our	first	products	in	2008,	our	cumulative	end-customer	base	has	grown	rapidly.	Between	December	31,	2011	and	December	31,	2015,	our cumulative	end-customer	base	grew	from	approximately	1,100	to	over	3,700.	Our	end	customers	span	a	range	of	industries	and	include	large	Internet	companies,	service providers,	financial	services	organizations,	government	agencies,	media	and	entertainment	companies	and	others.

To	continue	to	grow	our	revenue,	it	is	important	that	we	both	obtain	new	customers	and	sell	additional	products	to	existing	customers.	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	to	the	underlying merchant	silicon	architecture.	Today,	we	combine	our	EOS	software	with	merchant	silicon	into	a	family	of	switching	products.	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 currently	procure	certain	merchant	silicon	components	from	multiple	vendors,	and	we	continue	to	expand	our	relationships	with	these	and	other	vendors.	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	where	our	EOS	software	is	installed	on	our	products.		We	and	our	fulfillment	partners	then	perform	labeling,	final	configuration,	quality	assurance	testing	and shipment	to	our	customers.

We	market	and	sell	our	products	through	both	our	direct	sales	force	and	our	channel	partners,	including	distributors,	value-added	resellers,	system	integrators, original	equipment	manufacturer,	or	"OEM",	partners	and	in	conjunction	with	various	technology	partners.	To	facilitate	channel	coordination	and	increase	productivity, we	have	created	a	partner	program,	the	Arista	Partner	Program,	to	engage	partners	who	provide	value-added	services	and	extend	our	reach	into	the	marketplace. Authorized	training	partners	provide	technical	training	to	our	channel	partners.	Our	partners	commonly	receive	an	order	from	an	end	customer	prior	to	placing	an	order with	us,	and	we	confirm	the	identification	of	the	end	customer	prior	to	accepting	such	orders.	Our	partners	generally	do	not	stock	inventory	received	from	us.	Our	sales organization	is	supported	by	systems	engineers	with	deep	technical	expertise	and	responsibility	for	pre-sales	technical	support	and	engineering	for	our	end	customers. Each	sales	team	is	responsible	for	a	geographic	territory,	has	responsibility	for	a	number	of	major	direct	end-customer	accounts	or	has	assigned	accounts	in	a	specific vertical	market.	During	the	years	ended	December	31,	2015,	2014,	and	2013,	77.3%,	79.7%,	and	82.9%	of	our	revenue	was	generated	from	the	Americas,	substantially all	from	the	U.S.,	15.3%,	12.8%,	and	11.2%	from	Europe,	the	Middle	East	and	Africa	and	7.4%,	7.5%,	and	5.9%	from	the	Asia-Pacific	region,	respectively.

# Factors	Affecting	Our	Performance

We	believe	that	our	future	success	will	depend	on	many	factors,	including	our	ability	to	expand	sales	to	our	existing	customers	as	well	as	to	add	new	end customers.	While	these	areas	present	significant	opportunity,	they	also	present	risks	that	we	must	manage	to	ensure	successful	results.	See	the	section	titled	"Risk Factors."	Additionally,	we	face	intense	competition	especially	from	larger,	well-established	companies,	and	we	must	continue	to	expand	the	capabilities	of	our	cloud networking	platform	to	succeed	in	our	market.	We	are	also	currently	engaged	in	lawsuits	with	Cisco,	our	largest	competitor	whereby	they	claim	that	we	have	infringed their	intellectual	property	rights.		We	intend	to	vigorously	defend	against	these	Cisco	lawsuits	as	summarized	in	the	Legal	Proceedings	section	below.	However,	we cannot	be	certain	that	any	claims	by	Cisco	would	be	resolved	in	our	favor.		If	we	are	unable	to	address	these	challenges,	our	business	could	be	adversely	affected.

Increasing	Adoption	of	Cloud	Networks.	Networks	are	subject	to	increasing	performance	requirements	due	to	growing	numbers	of	connected	devices	as	well	as new	enterprise	and	consumer	applications.	Computing	architectures	are	evolving	to	meet	the	need	for	constant	connectivity	and	access	to	data	and	applications.	We believe	that	cloud	networks	will	continue	to	replace	legacy	network	technologies.	Our	business	and	results	of	operations	will	be	significantly	affected	by	the	speed	with which	organizations	implement	cloud	networks.

Expanding	Sales	to	Existing	Customer	Base.	We	expect	that	a	substantial	portion	of	our	future	sales	will	be	follow-on	sales	to	existing	end	customers.	As	noted above,	one	of	our	sales	strategies	is	to	target	specific	projects	at	our	current	end	customers	because	they	are	familiar	with	the	operational	and	economic	benefits	of	our cloud	networking	solutions,	thereby	reducing	the	sales	cycle	into	these	customers.	We	believe	this	opportunity	with	current	end	customers	to	be	significant	given	their existing	and	expected	infrastructure	spend.	We	expect	our	business	and	results	of	operations	will	depend	on	our	ability	to	sell	additional	products	to	our	growing	base	of customers.

Adding	New	End	Customers.	We	believe	that	the	cloud	networking	market	is	still	in	the	early	stages	of	adoption.	We	intend	to	target	new	end	customers	by continuing	to	invest	in	our	field	sales	force	and	extending	our	relationships	with	channel,	technology	and	system-level	partners.	To	date,	we	have	primarily	targeted	end customers	with	the	largest	cloud	data	centers.	A	typical	initial	order	involves	the	education	of	prospective	customers	about	the	technical	merits	and	capabilities	and potential	cost	savings	of	our	products	as	compared	to	our	competitors'	products.	Our	results	of	operations	will	depend	on	our	ability	to	continue	to	add	new	customers. We	believe	that

customer	references	have	been,	and	will	continue	to	be,	an	important	factor	in	winning	new	business	with	special	emphasis	on	four	key	verticals:	the	cloud	titans, financial	services,	service	and	internet	hosting	providers	and	high	tech	enterprises.

Selling	More	Complex	and	Higher-Performance	Configurations.	Our	results	of	operations	have	been,	and	we	believe	will	continue	to	be,	affected	by	our	ability to	sell	more	complex	and	higher-performance	configurations	of	our	products.	Our	ability	to	sustain	our	revenue	growth	will	depend,	in	part,	upon	our	continued	sales	of these	more	robust	configurations,	and	quarterly	results	of	operations	can	be	significantly	impacted	by	the	mix	of	products	and	product	configurations	sold	during	the period.

Leveraging	Channel	Partners.	We	expect	to	continue	to	derive	a	growing	portion	of	our	sales	through	our	channel	partners	as	they	develop	new	end	customers and	expand	sales	to	our	existing	end	customers.	We	plan	to	continue	to	invest	in	our	network	of	channel	partners	to	enable	them	to	reach	new	end	customers	more effectively,	increase	sales	to	existing	customers	and	provide	services	and	support	effectively.	We	believe	that	increasing	channel	leverage	will	extend	and	improve	our engagement	with	a	broad	set	of	customers.

Investing	in	Research	and	Development	for	Growth.	We	believe	that	the	market	for	cloud	networking	is	still	in	the	early	stages	of	adoption	and	we	intend	to continue	investing	for	long-term	growth.	We	expect	to	continue	to	invest	heavily	in	software	development	in	order	to	expand	the	capabilities	of	our	cloud	networking platform,	introduce	new	products	including	new	releases	and	upgrades	to	our	EOS	software	and	new	applications	building	upon	our	technology	leadership.	We	believe one	of	our	greatest	strengths	lies	in	the	speed	of	our	product	development	efforts.	By	investing	in	research	and	development,	we	believe	we	will	be	well	positioned	to continue	our	rapid	growth	and	take	advantage	of	our	large	market	opportunity.	We	expect	that	our	results	of	operations	will	be	impacted	by	the	timing	and	size	of	these product	development	investments.

Customer	Concentration	and	Timing	of	Large	Orders.	Historically,	large	purchases	by	a	relatively	limited	number	of	end	customers	have	accounted	for significant	portion	of	our	revenue.	During	the	years	ended	December	31,	2015,	2014,	and	2013,	our	largest	end	customer	accounted	for	12.0%,	14.9%,	and	21.9%	of our	revenue,	respectively.	We	have	also	experienced	and	continue	to	experience	customer	concentration	on	a	quarterly	basis.	In	addition,	we	have	experienced	increases in	the	size	of	our	orders,	including	orders	from	existing	customers,	which	could	result	in	future	increased	customer	concentration,	depending	on	the	timing	of	the fulfillment	of	those	orders.	We	have	also	experienced	unpredictability	in	the	timing	of	large	orders,	especially	with	respect	to	our	large	end	customers,	due	to	the complexity	of	orders,	the	time	it	takes	end	customers	to	evaluate,	test,	qualify	and	accept	our	products	and	factors	specific	to	our	end	customers.	Due	to	these	factors,	we expect	continued	variability	in	our	customer	concentration	and	timing	of	sales	on	a	quarterly	and	annual	basis.	In	addition,	we	have	provided,	and	may	in	the	future provide,	pricing	discounts	to	large	end	customers,	which	may	result	in	lower	margins	for	the	period	in	which	such	sales	occur.	Our	gross	margins	may	also	fluctuate	as	a result	of	the	timing	of	such	sales	to	large	end	customers.

# Basis	of	Presentation

# Revenue

We	generate	revenue	primarily	from	sales	of	our	switching	products	which	incorporate	our	EOS	software.	We	also	derive	a	portion	of	our	revenue	from	sales of	post	contract	support,	or	PCS,	and	to	a	lesser	extent	professional	services.	We	generate	PCS	revenue	from	sales	of	technical	support	services	contracts	that	are typically	purchased	in	conjunction	with	our	products	and	subsequent	renewals	of	those	contracts.	We	offer	PCS	services	under	renewable,	fee-based	contracts,	which include	24-hour	technical	support,	hardware	repair	and	replacement	parts,	bug	fixes,	patches	and	unspecified	upgrades	on	a	when-and-if	available	basis.	We	expect	our revenue	may	vary	from	period	to	period	based	on,	among	other	things,	the	timing	and	size	of	orders,	the	delivery	and	acceptance	of	products,	the	impact	of	significant transactions	with	unique	terms	and	conditions	that	may	require	deferral	of	revenue	and	cyclicality	of	orders	being	placed	by	our	customers.	Additionally,	we	expect	PCS revenue	to	increase	in	absolute	dollars	as	we	expand	our	installed	base.	Our	ability	to	expand	our	installed	base	and	increase	our	revenue	is	subject	to	numerous	risks	and uncertainties.	See	the	section	titled	"Risk	Factors."	We	report	revenue	net	of	sales	taxes.

# Cost	of	Revenue

Cost	of	revenue	primarily	consists	of	amounts	paid	for	inventory	to	our	third-party	contract	manufacturers	and	merchant	silicon	vendors,	overhead	costs	in	our manufacturing	operations	department,	and	other	manufacturing-related	costs	associated	with	manufacturing	our	products	and	managing	our	inventory.	We	expect	our cost	of	product	revenue	to	increase	as	our	product	revenue	increases.	Cost	of	providing	PCS	and	other	services	consists	primarily	of	personnel	costs	for	our	global customer	support	organization.	We	expect	our	cost	of	service	revenue	to	increase	as	our	PCS	revenue	increases.

# Gross	Margin

Gross	margin,	or	gross	profit	as	a	percentage	of	revenue,	has	been	and	will	continue	to	be	affected	by	a	variety	of	factors,	including	sales	to	large	end	customers who	generally	receive	lower	pricing,	the	average	sales	price	of	our	offerings,	manufacturing	costs,	merchant	silicon	costs	and	the	mix	of	products	sold.	We	expect	our gross	margins	to	fluctuate	over	time,	depending	on	the	factors	described	above	and	others.	See	the	section	titled	"Risk	Factors."

# Operating	Expenses

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.	We	expect	operating	expenses	to	continue	to	increase	in	absolute	dollars	in	the	near	term	as we	continue	to	invest	in	the	growth	of	our	business.

# Research	and	Development	Expenses

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

# Sales	and	Marketing	Expenses

Sales	and	marketing	expenses	consist	primarily	of	personnel	costs	and	also	include	costs	related	to	marketing	and	promotional	activities,	with	the	remainder being	an	allocated	portion	of	facility	and	IT	costs	and	depreciation.	We	expect	our	sales	and	marketing	expenses	to	increase	in	absolute	dollars	as	we	expand	our	sales and	marketing	efforts	worldwide	and	expand	our	relationships	with	current	and	future	channel	partners	and	end	customers.

# General	and	Administrative	Expenses

General	and	administrative	expenses	consist	primarily	of	personnel	costs,	legal	and	professional	fees,	and	an	allocated	portion	of	facility	and	IT	costs	and depreciation.	General	and	administrative	personnel	costs	include	those	for	our	executive,	finance,	IT,	human	resources	and	legal	functions.	Our	professional	fees	consist primarily	of	accounting,	external	legal	and	IT	and	other	consulting	costs.	Refer	to	the	discussion	under	"Legal	Proceedings"	subheading	in	Note	5.	Commitments	and Contingencies	of	Notes	to	Consolidated	Financial	Statements	in	Part	II,	Item	8	of	this	Annual	Report	on	Form	10-K	for	information	related	to	pending	litigation.

# Other	Income	(Expense),	Net

# Interest	Expense

Interest	expense	consists	of	interest	expense	on	our	subordinated	convertible	promissory	notes,	including	our	related	party	subordinated	convertible	promissory notes	which	were	converted	during	fiscal	2014	and	interest	expense	from	our	lease	financing	obligation.

# Other	Income	(Expense)

Other	income	(expense)	consists	of	gains	on	investments,	write-offs	of	debt	discount	on	notes	payable	which	were	repaid	and	converted	during	fiscal	2014,	and foreign	currency	exchange	gains	and	losses.	Our	foreign	currency	exchange	gains	and	losses	relate	to	transactions	and	asset	and	liability	balances	denominated	in currencies	other	than	the	U.S.	dollar.	We	expect	our	foreign	currency	gains	and	losses	to	continue	to	fluctuate	in	the	future	due	to	changes	in	foreign	currency	exchange rates.

# Provision	for	Income	Taxes

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	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	earnings	which	avoids	double	taxation.	Our	tax	expense	to	date	consists	of	federal,	state	and	foreign	current	and	deferred	income	taxes.	As	we expand	internationally,	our	marginal	tax	rate	may	decrease;	however,	there	can	be	no	certainty	that	our	marginal	tax	rate	will	decrease,	and	we	may	experience	changes in	tax	rates	that	are	not	reflective	of	actual	changes	in	our	business	or	operations.

We	account	for	income	taxes	under	the	liability	approach	for	deferred	income	taxes,	which	requires	recognition	of	deferred	income	tax	assets	and	liabilities	for the	expected	future	tax	consequences	of	events	that	have	been	recognized	in	our	consolidated	financial	statements	but	have	not	been	reflected	in	our	taxable	income. Estimates	and	judgments	occur	in	the	calculation	of	certain	tax	liabilities	and	in	the	determination	of	the	recoverability	of	certain	deferred	income	tax	assets,	which	arise from	temporary	differences	and	carryforwards.	We	measure	deferred	income	tax	assets	and	liabilities	using	the	currently	enacted	tax	rates	that	apply	to	taxable	income in	effect	for	the	years	in	which	those	tax	assets	are	expected	to	be	realized	or	settled.	We	regularly	assess	the	likelihood	that	our	deferred	income	tax	assets	will	be realized	based	on	the	positive	and	negative	evidence	available.	We	record	a	valuation	allowance	to	reduce	the	deferred	tax	assets	to	the	amount	that	we	are	more	likely than	not	to	realize.

We	believe	that	we	have	adequately	reserved	for	our	uncertain	tax	positions,	although	we	can	provide	no	assurance	that	the	final	tax	outcome	of	these	matters will	not	be	materially	different.	To	the	extent	that	the	final	tax	outcome	of	these	matters	is	different	than	the	amounts	recorded,	such	differences	will	affect	the	provision for	income	taxes	in	the	period	in	which	such	determination	is	made	and	could	have	a	material	impact	on	our	financial	condition	and	results	of	operations.	The	provision for	income	taxes	includes	the	effects	of	any	reserves	that	we	believe	are	appropriate,	as	well	as	the	related	net	interest	and	penalties.

# Results	of	Operations

The	following	table	summarizes	historical	results	of	operations	for	the	periods	presented	and	as	a	percentage	of	revenue	for	those	periods.	We	have	derived	the data	for	the	years	ended	December	31,	2015,	2014	and	2013	from	our	consolidated	financial	statements	included	elsewhere	in	thus	Form	10-K	(in	thousands,	except	for percentage	of	revenue).

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Consolidated\tStatements\tof\tOperations\tData: |  |  |  |
| Revenue: |  |  |  |
| Product | $744,877 | $531,543 | $331,687 |
| Service | 92,714 | 52,563 | 29,537 |
| Total\trevenue | 837,591 | 584,106 | 361,224 |
| Cost\tof\trevenue\t(1): |  |  |  |
| Product | 263,585 | 174,004 | 112,958 |
| Service | 30,446 | 18,011 | 9,728 |
| Total\tcost\tof\trevenue | 294,031 | 192,015 | 122,686 |
| Gross\tprofit | 543,560 | 392,091 | 238,538 |
| Operating\texpenses\t(1): |  |  |  |
| Research\tand\tdevelopment | 209,448 | 148,909 | 98,587 |
| Sales\tand\tmarketing | 109,084 | 85,338 | 55,115 |
| General\tand\tadministrative | 75,720 | 32,331 | 18,688 |
| Total\toperating\texpenses | 394,252 | 266,578 | 172,390 |
| Income\tfrom\toperations | 149,308 | 125,513 | 66,148 |
| Interest\texpense | (3,152) | (6,280) | (7,119) |
| Other\tincome\t(expense),\tnet | (147) | 2,275 | (754) |
| Total\tOther\tincome\t(expense),\tnet | (3,299) | (4,005) | (7,873) |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 146,009 | 121,508 | 58,275 |
| Provision\tfor\tincome\ttaxes | 24,907 | 34,658 | 15,815 |
| Net\tincome | $121,102 | $86,850 | $42,460 |

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Stock-Based\tCompensation\tExpense: |  |  |  |
| Cost\tof\trevenue | $3,048 | $1,535 | $408 |
| Research\tand\tdevelopment | 25,515 | 14,986 | 5,464 |
| Sales\tand\tmarketing | 11,454 | 7,643 | 2,985 |
| General\tand\tadministrative | 5,286 | 3,455 | 1,302 |
| \t\t\t\t\t\t\t\t\t\t\tTotal\tstock-based\tcompensation | $45,303 | $27,619 | $10,159 |

| Product | 88.9	% | 91.0	% | 91.8	% |
| :--- | :--- | :--- | :--- |
| Service | 11.1 | 9.0 | 8.2 |
| Total\trevenue | 100.0 | 100.0 | 100.0 |
| Cost\tof\trevenue: |  |  |  |
| Product | 31.5 | 29.8 | 31.3 |
| Service | 3.6 | 3.1 | 2.7 |
| Total\tcost\tof\trevenue | 35.1 | 32.9 | 34.0 |
| Gross\tmargin | 64.9 | 67.1 | 66.0 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment | 25.0 | 25.5 | 27.3 |
| Sales\tand\tmarketing | 13.0 | 14.6 | 15.3 |
| General\tand\tadministrative | 9.0 | 5.5 | 5.2 |
| Total\toperating\texpenses | 47.0 | 45.6 | 47.8 |
| Income\tfrom\toperations | 17.9 | 21.5 | 18.2 |
| Interest\texpense | (0.4) | (1.1) | (2.0) |
| Other\tincome\t(expense),\tnet | 0.0 | 0.4 | (0.2) |
| Total\tother\tincome\t(expense),\tnet | (0.4) | (0.7) | (2.2) |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 17.5 | 20.8 | 16.0 |
| Provision\tfor\tincome\ttaxes | 3.0 | 5.9 | 4.4 |
| Net\tincome | 14.5\t% | 14.9\t% | 11.6\t% |

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

| Product | $744,877 | 88.9% | $531,543 | 91.0% | $213,334 | 40.1% |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Service | 92,714 | 11.1 | 52,563 | 9.0 | 40,151 | 76.4 |
| Total\trevenue | 837,591 | 100.0 | 584,106 | 100.0 | 253,485 | 43.4 |
| Cost\tof\trevenue |  |  |  |  |  |  |
| Product | 263,585 | 31.5 | 174,004 | 29.8 | 89,581 | 51.5 |
| Service | 30,446 | 3.6 | 18,011 | 3.1 | 12,435 | 69.0 |
| Total\tcost\tof\trevenue | 294,031 | 35.1 | 192,015 | 32.9 | 102,016 | 53.1 |
| Gross\tprofit | $543,560 | 64.9% | $392,091 | 67.1% | $151,469 | 38.6% |
| Gross\tmargin | 64.9% |  | 67.1% |  |  |  |

Revenue.	Product	revenue	increased	40.1%	in	the	year	ended	December	31,	2015	compared	to	2014.	We	increased	shipments	to	our	existing	customers	during the	year	as	they	continued	to	grow	their	businesses	and	increase	their	demand	for	our	switch	products	and	related	accessories.	In	addition,	we	continued	to	add	new customers	as	we	expanded	our	market	presence	and	geographic	footprint.	Service	revenue	increased	76.4%	in	the	year	ended	December	31,	2015	with	growth	in	initial and	renewal	support	contracts	as	our	customer	installed	base	continued	to	expand.	We	also	continued	to	experience	fluctuations	in	product	and	service	pricing	due	to competitive	market	pressures.	However,	these	were	more	than	offset	by	the	increased	demand	drivers	outlined	above.

Cost	of	Revenue	and	Gross	Margin.	Gross	margin	decreased	from	67.1%	to	64.9%	for	the	year	ended	December	31,	2015	compared	to	the	same	period	in	2014. This	decrease	in	2015	was	primarily	due	to	increased	inventory-related	obsolescence	charges	associated	with	upcoming	product	transitions	and	higher	warranty	costs,	in addition	to	a	greater	mix	of	revenue	from	larger	customers	who	typically	receive	higher	discounts.

# Operating	Expenses	(in	thousands,	except	percentages)

| Research	and	development | $209,448 | 25.0% | $148,909 | 25.5% | $60,539 | 40.7% |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Sales\tand\tmarketing | 109,084 | 13.0 | 85,338 | 14.6 | 23,746 | 27.8 |
| General\tand\tadministrative | 75,720 | 9.0 | 32,331 | 5.5 | 43,389 | 134.2 |
| Total\toperating\texpenses | $394,252 | 47.0% | $266,578 | 45.6% | $127,674 | 47.9% |

Research	and	development.	Research	and	development	expenses	increased	$60.5	million,	or	40.7%,	for	the	year	ended	December	31,	2015	compared	to	the same	period	in	2014.	The	increase	was	primarily	due	to	an	increase	in	personnel	costs	of	$33.3	million,	resulting	from	increases	in	headcount,	stock	based	compensation as	well	as	additional	bonus	expense	under	our	corporate	bonus	plan.	Prototype	spend	and	third-party	engineering	and	consulting	costs	increased	by	$14.2	million,	and facilities	and	IT	infrastructure	costs	increased	$8.6	million	due	to	new	product	introductions	and	the	continued	expansion	and	support	of	our	research	and	development activities.

Sales	and	marketing.	Sales	and	marketing	expenses	increased	$23.7	million,	or	27.8%,	for	the	year	ended	December	31,	2015	compared	to	the	same	period	in 2014.	The	increase	was	primarily	due	to	an	increase	in	personnel	costs	of	$17.0	million,	resulting	from	increased	headcount	and	additional	sales	commissions.	The increase	also	related	to	additional	product	field	demonstration	costs	of	$6.0	million.

General	and	administrative.	General	and	administrative	expenses	increased	$43.4	million,	or	134.2%,	for	the	year	ended	December	31,	2015	compared	to	the same	period	in	2014.	The	increase	was	due	to	an	increase	in	legal	fees	of	$39.8	million	primarily	related	to	the	Cisco	and	OptumSoft	legal	matters	outlined	in	Note	5	to the	Consolidated	Financial	Statements.	In	addition,	personnel	costs	increased	by	$4.1	million	reflecting	additional	bonus	cost	under	our	corporate	bonus	program	and increased	stock-based	compensation	charges	during	2015.

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

|  | Year	Ended	December	31,<br>2015 | 2014 | Change	in<br>$% |  |
| :--- | :--- | :--- | :--- | :--- |
| Other\tincome\t(expense),\tnet: |  |  |  |  |
| Interest\texpense | $(3,152) | $(6,280) | $3,128 | (49.8)% |
| Other\tincome\t(expense),\tnet | (147) | 2,275 | (2,422) | (106.5) |
| Total\tother\tincome\t(expense),\tnet | $(3,299) | $(4,005) | $706 | (17.6)% |

Interest	 expense.	The	reduction	in	interest	expense	during	the	year	ended	December	31,	2015	compared	to	the	same	period	in	2014	is	primarily	related	to repayment	and	conversion	of	our	notes	payable	upon	closing	of	our	initial	public	offering	during	the	second	quarter	of	2014.

Other	income	(expense),	net.	The	unfavorable	change	in	other	income	(expense),	net	during	the	year	ended	December	31,	2015,	compared	to	the	same	period	in 2014	was	primarily	due	to	a	one-time	gain	on	our	notes	receivable	of	$4.0	million	in	2014,	partially	offset	by	a	$0.7	million	write-off	related	to	the	debt	discount	on notes	payable	during	the	second	quarter	of	2014,	and	a	reduction	in	transactional	exchange	rate	losses	during	2015.

# Provision	for	Income	Taxes	(in	thousands,	except	percentages)

|  | Year	Ended	December	31, |  | Change	in |  |
| :--- | :--- | :--- | :--- | :--- |
|  | 2015 | 2014 | $% |  |
| Provision\tfor\tincome\ttaxes | $24,907 | $34,658 | $(9,751) | (28.1)% |
| Effective\ttax\trate | 17.1% | 28.5% |  |  |

Provision	for	income	taxes	was	approximately	$24.9	million	and	$34.7	million	for	the	year	ended	December	31,	2015	and	2014,	respectively.	The	change	in our	provision	was	the	result	of	an	increase	in	profit	before	income	taxes,	offset	by	a	decrease	due	to	foreign	mix	earnings	taxed	at	a	lower	rate	than	the	US	tax	rate, release	of	reserves	due	to	expiration	of	the	statute	of	limitations	in	certain	domestic	jurisdictions,	and	reinstatement	of	the	federal	research	and	development	("R&D") credit.

The	R&D	credit,	which	was	made	permanent	under	Protecting	Americans	from	Tax	Hikes	(PATH)	Act,	signed	into	law	on	December	18,	2015. The	impact	of the	2015	federal	R&D	tax	credit	benefit	was	recorded	in	the	fourth	quarter	of	the	year	ended	December	31,	2015.

|  | 2014 |  | 2013 |  | Change	in |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | %\tof\n$revenue |  | %\tof\n$revenue |  | $% |  |
| Revenue | $584,106 | 100.0% | $361,224 | 100.0% | $222,882 | 61.7% |
| Cost\tof\trevenue | 192,015 | 32.9 | 122,686 | 34.0 | 69,329 | 56.5 |
| Gross\tprofit | $392,091 | 67.1% | $238,538 | 66.0% | $153,553 | 64.4% |
| Gross\tmargin | 67.1% |  | 66.0% |  |  |  |

Revenue.	Revenue	increased	$222.9	million,	or	61.7%,	for	the	year	ended	December	31,	2014	compared	to	2013.	The	increase	in	revenue	was	predominately driven	by	increased	product	shipments	to	existing	customers	due	to	increased	demand	for	our	switch	products	and	related	accessories.	In	addition,	our	cumulative number	of	customers	grew	approximately	33%	from	December	31,	2013	to	December	31,	2014	as	we	continued	to	broaden	our	market	penetration.

Cost	of	Revenue	and	Gross	Margin.	Gross	margin	increased	from	66.0%	for	the	year	ended	December	31,	2013	 to	67.1%	for	2014.	The	increase	in	gross margin	was	primarily	the	result	of	specific	warranty	and	excess	and	obsolete	inventory-related	charges	of	$10.3	million	recorded	in	2013	that	did	not	recur	in	2014.	To	a lesser	extent,	gross	margin	in	2014	was	negatively	impacted	by	a	decrease	in	product	margins	due	to	a	higher	revenue	mix	from	larger	customers	who	typically	receive higher	volume	discounts.

| Research	and	development | $148,909 | 25.5% | $98,587 | 27.3% | $50,322 | 51.0% |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Sales\tand\tmarketing | 85,338 | 14.6 | 55,115 | 15.3 | 30,223 | 54.8 |
| General\tand\tadministrative | 32,331 | 5.5 | 18,688 | 5.2 | 13,643 | 73.0 |
| Total\toperating\texpenses | $266,578 | 45.6% | $172,390 | 47.8% | $94,188 | 54.6% |

Research	and	development.	Research	and	development	expenses	increased	$50.3	million,	or	51.0%,	for	the	year	ended	December	31,	2014	compared	to	2013. The	increase	was	primarily	due	to	an	increase	in	personnel	costs	of	$39.0	million,	resulting	from	an	increase	of	156	employees	(a	34.1%	increase)	from	December	31, 2013	to	December	31,	2014,	and	additional	bonus	expenses	under	our	corporate	bonus	plan.	The	increase	was	also	due	to	an	increase	of	$6.6	million	in	research	and development	related	facilities	and	IT	infrastructure	costs,	and	increases	in	third-party	engineering	costs	of	$5.9	million	and	depreciation	expense	of	$2.0	million,	as	we continued	to	expand	and	support	our	research	and	development	activities.	These	expenses	were	partially	offset	by	a	$4.3	million	reduction	in	prototype	spending	related to	project	timing.

Sales	and	marketing.	Sales	and	marketing	expenses	increased	$30.2	million,	or	54.8%,	for	the	year	ended	December	31,	2014	compared	to	2013.	The	increase was	primarily	due	to	an	increase	in	personnel	costs	of	$23.4	million,	resulting	from	an	increase	of	45	employees	(a	23.0%	increase)	from	December	31,	2013	to December	31,	2014,	as	well	as	an	increase	in	sales	commissions	resulting	from	higher	sales	volume.	The	increase	was	also	due	to	an	increase	of	$3.7	million	in	product demonstrations,	expenses	incurred	to	expand	our	sales	engineering	labs	to	support	our	growing	customer	base,	consulting	expenses.

General	and	administrative.	General	and	administrative	expenses	increased	$13.6	million,	or	73.0%,	for	the	year	ended	December	31,	2014	compared	to	2013. The	increase	was	primarily	due	to	an	increase	in	personnel	costs	of	$5.7	million,	resulting	from	an	increase	of	17	employees	(a	29.8%	increase)	from	December	31, 2013	to	December	31,	2014,	and	additional	expenses	under	our	corporate	bonus	plan.	We	also	incurred	higher	professional	service	fees	of	$3.7	million	related	to	outside legal,	accounting	and	consulting	services	to	support	increased	business	activity,	litigation	and	public-company	activities.	The	increase	was	also	attributable	to	higher insurance	expense	and	franchise	taxes	of	$1.5	million	associated	with	being	a	public	company,	and	a	$1.0	million	charitable	donation	through	a	fund	established	by	the Company	in	2014.

|  | Year	Ended	December	31,<br>2014 | 2013 | Change	in<br>$% |  |
| :--- | :--- | :--- | :--- | :--- |
| Other\tincome\t(expense),\tnet: |  |  |  |  |
| Interest\texpense | $(6,280) | $(7,119) | $839 | (11.8)% |
| Other\tincome\t(expense),\tnet | 2,275 | (754) | 3,029 | NM |
| Total\tother\tincome\t(expense),\tnet | $(4,005) | $(7,873) | $3,868 | (49.1)% |

Interest	 expense.	Interest	expense	decreased	during	the	year	ended	December	31,	2014	compared	to	the	same	period	in	2013	as	a	result	of	repayment	and conversion	of	our	notes	payable	upon	our	IPO	during	the	second	quarter	of	2014.

Other	income	(expense),	net.	Other	income	(expense),	net	increased	for	the	year	ended	December	31,	2014,	compared	to	2013	due	to	the	gain	on	our	notes receivable	of	$4.0	million	offset	by	a	$0.7	million	write-off	related	to	the	debt	discount	on	notes	payable	upon	our	IPO,	further	offset	by	net	transactional	exchange	rate losses.

|  | Year	Ended	December	31, |  | Change	in |  |
| :--- | :--- | :--- | :--- | :--- |
|  | 2014 | 2013 | $% |  |
| Provision\tfor\tincome\ttaxes | $34,658 | $15,815 | $18,843 | 119.1% |
| Effective\ttax\trate | 28.5% | 27.1% |  |  |

Provision	for	income	taxes	was	approximately	$34.7	million	and	$15.8	million	for	the	years	ended	December	31,	2014	and	2013,	respectively.	Provision	for income	taxes	increased	$18.8	million,	or	119.1%,	for	the	year	ended	December	31,	2014	compared	to	2013.	The	change	in	our	provision	for	income	taxes	was	primarily due	to	an	increase	in	profit	before	income	tax.	The	change	in	the	effective	tax	rate	was	a	result	of	the	geographical	distribution	of	the	earnings,	the	federal	R&D	tax	credit for	2014	including	only	a	current	year	benefit,	as	compared	to	a	two-year	federal	R&D	tax	credit	benefit	for	2013,	and	an	increase	in	state	taxes.

The	effective	tax	rate	for	the	year	ended	December	31,	2014	included	the	impact	of	the	reinstatement	of	the	2014	R&D	credit.	The	impact	of	the	2014	Federal R&D	tax	credit	benefit	was	recorded	in	the	fourth	quarter	of	the	year	ended	December	31,	2014.	The	effective	tax	rate	for	the	year	ended	December	31,	2013	included the	impact	of	the	reinstatement	of	the	2013	and	2012	Federal	R&D	tax	credits.

# Liquidity	and	Capital	Resources

Our	principal	sources	of	liquidity	are	cash	and	cash	equivalents,	marketable	securities,	and	cash	generated	from	operations.	As	of	December	31,	2015,	cash	and cash	equivalents	were	$687.3	million,	of	which	approximately	$41.6	million	was	held	outside	the	U.S.	in	our	foreign	subsidiaries.	We	have	not	repatriated	nor	do	we currently	have	plans	to	repatriate	these	funds,	but	if	we	were	to	repatriate	cash	held	outside	of	the	U.S.	for	domestic	cash	operations,	we	would	be	required	to	accrue	and pay	U.S.	income	taxes	to	repatriate	these	funds	less	any	previously	paid	foreign	income	taxes.	We	consider	the	undistributed	earnings	of	our	foreign	subsidiaries	as	of December	31,	2015	to	be	indefinitely	reinvested,	and,	accordingly,	no	U.S.	income	taxes	have	been	provided	thereon.

Our	cash	and	cash	equivalents	and	marketable	securities	are	held	for	working	capital	purposes.	We	plan	to	continue	to	invest	for	long-term	growth.	We	believe that	our	existing	cash	and	cash	equivalents	together	with	cash	flow	from	operations	will	be	sufficient	to	meet	our	working	capital	requirements	and	our	growth	strategies for	the	foreseeable	future.	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	and	access	to	outsourcing	our	manufacturing,	our	costs	related	to	investing	in	or	acquiring	complementary	or	strategic	businesses	and technologies,	the	continued	market	acceptance	of	our	products,	and	costs	incurred	related	to	outstanding	litigation	claims.	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

# Cash	Flows	from	Operating	Activities

Our	primary	source	of	cash	from	operating	activities	has	been	from	cash	collections	from	our	customers.	We	expect	cash	inflows	from	operating	activities	to	be affected	by	increased	sales	and	timing	of	collections.	Our	primary	uses	of	cash	from	operating	activities	have	been	for	personnel	costs,	inventory	purchases	from	our contract	manufacturer,	investment	in	research	and	development,	and	litigation	expenses.

During	the	year	ended	December	31,	2015,	cash	provided	by	operating	activities	was	$200.5	million,	primarily	from	net	income	of	$121.1	million,	net	non- cash	charges	of	($1.2)	million,	and	a	net	increase	in	cash	from	changes	in	our	operating	assets	and	liabilities	of	$80.6	million.	The	net	increase	in	cash	from	changes	in operating	assets	and	liabilities	was	primarily	due	to	an	increase	in	deferred	revenue	of	$90.3	million,	largely	related	to	short	and	long-term	services	contracts	and product	revenue	deferrals	related	to	contracts	with	acceptance	terms.	In	addition,	we	experienced	an	increase	in	cash	of	$32.0	million	from	income	taxes	payable	and	an increase	in	our	accounts	payable	and	accrued	liabilities	of	$29.4	million	due	to	the	timing	of	payments.	These	operating	liability	increases	were	offset	by	an	increase	in our	accounts	receivable	of	$47.3	million	resulting	from	an	increase	in	sales	during	the	period.	In	addition,	inventory	increased	$14.1	million	during	the	period	due	to higher	shipment	volume,	and	prepaid	expenses	and	current	assets	increased	$7.8	million	in	the	period.

During	the	year	ended	December	31,	2014,	cash	provided	by	operating	activities	was	$131.9	million	primarily	from	net	income	of	$86.9	million,	net	non-cash charges	of	$11.0	million,	and	an	increase	of	$33.2	million	due	to	changes	in	our	operating	assets	and

liabilities.	The	increase	in	cash	from	operating	assets	and	liabilities	was	primarily	due	an	increase	in	deferred	revenue	of	$47.6	million	resulting	from	the	increase	in sales,	an	increase	in	accrued	liabilities	of	$18.9	million	largely	related	to	our	payroll	and	corporate	bonus	plan	and	an	increase	in	accounts	payable	of	$14.0	million	due to	the	timing	of	our	payments,	partially	offset	by	a	reduction	in	cash	from	an	increase	in	accounts	receivable	of	$19.0	million	from	higher	products	shipments,	an increase	 in	 inventories	of	$13.4	million	to	meet	our	customer	demand,	an	increase	of	$15.3	million	in	cash	paid	for	income	taxes,	and	supplier	rebates	receivable resulting	from	our	increased	inventory	purchases.

During	the	year	ended	December	31,	2013,	cash	provided	by	operating	activities	was	$34.6	million,	primarily	from	net	income	of	$42.5	million	and	non-cash charges	of	$6.6	million,	partially	offset	by	a	decrease	of	$14.6	million	due	to	changes	in	our	operating	assets	and	liabilities.	The	decrease	in	cash	from	operating	assets and	liabilities	was	primarily	due	to	a	$49.2	million	increase	in	inventory	for	anticipated	growth	in	our	business,	a	$28.1	million	increase	in	accounts	receivable	due	to	an increase	in	sales	partially	offset	by	an	increase	in	cash	from	a	$3.0	million	decrease	in	prepaid	expenses	and	other	current	assets,	partially	offset	by	an	increase	in	cash from	a	$3.9	million	increase	in	accounts	payable	primarily	attributable	to	the	timing	of	payments,	a	$12.0	million	increase	in	accrued	liabilities	attributable	to	higher warranty	liabilities	and	higher	accrued	personnel	costs	due	to	growth	in	headcount,	a	$34.1	million	increase	in	deferred	revenue	due	to	increased	sales	and	a	$6.0	million increase	in	interest	payable	attributable	to	our	outstanding	convertible	promissory	notes,	including	our	related	party	convertible	promissory	notes.

# Cash	Flows	from	Investing	Activities

Our	investing	activities	have	consisted	primarily	of	capital	expenditures	and	net	investment	purchases	of	available	for	sale	marketable	securities.	We	expect	to continue	investing	in	these	activities	to	support	the	continued	growth	of	our	business.

During	the	year	ended	December	31,	2015,	cash	provided	by	investing	activities	was	$184.2	million,	consisting	of	proceeds	from	the	maturity	of	available-for- sale	securities	of	$208.2	million,	offset	by	purchases	of	property,	equipment	and	other	assets	of	$19.2	million	and	increase	in	restricted	cash	of	$4.0	million	related	to	a security	deposit	required	for	a	facility	lease.

During	the	year	ended	December	31,	2014,	cash	used	in	investing	activities	was	$249.4	million,	consisting	primarily	of	purchases	of	marketable	securities	of $210.0	million,	purchases	of	property	and	equipment	of	$13.1	million	and	other	investing	activities	of	$38.2	million	largely	due	to	a	$33.6	million	equity	investments	in privately	held	companies,	partially	offset	by	the	proceeds	of	the	repayments	of	our	notes	receivable	of	$8.0	million	and	the	release	of	our	restricted	cash	into	cash	and cash	equivalents	of	$4.0	million.

During	the	year	ended	December	31,	2013,	cash	used	in	investing	activities	was	$19.5	million,	of	which	$20.3	million	relates	to	the	purchase	of	property	and equipment	offset	by	notes	receivable	repayments	of	$1.0	million.

# Cash	Flows	from	Financing	Activities

During	the	year	ended	December	31,	2015,	cash	provided	by	financing	activities	was	$63.1	million,	consisting	primarily	of	the	excess	tax	benefit	associated with	equity	incentive	plans	of	$37.3	million,	proceeds	from	the	exercise	of	stock	options,	net	of	repurchases	of	$17.8	million	and	the	proceeds	from	the	issuance	of common	stock	from	our	ESPP	of	$9.4	million.

During	the	year	ended	December	31,	2014,	cash	provided	by	financing	activities	was	$244.0	million,	consisting	primarily	of	net	proceeds	raised	from	our	initial public	offering	of	$239.3	million,	proceeds	from	the	exercise	of	stock	options,	net	of	repurchases	of	$8.0	million	and	excess	tax	benefits	from	our	equity	incentive	plans amounting	to	$17.4	million.	These	proceeds	were	partially	offset	by	the	repayment	of	our	notes	payable	of	$20.0	million.

During	the	year	ended	December	31,	2013,	cash	provided	by	financing	activities	was	$9.9	million,	consisting	primarily	of	proceeds	from	the	exercise	of	stock options,	net	of	repurchases,	amounting	to	$9.0	million	and	excess	tax	benefits	associated	with	our	equity	incentive	plans	amounting	to	$0.9	million.

# Off-Balance	Sheet	Arrangements

As	of	December	31,	2015,	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.

# Contractual	Obligations	and	Commitments

Our	contractual	commitments	will	have	an	impact	on	our	future	liquidity.	Our	contractual	obligations	represent	material	expected	or	contractually	committed future	obligations	with	terms	in	excess	of	one	year.	We	believe	that	we	will	be	able	to	fund	these	obligations	through	cash	generated	from	operations	and	from	our existing	cash	balances.

The	following	summarizes	our	contractual	obligations	and	commitments	as	of	December	31,	2015	(in	thousands):

|  | Total | Less	than<br>1	Year | 1	to	3	Years | 3	to	5	Years | More	than<br>5	Years |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Financing\tlease\tobligation(1) | $49,380 | $5,754 | $12,047 | $12,769 | $18,810 |
| Operating\tlease\tobligations | 52,083 | 6,307 | 12,937 | 11,389 | 21,450 |
| Non-cancelable\tpurchase\tobligations | 43,902 | 43,902 | — | — |  |
| Total | $145,365 | $55,963 | $24,984 | $24,158 | $40,260 |

(1)	Includes	interest	and	land	lease

The	contractual	obligation	table	above	excludes	tax	liabilities	of	$14.3	million	related	to	uncertain	tax	positions	because	we	are	unable	to	make	a	reasonably reliable	estimate	of	the	timing	of	settlement,	if	any,	of	these	future	payments.

# Critical	Accounting	Policies	and	Estimates

We	 have	 prepared	 our	 consolidated	 financial	 statements	 in	 accordance	 with	 GAAP	 and	 include	 our	 accounts	 and	 the	 accounts	 of	 our	 wholly	 owned subsidiaries.	The	preparation	of	these	consolidated	financial	statements	requires	our	management	to	make	estimates,	assumptions	and	judgments	that	affect	the	reported amounts	of	assets	and	liabilities	at	the	date	of	the	financial	statements,	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial	statements	and	the reported	amounts	of	revenue	and	expenses	during	the	applicable	periods.	We	base	our	estimates,	assumptions	and	judgments	on	historical	experience	and	on	various other	factors	that	we	believe	to	be	reasonable	under	the	circumstances.	Different	assumptions	and	judgments	would	change	the	estimates	used	in	the	preparation	of	our consolidated	financial	statements,	which,	in	turn,	could	change	the	results	from	those	reported.	We	evaluate	our	estimates,	assumptions	and	judgments	on	an	ongoing basis.	The	critical	accounting	estimates,	assumptions	and	judgments	that	we	believe	have	the	most	significant	impact	on	our	consolidated	financial	statements	are	the following:

# Revenue	Recognition

We	generate	revenue	from	sales	of	switching	products	which	incorporate	our	EOS	software	and	accessories	such	as	cables	and	optics	to	direct	customers	and channel	partners	together	with	post	contract	customer	support	("PCS").	We	typically	sell	products	and	PCS	in	a	single	transaction.	We	recognize	revenue	when	all	of	the following	criteria	are	met:	persuasive	evidence	of	an	arrangement	exists;	delivery	or	performance	has	occurred;	the	sales	price	is	fixed	or	determinable;	and	collectability is	reasonably	assured.

We	define	each	of	the	four	criteria	above	as	follows:

•Persuasive	evidence	of	an	arrangement	exists.	Evidence	of	an	arrangement	consists	of	stand-alone	purchase	orders	or	purchase	orders	issued	pursuant	to	the terms	and	conditions	of	a	master	sales	agreement.	It	is	our	practice	to	identify	an	end	customer	prior	to	shipment	to	a	reseller	or	distributor.

•Delivery	or	performance	has	occurred.	We	use	shipping	documents	or	written	evidence	of	customer	acceptance,	when	applicable,	to	verify	delivery	or performance.	We	recognize	product	revenue	upon	transfer	of	title	and	risk	of	loss,	which	primarily	is	upon	shipment	to	customers.	We	generally	do	not	have significant	 obligations	 for	 future	 performance,	 rights	 of	 return,	 or	 pricing	 credits	 associated	 with	 our	 product	 sales.	 In	 instances	 where	 substantive acceptance	provisions	are	specified	in	the	customer	arrangement,	revenue	is	deferred	until	all	acceptance	criteria	have	been	met.

•The	sales	price	is	fixed	or	determinable.	We	assess	whether	the	sales	price	is	fixed	or	determinable	based	on	payment	terms	and	whether	the	sales	price	is subject	to	refund	or	adjustment.

•Collectability	is	reasonably	assured.	We	assess	probability	of	collectability	on	a	customer-by-customer	basis.	Our	customers	and	channel	partners	are subjected	to	a	credit	review	process	that	evaluates	their	financial	condition	and	ability	to	pay	for	products	and	services.

PCS	is	offered	under	renewable,	fee-based	contracts,	which	includes	technical	support,	hardware	repair	and	replacement	parts	beyond	standard	warranty,	bug fixes,	patches	and	unspecified	upgrades	on	a	when-and-if-available	basis.	We	initially	defer	PCS	revenue	and	recognize	it	ratably	over	the	life	of	the	PCS	contract,	with the	related	expenses	recognized	as	incurred.	PCS	contracts	usually	have	a	term	of	one	to	three	years.	We	include	billed	but	unearned	PCS	revenue	in	deferred	revenue.

We	report	revenue	net	of	sales	taxes.	We	include	shipping	charges	billed	to	customers	in	revenue	and	the	related	shipping	costs	are	included	in	cost	of	goods

# sold.

# Multiple-Element	Arrangements

Most	of	our	arrangements,	other	than	renewals	of	PCS,	are	multiple	element	arrangements	with	a	combination	of	products	and	PCS.	Products	and	PCS generally	qualify	as	separate	units	of	accounting.	Our	hardware	deliverables	include	EOS	software,	which	together	deliver	the	essential	functionality	of	our	products. For	multiple	element	arrangements,	we	allocate	revenue	to	each	unit	of	accounting	based	on	the	relative	selling	price.	The	relative	selling	price	for	each	element	is	based upon	the	following	hierarchy:	vendor-specific

objective	evidence	("VSOE"),	if	available;	third-party	evidence	("TPE"),	if	VSOE	is	not	available;	and	best	estimate	of	selling	price	("BESP"),	if	neither	VSOE	nor TPE	is	available.	As	we	have	not	been	able	to	establish	VSOE	or	TPE	for	our	products	and	most	of	our	services,	we	generally	utilize	BESP	for	the	purposes	of	allocating revenue	to	each	unit	of	accounting.

•VSOE—We	determine	VSOE	based	on	our	historical	pricing	and	discounting	practices	for	the	specific	products	and	services	when	sold	separately.	In determining	VSOE,	we	require	that	a	substantial	majority	of	the	stand-alone	selling	prices	fall	within	a	reasonably	narrow	pricing	range.

•TPE—When	VSOE	cannot	be	established	for	deliverables	in	multiple-element	arrangements,	we	apply	judgment	with	respect	to	whether	we	can	establish	a selling	price	based	on	TPE.	TPE	is	determined	based	on	competitor	prices	for	interchangeable	products	or	services	when	sold	separately	to	similarly	situated customers.	However,	as	our	products	contain	a	significant	element	of	proprietary	technology	and	offer	substantially	different	features	and	functionality,	the comparable	 pricing	 of	 products	 with	 similar	 functionality	 typically	 cannot	 be	 obtained.	Additionally,	 as	 we	 are	 unable	 to	 reliably	 determine	 what competitors	products'	selling	prices	are	on	a	stand-alone	basis,	we	are	not	able	to	obtain	reliable	evidence	of	TPE	of	selling	price.

•BESP—When	we	are	unable	to	establish	selling	price	using	VSOE	or	TPE,	we	use	BESP	in	our	allocation	of	arrangement	consideration.	The	objective	of BESP	is	to	determine	the	price	at	which	we	would	transact	a	sale	if	the	product	or	service	was	sold	regularly	on	a	stand-alone	basis.	BESP	is	based	on considering	multiple	factors	including,	but	not	limited	to	the	sales	channel	(reseller,	distributor	or	end	customer),	the	geographies	in	which	our	products	and services	were	sold	(domestic	or	international)	and	size	of	the	end	customer.

We	limit	the	amount	of	revenue	recognition	for	delivered	elements	to	the	amount	that	is	not	contingent	on	the	future	delivery	of	products	or	services,	future performance	obligations,	or	subject	to	customer-specific	return,	acceptance	or	refund	privileges.

We	account	for	multiple	agreements	with	a	single	partner	as	1	arrangement	if	the	contractual	terms	and/or	substance	of	those	agreements	indicate	that	they	may be	so	closely	related	that	they	are,	in	effect,	parts	of	a	single	arrangement.

We	may	occasionally	accept	returns	to	address	customer	satisfaction	issues	even	though	there	is	no	contractual	provision	for	such	returns.	We	estimate	returns for	sales	to	customers	based	on	historical	returns	rates	applied	against	current-period	gross	revenues.	Specific	customer	returns	and	allowances	are	considered	when determining	our	sales	return	reserve	estimate.

# Inventory	Valuation	and	Contract	Manufacturer/Supplier	Liabilities

Inventories	primarily	consist	of	finished	goods	purchased	from	third	party	contract	manufacturers	and	are	stated	at	the	lower	of	cost	(computed	using	the	first- in,	first-out	method)	or	market	value.	Manufacturing	overhead	costs	and	inbound	shipping	costs	are	included	in	the	cost	of	inventory.		In	addition,	we	purchase	strategic component	inventory	from	certain	suppliers	under	purchase	commitments	that	in	some	cases	are	non-cancelable,	including	integrated	circuits,	which	are	held	by	our contract	manufacturers.		We	record	a	provision	when	inventory	is	determined	to	be	in	excess	of	anticipated	demand,	or	obsolete,	to	adjust	inventory	to	its	estimated realizable	value.		We	also	record	a	liability	for	non-cancelable,	non-returnable	purchase	commitments	with	our	component	inventory	suppliers	for	quantities	in	excess	of our	demand	forecasts	or	that	are	considered	obsolete.

Our	contract	manufacturers	procure	components	and	assemble	products	on	our	behalf	based	on	our	forecasts.		We	generally	incur	a	liability	when	the	contract manufacturer	has	converted	the	component	inventory	to	a	finished	product.		Historically,	we	have	reimbursed	our	contract	manufacturer	for	component	inventory	that has	been	rendered	excess	or	obsolete	due	to	manufacturing	and	engineering	change	orders	resulting	from	design	changes,	or	in	cases	where	inventory	levels	greatly exceed	our	forecasts.

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.	If	actual	market	conditions	are	less	favorable	than	those	projected by	management,	which	may	be	caused	by	factors	within	and	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	liabilities.

# Warranty

We	 offer	 a	one-year	warranty	on	all	of	our	hardware	products	and	a	90-day	warranty	against	defects	in	the	software	embedded	in	the	products.	We	use judgment	and	estimates	when	determining	warranty	costs	based	on	historical	costs	to	replace	product	returns	within	the	warranty	period	at	the	time	we	recognize revenue.	We	accrue	for	potential	warranty	claims	at	the	time	of	shipment	as	a	component	of	cost	of	revenues	based	on	historical	experience	and	other	relevant information.	We	reserve	for	specifically	identified	products	if	and	when	we	determine	we	have	a	systemic	product	failure.	Although	we	engage	in	extensive	product quality	programs,	if	actual	product	failure	rates	or	use	of	materials	differ	from	estimates,	additional	warranty	costs	may	be	incurred,	which	could	reduce	our	gross margin.	The	accrued	warranty	liability	is	recorded	in	accrued	liabilities	in	the	accompanying	consolidated	balance	sheets.

# Stock-Based	Compensation

Compensation	expense	related	to	stock-based	transactions,	including	stock	options,	restricted	stock	units	("RSUs"),	restricted

stock	awards	("RSAs"),	and	stock	purchase	rights	under	our	employee	stock	purchase	program	is	measured	and	recognized	in	the	financial	statements	based	on	the estimated	fair	value	of	the	equity	granted.	Stock-based	compensation	expense	is	generally	recognized	on	a	straight-line	basis,	net	of	estimated	forfeitures,	over	the requisite	service	periods	of	the	awards,	which	typically	ranges	from	two	to	five	years.	The	assumptions	used	in	our	option-pricing	model	represent	management's	best estimates.	These	estimates	involve	inherent	uncertainties	and	the	application	of	management's	judgment.	If	factors	change	and	different	assumptions	are	used,	our	stock- based	compensation	expense	could	be	materially	different	in	the	future.	These	assumptions	and	estimates	are	as	follows:

# Fair	Value	of	Common	Stock

The	fair	value	of	each	stock-based	award	and	option	is	estimated	on	the	grant	date	using	the	Black-Scholes-Merton	option-pricing	model.	This	model	requires the	input	of	subjective	assumptions,	including	the	expected	term	of	the	option,	the	expected	volatility	of	the	price	of	our	common	stock,	risk-free	interest	rates	and	the expected	dividend	yield	of	our	common	stock.	RSUs	are	measured	based	on	the	fair	market	values	of	the	underlying	stock	on	the	dates	of	grant.	Prior	to	our	initial public	offering,	we	estimated	the	fair	value	of	common	stock,	based	on	numerous	subjective	and	objective	factors	at	each	grant	date.

# Expected	Term

The	expected	term	represents	the	period	that	our	equity	grants	are	expected	to	be	outstanding.	For	option	grants	that	are	considered	to	be	"simple,"	we	used	the simplified	method	to	determine	the	expected	term	which	calculates	the	expected	term	as	the	average	of	the	time-to-vesting	and	the	contractual	life	of	the	options.	For option	grants	that	are	not	considered	"simple,"	the	expected	term	is	based	on	historical	option	exercise	behavior	and	post-vesting	cancellations	of	options	by	employees. For	ESPP	grants,	the	expected	term	is	based	on	the	length	of	the	offering	period,	which	is	typically	24	months.

# Expected	Volatility

The	 volatility	 is	 derived	 from	 the	 average	 historical	 stock	 volatilities	 of	 a	 peer	 group	 of	 public	 companies	 within	 our	 industry	 that	 we	 consider	 to	 be comparable	to	our	business	over	a	period	equivalent	to	the	expected	term	of	the	stock-based	grants.	We	intend	to	continue	to	consistently	apply	this	process	using	the same	or	similar	public	companies	until	a	sufficient	amount	of	historical	information	regarding	the	volatility	of	our	own	common	stock	share	price	becomes	available,	or unless	circumstances	change	such	that	the	identified	companies	are	no	longer	similar	to	us,	in	which	case,	more	suitable	companies	whose	share	prices	are	publicly available	would	be	utilized	in	the	calculation.

# Risk-Free	Interest	Rate

The	risk-free	 interest	rate	 is	based	on	 the	U.S.	Treasury	yield	curve in	effect	at the time	of	grant	for	zero-coupon	U.S.	Treasury	notes	with	maturities approximately	equal	or	equivalent	to	the	option's	remaining	expected	term.

# Dividend	Yield

The	expected	dividend	assumption	is	based	on	our	current	expectations	about	our	anticipated	dividend	policy.	We	have	never	declared	or	paid	any	cash dividends	and	do	not	presently	plan	to	pay	cash	dividends	in	the	foreseeable	future.	Consequently,	we	used	an	expected	dividend	yield	of	zero.

In	addition	to	the	assumptions	used	above,	we	must	also	estimate	a	forfeiture	rate	to	calculate	the	stock-based	compensation	expense	for	our	awards.	Our forfeiture	rate	is	based	on	an	analysis	of	our	actual	forfeitures.	We	continue	to	evaluate	the	appropriateness	of	the	forfeiture	rate	based	on	actual	forfeiture	experience, analysis	of	employee	turnover	and	other	factors.	Changes	in	the	estimated	forfeiture	rate	can	have	a	significant	impact	on	our	stock-based	compensation	expense	as	the cumulative	effect	of	adjusting	the	rate	is	recognized	in	the	period	the	forfeiture	estimate	is	changed.	We	will	continue	to	use	judgment	in	evaluating	the	assumptions related	to	our	stock-based	compensation	on	a	prospective	basis.	As	we	continue	to	accumulate	additional	data	related	to	our	common	stock,	we	may	refine	our	estimates, which	could	materially	impact	our	future	stock-based	compensation	expense.

# Income	Taxes

Income	tax	expense	is	an	estimate	of	current	income	taxes	payable	in	the	current	fiscal	year	based	on	reported	income	before	income	taxes.	Deferred	income taxes	reflect	the	effect	of	temporary	differences	and	carryforwards	that	we	recognize	for	financial	reporting	and	income	tax	purposes.

We	account	for	income	taxes	under	the	liability	approach	for	deferred	income	taxes,	which	requires	recognition	of	deferred	income	tax	assets	and	liabilities	for the	expected	future	tax	consequences	of	events	that	have	been	recognized	in	our	consolidated	financial	statements,	but	have	not	been	reflected	in	our	taxable	income. Estimates	and	judgments	occur	in	the	calculation	of	certain	tax	liabilities	and	in	the	determination	of	the	recoverability	of	certain	deferred	income	tax	assets,	which	arise from	temporary	differences	and	carryforwards.	Deferred	income	tax	assets	and	liabilities	are	measured	using	the	currently	enacted	tax	rates	that	apply	to	taxable	income in	effect	for	the	years	in	which	those	tax	assets	are	expected	to	be	realized	or	settled.	We	regularly	assess	the	likelihood	that	our	deferred	income	tax	assets	will	be realized	based	on	the	positive	and	negative	evidence	available.	We	record	a	valuation	allowance	to	reduce	the	deferred	tax	assets	to	the	amount	that	we	are	more	likely than	not	to	realize.

We	regularly	review	our	tax	positions	and	benefits	to	be	realized.	We	recognize	tax	liabilities	based	upon	our	estimate	of	whether,	and	to	the	extent	to	which, additional	taxes	will	be	due	when	such	estimates	are	more	likely	than	not	to	be	sustained.	An	uncertain	income	tax	position	will	not	be	recognized	if	it	has	less	than	a 50%	likelihood	of	being	sustained.	We	recognize	interest	and	penalties	related	to	income	tax	matters	as	income	tax	expense.

# Loss	Contingencies

In	the	ordinary	course	of	business,	we	are	a	party	to	claims	and	legal	proceedings	including	matters	relating	to	commercial,	employee	relations,	business practices	and	intellectual	property.	In	assessing	loss	contingencies,	we	use	significant	judgment	and	assumptions	to	estimate	the	likelihood	of	loss,	impairment	of	an asset	or	the	incurrence	of	a	liability,	as	well	as	our	ability	to	reasonably	estimate	the	amount	of	loss.	We	record	a	provision	for	contingent	losses	when	it	is	both	probable that	an	asset	has	been	impaired	or	a	liability	has	been	incurred	and	the	amount	of	the	loss	can	be	reasonably	estimated.	We	will	record	a	charge	equal	to	the	minimum estimated	liability	for	litigation	costs	or	a	loss	contingency	only	when	both	of	the	following	conditions	are	met:	(i)	information	available	prior	to	issuance	of	our consolidated	financial	statements	indicates	that	it	is	probable	that	a	liability	had	been	incurred	at	the	date	of	the	financial	statements	and	(ii)	the	range	of	loss	can	be reasonably	estimated.	We	regularly	evaluate	current	information	available	to	us	to	determine	whether	such	accruals	should	be	adjusted	and	whether	new	accruals	are required.

# Recent	Accounting	Pronouncements

Refer	to	"Recent	Accounting	Pronouncements"	in	Note	1	to	Consolidated	Financial	Statements	included	in	Part	II,	Item	8	of	this	Annual	Report	on	Form	10-K.

# Item	7A.	Quantitative	and	Qualitative	Disclosures	About	Market	Risk

We	are	exposed	to	market	risk	in	the	ordinary	course	of	our	business.	Market	risk	represents	the	risk	of	loss	that	may	impact	our	financial	position	due	to adverse	changes	in	financial	market	prices	and	rates.	Our	market	risk	exposure	is	primarily	a	result	of	fluctuations	in	foreign	currency	exchange	rates,	interest	rates	and investments	in	privately	held	companies.

# Foreign	Currency	Exchange	Risk

Our	results	of	operations	and	cash	flows	are	subject	to	fluctuations	due	to	changes	in	foreign	currency	exchange	rates.	Substantially	all	of	our	revenue	is denominated	in	U.S.	dollars.	Our	expenses	are	generally	denominated	in	the	currencies	in	which	our	operations	are	located,	which	is	primarily	in	the	U.S.	and	to	a	lesser extent	in	Europe	and	Asia.	Our	results	of	operations	and	cash	flows	are,	therefore,	subject	to	fluctuations	due	to	changes	in	foreign	currency	exchange	rates	and	may	be adversely	affected	in	the	future	due	to	changes	in	foreign	exchange	rates.	The	effect	of	an	immediate	10%	adverse	change	in	foreign	exchange	rates	on	monetary	assets and	liabilities	at	December	31,	2015	would	not	be	material	to	our	financial	condition	or	results	of	operations.	To	date,	foreign	currency	transaction	gains	and	losses	and exchange	rate	fluctuations	have	not	been	material	to	our	financial	statements.	While	we	have	not	engaged	in	the	hedging	of	our	foreign	currency	transactions	to	date,	we may	in	the	future	hedge	selected	significant	transactions	denominated	in	currencies	other	than	the	U.S.	dollar.

# Interest	Rate	Sensitivity

Our	exposure	to	market	risk	for	changes	in	interest	rates	relates	primarily	to	our	cash	and	cash	equivalents	and	available-for-sale	marketable	securities.	Our	cash and	cash	equivalents	are	held	in	cash	deposits,	money	market	funds	with	maturities	of	less	than	90	days	from	the	date	of	purchase.	Our	primary	exposure	to	market	risk is	interest	income	sensitivity,	which	is	affected	by	changes	in	the	general	level	of	the	interest	rates	in	the	U.S.	However,	because	of	the	conservative	and	short-term nature	of	the	instruments	in	our	portfolio,	a	sudden	change	in	market	interest	rates	would	not	be	expected	to	have	a	material	impact	on	our	consolidated	financial statements.

As	of	December	31,	2015,	we	had	no	 investments	 in	available-for-sale	marketable	securities.	The	effect	of	an immediate	10%	change in interest	rates at	December	31,	2015	would	not	have	a	material	adverse	impact	on	our	future	operating	results	and	cash	flows.

# Investments	in	Privately	Held	Companies

We	have	invested	in	privately	held	companies	in	2014.	These	investments	are	recorded	in	investments,	non-current	in	our	consolidated	balance	sheets	and	are accounted	for	using	the	cost	method.	As	of	December	31,	2015,	the	total	carrying	amount	of	our	investments	in	privately	held	companies	was	$33.6	million.	Some	of	the privately	held	companies	in	which	we	invested	are	in	the	startup	or	development	stages.	These	investments	are	inherently	risky	because	the	markets	for	the	technologies or	products	these	companies	are	developing	are	typically	in	the	early	stages	and	may	never	materialize.	We	could	lose	our	entire	investment	in	these	companies.	Our evaluation	of	investments	in	privately	held	companies	is	based	on	the	fundamentals	of	the	businesses	invested	in,	including,	among	other	factors,	the	nature	of	their technologies	and	potential	for	financial	return.

# Item	8.	Financial	Statements	and	Supplementary	Data

# INDEX	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

|  | Page |
| :--- | :--- |
| Reports\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 63 |
| Consolidated\tBalance\tSheets | 65 |
| Consolidated\tStatements\tof\tIncome | 66 |
| Consolidated\tStatements\tof\tComprehensive\tIncome | 67 |
| Consolidated\tStatements\tof\tStockholders'\tEquity | 68 |
| Consolidated\tStatements\tof\tCash\tFlows | 69 |
| Notes\tto\tthe\tConsolidated\tFinancial\tStatements | 71 |

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# The	Board	of	Directors	and	Stockholders

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Arista	Networks,	Inc.	as	of	December	31,	2015	and	2014,	and	the	related	consolidated statements	of	income,	comprehensive	income,	stockholders'	equity	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2015.	These	financial statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	Arista	Networks,	Inc.	at December	31,	2015	and	2014,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2015,	in conformity	with	U.S.	generally	accepted	accounting	principles.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	Arista	Networks,	Inc.'s	internal control	 over	 financial	 reporting	 as	 of	 December	 31,	 2015,	 based	 on	 criteria	 established in	Internal	Control-Integrated	Framework issued	 by	 the	 Committee	 of Sponsoring	Organizations	of	the	Treadway	Commission	(2013	framework),	and	our	report	dated	February	25,	2016	expressed	an	unqualified	opinion	thereon.

/s/	Ernst	&	Young	LLP

Redwood	City,	California

We	have	audited	Arista	Networks,	Inc.'s	internal	control	over	financial	reporting	as	of	December	31,	2015,	based	on	criteria	established	in	Internal	Control	- Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(2013	framework)	("the	COSO	criteria").	Arista	Networks, Inc.'s	management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting,	and	for	its	assessment	of	the	effectiveness	of	internal	control	over financial	reporting	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to	express	an	opinion	on	the Company's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our audit	included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design and	operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We believe	that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	 and	 directors	 of	 the	 company;	 and	 (3)	 provide	 reasonable	 assurance	 regarding	 prevention	 or	 timely	 detection	 of	 unauthorized	 acquisition,	 use,	 or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

In	our	opinion,	Arista	Networks,	Inc.	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2015,	based	on the	COSO	criteria.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	2015	consolidated	financial statements	of	Arista	Networks,	Inc.	and	our	report	dated	February	25,	2016	expressed	an	unqualified	opinion	thereon.

# Consolidated	Balance	Sheets

# (In	thousands,	except	par	value)

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| ASSETS |  |  |
| CURRENT\tASSETS: |  |  |
| Cash\tand\tcash\tequivalents | $687,326 | $240,031 |
| Marketable\tsecurities | — | 209,426 |
| Accounts\treceivable,\tnet\tof\tallowances\tof\t$1,529\tand\t$3,094,\trespectively | 144,263 | 96,982 |
| Inventories | 92,129 | 78,006 |
| Deferred\ttax\tassets | — | 12,252 |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 50,610 | 42,782 |
| Total\tcurrent\tassets | 974,328 | 679,479 |
| Property\tand\tequipment,\tnet | 79,706 | 71,558 |
| Investments | 36,636 | 36,636 |
| Deferred\ttax\tassets | 48,429 | 11,510 |
| Other\tassets | 20,791 | 11,840 |
| TOTAL\tASSETS | $1,159,890 | $811,023 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| CURRENT\tLIABILITIES: |  |  |
| Accounts\tpayable | $43,966 | $32,428 |
| Accrued\tliabilities | 60,971 | 40,369 |
| Deferred\trevenue | 122,049 | 60,327 |
| Other\tcurrent\tliabilities | 8,025 | 11,249 |
| Total\tcurrent\tliabilities | 235,011 | 144,373 |
| Income\ttaxes\tpayable | 14,060 | 17,323 |
| Lease\tfinancing\tobligations,\tnon-current | 41,210 | 42,547 |
| Deferred\trevenue,\tnon-current | 74,759 | 46,141 |
| Other\tlong-term\tliabilities | 6,698 | 4,981 |
| TOTAL\tLIABILITIES | 371,738 | 255,365 |
| Commitments\tand\tcontingencies\t(Note\t5) |  |  |
| STOCKHOLDERS'\tEQUITY: |  |  |
| December\t31,\t2015\tand\t2014 | — | — |
| and\t65,528\tshares\tissued\tand\toutstanding\tas\tof\tDecember\t31,\t2015\tand\tDecember\t31,\t2014 | 7 | 7 |
| Additional\tpaid-in\tcapital | 537,904 | 426,171 |
| Retained\tearnings | 250,916 | 129,814 |
| Accumulated\tother\tcomprehensive\tloss | (675) | (334) |
| TOTAL\tSTOCKHOLDERS'\tEQUITY | 788,152 | 555,658 |
| TOTAL\tLIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY | $1,159,890 | $811,023 |

The	accompanying	notes	are	an	integral	part	of	these	consolidated	financial	statements.

# Consolidated	Statements	of	Income

# (In	thousands,	except	per	share	amounts)

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |
| Product | $744,877 | $531,543 | $331,687 |
| Service | 92,714 | 52,563 | 29,537 |
| Total\trevenue | 837,591 | 584,106 | 361,224 |
| Cost\tof\trevenue: |  |  |  |
| Product | 263,585 | 174,004 | 112,958 |
| Service | 30,446 | 18,011 | 9,728 |
| Total\tcost\tof\trevenue | 294,031 | 192,015 | 122,686 |
| Gross\tprofit | 543,560 | 392,091 | 238,538 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment | 209,448 | 148,909 | 98,587 |
| Sales\tand\tmarketing | 109,084 | 85,338 | 55,115 |
| General\tand\tadministrative | 75,720 | 32,331 | 18,688 |
| Total\toperating\texpenses | 394,252 | 266,578 | 172,390 |
| Income\tfrom\toperations | 149,308 | 125,513 | 66,148 |
| Other\tincome\t(expense),\tnet: |  |  |  |
| Interest\texpense—related\tparty | — | (782) | (1,739) |
| Interest\texpense | (3,152) | (5,498) | (5,380) |
| Other\tincome\t(expense),\tnet | (147) | 2,275 | (754) |
| Total\tother\tincome\t(expense),\tnet | (3,299) | (4,005) | (7,873) |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 146,009 | 121,508 | 58,275 |
| Provision\tfor\tincome\ttaxes | 24,907 | 34,658 | 15,815 |
| Net\tincome | $121,102 | $86,850 | $42,460 |
| Net\tincome\tattributable\tto\tcommon\tstockholders: |  |  |  |
| Basic | $119,115 | $68,889 | $20,777 |
| Diluted | $119,264 | $70,524 | $21,780 |
| Net\tincome\tper\tshare\tattributable\tto\tcommon\tstockholders: |  |  |  |
| Basic | $1.81 | $1.42 | $0.76 |
| Diluted | $1.67 | $1.29 | $0.72 |
| Weighted-average\tshares\tused\tin\tcomputing\tnet\tincome\tper\tshare\tattributable\tto\tcommon\tstockholders: |  |  |  |
| Basic | 65,964 | 48,427 | 27,320 |
| Diluted | 71,411 | 54,590 | 30,051 |

# Consolidated	Statements	of	Comprehensive	Income

# (In	thousands)

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $121,102 | $86,850 | $42,460 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustments | (494) | (217) | (2) |
| Change\tin\tnet\tunrealized\tloss\ton\tavailable-for-sale\tsecurities | 153 | (153) | — |
| Other\tcomprehensive\tloss | (341) | (370) | (2) |
| Comprehensive\tincome | $120,761 | $86,480 | $42,458 |

# Consolidated	Statements	of	Stockholders'	Equity

|  |  |  |  |  |  |  | Accumulated |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Convertible\tPreferred\tStock | Convertible\tPreferred\tStock | Common\tStock | Common\tStock |  |  | Other | Total |
|  | Shares | Amount | Shares | Amount | Additional\nPaid-In\tCapital | Retained\nEarnings | Comprehensive\nIncome\t(Loss) | Stockholders'\nEquity |
| Balance—December\t31,\t2012 | 24,000 | $5,992 | 30,306 | $3 | $12,373 | $504 | $38 | $18,910 |
| Net\tincome | — | — | — | — | — | 42,460 | — | 42,460 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | — | — | — | — | — | — | (2) | (2) |
| Tax\tbenefit\tfor\tequity\tincentive\tplans | — | — | — | — | 552 | — | — | 552 |
| Stock-based\tcompensation | — | — | — | — | 10,159 | — | — | 10,159 |
| Vesting\tof\tstock\toptions\tand\trestricted\tstock | — | — | — | — | 4,041 | — | — | 4,041 |
| Exercise\tof\tstock\toptions,\tnet\tof\trepurchases | — | — | 1,600 | — | 1,453 | — | — | 1,453 |
| Exercise\tof\tstock\tpurchase\trights | — | — | 21 | — | 159 | — | — | 159 |
| Balance—December\t31,\t2013 | 24,000 | 5,992 | 31,927 | 3 | 28,737 | 42,964 | 36 | 77,732 |
| Net\tincome | — | — | — | — |  | 86,850 | — | 86,850 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | — | — | — | — | — | — | (370) | (370) |
| Issuance\tof\tcommon\tstock\tfrom\tinitial\npublic\toffering,\tnet\tof\toffering\tcosts | — | — | 6,038 | 1 | 239,054 | — | — | 239,055 |
| Conversion\tof\tconvertible\tpreferred\tstock |  |  |  |  |  |  |  |  |
| into\tcommon\tstock\tupon\tinitial\tpublic |  |  |  |  |  |  |  |  |
| offering | (24,000) | (5,992) | 24,000 | 3 | 5,989 | — | — | — |
| Conversion\tof\tnotes\tpayable\tand\taccrued |  |  |  |  |  |  |  |  |
| interest\tinto\tcommon\tstock\tupon\tinitial |  |  |  |  |  |  |  |  |
| public\toffering | — | — | 1,543 | — | 66,338 | — | — | 66,338 |
| Conversion\tof\tnotes\tpayable\tand\taccrued |  |  |  |  |  |  |  |  |
| interest,\trelated\tparty,\tinto\tcommon\tstock |  |  |  |  |  |  |  |  |
| upon\tinitial\tpublic\toffering | — | — | 701 | — | 30,153 | — | — | 30,153 |
| Tax\tbenefit\tfor\tequity\tincentive\tplans | — | — | — | — | 17,358 | — | — | 17,358 |
| Stock-based\tcompensation | — | — | — | — | 27,619 | — | — | 27,619 |
| Vesting\tof\tstock\toptions\tand\trestricted\tstock | — | — | — | — | 4,095 | — | — | 4,095 |
| Exercise\tof\tstock\toptions,\tnet\tof\trepurchases | — | — | 1,319 | — | 6,828 | — | — | 6,828 |
| Balance—December\t31,\t2014 | — | — | 65,528 | 7 | 426,171 | 129,814 | (334) | 555,658 |
| Net\tincome | — | — | — | — | — | 121,102 |  | 121,102 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | — | — | — | (341) | (341) |
| Tax\tbenefit\tfor\tequity\tincentive\tplans | — | — | — | — | 37,003 | — | — | 37,003 |
| Stock-based\tcompensation | — | — | — | — | 45,303 | — | — | 45,303 |
| Issuance\tof\tcommon\tstock\tin\tconnection\nwith\temployee\tstock\tpurchase\tplan |  |  |  |  |  |  |  |  |
|  | — | — | 247 | — | 9,366 | — | — | 9,366 |
| Vesting\tof\tstock\toptions\tand\trestricted\tstock | — | — | 27 | — | 2,226 | — | — | 2,226 |
| Exercise\tof\tstock\toptions,\tnet\tof\trepurchases | — | — | 2,330 | — | 17,835 | — | — | 17,835 |
| Balance—December\t31,\t2015 | — | $— | 68,132 | $7 | $537,904 | $250,916 | $(675) | $788,152 |

# Consolidated	Statements	of	Cash	Flows

|  | 2015 | Year	Ended	December	31,<br>2014 | 2013 |
| :--- | :--- | :--- | :--- |
| CASH\tFLOWS\tFROM\tOPERATING\tACTIVITIES: |  |  |  |
| Net\tincome | $121,102 | $86,850 | $42,460 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 13,671 | 10,021 | 5,044 |
| Stock-based\tcompensation | 45,303 | 27,619 | 10,159 |
| Deferred\tincome\ttaxes | (24,409) | (6,774) | (8,831) |
| Amortization\tof\tinvestment\tpremiums | 1,471 | 348 | — |
| Realized\tgain\ton\tnotes\treceivable | — | (4,000) | — |
| Amortization\tof\tdebt\tdiscount | — | 527 | 1,118 |
| Write-off\tof\tdebt\tdiscount\ton\tnotes\tpayable | — | 680 | — |
| Excess\ttax\tbenefit\ton\tstock\tbased-compensation | (37,251) | (17,436) | (882) |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Accounts\treceivable,\tnet | (47,281) | (18,984) | (28,098) |
| Inventories | (14,123) | (13,425) | (49,179) |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | (7,827) | (15,257) | 2,981 |
| Other\tassets | (3,087) | (4,261) | (305) |
| Accounts\tpayable | 9,037 | 14,007 | 3,865 |
| Accrued\tliabilities | 20,398 | 18,874 | 11,967 |
| Deferred\trevenue | 90,340 | 47,564 | 34,127 |
| Interest\tpayable | — | (1,630) | 4,501 |
| Interest\tpayable—related\tparty | — | 670 | 1,500 |
| Income\ttaxes\tpayable | 32,018 | 4,377 | 2,141 |
| Other\tliabilities | 1,171 | 2,105 | 2,080 |
| Net\tcash\tprovided\tby\toperating\tactivities | 200,533 | 131,875 | 34,648 |
| CASH\tFLOWS\tFROM\tINVESTING\tACTIVITIES: |  |  |  |
| Purchases\tof\tmarketable\tsecurities | — | (210,019) | — |
| Proceeds\tfrom\tmarketable\tsecurities | 208,200 | — | — |
| Purchases\tof\tproperty\tand\tequipment | (19,989) | (13,134) | (20,316) |
| Proceeds\tfrom\trepayment\tof\tnotes\treceivable | — | 8,000 | 1,000 |
| Change\tin\trestricted\tcash | (4,041) | 4,040 | — |
| Other\tinvesting\tactivities | — | (38,249) | (175) |
| Net\tcash\tprovided\tby\t(used\tin)\tinvesting\tactivities | 184,170 | (249,362) | (19,491) |
| CASH\tFLOWS\tFROM\tFINANCING\tACTIVITIES: |  |  |  |
| Proceeds\tfrom\tinitial\tpublic\toffering,\tnet\tof\tissuance\tcost | (261) | 239,315 | — |
| Repayment\ton\tnotes\tpayable | — | (20,000) | — |
| Principal\tpayments\tof\tlease\tfinancing\tobligations | (1,086) | (793) | — |
| Excess\ttax\tbenefit\ton\tstock-based\tcompensation | 37,251 | 17,436 | 882 |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock\tupon\texercising\toptions,\tnet\tof\trepurchases | 17,835 | 8,020 | 9,004 |
| \t\t\t\t\t\t\t\t\tProceeds\tfrom\tissuance\tof\tcommon\tstock,\temployee\tstock\tpurchase\tplan | 9,366 | — | — |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 63,105 | 243,978 | 9,886 |
| Effect\tof\texchange\trate\tchanges | (513) | (124) | (34) |
| NET\tINCREASE\tIN\tCASH\tAND\tCASH\tEQUIVALENTS | 447,295 | 126,367 | 25,009 |
| CASH\tAND\tCASH\tEQUIVALENTS—Beginning\tof\tyear | 240,031 | 113,664 | 88,655 |
| CASH\tAND\tCASH\tEQUIVALENTS—End\tof\tyear | $687,326 | $240,031 | $113,664 |
| SUPPLEMENTAL\tDISCLOSURES\tOF\tCASH\tFLOW\tINFORMATION: |  |  |  |
| Cash\tpaid\tfor\tincome\ttaxes,\tnet\tof\trefunds | $6,591 | $44,770 | $16,806 |

|  |  | Year	Ended	December	31, |  |
| :--- | :--- | :--- | :--- |
|  | 2015 | 2014 | 2013 |
| Cash\tpaid\tfor\tinterest—\tlease\tfinancing\tobligation | $2,999 | $2,809 | $— |
| Cash\tpaid\tfor\tinterest—\tnotes\tpayable | $— | $3,639 | $— |
| SUPPLEMENTAL\tDISCLOSURES\tOF\tNON-CASH\tINVESTING\tAND\tFINANCING\nINFORMATION: |  |  |  |
| Property\tand\tequipment\tincluded\tin\taccounts\tpayable\tand\taccrued\tliabilities | $3,957 | $1,638 | $398 |
| Vesting\tof\tearly\texercised\tstock\toptions\tand\trestricted\tstock\tawards | $2,226 | $4,095 | $4,041 |
| Conversion\tof\tnotes\tpayable\tand\taccrued\tinterest\tto\tcommon\tstock\tupon\tinitial\tpublic\toffering | $— | $66,338 | $— |
| Conversion\tof\tnotes\tpayable\tand\taccrued\tinterest,\trelated\tparty,\tto\tcommon\tstock\tupon\tinitial\tpublic\noffering | $— | $30,153 | $— |
| Conversion\tof\tconvertible\tpreferred\tstock\tto\tcommon\tstock\tupon\tinitial\tpublic\toffering | $— | $5,992 | $— |
| Acquisition\tof\tbuilding\twith\tfinancing\tobligation | $— | $456 | $18,718 |
| Unpaid\tdeferred\toffering\tcosts | $— | $261 | $— |

# Notes	to	Consolidated	Financial	Statements

# 1.				Organization	and	Summary	of	Significant	Accounting	Policies

# Organization

Arista	Networks,	Inc.	(together	with	our	subsidiaries,	"we,"	"our"	or	"us")	is	a	supplier	of	cloud	networking	solutions	that	use	software	innovations	to	address the	needs	of	large-scale	Internet	companies,	cloud	service	providers	and	next-generation	enterprise.	Our	cloud	networking	solutions	consist	of	our	Extensible	Operating System,	a	set	of	network	applications	and	our	10/25/40/50/100	Gigabit	Ethernet	switches.	We	were	incorporated	in	October	2004	in	the	State	of	California	under	the name	Arastra,	Inc.	In	March	2008,	we	reincorporated	in	the	State	of	Nevada	and	in	October	2008	changed	our	name	to	Arista	Networks,	Inc.	We	reincorporated	in	the state	of	Delaware	in	March	2014.	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	consolidated	financial	statements	include	the	accounts	of	Arista	Networks,	Inc.	and	its	wholly	owned	subsidiaries	and	are	prepared	in accordance	with	U.S.	generally	accepted	accounting	principles	(GAAP).	All	significant	intercompany	accounts	and	transactions	have	been	eliminated.

Certain	prior	period	amounts	have	been	reclassified	to	conform	with	current	period	presentation.	Commencing	in	the	first	quarter	of	fiscal	2015,	we	have disaggregated	total	revenue	and	cost	of	revenue	into	"Product"	and	"Service".	Commencing	in	the	second	quarter	of	fiscal	2015,	we	have	reclassified	deferred	cost	of revenue	from	inventories	to	other	current	assets	as	the	balance	does	not	represent	property	available	for	sale	or	used	in	the	production	process.	The	change	resulted	in	a $2.5	million	reclassification	between	inventory	and	other	current	assets	retrospectively	applied	to	our	fiscal	2014	consolidated	balance	sheet.

# 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, revenue	recognition	and	deferred	revenue;	allowance	for	doubtful	accounts	and	sales	return	reserve;	determination	of	fair	value	for	stock-based	awards;	accounting	for income	taxes,	including	the	valuation	allowance	on	deferred	tax	assets	and	reserves	for	uncertain	tax	positions;	valuation	of	inventory;	valuation	of	warranty	accruals; and	the	recognition	and	measurement	of	contingent	liabilities.	We	evaluate	our	estimates	and	assumptions	on	an	ongoing	basis	using	historical	experience	and	other factors	and	adjust	those	estimates	and	assumptions	when	facts	and	circumstances	dictate.	As	future	events	and	their	effects	cannot	be	determined	with	precision,	actual results	could	differ	from	these	estimates,	and	those	differences	could	be	material	to	the	consolidated	financial	statements.

# Concentrations	of	Business	and	Credit	Risk

We	work	closely	with	third-party	contract	manufacturing	suppliers	 to	manufacture	our	products.	As	of	December	31,	2015	 and	December	31,	2014,	 two suppliers	 provided	 substantially	 all	 of	 our	 electronic	 manufacturing	 services.	 Our	 contract	 manufacturing	 suppliers	 deliver	 our	 products	 to	 our	 third	 party	 direct fulfillment	facilities	where	our	EOS	software	is	installed	on	our	products.		We	and	our	fulfillment	partners	then	perform	labeling,	final	configuration,	quality	assurance testing	and	shipment	to	our	customers.	Our	products	rely	on	key	components,	including	certain	integrated	circuit	components	and	power	supplies,	some	of	which	our contract	manufacturers	purchase	on	our	behalf	from	a	limited	number	of	suppliers,	including	certain	sole	source	providers.	We	do	not	have	guaranteed	supply	contracts with	any	of	our	component	suppliers,	and	our	suppliers	could	delay	shipments	or	cease	manufacturing	such	products	or	selling	them	to	us	at	any	time.	If	we	are	unable	to obtain	a	sufficient	quantity	of	these	components	on	commercially	reasonable	terms	or	in	a	timely	manner,	sales	of	our	products	could	be	delayed	or	halted	entirely	or	we may	be	required	to	redesign	our	products.	Quality	or	performance	failures	of	our	products	or	changes	in	our	contractors'	or	vendors'	financial	or	business	condition could	disrupt	our	ability	to	supply	quality	products	to	our	customers.	Any	of	these	events	could	result	in	lost	sales	and	damage	to	our	end-customer	relationships,	which would	adversely	impact	our	business,	financial	condition	and	results	of	operations.

Financial	instruments	that	potentially	subject	us	to	concentrations	of	credit	risk	consist	primarily	of	cash,	cash	equivalents,	marketable	securities,	restricted cash,	and	accounts	receivable.	Our	cash,	cash	equivalents	and	restricted	cash	are	invested	in	high	quality	financial	instruments	with	banks	and	financial	institutions.	Such deposits	may	be	in	excess	of	insured	limits	provided	on	such	deposits.

Our	accounts	receivable	are	unsecured	and	represent	amounts	due	to	us	based	on	contractual	obligations	of	our	customers.	We	mitigate	credit	risk	in	respect	to accounts	receivable	by	performing	ongoing	credit	evaluations	of	our	customers	to	assess	the	probability	of	accounts	receivable	collection	based	on	a	number	of	factors, including	 past	 transaction	 experience	 with	 the	 customer,	 evaluation	 of	 their	 credit	 history,	 the	 credit	 limits	 extended	 and	 review	 of	 the	 invoicing	 terms	 of	 the arrangement.	In	situations	where	a	customer	may	be	thinly	capitalized	and	we	have	limited	payment	history	with	it,	we	will	either	establish	a	small	credit	limit	or	require it	to	prepay	its	purchases.	We	generally	do	not	require	our	customers	to	provide	collateral	to	support	accounts	receivable.	We	have	recorded	an	allowance	for	doubtful accounts	for	those	receivables	that	we	have	determined	not	to	be	collectible.	We	mitigate	credit	risk	in	respect	to	the	notes	receivable	by	performing	ongoing	credit evaluations	of	the	borrower	to	assess	the	probability	of	collecting	all	amounts	due	to	us	under	the	existing	contractual	terms.

We	market	and	sell	our	products	through	both	our	direct	sales	force	and	our	channel	partners,	including	distributors,	value-added	resellers,	system	integrators and	original	equipment	manufacturer	("OEM")	partners	and	in	conjunction	with	various	technology	partners.	Significant	customers	are	those	which	represent	more	than 10%	of	our	total	net	revenue	during	the	period	or	net	accounts	receivable	balance	at	each	respective	balance	sheet	date.	For	each	significant	customer,	revenue	as	a percentage	of	total	revenue	and	accounts	receivable	as	a	percentage	of	total	accounts	receivable	are	as	follows:

|  | Revenue | Revenue | Revenue | Accounts	Receivable | Accounts	Receivable |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | \tYear\tEnded\tDecember\t31, |  | December\t31, |  |
| Customers | 2015 | 2014 | 2013 | 2015 | 2014 |
| Customer\tA | 12% | 15% | 22% | 30% | 15% |

# Comprehensive	Income

Comprehensive	income	is	comprised	of	net	income	and	other	comprehensive	income.	Unrealized	gains	and	losses	on	available-for-sale	investments	and	foreign currency	translation	adjustments	are	included	in	our	other	comprehensive	income	or	loss.

# Cash	and	Cash	Equivalents

We	consider	all	highly	liquid	investments	with	stated	maturity	of	three	months	or	less	at	the	time	of	purchase	to	be	cash	equivalents.	Cash	and	cash	equivalents consist	of	cash	on	deposit	with	various	financial	institutions	and	highly	liquid	investments	in	money	market	funds.	Interest	is	accrued	as	earned.	We	have	restricted	cash pledged	as	collateral	representing	a	security	deposit	required	for	a	facility	lease.	As	of	December	31,	2015,	we	had	classified	the	restricted	cash	of	$4.0	million	as	other assets	in	our	accompanying	consolidated	balance	sheet.	We	did	not	have	any	restricted	cash	as	of	December	31,	2014.

# Marketable	Securities

We	invest	our	excess	cash	primarily	in	money	market	and	highly	liquid	debt	instruments	of	the	U.S.	government.	We	classify	all	highly	liquid	investments	with stated	maturities	of	greater	than	three	months	as	marketable	securities.	We	determine	the	appropriate	classification	of	our	investments	in	marketable	securities	at	the	time of	purchase	and	reevaluate	such	designation	at	each	balance	sheet	date.	We	have	classified	and	accounted	for	our	marketable	securities	as	available-for-sale.	We	may	or may	not	hold	securities	with	stated	maturities	greater	than	12	months	until	maturity.	After	consideration	of	our	risk	versus	reward	objectives,	as	well	as	our	liquidity requirements,	we	may	sell	these	securities	prior	to	their	stated	maturities.	As	we	view	these	securities	as	available	to	support	current	operations,	we	classify	securities with	maturities	beyond	12	months	as	current	assets	under	the	caption	marketable	securities	in	the	accompanying	consolidated	balance	sheets.	We	carry	these	securities	at fair	value,	and	report	the	unrealized	gains	and	losses,	net	of	taxes,	as	a	component	of	stockholders'	equity,	except	for	unrealized	losses	determined	to	be	other-than- temporary,	which	we	record	as	other	income	(expense),	net.	We	determine	any	realized	gains	or	losses	on	the	sale	of	marketable	securities	on	a	specific	identification method,	and	we	record	such	gains	and	losses	as	a	component	of	interest	and	other	income,	net.

# Accounts	Receivable

Accounts	receivable	are	recorded	at	the	invoiced	amount,	net	of	allowances	for	doubtful	accounts,	and	sales	return	reserves.	We	estimate	our	allowance	for doubtful	accounts	based	upon	the	collectability	of	the	receivables	in	light	of	historical	trends,	adverse	situations	that	may	affect	our	customers'	ability	to	pay	and prevailing	economic	conditions.	This	evaluation	is	done	in	order	to	identify	issues	which	may	impact	the	collectability	of	receivables	and	related	estimated	required allowance.	Revisions	to	the	allowance	are	recorded	as	an	adjustment	to	bad	debt	expense.	After	appropriate	collection	efforts	are	exhausted,	specific	accounts	receivable deemed	to	be	uncollectible	are	charged	against	the	allowance	in	the	period	they	are	deemed	uncollectible.	Recoveries	of	accounts	receivable	previously	written-off	are recorded	as	credits	to	bad	debt	expense.	We	estimate	our	sales	return	reserves	based	on	historical	return	rates	applied	against	current	period	gross	revenues.	Specific customer	returns	and	allowances	are	considered	when	determining	our	sales	return	reserve	estimate.	Revisions	to	the	reserve	are	recorded	as	adjustments	to	revenue	and the	sales	return	reserves.

# Fair	Value	Measurements

Fair	value	is	defined	as	the	exchange	price	that	would	be	received	for	an	asset	or	an	exit	price	that	would	be	paid	to	transfer	a	liability	in	the	principal	or	most advantageous	market	for	the	asset	or	liability	in	an	orderly	transaction	between	market	participants	on	the	measurement	date.	We	apply	fair	value	accounting	for	all financial	assets	and	liabilities	that	are	recognized	or	disclosed	at	fair	value	in	the	financial	statements	on	a	recurring	basis.	The	carrying	amounts	reported	in	the consolidated	financial	statements	approximate	the	fair	value	for	cash	and	cash	equivalents,	restricted	cash,	accounts	receivable,	accounts	payable	and	accrued	liabilities due	to	their	short-term	nature.	For	certain	investments	where	we	have	elected	the	fair	value	option,	these	investments	are	stated	at	fair	value.

Assets	and	liabilities	recorded	at	fair	value	on	a	recurring	basis	in	the	accompanying	consolidated	balance	sheets	are	categorized	based	upon	the	level	of judgment	associated	with	the	inputs	used	to	measure	their	fair	value.	We	use	a	fair	value	hierarchy	to	measure	fair	value,	maximizing	the	use	of	observable	inputs	and minimizing	the	use	of	unobservable	inputs.	The	three-tiers	of	the	fair	value	hierarchy	are	as	follows:

Level	I—Inputs	are	unadjusted,	quoted	prices	in	active	markets	for	identical	assets	or	liabilities	at	the	measurement	date;

Level	II—Inputs	are	observable,	unadjusted	quoted	prices	in	active	markets	for	similar	assets	or	liabilities,	unadjusted	quoted	prices	for	identical	or	similar assets	or	liabilities	in	markets	that	are	not	active,	or	other	inputs	that	are	observable	or	can	be	corroborated	by	observable	market	data	for	substantially	the	full	term	of the	related	assets	or	liabilities;	and

Level	III—Unobservable	inputs	that	are	supported	by	little	or	no	market	data	for	the	related	assets	or	liabilities	and	typically	reflect	management's	estimate	of assumptions	that	market	participants	would	use	in	pricing	the	asset	or	liability.

Our	financial	instruments	consist	of	Level	I	and	include	highly	liquid	money	market	funds	that	are	included	in	cash	and	cash	equivalents	and	U.S.	government notes	classified	as	marketable	securities.

# Foreign	Currency

The	functional	currency	of	our	foreign	subsidiaries	is	either	the	U.S.	dollar	or	their	local	currency.

Transaction	re-measurement-Assets	and	liabilities	denominated	in	a	currency	other	than	the	foreign	subsidiaries'	functional	currency	are	re-measured	into	the functional	currency	using	exchange	rates	in	effect	at	the	end	of	the	reporting	period,	with	gains	and	losses	recorded	in	other	income	(expense),	net	in	the	consolidated statements	of	income.	We	recognized	$0.5	million,	$0.6	million	and	$0.1	million,	in	transaction	losses	for	the	years	ended	December	31,	2015,	2014	and	2013, respectively.

Translation-Assets	and	liabilities	of	subsidiaries	denominated	in	foreign	functional	currencies	are	translated	into	U.S.	dollars	at	the	closing	exchange	rate	on the	balance	sheet	date	and	equity	related	balances	are	translated	at	historical	exchange	rates.	Revenues,	costs	and	expenses	in	foreign	functional	currencies	are	translated using	average	exchange	rates	that	approximate	those	in	effect	during	the	period.	Translation	adjustments	are	accumulated	as	a	separate	component	of	accumulated	other comprehensive	income	within	stockholders'	equity	(deficit).

For	the	years	ended	December	31,	2015,	2014	and	2013,	we	recorded	inventory	write-downs	of	$9.0	million,	$2.8	million	and	$5.3	million,	respectively.		In addition,	our	contract	manufacturer	and	supplier	liabilities	totaled	$3.8	million	and	$0.3	million	as	of	December	31,	2015	and	2014,	respectively.

# Property	and	Equipment

Property	and	equipment	are	stated	at	cost,	less	accumulated	depreciation.	Depreciation	is	calculated	using	the	straight-line	method	over	the	shorter	of	the estimated	useful	lives	of	the	related	assets,	generally	from	one	to	five	years,	30	years	for	buildings	or	the	lease	term	for	leasehold	improvements.	The	leased	building under	our	build	to	suit	lease	is	capitalized	and	included	in	property	and	equipment	as	we	were	involved	in	the	construction	funding	and	did	not	meet	the	"sale-leaseback" criteria.

# Investments

Our	investments	in	privately-held	companies	are	accounted	for	under	the	cost	method	and	are	included	in	investments,	non-current	in	the	accompanying consolidated	balance	sheets.	Initial	measurement	of	our	investments	under	the	cost	method	were	recorded	at	historical	cost	which	represents	our	initial	investment	in	the privately-held	companies.

Our	unsecured	promissory	note	receivable	 investment	with	a	privately	held	company	was	recorded	at	cost.	Interest income is	recorded in	other income (expense),	in	the	accompanying	consolidated	statements	of	income	at	each	reporting	period.

# Impairment	of	Long-Lived	Assets	and	Investments

The	carrying	amounts	of	our	long-lived	assets,	including	property	and	equipment	and	investments	in	privately-held	companies,	are	periodically	reviewed	for impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	value	of	these	assets	may	not	be	recoverable.	Recoverability	of	these	assets	is measured	by	comparison	of	the	carrying	amount	of	each	asset	to	the	future	undiscounted	cash	flows	the	asset	is	expected	to	generate	over	their	remaining	lives.	If	the asset	is	considered	to	be	impaired,	the	amount	of	any	impairment	is	measured	as	the	difference	between	the	carrying	value	and	the	fair	value	of	the	impaired	asset.	No impairment	of	any	long-lived	assets	or	investments	was	identified	for	any	of	the	periods	presented.

In	the	ordinary	course	of	business,	we	are	a	party	to	claims	and	legal	proceedings	including	matters	relating	to	commercial,	employee	relations,	business practices	and	intellectual	property.	In	assessing	loss	contingencies,	we	use	significant	judgment	and	assumptions	to	estimate	the	likelihood	of	loss,	impairment	of	an asset	or	the	incurrence	of	a	liability,	as	well	as	our	ability	to	reasonably	estimate	the	amount	of	loss.	We	record	a	provision	for	contingent	losses	when	it	is	both	probable that	an	asset	has	been

impaired	or	a	liability	has	been	incurred	and	the	amount	of	the	loss	can	be	reasonably	estimated.	We	will	record	a	charge	equal	to	the	minimum	estimated	liability	for litigation	costs	or	a	loss	contingency	only	when	both	of	the	following	conditions	are	met:	(i)	information	available	prior	to	issuance	of	our	consolidated	financial statements	indicates	that	it	is	probable	that	a	liability	had	been	incurred	at	the	date	of	the	financial	statements	and	(ii)	the	range	of	loss	can	be	reasonably	estimated.	We regularly	evaluate	current	information	available	to	us	to	determine	whether	such	accruals	should	be	adjusted	and	whether	new	accruals	are	required.

Most	of	our	arrangements,	other	than	renewals	of	PCS,	are	multiple	element	arrangements	with	a	combination	of	products	and	PCS.	Products	and	PCS generally	qualify	as	separate	units	of	accounting.	Our	hardware	deliverables	include	EOS	software,	which	together	deliver	the	essential	functionality	of	our	products. For	multiple	element	arrangements,	we	allocate	revenue	to	each	unit	of	accounting	based	on	the	relative	selling	price.	The	relative	selling	price	for	each	element	is	based upon	the	following	hierarchy:	vendor-specific	objective	evidence	("VSOE"),	if	available;	third-party	evidence	("TPE"),	if	VSOE	is	not	available;	and	best	estimate	of selling	price	("BESP"),	if	neither	VSOE	nor	TPE	is	available.	As	we	have	not	been	able	to	establish	VSOE	or	TPE	for	our	products	and	most	of	our	services,	we generally	utilize	BESP	for	the	purposes	of	allocating	revenue	to	each	unit	of	accounting.

We	account	for	multiple	agreements	with	a	single	partner	as	one	arrangement	if	the	contractual	terms	and/or	substance	of	those	agreements	indicate	that	they may	be	so	closely	related	that	they	are,	in	effect,	parts	of	a	single	arrangement.

Costs	related	to	the	research,	design	and	development	of	our	products	are	charged	to	research	and	development	expenses	as	incurred.	Software	development costs	are	capitalized	beginning	when	a	product's	technological	feasibility	has	been	established	and	ending	when	the	product	is	available	for	general	release	to	customers. Generally,	our	products	are	released	soon	after	technological	feasibility	has	been	established.	As	a	result,	costs	incurred	subsequent	to	achieving	technological	feasibility have	not	been	significant	and	accordingly,	all	software	development	costs	have	been	expensed	as	incurred.

# Post-Employment	Benefits

We	have	a	401(k)	Plan	that	covers	substantially	all	of	our	employees	in	the	U.S.	For	the	years	ended	December	31,	2015,	2014	and	2013,	we	did	not	provide	a discretionary	company	match	to	employee	contributions.

# Segment	Reporting

We	develop,	market	and	sell	cloud	networking	solutions,	which	consist	of	our	Gigabit	Ethernet	switches	and	related	software.	We	have	one	business	activity and	there	are	no	segment	managers	who	are	held	accountable	for	operations	or	operating	results	below	the	Company	level.	Our	chief	operating	decision	maker	is	our Chief	Executive	Officer.	Our	Chief	Executive	Officer	reviews	financial	information	presented	on	a	consolidated	basis	for	purposes	of	allocating	resources	and	evaluating financial	performance.	Accordingly,	we	have	determined	that	we	operate	as	one	reportable	segment.

Compensation	expense	related	to	stock-based	transactions,	including	stock	options,	restricted	stock	units	("RSUs"),	restricted	stock	awards	("RSAs"),	and stock	purchase	rights	under	our	employee	stock	purchase	program	is	measured	and	recognized	in	the	financial	statements	based	on	the	fair	value	of	the	equity	granted, net	of	estimated	forfeitures.	Stock-based	compensation	expense	is	generally	recognized,	net	of	forfeitures,	on	a	straight-line	basis	over	the	requisite	service	periods	of the	awards,	which	typically	ranges	from	two	to	five	years.

				Excess	tax	benefits	associated	with	stock	option	exercises	and	other	equity	awards	are	recognized	in	additional	paid	in	capital.	The	income	tax	benefits	resulting	from stock	awards	that	were	credited	to	stockholders'	equity	were	$37.0	million,	$17.4	million	and	$0.6	million,	for	the	years	ended	December	31,	2015,	2014	 and	2013, respectively.

# Net	Income	per	Share	of	Common	Stock

Basic	and	diluted	net	income	per	share	attributable	to	common	stockholders	is	calculated	in	conformity	with	the	two-class	method	required	for	participating securities.	We	considered	our	Series	A	convertible	preferred	stock	to	be	participating	securities.	Under	the	two-class	method,	net	income	attributable	to	common stockholders	is	determined	by	allocating	undistributed	earnings,	calculated	as	net	income	less	current	period	convertible	preferred	stock	non-cumulative	dividends, among	our	common	stock	and	convertible	preferred	stock.	In	computing	diluted	net	income	attributable	to	common	stockholders,	undistributed	earnings	are	re-allocated to	reflect	the	potential	impact	of	dilutive	securities.	Basic	net	income	per	common	share	is	computed	by	dividing	the	net	income	attributable	to	common	stockholders	by the	weighted-average	number	of	common	shares	outstanding	during	the	period.	Shares	of	common	stock	subject	to	repurchase	resulting	from	the	early	exercise	of employee	stock	options	are	considered	participating	securities.	Diluted	net	income	per	share	attributable	to	common	stockholders	is	computed	by	dividing	the	net income	attributable	to	common	stockholders	by	the	weighted-average	number	of	common	shares	outstanding,	including	potential	dilutive	common	shares	assuming	the dilutive	effect	of	outstanding	stock	options	using	the	treasury	stock	method.	For	purposes	of	this	calculation,	convertible	preferred	stock	and	options	to	purchase	shares of	common	stock	are	considered	to	be	common	stock	equivalents	and	are	excluded	from	the	calculation	of	diluted	net	income	per	share	of	common	stock	if	their	effect is	antidilutive.	Convertible	notes	payable	were	excluded	from	the	calculation	of	diluted	net	income	per	share	since	such	notes	were	convertible	to	common	stock	at	the option	of	the	holder	only	upon	the	occurrence	of	a	contingent	event,	including	change	in	control,	initial	public	offering	or	prepayment	of	the	convertible	notes.

In	May	2014,	the	FASB	issued	ASU	No.	2014-09,	Revenue	From	Contracts	With	Customers,	which	outlines	a	single	comprehensive	model	for	entities	to	use in	accounting	for	revenue	arising	from	contracts	with	customers.	The	new	standard	provides	principles	for	recognizing	revenue	for	the	transfer	of	promised	goods	or services	to	customers	with	the	consideration	to	which	the	entity	expects	to	be	entitled	in	exchange	for	those	goods	or	services.	The	standard	also	requires	significantly expanded	disclosures	about	revenue	recognition.	In	July	2015,	the	FASB	deferred	the	effective	date	of	the	new	revenue	standard	by	one	year.	The	standard	is	now effective	for	fiscal	years	(and	interim	reporting	periods	within	those	years)	beginning	after	December	15,	2017.	The	guidance	is	effective	for	us	beginning	in	our	first quarter	of	fiscal	2018.	Early	adoption	would	be	permitted	for	all	entities	but	not	until	the	fiscal	year	beginning	after	December	15,	2016.	The	standard	permits	the	use	of either	the	retrospective	or	cumulative	effect	transition	method.	The	retrospective	method	requires	a	retrospective	approach	to	each	prior	reporting	period	presented	with the	option	to	elect	certain	practical	expedients	as	defined	within	the	guidance.	The	cumulative	approach	requires	a	retrospective	approach	with	the	cumulative	effect	of initially	applying	the	guidance	recognized	at	the	date	of	initial	application	and	providing	certain	additional	disclosures	as	defined	per	the	guidance.	We	are	currently reviewing	the	provisions	of	the	standard	and	have	not	yet	selected	a	transition	method	nor	have	we	determined	the	effect	of	the	standard	on	our	consolidated	financial statements.

In	April	2015,	the	FASB	issued	ASU	No.	2015-05,	Intangibles—Goodwill	and	Other—Internal-Use	Software,	which	clarifies	the	circumstances	under	which	a cloud	computing	customer	would	account	for	the	arrangement	as	a	license	of	internal-use	software.	A	cloud	computing	arrangement	would	include	a	software	license	if (1)	the	customer	has	a	contractual	right	to	take	possession	of	the	software	at	any	time	during	the	hosting	period	without	significant	penalty	and	(2)	it	is	feasible	for	the customer	to	either	run	the	software	on	its	own	hardware	or	contract	with	another	party	unrelated	to	the	vendor	to	host	the	software.	If	the	arrangement	does	not	contain	a software	license,	it	would	be	accounted	for	as	a	service	contract.	The	guidance	is	effective	for	fiscal	years	beginning	after	December	15,	2015.	The	standard	is	effective for	us	for	our	first	quarter	of	fiscal	2016.	Early	adoption

is	permitted.	The	guidance	can	be	applied	retrospectively	to	each	prior	reporting	period	presented	or	prospectively	to	arrangements	entered	into,	or	materially	modified, after	the	effective	date.	We	do	not	expect	the	adoption	of	the	standard	will	have	a	material	impact	on	our	consolidated	financial	statements.

In	July	2015,	the	FASB	issued	ASU	No,	2015-11,	Inventory:	Simplifying	the	Measurement	of	Inventory,	which	simplifies	the	measurement	of	inventory	to	be measured	at	the	lower	of	cost	or	net	realizable	value.	The	guidance	applies	to	inventory	measured	using	First	in	First	Out	("FIFO")	or	average	cost.	The	guidance	is effective	for	fiscal	years	beginning	after	December	15,	2016,	including	interim	periods	within	those	fiscal	years.	The	standard	is	effective	for	us	for	our	first	quarter	of fiscal	2017.	The	guidance	can	be	applied	prospectively	with	earlier	application	permitted	as	of	the	beginning	of	an	interim	or	annual	reporting	period.	We	are	currently assessing	the	impact	this	guidance	may	have	on	our	consolidated	financial	statements	as	well	as	the	transition	method	that	we	will	use	to	adopt	the	guidance.

In	November	2015,	the	FASB	issued	ASU	2015-17,	Income	Taxes	-	Balance	Sheet	Classification	of	Deferred	Taxes,	which	will	require	the	presentation	of deferred	tax	liabilities	and	asset	be	classified	as	noncurrent	in	a	classified	statement	of	financial	position.	The	guidance	is	effective	for	fiscal	years	beginning	after December	15,	2016,	including	interim	periods	within	those	fiscal	years.	The	guidance	can	be	applied	prospectively	with	earlier	application	permitted	as	of	the	beginning of	an	interim	or	annual	reporting	period.	The	Company	early	adopted	the	guidance	prospectively	beginning	in	the	fourth	quarter	of	fiscal	2015.	The	adoption	of	the standard	impacted	presentation	on	the	Company's	Consolidated	Financial	Statements	and	related	disclosures.	No	prior	periods	were	retrospectively	adjusted.

In	January	2016,	the	FASB	issued	ASU	No,	2016-1,	Financial	Instruments-Recognition	and	Measurement	of	Financial	Assets	and	Financial	Liabilities,	which enhances	the	reporting	model	for	financial	instruments	to	provide	users	of	financial	statements	with	more	decision-useful	information.	The	guidance	will	address	certain aspects	of	recognition,	measurement,	presentation,	and	disclosure	of	financial	instruments.	The	guidance	is	effective	for	fiscal	years	beginning	after	December	15,	2017, including	interim	periods	within	those	fiscal	years.	The	standard	is	effective	for	us	for	our	first	quarter	of	fiscal	2018.	The	guidance	may	be	early	adopted	under	early application	guidance.	We	are	currently	assessing	the	impact	this	guidance	may	have	on	our	consolidated	financial	statements	as	well	as	the	transition	method	that	we will	use	to	adopt	the	guidance.

We	measure	and	report	our	cash	equivalents,	restricted	cash,	available-for-sale	marketable	securities	and	notes	receivable	at	fair	value.	The	following	table	set forth	the	fair	value	of	our	financial	assets	by	level	within	the	fair	value	hierarchy	(in	thousands):

|  | Level	I | Level	II | Level	III | Total |
| :--- | :--- | :--- | :--- | :--- |
| Financial\tAssets |  |  |  |  |
| Cash\tand\tcash\tequivalents: |  |  |  |  |
| Money\tmarket\tfunds | $104,156 | $— | $— | $104,156 |
| Other\tassets—Restricted\tcash: |  |  |  |  |
| Money\tmarket\tfunds | 4,041 | — | — | 4,041 |
| Total\tfinancial\tassets | $108,197 | $— | $— | $108,197 |

|  | Level	I | Level	II | Level	III | Total |
| :--- | :--- | :--- | :--- | :--- |
| Financial\tAssets |  |  |  |  |
| Cash\tand\tcash\tequivalents: |  |  |  |  |
| Money\tmarket\tfunds | $104,216 | $— | $— | $104,216 |
| Marketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tnotes | 209,426 | — | — | 209,426 |
| Total\tfinancial\tassets | $313,642 | $— | $— | $313,642 |

# 3.				Balance	Sheet	Components

The	following	table	summarizes	the	unrealized	gains	and	losses	and	fair	value	of	our	available-for-sale	marketable	securities	(in	thousands):

|  |  | December	31,	2014 |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Amortized\tCost | Unrealized\tGains | Unrealized\tLosses | Fair\tValue |
| U.S.\tgovernment\tnotes | $209,671 | $— | $(245) | $209,426 |

There	were	no	marketable	securities	as	of	December	31,	2015.	We	did	not	realize	any	other-than-temporary	losses	on	our	marketable	securities	for	the	year ended	December	31,	2015	and	2014.	None	of	our	marketable	securities	were	in	continuous	unrealized	loss	positions	for	greater	than	twelve	months	as	of	December	31, 2015	and	2014.

We	invest	in	marketable	securities	that	have	maximum	maturities	of	up	to	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.	As interest	rates	increase,	those	marketable	securities	purchased	at	a	lower	yield	show	a	mark-to-market	unrealized	loss.	The	unrealized	losses	are	due	primarily	to	changes in	credit	spreads	and	interest	rates.	We	realized	the	full	value	of	all	these	investments	upon	maturity.

# Accounts	Receivable,	net

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

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Accounts\treceivable | $145,792 | $100,076 |
| Allowance\tfor\tdoubtful\taccounts | (963) | (1,063) |
| Product\tsales\treturn\treserve | (566) | (2,031) |
| Accounts\treceivable,\tnet | $144,263 | $96,982 |

# 	Allowance	for	Doubtful	Accounts

Activity	in	the	allowance	for	doubtful	accounts	consists	of	the	following	(in	thousands):

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Balance\tat\tthe\tbeginning\tof\tyear | $1,063 | $810 | $1,284 |
| \t\t\t\t\tCharged\tto\texpenses | 335 | 860 | 191 |
| \t\t\t\t\tDeductions\t(write-offs) | (435) | (607) | (665) |
| Balance\tat\tthe\tend\tof\tyear | $963 | $1,063 | $810 |

# Sales	Return	Reserve

Activity	in	the	sales	return	reserve	consists	of	the	following	(in	thousands):

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Balance\tat\tthe\tbeginning\tof\tyear | $2,031 | $1,529 |
| \t\t\t\t\tCharged\tagainst\trevenue | 2,798 | 4,063 |
| \t\t\t\t\tDeductions | (2,283) | (2,943) |
| \t\t\t\t\tChange\tin\testimate | (1,980) | (618) |
| Balance\tat\tthe\tend\tof\tyear | $566 | $2,031 |

# Inventories

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Raw\tmaterials | $29,831 | $17,094 |
| Finished\tgoods | 62,298 | 60,912 |
| Total\tinventories | $92,129 | $78,006 |

# Prepaid	Expenses	and	Other	Current	Assets

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

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Prepaid\tincome\ttaxes | $14,150 | $25,212 |
| Other\tcurrent\tassets | 29,270 | 11,512 |
| Other\tprepaid\tand\tdeposits | 7,190 | 6,058 |
| Total\tprepaid\texpenses\tand\tother\tcurrent\tassets | $50,610 | $42,782 |

# Property	and	Equipment,	net

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

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Equipment\tand\tmachinery | $29,101 | $18,265 |
| Computer\thardware\tand\tsoftware | 12,630 | 7,772 |
| Furniture\tand\tfixtures | 2,380 | 1,373 |
| Leasehold\timprovements | 24,372 | 19,420 |
| Building | 35,154 | 35,154 |
| Construction-in-process | 6,408 | 6,532 |
| Property\tand\tequipment,\tgross | 110,045 | 88,516 |
| Less:\taccumulated\tdepreciation | (30,339) | (16,958) |
| Property\tand\tequipment,\tnet | $79,706 | $71,558 |

Building	consists	of	capitalized	construction	costs	of	our	leased	building	in	Santa	Clara,	California.	Based	on	the	terms	of	the	lease	agreement	and	due	to	our involvement	in	certain	aspects	of	the	construction,	such	as	our	financial	involvement	in	structural	elements	of	asset	construction,	making	decisions	related	to	tenant improvement	costs	and	purchasing	insurance	not	reimbursable	by	the	buyer-lessor	(the	Landlord),	we	were	deemed	the	owner	of	the	building	(for	accounting	purposes only)	during	the	construction	period.	We	continue	to	maintain	involvement	in	the	property	post	construction	completion	and	lack	transferability	of	the	risks	and	rewards of	ownership,	due	to	our	required	maintenance	of	a	$4.0	million	letter	of	credit,	in	addition	to	our	ability	and	option	to	sublease	our	portion	of	the	leased	building	for fees	substantially	higher	than	our	base	rate.	Due	to	our	continuing	involvement	in	the	property	post	construction	and	lack	of	transferability	of	related	risks	and	rewards	of ownership	 to	 the	Landlord	after	construction	 is	complete,	we	account	for	 the	building	as	a	financing	obligation.	See	"Note	5-Commitments	and	Contingencies". Accordingly,	as	of	December	31,	2015	and	December	31,	2014,	we	have	recorded	assets	of	$53.4	million,	representing	the	total	costs	of	the	building	and	improvements incurred,	including	the	costs	paid	by	the	Landlord.	The	building	was	completed	in	2014.

# Accrued	Liabilities

Accrued	liabilities	consist	of	the	following	(in	thousands):

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Accrued\tpayroll\trelated\tcosts | $39,479 | $30,749 |
| Accrued\twarranty\tcosts | 4,718 | 3,204 |
| Accrued\tmanufacturing\tcosts | 6,397 | 1,089 |
| Accrued\tprofessional\tfees | 4,875 | 2,354 |
| Accrued\ttaxes | 1,347 | 1,577 |
| Other | 4,155 | 1,396 |
| Total\taccrued\tliabilities | $60,971 | $40,369 |

# Warranty	Accrual

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

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Warranty\taccrual,\tbeginning\tof\tyear | $3,204 | $5,075 |
| Liabilities\taccrued\tfor\twarranties\tissued\tduring\tthe\tyear | 3,973 | 2,611 |
| Warranty\tcosts\tincurred\tduring\tthe\tyear | (2,459) | (2,163) |
| Adjustments\trelated\tto\tchange\tin\testimate | — | (2,319) |
| Warranty\taccrual,\tend\tof\tyear | $4,718 | $3,204 |

There	were	no	significant	specific	product	warranty	reserves	recorded	for	the	years	ended	December	31,	2015	or	2014.

# Other	Current	Liabilities

Other	current	liabilities	consist	of	the	following	(in	thousands):

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Liability\tfor\tearly\texercised\tshares\tsubject\tto\trepurchase | $2,390 | $4,616 |
| Sales\ttax\tpayable | 3,347 | 3,101 |
| Lease\tfinancing\tobligations,\tcurrent\tportion | 1,336 | 1,087 |
| Other | 952 | 2,445 |
| Total\tother\tcurrent\tliabilities | $8,025 | $11,249 |

As	of	December	31,	2015	and	2014,	we	held	equity	investments	of	approximately	$33.6	million	in	privately	held	companies	which	are	accounted	for	under	the cost	method.	There	were	no	impairments	recognized	on	our	investments	for	the	year	ended	December	31,	2015.

# Notes	Receivable

In	2014,	we	entered	into	a	$3.0	million	promissory	note	with	a	privately	held	company	which	was	recorded	at	cost.	The	interest	rate	on	the	promissory	note	is 8.0%	per	annum	and	is	payable	quarterly.	All	unpaid	principal	and	accrued	interest	on	the	promissory	note	is	due	and	payable	on	the	earlier	of	August	26,	2017,	or	upon default.

# 5.				Commitments	and	Contingencies

# Operating	Leases

We	lease	various	operating	spaces	in	North	America,	Europe,	Asia	and	Australia	under	non-cancelable	operating	lease	arrangements	that	expire	on	various dates	through	2024.	These	arrangements	require	us	to	pay	certain	operating	expenses,	such	as	taxes,	repairs,	and	insurance	and	contain	renewal	and	escalation	clauses. We	recognize	rent	expense	under	these	arrangements	on	a	straight-line	basis	over	the	term	of	the	lease.

As	of	December	31,	2015,	the	aggregate	future	minimum	payments	under	non-cancelable	operating	leases	consist	of	the	following	(in	thousands):

# Financing	Obligation—Build-to-Suit	Lease

In	August	2012,	we	executed	a	lease	for	a	building	then	under	construction	in	Santa	Clara,	California	to	serve	as	our	headquarters.	The	lease	term	is	120 months	and	commenced	in	August	2013.

Based	on	the	terms	of	the	lease	agreement	and	due	to	our	involvement	in	certain	aspects	of	the	construction	such	as	our	financial	involvement	in	structural elements	of	asset	construction,	making	decisions	related	to	tenant	improvement	costs	and	purchasing	insurance	not	reimbursable	by	the	buyer-lessor	(the	Landlord),	we were	deemed	the	owner	of	the	building	(for	accounting	purposes	only)	during	the	construction	period.	We	continue	to	maintain	involvement	in	the	property	post construction	completion	and	lack	transferability	of	the	risks	and	rewards	of	ownership,	due	to	our	required	maintenance	of	a	$4.0	million	letter	of	credit,	in	addition	to our	ability	and	option	to	sublease	our	portion	of	the	leased	building	for	fees	substantially	higher	than	our	base	rate.	Due	to	our	continued	involvement	in	the	property	and lack	of	transferability	of	related	risks	and	rewards	of	ownership	to	the	Landlord	post	construction,	we	account	for	the	building	and	related	improvements	as	a	lease financing	obligation.	Accordingly,	as	of	December	31,	2015	 and	2014,	we	have	recorded	assets	of	$53.4	million,	representing	the	total	costs	of	the	building	and improvements	incurred,	including	the	costs	paid	by	the	lessor	(the	legal	owner	of	the	building)	and	additional	improvement	costs	paid	by	us,	and	a	corresponding financing	obligation	of	$42.5	million	and	$43.6	million,	respectively.	As	of	December	31,	2015,	$1.3	million	and	$41.2	million	were	recorded	as	short-term	and	long- term	financing	obligations,	respectively.

Land	lease	expense	under	our	lease	financing	obligation	included	in	rent	expense	above,	amounted	to	$1.3	million	and	$1.2	million	for the	years	ended December	31,	2015	and	2014,	respectively.	There	was	no	land	lease	expense	for	the	year	ended	December	31,	2013.

As	of	December	31,	2015,	the	future	minimum	payments	due	under	the	lease	financing	obligation	were	as	follows	(in	thousands):

| Years	Ending	December	31, |  |
| :--- | :--- |
| 2016 | $5,754 |
| 2017 | 5,933 |
| 2018 | 6,113 |
| 2019 | 6,293 |
| 2020 | 6,477 |
| Thereafter | 18,810 |
| Total\tpayments | 49,380 |
| Less:\tinterest\tand\tland\tlease\texpense | (30,463) |
| Total\tpayments\tunder\tfacility\tfinancing\tobligations | 18,917 |
| Property\treverting\tto\tlandlord | 23,629 |
| Present\tvalue\tof\tobligation | 42,546 |
| Less\tcurrent\tportion | (1,336) |
| Long-term\tportion\tof\tobligation | $41,210 |

Upon	 completion	 of	 construction	 in	 2013,	 we	 evaluated	 the	 de-recognition	 of	 the	 asset	 and	 liability	 under	 the	 sale-leaseback	 accounting	 guidance.	We concluded	that	we	had	forms	of	continued	economic	involvement	in	the	facility,	and	therefore	did	not	meet	with	the	provisions	for	sale-leaseback	accounting.	Therefore, the	lease	is	accounted	for	as	a	financing	obligation	and	lease	payments	will	be	attributed	to	(1)	a	reduction	of	the	principal	financing	obligation;	(2)	imputed	interest expense;	and	(3)	land	lease	expense	(which	is	considered	an	operating	lease	and	a	component	of	cost	of	goods	sold	and	operating	expenses)	representing	an	imputed	cost to	lease	the	underlying	land	of	the	building.	In	addition,	the	underlying	building	asset	is	depreciated	over	the	building's	estimated	useful	life	of	30	years.	At	the conclusion	of	the	initial	lease	term,	we	will	de-recognize	both	the	net	book	values	of	the	asset	and	the	remaining	financing	obligation.

# 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	based	on	our	forecasts	in	order	to	reduce	manufacturing	lead	times	and	ensure	adequate	component	supply.	We	issue	purchase	orders	to our	contract	manufacturers	for	finished	product	and	a	significant	portion	of	these	orders	consist	of	firm	non-cancelable	commitments.	In	addition,	we	purchase	strategic component	inventory	from	certain	suppliers	under	purchase	commitments	that	in	some	cases	are	non-cancelable,	including	integrated	circuits,	which	are	consigned	to our	contract	manufacturers.	As	of	December	31,	2015,	we	had	non-cancelable	purchase	commitments	of	$43.9	million	to	our	contract	manufacturers	and	suppliers.

We	have	provided	restricted	deposits	to	our	third-party	contract	manufacturers	and	vendors	to	secure	our	obligations	to	purchase	inventory.	We	had	$2.3 million	in	restricted	deposits	as	of	December	31,	2015	 and	December	31,	2014.	Restricted	deposits	are	classified	in	other	assets	in	our	accompanying	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	the	unamortized	value	of	the	product	based	on	its	estimated useful	life.	Other	guarantees	or	indemnification	agreements	include	guarantees	of	product	and	service	performance	and	standby	letters	of	credit	for	lease	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	any	significant	impact	on	our	consolidated	financial	statements	to	date.

# Legal	Proceedings

# OptumSoft,	Inc.	Matters

On	April	4,	2014,	OptumSoft	filed	a	lawsuit	against	us	in	the	Superior	Court	of	California,	Santa	Clara	County	titled	OptumSoft,	Inc.	v.	Arista	Networks,	Inc., in	which	it	asserts	(i)	ownership	of	certain	components	of	our	EOS	network	operating	system	pursuant	to	the	terms	of	a	2004	agreement	between	the	companies	and (ii)	breaches	of	certain	confidentiality	and	use

restrictions	in	that	agreement.	Under	the	terms	of	the	2004	agreement,	OptumSoft	provided	us	with	a	non-exclusive,	irrevocable,	royalty-free	license	to	software delivered	by	OptumSoft	comprising	a	software	tool	used	to	develop	certain	components	of	EOS	and	a	runtime	library	that	is	incorporated	into	EOS.	The	2004	agreement places	certain	restrictions	on	our	use	and	disclosure	of	the	OptumSoft	software	and	gives	OptumSoft	ownership	of	improvements,	modifications	and	corrections	to,	and derivative	works	of,	the	OptumSoft	software	that	we	develop.

On	April	14,	2014,	we	filed	a	cross-complaint	against	OptumSoft,	in	which	we	assert	our	ownership	of	the	software	components	at	issue	and	our	interpretation of	the	2004	agreement.	Among	other	things,	we	assert	that	the	language	of	the	2004	agreement	and	the	parties'	long	course	of	conduct	support	our	ownership	of	the disputed	software	components.	We	ask	the	Court	to	declare	our	ownership	of	those	software	components,	all	similarly-situated	software	components	developed	in	the future	and	all	related	intellectual	property.	We	also	assert	that,	even	if	we	are	found	not	to	own	any	particular	components	at	issue,	such	components	are	licensed	to	us under	the	terms	of	the	2004	agreement.	However,	there	can	be	no	assurance	that	our	assertions	will	ultimately	prevail	in	litigation.	On	the	same	day,	we	also	filed	an answer	to	OptumSoft's	claims,	as	well	as	affirmative	defenses	based	in	part	on	OptumSoft's	failure	to	maintain	the	confidentiality	of	its	claimed	trade	secrets,	its authorization	of	the	disclosures	it	asserts	and	its	delay	in	claiming	ownership	of	the	software	components	at	issue.	We	have	also	taken	additional	steps	to	respond	to OptumSoft's	allegations	 that	we	 improperly	used	and/or	disclosed	OptumSoft	confidential	 information.	While	we	believe	we	have	meritorious	defenses	 to	 these allegations,	we	believe	we	have	(i)	revised	our	software	to	remove	the	elements	we	understand	to	be	the	subject	of	the	claims	relating	to	improper	use	and	disclosure	of OptumSoft	confidential	information	and	made	the	revised	software	available	to	our	customers	and	(ii)	removed	information	from	our	website	that	OptumSoft	asserted disclosed	OptumSoft	confidential	information.

The	parties	tried	the	case	for	Phase	I	of	the	proceedings,	relating	to	contract	interpretation	and	application	of	the	contract	to	certain	claimed	source	code	in September	2015.	On	December	16,	2015,	the	Court	issued	a	Proposed	Statement	of	Decision	Following	Phase	1	Trial.	In	that	Proposed	Statement,	the	Court	agreed with	and	adopted	Arista's	interpretation	of	the	2004	agreement,	and	held	that	Arista,	and	not	OptumSoft,	owns	all	of	the	software	that	was	put	at	issue	in	Phase	1.	On January	8,	2016,	OptumSoft	filed	 its	objections	 to	 the	Court's	Proposed	Statement	of	Decision.	The	Court	has	not	ruled	on	those	objections	to	date,	and	Arista anticipates	a	ruling	in	the	first	calendar	quarter	of	2016.	The	remaining	issues	that	were	not	addressed	in	the	court	trial	are	currently	scheduled	to	be	tried	in	April	2016.

We	intend	to	vigorously	defend	against	any	action	brought	against	us	by	OptumSoft.	However,	we	cannot	be	certain	that,	if	litigated,	any	claims	by	OptumSoft would	be	resolved	in	our	favor.	For	example,	if	it	were	determined	that	OptumSoft	owned	components	of	our	EOS	network	operating	system,	we	would	be	required	to transfer	ownership	of	those	components	and	any	related	intellectual	property	to	OptumSoft.	If	OptumSoft	were	the	owner	of	those	components,	it	could	make	them available	to	our	competitors,	such	as	through	a	sale	or	license.	An	adverse	litigation	ruling	could	result	in	a	significant	damages	award	against	us	and	injunctive	relief.	In addition,	OptumSoft	could	assert	additional	or	different	claims	against	us,	including	claims	that	our	license	from	OptumSoft	is	invalid.

Additionally,	the	existence	of	this	lawsuit	could	cause	concern	among	our	customers	and	potential	customers	and	could	adversely	affect	our	business	and results	of	operations.	An	adverse	litigation	ruling	could	also	result	in	a	significant	damages	award	against	us	and	the	injunctive	relief	described	above.	In	addition,	if	our license	was	ruled	to	have	been	terminated,	and	we	were	not	able	to	negotiate	a	new	license	from	OptumSoft	on	reasonable	terms,	we	could	be	prohibited	from	selling products	that	incorporate	OptumSoft	intellectual	property.	Any	such	adverse	ruling	could	materially	adversely	affect	our	business,	prospects,	results	of	operations	and financial	condition.	Whether	or	not	we	prevail	in	a	lawsuit,	we	expect	that	any	litigation	would	be	expensive,	time-consuming	and	a	distraction	to	management	in operating	our	business.

# Cisco	Systems,	Inc.	("Cisco")	Matters

alleges	that	we	infringe	U.S.	Patent	Nos.	6,377,577;	6,741,592;	7,023,853;	7,061,875;	7,162,537;	7,200,145;	7,224,668;	7,290,164;	7,340,597;	7,460,492;	8,051,211; and	8,356,296	(respectively,	"the	'577	patent,"	"the	'592	patent,"	"the	'853	patent,"	"the	875	patent,"	"the	'537	patent,"	"the	'145	patent,"	"the	'668	patent,"	"the	'164 patent,"	"the	'597	patent,"	"the	'492	patent,"	"the	'211	patent,"	and	"the	'296	patent").	Cisco	seeks,	as	relief	for	our	alleged	infringement	in	the	'43	Case,	lost	profits and/or	reasonable	royalty	damages	in	an	unspecified	amount,	including	treble	damages,	attorney's	fees,	and	associated	costs.	Cisco	also	seeks	injunctive	relief	in	the	'43 Case.	On	February	10,	2015,	the	court	granted	our	unopposed	motion	to	stay	the	'43	Case	until	the	proceedings	before	the	United	States	International	Trade	Commission ("USITC")	pertaining	to	the	same	patents	(as	discussed	below)	become	final.	In	the	'44	Case,	Cisco's	complaint	alleges	that	we	infringe	U.S.	Patent	Nos.	7,047,526	and 7,953,886	(respectively,	"the	'526	patent"	and	"the	'886	patent"),	and	further	alleges	that	we	infringe	numerous	copyrights	pertaining	to	Cisco's	"Command	Line Interface"	or	"CLI."	As	relief	for	our	alleged	patent	infringement	in	the	'44	Case,	Cisco	seeks	lost	profits	and/or	reasonable	royalty	damages	in	an	unspecified	amount including	treble	damages,	attorney's	fees,	and	associated	costs	as	well	as	injunctive	relief.	As	relief	for	our	alleged	copyright	infringement,	Cisco	seeks	damages	in	an unspecified	amount	in	the	form	of	alleged	lost	profits,	profits	from	our	alleged	infringement,	statutory	damages,	attorney's	fees	and	associated	costs.	Cisco	also	seeks injunctive	relief	against	our	alleged	copyright	infringement.	On	February	13,	2015,	we	answered	the	complaint	in	the	'44	Case,	denying	the	patent	and	copyright infringement	allegations	and	also	raising	numerous	affirmative	defenses.	On	March	6,	2015,	Cisco	filed	an	amended	complaint	against	us	the	'44	Case.	In	response,	we moved	to	dismiss	Cisco's	allegations	of	willful	patent	infringement	pre-suit	indirect	patent	infringement.	The	Court	granted	the	motion	with	leave	to	amend	on	July	2, 2015.	On	July	23,	2015,	Cisco	filed	an	amended	complaint.	On	January	25,	2016,	we	sought	leave	to	file	counterclaims	against	Cisco	in	the	'44	case	for	antitrust	and unfair	competition.	Trial	has	been	set	for	November	21,	2016	in	the	'44	Case.	Trial	has	not	been	scheduled	in	the	'43	Case.

The	Administrative	Law	Judge	assigned	to	the	944	Investigation	issued	a	procedural	schedule	calling	for,	among	other	events:	an	evidentiary	hearing	on	Sept. 9-11	&	15-17,	2015;	issuance	of	an	initial	determination	regarding	our	alleged	violations	on	January	27,	2016;	and	the	target	date	for	completion	on	May	27,	2016.	On January	27,	2016	the	Administrative	Law	Judge	issued	a	revised	procedural	schedule	extending	the	date	for	issuance	an	initial	determination	to	February	2,	2016	and	the target	date	to	June	2,	2016.	The	final	determination	in	the	944	Investigation	is	then	subject	to	Presidential	review.	The	hearing	has	been	completed	and	all	post	trial briefs	have	been	submitted	to	the	USITC.	On	February	2,	2016,	the	Administrative	Law	Judge	issued	his	initial	determination	finding	a	violation	of	section	337	of	the Tariff	Act.	More	specifically,	it	was	found	that	a	violation	has	occurred	in	the	importation	into	the	United	States,	the	sale	for	importation,	or	the	sale	within	the	United States	after	importation,	of	certain	network	devices,	related	software,	and	components	thereof	that	the	ALJ	found	infringe	asserted	claims	1,	2,	8-11,	and	17-19	of	the '537	patent;	asserted	claims	6,	7,	20,	and	21	of	the	'592	patent;	and	asserted	claims	5,	7,	45,	and	46	of	the	'145	patent.	A	violation	of	section	337	was	not	found	with respect	to	any	asserted	claims	of	the	'597	and	'164	patents.	On	February	17,	2016,	we	filed	a	request	for	the	Commission	to	review	certain	issues,	including	the infringement	findings	in	the	initial	determination,	and	the	Commission	must	decide	whether	to	grant	the	review	no	later	than	60	days	from	the	date	of	the	initial determination	(February	2,	2016).

On	April	1,	2015,	we	filed	petitions	for	Inter	Partes	Review	with	the	United	States	Patent	Trial	and	Appeal	Board	("PTAB")	seeking	to	invalidate	Cisco's	'597, '211,	and	'668	patents.		On	April	10,	2015,	we	filed	petitions	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'853	and	'577	patents.		On	April	16, 2015,	we	filed	additional	petitions	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'853	and	'577	patents.		On	August	11,	2015,	we	filed	a	second petition	for	Inter	Partes	Review	of	Cisco's	'668	patent.		On	October	6,	2015	we	filed	a	second	petition	for	Inter	Partes	Review	of	Cisco's	'211	patent.		On	October	6, 2015,	the	PTAB	granted	our	petition	for	Inter	Partes	Review	of	Cisco's	'597	patent	and	our	first	petition	for	Inter	Partes

review	of	Cisco's	'211	patents,	but	denied	one	of	our	petitions	for	Inter	Partes	Review	of	Cisco's	'668	patent.	On	October	19,	2015	and	October	22,	2015,	the	PTAB denied	four	petitions	relating	to	the	'853	and	'577	patents.	On	November	18,	2015,	we	filed	a	request	for	rehearing	on	one	of	the	denied	petitions	related	to	the	'577 patent	and	we	are	awaiting	a	decision	on	the	request.		On	December	9,	2015,	we	filed	a	petition	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'537 patent,	and	additional	petitions	for	Inter	Partes	Review	with	the	PTAB	seeking	to	invalidate	Cisco's	'853,	'577,	and	'668	patents.		On	February	16,	2016,	the	PTAB denied	our	second	petition	for	Inter	Partes	review	of	the	'668	patent.	We	are	awaiting	decisions	by	the	PTAB	on	our	remaining	petitions	for	Inter	Partes	Review	of	the '537,	'853,	'577,	and	'668	patents.		For	those	petitions	that	the	PTAB	grants,	the	PTAB	must	issue	its	final	written	decision	on	validity	within	twelve	months	of	its institution	decision.

We	intend	to	vigorously	defend	against	Cisco's	lawsuits,	as	summarized	in	the	preceding	paragraphs.	However,	we	cannot	be	certain	that	any	claims	by	Cisco would	be	resolved	in	our	favor	regardless	of	the	merit	of	the	claims.	For	example,	an	adverse	litigation	ruling	could	result	in	a	significant	damages	award	against	us, could	further	result	in	the	above	described	injunctive	relief,	could	result	in	a	requirement	that	we	make	substantial	royalty	payments	to	Cisco,	and/or	could	require	that we	 modify	 our	 products	 to	 the	 extent	 that	 we	 are	 found	 to	 infringe	 any	 valid	 claims	 asserted	 against	 us	 Cisco.	 In	 particular,	 with	 respect	 to	 the	 944	 and	 945 Investigations,	if	our	products	are	found	to	infringe	any	patents	that	are	the	subject	of	those	investigations,	the	USITC	would	likely	issue	a	limited	exclusion	order barring	entry	into	the	United	States	of	our	products	(including	7000	Series	of	switches)	and	a	cease	and	desist	order	restricting	our	activities	with	respect	to	our	imported products.	If	we	become	subject	to	a	limited	exclusion	order	and	it	is	not	disapproved	by	the	US	Trade	Representative,	we	will	need	to	remove	features	or	develop technical	design-arounds	in	order	to	take	the	products	outside	of	the	scope	of	any	patent	found	to	have	been	infringed	and	the	subject	of	a	violation.	We	may	not	be successful	in	developing	technical	design-arounds	that	do	not	infringe	the	patents	or	that	are	acceptable	to	our	customers.	Our	development	efforts	could	be	extremely costly	and	time	consuming	as	well	as	disruptive	to	our	other	development	activities	and	distracting	to	management.	Moreover,	we	may	seek	to	obtain	clearance	for	any such	technical	design-arounds	from	U.S.	Customs	and	Border	Patrol	("CBP")	in	order	to	continue	the	importation	of	our	products,	and	we	may	be	unable	to	do	so	in	a timely	manner,	if	at	all.	In	the	case	that	we	attempt	to	change	our	manufacturing,	importation	processes	and	shipping	workflows	to	comply	with	any	limited	exclusion order	or	cease	and	desist	order,	such	changes	may	be	extremely	costly,	time	consuming	and	we	may	not	be	able	to	implement	such	changes	successfully.	Any	failure	to develop	effective	technical	design-arounds,	obtain	timely	clearance	of	such	technical	design-arounds	or	successfully	change	our	manufacturing,	importation	processes	or shipping	workflows	may	cause	a	disruption	in	our	shipments	and	impact	our	revenues,	business	and	reputation.	Any	such	adverse	ruling	could	materially	adversely affect	our	business,	prospects,	results	of	operation	and	financial	condition.

Additionally,	the	existence	of	this	lawsuit	could	cause	concern	among	our	customers	and	partners	and	could	adversely	affect	our	business	and	results	of operations.	Whether	or	not	we	prevail	in	the	lawsuit,	we	expect	that	the	litigation	will	be	expensive,	time-consuming	and	a	distraction	to	management	in	operating	our business.

With	respect	to	the	various	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	at	this	time.		However,	the	outcome	of	litigation	is	inherently	uncertain.	Therefore,	if	one	or more	of	these	legal	matters	were	resolved	against	us	in	a	reporting	period	for	amounts	in	excess	of	management's	expectations,	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.	Based	on	currently	available	information,	management	does	not	believe	that	liability	relating	to	these	other	unresolved	matters	is	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.				Equity	Award	Plan	Activities

# 2014	Equity	Incentive	Plan

In	April	2014,	the	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.	A	total	of	6,510,000	shares	of	our	common	stock	were	initially	reserved	for	issuance	under	the	2014	Plan.	In	addition,	the	shares	reserved	for issuance	under	our	2014	Plan	also	included	(a)	those	shares	reserved	but	unissued	under	the	2011	Plan	and	2004	Plan	as	of	the	effective	date	and	(b)	shares	returned	to our	2011	Plan	and	2004	Plan	as	the	result	of	expiration	or	termination	of	options	(provided	that	the	maximum	number	of	shares	that	may	be	added	to	the	2014	Plan pursuant	to	(a)	and	(b)	is	20,025,189	shares).	Awards	granted	under	the	2014	Plan	could	be	in	the	form	of	Incentive	Stock	Options	("ISOs"),	Nonstatutory	Stock	Options ("NSOs"),	Restricted	Stock	Awards	("RSAs"),	Stock	Appreciation	Rights	("SARs")	or	Restricted	Stock	Units	("RSUs").	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	our	shares	outstanding on	the	immediately	preceding	December	31,	but	not	to	exceed	12,500,000	shares,	unless	the	board	of	directors,	in	its	discretion,	determines	to	make	a	smaller	increase.

On	February	12,	2016,	the	board	authorized	the	increase	to	shares	available	for	issuance	under	the	plan	of	3%	of	the	total	shares	outstanding	on	January	1, 2016.	The	increase	amounted	to	2,043,946	shares.

# 2014	Employee	Stock	Purchase	Plan

In	April	2014,	the	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.	A	total	of	651,000	shares	of	our	common	stock	were	initially	reserved	for	future	issuance	under	the	ESPP.	The	number of	shares	reserved	for	issuance	under	the	ESPP	increases	automatically	on	January	1	of	each	year	commencing	with	2015	by	the	number	of	shares	equal	to	1%	of	our shares	outstanding	immediately	preceding	December	31,	but	not	to	exceed	2,500,000	shares,	unless	the	board	of	directors,	in	its	discretion,	determines	to	make	a	smaller increase.	As	of	December	31,	2015,	there	remain	1,058,754	shares	available	for	issuance	under	the	ESPP.

On	February	12,	2016,	the	board	authorized	the	increase	to	shares	available	for	issuance	under	the	plan	of	1%	of	the	total	shares	outstanding	on	January	1, 2016.	The	increase	amounted	to	681,315	shares.

# Stock	Option	Activities

The	following	table	summarizes	the	option	and	RSA	(Restricted	Stock	Award)	activity	under	our	Plans	and	related	information:

|  | Number	of<br>Shares<br>Underlying<br>Outstanding	Options<br>and	RSAs<br>	(in	thousands) | Weighted-<br>Average<br>Exercise<br>Price	per	Share | Weighted-<br>Average<br>Remaining<br>Contractual<br>Term	(Years)	of<br>Stock	Options | Aggregate<br>Intrinsic<br>Value<br>of	Stock<br>Options<br>Outstanding<br>(in	thousands) |
| :--- | :--- | :--- | :--- | :--- |
| Balance—December\t31,\t2014 | 13,654 | $17.63 | 8.3 | $598,775 |
| Authorized |  |  |  |  |
| Options\tgranted | 1,235 | $66.68 |  |  |
| Options\texercised | (2,347) | $7.63 |  |  |
| Options\tcanceled | (912) | $22.09 |  |  |
| Balance—December\t31,\t2015 | 11,630 | $24.49 | 7.6 | $620,802 |
| Vested\tand\texercisable—December\t31,\t2015 | 3,692 | $8.68 | 6.64 | $255,392 |
| Vested\tand\texpected\tto\tvest—December\t31,\t2015 | 10,786 | $23.57 | 7.58 | $585,727 |

The	weighted-average	grant-date	fair	value	of	options	granted	during	the	year	ended	December	31,	2015	was	$29.20	per	share.	The	aggregate	intrinsic	value	of options	exercised	during	the	year	ended	December	31,	2015	was	$152.4	million.

# Restricted	Stock	Unit	(RSU)	Activities

A	summary	of	the	activity	under	our	stock	plans	and	changes	during	the	reporting	period	and	a	summary	of	information	related	to	RSUs	are	presented	below (in	thousands,	except	years	and	per	share	amounts):

|  | Number	of<br>Shares | Weighted-<br>Average	Grant<br>Date	Fair	Value	Per	Share | Weighted-Average<br>Remaining<br>Contractual	Term	(in<br>years) | Aggregate<br>Intrinsic	Value |
| :--- | :--- | :--- | :--- | :--- |
| Unvested\tbalance—December\t31,\t2014 | 108 | $75.56 | 2 | $6,557 |
| \t\t\t\t\t\t\tRSUs\tgranted | 846 | 69.65 |  |  |
| \t\t\t\t\t\t\tRSUs\tvested | (27) | 75.51 |  |  |
| \t\t\t\t\t\t\tRSUs\tforfeited/canceled | (34) | 70.76 |  |  |
| Unvested\tbalance—December\t31,\t2015 | 893 | $70.14 | 1.93 | $69,509 |
| RSUs\texpected\tto\tvest—December\t31,\t2015 | 815 | $70.11 | 1.86 | $63,443 |

# Employee	Stock	Purchase	Plan	Activities

During	the	year	ended	December	31,	2015,	we	issued	247,385	shares	at	an	average	purchase	price	of	$37.86	under	the	2014	Employee	Stock	Purchase	Plan,	or ESPP.	On	February	12,	2015,	the	board	authorized	an	increase	to	shares	available	for	future	issuance	under	the	ESPP.	 Shares	available	for	future	issuance	are	1.7 million.

# Shares	Available	for	Grant

The	following	table	presents	the	stock	activity	and	the	total	number	of	shares	available	for	grant	as	of	December	31,	2015	(in	thousands):

|  | Number	of	Shares |
| :--- | :--- |
| Balance—December\t31,\t2014 | 11,612 |
| Options\tgranted | (1,235) |
| RSUs\tgranted | (846) |
| Options\tcanceled | 912 |
| Options\trepurchased | 17 |
| RSUs\tforfeited | 34 |
| Balance—December\t31,\t2015 | 10,494 |

# Early	Exercise	of	Stock	Options

We	have	historically	allowed	our	employees	and	directors	to	exercise	options	granted	under	the	2011	Plan	and	the	2004	Plan	prior	to	vesting.	Upon	an	"early exercise"	of	these	options,	the	unvested	shares	acquired	through	the	exercise	become	options	subject	to	our	repurchase	right	that	lapse	in	accordance	with	the	original option	vesting	schedule.	Upon	termination	of	employment	prior	to	our	repurchase	rights	lapsing	in	full,	we	have	a	right	to	repurchase	the	unvested	shares	at	the	original purchase	price	(or	the	then-current	fair	market	value,	if	lower).	The	proceeds	received	from	the	early	exercise	of	stock	options	and	are	initially	recorded	in	other liabilities	and	are	reclassified	to	common	stock	and	paid-in	capital	as	our	repurchase	right	lapse.	For	the	year	ended	December	31,	2015,	we	repurchased	17,000	shares of	common	stock	at	the	original	exercise	price	due	to	the	termination	of	the	holders	of	the	unvested	shares.	As	of	December	31,	2015,	shares	held	by	employees	and directors	that	were	subject	to	repurchase	were	0.7	million	with	an	aggregate	price	of	$2.4	million.

Total	stock-based	compensation	expense	related	to	options,	RSAs,	ESPP	and	RSUs	granted	were	charged	to	the	department	to	which	the	associated	employee reported	as	follow	(in	thousands):

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Cost\tof\trevenue | $3,048 | $1,535 | $408 |
| Research\tand\tdevelopment | 25,515 | 14,986 | 5,464 |
| Sales\tand\tmarketing | 11,454 | 7,643 | 2,985 |
| General\tand\tadministrative | 5,286 | 3,455 | 1,302 |
| \t\t\t\t\t\t\t\t\t\t\tTotal\tstock-based\tcompensation | $45,303 | $27,619 | $10,159 |

# Determination	of	Fair	Value

We	record	stock-based	compensation	awards	based	on	fair	value	as	of	the	grant	date.	For	option	awards	and	ESPP	offerings	we	use	the	Black-Scholes-Merton option-pricing	model	to	determine	fair	value.	We	recognize	such	costs	as	compensation	expense	generally	on	a	straight-line	basis	over	the	requisite	service	period	of	the award.

# Stock	Options

For	the	years	ended	December	31,	2015,	2014	and	2013	the	fair	value	of	each	stock	option	granted	under	our	plans	was	estimated	on	the	date	of	grant	using	the Black-Scholes	option	pricing	model	with	the	following	assumptions	and	fair	value	per	share:

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Expected\tterm\t(in\tyears) | 6.2 | 7.6 | 6.5 |
| Risk-free\tinterest\trate | 1.6% | 2.2% | 1.7% |
| Expected\tvolatility | 42.9% | 47.7% | 51.0% |
| Dividend\trate | —% | —% | —% |

As	of	December	31,	2015,	the	total	unrecognized	stock-based	compensation	expense	for	unvested	stock	options,	net	of	expected	forfeitures,	was	$110.3	million, which	is	expected	to	be	recognized	over	a	weighted-average	period	of	4.0	years.	The	total	fair	value	of	options	vested	for	the	year	ended	December	31,	2015	was	$22.8 million.

As	of	December	31,	2015,	there	was	$50.4	million	of	unrecognized	stock-based	compensation	expense	related	to	unvested	RSUs,	net	of	estimated	forfeitures. This	amount	is	expected	to	be	recognized	over	a	weighted-average	period	of	3.7.

The	following	table	summarizes	the	assumptions	relating	to	our	ESPP:

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Expected\tterm\t(in\tyears) | 1.4 | 1.4 | N/A |
| Risk-free\tinterest\trate | 0.3% | 0.3% | N/A |
| Expected\tvolatility | 34.8% | 36.3% | N/A |
| Dividend\trate | —% | —% | N/A |

As	of	December	31,	2015,	the	total	unrecognized	stock-based	compensation	expense	related	to	unvested	ESPP	options,	net	of	expected	forfeitures,	was	$1.2 million,	which	is	expected	to	be	recognized	over	a	weighted-average	period	of	1.1	years.

# 7.				Net	Income	Per	Share	Available	to	Common	Stock

The	following	table	sets	forth	the	computation	of	our	basic	and	diluted	net	income	per	share	available	to	common	stock	(in	thousands,	except	per	share

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Numerator: |  |  |  |
| Basic: |  |  |  |
| Net\tincome | $121,102 | $86,850 | $42,460 |
| Less:\tundistributed\tearnings\tallocated\tto\tparticipating\tsecurities | (1,987) | (17,961) | (21,683) |
| Net\tincome\tavailable\tto\tcommon\tstockholders,\tbasic | $119,115 | $68,889 | $20,777 |
| Diluted: |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders,\tbasic | $119,115 | $68,889 | $20,777 |
| Add:\tundistributed\tearnings\tallocated\tto\tparticipating\tsecurities | 149 | 1,635 | 1,003 |
| Net\tincome\tattributable\tto\tcommon\tstockholders,\tdiluted | $119,264 | $70,524 | $21,780 |
| Denominator: |  |  |  |
| Basic: |  |  |  |
| Weighted-average\tshares\tused\tin\tcomputing\tnet\tincome\tper\tshare\tavailable\tto\ncommon\tstockholders,\tbasic | 65,964 | 48,427 | 27,320 |
| Diluted: |  |  |  |
| Weighted-average\tshares\tused\tin\tcomputing\tnet\tincome\tper\tshare\tavailable\tto\ncommon\tstockholders,\tbasic | 65,964 | 48,427 | 27,320 |
| Add\tweighted-average\teffect\tof\tdilutive\tsecurities: |  |  |  |
| Stock\toptions,\tRSUs\tand\tRSAs | 5,363 | 6,059 | 2,726 |
| Employee\tstock\tpurchase\tplan | 84 | 104 | — |
| Stock\tpurchase\trights | — | — | 5 |
| Weighted-average\tshares\tused\tin\tcomputing\tnet\tincome\tper\tshare\tavailable\tto\ncommon\tstockholders,\tdiluted | 71,411 | 54,590 | 30,051 |
| Net\tincome\tper\tshare\tattributable\tto\tcommon\tstockholders: |  |  |  |
| Basic | $1.81 | $1.42 | $0.76 |
| Diluted | $1.67 | $1.29 | $0.72 |

The	following	outstanding	shares	of	common	stock	equivalents	were	excluded	from	the	computation	of	diluted	net	income	per	share	available	to	common stockholders	for	the	periods	presented	because	including	them	would	have	been	anti-dilutive	(in	thousands):

The	geographical	breakdown	of	income	before	provision	for	income	taxes	is	as	follows	(in	thousands):

The	reconciliation	of	the	statutory	federal	income	tax	and	our	effective	income	tax	is	as	follows:

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| U.S.\tfederal\tstatutory\tincome\ttax | 35.00\t% | 35.00\t% | 35.00\t% |
| State\ttax,\tnet\tof\tfederal\tbenefit | (1.35) | 1.19 | 0.89 |
| Foreign\ttax\tdifferential | (2.16) | 0.68 | (2.61) |
| Tax\tcredits | (6.72) | (5.26) | (10.64) |
| Change\tin\tvaluation\tallowance | 2.84 | 1.92 | 3.87 |
| Permanent\titems | (1.32) | (0.86) | (2.54) |
| Uncertain\ttax\tpositions\tand\tassociated\tinterest | (3.95) | 0.37 | 0.58 |
| Stock-based\tcompensation | (5.29) | (4.01) | 2.47 |
| Other,\tnet | 0.01 | (0.51) | 0.12 |
| Total\tprovision\tfor\tincome\ttaxes | 17.06\t% | 28.52\t% | 27.14\t% |

We	have	operations	and	a	taxable	presence	in	numerous	jurisdictions	outside	the	U.S.	All	of	these	countries	except	one	jurisdiction	have	a	lower	tax	rate	than the	U.S.	The	significant	jurisdictions	in	which	we	have	a	presence	include	Cayman	Islands,	Ireland,	and	the	United	Kingdom.

The	tax	effects	of	temporary	differences	that	give	rise	to	significant	portions	of	deferred	tax	assets	(liabilities)	are	as	follows	(in	thousands):

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Property\tand\tequipment | $241 | $504 |
| Stock-based\tcompensation | 15,859 | 6,365 |
| Reserves\tand\taccruals\tnot\tcurrently\tdeductible | 33,686 | 16,160 |
| Net\toperating\tlosses | 221 | 721 |
| Tax\tcredits | 12,465 | 9,923 |
| State\ttaxes | 9 | 342 |
| Other | 380 | 1,142 |
| Gross\tdeferred\ttax\tassets | 62,861 | 35,157 |
| Valuation\tallowance | (12,655) | (8,954) |
| Total\tdeferred\ttax\tassets | 50,206 | 26,203 |
| Deferred\ttax\tliabilities: |  |  |
| Property\tand\tequipment | (1,517) | (2,001) |
| Accrued\tliabilities | (728) | (558) |
| Other | (1) | (2) |
| Total\tdeferred\ttax\tliabilities | (2,246) | (2,561) |
| Net\tdeferred\ttax\tassets | $47,960 | $23,642 |

The	following	table	presents	the	breakdown	between	current	and	non-current	deferred	tax	assets	and	liabilities	(in	thousands):

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets,\tcurrent | $— | $12,252 |
| Deferred\ttax\tassets,\tnon-current | 48,429 | 11,510 |
| Deferred\ttax\tliabilities,\tnon-current | (469) | (120) |
| Total\tnet\tdeferred\ttax\tassets | $47,960 | $23,642 |

Recognition	of	deferred	tax	assets	is	appropriate	when	realization	of	these	assets	is	more	likely	than	not.	We	believe	that	all	of	the	deferred	tax	assets	were realizable	with	the	exception	of	California	and	Canada	deferred	tax	assets.	Therefore,	a	valuation	allowance	of	$12.7	million	 and	$9.0	million	was	recorded	as	of December	31,	2015	and	2014,	respectively,	against	the	California	and	Canadian	deferred	tax	assets	as	it	was	not	more	likely	than	not	that	these	assets	will	be	recognized. The	net	valuation	allowance	increased	by	$3.7	million,	$2.7	million	and	$2.4	million	as	of	December	31,	2015,	2014	and	2013,	respectively.

As	of	December	31,	2015	and	2014,	we	had	no	net	operating	loss	carryforwards	for	federal	and	state	income	tax	purposes.	As	of	December	31,	2015	and	2014, we	had	combined	foreign	net	operating	loss	carryforwards	of	$10.2	million	and	$7.5	million,	respectively,	that	do	not	expire.

As	of	December	31,	2015	and	2014,	we	had	$2.8	million	and	$1.9	million,	respectively,	U.S.	federal	credit	carryforwards	which	begin	to	expire	in	2025.	As	of December	31,	2015	 and	2014,	we	had	state	credit	carryforwards	of	approximately	$27.2	million	 and	$16.4	million	 which	 can	 be	 carried	 over	 indefinitely.	As	 of December	 31,	 2015	 and	2014,	 we	 had	$1.9	 million	 and	$2.1	 million	 of	 Canadian	 scientific	 research	 and	 experimental	 development	 tax	 credit	 carry-forwards, respectively,	which	begin	to	expire	in	2033.

Utilization	of	the	net	operating	losses	and	tax	credit	carryforwards	may	be	subject	to	limitations	due	to	ownership	changes	limitations	provided	in	the	Internal Revenue	code	and	similar	state	or	foreign	provisions.	In	all	years	up	to	December	31,	2015,	such	limitations	had	no	impact	to	our	deferred	tax	assets.

Our	policy	with	respect	to	our	undistributed	foreign	subsidiaries	earnings	is	to	consider	those	earnings	to	be	indefinitely	reinvested	and,	accordingly,	no	related provision	for	U.S.	federal	and	state	income	taxes	has	been	provided.	Upon	distribution	of	those	earnings'	in	the	form	of	dividends	or	otherwise,	we	may	be	subject	to both	U.S.	income	taxes	(subject	to	an	adjustment	for

foreign	tax	credits)	and	withholding	taxes	in	the	various	countries.	As	of	December	31,	2015,	2014	and	2013,	the	undistributed	earnings	approximated	$16.4	million, $4.9	million	and	$4.9	million,	respectively.	The	determination	of	the	future	tax	consequences	of	the	remittance	of	these	earnings	is	not	practicable.

# Uncertain	Tax	Positions

We	recognize	uncertain	tax	positions	only	to	the	extent	that	management	believes	that	it	is	more	likely	than	not	the	position	will	be	sustained.	The reconciliation	of	the	beginning	and	ending	amount	of	gross	unrecognized	tax	benefits	as	of	December	31,	2015,	2014	and	2013	was	as	follows	(in	thousands):

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| Gross\tunrecognized\ttax\tbenefits—beginning\tbalance | $21,322 | $16,973 | $13,960 |
| \t\t\t\t\t\t\t\t\tIncreases\trelated\tto\ttax\tpositions\ttaken\tin\ta\tprior\tyear | 346 | 425 | 70 |
| \t\t\t\t\t\t\t\t\tIncreases\trelated\tto\ttax\tpositions\ttaken\tduring\tcurrent\tyear | 7,385 | 4,355 | 2,975 |
| \t\t\t\t\t\t\t\t\tDecreases\trelated\tto\ttax\tpositions\ttaken\tin\ta\tprior\tyear | (228) | (431) | (32) |
| \t\t\t\t\t\t\t\t\tDecreases\trelated\tto\tsettlements\twith\ttaxing\tauthorities | — | — | — |
| \t\t\t\t\t\t\t\t\tDecreases\trelated\tto\tlapse\tof\tstatute\tof\tlimitations | (6,586) | — | — |
| Gross\tunrecognized\ttax\tbenefits—ending\tbalance | $22,239 | $21,322 | $16,973 |

As	of	December	31,	2015,	2014	and	2013	the	total	amount	of	gross	unrecognized	tax	benefits	was	$22.2	million,	$21.3	million	and	$17.0	million	of	which	$13.0 million,	$15.8	million	and	$13.9	million	would	affect	our	effective	tax	rate	if	recognized,	respectively.

Our	policy	is	to	recognize	interest	and	penalties	accrued	on	any	unrecognized	tax	benefits	as	a	component	of	income	tax	expense.	We	have	recorded	a	net benefit	for	interest	and	penalties	of	$0.4	million	and	net	expense	of	$0.7	million	in	the	years	ended	December	31,	2015	and	2014,	respectively.	As	of	December	31,	2015 and	2014,	we	recognized	a	liability	for	interest	and	penalties	of	$1.1	million	and	$1.5	million,	respectively.

Because	of	the	net	operating	loss	and	tax	credit	carryforwards,	tax	years	remain	open	to	federal	and	state	tax	examination.	The	majority	of	our	foreign	tax returns	are	open	to	audit	under	the	statute	of	limitations	of	the	respective	foreign	countries,	in	which	the	subsidiaries	are	located.	It	is	possible	that	the	amount	of	existing unrecognized	tax	benefits	may	decrease	within	the	next	12	months	as	a	result	of	statute	of	limitation	lapses	in	some	of	the	jurisdictions,	however,	an	estimate	of	the range	cannot	be	made.

# 9.					Segment	Information

We	have	determined	that	we	operate	as	one	reportable	segment.	The	following	table	represents	revenue	based	on	the	customer's	location,	as	determined	by	the customer's	shipping	address	(in	thousands):

|  | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- |
| United\tStates | $634,413 | $456,691 | $293,579 |
| Other\tAmericas | 12,506 | 8,853 | 6,040 |
| Europe,\tMiddle\tEast\tand\tAfrica | 128,400 | 74,555 | 40,577 |
| Asia\tPacific | 62,272 | 44,007 | 21,028 |
| Total\trevenue | $837,591 | $584,106 | $361,224 |

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| United\tStates | $70,719 | $67,727 |
| International | 8,987 | 3,831 |
| Total | $79,706 | $71,558 |

# 10.				Other	Related	Party	Transactions	and	Balances

Certain	members	of	our	board	of	directors	serve	on	the	boards	of	our	customers	and	one	of	our	vendors.	During	the	years	ended	December	31,	2015,	2014	and 2013,	we	recognized	revenue	of	39.4	million,	$29.6	million	and	$11.1	million,	respectively,	from	sales	transactions	with	these	related	party	customers.	Amounts	due from	these	related	party	customers	were	9.8	million	and	$6.4	million	as	of	December	31,	2015	and	2014,	respectively.	The	amount	incurred	related	to	transactions	with	a related	party	vendor	was	2.7	million	during	the	year	ended	December	31,	2015.	There	were	no	transactions	with	this	related	party	vendor	during	the	years	ended December	31,	2014	and	2013.

# 11.				Selected	Quarterly	Financial	Information	(Unaudited)

The	following	tables	set	forth	selected	unaudited	quarterly	consolidated	statements	of	operations	data	for	each	of	the	quarters	in	the	years	ended	December	31, 2015	and	2014:

|  | Dec.	31,	2015 | Sep.	30,	2015 | Jun.	30,	2015 | Mar.	31,	2015 | Dec.	31,	2014 | Sep.	30,<br>2014 | Jun.	30,	2014 | Mar.	31,<br>2014 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (in\tthousands) | (in\tthousands) |  |  |  |
| Revenue: |  |  |  |  |  |  |  |  |
| Product | $217,325 | $193,339 | $174,072 | $160,141 | $157,205 | $141,455 | $126,390 | $106,493 |
| Service | 28,121 | 24,209 | 21,480 | 18,904 | 16,284 | 14,008 | 11,557 | 10,714 |
| Total\trevenue | 245,446 | 217,548 | 195,552 | 179,045 | 173,489 | 155,463 | 137,947 | 117,207 |
| Cost\tof\trevenue: |  |  |  |  |  |  |  |  |
| Product | 81,142 | 67,990 | 60,014 | 54,439 | 51,312 | 49,633 | 40,032 | 33,027 |
| Service | 8,136 | 7,810 | 7,648 | 6,852 | 5,737 | 4,873 | 4,535 | 2,866 |
| Total\tcost\tof\trevenue | 89,278 | 75,800 | 67,662 | 61,291 | 57,049 | 54,506 | 44,567 | 35,893 |
| Gross\tprofit | 156,168 | 141,748 | 127,890 | 117,754 | 116,440 | 100,957 | 93,380 | 81,314 |
| Operating\texpenses: |  |  |  |  |  |  |  |  |
| Research\tand\tdevelopment | 57,413 | 58,748 | 49,947 | 43,340 | 44,344 | 36,231 | 34,888 | 33,446 |
| Sales\tand\tmarketing | 31,308 | 26,508 | 26,681 | 24,587 | 25,016 | 20,956 | 20,711 | 18,655 |
| General\tand\tadministrative | 18,050 | 25,195 | 18,403 | 14,072 | 8,078 | 9,896 | 7,126 | 7,231 |
| Total\toperating\texpenses | 106,771 | 110,451 | 95,031 | 81,999 | 77,438 | 67,083 | 62,725 | 59,332 |
| Income\tfrom\toperations | 49,397 | 31,297 | 32,859 | 35,755 | 39,002 | 33,874 | 30,655 | 21,982 |
| Other\tincome\t(expense),\tnet: |  |  |  |  |  |  |  |  |
| Interest\texpense | (746) | (753) | (832) | (821) | (768) | (764) | (1,435) | (1,771) |
| Other\tincome\t(expense),\tnet | (109) | 13 | 417 | (468) | (151) | (824) | 2,472 | (764) |
| Total\tother\tincome\t(expense),\nnet | (855) | (740) | (415) | (1,289) | (919) | (1,588) | 1,037 | (2,535) |
| Income\tbefore\tprovision\tfor\tincome\ttaxes | 48,542 | 30,557 | 32,444 | 34,466 | 38,083 | 32,286 | 31,692 | 19,447 |
| Provision\tfor\tincome\ttaxes | 4,618 | 1,867 | 8,448 | 9,974 | 7,046 | 10,420 | 10,074 | 7,118 |
| Net\tincome | $43,924 | $28,690 | $23,996 | $24,492 | $31,037 | $21,866 | $21,618 | $12,329 |
| Net\tincome\tper\tshare\tattributable\tto\tcommon\nstockholders: |  |  |  |  |  |  |  |  |
| Basic | $0.65 | $0.42 | $0.36 | $0.37 | $0.48 | $0.34 | $0.37 | $0.22 |
| Diluted | $0.60 | $0.39 | $0.33 | $0.34 | $0.43 | $0.30 | $0.34 | $0.20 |

# Item	9.	Change	in	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure

# Item	9A.	Controls	and	Procedures

# 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	as	of	December	31,	2015.	The	term	"disclosure	controls	and	procedures,"	as	defined	in	Rules	13a-15(e)	and	15d-15(e)	under	the Exchange	Act,	means	controls	and	other	procedures	of	a	company	that	are	designed	to	ensure	that	information	required	to	be	disclosed	by	a	company	in	the	reports	that	it files	or	submits	under	the	Exchange	Act	is	recorded,	processed,	summarized	and	reported,	within	the	time	periods	specified	in	the	SEC's	rules	and	forms.	Disclosure controls	and	procedures	include,	without	limitation,	controls	and	procedures	designed	to	ensure	that	information	required	to	be	disclosed	by	a	company	in	the	reports that	it	files	or	submits	under	the	Exchange	Act	is	accumulated	and	communicated	to	the	company's	management,	including	its	principal	executive	and	principal	financial officers,	as	appropriate	to	allow	timely	decisions	regarding	required	disclosure.

Based	on	the	evaluation	of	our	disclosure	controls	and	procedures	as	of	December	31,	2015,	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	Securities	and	Exchange Commission	(SEC)	rules	and	forms,	and	that

such	information	is	accumulated	and	communicated	to	our	management,	including	our	chief	executive	officer	and	chief	financial	officer,	as	appropriate,	to	allow	timely decisions	regarding	required	disclosure.

# Changes	in	Internal	Control	over	Financial	Reporting

We	have	remediated	the	material	weakness	in	our	internal	control	over	financial	reporting	related	to	the	inadequate	design	and	operation	of	review	controls over	the	cash	flow	statement	by	implementing	a	number	of	measures	designed	to	address	the	underlying	causes	of	the	material	weakness.	Our	remediation	included implementation	of	additional	procedures	surrounding	the	precision	and	accuracy	of	the	review	control	over	our	statement	of	cash	flows,	including	enhancement	and segregation	of	duties	within	our	accounting	and	finance	department.	In	addition,	we	 improved	and	expanded	our	 internal	review	procedures	during	our	financial statement	close	process.	We	believe	that	these	additional	processes	and	procedures	have	enabled	us	to	broaden	the	scope	and	quality	of	our	controls	related	to	the oversight	and	review	of	our	financial	statements.

Except	for	the	remediation	efforts	related	to	the	controls	over	the	cash	flow	statement	described	above,	there	were	no	changes	in	our	internal	control	over financial	reporting	identified	in	connection	with	the	evaluation	required	by	Rule	13a-15(d)	and	15d-15(d)	of	the	Securities	and	Exchange	Act	of	1934,	as	amended,	that occurred	during	the	year	ended	December	31,	2015	that	have	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,	does	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.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

The	management	of	Arista	Networks,	Inc.	(the	"Company")	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting	as defined	in	Rules	13a-15(f)	and	15d-15(f)	under	the	Securities	Exchange	Act	of	1934	for	the	Company.	The	Company's	internal	control	over	financial	reporting	is	a process	designed	under	the	supervision	of	the	Company's	principal	executive	and	principal	financial	officers	to	provide	reasonable	assurance	regarding	the	reliability	of financial	reporting	and	the	preparation	of	the	Company's	financial	statements	for	external	purposes	in	accordance	with	U.S.	generally	accepted	accounting	principles.

The	Company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that:	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	Company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as necessary	to	permit	preparation	of	financial	statements	in	accordance	with	U.S.	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the Company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	Company;	and	(iii)	provide	reasonable	assurance	regarding prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	Company's	assets	that	could	have	a	material	effect	on	the	Consolidated	Financial Statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.	Management	assessed	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting	as	of	December	31,	2015, based	on	the	framework	set	forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO)	in	Internal	Control	-	Integrated	Framework (2013	framework).	Based	on	that	assessment,	management	concluded	that,	as	of	December	31,	2015,	the	Company's	internal	control	over	financial	reporting	was effective.

The	effectiveness	of	the	Company's	internal	control	over	financial	reporting	as	of	December	31,	2015,	has	been	audited	by	Ernst	&	Young	LLP,	the independent	registered	public	accounting	firm	that	audits	the	Company's	Consolidated	Financial	Statements,	as	stated	in	their	report	preceding	this	report,	which expresses	an	unqualified	opinion	on	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting	as	of	December	31,	2015.

# Item	9B.	Other	Information

# PART	III

# Item	10.	Directors,	Executive	Officers,	and	Corporate	Governance

Information	 required	 by	 this	 Item	 is	 incorporated	 herein	 by	 reference	 to	 our	 definitive	 proxy	 statement	 with	 respect to	 our	 2016	Annual	 Meeting	 of Stockholders	to	be	filed	with	the	SEC	within	120	days	after	the	end	of	the	fiscal	year	covered	by	this	Annual	Report	on	Form	10-K.

# Item	11.	Executive	Compensation

# Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

# Item	13.	Certain	Relationships	and	Related	Transactions	and	Director	Independence

# Item	14.	Principal	Accountant	Fees	and	Services

# PART	IV

# Item	15.	Exhibits	and	Financial	Statement	Schedules

Documents	filed	as	part	of	this	Annual	Report	on	Form	10-K	are	as	follows:

1. Consolidated Financial

Statements

Our	Consolidated	Financial	Statements	are	listed	in	the	"Index	to	Consolidated	Financial	Statements"	under	Part	II,	Item	8	of	this	Annual	Report	on	Form	10-

2. Financial	Statement	Schedules

Financial	statement	schedules	have	been	omitted	because	they	are	not	required,	not	applicable,	not	present	in	amounts	sufficient	to	require	submission	of	the schedule,	or	the	required	information	is	shown	in	the	Consolidated	Financial	Statements	or	Notes	thereto.

# 3. Exhibits

The	documents	listed	in	the	Exhibit	Index	of	this	Annual	Report	on	Form	10-K	are	incorporated	by	reference	or	are	filed	with	this	Annual	Report	on	Form	10- K,	in	each	case	as	indicated	therein	(numbered	in	accordance	with	Item	601	of	Regulation	S-K).

# Item	6.	Exhibits

See	the	Exhibit	Index	following	the	signature	page	to	this	Annual	Report	on	Form	10-K	for	a	list	of	exhibits	filed	or	furnished	with	this	report,	which	Exhibit	Index	is incorporated	herein	by	reference.

# 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.

(Registrant)

Jayshree	Ullal

Chief	Executive	Officer,	President	and	Director

# POWER	OF	ATTORNEY

KNOW	ALL	PERSONS	BY	THESE	PRESENTS,	that	each	person	whose	signature	appears	below	constitutes	and	appoints	Jayshree	Ullal	and	Ita	Brennan, jointly	and	severally,	his	or	her	attorney-in-fact,	with	the	power	of	substitution,	for	him	or	her	in	any	and	all	capacities,	to	sign	any	amendments	to	this	Annual	Report	on Form	10-K	and	to	file	the	same,	with	exhibits	thereto	and	other	documents	in	connection	therewith,	with	the	Securities	and	Exchange	Commission,	hereby	ratifying	and confirming	all	that	each	of	said	attorneys-in-fact,	or	his	or	her	substitute	or	substitutes,	may	do	or	cause	to	be	done	by	virtue	hereof.

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Company	and in	the	capacities	and	on	the	dates	indicated:

| Number | Description | Form | File	No. | Exhibit | Filing	Date |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 3.1 | \t\t Amended\tand\tRestated\tCertificate\tof\tIncorporation\tof\tthe\tRegistrant. | 10-Q | 001-36468 | 3.1 | 8/8/2014 |
| 3.2 | \t\t Bylaws\tof\tthe\tRegistrant. | 10-Q | 001-36468 | 3.2 | 8/8/2014 |
| 4.1 | Form\tof\tthe\tRegistrant's\tcommon\tstock\tcertificate. | S-1/A | 333-194899 | 4.1 | 4/21/2014 |
| 4.2 | Investors'\tRights\tAgreement,\tdated\tOctober\t16,\t2004,\tbetween | S-1 | 333-194899 | 4.2 | 3/31/2014 |
|  | Registrant\tand\tcertain\tholders\tof\tRegistrant's\tcapital\tstock\tnamed |  |  |  |  |
|  | therein. |  |  |  |  |
| 4.3 | Investors'\tRights\tAgreement,\tdated\tJanuary\t4,\t2011,\tbetween\tRegistrant | S-1 | 333-194899 | 4.3 | 3/31/2014 |
|  | and\tcertain\tholders\tof\tRegistrant's\tcapital\tstock\tnamed\ttherein. |  |  |  |  |
| 10.1 | Form\tof\tIndemnification\tAgreement\tbetween\tthe\tRegistrant\tand\teach\tof | S-1/A | 333-194899 | 10.1 | 5/2/2014 |
|  | its\tdirectors\tand\texecutive\tofficers. |  |  |  |  |
| 10.2\t† | 2004\tEquity\tIncentive\tPlan. | S-1 | 333-194899 | 10.2 | 3/31/2014 |
| 10.3\t† | 2011\tEquity\tIncentive\tPlan. | S-1 | 333-194899 | 10.3 | 3/31/2014 |
| 10.4\t† | 2014\tEquity\tIncentive\tPlan. | S-1/A | 333-194899 | 10.4 | 5/2/2014 |
| 10.5\t† | 2014\tEmployee\tStock\tPurchase\tPlan. | 10-K | 001-36468 | 10.5 | 3/11/2015 |
| 10.6\t† | \t\t Offer\tLetter,\tdated\tOctober\t17,\t2004,\tby\tand\tbetween\tthe\tRegistrant\tand | S-1 | 333-194899 | 10.6 | 3/31/2014 |
|  | Kenneth\tDuda. |  |  |  |  |
| 10.7\t† | \t\t Offer\tLetter,\tdated\tJune\t8,\t2007,\tby\tand\tbetween\tthe\tRegistrant\tand | S-1 | 333-194899 | 10.7 | 3/31/2014 |
|  | Anshul\tSadana. |  |  |  |  |
| 10.8\t† | \t\t Offer\tLetter,\tdated\tAugust\t1,\t2008,\tby\tand\tbetween\tthe\tRegistrant\tand | S-1 | 333-194899 | 10.8 | 3/31/2014 |
|  | Jayshree\tUllal. |  |  |  |  |
| 10.9\t† | \t\t Offer\tLetter,\tdated\tMarch\t27,\t2013,\tby\tand\tbetween\tthe\tRegistrant\tand | S-1 | 333-194899 | 10.9 | 3/31/2014 |
|  | Charles\tGiancarlo. |  |  |  |  |
| 10.10\t† | \t\t Offer\tLetter,\tdated\tJune\t3,\t2013,\tby\tand\tbetween\tthe\tRegistrant\tand\tAnn | S-1 | 333-194899 | 10.10 | 3/31/2014 |
|  | Mather. |  |  |  |  |
| 10.11\t† | \t\t Offer\tLetter,\tdated\tJune\t21,\t2013,\tby\tand\tbetween\tthe\tRegistrant\tand | S-1 | 333-194899 | 10.11 | 3/31/2014 |
|  | Kelyn\tBrannon. |  |  |  |  |
| 10.12\t† | Severance\tAgreement,\tdated\tJuly\t8,\t2013,\tby\tand\tbetween\tthe\tRegistrant | S-1 | 333-194899 | 10.12 | 3/31/2014 |
|  | and\tKelyn\tBrannon. |  |  |  |  |
| 10.13\t† | \t\t Offer\tLetter,\tdated\tOctober\t3,\t2013,\tby\tand\tbetween\tthe\tRegistrant\tand | S-1 | 333-194899 | 10.13 | 3/31/2014 |
|  | Marc\tStoll. |  |  |  |  |
| 10.14 | Lease\tbetween\tArista\tNetworks,\tInc.\tand\tThe\tIrvine\tCompany\tLLC, | S-1 | 333-194899 | 10.15 | 3/31/2014 |
|  | dated\tAugust\t10,\t2012,\tas\tamended\ton\tFebruary\t28,\t2013. |  |  |  |  |
| 10.15 |  | 10-Q | 001-36468 | 10.1 | 8/8/2014 |
|  | The\tIrvine\tCompany\tLLC,\tdated\tJuly\t30,\t2014. |  |  |  |  |
| 10.16 | License\tAgreement,\tdated\tNovember\t30,\t2004,\tby\tand\tbetween\tthe | S-1 | 333-194899 | 10.16 | 3/31/2014 |
|  | Registrant\tand\tOptumsoft,\tInc. |  |  |  |  |
| 10.17‡ | \t\t Manufacturing\tServices\tLetter\tAgreement,\tdated\tFebruary\t5,\t2007, | S-1 | 333-194899 | 10.17 | 3/31/2014 |
|  | between\tthe\tRegistrant\tand\tJabil\tCircuit,\tInc. |  |  |  |  |
| 10.18\t‡ | \t\t Microsoft\tMaster\tProduct\tPurchase\tAgreement,\tdated\tFebruary\t8,\t2012, | S-1 | 333-194899 | 10.18 | 3/31/2014 |
|  | between\tthe\tRegistrant\tand\tMicrosoft\tCorporation. |  |  |  |  |
| 10.19\t† | Employee\tIncentive\tPlan. | S-1/A | 333-194899 | 10.21 | 4/21/2014 |
| 10.12\t† | \t\t Offer\tLetter,\tdated\tMay\t18,\t2015,\tby\tand\tbetween\tthe\tRegistrant\tand\tIta | 8-K | 001-36468 | 10.1 | 5/14/2015 |

*	The	certifications	attached	as	Exhibit	32.1	that	accompany	this	Annual	Report	on	Form	10-K	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	Annual	Report	on	Form	10-K,	irrespective	of	any	general	incorporation	language	contained	in	such	filing.

†	Indicates	a	management	contract	or	compensatory	plan	or	arrangement.

‡	Portions	of	this	exhibit	have	been	granted	confidential	treatment	by	the	Securities	and	Exchange	Commission.


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