Thank you, Regina. Good afternoon, everyone. Thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks Chairperson and Chief Executive Officer, and Chantelle Breithaupt, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing its fiscal second quarter results for the period ending June 30th, 2026. If you want a copy of this release, you can find it on our website.
During the course of this conference call, Arista Networks management will make forward-looking statements, including those relating to our financial outlook for the third quarter of the 2026 fiscal year, longer-term business model and financial outlooks for 2026 and beyond, our total addressable market and strategy for addressing these market opportunities, including AI, inventory levels and management, lead times, purchase commitments, component supply and product innovation, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today. You should not rely on them representing our views in the future. We undertake no obligation to update these statements after this call.
This analysis of our Q2 results and our guidance for Q3 2026 is based on non-GAAP and excludes stock-based compensation expense, intangible asset amortization, gains/losses on strategic investments, and the income tax effect of these non-GAAP exclusions, including the recognition of direct access tax benefits associated with stock-based awards. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. With that, I will turn the call over to Jayshree.
Thank you, Rudy, and welcome everyone to our second quarter 2026 earnings call. Arista is experiencing significant demand to achieve our first $3 billion quarter in revenue. To put this in perspective, just five years ago, our entire year was $2.9 billion in 2021. We have also entered the prestigious Fortune 500 list in 2026, and in addition to that, we are now included in the Russell 50. Our AI fabrics momentum with Etherlink switches now exceeds 100 cumulative customers from the initial four to five customers I spoke of in 2024. Arista has developed innovative features to enable Smart System Upgrade, SSU, deep analytics, load balancing at scale for AI training workloads. Our latest member is the 7060X-E7 for 100 terabit capacity and 1.6 terabit throughput, as well as the first liquid cooling options, highlighting our continued scale-out leadership.
Over a decade ago, we pioneered the use of leaf and spine topologies in the data center and cloud networks. We are now building upon that with our lossless and high-performance AI fabrics. The maximum possible scale for an AI network generally depends on two things, the number of tiers in the network and the number of ports per device, often known as radix. Increasing the tiers and ports is expensive and power hungry. Our customers deploy and often choose the Arista flagship 7800 AI spine to achieve that high scale without adding additional tiers. Scale-across is an important application. The scarcity of compute capacity, physical space, and gigawatts of power mandates that the AI infrastructure must be designed thoughtfully. The Arista 7800 platform continues to be the flagship spine for distributed scale-across applications, providing traffic isolation, contextual routing, and security.
The scale-across switching and routing TAM is forecasted to be roughly $15 billion-$20 billion in 2030. Arista is well-poised in this segment. Our scale-across AI innovations deliver programmable and deterministic routing, SRv6 multi-plane forwarding, multi-tenancy and traffic engineering, as well as load balancing across the regions. We are capable of providing near instantaneous recovery in the event of transient congestion, packet loss, or a physical failure of AI clusters independent of their geographical location. This scale-across use case is expected to be approximately 30% of our overall AI target of at least $3.6 billion in 2026. While compute and AI accelerators supporting billions of parameters often grab the headline, we did introduce a suite of EOS, Extensible Operating System innovations to enable a robust AI network capable of diverse models and accelerators.
At this point, I'd like to invite Ken Duda, our President and Chief Technology Officer, to highlight some of these AI innovations.
Thanks, Jayshree. I have never witnessed the combination of rapid innovation and scale deployment that we are seeing in AI networks. I'd like to call your attention to three innovations: SSU, MRC, and SRv6. First, SSU. SSU is Arista's Smart System Upgrade, the ability to upgrade switch software without any disruption. Frequent upgrades are a hard reality today, especially as AI both uncovers security vulnerabilities and creates tools to exploit them. While many competing systems require a full reboot to address these issues, leading to expensive and disruptive downtime, Arista's EOS handles these upgrades seamlessly. We ensure our customers stay secure without sacrificing even a single minute of valuable XPU cycles. Second, to maximize XPU utilization, you need MRC, or Multipath Reliable Connection. See, in first-generation AI networks, every packet on an XPU-to-XPU flow has to take the same path.
That means if two flows hash to the same link, they both run at half speed. MRC enables senders to spray a single flow across many paths through the fabric, where receivers reassemble any data that arrives out of order, eliminating the performance hit from fabric hash collisions. How is the sender supposed to control which paths the flow will use? That's where the third innovation comes in. SRv6 or Segment Routing, it's not new, but using it to load balance an AI fabric, that's the game changer. The sender tags each packet with a stack of SRv6 segment IDs, dictating the exact path the packet will take. The system then uses real-time congestion signaling to dynamically shift packets away from hotspots. Because Arista EOS provides a single unified operating system, we support this SRv6 intelligence all the way from the scale-out fabric to the long-distance scale-across routing.
It gives our customers the combination of high quality, top performance, and operational simplicity that Arista is known for.
Thank you, Ken. Undoubtedly, the Arista EOS architecture shines with its inherent state sharing, programmability, and single binary. All of this, as you just pointed out, is foundational for reliable accelerator operation and optimal compute utilization. Arista's multi-path and multi-plane monitoring with explicit SRv6 probes ensures that reliable performance for accelerator communication. We have collaborated with leading customers to build that AI fabric with that operational excellence. As you know, during the last six months, I've been quite vocal and candid in sharing our supply chain challenges and concerns, not only affecting us, but affecting the entire industry. While the industry-wide supply tightness and rising component costs persist, Arista has taken individual and aggressive proactive steps. Arista is making solid progress here in addressing our tight supply chain. After all, we have a lot of experience that comes from many years.
During the lawsuit crisis, we had to build a manufacturing site in the U.S. in 2016, during COVID challenges in 2021, and here we are back again in 2026. Our manufacturing rigor is based on a three-pronged approach. The number one is the people and leadership. Recently, we've hired a terrific global operations executive, Eugenia Corrales, with over 35 years of engineering, networking, and manufacturing expertise. She has built an outstanding suite of leaders for new product engineering, contract manufacturing, global supply chain, direct fulfillment, and logistics. We are also partnering closely with our key suppliers to meet our prioritized forecasts, and I'm so thankful to them for their continued cooperation. Finally, Arista is leaning in with our increased multi-year purchase commitments, now almost tripling from a year ago at $3.6 billion to approximately $9.7 billion by the end of Q2 2026.
To describe that relentless execution, I would like to invite Todd Nightingale, our Chief Operating Officer and President. Over to you, Todd.
Thanks, Jayshree. Arista has spent the last six months improving our supply chain to meet growing product demand, and we're seeing significant improvements. We've secured multi-year agreements with leading vendors of strategic components, qualified new suppliers in key areas to limit risk, and built out supply chains for next-gen AI technologies. Our capacity has been increased in both manufacturing and distribution, and we've negotiated better component delivery terms to drive up both factory efficiency and capital deployment. Relationships with our strategic silicon vendors continue to be strong, with really excellent collaboration in both supply chain and technical engagements. Our memory supply has been secured for 2026, and we have extended visibility well into 2027 across DDR4, DDR5, and NAND memory. Importantly, we've increased our resiliency through optionality and expanded vendor qualification.
For PCBs and optics, we're now able to build capacity in a 12-month window and have strengthened our engagement and commitments from key suppliers. We've improved our lead times and inventory management of thousands of component SKUs, improving sub-component pipelining and multi-sourcing, and providing increased flexibility with reduced inventory risk. In a new area, we've now established a liquid cooling supply chain capable of driving and delivering the next generation of AI infrastructure. This includes cold plate, quick disconnect, and tubing vendors with capacity agreements for cutting-edge new AI technology. To match our capacity with customer demand, we've increased both our manufacturing and distribution capacity. We have now three contract manufacturers and three distribution facilities providing geographic diversity in the U.S., in Asia, and in Mexico.
By focusing on vendor stability and diversity, risk mitigation, and predictable delivery terms, innovation for new AI products, and capacity across our factories, we are making significant improvements and significant capacity increases across our supply chain. Thank you, Jayshree.
Thank you, Todd. My God, it's so gratifying to hear the great strides and progress that you have made in such a short time. Great job by you and the team. Given our improving stance in supply chain, we are excited to increase our guidance for the third time this year to $12.6 billion revenue in 2026. We are now projecting 40% annual growth, which is an incremental $2.1 billion over our Analyst Day goal of $10.5 billion, and an incremental $1.1 billion over our recent projections of $11.5 billion in May of 2026. Our renewed enthusiasm in fulfilling demand in the second half of 2026 is expected to apply across all our product sectors in a widespread manner, including the backend AI fabrics, the core data center frontend, and campus and routing adjacencies.
With that exciting guidance, I'd like to turn it over to none other than our Chief Financial Officer, Chantelle, for more financial specifics.
Thank you, Jayshree. It's great to see the supply chain ecosystem gaining traction to meet our customers' demand. Let's review how that is translating into our financial performance and outlook. To start off, total revenues in Q2 were just over $3 billion, up 37.7% year-over-year and above our guidance of $2.8 billion. This significant growth was driven by our AI and enterprise customers. Congratulations to the employees on our first $3 billion quarter. International revenues for the quarter came in at $697.8 million, or 23% of total revenue, up from 13.5% last quarter. This quarter-over-quarter increase was primarily influenced by strong organic growth across our international regions, combined with a shift in the geographic mix of sales to our large global customers.
The overall gross margin in Q2 was 63.4%, down from 65.6% in the prior year, driven by end customer mix, and up from 62.4% in the prior quarter, benefiting from both tariff refunds and customer mix. Operating expenses for the quarter were $411 million, or 13.5% of revenue, up slightly from the last quarter at $396.8 million due to an additional investment in liquid cooling, high Radix switching, and AI optimizing software. Our R&D spending came in strong at $278.1 million, or 9.2% of revenue, up slightly from the last quarter at $271.5 million. Arista continues to demonstrate its commitment and focus on networking innovation. Sales and marketing expense was $109.8 million, or 3.6% of revenue, down slightly from 3.8% of revenue last quarter, representative of the highly efficient Arista go-to-market methodology.
Our G&A costs came in at $23.1 million, or 0.8% of revenue, up slightly from $21.8 million last quarter, reflecting our strong base cost productivity within a pure-play networking business model. Our operating income for the quarter was $1.5 billion or 49.9% of revenue, an incredible financial outcome for the company. Other income and expense for the quarter was a favorable $120.3 million, and our effective tax rate was 20.3%. Overall, this resulted in net income for the quarter of $1.3 billion or 42.9% of revenue. Diluted earnings per share for the quarter was $1.02, based on 1.276 billion diluted shares, representing a significant 39.7% increase from $0.73 in the prior year. Now turning to the balance sheet. Cash, cash equivalents, and marketable securities ended the quarter at approximately $13.3 billion, up from $12.4 billion at the end of Q1.
In the quarter, we did not repurchase our common stock. Of the $1.5 billion repurchase program approved in May 2025, $817.9 million remain available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price, and other factors. Now, turning to operating cash performance for the second quarter, we generated approximately $1.1 billion of cash from operations. This was driven by a robust earnings performance, coupled with an increase in deferred revenue. DSOs came in at 68 days, up from 64 days in Q1 due to the timing of customer shipments and invoicing. Our inventory turns remain at 1.7 for the quarter. We ended the quarter with $2.5 billion in inventory, up from $2.4 billion last quarter. Inventory level fluctuations are expected to continue as we work through the balancing of component timing and availability.
This could result in quarters of elevated inventory balances affecting the timing of cash flow from operations ahead of the deployments. Our purchase commitments at the end of the quarter were $9.7 billion, up from $8.9 billion at the end of Q1. As mentioned in prior quarters, this expected activity mostly represents purchases for chips related to new products and AI deployments. Our total deferred revenue balance was approximately $6.9 billion, up from $6.2 billion in the prior quarter. The majority of the deferred revenue balance is product related. Our product deferred revenue increased approximately $600 million sequentially versus last quarter. We remain in a period of ramping our new products, winning new customers, and expanding new use cases, including AI. These trends have resulted in increased customer-specific acceptance clauses and an increase in the volatility of our product deferred revenue balances.
As mentioned in prior quarters, the deferred balance can move significantly on a quarterly basis independent of underlying business drivers. Accounts payable days are 57 days, up from 54 days in Q1, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $29.7 million. Our construction work to build expanded facilities in Santa Clara remains on track, and we expect construction to be completed by the end of fiscal 2026. These exceptional Q2 results, combined with the ability of the ecosystem to deliver what is required, are foundational to underpin our financial outlook for the company. Reflecting our strong momentum, we are raising our 2026 fiscal year outlook to 40% revenue growth, equating to approximately $12.6 billion. Within this guide, our 2026 campus revenue goal is at least $1.25 billion, and our AI Fabrics goal is at least $3.5 billion.
Gross margin, we are maintaining the range for the fiscal year of 62%-64%, inclusive of mix and anticipated supply chain cost increases for memory and silicon. We have increased our fiscal 2026 operating margin target now at a range of 48%-49%, while maintaining an expected tax rate of 21.5%. More specifically, our guidance for the third quarter is as follows. Revenues of approximately $3.3 billion. Gross margin of approximately 63%. Operating margin between 48%-49%. Diluted earnings per share between $1.06-$1.08 with approximately 1.279 billion diluted shares. Our effective tax rate is expected to be approximately 21.5%. In closing, the Arista team is energized. We are well-positioned for this AI super cycle and for Ethernet networking overall. This is earned through a combination of our innovation, our culture, and our focus.
The opportunity ahead of us is tremendous. We are ready to capture it. Back to you, Rudy, for Q&A.
Thank you, Chantelle. We will now move to the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to one question only. Your line will be placed on mute after your question. Thank you for your understanding. Regina, please take it away.