Chantelle Breithaupt
Chief Financial Officer at Arista Networks
Thank you, Jayshree. Turning now to more detail on the financials. This analysis of our Q3 results and our guidance for Q4 fiscal year '24 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, intangible asset amortization and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Total revenues reached $1.81 billion, marking a 20% year-over-year increase. This strong performance exceeded our guidance range of $1.72 billion to $1.75 billion. Services and subscription software contributed approximately 17.6% of revenues in the third quarter. International revenues for the quarter came in at $330.9 million or 18.3% of total revenue, down from 18.7% last quarter. This quarter-over-quarter decrease reflects an increased contribution from domestic shipments to our cloud and enterprise customers. Overall, gross margin in Q3 was 64.6%, above the upper range of our guidance of approximately 64%, down from 65.4% last quarter and up from 63.1% in Q3 prior year. This year-over-year improvement is driven by stronger enterprise margins and supply chain discipline in the current quarter.
Operating expenses in the quarter were $279.9 million or 15.5% of revenue, down from last quarter at $319.8 million. R&D spending came in at $177.5 million or 9.8% of revenue, down from $216.7 million last quarter. An item of note is that there were additional R&D related expenses originally expected in Q3 that are now expected to materialize in the Q4 quarter. R&D headcount has increased low-double-digit percentage versus Q3 in the prior year. Sales and marketing expense was $83.4 million or 4.6% of revenue, down slightly from last quarter. Our G&A costs came in at $19.1 million or 1.1%, similar to last quarter.
Our operating income for the quarter was $890.1 million or 49.1% of revenue. This was favorably impacted by the shift of R&D-related expenses from Q3, now anticipated in Q4 of this year. Other income and expense for the quarter was a favorable $85.3 million and our effective tax-rate was 21.1%. This resulted in net income for the quarter of $769.1 million or 42.5% of revenue. Our diluted share number was 320.5 million shares, resulting in a diluted earnings per share number for the quarter of $2.40, up 31.1% from the prior year. This too was favorably impacted by the shift in R&D-related expenses from Q3 to Q4.
Now, turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $7.4 billion. In the quarter, we repurchased $65.2 million of our common stock at an average price of $318.14 per share. Of the $1.2 billion repurchase program approved in May 2024, $1 billion remains available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent upon market and business conditions, stock price and other factors.
Turning to operating cash performance for the third quarter. We generated approximately $1.2 billion of cash from operations in the period, reflecting strong earnings performance combined with favorable working capital results. DSOs came in at 57 days, down from 66 days in Q2, reflecting a strong collections quarter combined with contributions from the linearity of billing. Inventory turns were 1.3 times, up from 1.1 times last quarter. Inventory decreased to $1.8 billion in the quarter, down from $1.9 billion in the prior period, reflecting a reduction in our raw materials inventory. Our purchase commitments in inventory at the end of the quarter totaled $4.1 billion, up from $4 billion at the end of Q2. We expect this number to continue to have some variability in future quarters as a reflection of demand for our new product introductions.
Our total deferred revenue balance was $2.5 billion, up from $2.1 billion in Q2. The majority of the deferred revenue balance is services related and directly linked to the timing and term of service contracts, which can vary on a quarter-by-quarter basis. Our product deferred revenue increased approximately $320 million versus last quarter. Fiscal 2024 continues to be a year of new product introductions, new customers and expanded use cases. These trends have resulted in increased customer trials and contracts, with customer-specific acceptance clauses and has and will continue to increase the variability and magnitude of our product deferred revenue balances. Accounts payable days were 42 days, down from 46 days in Q2, reflecting the timing of inventory receipt payments.
Capital expenditures for the quarter were $7 million. In October, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $15 million during Q4 for this project.
Now, turning to the fourth quarter. Our guidance for the fourth quarter, which is based on non-GAAP results and excludes any non-cash stock-based compensation impacts, intangible asset amortization and other non-recurring items is as follows: revenues of approximately $1.85 billion to $1.9 billion; gross margin of approximately 63% to 64%; operating margin of approximately 44%; our effective tax-rate is expected to be approximately 21.5%, with diluted shares of approximately 321 million shares on a pre-split basis.
On the cash front, while we have experienced significant increases in operating cash over the last couple of quarters, we anticipate an increase in working capital requirements in Q4. This is primarily driven by increased inventory in order to respond to the rapid deployment of AI networks and to reduce overall lead times as we move into 2025, mentioned in John's prepared remarks. We will continue our spending investment in R&D, go-to-market activities and scaling the Company.
Additionally, in Q4, as part of our ongoing commitment to creating long-term value for our shareholders and enhancing the accessibility of our stock, we are pleased to announce that Arista's Board of Directors has approved a four-for-one stock split. This decision reflects our confidence in the continued growth and prospects of the Company. It's important to note that while the stock split increases the number of shares outstanding, it does not change the intrinsic value of the Company, nor does it impact our financial performance or strategy. The split is designed to make our stock more accessible and attractive to a wider range of investors, particularly retail investors, which we believe will ultimately support broader ownership and improved trading dynamics.
Transitioning now to fiscal year 2025. As Jayshree mentioned, we are projecting revenue growth of 15% to 17%. The expected revenue mix is forecasted to have an increased weighting of cloud and AI customers placing the gross margin outlook at 60% to 62% and operating margin at approximately 43% to 44%. Our commitment remains to continue to invest in R&D, go-to-market and the scaling of the Company as we forecast to reach approximately $8 billion in revenue in 2025. We reiterate our double-digit growth forecast in the foreseeable future and a three-year revenue CAGR goal of mid-teens for fiscal years '24 through '26. We are excited by the current and future opportunities to serve our customers as the pure-play networking innovation company and to deliver strong returns to our shareholders.
I will now turn the call-back to Liz. Liz?
