Ita Brennan
Chief Financial Officer at Arista Networks
Thanks Jayshree and good afternoon. This analysis of our Q2 results and our guidance for Q4 '23 is based on non-GAAP and excludes all non-cash, stock-based compensation impacts, certain acquisition-related charges, and other non-recurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenues in Q3 were $1.51 billion, up 28.3% Year-over-Year and well-above the upper-end of our guidance, of $1.45 to %1.5 billion. Services and subscription software contributed approximately 16.8% of revenues in the third-quarter, up from 15.2% in Q2.
International revenues for the quarter came in at $324.7 million or 21.5% of total revenue, up from 20.9% last quarter. This quarter-over quarter increase affected a healthy contribution from our enterprise customers in EMEA and APAC and some reduction in domestic shipments to our contact customers. Overall gross margin in Q3 was 63.1% well-above guidance of approximately 62%, and up from 61.3% last quarter. We continue to see incremental improvements in gross margin quarter-over quarter with higher enterprise shipments and better supply-chain costs, somewhat offset by the need for additional inventory reserves as customers refined their forecasted product mix.
Operating expenses for the quarter were $255.6[phonetic] million or 16.9% of revenue, down from last quarter at $287.3 million. R&D spending came in at $164.4 million or 10.9% of revenue, down from $188.5 million last quarter. This primarily reflected increased headcount, more than offset by lower new product introduction costs in the period. Sales and marketing expense was $79 million or 5.2% of revenue consistent with last quarter with increased headcounts and some reduction in products demo costs. Our G&A costs came in at $12.1 million or 0.8% of revenue, down from last quarter and reflecting the recovery, the bad debt amounts recorded in prior periods.
Our operating income for the quarter was $696.2 million or 46.1% of revenue. Other income expense in the quarter were the favorable $42.3 million and our effective tax rate is 21.3%. This resulted in net income for the quarter of $581.4 million or 38.5% of revenue. Our diluted share number was
317.6 million shares, resulting in a diluted earnings per share number for the quarter and $1.83 up 46.4% from the prior year. Now turning to the balance sheet, cash, cash equivalents, and investments ended the quarter at approximately $4.5 billion. We did not repurchase shares of our common stock in the quarter.
To recap our repurchase program to date, we have repurchased $855.5 million or 8 million shares at an average price of $107 per share under our current $1 billion award authorization. This leaves $144.5 million 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 I'm turning to operating cash performance for the third quarter. We generated approximately $699 million of cash from operations in the period, reflecting strong earnings performance, combined with some increase in deferred revenue and taxes payable.
DSOs came in at 51 days, up from 49 days in Q2, reflecting the strong collections quarter and a good linearity of billings. Inventory turns were 1.1 times, down from 1.2 last quarter. Inventory remained flat to last quarter at $1.9 billion, reflecting the ongoing receipt and consumption of components from our purchase commitments, and an increase in switch-related finished clips. Our purchase commitments at the end of the quarter were $2 billion, down from $2.2 billion at the end of Q2. We expect the overall purchase commitment number to continue to decline as we further optimize our supply position.
However, we will maintain a healthy position related to key component, especially as we focus on new products. Our total deferred revenue balance was $1.195 billion, up from $1.085 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-on-quarter basis. Our product deferred revenue balance increased by $47 million from last quarter. Accounts payable days were 44 days, down from 57 days in Q2 reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $11.2 million.
Now turning to our outlook for the fourth-quarter. Customer planning horizons for new deployments have shortened in concert with steadily improving lead time. On the supply-side, we expect to continue to ship against previously committed deployment plans for some time targeting supply improvements where most needed but also careful not to create redundant, customer inventory. As outlined in our guidance, we expect to make incremental improvements to our '23 outlook, which now calls for Year-over-Year revenue growth of approximately 33%. On the gross margin front we expect gross margins of approximately 63% in the Fourth qh-quarter. ongoing supply-chain and manufacturing benefits, while maintaining a reasonably healthy cloud contribution.
Turning to spending and investments. We expect to monitor the overall macro-environment carefully, while engaging in targeted hiring R&D go-to-market as the teams get the opportunities to acquire talent. On the cash front, while increases in working capital has begun to moderate in recent quarters. Our year-to-date 2023 tax payments have been deferred to October. And this will represent a significant incremental use of cash in the fourth-quarter at approximately $352 million. With all of this as a backdrop, our guidance for the fourth-quarter, which speaks of non-GAAP results and excludes any non-cash stock-based compensation, impacts and other nonrecurring items is as follows.
Revenues of approximately $1.5 to $1.55 billion. Gross margin of approximately 63% operating margin at approximately 42%. Our effective tax-rate is expected to be approximately 21.5%, with diluted shares of approximately 319 million share. I will now turn the call-back to Liz. Liz? Thank you Ita. 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 everybody please limit themselves to a single question. Thank you for your understanding. Operator take it away.
