Ita Brennan
Chief Financial Officer at Arista Networks
Thanks, Jayshree, and good afternoon. This analysis of our Q3 results and our guidance for Q4 2022 is based on non-GAAP and excludes all noncash stock-based compensation impacts, certain acquisition-related charges and other nonrecurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release.
Total revenues in Q3 were $1.177 billion, up 57.2% year-over-year and well above the upper end of our guidance range of $1.025 billion to $1.075 billion. Overall demand for our products remains healthy across all areas of the business. Supply challenges continued throughout the quarter, with ongoing supplier decommits constraining shipments and requiring higher-cost broker purchases and expedite fees.
Services and subscription software contributed approximately 16.3% of revenue in the third quarter, down from 17.6% in Q2. This largely reflected accelerated growth in product revenues, while service and software continue to grow on a more consistent basis.
International revenues for the quarter came in at $199.1 million or 17% of total revenue, down from 20% in the second quarter. This reflected strength in U.S. revenues in the period and particularly with our larger cloud customers. Overall gross margin in Q3 was 61.2%, just above the midpoint of our guidance range of 60% to 62%. As previously discussed, our current lower gross margin ranges reflect a healthy cloud mix and higher levels of broker component sourcing and expedite fees.
Operating expenses for the period were mostly flat to last quarter at $227.7 million or 19.3% of revenue. R&D spending came in at $150.1 million or 12.8% of revenue, up from last quarter at $148 million. This primarily reflected increased headcount costs in the period with slightly lower new product introduction costs.
Sales and marketing expense was $62.8 million or 5.3% of revenue and G&A costs were $14.7 million or 1.3% of revenue, both mostly consistent with last quarter. Our operating income for the quarter was $492.1 million or 41.8% of revenue. Other income and expense for the quarter was a favorable $6.1 million and our effective tax rate was roughly 21.3%. This resulted in net income for the quarter of $391.9 million or 33.3% of revenue.
Our diluted share number was 314.4 million shares, resulting in a diluted earnings per share number for the quarter of $1.25, up approximately 69% from the prior year.
Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $2.98 billion. We repurchased $47.6 million of our common stock during the third quarter at an average price of approximately $99 per share. As a reminder, we've now repurchased approximately $740 million or 7 million shares against our October 2021 $1 billion Board authorization. The actual timing and amount of future repurchases will be dependent on market and business conditions, business requirements, stock price, acquisition opportunities and other factors.
Now turning to our operating cash performance for the third quarter. We generated $134.1 million of cash from operations in the quarter, reflecting strong earnings performance, somewhat offset by increased working capital investments.
Increases in inventory and other assets are mainly driven by receipt of components for future shipments, including shipments delayed due to supplier decommits. This trend should reverse once overall supply conditions for these decommitted components improve.
DSOs came in at 51 days, flat to last quarter. Inventory turns were 1.7 times, down from 1.9 times in the prior quarter. Inventory increased to $1.1 billion in the quarter, up from $852.8 million in the prior period, reflecting higher component and peripherals inventory and an increase in switch-related finished goods in transit. Our purchase commitment number for the quarter was $4.3 billion, down from $4.5 billion in Q2. These multiyear purchase commitments reflect overall strength and demand and the current long lead time supply environment.
As a reminder, we continue to prioritize newer early life cycle products for inclusion in these strategies in order to help mitigate the risk of excess or obsolescence.
Our total deferred revenue balance was $941 million, down from $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. Approximately $165 million of the balance, down from $228 million last quarter, represents product deferred revenue largely related to customer-specific acceptance clauses for new products with our larger customers.
Accounts payable days were 56 days, down from 63 days in Q2, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $10.4 million.
Now turning to our outlook for the fourth quarter. We came into the year calling for 30% year-over-year revenue growth, somewhat balanced across our market sectors and heavily constrained by supply. We now expect revenue growth for the year of approximately 45% at the midpoint of our Q4 guidance with a healthy contribution coming from our Cloud Titan customers in what has remained a stubbornly constrained supply environment. Our Cloud Titan customers are now expected to account for approximately 45% of our revenue for the year with major contributions from Meta and Microsoft.
Demand from our enterprise and provider businesses has also been strong, exceeding our original expectations from a demand perspective, but with revenue somewhat constrained by supply. We expect gross margin pressure to continue in the quarter with some continued need for broker purchases and expedite fees in response to ad hoc supplier decommits combined with a healthy cloud mix. Even allowing for the lower gross margins, we expect healthy operating margins for the quarter, again demonstrating the resiliency of the business model with significant bottom line flow-through from increased revenue scale.
With all of this as a backdrop, our guidance for the fourth quarter, which is based on non-GAAP results and excludes any noncash stock-based compensation impacts and other nonrecurring items is as follows: revenues of approximately $1.175 billion to $1.2 billion; gross margin of approximately 60% to 62%, operating margin of approximately 40%. Our effective tax rate is expected to be 21.5% with diluted shares on a post-split basis of approximately 316 million shares.
I will now turn the call back to Liz. Liz?
