Ita Brennan
Chief Financial Officer at Arista Networks
Thanks, Jayshree. It had been amazing experience working with you and the whole Arista team over the last eight years. Now back to the numbers. Since announcement of our Q2 results and our guidance for Q3 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, certain acquisition-related charges, and other nonrecurring items. A full reconciliation of our selected GAAP to non-GAAP results are provided in our earnings release. Total revenues in Q2 were $1.46 billion, up 38.7% year-over-year, well-above the upper end of our guidance of $1.35 billion to $1.4 billion. Services and subscription software contributed approximately 15.2% of revenue in the quarter, up from 14.9% in Q1. International revenues for the quarter came in at $304.4 million, or 20.9% of total revenue, up from 17.5% last quarter. This quarter-over-quarter increase largely reflected a healthy contribution from our enterprise customers in EMEA and APAC and some reduction in domestic shipments for our cloud titan customers which were unusually robust in the prior quarter. Overall gross margin in Q2 was 61.3%, in line with our guidance of approximately 61%, and up from 60.3% last quarter.
We continue to see incremental improvements in gross margin quarter-over-quarter growth, with higher enterprise shipments and better supply chain costs, somewhat offset by the need for some additional inventory reserves as customers refine their forecasted product mix. Operating expenses for the quarter were $287.3 million or 19.7% of revenue, up from last quarter at $257.5 million. R&D spending came in at $188.5 million, or 12.9% of revenue, up from $164.8 million last quarter. This primarily reflected increased headcount and higher new product introduction costs in the period. Share of the marketing expense was $79.6 million, or 5.5% of revenue, compared to $75.9 million last quarter with increased headcount and product introduction costs. Our G&A costs came in at $19.1 million, or 1.3% of revenue, consistent with last quarter. Our operating income for the quarter was $606.5 million, or 41.6% of revenue. Other income and expense in the quarter was a favorable $31.6 million and our effective tax rate was 21.4%. This resulted in net income for the quarter of $501.2 million, or 34.4% of revenue. Our diluted share number was 316.5 million shares, resulting in a diluted earnings per share number for the quarter of $1.58, up 46% from the prior year.
Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $3.7 billion. In the quarter, we repurchased $30 million of our common stock at an average price of $137.2 per share. We have now repurchased $855.5 million, or 8 million shares, at an average price of $107 per share under our current $1 billion board authorization. This leaves $145 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 turning to operating cash performance in the second quarter. We generated approximately $434.1 million of cash from operations in the period, reflecting strong earnings performance, partially offset by ongoing investments in working capital. DSOs came in at 49 days, down from 57 days in Q1, reflecting strong collections quarter with good linearity of billings. Inventory turns were 1.2 times, down from 1.3 last quarter. Inventory increased to $1.9 billion in the corner, up from $1.7 billion in the prior period, reflecting the receipt of components from our purchase commitments and an increase in switch-related finished goods. Our purchase commitments at the end of the quarter were $2.2 billion, down from $2.9 billion at the end of Q1. We expect this number to continue to decline in future quarters as component lead times improve and we work to optimize our supply position. Our total deferred revenue balance was $1.085 billion, down from $1.092 billion in Q1. The majority of the deferred revenue balance and services are 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 balance declined approximately $33 million from last quarter. Accounts payable days were 57 days, up from 55 days in Q1, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $11.6 million.
Now turning to our outlook for the third quarter and beyond. To recap, global supply chain disruptions over the last couple of years necessitated, elongated planning horizons and customer demand signals. The [Indecipherable] results are true. Improving lead times are now driving shorter planning horizons and demand signals, delaying when customers needs to place new orders. This is particularly true of our cloud titan customers, who following a year of elevated repurchases, was now rapidly changing technology road maps and the priorities before providing visibility into future demand later in the year.
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. In spite of the return to shorter lead times and reduced visibility, we are executing well, with gradual incremental improvements to our 2023 outlook which now calls for year-over-year growth in excess of 30%. On the gross margin front, we expect continued progress through the end of the year, reflecting supply chain and manufacturing benefits, while maintaining a reasonably healthy cloud contribution.
Now turning to spending and investments. We continue to monitor the overall macro environment carefully, and we're going to prioritize our investments as we move through the year. This will include a focus on targeted hires in R&D and go-to-market as the team sees the opportunity to add talent. On the cash front, while we'll continue to focus on supply chain and working capital optimization, you should expect some continued growth in inventory through the end of the year. Also as a reminder, our 2023 tax payments have been deferred to October and will represent a significant use of cash in that quarter. Although all of this is a backdrop, our guidance for the third quarter [Technical Issues] a non-GAAP result and excludes any non-cash stock-based compensation impacts and other nonrecurring items is as follows: Revenues of approximately $1.45 billion to 1.5 billionl, gross margin of approximately 62%, operating margin at approximately 41%. Our effective tax rate is expected to be approximately 21.5%, with diluted shares of approximately 318 million shares.
I will now turn the call back to Liz. Liz?
