A10 Networks, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 8, 2022. The filing also reports fourth-quarter 2021 results. A10 provides application networking and security solutions for service providers, enterprises and government customers, through hardware, software and support offerings.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $250.0 million | $225.5 million |
| Products revenue | $148.4 million | $129.9 million |
| Services revenue | $101.6 million | $95.7 million |
| Gross profit / margin | $196.5 million / 78.6% | $175.4 million / 77.8% |
| Operating income / margin | $33.4 million / 13.3% | $17.7 million / 7.9% |
| Net income / diluted EPS | $94.9 million / $1.19 | $17.8 million / $0.22 |
| Cash from operations | $50.1 million | $55.3 million |
| Cash and cash equivalents; marketable securities | $78.9 million; $106.1 million | $83.3 million; $74.9 million |
At year-end, working capital was $167.9 million and stockholders’ equity was $208.9 million. The filing reports no outstanding borrowings and says the former $25 million revolving credit facility expired in 2019; A10 had no current plans to enter a new borrowing facility. Current liabilities were $116.1 million and total liabilities $184.2 million.
FY2021 cash declined by $4.4 million: operating activities provided $50.1 million, investing activities used $38.1 million, and financing activities used $16.4 million. Operating cash flow was below net income, which included a substantial noncash tax benefit. Deferred revenue was $121.6 million, including $73.1 million expected to be recognized within one year.
Changes versus the prior period
- Revenue grew 10.9%; products revenue increased 14.3% and services revenue 6.3%. Management attributed product growth chiefly to higher demand from service-provider and enterprise customers in the Americas and service providers in EMEA.
- Americas revenue rose 23% to $121.2 million and EMEA rose 26% to $38.5 million; Japan revenue fell 8% to $61.7 million, while Asia Pacific excluding Japan declined 4% to $28.7 million.
- Gross margin improved 0.8 percentage points to 78.6%. Operating expenses rose 3.5% to $163.1 million: higher sales and marketing costs were partly offset by lower research and development costs. Operating income increased 88.3%.
- Net income rose sharply, primarily because A10 released $62.9 million of deferred-tax-asset valuation allowance in the third quarter, recognizing a discrete tax benefit. The $63.2 million total income-tax benefit is not a measure of recurring operating improvement.
- Cash from operations decreased from $55.3 million to $50.1 million, while cash and cash equivalents decreased from $83.3 million to $78.9 million. Marketable securities increased to $106.1 million.
Fourth-quarter 2021
Revenue was $70.7 million, gross profit $56.5 million and net income $10.7 million; diluted EPS was $0.13. Third-quarter net income was $74.9 million, reflecting the period’s large valuation-allowance release.
Outlook, risks and notable items
- Management expects 2022 sales and marketing, research and development, and general and administrative expenses to remain around 2021 levels, while focusing investment on areas with the greatest opportunities. It expects existing cash, cash equivalents and marketable securities to cover anticipated needs for at least 12 months and beyond; no specific revenue or earnings guidance is provided.
- A10 intends to continue investing in product development and potentially expand global sales, marketing and channel programs; these investments may affect short-term profitability. Management said the ongoing pandemic and semiconductor shortage could disrupt supply and negatively affect 2022 revenue, results, liquidity or capital investment.
- Customer concentration is material: the ten largest end-customers contributed 39% of FY2021 revenue; service providers contributed 63%. One distribution partner represented 12% of revenue. Nearly all orders are fulfilled through channel partners.
- Product backlog was $10.9 million at year-end, versus $3.0 million a year earlier, but management cautions that backlog is cancellable and not a reliable revenue indicator. Hardware production depends on outsourced manufacturers and constrained components, with open manufacturer purchase commitments of $31.2 million.
- Capital returns began in 2021: A10 paid a $0.05-per-share quarterly dividend and repurchased $18.3 million of shares during the year. A new $100 million repurchase authorization was approved in October, with $92.9 million remaining at year-end. Future dividends and buybacks are discretionary.
- Key risks include demand and sales-cycle variability, competition and cloud-transition execution, supply-chain constraints, cybersecurity/product defects, international and foreign-exchange exposure, and reliance on large customers and distributors. A10 continues to refer to exploration of strategic alternatives, without assurance a transaction will occur.
- The filing describes ordinary-course litigation and contingencies but does not provide a clear quantified estimate of potential losses. A prior export-control matter was resolved after a BIS warning letter, with no fines or penalties. The independent auditor gave an unqualified opinion and concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- How much of reported earnings growth is sustainable apart from the one-time deferred-tax valuation-allowance release.
- Whether product demand, backlog conversion and operating cash generation remain strong amid semiconductor and manufacturer constraints.
- Revenue trends in Japan and Asia Pacific, and the continuing concentration in large end-customers, service providers and distribution partners.
- Whether margins and profitability hold as A10 funds product development and sales efforts, and as customers shift toward subscription and cloud-based models.
- The pace and funding of dividends and share repurchases relative to liquidity needs and future investment plans.