A10 Networks, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing reports the three months ended March 31, 2018. A10 provides secure application networking products and related support services, selling primarily through distributors and resellers. The report was signed September 24, 2018, after delays in the company’s periodic filings.
Key financial results
| Metric | Q1 2018 | Q1 2017, as restated |
|---|---|---|
| Revenue | $49.2 million | $63.9 million |
| Products revenue | $28.1 million | $43.7 million |
| Services revenue | $21.0 million | $20.2 million |
| Gross profit / margin | $37.3 million / 75.8% | $49.2 million / 76.9% |
| Operating expenses | $57.3 million | $51.0 million |
| Operating loss | $20.0 million | $1.8 million |
| Net loss | $19.7 million | $1.3 million |
| Net loss per share | $0.27 | $0.02 |
| Cash used in operating activities | $0.4 million | Cash provided of $0.5 million |
Products generated 57% of Q1 2018 revenue and services 43%. The company reported $47.0 million of cash and cash equivalents and $83.7 million of marketable securities at quarter-end, or $130.7 million combined. Working capital was $110.1 million. It had no borrowings under its $25 million revolving credit facility. Deferred revenue totaled $97.6 million.
Changes versus the prior comparable period
- Revenue fell 23%, principally because products revenue declined 36%; services revenue rose 4%, supported by post-contract support sales.
- Revenue declined in the United States and Asia Pacific excluding Japan; Japan was approximately flat and EMEA revenue increased.
- Gross margin decreased 1.1 percentage points. Management attributed product margin pressure to product and geographic mix, and services margin pressure to higher hardware-replacement costs.
- Operating expenses increased 12%. General and administrative expense rose 52%, primarily reflecting professional fees for the internal investigation. Stock-based compensation increased to $8.2 million, including $4.1 million of accelerated expense related to the suspended employee stock purchase plan.
- Operating cash flow moved from a $0.5 million inflow to a $0.4 million outflow. Deferred revenue and accrued liabilities provided working-capital inflows during Q1 2018.
The 2017 comparative financial statements were restated for revenue-recognition and other errors. Restatement adjustments increased Q1 2017 revenue by $3.6 million and reduced the reported net loss from $3.9 million to $1.3 million. The company adopted ASC 606 on January 1, 2018; adoption reduced opening accumulated deficit by $12.4 million. The company said the new standard did not materially affect revenue recognition, although reported Q1 2018 revenue was $0.3 million higher than it would have been without adoption. Comparisons therefore involve restated prior-period figures and a change in accounting standard.
Outlook, risks and unusual items
- Outlook: No quantified revenue or earnings guidance is provided. Management expects to continue investing in product development, sales and marketing, and says available cash, marketable securities and other resources should cover anticipated cash needs for at least 12 months. It cautions that growth investments may weigh on near-term profitability.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective as of March 31, 2018, citing material weaknesses in the control environment, monitoring and revenue recognition. Remediation was underway but not yet considered complete.
- Investigation and litigation: The Audit Committee’s investigation identified accounting and conduct issues, principally involving the timing of revenue recognition on certain reseller and distributor transactions. The SEC was conducting a private investigation; the company could not estimate the likelihood or range of possible loss. A securities class action and a shareholder derivative action were also disclosed.
- Filing and listing risk: The filing describes delayed periodic reports and an NYSE notice concerning listing compliance. At the filing date, the company said it remained noncompliant because its Q2 2018 Form 10-Q had not yet been filed, creating delisting risk.
- Customer and operating risks: The ten largest end-customers accounted for 36% of Q1 revenue, and purchases can be large and irregular. Competition, long sales cycles, product mix, foreign exchange, and reliance on third-party manufacturers and component suppliers may cause significant fluctuations in results.
- Tax and financing: The company maintained a valuation allowance against U.S. and certain foreign deferred tax assets. The credit facility is secured by substantially all assets other than intellectual property and includes financial covenants; a filing-timeliness requirement had received a lender forbearance.
Important facts for investors to verify
- Progress in remediating the material weaknesses and whether controls are subsequently found effective.
- Resolution and potential financial impact of the SEC investigation and shareholder litigation.
- Timeliness of later SEC filings and the company’s NYSE listing status.
- Whether product revenue recovers and customer concentration or large-order timing changes materially.
- Cash generation, expenses related to investigations and remediation, and continued compliance with credit-facility covenants.
- Comparability of future results given the 2017 restatement and adoption of ASC 606.