A10 Networks, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Dollar amounts are in millions unless noted.
Business context
A10 sells hardware, software and cloud-based application delivery and security solutions, plus related support and professional services. Sales are primarily through distributors and other channel partners. Results can fluctuate with large, irregular customer orders; the ten largest end customers accounted for 40% of first-half revenue, up from 35% a year earlier.
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $53.7 | $57.1 | $114.0 | $110.9 |
| Products revenue | $32.1 | $38.8 | $71.8 | $75.2 |
| Services revenue | $21.6 | $18.3 | $42.2 | $35.8 |
| Gross profit | $41.0 | $42.9 | $87.1 | $83.5 |
| Gross margin | 76.4% | 75.1% | 76.5% | 75.3% |
| Operating loss | $(8.0) | $(5.8) | $(12.4) | $(15.2) |
| Net loss | $(8.3) | $(4.9) | $(12.2) | $(14.5) |
| Net loss per share | $(0.12) | $(0.08) | $(0.18) | $(0.22) |
| Operating cash flow | Not presented quarterly | $13.8 | $19.3 |
Q2 revenue fell 6% year over year as product revenue declined 17%, partly offset by 18% growth in services. Management attributed lower product sales mainly to U.S. and Japan declines and deals that did not close during the quarter. First-half revenue rose 3%, with 18% services growth offsetting a 4% product decline, primarily in ADC products. Services growth reflected increased post-contract support sales from the larger installed base.
First-half operating loss improved by $2.8 million year over year, partly because the prior-year period included $2.0 million of litigation and settlement expense. Q2 operating loss widened by $2.3 million: R&D expense rose 14%, while sales and marketing expense fell 5%. First-half R&D spending increased 15%. First-half net loss improved despite lower other income, which included fewer foreign-exchange gains.
First-half operating cash flow was $13.8 million, down from $19.3 million. Improved collections contributed a $25.1 million cash inflow from accounts receivable changes; cash was also affected by lower accrued liabilities and inventory investment. Investing activities used $2.0 million, while financing activities provided $5.7 million. Cash and cash equivalents increased $17.4 million during the half.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $46.4 million and marketable securities were $85.8 million, for combined cash and investments of $132.2 million.
- Working capital was $100.7 million. Current assets were $196.2 million and current liabilities were $95.6 million.
- Total liabilities were $127.0 million; deferred revenue totaled $92.5 million, including $61.8 million current.
- No borrowings were outstanding under the $25 million revolving credit facility. The company reported covenant compliance; the facility requires an adjusted quick ratio of at least 1.50:1.00 and is secured by substantially all assets other than intellectual property.
- Management said available cash, investments and other financial resources should cover anticipated needs for at least the next 12 months. The company reported no plan to repatriate foreign earnings.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance was provided. Management expects continued investment in product development, sales and marketing, and public-company resources, which may weigh on short-term profitability; R&D expense is expected to increase.
- Key risks include unpredictable large-customer purchasing and long sales cycles, product-market competition and cloud-transition execution, dependence on third-party manufacturers and limited component sources, foreign-exchange exposure, and product or cybersecurity defects.
- The company repurchased 99,735 shares for about $0.8 million in the first half under a $20 million authorization; $17.4 million remained authorized at June 30.
- The 2016 securities class action and related derivative action were settled in 2016 and dismissed in Q1 2017. The filing reports no first-half 2017 litigation and settlement expense.
- Trial software was inadvertently available to international users and was downloaded on limited occasions by individuals in a U.S.-sanctioned country. Commerce and Treasury reviews were disclosed: Commerce closed its review without fines or penalties; the company was awaiting Treasury’s response and did not expect potential fines to be material.
- The IRS was examining the company’s 2014 and 2015 tax returns. Unrecognized tax benefits were $3.3 million; management did not anticipate a material change over the next 12 months.
- The company planned modified-retrospective adoption of revenue standard ASC 606 in Q1 2018 and did not then expect a material revenue-recognition impact; it was still assessing the effect on capitalization of customer-acquisition costs. Lease accounting changes were also under evaluation.
Investor verification priorities
- Track whether product revenue stabilizes and whether the Q2 pipeline deals that did not close are subsequently won, especially in the U.S. and Japan.
- Assess the durability and renewal rates of services growth and its contribution to gross margin.
- Monitor operating expense growth, losses and operating cash flow, including the effects of working-capital movements and stock-based compensation.
- Review customer concentration and large-customer order timing; verify any subsequent developments on the Treasury export-compliance review and IRS examination.
- Confirm credit-facility covenant compliance, liquidity, and the use of the remaining share-repurchase authorization.