A10 Networks, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; dollar amounts below are in millions unless otherwise noted. A10 sells application delivery and security hardware, software and related support services.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $61.4 | $55.1 | $175.4 | $166.0 |
| Gross profit / margin | $47.7 / 77.6% | $42.1 / 76.5% | $134.8 / 76.9% | $125.6 / 75.7% |
| Operating loss | $(2.1) | $(4.6) | $(14.5) | $(19.7) |
| Net loss | $(2.7) | $(4.7) | $(14.8) | $(19.2) |
| Net loss per share | $(0.04) | $(0.07) | $(0.21) | $(0.29) |
- Revenue mix: Q3 product revenue was $39.4 million, up 12%; services revenue was $22.0 million, up 11%. For nine months, products were $111.2 million, up 1%, while services were $64.2 million, up 16%.
- Cash flow: Nine-month operating cash flow was $10.0 million, versus $21.8 million in 2016. The filing attributes the current-period inflow partly to a $16.0 million reduction in receivables; working-capital changes were less favorable overall than in the prior period. Investing activities used $2.9 million, versus $95.6 million, primarily reflecting much lower net purchases of marketable securities. Financing provided $3.9 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $39.9 million and marketable securities were $84.0 million, totaling $123.9 million. Working capital was $101.3 million. There were no borrowings under the $25 million revolving credit facility; the company reported compliance with its covenants. Deferred revenue totaled $91.0 million.
Changes versus the prior comparable periods
- Q3 revenue grew 12%; nine-month revenue grew 6%. Q3 growth came from both products and services, while nine-month growth was driven mainly by services.
- Service-provider revenue increased 36% in Q3 and 18% for nine months; enterprise revenue decreased 7% and 3%, respectively.
- Gross margin improved 1.1 percentage points in Q3 and 1.2 points for nine months. Management cited favorable product and geographic mix for product margins and higher services revenue against relatively stable support costs for nine-month services margins.
- Operating and net losses narrowed in both comparison periods. Nine-month operating expenses rose 3%; the prior-year period included $2.1 million of litigation and settlement expense, compared with none in 2017.
- Operating cash flow fell by $11.8 million year over year, in part because the prior period benefited from a $10.4 million increase in deferred revenue, whereas deferred revenue declined by $1.9 million in 2017.
Outlook, commentary and risks
- Management provided no specific revenue or earnings guidance. It expects to continue investing in product development, sales and marketing, and public-company capabilities, which may weigh on near-term profitability. Management believes existing cash, securities and other resources will meet anticipated cash needs for at least 12 months.
- Revenue is exposed to large, irregular customer purchases and long sales cycles: the ten largest end-customers represented 38% of revenue in both nine-month periods. Management warns that purchase delays or changes could materially affect quarterly results.
- Other key risks include intense competition, adapting to cloud-based and subscription models, product security or reliability failures, dependence on third-party manufacturers and limited-source components, foreign-exchange movements, and intellectual-property claims.
- The company reported no outstanding credit-facility borrowings and no material change in contractual obligations outside the ordinary course. It had no off-balance-sheet arrangements described in the filing.
- The IRS was examining the company’s 2014 and 2015 tax returns. Unrecognized tax benefits were $3.6 million. The company maintained a valuation allowance against U.S. and certain foreign deferred tax assets.
- A trial-software export-control issue involving downloads by individuals in a U.S.-sanctioned country was disclosed to U.S. agencies; the agencies closed their reviews without fines or penalties. The company also disclosed a new $20 million share-repurchase authorization announced October 23, 2017.
- Disclosure controls were assessed as effective at a reasonable assurance level; no material changes in internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Whether service-provider growth can persist and offset the decline in enterprise revenue.
- Whether services growth, including support-contract renewals, sustains margins and deferred-revenue trends.
- Drivers of the lower year-to-date operating cash flow and the extent to which receivables collections remain a significant source of cash.
- Customer concentration and the timing of large orders, as well as exposure to the two customers representing 16% and 13% of gross receivables at quarter-end.
- Future spending, profitability progress, and the use of the new repurchase authorization relative to investment needs.
- Developments in the IRS examination, tax assets and valuation allowance, and any material legal or intellectual-property contingencies.