A10 Networks, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; includes unaudited fourth-quarter results. The filing was signed February 23, 2017. A10 sells hardware, software and cloud-based application delivery and network security solutions, with revenue from products and support and other services.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $230.0 million | $199.0 million | +15.6% |
| Products revenue | $153.9 million | $138.3 million | +11% |
| Services revenue | $76.1 million | $60.7 million | +25% |
| Gross profit / margin | $175.1 million / 76.1% | $150.2 million / 75.5% | Margin +0.6 percentage points |
| Operating loss | $19.1 million | $38.4 million | Loss narrowed |
| Net loss | $20.9 million | $40.0 million | Loss narrowed |
| Operating cash flow | $18.8 million | $3.4 million | Increased |
FY2016 operating expenses were $194.2 million, up 3%; research and development rose 11% to $60.7 million, while sales and marketing and general and administrative expenses were essentially flat. Net loss per share was $0.32 versus $0.64 in FY2015. Services represented 33.1% of revenue, up from 30.5%.
Q4 2016: Revenue was $64.0 million versus $56.6 million in Q4 2015. Operating income was $0.6 million versus an operating loss of $6.8 million; net loss was $1.8 million versus $7.4 million. Q4 included $2.2 million of net interest and other expense, primarily reflecting foreign-exchange losses.
Liquidity, cash flow and debt
- At year-end, cash and cash equivalents were $29.0 million and marketable securities were $85.4 million, totaling $114.3 million, compared with $98.1 million in cash and cash equivalents in 2015. Working capital was $98.6 million; total assets were $221.3 million.
- Operating cash flow improved to $18.8 million, supported in part by a $20.1 million increase in deferred revenue; net loss was $20.9 million. Investing cash outflow was $96.4 million, principally reflecting $85.6 million of net marketable-security purchases, plus Appcito acquisition, intangible-asset and equipment spending. Financing cash inflow was $8.4 million, including employee equity-plan proceeds, partly offset by repurchases.
- No debt was outstanding at year-end. A new three-year, $25 million revolving facility was entered into in November 2016, secured by substantially all assets other than intellectual property and subject to covenants, including an adjusted quick-ratio requirement. A prior facility expired in September 2016.
- Deferred revenue was $92.9 million, up from $72.8 million, mostly services revenue. Contractual obligations totaled $22.5 million, including $14.9 million of purchase commitments due within one year.
Material changes and business developments
- Revenue growth accelerated from 11% in 2015 to 16% in 2016. Japan revenue rose 49% to $53.0 million; EMEA revenue fell 15% to $23.1 million. U.S. revenue increased 11% to $118.8 million.
- Services growth reflected a larger installed base and increased maintenance, professional-services and subscription revenue. Products revenue from enterprise customers increased 22%, while service-provider product revenue decreased 1%.
- Gross margin improved overall. Product margin declined 0.6 percentage points, partly due to higher excess and obsolete inventory reserves; services margin rose 3.2 points as revenue grew while related personnel costs remained relatively constant.
- A10 acquired substantially all Appcito assets in June 2016 for purchase consideration with a fair value of $6.3 million, including cash and shares. The acquisition added cloud-native Lightning ADS; the company said it was not material to consolidated results or financial position.
- The board authorized up to $20 million of repurchases over 12 months. By year-end, 226,676 shares had been repurchased for approximately $1.8 million at a weighted-average $7.92 per share.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management expects continued investment in product development, sales and marketing, international expansion and public-company infrastructure, which may affect short-term profitability. It stated that existing cash, securities and other available resources should meet anticipated cash needs for at least 12 months.
- A10 reported net losses in 2014–2016 and cautioned that it may not achieve or sustain profitability. Results can fluctuate because of large, irregular customer purchases, long sales cycles, quarter-end shipments, product mix and customer concentration. The ten largest end-customers represented approximately 35% of FY2016 revenue; service providers represented approximately 41%.
- Competition, technology changes, customer adoption of cloud and subscription models, cybersecurity product defects, and the ability to develop and sell new products remain significant risks. Hardware manufacturing depends substantially on two Taiwan-based manufacturers and certain limited-source components; agreements do not guarantee fixed capacity or pricing.
- Foreign-exchange losses were $1.6 million for FY2016. Japan sales are primarily yen-denominated; the company initiated a hedging program in 2016. Management cited EMEA economic weakness and Middle East personnel turnover as factors in that region’s revenue decline.
- The company paid $0.8 million, net of expected insurance proceeds, in October 2016 under a proposed securities class-action settlement; final court approval was scheduled for February 24, 2017. A related derivative-action settlement, including corporate-governance measures, was preliminarily approved and also awaited final approval. The filing states settlements attribute no wrongdoing or liability.
- A10 disclosed that trial software was inadvertently available for international download and was downloaded on limited occasions by individuals in a U.S.-sanctioned country. It implemented corrective actions and filed a voluntary self-disclosure with U.S. authorities in February 2017; management did not expect potential fines to be material.
- Management assessed disclosure controls and internal control over financial reporting as effective at December 31, 2016. The auditor issued an unqualified opinion on the financial statements but did not provide an internal-control attestation. A prior material weakness related to share-based compensation was reported as remediated in 2015.
Important facts for investors to verify
- Whether revenue growth, particularly in Japan and services, is sustained and whether customer and service-provider concentration changes.
- Whether improved operating cash flow is repeatable, given its contribution from deferred-revenue growth and working-capital movements.
- How product and services margins, inventory reserves and foreign-exchange exposure develop.
- Final court approval and any remaining obligations from the securities and derivative settlements, and the outcome of the export-control self-disclosure.
- Compliance with the new credit facility’s covenants and the use of the remaining repurchase authorization; no borrowings were outstanding at year-end.