A10 Networks, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. A10 sells application networking and security solutions, including ADC, CGN and DDoS protection products, on hardware and virtual appliances, plus support and professional services.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $47.5 million | $45.1 million | $91.6 million | $90.9 million |
| Product revenue | $33.3 million | $34.1 million | $63.8 million | $70.5 million |
| Services revenue | $14.2 million | $11.0 million | $27.7 million | $20.3 million |
| Gross margin | 75.6% | 77.1% | 75.5% | 77.6% |
| Operating loss | $9.4 million | $0.7 million | $23.0 million | $5.0 million |
| Net loss | $10.0 million | $1.3 million | $23.7 million | $6.4 million |
| Net loss per share | $0.16 | $0.02 | $0.38 | $0.21 |
Q2 revenue grew 5%, as services growth of 29% more than offset a 2% decline in products. First-half revenue grew less than 1%: services rose 36%, while products fell 9%. The company attributed services growth to a larger installed base, support-contract sales and professional services. Japan revenue was notably weaker, partly due to currency effects and prior-period product demand; U.S. and EMEA revenue increased.
Operating expenses rose 28% in Q2 and 22% in the first half, including increased research and development and sales and marketing spending. Comparisons were also affected by a $7.0 million litigation-related benefit recorded in Q2 2014 after a contractual-liability settlement. Product gross margin declined, mainly due to geographic sales mix and, in the first half, the yen-dollar exchange rate.
Cash, liquidity and debt
- Cash and cash equivalents were $96.2 million at June 30, 2015, versus $91.9 million at December 31, 2014. Working capital was $92.8 million.
- First-half operating cash flow was positive $3.5 million, compared with negative $9.7 million in the first half of 2014. Improved working capital, including higher deferred revenue and lower receivables and inventory, supported the 2015 result.
- Investing cash outflow was $1.8 million; financing cash inflow was $2.6 million, primarily from employee equity plans. First-half 2014 financing included $122.3 million of net IPO proceeds.
- No borrowings were outstanding under the $35 million revolving facility; the company reported covenant compliance. The facility is secured by substantially all assets, including intellectual property, and matures September 30, 2016.
- Total deferred revenue was $65.8 million, up from $57.2 million at year-end 2014. Management said cash resources should meet anticipated needs for at least 12 months.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expects continued investment in product development and global sales and marketing, with spending potentially weighing on near-term profitability.
- Management noted that large, irregular customer orders, long sales cycles, shipment timing and customer concentration can make quarterly results difficult to predict. The ten largest end-customers accounted for approximately 35% of first-half revenue.
- Foreign-exchange exposure, particularly to the Japanese yen, affected revenue and margins. The company had no currency hedges in place.
- A patent case brought by Parallel Networks was settled in June 2015 through a fully paid-up license, and the case was dismissed. IPO-related securities class actions and a derivative lawsuit remained pending; possible losses could not be reasonably estimated and no liability was accrued.
- Management concluded disclosure controls were ineffective as of June 30, 2015, solely because of a material weakness in controls over stock-based compensation for the 2014 Employee Stock Purchase Plan. Remediation work was underway, with management expecting remediation by year-end 2015, subject to testing.
- The company maintained a full valuation allowance against U.S. federal and state deferred tax assets. It reported $2.3 million of unrecognized tax benefits.
Key investor verification points
- Assess whether services growth and deferred-revenue expansion can offset declining product revenue, particularly in Japan.
- Track gross-margin trends, regional and product mix, and the effects of foreign exchange.
- Review operating-expense growth and the path to profitability, separating recurring costs from prior-period litigation benefits.
- Monitor customer concentration, order timing, and collections; one customer represented 18% of gross receivables at quarter-end.
- Follow the status and potential financial impact of pending securities and derivative litigation, as well as progress testing remediation of the control weakness.