A10 Networks, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. A10 sells secure application networking and cybersecurity products and related support services to service providers and enterprises.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $56.6 million | $52.8 million | $162.9 million | $152.3 million |
| Gross margin | 76.8% | 77.4% | 77.5% | 76.7% |
| Operating income (loss) | $6.2 million | $0.2 million | $9.9 million | $(17.2) million |
| Net income (loss) | $6.5 million | $0.2 million | $10.0 million | $(17.9) million |
| Diluted earnings (loss) per share | $0.08 | $0.00 | $0.12 | $(0.24) |
| Operating cash flow | Not provided for quarter | $38.5 million | $(5.9) million |
Q3 revenue grew 7% year over year, with product revenue up 7% and services revenue up 7%. Nine-month revenue also grew 7%; products rose 8% and services 5%. Nine-month service-provider revenue increased $13.6 million, while enterprise revenue declined $3.0 million.
Q3 operating expenses fell 8.5% year over year, primarily reflecting the 2019 restructuring and reduced travel and event spending during COVID-19. Sales and marketing decreased 15.9% and research and development decreased 13.2%; general and administrative expense increased 75.0%, mainly because Q3 2019 included a one-time $2.3 million litigation-related insurance recovery. Nine-month operating expenses decreased 13.3%.
Q3 gross margin declined 0.6 percentage points, as lower services margin outweighed a slight improvement in product margin. Nine-month gross margin improved 0.8 percentage points, driven by product mix and geography; services margin declined due mainly to higher support personnel costs.
Liquidity, cash flow and capital
- At September 30, 2020, cash and cash equivalents were $83.1 million and marketable securities were $76.0 million, totaling $159.1 million. Working capital was $138.5 million.
- Nine-month operating cash flow was $38.5 million, versus cash use of $5.9 million in 2019. Management attributed the 2020 inflow in part to net income and working-capital movements, including collections of receivables; it noted collection timing contributed to the receivables benefit.
- Nine-month investing cash flow was positive $5.4 million, and financing cash flow was negative $6.6 million, including $13.3 million used for a share repurchase, partly offset by employee equity-plan proceeds.
- The company reported no material borrowing balance; its credit facility expired in November 2019 and was not renewed. Management stated available resources should cover anticipated needs for at least 12 months.
- Total liabilities were $162.4 million, including $30.0 million of operating lease liabilities. Future operating lease payments totaled $33.1 million. The filing identifies no off-balance-sheet arrangements.
Material changes and notable items
- Q3 regional revenue increased 19% in Japan and 21% in EMEA, while the Americas declined 3%. For the first nine months, Americas revenue rose 14% and Japan rose 12%, while Asia Pacific excluding Japan fell 18%.
- Ten largest end-customers accounted for 41% of Q3 revenue and 44% of nine-month revenue. Service providers generated 60% of Q3 revenue and 61% for the nine-month period.
- In May, A10 repurchased 2.2 million shares from its former CEO for $13.2 million and paid $0.1 million to cancel vested options. In September, the board authorized an additional repurchase program of up to $50 million over 12 months; no purchases under that program had occurred by September 30.
- The 2019 restructuring plan, which reduced the workforce by approximately 5% and consolidated facilities, was completed by September 30, 2020.
- A10 began capitalizing certain internally developed software labor costs in Q1 2020; amounts capitalized through September were not material.
Outlook, risks and contingencies
- A10 temporarily suspended quarterly quantitative revenue and earnings guidance because of uncertainty related to COVID-19. Management said COVID-19 had not materially adversely affected Q3, but could negatively affect revenue, results, liquidity, supply and investment in 2020; it described expected impacts as temporary, while emphasizing uncertainty.
- Key risks include unpredictable timing of large customer purchases and long sales cycles, customer and geographic concentration, competition and cloud-based business-model shifts, and dependence on third-party manufacturers and limited-source components. The pandemic may disrupt customers, channel partners, vendors and supply chains.
- The filing notes ongoing litigation risk, but does not provide a clear quantified estimate of potential exposure. It also discloses a voluntary self-disclosure to the U.S. Bureau of Industry and Security after identifying certain encryption-product shipments made before required export authorizations and classification requests; the internal review was ongoing and potential penalties were uncertain.
- A10 continued exploring strategic alternatives, including a potential sale or change-of-control transaction; the filing gives no assurance that a transaction will occur.
- The company maintained a full valuation allowance against U.S. and certain foreign deferred tax assets and reported $4.5 million of unrecognized tax benefits.
Investor verification priorities
- Assess whether revenue growth and the return to profitability are sustainable, particularly given nine-month enterprise weakness and regional variation.
- Verify the sources and repeatability of operating cash flow, including the impact of receivables collection timing and working capital.
- Track large-customer concentration, order timing, service-provider demand and Asia Pacific performance.
- Monitor COVID-19 effects on customer spending and supply availability, and any resumption of quantitative guidance.
- Follow the export-control self-disclosure, litigation matters and strategic-alternatives process for material developments.
- Consider the effect of the authorized $50 million repurchase program on liquidity and capital allocation if executed.