A10 Networks, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparative period is Q1 2019. A10 provides secure application networking and cybersecurity solutions through hardware, software and related support services.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $53.8 million | $50.3 million | Up 6.9% |
| Product revenue | $30.7 million | $28.2 million | Up 8.9% |
| Services revenue | $23.0 million | $22.1 million | Up 4.4% |
| Gross profit / margin | $41.6 million / 77.4% | $38.0 million / 75.6% | Margin up 1.8 percentage points |
| Operating expenses | $41.8 million | $49.0 million | Down 14.6% |
| Operating loss | $0.2 million | $11.0 million | Improved by $10.8 million |
| Net loss | $0.3 million | $12.3 million | Improved by $12.0 million |
| Operating cash flow | $12.2 million provided | $6.1 million used | Improved by $18.2 million |
The filed basic and diluted loss per share is $0.00 for Q1 2020, versus a loss of $0.16 in Q1 2019; the 2020 loss rounds to zero at the reported precision. The effective total gross margin improvement reflected higher product margin (77.4%, up 4.0 points), partly offset by lower services margin (77.4%, down 1.1 points).
Liquidity and obligations: Cash and cash equivalents were $65.6 million and marketable securities were $77.3 million at March 31, for combined cash and securities of $142.9 million. Working capital was $128.2 million. Total liabilities were $156.8 million, including $101.3 million of deferred revenue; operating lease liabilities were $31.6 million. The company let its credit facility expire in November 2019 and reported no interest expense in Q1 2020. Management said existing cash, securities and other available resources should cover anticipated needs for at least 12 months.
Material changes and operating drivers
- Revenue growth was led by Japan, up 34% to $17.6 million, and the Americas, up 20% to $25.4 million. Asia Pacific excluding Japan fell 44% to $4.9 million, and EMEA fell 20% to $5.8 million.
- Service providers contributed 65% of revenue, compared with 54% a year earlier; enterprises contributed 35%, compared with 46%. The ten largest end-customers accounted for 52% of revenue versus 33% in Q1 2019, increasing customer-concentration exposure.
- Operating expenses declined following the 2019 restructuring plan, which included an approximately 5% workforce reduction and office closures. Lower sales and marketing and general and administrative costs were also drivers. No restructuring expense was recorded in Q1 2020.
- Operating cash flow benefited from working-capital movements, including $10.8 million from accounts receivable, which management attributed to the timing of collections. The improvement therefore should not be treated as solely earnings-driven.
Outlook, risks and unusual items
- Guidance: The company temporarily suspended quarterly revenue and earnings guidance because of COVID-19 uncertainty. It expected sales and marketing and R&D expenses for the remainder of 2020 to be broadly consistent with Q1 levels, and G&A to be consistent with or slightly below Q1.
- COVID-19: Management said the pandemic had not materially adversely affected the business during Q1, but warned that disruption could negatively affect revenue, results, liquidity and investment in 2020. Risks include weaker customer demand, partner disruption, supply shortages, and constraints on importing, exporting or selling products. Employees shifted to remote work and travel was restricted.
- Strategic alternatives: The board’s Strategy Committee was exploring alternatives, including a potential sale or change-of-control transaction, with an outside adviser. The filing provides no assurance that a transaction will occur and cites possible business disruption and added costs.
- Export compliance: The company disclosed that some encryption products were shipped before required export authorizations and classification requests were obtained. It filed an initial voluntary self-disclosure with BIS, was conducting an internal review and planned a complete submission; penalties or other consequences remain possible.
- Other risks and contingencies: Large, irregular customer orders; intense competition and cloud-based market shifts; reliance on Taiwan-based contract manufacturers and limited-source components; foreign-exchange exposure; and litigation could affect results. The company cited $4.3 million of unrecognized tax benefits and said settlement timing could not be reliably estimated. No specific litigation outcome or quantified loss is provided in the filing text.
Important facts for investors to verify
- Whether the unusually high top-ten customer revenue share and service-provider mix persist, and whether large customer orders are delayed or reduced.
- How COVID-19 affects demand, supply chains and the company’s ability to resume or provide quarterly guidance.
- Whether operating cash flow remains positive after considering the timing-related working-capital inflows.
- Developments in the BIS export self-disclosure, including any penalties or remediation requirements.
- Any outcome of the strategic-alternatives process, and the potential impact on operations, costs and shareholders.
- Progress on profitability: Q1 remained loss-making despite improved revenue, margins and operating expenses.