A10 Networks, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. A10 provides secure application networking and security products and related support services. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $50.3 million | $49.2 million | Up 2.3% |
| Products revenue | $28.2 million | $28.1 million | Up less than 1% |
| Services revenue | $22.1 million | $21.0 million | Up 4.9% |
| Gross profit / margin | $38.0 million / 75.6% | $37.3 million / 75.8% | Margin down 0.2 percentage points |
| Operating expenses | $49.0 million | $57.3 million | Down 14.5% |
| Operating loss | $11.0 million | $20.0 million | Loss narrowed |
| Net loss | $12.3 million | $19.7 million | Loss narrowed |
| Net loss per share, diluted | $0.16 | $0.27 | Loss per share narrowed |
| Cash used in operating activities | $6.1 million | $0.4 million | Cash use increased |
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $34.0 million and marketable securities were $88.8 million, totaling $122.8 million. Working capital was $109.5 million.
- Total assets were $232.0 million; total liabilities were $135.2 million. Accumulated deficit was $284.5 million.
- No borrowings were outstanding under the $25 million revolving credit facility; A10 reported compliance with its covenants. The facility is secured by substantially all assets other than intellectual property.
- Deferred revenue totaled $98.6 million, including $62.5 million current. The company recognized $23.7 million of revenue during the quarter from deferred revenue at the beginning of the period.
- Operating cash outflow reflected the net loss, partly offset by non-cash charges and a $9.3 million cash inflow from accounts receivable collections; inventory and accrued-liability changes were significant cash uses.
Changes versus prior comparable period
- Revenue growth was modest and primarily services-led. U.S. revenue fell 12%, partly due to lower product demand from U.S. web-giant customers; growth in Asia Pacific excluding Japan, EMEA and Latin America partly offset the decline.
- Gross margin was nearly stable. Product gross margin declined 1.3 percentage points, which management attributed primarily to pricing incentives on selected strategic opportunities; services gross margin improved 1.2 points.
- Operating expenses fell $8.3 million. Management cited lower headcount and reduced stock-based compensation in sales and marketing and R&D, as well as lower internal-investigation-related fees in G&A. The comparison was affected by accelerated ESPP compensation expense in Q1 2018.
- Net non-operating expense was $0.8 million versus net income of $0.5 million in Q1 2018, primarily reflecting a $1.2 million foreign-exchange loss in Q1 2019 versus a $0.2 million foreign-exchange gain in the prior period.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects sales and marketing, R&D, and G&A expenses to be relatively consistent quarter over quarter for the remainder of 2019, and says it plans to continue investing for long-term growth, which may affect near-term profitability.
- Management believes existing cash, marketable securities and other available resources will meet anticipated cash needs for at least 12 months. Results remain exposed to irregular large-customer purchases, long sales cycles, competition, pricing and product mix, international operations, foreign exchange, and supply-chain risks.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2019 because previously identified material weaknesses in the control environment, monitoring and revenue recognition remained unremediated. Remediation was ongoing and had not been tested for a sufficient period. Management nevertheless stated that the interim financial statements present fairly in all material respects.
- The SEC is conducting a private investigation into possible securities-law violations. A10 is cooperating; an adverse outcome is described as reasonably possible, but the company cannot estimate likelihood or a reasonable range of loss.
- A securities class action had been dismissed with leave to amend; the plaintiff appealed and later sought voluntary dismissal of the appeal. A request for final judgment remained pending after quarter-end. A related derivative action was stayed. A patent case was settled through a fully paid-up license and dismissed with prejudice.
- After quarter-end, A10 entered into a conditional sublease for San Jose office and R&D space. The 7-year-8-month term carries first-year base rent of approximately $262,000 per month and total base rent of approximately $26.4 million, plus operating and other expenses; landlord consent is required.
- Effective January 1, 2019, adoption of lease accounting resulted in recognition of approximately $5.5 million of right-of-use assets and $6.1 million of operating lease liabilities at March 31; adoption had no material income-statement impact.
Important facts for investors to verify
- Whether material weaknesses in financial reporting controls are remediated and tested, and whether reporting remains timely and reliable.
- Developments in the SEC investigation and pending securities and derivative litigation, including any eventual financial exposure.
- Whether revenue growth can improve, especially given declining U.S. revenue and reliance on large, irregular customer orders.
- Cash burn and working-capital trends, including whether operating cash use persists despite the reported 12-month liquidity expectation.
- Terms, consent and financial-statement treatment of the new sublease, and the status and terms of the revolving credit facility.