A10 Networks, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; amounts below are in millions of dollars unless otherwise stated. A10 sells application networking products and related support services, including ADC, CGN and DDoS protection solutions.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $45.1 | $30.1 | $90.9 | $59.7 |
| Gross profit / margin | $34.8 / 77.1% | $23.2 / 77.1% | $70.5 / 77.6% | $46.2 / 77.4% |
| Operating loss | $(0.7) | $(9.3) | $(5.0) | $(17.0) |
| Net loss | $(1.3) | $(10.2) | $(6.4) | $(18.7) |
- Q2 revenue increased 49.8%; first-half revenue increased 52.2%. Product revenue grew 47.9% in Q2 and 52.2% in the first half; services revenue grew 55.8% and 52.0%, respectively.
- Operating expenses rose 9.1% in Q2 and 19.5% in the first half, excluding the effect of the litigation benefit: sales and marketing, R&D and G&A all increased as the company expanded staff and growth investments.
- Q2 basic and diluted loss per share was $0.02, versus $1.12 a year earlier. First-half loss per share was $0.21, versus $2.07. Share count and preferred-stock conversion differ substantially year over year.
- For the first half, cash used in operating activities was $9.7, versus $14.0 in 2013; investing activities used $3.8, versus $1.9. Financing provided $104.8, mainly from the IPO, partly offset by repayment of $20.0 of revolver borrowings. Cash increased $91.3 to $112.1.
- At June 30, cash and cash equivalents were $112.1; working capital was $112.3. The company had no revolver borrowings, compared with $20.0 at December 31, 2013. It had a $35.0 revolving facility, secured by substantially all assets, and reported covenant compliance.
Changes and operating context
- Revenue growth reflected greater adoption by new and existing customers, rapid uptake of the Thunder product family, and the absence of the prior-year sales impact from Brocade litigation injunctions. Management said Thunder products accounted for most product revenue in the period.
- U.S. Q2 revenue rose 154% year over year, while Japan revenue fell 27% amid a broad slowdown and delays in service-provider purchases. First-half revenue rose in the U.S., EMEA and Asia Pacific excluding Japan; Japan increased 7% for the half despite the Q2 decline.
- Gross margin was nearly unchanged in Q2 and improved 0.2 percentage points for the first half. Product margin declined 0.5 points in Q2, mainly due to geographic sales mix; services margin improved as revenue growth outpaced cost growth.
- The company completed its IPO in March 2014. It received $122.3 of net cash proceeds reported in the cash flow statement and repaid its $20.0 revolver borrowing. Preferred shares converted into common stock.
Outlook, unusual items and risks
- Management said existing cash and expected operating cash inflows should meet anticipated cash needs for at least the next 12 months. It planned continued investment in product development, sales and marketing, international expansion and public-company infrastructure, and expected approximately $4.6 of capital expenditures in the remainder of 2014. No specific revenue or earnings guidance was provided.
- A May settlement with a legal service provider reduced a previously accrued $12.0 contractual liability: A10 paid $5.0 and recorded a $7.0 litigation benefit. Litigation expense therefore showed a benefit of $5.9 in Q2 and $4.0 for the first half, including regular litigation costs.
- Radware and Parallel Networks patent cases remained pending. The filing states that potential losses could not be reasonably estimated and no reserve was recorded for those matters. Adverse outcomes could require damages, royalties, settlements or product changes.
- Business risks include dependence on large, irregular customer purchases (the ten largest customers represented 47% of first-half revenue), competitive pressure, product and technology execution, third-party manufacturing and component supply, foreign-exchange exposure, and potential volatility in quarterly results. A broad slowdown in Japanese service-provider buying affected Q2.
- The filing reports effective disclosure controls as of June 30, while also describing significant deficiencies in financial close and reporting controls identified in 2013, including account reconciliation and tax-provision review. Management said remediation efforts were underway; investors should distinguish the disclosure-controls conclusion from the separately described control deficiencies.
- The company maintains a full valuation allowance against federal and state deferred tax assets. It reported $2.3 of unrecognized tax benefits and did not anticipate a material change over the next 12 months.
Most important facts for investors to verify
- Whether revenue growth and Thunder adoption continue, given customer concentration and the irregular timing of large orders.
- Whether Japan demand recovers and how geographic mix and currency movements affect revenue and gross margin.
- Progress in remediating the reported financial-close and reporting control deficiencies.
- Developments, potential exposure and cash consequences in the Radware and Parallel Networks cases.
- Cash conversion and spending needs as the company invests; operating cash flow remained negative despite improved year-over-year performance.
- How IPO proceeds are deployed and whether the company sustains liquidity while meeting facility covenants and planned investment.