A10 Networks, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
A10 Networks sells secure application networking products, including hardware appliances and software, and related support and professional services. It sells largely through distribution partners and serves enterprise and service-provider customers. The company reported approximately 6,700 customers across 84 countries.
Comparative 2017 financial statements were restated following an investigation into revenue-recognition errors, primarily involving reseller and distributor transactions. The 2018 figures also reflect adoption of ASC 606 on January 1, 2018; 2017 comparatives were not recast for that accounting change.
Key financial metrics
| Metric | Q3 2018 | Q3 2017, restated | Nine months 2018 | Nine months 2017, restated |
|---|---|---|---|---|
| Revenue | $60.5 | $62.0 | $170.4 | $179.9 |
| Products revenue | $38.3 | $40.4 | $105.6 | $116.9 |
| Services revenue | $22.2 | $21.6 | $64.8 | $63.0 |
| Gross profit / margin | $47.5 / 78.5% | $48.1 / 77.6% | $132.3 / 77.6% | $138.5 / 77.0% |
| Operating loss | $(1.6) | $(1.7) | $(25.3) | $(11.2) |
| Net loss | $(1.8) | $(2.2) | $(26.0) | $(11.5) |
| Net loss per share, diluted | $(0.02) | $(0.03) | $(0.36) | $(0.17) |
For the nine months, operating cash flow was $(5.5) million, compared with $10.0 million generated in 2017. Investing cash flow was $(6.1) million and financing cash flow was $1.2 million. Cash and cash equivalents fell $10.4 million from year-end 2017.
At September 30, 2018, cash and cash equivalents were $36.2 million and marketable securities were $87.4 million. Working capital was $112.1 million; total assets were $224.8 million and total liabilities were $125.7 million. The company had no borrowings under its $25 million revolving credit facility and reported covenant compliance. No clear total-debt balance beyond the disclosed facility is provided.
Material changes versus the prior comparable period
- Q3 revenue declined 2%; nine-month revenue declined 5%. Product revenue fell 5% in Q3 and 10% year to date, while services revenue grew 3% in both periods.
- Management attributed the product-revenue decline primarily to weaker U.S. service-provider demand. Q3 service-provider revenue fell 24%, while enterprise revenue rose 21%; for the first nine months, those customer groups changed by -18% and +6%, respectively.
- Gross margin improved 0.9 percentage points in Q3 and 0.6 points year to date, mainly reflecting higher services margins and product margins that remained broadly stable.
- Q3 net loss narrowed by $0.4 million. The nine-month net loss widened by $14.5 million; general and administrative expense rose $9.0 million, largely due to $8.6 million of internal-investigation fees incurred in 2018.
- Cash from operations swung from a $10.0 million inflow to a $5.5 million outflow, with working-capital movements and the larger net loss contributing to the change.
Outlook, risks, contingencies, and unusual items
- Management said existing cash, marketable securities, and other available resources should cover anticipated cash needs for at least the next 12 months. It plans to continue investing for long-term growth; no numerical revenue or earnings guidance is provided.
- Management expected research and development and general and administrative expenses to remain relatively consistent quarter over quarter for the remainder of 2018.
- Disclosure controls and internal control over financial reporting were reported ineffective at September 30, 2018 because of material weaknesses involving the control environment, monitoring, and revenue-recognition processes. Remediation was underway but not yet considered complete.
- The Audit Committee investigation identified errors that required restatement of 2016 and 2017 financial statements, including 2017 interim periods. The SEC was conducting a private investigation; the company said an adverse outcome was reasonably possible but could not estimate a loss range.
- Related matters include a putative securities class action, a stayed shareholder derivative action, and an October 2018 patent-infringement lawsuit. The company recorded no litigation accrual for the patent case because a possible loss could not be reasonably estimated.
- ASC 606 adoption reduced opening accumulated deficit by $12.4 million. Compared with results calculated without the new standard, reported 2018 revenue was lower by $0.5 million for Q3 and $1.4 million for the first nine months; reported net loss was higher by $0.8 million and $1.8 million, respectively.
- Other disclosed risks include customer concentration and irregular large orders, foreign-exchange exposure (including a $1.4 million nine-month FX loss), competition, product and supply-chain risks, and potential costs from control remediation and litigation.
Important facts for investors to verify
- Whether revenue-recognition controls have been remediated and whether future filings avoid further restatements or delays.
- Whether product demand, particularly among U.S. service providers, stabilizes and services growth continues.
- Whether operating cash flow improves and the company maintains adequate liquidity without drawing on its credit facility.
- Developments, potential costs, and outcomes of the SEC investigation and disclosed litigation.
- The comparability of reported results given the 2017 restatement and ASC 606 adoption, and the effects of customer concentration and currency movements.