A10 Networks, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2020. A10 sells secure application networking and security products, related support, and professional services to service providers and enterprises through direct sales and channel partners.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $52.5 million | $49.2 million | $106.3 million | $99.5 million |
| Gross margin | 78.2% | 77.1% | 77.8% | 76.4% |
| Operating income (loss) | $3.9 million | $(6.4) million | $3.7 million | $(17.4) million |
| Net income (loss) | $3.8 million | $(5.8) million | $3.5 million | $(18.0) million |
| Diluted EPS | $0.05 | $(0.08) | $0.04 | $(0.24) |
| Operating cash flow | Not stated by quarter | $22.7 million | $(10.6) million |
- Q2 revenue grew 6.7% year over year; product revenue rose 9.1% and services revenue rose 3.9%. First-half revenue increased 6.8%.
- Operating expenses declined 16.2% in Q2 and 15.4% in the first half, supporting the return to operating and net profitability. Management attributed reductions mainly to the 2019 restructuring and lower travel and marketing activity during COVID-19 restrictions.
- At June 30, cash and cash equivalents were $65.8 million and marketable securities were $77.5 million. Working capital was $126.5 million. Management said available resources should meet anticipated cash needs for at least 12 months.
- Total liabilities were $161.7 million, including $104.998 million of deferred revenue and $31.2 million of operating lease liabilities. The credit facility expired in November 2019; the filing reports only immaterial interest expense and does not identify outstanding borrowings.
- First-half cash from operations was $22.7 million, versus $10.6 million used in the prior-year period. Financing used $7.7 million, including $13.3 million for share repurchases; investing provided $5.2 million. Cash increased $20.1 million during the half.
Material changes versus comparable periods
- Q2 revenue growth was led by the Americas, where revenue rose 29% to $24.0 million, and EMEA, up 17% to $7.7 million. Japan declined 14% and Asia Pacific excluding Japan declined 13%.
- For the first half, service-provider revenue increased $11.2 million while enterprise revenue decreased $4.4 million. The Americas grew 25%; Asia Pacific excluding Japan declined 28%.
- Product gross margin improved 3.3 percentage points in Q2 and 3.7 points in the first half, primarily reflecting product and geographic mix. Services gross margin fell 1.3 points in both periods, primarily due to higher support personnel costs.
- Q2 sales and marketing expense fell 21.8%; R&D fell 8.0%; and general and administrative expense fell 14.1%. The prior-year G&A comparison included higher costs related to then-pending litigation associated with an internal investigation.
- The company repurchased 2.2 million shares from founder and former CEO Lee Chen for $13.2 million and paid $0.1 million to cancel vested options. Shares are held in treasury.
Outlook, commentary, risks and unusual items
- The company temporarily suspended quarterly revenue and earnings guidance because of COVID-19 uncertainty. Management said the pandemic had not materially adversely affected Q2, but warned that future disruption could affect revenue, operations, liquidity, investment and supply chains.
- Management cited long, variable sales cycles and large, irregular customer orders. The ten largest end-customers accounted for 38% of Q2 revenue and 45% of first-half revenue; one customer represented 22% of gross accounts receivable at June 30.
- Key risks include COVID-related demand and supply-chain disruption; reliance on Taiwan-based manufacturers and limited-source components; intense competition and cloud-based market shifts; customer and geographic concentration; foreign-exchange exposure; and litigation and cybersecurity risks.
- The filing describes an export-control matter: the company identified some shipments of encryption products made before required authorizations and classification requests, implemented corrective actions, and filed an initial voluntary self-disclosure with BIS. It intended to submit a complete disclosure; potential consequences were not quantified.
- The company continued to disclose its exploration of strategic alternatives, including a potential sale or change-of-control transaction, but gave no assurance that a transaction would occur. The filing provides no transaction outcome.
- Other notable items: $4.2 million of unrecognized tax benefits; a full valuation allowance against U.S. and certain foreign deferred tax assets; and $34.5 million of future operating lease payments before imputed interest. Management reported disclosure controls at the reasonable-assurance level and no material Q2 change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and profitability persist after the restructuring-related expense reductions, and how much lower travel and marketing spending contributed.
- How customer concentration, order timing, enterprise demand and regional declines—particularly in Asia Pacific excluding Japan—affect future results.
- Whether COVID-19 affects customer spending, supply availability, product delivery, collections or liquidity; quarterly guidance remains suspended.
- The status and potential financial or regulatory consequences of the BIS export-control self-disclosure, and any material litigation developments.
- Any update to the strategic-alternatives process and the company’s capital allocation after the former CEO share repurchase.
- Whether lease obligations, uncertain tax positions, deferred tax asset valuation allowances or other contingencies change materially.