A10 Networks, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results. A10 sells secure application networking and cybersecurity products and related support to service providers and enterprises, primarily through channel partners.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $212.6 million | $232.2 million |
| Gross profit / gross margin | $163.7 million / 77.0% | $180.3 million / 77.7% |
| Operating loss | $17.1 million | $27.7 million |
| Net loss | $17.8 million | $27.6 million |
| Net loss per share, diluted | $0.23 | $0.38 |
| Cash used in operating activities | $0.4 million | $2.7 million |
Fourth-quarter revenue was $60.3 million, compared with $61.8 million in Q4 2018. Gross profit was $46.9 million versus $48.0 million. The company reported net income of $51,000 in Q4 2019, compared with a net loss of $1.6 million in Q4 2018.
- Products revenue fell 16% to $121.9 million; services revenue rose 4% to $90.7 million. Services were 42.7% of revenue, up from 37.7%.
- Americas revenue declined 20% to $89.9 million. Japan revenue increased 8% to $59.5 million; Asia Pacific excluding Japan fell 3% to $35.7 million, and EMEA was essentially flat at $27.5 million.
- Cash and cash equivalents were $45.7 million and marketable securities were $84.2 million at year-end; working capital was $123.4 million. Total assets were $274.1 million and stockholders’ equity was $108.8 million.
- The company had no outstanding borrowings when its $25 million revolving credit facility expired in November 2019 and reported no plans for a new borrowing facility. Operating lease liabilities were $33.2 million; undiscounted operating lease payments totaled $36.9 million.
- Deferred revenue totaled $101.2 million, principally services. Financing activities provided $5.8 million, mainly from employee equity-plan stock issuances; cash and cash equivalents increased $5.1 million.
Changes, outlook and material matters
- Annual revenue declined 8.4%, mainly because of weaker product demand from service-provider and enterprise customers in the Americas. Product revenue fell $22.8 million; increased services revenue partly offset the decline.
- Gross margin decreased 0.7 percentage points. Operating expenses fell 13.1%, including lower sales and marketing, R&D and general and administrative costs. The 2018 comparison included substantial investigation, litigation and restatement-related costs.
- A restructuring plan begun in October 2019 is expected to reduce the workforce by about 5% and close or consolidate certain offices. The company recorded $2.5 million of restructuring expense in 2019 and expected to complete the plan by the end of Q2 2020. Management expected sales and marketing, R&D and general and administrative expenses to decrease in 2020 as a result; no numerical earnings or revenue guidance was provided.
- Management said it planned to introduce several new products in 2020 and continue investing in product development and sales capabilities. It stated existing cash, cash equivalents and marketable securities should cover anticipated cash needs for at least 12 months.
- In July 2019, the board formed a Strategy Committee and retained Bank of America Merrill Lynch to advise on strategic matters, including a potential sale or change-of-control transaction. No transaction was assured.
- Material weaknesses in financial reporting controls identified for 2017 and 2018 were reported remediated as of December 31, 2019. Management concluded controls were effective, and the 2019 auditor also opined that internal control over financial reporting was effective.
- The SEC informed the company in September 2019 that it had concluded its investigation and did not intend to recommend enforcement action. Related securities and derivative lawsuits were dismissed or voluntarily withdrawn during 2019.
- The filing cited COVID-19-related uncertainty and possible impacts on personnel, suppliers and sales; it reported no material negative business impact to date. Other key risks include concentrated customer and channel-partner exposure, competition, execution in cloud and 5G markets, international and supply-chain exposure, and continued net losses.
Investor verification points
- Track whether Americas product demand stabilizes and whether Japan’s growth and services renewals can offset continued product weakness.
- Verify the timing, completion costs and realized savings from the restructuring, and whether management’s 2020 expense expectations were achieved.
- Monitor operating cash flow, inventory growth, deferred revenue and the company’s cash and securities balance against its stated liquidity outlook.
- Assess customer and distributor concentration: the ten largest end-customers represented 36% of 2019 revenue, while two distribution partners represented 14% and 12%.
- Follow strategic-alternatives developments, COVID-19 and supply-chain effects, and any change in the status of litigation, tax contingencies or internal controls.