A10 Networks, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. A10 provides secure application networking and security products and related support, serving service providers, enterprises, and web giants.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $232.2 million | $235.4 million |
| Products revenue | $144.7 million | $149.9 million |
| Services revenue | $87.5 million | $85.5 million |
| Gross profit / margin | $180.3 million / 77.7% | $182.1 million / 77.4% |
| Operating expenses | $208.0 million | $192.5 million |
| Operating loss | $27.7 million | $10.4 million |
| Net loss / diluted loss per share | $27.6 million / $0.38 | $10.8 million / $0.15 |
| Cash from operating activities | Used $2.7 million | Provided $14.3 million |
At December 31, 2018, cash and cash equivalents were $40.6 million and marketable securities were $87.8 million, totaling $128.4 million. Working capital was $117.6 million. The company reported no borrowings under its $25 million revolving credit facility and was compliant with its covenants. Total liabilities were $132.0 million; the filing does not identify funded debt outstanding.
Fourth-quarter 2018 revenue was $61.8 million, gross profit was $48.0 million (approximately 77.7% margin), and net loss was $1.6 million, or $0.02 per share. In fourth-quarter 2017, revenue was $55.5 million and net income was $0.8 million, or $0.01 per share.
Material changes versus prior periods
- FY 2018 revenue declined 1.4% year over year as products revenue fell 3.5%; services revenue grew 2.4%, supported by maintenance and support sales to the larger installed base.
- Revenue from U.S. service providers weakened; total U.S. revenue fell 10%. Web-giant revenue increased 26%, while service-provider revenue decreased 10% and enterprise revenue was relatively unchanged.
- Operating expenses increased 8.1%, driven chiefly by general and administrative expense, up 40.9% to $39.6 million. This included $8.6 million of internal-investigation-related fees. Net loss widened substantially.
- Operating cash flow moved from $14.3 million provided in 2017 to $2.7 million used in 2018. Cash and marketable securities combined decreased $2.8 million year over year.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. Adoption increased reported 2018 products revenue by $2.6 million and improved reported 2018 net income by approximately $3.9 million versus the prior accounting method; prior-year comparisons were not restated. Opening accumulated deficit was reduced by $12.4 million.
Outlook, risks, contingencies, and unusual items
- Management expects to continue investing in product development, sales, marketing, and distribution. It expected 2019 sales and marketing expense to decrease following a sales-organization transformation, R&D expense to remain relatively consistent with 2018, and G&A expense to decrease due to lower accounting and legal costs. The filing gives no explicit revenue or earnings guidance.
- Management said existing cash, cash equivalents, marketable securities, and other available resources should cover anticipated needs for at least 12 months. Future funding needs depend on growth and investment; external financing may not be available on acceptable terms.
- Material weaknesses in internal control over financial reporting remained unresolved at December 31, 2018; disclosure controls were also deemed ineffective. Weaknesses related to the control environment, monitoring, and revenue recognition. Remediation was underway but had not been tested for a sufficient period. Prior weaknesses contributed to restatements of 2015 and 2016 financial statements.
- The SEC was conducting a private investigation into possible securities-law violations. The company was cooperating; an adverse outcome was considered reasonably possible, but potential loss could not be estimated. A securities class action was dismissed with leave to amend in February 2019; no amended complaint was filed by the deadline. A related derivative action was stayed. A separate patent case was settled through a paid-up license and dismissed in February 2019.
- Revenue is concentrated: the ten largest end-customers represented 37% of FY 2018 revenue. Two distribution partners accounted for 14% and 10%, respectively. Nearly all global orders are fulfilled through channel partners.
- Other key risks include quarterly order timing and large-customer purchase variability, competition and cloud transition, product/security defects, reliance on Taiwan-based manufacturers and constrained component suppliers, foreign-exchange exposure, and U.S.–China tariffs. The company also disclosed prior late periodic filings and resulting temporary ineligibility to use Form S-3 for public offerings.
Important facts for investors to verify
- Progress and independent testing of remediation for the unresolved material weaknesses, and whether financial reporting remains timely and reliable.
- Any developments or outcomes in the SEC investigation and stayed derivative litigation, including potential costs or sanctions.
- Whether product demand, particularly from U.S. service providers, recovers and whether web-giant growth continues to offset softness elsewhere.
- Underlying operating cash generation, given the shift to cash used in operations despite substantial reported liquidity.
- The effect of ASC 606 and deferred commission accounting when comparing 2018 results with prior years, and the sustainability of reported margins.
- Customer and channel-partner concentration, purchase commitments of $19.3 million due within one year, and exposure to tariffs and supply interruptions.