A10 Networks, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. A10 provides application networking and network security products, including ADC, CGN, DDoS protection and firewall solutions, sold as hardware, software and virtual appliances, with related support services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $57.1 million | $47.5 million | $110.9 million | $91.6 million |
| Gross profit / margin | $42.9 million / 75.1% | $35.9 million / 75.6% | $83.5 million / 75.3% | $69.2 million / 75.5% |
| Operating loss | $5.8 million | $9.4 million | $15.2 million | $23.0 million |
| Net loss | $4.9 million | $10.0 million | $14.5 million | $23.7 million |
| Basic and diluted loss per share | $0.08 | $0.16 | $0.22 | $0.38 |
- Revenue mix and growth: Q2 product revenue rose 16% to $38.8 million and services revenue rose 29% to $18.3 million. First-half product revenue increased 18% to $75.2 million and services revenue increased 29% to $35.8 million.
- Margins and expenses: Q2 gross margin edged down 0.5 percentage point; product margin fell 1.6 points, partly due to product/geographic mix and higher inventory reserves, while services margin rose 2.0 points. First-half operating expenses increased 7% to $98.7 million, including a 36% increase in litigation and settlement expense to $2.0 million.
- Cash flow: First-half operating cash flow was $19.3 million, versus $3.5 million in 2015. The improvement included a $17.5 million reduction in accounts receivable, attributed primarily to improved collections, and higher deferred revenue. Investing activities used $92.0 million, mainly reflecting net marketable-security purchases, the Appcito acquisition and capital expenditures.
- Liquidity and debt: At June 30, cash and cash equivalents were $28.6 million and marketable securities were $85.1 million; working capital was $84.8 million. Total liabilities were $113.5 million, including $75.8 million of deferred revenue. There were no borrowings on the $35 million revolving facility; it was due to expire September 30, 2016. A10 said available resources should cover anticipated cash needs for at least 12 months.
Changes, outlook and material items
- Revenue growth was broad in the U.S., Japan and Asia Pacific, excluding Japan; EMEA revenue declined 14% in Q2 and 16% in the first half. Japan’s reported growth also benefited from favorable currency movements.
- Net losses narrowed year over year, but the company remained loss-making. Other income included favorable foreign-exchange gains; management attributed much of the improvement in other income to the yen’s movement against the U.S. dollar.
- A10 acquired substantially all Appcito assets in June for fair-value consideration of $6.3 million, including $5.0 million cash consideration (less a $0.7 million holdback) and $1.3 million in shares. The acquisition added $5.1 million of developed technology and $1.2 million of goodwill. The company considered it immaterial to results and did not provide pro forma financial information.
- The company agreed in principle to settle the IPO securities class action for a $0.8 million payment net of expected insurance proceeds; court approval remained pending. A derivative-action settlement, including planned corporate-governance measures, also remained subject to formal agreement and court approval. Settlements provide for dismissal without admission of wrongdoing.
- Outlook: No specific revenue, earnings or margin guidance is provided in the filing. Management expects continued investment in product development, sales and marketing, international expansion and public-company infrastructure, which may pressure near-term profitability.
- Key risks: Large, irregular customer purchases and long sales cycles; dependence on channel partners and third-party manufacturers and component suppliers; intense competition and pricing pressure; product security, reliability and intellectual-property claims; foreign-exchange exposure without hedging; international and Brexit-related uncertainty; and continuing losses. The filing reports disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, particularly in Japan and Asia Pacific, continues and whether EMEA weakness persists; the top ten end-customers accounted for approximately 35% of first-half revenue.
- Whether operating cash generation remains strong after the benefit of collections and working-capital movements, and how cash and marketable securities are deployed.
- The renewal, replacement or other status of the revolving credit facility scheduled to expire September 30, 2016.
- Final court approval, payment and governance obligations for the two shareholder-litigation settlements.
- Appcito integration and the commercial contribution of its cloud application technology, alongside the related amortization and acquisition costs.
- Whether product-margin pressure, investment spending and stock-based compensation affect the path to profitability; A10 reported $33.1 million of unrecognized stock-based compensation expense at quarter-end.