A10 Networks, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2022. Unaudited consolidated financial statements; amounts below are in millions of dollars unless otherwise noted.
Business context
A10 provides networking, application delivery and cybersecurity solutions to service providers, enterprises and government organizations. Products include hardware and software solutions; services include support, professional services and training. Sales are primarily made through channel partners, and hardware manufacturing is outsourced.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $72.1 | $65.4 | +10.2% |
| Products revenue | $45.1 | $39.8 | +13.3% |
| Services revenue | $27.0 | $25.5 | +5.5% |
| Gross profit / margin | $57.3 / 79.5% | $52.2 / 79.8% | Margin down 0.3 percentage points |
| Operating income / margin | $15.7 / 21.7% | $10.3 / 15.8% | Operating income +52.1% |
| Net income | $12.1 | $74.9 | Down $62.8 |
| Diluted EPS | $0.16 | $0.94 | Down $0.78 |
For the nine months, revenue was $202.7 million, up 13.0%; gross profit was $161.6 million, with a 79.7% gross margin; operating income was $36.8 million, up 70.9%; and net income was $28.9 million versus $84.2 million. Diluted EPS was $0.37 versus $1.05. The prior-year net income and EPS benefited substantially from a $65.4 million deferred-tax valuation allowance release; 2022 results included tax provisions of $3.1 million in Q3 and $7.5 million for the nine months, making headline net-income comparisons less representative of operating performance.
Q3 revenue growth reflected increases from both enterprise customers and service providers. For the nine months, Americas revenue rose 23%, while APJ revenue declined 2%, including a 9% decline in Japan; EMEA revenue rose 16%. The ten largest end-customers contributed 36% of Q3 revenue, versus 45% a year earlier, and 40% for the nine-month period, versus 37%.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $38.8 million, compared with $41.2 million in 2021. The 2022 period included a $11.1 million cash outflow from accounts receivable changes.
- Nine-month investing cash flow was positive $0.5 million, including $8.3 million of property and equipment purchases. Financing cash flow was negative $86.1 million, primarily due to $79.3 million of share repurchases and $11.5 million of dividends.
- Cash and cash equivalents were $32.1 million and marketable securities were $95.6 million at September 30, 2022, for combined cash and securities of $127.8 million. Working capital was $115.3 million. Management said these resources should cover anticipated needs for at least the next 12 months and beyond.
- Total liabilities were $191.9 million; the balance sheet lists no debt or borrowings. Liabilities included $126.2 million of deferred revenue and $22.6 million of operating lease liabilities. Operating leases had $24.3 million of total future payments.
- The company repurchased 6.1 million shares for $79.3 million in the first nine months, including 3.7 million shares for $47.5 million in Q3. The 2021 repurchase program expired in October. Subsequent to quarter-end, the board authorized a new $50 million repurchase program and declared a $0.06-per-share dividend payable in December.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects 2022 sales and marketing and research and development expenses to increase from 2021 levels, while general and administrative expense is expected to remain stable. It expects to continue investing in product development, sales and marketing, distribution and cybersecurity technology, which may affect near-term profitability.
- Management cited large, irregular customer purchases and long sales cycles as sources of quarterly variability. The ten largest end-customers represented 36% of Q3 revenue; one customer represented 24% of gross receivables at quarter-end.
- Risks include COVID-19-related disruption, semiconductor and other supply constraints, reliance on third-party manufacturers in Taiwan, geopolitical and trade tensions, competition and cloud-based business-model changes, foreign-exchange movements, and product or cybersecurity defects. The company had $37.9 million in open manufacturer purchase commitments.
- Foreign exchange losses were $0.9 million in Q3; management identified the Japanese yen as a key source of currency exposure. The company also disclosed a Japanese transfer-pricing examination expected to conclude by year-end 2022, $7.7 million of unrecognized tax benefits, and ongoing litigation risk; the filing does not quantify a probable litigation loss.
- Management reported disclosure controls were effective at the reasonable assurance level as of September 30, 2022, and no material change in internal control over financial reporting during Q3.
Important facts for investors to verify
- Whether product demand and customer purchasing patterns sustain revenue growth, particularly given customer concentration and irregular large orders.
- Whether product gross-margin pressure from product and geographic mix persists, and whether service-margin improvement continues.
- How receivable collections, supply availability and manufacturer commitments affect operating cash flow and product delivery.
- The use of cash for repurchases and dividends relative to investment needs, and whether future distributions remain consistent with board-approved policy.
- The outcome of the Japanese tax examination and any material developments in litigation, geopolitical risks or supply-chain disruption.