A10 Networks, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 27, 2023. The filing also provides unaudited fourth-quarter results. A10 supplies networking and security solutions for service providers, enterprises and government customers, across hardware, software and cloud deployments.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $280.3 million | $250.0 million |
| Products revenue | $173.2 million | $148.4 million |
| Services revenue | $107.1 million | $101.6 million |
| Gross profit / margin | $223.5 million / 79.7% | $196.5 million / 78.6% |
| Operating income / margin | $53.1 million / 18.8% | $33.4 million / 13.4% |
| Net income | $46.9 million | $94.9 million |
| Diluted earnings per share | $0.60 | $1.19 |
| Cash from operating activities | $66.1 million | $50.1 million |
Revenue grew 12.1%, led by 16.7% growth in products; services revenue increased 5.4%. Products gross margin declined 1.2 percentage points to 76.8%, primarily due to product and geographic mix, while services gross margin rose 4.9 points to 84.4%, mainly reflecting lower personnel-related support costs.
Net income fell 50.6% despite higher operating income. FY2021 included a $63.2 million income tax benefit, largely from releasing a deferred-tax-asset valuation allowance; FY2022 recorded a $5.8 million tax provision. FY2022 quarterly revenue increased sequentially from $62.7 million in Q1 to $77.6 million in Q4. Q4 net income was $18.0 million and diluted EPS was $0.24.
Liquidity, cash flow and capital allocation
- At December 31, 2022, cash and cash equivalents were $68.0 million and marketable securities were $83.0 million. Working capital was $138.7 million; management said these resources were expected to cover anticipated cash needs for at least 12 months and beyond.
- Operating cash flow was $66.1 million. Investing activities provided $11.1 million, primarily reflecting net maturities and sales of marketable securities, partly offset by $10.8 million of property and equipment purchases. Financing activities used $88.1 million, including $79.3 million for share repurchases and $15.9 million for dividends. Cash declined by $11.0 million during the year.
- The filing reports no borrowings or funded debt. Operating lease liabilities totaled $21.6 million. Open purchase commitments with Taiwan manufacturers were $31.9 million.
- A10 repurchased 6.1 million shares for $79.3 million in FY2022, including 3.5 million shares from Summit Partners for $44.6 million. A new $50 million repurchase authorization was approved in November 2022; no shares were repurchased under it in Q4. The quarterly dividend was increased to $0.06 per share.
Business changes, outlook and risks
- Americas revenue grew 23% to $148.7 million, while APJ revenue declined 1% to $89.7 million and EMEA revenue grew 9% to $42.0 million. Japan revenue declined 8%; U.S. revenue rose 30%.
- Service providers contributed 66% of FY2022 revenue, up from 63%; the ten largest end-customers contributed 41%, compared with 39%. Two distribution channel partners individually accounted for 15% and 13% of revenue. Sales through channel partners remained substantial.
- Management expects FY2023 sales and marketing expense to rise with revenue, R&D expense to increase for growth priorities including cybersecurity, and general and administrative expense to remain stable. No specific revenue or earnings guidance is provided.
- Management intends to invest in product development and potentially expand global sales and marketing, noting that these investments may affect near-term profitability. The filing discusses exploration of strategic alternatives but provides no assurance a transaction will occur.
- Risks include concentrated and irregular customer purchasing, intense competition and shifts to cloud and subscription models, dependence on third-party manufacturers and constrained components, semiconductor and broader supply-chain disruption, international and foreign-exchange exposure, and macroeconomic uncertainty. The filing notes geopolitical risks involving Taiwan and China.
- A cyber incident was identified in January 2023 in A10’s corporate IT infrastructure, not in customer products or solutions. The company reported no material operational impact to date but incurred investigation costs; the investigation and potential consequences remain relevant to monitor.
- In December 2022, A10 released the software portion of its first capitalized long-term project and impaired the remaining hardware portion. The filing text does not provide a clear value for that impairment.
Important facts for investors to verify
- Whether revenue growth and improving operating margins continue, particularly given product-mix effects and uneven regional demand.
- How much of the FY2021-to-FY2022 net income decline reflects the non-recurring tax benefit, and the sustainability of the current tax rate and deferred tax assets.
- Customer and channel-partner concentration, large-deal timing, and the effect of changes in customer deployment and payment models.
- Any updates on the January 2023 cyber incident, related expenses, remediation and potential disclosure of further impacts.
- Whether planned investment, repurchases and dividends remain supportable by operating cash generation and liquidity.
- Supply-chain and Taiwan manufacturing exposure, including the $31.9 million open purchase commitments and product backlog, which the company cautions is not a reliable predictor of future revenue.