A10 Networks, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; comparisons are with Q1 2021 unless noted. A10 sells networking, application delivery and cybersecurity solutions, with revenue from products and related support services.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $62.7 million | $54.8 million | +14.3% |
| Products revenue | $37.0 million | $30.5 million | +21.3% |
| Services revenue | $25.6 million | $24.3 million | +5.4% |
| Gross profit / margin | $49.8 million / 79.5% | $42.3 million / 77.2% | Margin +2.3 percentage points |
| Operating income / margin | $8.0 million / 12.8% | $4.0 million / 7.3% | Income +98.9% |
| Net income | $6.3 million | $2.7 million | +139.0% |
| Diluted earnings per share | $0.08 | $0.03 | — |
| Operating cash flow | $15.9 million | $2.3 million | +$13.6 million |
Products represented 59% of revenue, compared with 56% a year earlier. Services gross margin improved to 83.6% from 77.7%; product gross margin was essentially flat at 76.7% versus 76.8%. Sales and marketing expense rose 19.3%, R&D expense fell 7.8%, and G&A expense increased 17.4%.
Liquidity, cash flows and capital allocation
- At March 31, 2022, cash and cash equivalents were $67.8 million and marketable securities were $96.9 million; working capital was $142.9 million. Management said these resources should meet anticipated cash needs for at least the next 12 months and beyond.
- Operating cash flow was $15.9 million, with cash inflows from receivables and inventory changes contributing to the result. Cash and cash equivalents declined $11.2 million during the quarter.
- Financing activities used $32.0 million, primarily for $28.3 million of share repurchases and $3.9 million of dividends. The company had $64.6 million remaining under its $100 million repurchase authorization at quarter-end.
- The balance sheet reports no borrowings or other financial debt. It does report operating lease liabilities of $22.8 million, including $3.9 million current and $18.9 million non-current.
- After quarter-end, the board declared a $0.05-per-share dividend, payable June 1, 2022. Future dividends remain subject to board approval.
Material changes and business trends
- Revenue growth was led by the Americas, up 25% to $33.0 million, and EMEA, up 38% to $11.9 million. Asia Pacific revenue declined 11% to $17.8 million. A10 changed its geographic presentation, combining Japan with Asia Pacific; the change did not affect overall results.
- Service-provider customers accounted for 65% of revenue, up from 62%; enterprise customers represented 35%, down from 38%. The ten largest end-customers contributed 45% of revenue, compared with 36% a year earlier.
- Deferred revenue was $121.3 million at quarter-end. The company expects to recognize $74.1 million within one year, $37.6 million in the next two to three years, and $9.6 million thereafter.
- Operating cash flow improved substantially year over year, partly reflecting the timing of customer collections and other working-capital movements; the quarter’s cash-flow level may not recur.
Outlook, risks and unusual items
- A10 provided no specific revenue or earnings guidance in the supplied filing text. Management expected sales and marketing, R&D, and G&A expenses in 2022 to remain around 2021 levels, while continuing to invest for long-term growth.
- The filing identifies the ongoing semiconductor shortage and supply-chain disruption as risks, including reliance on third-party manufacturers in Taiwan and open manufacturer purchase commitments of $34.9 million.
- Revenue and quarterly results may fluctuate because of large, irregular customer orders, long sales cycles, quarter-end shipment dependence, product and regional mix, and customer concentration.
- Other risks include competition and cloud-based business-model transitions, COVID-19 and macroeconomic uncertainty, cybersecurity and product defects, foreign-exchange movements, and geopolitical and trade tensions, including risks involving Taiwan, China and Russia’s war against Ukraine.
- The company continues to explore strategic alternatives; it cautioned there is no assurance that a transaction will occur. Management reported disclosure controls at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
- Unrecognized tax benefits were $6.5 million; the company did not expect a material change over the next 12 months. Legal proceedings are described generally, with no clear quantified potential loss provided in the filing text.
Key facts for investors to verify
- Whether product growth and strong regional results persist, particularly given the Asia Pacific decline and 45% revenue contribution from the ten largest end-customers.
- Whether semiconductor availability, Taiwan-based manufacturing and the $34.9 million of open purchase commitments affect shipments, costs or margins.
- How much of the operating cash-flow increase reflects sustainable earnings versus collection and working-capital timing.
- How continued dividends and repurchases affect liquidity and capital available for investment; repurchases are discretionary and dividends are not guaranteed.
- Any material developments in strategic alternatives, litigation, uncertain tax positions, or the expected Q4 2022 release of the largest software development project described in the filing.