A10 Networks, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results are compared with the same periods in 2020. A10 Networks provides networking and cybersecurity solutions, selling products and related support services globally, primarily through channel partners.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $65.4 million | $56.6 million | $179.4 million | $162.9 million |
| Gross profit / margin | $52.2 million / 79.8% | $43.5 million / 76.8% | $140.0 million / 78.1% | $126.2 million / 77.5% |
| Operating income / margin | $10.3 million / 15.8% | $6.2 million / 11.0% | $21.5 million / 12.0% | $9.9 million / 6.1% |
| Net income | $74.9 million | $6.5 million | $84.2 million | $10.0 million |
| Diluted EPS | $0.94 | $0.08 | $1.05 | $0.12 |
Q3 revenue grew 15.5%; product revenue rose 23.7% to $39.8 million and services revenue rose 4.6% to $25.5 million. For the nine months, revenue grew 10.1%, with products up 13.7% and services up 5.5%. Reported net income was substantially boosted by a $64.8 million Q3 income tax benefit, primarily reflecting a $65.4 million discrete benefit from releasing deferred-tax-asset valuation allowances. Operating income provides a clearer view of the period’s operating performance.
Q3 gross margin improved 3.0 percentage points year over year; nine-month gross margin improved 0.6 points. Q3 operating expenses increased 12.4%, including higher sales and marketing and general and administrative costs. Nine-month operating expenses increased 2.0%.
Cash, liquidity and capital
- At September 30, 2021, cash and cash equivalents were $85.6 million and marketable securities were $101.8 million, or $187.5 million combined. Working capital was $164.1 million.
- Nine-month operating cash flow was $41.2 million, versus $38.5 million in 2020. Investing activities used $31.4 million, primarily reflecting net purchases of marketable securities; financing activities used $7.5 million, including $11.2 million of share repurchases.
- Total liabilities were $170.9 million, including $117.1 million of deferred revenue. The filing does not identify interest-bearing borrowings; operating lease liabilities were $24.8 million.
- Stockholders’ equity was $203.6 million. The prior $50 million repurchase program expired in early October. On October 28, the board authorized a new $100 million, 12-month repurchase program and declared a $0.05-per-share quarterly dividend, initially payable December 15, 2021, subject to board review or revocation.
Material changes and management commentary
- Q3 growth was led by the Americas, up 47% to $32.3 million, and EMEA, up 39% to $11.0 million. Japan declined 15% to $15.3 million and Asia Pacific excluding Japan declined 22% to $6.8 million. Nine-month Americas and EMEA revenue grew 22% and 25%, respectively, while Japan declined 8%.
- Management attributed growth mainly to service-provider demand, particularly in the Americas and EMEA, and to a larger installed base supporting maintenance and support sales. The top ten end-customers represented 45% of Q3 revenue and 37% of nine-month revenue.
- Management expects 2021 sales and marketing, research and development, and general and administrative expenses to remain near 2020 levels while controlling costs. The company temporarily suspended quarterly quantitative revenue and earnings guidance amid COVID-19 uncertainty.
- The company plans continued investment in product development and expects existing cash and marketable securities to cover anticipated needs for at least 12 months. Revenue recognition obligations totaled $117.1 million, expected to be recognized as $70.5 million within one year, $36.8 million in the next two to three years, and $9.8 million thereafter.
Risks, contingencies and unusual items
- Management cited COVID-19 uncertainty and ongoing global semiconductor and supply-chain disruptions that could constrain product availability, shipments and sales. Hardware manufacturing is outsourced, with primary manufacturers in Taiwan and limited-source components.
- Results are exposed to irregular large-customer orders, long sales cycles, channel-partner concentration, competitive and cloud-transition pressures, product mix, and foreign-exchange movements. The filing reports $1.6 million of foreign-exchange losses for the nine months.
- The company describes ongoing legal proceedings but provides no clear quantified exposure in this filing. It states that adverse outcomes could materially affect results, cash balances or cash flows. Unrecognized tax benefits were $4.6 million; settlement timing could not be reasonably estimated.
- COVID-19 measures included remote work and travel restrictions. Management said it had not identified a specific pandemic-related event requiring an estimate or carrying-value adjustment as of November 3, 2021.
Important facts for investors to verify
- Whether the substantial tax benefit from releasing valuation allowances is supportable by future taxable income, and how much reported earnings depend on this nonrecurring item.
- Whether revenue growth and margin gains can continue, particularly given the declines in Japan and Asia Pacific and reliance on large, irregular customer purchases.
- Whether semiconductor shortages, outsourced manufacturing and component availability are affecting order fulfillment, costs or future guidance.
- How the new repurchase authorization and dividend will be funded and balanced against product investment and other capital needs.
- The status and potential financial exposure of ongoing litigation and the $4.6 million of unrecognized tax benefits.