A10 Networks, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed March 8, 2021. This is an annual report, not a standalone fourth-quarter filing. The filing also provides unaudited quarterly results, including Q4 2020.
Business context
A10 Networks sells application delivery, networking and cybersecurity products and related support services to service providers, enterprises and government customers. Its portfolio is offered through hardware, software and cloud-based models. Most revenue still comes from hardware appliances with perpetual software licenses; services primarily include maintenance and support. Nearly all orders are fulfilled through channel partners.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $225.5 million | $212.6 million |
| Gross profit / margin | $175.4 million / 77.8% | $163.7 million / 77.0% |
| Operating income (loss) / margin | $17.7 million / 7.9% | $(17.1) million / (8.0%) |
| Net income (loss) | $17.8 million; $0.22 diluted EPS | $(17.8) million; $(0.23) diluted EPS |
| Cash from operating activities | $55.3 million | $(0.4) million |
| Cash, cash equivalents and marketable securities at year-end | $158.1 million | $129.9 million |
| Working capital at year-end | $134.5 million | $123.4 million |
FY2020 revenue rose 6.1%: product revenue increased 6.5% to $129.9 million and services revenue rose 5.4% to $95.7 million. Products represented 57.6% of revenue and services 42.4%. Net cash increased by $37.5 million during the year. The company had no outstanding borrowings; its revolving credit facility expired in November 2019 and management said it had no current plan for a new facility. Year-end operating lease liabilities were $28.8 million, with $31.6 million of undiscounted lease payments remaining.
Q4 2020 revenue was $62.7 million, gross profit was $49.2 million and net income was $7.8 million. Revenue and net income were higher than in Q4 2019, when they were $60.3 million and $0.1 million, respectively.
Material changes versus prior periods
- Return to profitability followed net losses in 2019 and 2018. FY2020 operating expenses fell 12.8% to $157.6 million, including lower sales and marketing spending and no repeat of 2019 restructuring expense.
- Gross margin improved 0.8 percentage points. Product gross margin rose to 77.6%; services gross margin declined to 78.0%, mainly due to higher support personnel costs.
- Revenue increased in the Americas, Japan and EMEA, but declined 17% in Asia Pacific excluding Japan. Japan revenue grew 13%, while Americas revenue grew 9%.
- Cash from operations improved from a small outflow to $55.3 million, supported by net income and working-capital movements, including higher deferred revenue.
- Product backlog fell to approximately $3.0 million from $12.9 million. The company cautions that backlog is cancellable and is not a reliable indicator of future revenue.
Outlook, risks and unusual items
- Because of COVID-19 uncertainty, the company temporarily suspended quarterly quantitative revenue and earnings guidance. It said pandemic-related disruption could affect 2021 revenue, results, liquidity and capital investment. Japan demand was affected in 2020 by postponement of the Tokyo Olympics.
- Management expected 2021 sales and marketing, research and development, and general and administrative expenses to remain at 2020 levels while controlling costs; it also plans continued investment in product development and potentially sales and marketing, which could affect near-term profitability.
- Major risks include large and irregular customer orders, concentration among the ten largest end-customers (41% of FY2020 revenue), intense competition, transition toward cloud and subscription models, COVID-19 and supply-chain disruption. Approximately 91% of revenue was fulfilled through channel partners, and one distributor represented 10% of FY2020 revenue.
- The company continued exploring strategic alternatives, a process announced in 2019; it gave no assurance that a transaction would occur. It repurchased 2.2 million shares from founder Lee Chen for approximately $13.3 million and repurchased 2.7 million shares for $19.2 million under its separate $50 million authorization during 2020.
- Prior internal-control material weaknesses were reported as remediated; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2020. A past export-control matter was resolved after a BIS warning letter, with no fines or penalties.
- Other exposures include litigation and contingencies, uncertain tax positions, foreign-exchange and trade risks, reliance on Taiwan-based contract manufacturers, and product-security, privacy and intellectual-property risks. The company maintains a valuation allowance against U.S. deferred tax assets and reports $4.6 million of unrecognized tax benefits.
Important facts for investors to verify
- Whether revenue growth and profitability are sustainable after substantial expense reductions, and how margins evolve as product mix and recurring or subscription revenue change.
- Customer and channel concentration, order timing, backlog quality, and the extent to which the 2020 operating cash-flow improvement reflects repeatable performance.
- COVID-19’s continuing effects on demand, supply availability and international markets, particularly Japan and Asia Pacific.
- Progress and potential consequences of the strategic-alternatives review, and the pace and remaining authorization of share repurchases.
- Future product execution in cloud, cybersecurity and 5G markets, as well as compliance, litigation, tax and outsourced-manufacturing exposures.