A10 Networks, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The annual report was signed and filed August 28, 2018. Although the request references 2017 Q4, this filing covers the full fiscal year; selected quarterly figures are included below.
Business context and reporting period
A10 Networks sells secure application networking products and related support services, including application delivery, network address translation, DDoS protection, SSL inspection and firewall solutions. Products are sold in hardware, software and cloud-based forms. The company sells globally, primarily through distribution partners, and reported more than 6,200 customers in 83 countries. Service providers accounted for approximately 46% of FY2017 revenue; the ten largest end customers accounted for 35%.
Financial performance and liquidity
| Metric (USD millions, except per-share data) | FY2017 | FY2016, restated | FY2015, restated |
|---|---|---|---|
| Revenue | 235.4 | 227.3 | 196.3 |
| Gross profit / gross margin | 182.1 / 77.4% | 172.9 / 76.1% | 147.9 / 75.3% |
| Operating loss | (10.4) | (20.6) | (40.3) |
| Net loss | (10.8) | (22.4) | (41.9) |
| Net loss per share, diluted | (0.15) | (0.34) | (0.67) |
| Cash from operating activities | 14.3 | 18.8 | 3.4 |
FY2017 revenue grew 3.6% year over year, while net losses narrowed. Products revenue declined 1.6% to $149.9 million; services revenue increased 14.1% to $85.5 million, primarily with growth in maintenance and support contracts. Annual gross margin improved 1.3 percentage points. The company remained unprofitable.
At December 31, 2017, cash and cash equivalents were $46.6 million and marketable securities were $84.6 million, totaling $131.1 million. Working capital was $111.1 million; total assets were $224.9 million and stockholders’ equity was $98.4 million. Total debt and credit-facility borrowings were zero. Deferred revenue was $94.6 million. Management said available financial resources were expected to cover anticipated needs for at least 12 months.
Operating cash flow fell to $14.3 million from $18.8 million. Investing activities used $5.1 million and financing activities provided $8.4 million. The company reported $21.3 million in leases and other contractual obligations and purchase commitments, including $10.4 million due within one year. Its $25 million revolving credit facility was undrawn; the lender granted forbearance through August 31, 2018 on the late audited-financial-statement covenant.
In Q4 2017, revenue was $55.5 million and net income was $0.8 million, versus restated Q4 2016 revenue of $60.8 million and a net loss of $4.4 million.
Material changes versus prior periods
- Growth slowed to 3.6% in 2017 from 15.8% in 2016. Services growth more than offset a decline in product sales.
- FY2016 revenue was restated from $230.0 million to $227.3 million, and net loss from $20.9 million to $22.4 million. FY2015 revenue was restated from $199.0 million to $196.3 million, and net loss from $40.0 million to $41.9 million. The adjustments primarily corrected premature revenue recognition in certain reseller and distributor transactions; restated operating cash flow was unchanged for both years.
- The Audit Committee’s investigation also led to restated quarterly information for the first three quarters of 2017 and all quarters of 2016. FY2017 annual statements are presented as reported in this filing.
- The company authorized a new $20 million share-repurchase program in October 2017; no shares were repurchased under that authorization by year-end. Under the prior program, it repurchased 451,259 shares in 2017 for approximately $3.1 million.
Outlook, risks, contingencies and unusual items
- No quantified outlook: The filing provides no specific revenue or earnings guidance. Management expects to continue investing in product development, sales and marketing, and public-company infrastructure, which may weigh on near-term profitability.
- Accounting investigation and controls: The investigation followed policy and conduct violations by a finance employee and identified accounting errors focused on revenue timing. Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end 2017 because of material weaknesses in the control environment, monitoring and revenue-recognition processes. Remediation was underway, but management did not consider the weaknesses remediated.
- Filing and listing risk: The 10-K was filed about five months late, and the Q1 and Q2 2018 10-Qs were also overdue. A NYSE notice identified noncompliance with timely filing requirements; the company said it remained at risk of delisting and temporarily ineligible to use Form S-3 for public offerings until it met the applicable filing conditions.
- Legal and regulatory exposure: A securities class action and related shareholder derivative suit were filed in 2018. The SEC was conducting a private investigation, and the company said an adverse outcome was reasonably possible but that it could not estimate a loss or range. The filing also describes the risk of additional audit, legal and remediation costs.
- Revenue recognition transition: A10 planned to adopt ASC 606 on January 1, 2018 using the modified retrospective method and estimated a $12.4 million reduction to opening accumulated deficit, comprising a $4.0 million decrease in deferred revenue and an $8.4 million deferred-commission asset.
- Other risks: Large and irregular customer orders, channel-partner reliance, competitive and cloud-market shifts, foreign exchange exposure, outsourced manufacturing and component supply, cybersecurity and product defects, and the company’s history of losses could affect results. The company reported an unfavorable $0.4 million foreign-exchange impact in 2017.
- Tax and other items: The Tax Cuts and Jobs Act prompted deferred-tax remeasurement, offset by a valuation allowance; certain tax effects remained under evaluation. The SEC investigation and litigation exposures were not quantified. The filing reports no off-balance-sheet arrangements and no cash dividends anticipated for the foreseeable future.
Important facts for investors to verify
- Review Note 2 and the quarterly tables to understand the full scope and timing of revenue restatements, including the underlying reseller and distributor terms.
- Track whether the material weaknesses are remediated and independently tested, and whether subsequent filings are timely.
- Check the status and outcomes of the SEC investigation, securities litigation and derivative action, including any financial exposure or additional remedial requirements.
- Confirm NYSE listing compliance, the status of the 2018 quarterly reports and the credit-facility covenant forbearance.
- Assess whether slower product revenue, customer concentration and the shift toward services and subscription models affect growth, margins and cash generation.
- Monitor ASC 606 adoption effects against the company’s estimated $12.4 million opening-equity adjustment and review any subsequent tax or accounting updates.