A10 Networks, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Amounts are in millions of U.S. dollars unless otherwise noted. The filing is unaudited.
Business context
A10 provides application networking and network security products and related support services to enterprises, service providers, web companies, and government organizations. Its offerings include application delivery controllers, carrier-grade network address translation, DDoS threat protection, and convergent firewalls. It sells through its own sales organization and channel partners, and outsources hardware manufacturing.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $55.1 | $50.8 | $166.0 | $142.3 |
| Gross profit / margin | $42.1 / 76.5% | $38.1 / 75.0% | $125.6 / 75.7% | $107.2 / 75.3% |
| Operating loss | $(4.6) | $(8.6) | $(19.7) | $(31.6) |
| Net loss | $(4.7) | $(9.0) | $(19.2) | $(32.7) |
| Net loss per share, diluted | $(0.07) | $(0.14) | $(0.29) | $(0.53) |
- Revenue mix: Q3 product revenue was $35.3 million, up 1%; services revenue was $19.8 million, up 25%. For nine months, products rose 12% to $110.4 million and services rose 28% to $55.6 million.
- Margins and expenses: Q3 gross margin improved 1.5 percentage points, primarily as services margins rose; nine-month gross margin increased 0.4 points. Q3 operating expenses were essentially flat year over year, while nine-month expenses rose 5%, including higher research and development spending.
- Cash flow: Operating cash flow was $21.8 million for the first nine months, versus $7.6 million a year earlier. Investing activities used $95.6 million, mainly reflecting net purchases of marketable securities, the Appcito acquisition, equipment, and an intangible asset. Financing provided $7.0 million. Cash and cash equivalents declined by $66.7 million to $31.4 million.
- Liquidity and balance sheet: At September 30, cash and cash equivalents were $31.4 million and marketable securities were $85.4 million; working capital was $92.5 million. Current assets were $184.9 million and current liabilities $92.3 million. Total liabilities were $123.1 million, including deferred revenue; the company reported no borrowings under its credit facilities at the reporting date.
- Deferred revenue: Total deferred revenue increased to $83.2 million from $72.8 million at year-end 2015, largely reflecting services and support contracts.
Material changes versus the prior comparable periods
- Revenue growth was stronger for the first nine months than for Q3: 17% versus 8%. Q3 growth was driven mainly by services, while product revenue was nearly flat.
- Japan revenue increased 83% in Q3 and 56% for the nine-month period, with favorable yen exchange effects. EMEA revenue declined 17% in both comparisons; management cited economic weakness and lower product revenue.
- Losses narrowed: nine-month net loss improved by $13.5 million, and Q3 net loss improved by $4.3 million. The company remained unprofitable.
- Operating cash flow improved, while cash and cash equivalents fell substantially because the company invested heavily in marketable securities. Marketable securities were $85.4 million at quarter-end versus none at December 31, 2015.
Outlook, commentary, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects continued investment in product development, sales and marketing, international expansion, and public-company infrastructure, which may weigh on near-term profitability. Management believes available cash, securities, and other resources will cover anticipated needs for at least 12 months.
- Customer and market concentration: The ten largest end-customers represented 38% of nine-month revenue, compared with 30% a year earlier. Large customer purchases can be irregular and difficult to forecast. One distribution partner accounted for 19% of Q3 revenue, 13% of nine-month revenue, and 22% of gross receivables at quarter-end.
- Acquisition: In June 2016, A10 acquired substantially all Appcito assets for consideration with a fair value of $6.3 million, including cash and stock. The acquisition added developed technology and goodwill; management said it was not material to reported results or financial position.
- Legal matters: A securities class-action settlement provides for a $0.8 million payment net of expected insurance proceeds; payment was made in October 2016, subject to final court approval. A derivative action settlement would require governance measures and remained subject to court approval and other conditions.
- Credit facility: The prior $35 million revolving facility expired September 30, 2016. In November, A10 entered into a three-year, $25 million facility with Silicon Valley Bank, secured by substantially all assets other than intellectual property. It includes an adjusted quick-ratio covenant of at least 1.50:1.00. No amount was drawn through the filing date.
- Capital allocation: On October 27, the board authorized repurchases of up to $20 million of common stock over 12 months; purchases are discretionary and the filing does not state that any had been made.
- Key risks: The filing highlights volatile and hard-to-predict quarterly sales, competition, execution and product-development risks, reliance on third-party manufacturers and limited-source components, cybersecurity and product-defect exposure, intellectual-property litigation, international and currency risks, and the possibility that continued investment delays profitability. A10 had no foreign-currency hedging arrangements.
- Taxes: The company maintained a valuation allowance against U.S. and certain foreign deferred tax assets and reported $3.0 million of unrecognized tax benefits.
Most important facts for investors to verify
- Whether services-led growth and Japan’s unusually strong contribution continue, and whether EMEA weakness persists.
- Whether operating cash flow remains positive after considering working-capital movements, especially deferred revenue and receivables.
- How customer concentration and large, irregular orders affect quarterly revenue and collections.
- The final court approval and completion of the securities and derivative litigation settlements, including any remaining costs or conditions.
- Use of the new credit facility, compliance with its financial covenant, and whether the authorized share repurchase program is implemented.
- Whether investment in research, sales, and international growth improves performance sufficiently to achieve profitability.