Business context and reporting period
A10 Networks, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. It provides application networking and network security products, including application delivery controllers (ADC), carrier-grade network address translation (CGN), and DDoS protection (TPS), built on its ACOS platform. The Convergent Firewall (CFW) was announced in 2015, with shipments expected to begin in Q1 2016.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $199.0 million | $179.5 million |
| Gross profit / gross margin | $150.2 million / 75.5% | $136.6 million / 76.1% |
| Operating loss | $38.4 million | $30.3 million |
| Net loss | $40.0 million | $34.7 million |
| Cash from (used in) operations | $3.4 million | ($30.5 million) |
- Revenue increased 10.8%; product revenue rose 2.8% to $138.3 million, while services revenue increased 34.7% to $60.7 million, driven principally by support contracts and the growing installed base.
- Operating expenses rose 13.1% to $188.6 million. Sales and marketing was $104.5 million, R&D $54.8 million, and G&A $27.1 million. R&D equaled 27.6% of revenue.
- Q4 2015 revenue was $56.6 million, versus $45.2 million in Q4 2014. Q4 net loss was $7.4 million, versus $16.0 million; quarterly losses narrowed through 2015.
- Year-end cash and cash equivalents were $98.1 million, working capital was $91.4 million, and total stockholders’ equity was $80.1 million. Total debt was zero; the $35 million revolving facility was undrawn and expires September 30, 2016.
- Operating cash flow improved substantially, but included a $15.6 million increase in deferred revenue and $28.0 million in non-cash charges. Investing cash outflow was $3.5 million, primarily for property and equipment.
- Deferred revenue totaled $72.8 million, largely service obligations. Contractual commitments were $15.3 million, including $6.1 million in purchase commitments due within one year.
Material changes versus prior period
- Revenue growth slowed to 11% in 2015 from 27% in 2014. Services expanded much faster than products, increasing to 30.5% of revenue from 25.1%.
- Gross margin declined 0.6 percentage points to 75.5%; management cited yen depreciation, partly offset by improved geographic sales mix.
- Net loss widened by $5.3 million, as operating expenses increased faster than gross profit. The comparison is also affected by a $7.0 million litigation benefit recognized in 2014; 2015 included $2.2 million of litigation expense.
- U.S. revenue rose 25% to $106.8 million; Japan revenue fell 22% to $35.6 million, partly reflecting currency and prior-period demand/backlog. EMEA revenue rose 41% to $27.2 million.
- Operating cash flow shifted from a $30.5 million use in 2014 to $3.4 million provided in 2015. Cash increased to $98.1 million from $91.9 million.
Outlook, commentary, risks and unusual items
- No quantified revenue, earnings, or margin 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. It states existing cash and expected operating cash inflows should cover anticipated needs for at least 12 months.
- Key uncertainties include large, irregular customer purchases and long sales cycles; competitive and pricing pressure; reliance on distribution partners and two Taiwan-based manufacturers; component availability; foreign exchange exposure, particularly the Japanese yen; and the ability to commercialize new products and sustain growth.
- Shareholder securities class-action and derivative lawsuits remain pending. Plaintiffs seek unspecified damages and other relief; the company says it cannot reasonably estimate a possible loss range and recorded no reserve. The company intends to defend the cases. A separate patent case was settled in 2015 with a fully paid-up license.
- The company previously disclosed a material weakness related to employee stock purchase plan share-based compensation. Management concluded the weakness was remediated and internal control over financial reporting was effective at year-end 2015. The auditor did not provide an internal-control attestation.
- Management disclosed no outstanding borrowings at year-end and compliance with credit-facility covenants. However, substantially all assets, including intellectual property, secure the facility; a covenant breach could permit acceleration.
- The financial statements received an unqualified independent audit opinion. No cash dividends are anticipated for the foreseeable future.
Important facts for investors to verify
- Whether the accelerating services and deferred-revenue base can offset slower product growth and support improved operating cash generation.
- Whether margin pressure from yen weakness, discounts, product mix, and inventory risks persists.
- Progress, shipment timing, customer adoption, and costs for CFW and other new products.
- Developments in the shareholder lawsuits, including any changes to the currently unestimable exposure or insurance coverage.
- Cash-flow quality and working-capital trends, including receivable collection, deferred revenue, and purchase commitments.
- Renewal or replacement of the revolving credit facility before its September 2016 expiry, and continued covenant compliance.