A10 Networks, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited figures below are in millions of dollars, except per-share data and percentages. A10 provides secure application and network security solutions, selling products and support services globally, primarily through channel partners.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $57.8 | $72.1 | $181.3 | $202.7 |
| Products revenue | $30.3 | $45.1 | $100.5 | $123.6 |
| Services revenue | $27.5 | $27.0 | $80.8 | $79.1 |
| Gross margin | 80.9% | 79.5% | 80.9% | 79.7% |
| Operating income | $2.2 | $15.7 | $20.6 | $36.8 |
| Net income | $6.5 | $12.1 | $22.1 | $28.9 |
| Diluted EPS | $0.09 | $0.16 | $0.29 | $0.37 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $41.8 | $38.8 |
Q3 operating margin was 3.8% versus 21.7% a year earlier; nine-month operating margin was 11.4% versus 18.2%. Gross margin improved year over year in both periods despite lower revenue.
Liquidity, cash flow and capital allocation
- At September 30, cash and cash equivalents were $104.2 million and marketable securities were $64.9 million, totaling $169.0 million. Working capital was $153.3 million.
- Total liabilities were $180.9 million, including $17.961 million of operating lease liabilities. The filing reports no borrowings or other debt.
- Nine-month investing cash flow was positive $13.4 million, primarily reflecting marketable-security sales and maturities, partly offset by purchases and $7.8 million of capital expenditures. Financing cash use was $19.0 million, including $13.4 million of dividends and $8.7 million of share repurchases.
- Management expects cash and marketable securities to cover anticipated cash needs for at least the next 12 months and beyond. It reported $18.2 million of open manufacturer purchase commitments and $19.0 million of operating lease commitments.
Material changes and unusual items
- Q3 revenue fell 19.8% year over year, driven by a 32.9% decline in products revenue. Services revenue increased 2.1%. For the first nine months, revenue declined 10.6%, with products down 18.7% and services up 2.1%.
- Management attributed the decline principally to lower demand from service-provider customers. Service-provider revenue fell $16.2 million in Q3 and $24.3 million in the nine-month comparison; enterprise revenue rose $1.9 million and $2.9 million, respectively.
- Q3 net income declined 46.6%; nine-month net income declined 23.6%. Higher interest and other income, along with a Q3 tax benefit, partly offset lower operating income. Q3 2023 included a $1.5 million income tax benefit, primarily related to a foreign-derived intangible income deduction.
- R&D expense included a $3.0 million impairment charge for a delayed project with cost overruns. The company also recorded severance expense of $2.4 million in Q3 and $4.3 million for the first nine months following expense-management initiatives and headcount reductions.
- Cash from operations increased to $41.8 million from $38.8 million for the nine-month period, aided by collections and deferred revenue movements; changes in accrued liabilities and inventory partly offset those inflows.
Outlook, risks and contingencies
- No numeric revenue or earnings guidance is provided. For 2023, management expects sales and marketing expense to decrease slightly from 2022, R&D expense to increase, and general and administrative expense to be about flat, while continuing investment in growth and cybersecurity technology.
- Revenue is exposed to irregular, large customer purchases and long sales cycles. The ten largest end-customers represented 29% of Q3 revenue, versus 36% a year earlier. Service providers represented 50% of Q3 revenue, down from 62%; enterprise customers represented 50%, up from 38%.
- Management cites risks including macroeconomic conditions, customer order delays or cancellations, competition, product and market adoption, execution and channel-partner performance, foreign-exchange fluctuations, cybersecurity incidents, and litigation. Litigation outcomes and potential losses are uncertain; the filing does not provide a clear quantified exposure.
- Unrecognized tax benefits were $7.3 million; the company does not anticipate a material change over the next 12 months. Management says it is not currently under tax examination.
- Subsequent to quarter-end, the board declared a $0.06-per-share dividend payable December 1, 2023 and authorized a new $50 million repurchase program for 12 months. Future dividends remain subject to board review. Management assessed disclosure controls as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether product demand, particularly from service providers and in the Americas, recovers after the sharp Q3 decline.
- Whether services growth and deferred revenue provide durable support; remaining performance obligations were $135.7 million, including $79.5 million expected within one year.
- How operating profitability develops after the project impairment, severance costs, headcount reductions, and planned R&D investment.
- Whether operating cash flow remains resilient as working-capital movements normalize, and how dividends and the new repurchase program affect liquidity and share count.
- Any material development in litigation, tax exposures, customer concentration, foreign-exchange risk, or the delayed software project.