A10 Networks, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
A10 sells networking and cybersecurity solutions, including hardware appliances, software licenses and related support services, primarily to service providers and enterprises. It sells globally, largely through distribution partners, and outsources hardware manufacturing. At quarter-end it had served more than 7,400 customers worldwide.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Product revenue | $30.5 | $30.7 | Down 0.6% |
| Services revenue | $24.3 | $23.0 | Up 5.5% |
| Total revenue | $54.8 | $53.8 | Up 2.0% |
| Gross profit / margin | $42.3 / 77.2% | $41.6 / 77.4% | Margin down 0.2 percentage points |
| Operating expenses | $38.3 | $41.8 | Down 8.4% |
| Operating income (loss) | $4.0 | $(0.2) | Improved $4.2 |
| Net income (loss) | $2.7 | $(0.3) | Improved $3.0 |
| Diluted earnings (loss) per share | $0.03 | $0.00 | Turned profitable |
| Operating cash flow | $2.3 | $12.2 | Down $9.9 |
Services growth reflected increased support-contract sales from the expanding installed base. Revenue growth by geography was strongest in EMEA (+49%) and Asia Pacific excluding Japan (+30%); Americas revenue rose 3%, while Japan fell 23%. Enterprise revenue rose $2.1 million, partly offset by a $1.0 million decline in service-provider revenue. The ten largest end-customers contributed 36% of revenue, versus 52% a year earlier.
Operating expenses declined primarily because of lower employee-related costs, travel restrictions and facility expenses. Gross margin was nearly stable. Net non-operating expense was $1.2 million, including $1.3 million of foreign-exchange losses, chiefly associated with yen weakness; this compared with $0.2 million of net non-operating income in Q1 2020.
Liquidity, cash flow and balance sheet
- At March 31, cash and cash equivalents were $75.7 million and marketable securities were $85.3 million, totaling $161.0 million. Working capital was $146.0 million.
- Cash and cash equivalents declined $7.6 million during the quarter. Investing activities used $11.5 million, primarily reflecting purchases of marketable securities; operating activities provided $2.3 million.
- Operating cash flow was lower than the prior-year period, chiefly due to a $12.1 million cash outflow from accrued and other liabilities, including bonus and commission payments. Deferred revenue provided a $4.5 million inflow.
- Total liabilities were $166.9 million, including $113.2 million of deferred revenue and $27.4 million of operating lease liabilities. The balance sheet reports no borrowings or other debt line item.
- Management said existing cash and marketable securities should cover anticipated needs for at least the next 12 months. The company had $30.7 million remaining under its $50 million share repurchase authorization; it repurchased $88,000 of shares during the quarter.
Outlook, risks and unusual items
- A10 had temporarily suspended quarterly quantitative revenue and earnings guidance because of COVID-19 uncertainty. Management expects to keep sales and marketing, research and development, and general and administrative expenses near 2020 levels while controlling costs; it also plans continued investment in product development and long-term growth.
- The company warned that COVID-19 could affect demand, supply, operations and liquidity. It cited possible manufacturing or component shortages, with primary hardware manufacturers located in Taiwan.
- Revenue is exposed to large, irregular customer orders and long sales cycles. Japan revenue weakness and foreign-exchange losses were notable in the quarter. Service providers accounted for 62% of revenue and enterprises 38%.
- Other disclosed risks include competition and cloud-based business-model shifts, product security or performance issues, international and regulatory exposures, and litigation. The filing does not provide a clear estimate of potential litigation losses; it states adverse outcomes could affect results and cash flows.
- The company continued to explore strategic alternatives; it cautioned that no transaction was assured. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and profitability can persist after the year-over-year reduction in operating expenses.
- Whether Japan demand recovers and whether geographic and customer mix continues to affect growth and gross margin.
- Whether operating cash flow improves after the quarter’s substantial accrued-liability payments.
- How COVID-19, component availability and Taiwan manufacturing exposure affect deliveries and customer demand.
- Whether foreign-exchange losses continue, and whether the company’s hedging practices meaningfully mitigate currency exposure.
- Developments in strategic alternatives, litigation contingencies and the pace of share repurchases.