A10 Networks, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with Q1 2014. A10 sells application networking products, including application delivery controllers, carrier-grade network address translation and DDoS protection, plus support and professional services.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $44.0 million | $45.7 million |
| Product revenue | $30.5 million | $36.4 million |
| Services revenue | $13.5 million | $9.3 million |
| Gross profit / margin | $33.2 million / 75.5% | $35.7 million / 78.0% |
| Operating expenses | $46.8 million | $40.0 million |
| Operating loss | $13.6 million | $4.3 million |
| Net loss | $13.7 million | $5.1 million |
| Net loss per common share, diluted | $0.22 | $0.45 |
| Cash used in operating activities | $5.5 million | $3.0 million |
- Revenue declined 3.8% year over year: product revenue fell 16.2%, while services revenue rose 44.7% as the installed base and support sales expanded.
- Gross margin decreased 2.5 percentage points. Product margin fell on less favorable geographic sales mix; services margin edged up despite higher support costs.
- Sales and marketing, research and development, and general and administrative expenses increased 13.7%, 27.7%, and 40.4%, respectively. Lower litigation expense partly offset those increases.
- Cash and cash equivalents were $85.6 million at March 31, down from $91.9 million at year-end. Working capital was $94.3 million. Deferred revenue totaled $59.7 million, including $19.5 million non-current.
- No borrowings were outstanding under the $35 million revolving credit facility; the company reported compliance with its covenants. The facility is secured by substantially all assets, including intellectual property.
Changes, outlook and notable matters
- Revenue mix shifted: U.S. revenue increased 25.5% to $22.9 million, while Japan revenue fell 48.9% to $8.8 million. Enterprise revenue increased 26%; service-provider revenue declined 26%.
- Management expects sales and marketing and R&D expenses to continue increasing in absolute dollars during 2015, and G&A expenses to increase slightly. It expects gross margin generally to remain consistent with its historical average. No specific revenue or earnings guidance is provided.
- Management said existing cash and available financial resources should cover anticipated needs for at least 12 months. It plans continued investment in product development and global sales and marketing; such spending may weigh on near-term profitability.
- Large customers make irregular purchases, creating quarterly revenue volatility. The ten largest end-customers accounted for about 42% of Q1 revenue. Management cited a slowdown in service-provider product demand as a cause of the product revenue decline.
- The company faces a patent infringement suit brought by Parallel Networks and putative securities class actions filed in California in 2015 relating to the 2014 IPO. It intends to defend the cases; potential losses could not be reasonably estimated, and no litigation accrual was recorded.
- Disclosure controls were deemed ineffective as of March 31, 2015, due solely to a material weakness in controls over share-based compensation for the employee stock purchase plan. Remediation work began, but effectiveness had not yet been demonstrated.
- Foreign currency exposure, particularly the Japanese yen, is not hedged. Management described a hypothetical 10% exchange-rate change as not significant to Q1 results; it warned that currency movements can affect revenue and operating income.
Investor verification points
- Track whether product demand, especially among service providers and in Japan, stabilizes, and whether recurring services growth offsets product weakness.
- Assess whether operating expense growth and cash use are consistent with management’s growth plans and liquidity expectations.
- Monitor gross margin, geographic and customer mix, and the impact of currency movements.
- Review progress in remediating the stock-based compensation control weakness and whether subsequent filings report effective controls.
- Follow the Parallel Networks and IPO-related lawsuits, including any developments in estimated exposure, accruals or cash impact.
- Confirm covenant compliance and availability under the secured revolving credit facility; no debt was drawn at quarter-end.