A10 Networks, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. A10 provides secure application networking and security products and related support services. The 2017 comparative financial statements were restated; comparisons below use the restated figures.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $60.7 million | $54.0 million | $109.9 million | $117.9 million |
| Gross margin | 78.3% | 76.3% | 77.2% | 76.6% |
| Operating loss | $3.7 million | $7.7 million | $23.7 million | $9.5 million |
| Net loss | $4.5 million | $8.0 million | $24.2 million | $9.3 million |
| Diluted loss per share | $0.06 | $0.11 | $0.33 | $0.13 |
- Q2 revenue rose 12% year over year, led by a 19% increase in product revenue; services revenue rose 2%. Management attributed growth partly to improved execution and an expansion win at a large customer. Enterprise revenue increased 23%, while service-provider revenue declined 2%.
- First-half revenue fell 7%, as product revenue decreased 12%, partly offset by 3% services growth. Management cited the sales-organization transformation begun early in 2018; service-provider revenue declined 15%, while enterprise revenue was relatively consistent.
- First-half operating expenses increased 9% to $108.5 million. General and administrative expense rose 48%, including $7.3 million of internal-investigation fees ($3.1 million in Q2). First-half net loss also included $4.1 million of accelerated employee stock-purchase-plan compensation after that plan was suspended.
- Cash used in operating activities was $2.6 million in the first half, versus $13.8 million generated in the prior-year period. Investing activities used $4.6 million and financing activities provided $1.2 million; cash and cash equivalents declined $6.0 million.
- At June 30, cash and cash equivalents were $40.6 million and marketable securities were $86.8 million. Working capital was $109.4 million. Current assets were $205.7 million and current liabilities $96.3 million. Management said available resources should cover anticipated cash needs for at least 12 months.
- No borrowings were outstanding under the $25 million revolving credit facility. The facility is secured by substantially all assets other than intellectual property. A late financial-statement submission covenant was covered by lender forbearance through August 31, 2018; the company submitted the statements within that period.
Material changes, accounting, and outlook
- Q2 gross margin improved to 78.3% from 76.3%, primarily on favorable product and geographic mix. First-half margin was 77.2%, compared with 76.6%.
- A10 adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated equity by $12.4 million, reflecting principally a $4.0 million reduction in deferred revenue and recognition of an $8.4 million deferred-commission asset. The company said adoption had no material effect on the timing or recognition of revenue overall, although reported first-half revenue was $0.9 million higher than it would have been without the new standard.
- Management provided no numerical revenue or earnings guidance. It expected research and development and general and administrative expenses to be relatively consistent for the remainder of 2018 and said it would continue investing for long-term growth, which may affect near-term profitability.
- Revenue is concentrated and uneven: the ten largest end-customers contributed 38% of first-half revenue, and one distribution-channel customer represented 20% of Q2 revenue. Large orders, long sales cycles, and timing of customer purchases can cause significant quarterly fluctuations.
Controls, contingencies, and key risks
- The company restated prior financial statements after an Audit Committee investigation identified revenue-recognition errors, principally premature recognition on certain reseller and distributor transactions. The investigation also identified conduct and control failures. The restated first-half 2017 net loss was $9.3 million, versus $12.2 million previously reported.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2018 because of material weaknesses in the control environment, monitoring, and revenue recognition. Remediation efforts were underway, but management said weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- The company filed its 2017 Form 10-K about five months late and consequently also filed its Q1 and Q2 2018 10-Qs late. It disclosed that it could not use Form S-3 for public offerings until it had timely filed all periodic reports for 12 months.
- The SEC was conducting a private investigation into possible securities-law violations. A securities class action and a shareholder derivative action were also pending. The company could not predict the SEC investigation’s outcome or estimate a possible loss range; an adverse outcome could involve fines, sanctions, or remediation.
- Foreign-exchange losses were $0.7 million in the first half. Other principal risks include large-customer purchasing variability, competition, execution of the sales transformation and cloud strategy, product and supply-chain risks, and the company’s ability to remediate control weaknesses.
Investor facts to verify
- Progress and independent testing of revenue-recognition and broader internal-control remediation.
- Resolution, timing, and potential financial impact of the SEC investigation and shareholder litigation.
- Whether Q2’s growth and large-customer expansion win continue, given first-half revenue contraction and customer concentration.
- Operating cash flow, expense trends, and liquidity as the company continues investing and managing the sales-organization transition.
- Effects of ASC 606 and deferred commissions on future reported revenue, margins, and cash generation.