A10 Networks, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This annual filing also reports fourth-quarter results. A10 sells application delivery, carrier-grade networking and DDoS protection products, plus related support services, to enterprises and service providers.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $179.5 million | $141.7 million | +26.6% |
| Product revenue | $134.5 million | $112.0 million | +20.0% |
| Services revenue | $45.0 million | $29.7 million | +51.6% |
| Gross profit / margin | $136.6 million / 76.1% | $108.3 million / 76.4% | Margin down 0.3 percentage points |
| Operating loss | $(30.3) million | $(22.8) million | Loss widened |
| Net loss | $(34.7) million | $(27.1) million | Loss widened |
| Operating cash flow | $(30.5) million | $(25.1) million | Cash use increased |
- Fourth-quarter revenue was $45.2 million, versus $43.4 million in Q3 2014; Q4 net loss was $16.0 million, versus $12.3 million in Q3.
- Year-end cash and cash equivalents were $91.9 million, working capital was $100.7 million, and total assets were $187.0 million. The company reported no outstanding credit-facility borrowings at year-end, compared with $20.0 million at the end of 2013.
- FY 2014 investing cash use was $6.1 million, primarily for property and equipment. Financing provided $107.8 million, mainly from the IPO, partly offset by repayment of $20.0 million of credit-facility borrowings.
- Deferred revenue was $57.2 million, up from $41.2 million. Accumulated deficit was $181.8 million.
Changes and notable items
- Revenue growth reflected adoption of Thunder Series products, new and existing customers, and a larger installed base supporting maintenance revenue. Services grew faster than products; services represented 25.1% of revenue versus 20.9% in 2013.
- Operating expenses rose 27.2% to $166.8 million, led by higher sales and marketing, R&D and general and administrative spending as the company expanded personnel and international operations.
- 2014 litigation expense was a net benefit of $2.8 million, including a $7.0 million benefit from settling a contractual liability with a legal-services provider. FY 2013 included $11.5 million of litigation expense; FY 2012 included $95.5 million, primarily related to the $75.0 million Brocade settlement.
- Inventory write-downs were $2.2 million in 2014. Management cited obsolete inventory, unfavorable yen exchange rates and geographic sales mix as pressures on product gross margin.
- The March 2014 IPO generated approximately $120.3 million in net proceeds to the company. Preferred stock converted into common stock in connection with the offering.
Outlook, risks and contingencies
- No numeric revenue or earnings guidance is provided. Management expects services revenue to increase as the installed base grows and expects gross margin to be consistent with its historical average.
- Management remained cautious about possible slower North American service-provider spending and warned of continued near-term revenue fluctuations. It cited longer-than-expected sales cycles and a 62% year-over-year decline in North American service-provider revenue in Q3 2014.
- The company said cash, cash equivalents and expected operating cash inflows should cover anticipated needs for at least 12 months, while noting that future capital needs depend on growth, hiring, product development and market acceptance.
- Key risks include large and irregular customer orders, reliance on distribution partners and two Taiwanese manufacturers, component-supply constraints, competition, foreign-exchange exposure, product/security defects and ongoing operating losses. Japan generated 26% of FY 2014 revenue; the company had not hedged foreign-currency risk.
- Pending matters include Parallel Networks’ patent-infringement lawsuit, for which the company could not estimate a possible loss and recorded no reserve, and a January 2015 securities class action related to the IPO, also without a recorded reserve because the loss was not estimable. The filing says the Brocade and Radware matters had settled.
- Management identified a material weakness in controls over share-based compensation calculations for the 2014 Employee Stock Purchase Plan. The error prompted a material Q4 adjustment but was found before publication, so no restatement was made. Disclosure controls were deemed ineffective at year-end solely as a result of this weakness; remediation was planned for 2015.
Investor verification priorities
- Track whether revenue growth, especially product sales and North American service-provider demand, recovers or slows further.
- Assess operating-expense growth and cash burn against the company’s stated expectation of at least 12 months of liquidity.
- Review gross-margin drivers, including inventory reserves, product mix and yen movements.
- Monitor remediation of the ESPP share-based-compensation control weakness and the outcome or development of pending litigation.
- Check customer and channel concentration, including that one distribution partner accounted for 13% of 2014 revenue and the ten largest end-customers accounted for 37%.