A10 Networks, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results are compared with Q1 2013. A10 sells application networking products and related support services, including ADC, CGN and DDoS protection solutions. The quarter included the company’s March 2014 IPO and conversion of preferred stock into common stock.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $45.7 million | $29.6 million; up 54.6% |
| Product revenue | $36.4 million | $23.3 million; up 56.5% |
| Services revenue | $9.3 million | $6.3 million; up 47.8% |
| Gross profit / margin | $35.7 million / 78.0% | $23.0 million / 77.7% |
| Operating expenses | $40.0 million | $30.6 million; up 30.7% |
| Operating loss | $4.3 million | $7.6 million |
| Net loss | $5.1 million | $8.5 million |
| Net loss attributable to common stockholders / diluted EPS | $6.3 million / $(0.45) | $8.5 million / $(0.95) |
| Operating cash flow | $(3.0) million | $(8.1) million |
| Investing cash flow | $(2.0) million | $(0.7) million |
| Cash and cash equivalents at quarter-end | $122.1 million | $20.8 million at December 31, 2013 |
| Working capital | $113.2 million | — |
| Revolving credit facility | No balance at March 31 | $20.0 million outstanding at December 31; repaid in March |
Q1 financing cash flow was $106.3 million, principally reflecting $124.2 million of reported net IPO proceeds, offset by repayment of the $20.0 million revolver balance. The filing also describes IPO net proceeds of approximately $120.3 million in a note; the difference is not reconciled clearly in the supplied filing text.
Material changes versus the prior comparable period
- Revenue increased 54.6%, with growth in both products and services. Management attributed product growth to greater adoption and the absence of customer purchasing delays associated with the Brocade litigation injunction in Q1 2013.
- Gross margin improved 0.3 percentage points overall. Product margin rose 0.7 points, while services margin fell 1.3 points as support-related costs grew faster than services revenue.
- Operating loss narrowed to $4.3 million from $7.6 million, despite higher sales and marketing, R&D, and G&A expenses. Lower litigation expense helped offset increased investment in growth.
- Operating cash use improved to $3.0 million from $8.1 million, but remained negative. Receivables, inventory and prepaid assets increased; deferred revenue also rose.
- Cash increased substantially following the IPO, and the company repaid its $20.0 million revolving borrowing.
Outlook, risks and unusual items
- Outlook: Management said cash, cash equivalents and expected operating cash inflows should cover anticipated needs for at least the next 12 months. It expected approximately $10 million in capital expenditures over that period and planned continued investment in R&D, sales and marketing, and public-company infrastructure. No specific revenue or earnings guidance was provided.
- Customer and geographic concentration: The ten largest end-customers represented approximately 54% of Q1 revenue; service providers represented approximately 56%. Japan contributed 38% of revenue and the United States 40%. NTT DoCoMo, through a reseller, represented approximately 13% of revenue.
- Legal matters: Radware and Parallel Networks patent suits remained pending. The company said it could not reasonably estimate potential losses and recorded no reserve for these matters. Adverse outcomes could lead to substantial costs, damages, royalties or product restrictions.
- Subsequent event: On May 6, 2014, the company settled a vendor contractual liability accrued at March 31, reducing it from approximately $12 million to $5 million. It expected to reduce the liability by $7 million in Q2.
- Other risks: Results may fluctuate with large, irregular customer orders, long sales cycles, competition, foreign exchange (particularly the yen), outsourced manufacturing and component supply. The company had no currency hedges.
- Controls: Management concluded disclosure controls were effective as of March 31. Separately, the risk factors disclose significant deficiencies in financial close and reporting controls, including account reconciliation and tax-provision review; remediation was ongoing.
- Profitability and tax: The company remained loss-making and maintained a full valuation allowance against federal and state deferred tax assets. Stock-based compensation was $1.8 million in the quarter.
Important facts for investors to verify
- Reconcile the filing’s differing descriptions of IPO net proceeds ($124.2 million in cash-flow/MD&A discussion versus approximately $120.3 million in the IPO note), and confirm the treatment of selling-stockholder proceeds and offering costs.
- Track concentration and timing of major customer orders, especially Japan and service-provider purchases, and assess whether Q1 growth is repeatable.
- Review the status and potential financial exposure of the Radware and Parallel Networks cases, as no loss estimate or reserve was recorded.
- Confirm the Q2 accounting and cash implications of the $7 million vendor-liability reduction.
- Monitor remediation of disclosed financial-reporting control deficiencies, alongside the company’s stated effectiveness of disclosure controls.
- Assess continued operating cash use, planned capital spending, support-cost growth and the company’s progress toward profitability.