A10 Networks, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. A10 sells secure application networking and security products, related support and services, to enterprises, service providers and web-scale customers globally.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $49.2m | $60.7m | $99.5m | $109.9m |
| Gross profit / margin | $37.9m / 77.1% | $47.5m / 78.3% | $76.0m / 76.4% | $84.8m / 77.2% |
| Operating loss | $(6.4)m | $(3.7)m | $(17.4)m | $(23.7)m |
| Net loss | $(5.8)m | $(4.5)m | $(18.0)m | $(24.2)m |
| Net loss per diluted share | $(0.08) | $(0.06) | $(0.24) | $(0.33) |
- Q2 product revenue fell 31.7% to $26.8m; services revenue rose 4.3% to $22.4m. First-half product revenue declined 18.3% to $55.0m, while services increased 4.6% to $44.5m.
- Q2 revenue declined 19%, principally because U.S. revenue fell $15.2m amid lower demand from U.S. web giants and service providers. Japan revenue increased $3.0m. First-half U.S. revenue declined 35% to $33.4m; Japan rose 12% to $28.0m.
- Q2 gross margin declined 1.2 percentage points. Product gross margin fell 2.6 points, attributed primarily to pricing incentives on selected strategic opportunities. First-half gross margin decreased 0.8 points, with product margin affected by product and geographic mix.
- Operating expenses decreased 13.4% in Q2 and 14.0% in the first half. Lower personnel costs and lower prior-year investigation-related fees contributed; the prior-year comparison also included accelerated ESPP stock compensation.
- First-half operating cash outflow was $10.6m versus $2.6m in 2018. Cash and cash equivalents decreased $3.8m to $36.8m; marketable securities were $82.5m. Management cited working-capital outflows, including accrued liabilities and inventory.
- At June 30, working capital was $113.3m; total assets were $226.8m and total liabilities $128.5m. The company had no borrowings under its $25m revolving facility and was in covenant compliance. The filing reports no other outstanding debt balance.
Changes, outlook and significant matters
- For the first half, the net loss narrowed year over year, but Q2 net loss widened and revenue fell sharply. Revenue mix shifted toward services; U.S. revenue weakness was partly offset by growth in Japan and other regions.
- Management expected sales and marketing, R&D and G&A expenses to remain relatively consistent quarter to quarter for the rest of 2019. It gave no specific revenue or earnings guidance and said existing cash, securities and other resources should cover anticipated needs for at least 12 months. It intends to continue investing in product development and sales and marketing, which may weigh on near-term profitability.
- Customer concentration and purchase timing are material: the ten largest end-customers generated 33% of first-half revenue, and purchases are described as large and irregular. First-half revenue was 43% from service providers and 12% from web giants.
- A new San Jose office sublease signed in May has a seven-year, eight-month term and approximately $26.4m of base rent, plus operating expenses. Monthly base rent is approximately $262,000 in the first year.
- Post-period developments: On July 26, 2019, the company added Eric Singer to its board under an agreement with VIEX. On July 30, it announced CEO Lee Chen’s planned retirement and began a successor search. The board also formed a Strategy Committee and retained Bank of America Merrill Lynch to advise on strategic matters, including a potential sale or change of control; no transaction is assured.
- Controls and investigations: Management concluded disclosure controls were ineffective at June 30 because previously identified material weaknesses in internal control over financial reporting remained unremediated; remediation actions were ongoing and had not been tested for a sufficient period. The SEC investigation remained open, and the company said an adverse outcome was reasonably possible but could not estimate the likelihood or loss range.
- The securities class action was dismissed by final judgment in May, but the lead plaintiff filed a notice of appeal in June. The related derivative action was voluntarily dismissed in June. The filing identifies litigation costs and possible adverse outcomes as risks.
Investor facts to verify
- Whether product demand—particularly from U.S. web giants and service providers—recovers, and whether the sales organization transformation affects future growth.
- Whether the continuing internal-control material weaknesses are remediated and independently tested, and whether further restatements or reporting delays arise.
- Developments and potential financial consequences of the SEC investigation and securities-action appeal; possible losses are not quantifiable from the filing.
- Whether the strategic review results in a transaction, alongside the CEO transition and potential effects on customers, employees and execution.
- Cash burn, working-capital trends, product pricing and margins, and the financial commitment associated with the new office lease.