A10 Networks, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. The filing was signed November 1, 2019. A10 provides secure application networking and security products, software, and support services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $52.8 million | $60.5 million | $152.3 million | $170.4 million |
| Gross profit / margin | $40.9 million / 77.4% | $47.5 million / 78.5% | $116.9 million / 76.7% | $132.3 million / 77.6% |
| Operating income (loss) | $0.2 million | $(1.6) million | $(17.2) million | $(25.3) million |
| Net income (loss) | $0.2 million | $(1.8) million | $(17.9) million | $(26.0) million |
| Operating cash flow | Not separately presented for the quarter | $(5.9) million | $(5.5) million |
- Q3 product revenue fell 21% to $30.1 million; services revenue rose 2% to $22.8 million. For the first nine months, products declined 19% to $85.1 million, while services increased 4% to $67.2 million.
- Q3 operating expenses decreased 17% year over year to $40.7 million, including lower general and administrative costs. The nine-month decrease was 15% to $134.0 million.
- At September 30, cash and cash equivalents were $36.1 million and marketable securities were $86.5 million, totaling $122.6 million. Working capital was $117.8 million. The company reported no borrowings under its credit facility and compliance with its covenants.
- Total liabilities were $126.8 million, including $98.1 million of deferred revenue. Stockholders’ equity was $102.2 million. The filing does not report a separate total-debt balance; it states the credit facility was undrawn.
- Cash declined $4.6 million in the first nine months, compared with a $10.4 million decline in the prior-year period. Investing activities used $2.2 million and financing activities provided $3.5 million.
Changes and management commentary
- Revenue declines were driven chiefly by weaker North American product demand, especially from web giant and enterprise customers. North American revenue fell 27% in Q3 and 32% in the first nine months. Japan revenue increased 8% in Q3 and 11% year to date.
- Gross margin decreased 1.1 percentage points in Q3 and 0.9 points year to date. Management cited product and geographic mix; services margin also faced higher professional-services staffing and logistics costs.
- Management said it expected sales and marketing, research and development, and general and administrative expenses for the remainder of 2019 to be consistent with Q3 levels. The filing provides no specific revenue or earnings guidance and says interim results may not indicate full-year results.
- The company said existing cash, securities, and other available resources should cover anticipated cash needs for at least 12 months. It also cautioned that additional financing, if needed, might not be available on acceptable terms.
- A new San Jose office sublease has a seven-year, eight-month term, approximately $262,000 monthly base rent in its first year, and approximately $26.4 million in total base rent, plus operating expenses.
Risks, contingencies, and unusual items
- Controls: Disclosure controls were deemed ineffective as of September 30, 2019 because previously identified material weaknesses in internal control over financial reporting remained unresolved. Remediation was ongoing and had not been tested for sufficient time to establish effectiveness.
- Strategic and leadership uncertainty: The Board formed a Strategy Committee and engaged an adviser to explore strategic alternatives, including a potential sale or change of control; no transaction was assured. CEO Lee Chen’s planned retirement had been announced, and a successor search was underway.
- Workforce reduction: After quarter-end, A10 began a planned reduction of approximately 5% of its workforce, expected to conclude by the end of Q2 2020. It estimated approximately $2 million in restructuring charges, primarily cash severance, to be expensed in Q4 2019.
- Legal/regulatory: The SEC informed the company in September 2019 that it had concluded its investigation and did not intend to recommend enforcement action. A securities class-action appeal was dismissed in October 2019; a related derivative action had been voluntarily dismissed in June 2019.
- Business risks: The filing highlights large, irregular customer purchases and concentration (the ten largest end-customers represented 35% of nine-month revenue), ongoing North American weakness, competition, foreign-exchange exposure, and reliance on third-party manufacturers and component suppliers.
- The company maintained a full valuation allowance against U.S. and certain foreign deferred tax assets. It reported $4.0 million of unrecognized tax benefits and no current tax examinations.
Important facts for investors to verify
- Whether product demand and revenue stabilize, particularly in North America, and whether service growth can offset product weakness.
- Progress in remediating material control weaknesses and any impact on reporting reliability or compliance costs.
- Developments in the strategic-alternatives review and CEO succession; neither a transaction nor its timing was assured.
- The timing, cash cost, and expected savings from the workforce reduction, alongside the new office lease commitment.
- Liquidity and operating cash use, including the status and terms of the credit facility as it approached the end of its stated three-year term.