A10 Networks, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. A10 provides hardware, software, and cloud-based application delivery and network security products, plus support and professional services.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $60.3 million | $53.8 million |
| Gross profit / margin | $46.1 million / 76.5% | $40.6 million / 75.4% |
| Operating loss | $4.3 million | $9.4 million |
| Net loss | $3.9 million | $9.5 million |
| Diluted net loss per share | $0.06 | $0.15 |
| Cash from operating activities | $0.5 million | $10.4 million |
- Revenue rose 12%: product revenue increased 9% to $39.7 million and services revenue increased 18% to $20.6 million.
- Gross margin improved 1.1 percentage points. Product margin declined 0.7 points to 75.4%, mainly due to geographic and product mix; services margin rose 4.8 points to 78.8%.
- Operating expenses increased 1% to $50.5 million. Higher R&D and G&A spending was partly offset by lower sales and marketing costs and no litigation expense, compared with $1.8 million in Q1 2016.
- Cash and cash equivalents were $30.6 million and marketable securities were $85.6 million at quarter-end. Working capital was $103.5 million; total liabilities were $132.4 million, including $93.1 million of deferred revenue.
- No borrowings were outstanding under the $25 million revolving credit facility; the company reported covenant compliance. The facility is secured by substantially all assets other than intellectual property.
Changes, outlook, and risks
- Operating loss narrowed by $5.1 million, and net loss narrowed by $5.6 million year over year. Revenue growth came from both products and services; service-provider revenue rose 27%, while enterprise revenue rose 2%.
- Operating cash flow fell to $0.5 million from $10.4 million, reflecting working-capital outflows, including inventory buildup and payments of accrued liabilities. Management cited improved receivables collections.
- Management expects to keep investing in product development and global sales and marketing, which may weigh on near-term profitability. It believes existing cash, securities, and other resources will cover anticipated needs for at least 12 months. No specific revenue or earnings guidance is provided.
- Quarterly results are exposed to large, irregular customer orders: the ten largest end-customers generated 49% of Q1 revenue, versus 38% a year earlier. Two distribution partners individually represented 13% and 12% of Q1 revenue.
- Other key risks include intense competition, long and unpredictable sales cycles, dependence on third-party manufacturers and limited-source components, product/security defects, foreign-exchange exposure, and international regulatory and economic risks.
- Two shareholder-related lawsuits were finally settled and dismissed in March 2017 without admission of liability or wrongdoing. A separate export-control matter involved trial software downloads by individuals in a U.S.-sanctioned country; Commerce closed its review without penalty, while Treasury’s response was pending at filing.
- The IRS was examining the company’s 2014 and 2015 tax returns. Management maintained a valuation allowance against U.S. and certain foreign deferred tax assets. Disclosure controls were assessed as effective; no material quarterly change in internal control was reported.
Important facts for investors to verify
- Whether the Q1 revenue growth and improving operating loss can continue despite customer concentration and order timing variability.
- Whether working-capital demands and lower operating cash generation persist, particularly given the inventory build for anticipated demand.
- How continued R&D and sales investment affects the path to profitability; the company reported losses in Q1 2017 and recent fiscal years.
- Any updates on the pending Treasury response to the export-control disclosure and on the IRS examination.
- Share repurchase status: no repurchases occurred in Q1; the filing states $18.2 million remained authorized at March 31, while describing approximately $1.8 million of purchases since authorization through that date.