A10 Networks, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. A10 sells application networking and network security products—including ADC, CGN, TPS and CFW solutions—and related support services to enterprises and service providers globally.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $53.8 million | $44.0 million | +22.2% |
| Products revenue | $36.4 million | $30.5 million | +19.2% |
| Services revenue | $17.4 million | $13.5 million | +29.1% |
| Gross profit / margin | $40.6 million / 75.4% | $33.2 million / 75.5% | Gross profit +22.1%; margin down 0.1 percentage point |
| Operating loss | $9.4 million | $13.6 million | Improved $4.2 million |
| Net loss | $9.5 million; $0.15 per share | $13.7 million; $0.22 per share | Loss narrowed $4.2 million |
| Operating cash flow | $10.4 million provided | $5.5 million used | Improved $15.9 million |
Revenue growth was broad across products and services. Enterprise customer revenue grew 29% and service-provider revenue 14%. By geography, the United States grew 29%, Japan 23% and Asia Pacific excluding Japan 47%; EMEA declined 19%. Ten largest end-customers generated approximately 38% of revenue, versus 42% in Q1 2015. Enterprise customers represented 60% of Q1 2016 revenue, compared with 57% a year earlier.
Liquidity, cash flow and debt
- At March 31, 2016, cash and cash equivalents were $38.2 million and marketable securities were $69.3 million, totaling $107.5 million; the combined amount was $98.1 million at December 31, 2015. The cash balance fell mainly as the company invested $69.5 million in marketable securities.
- Working capital was $88.3 million. Operating cash flow benefited primarily from a $15.6 million decrease in accounts receivable and a $2.0 million increase in deferred revenue; management attributed the receivables decline to improved collections.
- Investing cash outflow was $70.7 million, chiefly securities purchases; financing cash inflow was $0.3 million. Capital expenditures were $1.4 million.
- No borrowings were outstanding under the $35 million revolving credit facility, and the company reported covenant compliance. The facility was scheduled to expire September 30, 2016; substantially all assets, including intellectual property, secure the facility.
- Total liabilities were $110.1 million, including $74.8 million of deferred revenue. The filing reports no outstanding borrowings, but does not provide a separate total-debt figure in the balance sheet.
Material changes and notable items
- Operating expenses increased 6.8% to $50.0 million. Sales and marketing rose 9% and R&D 3%, while G&A fell 12%. Litigation expense increased to $1.8 million from $0.4 million, primarily reflecting legal fees and settlement costs related to the securities class action.
- Product gross margin declined 0.8 percentage point, primarily due to increased inventory reserves, partly offset by improved sales mix. Services gross margin increased 1.6 percentage points, reflecting services revenue growth, partly offset by higher personnel and professional-services costs.
- On April 6, 2016, after quarter-end, the parties to a putative securities class action reached an agreement in principle under which A10 would pay $0.8 million net of expected insurance proceeds. Settlement remained subject to stockholder notice, court approval and customary conditions. A related derivative action remained pending; A10 stated it would defend it.
- Customer concentration remains material: one customer represented 11% of Q1 revenue and 16% of gross accounts receivable at March 31. Purchases from large customers may be irregular and difficult to predict.
- Stock-based compensation was $4.6 million, broadly unchanged year over year. Unrecognized stock-based compensation was $33.3 million, expected to be recognized over a weighted-average 2.8 years.
Outlook, commentary and risks
Management gave no numerical revenue or earnings guidance. It plans continued investment in product development and global sales and marketing, and expects these investments and general and administrative costs to increase in absolute dollars, potentially affecting near-term profitability. Management believes available cash, cash equivalents, marketable securities and other resources will meet anticipated cash needs for at least the next 12 months.
The company continued to report net losses and cautioned that results may fluctuate because of large, irregular customer orders, long sales cycles, quarter-end shipment timing, competition, product mix, foreign exchange, inventory requirements and litigation. Other highlighted exposures include reliance on third-party manufacturers and limited-source components, product defects or security failures, international operations and currency movements. A10 had no currency hedging arrangements; management said a hypothetical 10% exchange-rate change would not significantly affect Q1 results. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material changes in internal control over financial reporting reported for the quarter.
Key facts for investors to verify
- Whether the securities class-action settlement receives court approval and the final cash cost after insurance, and the outcome of the derivative litigation.
- Whether revenue growth and services renewals continue, and whether customer concentration or delayed large orders cause quarterly volatility.
- Whether Q1 operating cash generation is sustainable: it relied substantially on improved receivables collections and working-capital movements.
- The status and terms of the revolving credit facility after its September 30, 2016 expiration date.
- Whether planned spending, competition and product investments—including the recently shipping CFW offering—affect margins and the path to profitability.