A10 Networks(ATEN) - 2018 Q4 - Annual Report

Part I Business A10 Networks provides secure application solutions and services for cloud providers, service providers, and enterprises - The company's business is driven by industry trends such as the increased adoption of multi-cloud applications, rising complexity of network infrastructure, the growing importance of automation, and the proliferation of DDoS attacks and encrypted threats[15][16][17] - A10's product portfolio consists of six secure application solutions and two intelligent management tools, available in various form factors including hardware, virtual, and cloud-native software[26][29] - The core technology is the Advanced Core Operating System (ACOS), a proprietary software platform optimized for multi-core CPUs, which enables high performance and scalability for its products[48][49] Key Financial and Customer Metrics (2016-2018) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenue | $232.2M | $235.4M | $227.3M | | Gross Margin | 77.7% | 77.4% | 76.1% | | Net Loss | ($27.6M) | ($10.8M) | ($22.4M) | | Top 10 Customer Revenue % | 37% | 35% | 36% | - The company faces competition from traditional ADC vendors like F5 Networks and Citrix, cloud-based ADC services, CGN product vendors like Cisco and Juniper, and DDoS protection providers like Arbor Networks and Radware[63] - A10 outsources its hardware manufacturing to partners including Lanner Electronics and AEWIN Technologies, allowing it to reduce costs and adjust to demand[68] Risk Factors The company faces significant risks from material weaknesses in internal controls, intense competition, customer concentration, and international operations - The company has identified material weaknesses in its internal control over financial reporting as of December 31, 2018, and 2017, concluding that its disclosure controls and procedures were not effective[80][81] - A10 faces intense competition from larger, well-established companies such as F5 Networks, Citrix Systems, Cisco Systems, and Juniper Networks, which have greater resources[108][109][110] - A significant portion of revenue comes from a limited number of large end-customers, with the top ten accounting for 37% of total revenue in 2018[123][124] - International sales constitute a significant portion of revenue (55% in 2018), exposing the company to risks such as currency fluctuations, trade restrictions, and political instability[148][149][152] - The company outsources hardware manufacturing to third parties, primarily in Taiwan, creating risks related to supply chain disruption, quality control, and product costs[170][171] - Enhanced U.S. tariffs on imports from China, effective September 2018, are expected to increase costs and could negatively impact business[166] - The company will lose its "emerging growth company" status effective December 31, 2019, which will increase compliance costs, particularly related to the Sarbanes-Oxley Act[272][273] Unresolved Staff Comments The company reports that it has no unresolved comments from the SEC staff - None[287] Properties The company leases its corporate headquarters in San Jose, California, and other offices globally - The corporate headquarters is a leased space of 79,803 square feet in San Jose, California, under a lease agreement expiring on January 31, 2020[289] - The company maintains additional leased offices in various international locations, including China, Japan, the United Kingdom, the Netherlands, Taiwan, Korea, Singapore, and India[289] Legal Proceedings The company is involved in various legal proceedings arising in the ordinary course of business - The company evaluates legal proceedings and records a liability when a loss is probable and reasonably estimable, with further details in Note 6 of the financial statements[290][291] Mine Safety Disclosures This item is not applicable to the company - Not applicable[292] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, and a $20.0 million share repurchase program expired unused in 2018 - The company's common stock is listed on the New York Stock Exchange under the symbol "ATEN"[294] - A share repurchase program for up to $20.0 million, authorized in October 2017, expired in October 2018 without any shares being repurchased[296] Selected Financial Data This section presents five years of selected financial data, showing fluctuating revenue and consistent net losses Selected Consolidated Financial Data (2014-2018) | (in thousands, except per share) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $232,223 | $235,429 | $227,297 | $196,285 | $179,507 | | Gross Profit | $180,327 | $182,111 | $172,884 | $147,883 | $136,570 | | Net Loss | $(27,617) | $(10,751) | $(22,391) | $(41,897) | $(35,870) | | Net Loss Per Share | $(0.38) | $(0.15) | $(0.34) | $(0.67) | $(0.74) | | Total Assets | $235,876 | $224,858 | $216,733 | $189,892 | $186,980 | | Total Stockholders' Equity | $103,883 | $98,386 | $82,752 | $78,205 | $96,565 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 1% revenue decrease and a widened net loss in 2018, driven by lower product sales and investigation costs Overview The company derives revenue from products and services across service provider, enterprise, and web giant customer verticals Revenue by Geography (2016-2018) | Region | 2018 % | 2017 % | 2016 % | | :--- | :--- | :--- | :--- | | United States | 45% | 49% | 51% | | Japan | 24% | 22% | 23% | | Other | 31% | 29% | 26% | Revenue by Customer Vertical (2016-2018) | Vertical | 2018 % | 2017 % | 2016 % | | :--- | :--- | :--- | :--- | | Service Providers | 43% | 47% | 48% | | Enterprises | 39% | 39% | 41% | | Web Giants | 18% | 14% | 11% | Results of Operations Total revenue decreased 1% in 2018 while net loss widened significantly due to a 41% increase in G&A expenses Revenue Comparison (2017 vs 2018) | (in thousands) | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Products Revenue | $144,682 | $149,903 | (3.5)% | | Services Revenue | $87,541 | $85,526 | 2.4% | | Total Revenue | $232,223 | $235,429 | (1.4)% | Profitability Comparison (2017 vs 2018) | (in thousands) | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Gross Profit | $180,327 | $182,111 | (1.0)% | | Loss from Operations | $(27,679) | $(10,372) | (166.9)% | | Net Loss | $(27,617) | $(10,751) | (156.9)% | - The increase in General and Administrative expenses in 2018 was primarily driven by $8.6 million in fees related to an internal investigation[355] - The adoption of ASC 606 in 2018 resulted in a $2.6 million increase in products revenue for the year[317][321] Liquidity and Capital Resources The company maintains a strong liquidity position with sufficient resources to meet cash needs for the next 12 months Cash Flow Summary (in thousands) | Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating Activities | $(2,694) | $14,314 | $18,778 | | Investing Activities | $(6,876) | $(5,142) | $(96,355) | | Financing Activities | $3,624 | $8,420 | $8,435 | - As of December 31, 2018, the company had cash and cash equivalents of $40.6 million and marketable securities of $87.8 million[367] - The company has a $25.0 million revolving credit facility with Silicon Valley Bank, with no outstanding balance as of December 31, 2018[371][373] Contractual Obligations as of Dec 31, 2018 (in thousands) | Obligation Type | Total | Less than 1 Year | 1 to 3 Years | | :--- | :--- | :--- | :--- | | Operating leases & other | $7,335 | $3,907 | $3,428 | | Purchase commitments | $19,296 | $19,296 | $0 | | Total | $26,631 | $23,203 | $3,428 | Critical Accounting Policies and Estimates Critical accounting policies involve significant judgments, particularly for inventory valuation and revenue recognition - Key estimates are required for inventory valuation, where management assesses future demand and market conditions to identify excess and obsolete products[394] - Revenue recognition requires significant judgment, especially in allocating the transaction price to multiple performance obligations based on their standalone selling prices (SSP)[399][400] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign currency exposure from Japanese yen revenue and interest rate risk on its investment portfolio - The company is exposed to foreign currency risk, as a significant portion of its revenue, particularly from Japan, is denominated in Japanese yen[406] - Interest rate risk primarily relates to the company's portfolio of marketable securities, which had a fair value of $87.8 million as of December 31, 2018[411] Interest Rate Sensitivity of Marketable Securities (as of Dec 31, 2018) | Change in Interest Rates | Hypothetical Fair Value (in thousands) | | :--- | :--- | | -100 BPS | $88,274 | | Current Fair Value | $87,754 | | +100 BPS | $87,234 | Financial Statements and Supplementary Data This section includes the audited consolidated financial statements, the independent auditor's report, and accompanying notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified audit opinion on the company's consolidated financial statements - The auditor, Deloitte & Touche LLP, provided an unqualified opinion on the financial statements[416][421] - The report explicitly notes the change in accounting principle for revenue from contracts with customers (ASC 606) adopted in 2018[417] Consolidated Financial Statements The financial statements present the company's financial position, showing total assets of $235.9 million and a net loss of $27.6 million for 2018 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Current Assets | $214,939 | $203,802 | | Total Assets | $235,876 | $224,858 | | Total Current Liabilities | $97,367 | $92,726 | | Total Liabilities | $131,993 | $126,472 | | Total Stockholders' Equity | $103,883 | $98,386 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenue | $232,223 | $235,429 | $227,297 | | Gross Profit | $180,327 | $182,111 | $172,884 | | Loss from Operations | $(27,679) | $(10,372) | $(20,570) | | Net Loss | $(27,617) | $(10,751) | $(22,391) | Notes to Consolidated Financial Statements The notes detail the adoption of ASC 606, ongoing legal proceedings, and significant tax attributes - The adoption of new revenue standard ASC 606 on January 1, 2018, resulted in a cumulative-effect adjustment that reduced the opening accumulated deficit by $12.4 million[479] - The company is subject to an ongoing private investigation by the SEC regarding possible violations of securities laws, but cannot predict the outcome or estimate a possible range of loss[526] - As of December 31, 2018, the company had U.S. federal net operating loss carryforwards of $185.0 million and state net operating loss carryforwards of $75.3 million, subject to a full valuation allowance[565][566] - In 2018, two distribution channel partners, Customer A and Customer B, accounted for 14% and 10% of total revenue, respectively[471] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[587] Controls and Procedures Management concluded that disclosure controls and procedures were not effective due to material weaknesses in internal control - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018, due to material weaknesses in internal control over financial reporting[590] - The material weaknesses relate to the control environment, monitoring activities, and revenue recognition, and continue to be present as of December 31, 2018[595] - Remediation actions are underway, including reinforcing compliance, hiring new personnel, enhancing training, and implementing improved policies[597][598][599] Other Information The company reports no other information for this item - None[605] Part III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Stockholders[607] Executive Compensation Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Stockholders[608] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Stockholders[608] Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Stockholders[609] Principal Accountant Fees and Services Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Stockholders[610] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Annual Report, including financial statements and exhibits - This section contains a list of the consolidated financial statements and all exhibits filed with the report, as required by Item 601 of Regulation S-K[612][614] Form 10-K Summary The company indicates that there is no Form 10-K summary provided - None[618]