A10 Networks(ATEN) - 2022 Q2 - Quarterly Report

Note Regarding Forward-Looking Statements This section outlines forward-looking statements, emphasizing their inherent risks and the company's policy against future updates, directing investors to public disclosures Forward-Looking Statements Disclosure This section identifies forward-looking statements within the report, highlighting that they are subject to risks, uncertainties, and assumptions, including those detailed in the "Risk Factors" section, and explicitly states that actual results may differ materially from these statements and that the company does not intend to update them, except as required by law, directing investors to the company's investor relations website, blog, and Twitter for important information - Forward-looking statements are identified by words like "believe," "may," "will," "estimate," "anticipate," "intend," "expect," and similar expressions[11] - These statements are subject to a number of risks, uncertainties, and assumptions, including those related to the COVID-19 pandemic, global semiconductor shortages, market adoption of products, ability to manage growth, competition, and macroeconomic climate[12][13] - The company does not guarantee future results and does not intend to update forward-looking statements after filing, except as required by law[15] - Investors are directed to the company's investor relations website, blog, and Twitter for important information, including news releases, analyst presentations, and SEC filings[16] Note Regarding COVID-19 This section details the ongoing COVID-19 pandemic's potential impact on the company's 2022 financial performance and operational responses implemented to mitigate risks COVID-19 Impact and Company Response The company acknowledges the ongoing COVID-19 pandemic and its potential negative impacts on revenue, operations, financial condition, liquidity, and capital investments in 2022 due to economic deterioration, supply chain disruptions, and modified business practices like work-from-home policies, having implemented measures such as work-from-home policies, ensuring remote work capability, maintaining focus on profitability, and closely monitoring its supply chain - COVID-19 continues to exist in operating areas and may negatively affect revenue, results of operations, financial condition, liquidity, and capital investments in 2022[18] - Measures taken include implementing work-from-home and social distancing policies, ensuring employee remote work capability, maintaining focus on improving profitability, and closely monitoring the supply chain[19][20] - Disruptions may include supply shortages of products or the ability to import, export, or sell products to customers in both the U.S. and international markets[18] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and financial performance Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for A10 Networks, Inc., including the balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, lease commitments, marketable securities, and other financial details for the periods ended June 30, 2022, and December 31, 2021 (for balance sheet) or June 30, 2021 (for income/cash flow statements) Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of June 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :--------------------------------- | :-------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $84,242 | $78,925 | | Marketable securities | $82,551 | $106,117 | | Accounts receivable, net | $67,908 | $61,795 | | Inventory | $21,926 | $22,462 | | Prepaid expenses and other current assets | $15,038 | $14,720 | | Total current assets | $271,665 | $284,019 | | Property and equipment, net | $15,046 | $10,692 | | Goodwill | $1,307 | $1,307 | | Deferred tax assets, net | $65,557 | $65,773 | | Other non-current assets | $30,990 | $31,294 | | Total assets | $384,565 | $393,085 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $5,567 | $6,852 | | Accrued liabilities | $36,870 | $36,101 | | Deferred revenue (current) | $80,022 | $73,132 | | Total current liabilities | $122,459 | $116,085 | | Deferred revenue (non-current) | $47,848 | $48,499 | | Other non-current liabilities | $19,499 | $19,613 | | Total liabilities | $189,806 | $184,197 | | Total stockholders' equity | $194,759 | $208,888 | | Total liabilities and stockholders' equity | $384,565 | $393,085 | Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenue, cost of revenue, operating expenses, and net income for the three and six months ended June 30, 2022 and 2021 Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue: | | | | | | Products | $41,475 | $34,363 | $78,520 | $64,903 | | Services | $26,498 | $24,805 | $52,125 | $49,108 | | Total revenue | $67,973 | $59,168 | $130,645 | $114,011 | | Cost of revenue: | | | | | | Products | $9,518 | $8,215 | $18,151 | $15,301 | | Services | $3,967 | $5,415 | $8,173 | $10,828 | | Total cost of revenue | $13,485 | $13,630 | $26,324 | $26,129 | | Gross profit | $54,488 | $45,538 | $104,321 | $87,882 | | Operating expenses: | | | | | | Sales and marketing | $21,773 | $19,749 | $44,555 | $38,841 | | Research and development | $14,235 | $13,491 | $27,122 | $27,472 | | General and administrative | $5,337 | $5,082 | $11,499 | $10,329 | | Total operating expenses | $41,345 | $38,322 | $83,176 | $76,642 | | Income from operations | $13,143 | $7,216 | $21,145 | $11,240 | | Income before provision for income taxes | $13,628 | $7,104 | $21,117 | $9,945 | | Provision for income taxes | $3,212 | $488 | $4,352 | $672 | | Net income | $10,416 | $6,616 | $16,765 | $9,273 | | Net income per share (Basic) | $0.14 | $0.09 | $0.22 | $0.12 | | Net income per share (Diluted) | $0.13 | $0.08 | $0.21 | $0.12 | Condensed Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income items, for the three and six months ended June 30, 2022 and 2021 Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $10,416 | $6,616 | $16,765 | $9,273 | | Unrealized loss on marketable securities | $(201) | $(19) | $(977) | $(107) | | Comprehensive income | $10,215 | $6,597 | $15,788 | $9,166 | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the company's stockholders' equity, including stock repurchases, dividends, and net income, for the periods ended June 30, 2022 and 2021 Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stockholders' equity (Beginning balance) | $185,977 | $124,659 | $208,888 | $115,974 | | Repurchase of common stock | $(3,436) | $(11,125) | $(31,758) | $(11,213) | | Payments for dividends | $(3,794) | $0 | $(7,663) | $0 | | Net income | $10,416 | $6,616 | $16,765 | $9,273 | | Total stockholders' equity (Ending balance) | $194,759 | $124,505 | $194,759 | $124,505 | Condensed Consolidated Statements of Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $24,740 | $19,436 | | Net cash provided by (used in) investing activities | $17,028 | $(27,133) | | Net cash used in financing activities | $(36,451) | $(7,635) | | Net increase (decrease) in cash and cash equivalents | $5,317 | $(15,332) | | Cash and cash equivalents—beginning of period | $78,925 | $83,281 | | Cash and cash equivalents—end of period | $84,242 | $67,949 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's business description, significant accounting policies, recent accounting pronouncements, lease obligations, marketable securities, inventory, property and equipment, accrued liabilities, deferred revenue, commitments, equity incentive plans, stock-based compensation, net income per share, income taxes, geographic information, revenue recognition, and subsequent events 1. Description of Business and Summary of Significant Accounting Policies This section describes A10 Networks' business, key products, revenue streams, and summarizes significant accounting policies and recent pronouncements - A10 Networks is a leading provider of networking solutions for next-generation networks, focusing on reliability, availability, scalability, and cybersecurity across cloud, on-premise, and hybrid environments[38] - Key product categories include Standalone Thunder Application Delivery Controller (ADC), Carrier-Grade Network Access Translation (CGNAT)/Convergent Firewall (CFW), and Thunder Threat Protection System (TPS) for DDOS protection/Secure Socket Layer Insight (SSLi), along with management tools like Harmony Controller and aGalaxy[39] - Revenue is primarily from hardware appliances with perpetual software licenses and related maintenance/support contracts, with sales conducted globally through a high-touch sales organization and channel partners[40][43] Significant Customers as % of Total Revenue | Customer | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Customer A | 20% | 10% | 18% | * | | Customer B | 11% | * | 10% | * | - The adoption of ASU 2016-13 (Credit Losses), ASU 2017-04 (Goodwill Impairment), ASU 2018-13 (Fair Value Measurement), ASU 2019-12 (Income Taxes), and ASU 2020-10 (Codification Improvements) did not have a significant impact on the condensed consolidated financial statements[56][57][58][59][60] 2. Leases This section provides details on the company's operating lease assets, liabilities, future lease payments, and total lease costs for the reported periods Operating Lease Assets and Liabilities (in thousands) | Metric | June 30, 2022 | | :------------------------ | :-------------- | | Total right-of-use assets | $23,546 | | Total operating lease liabilities | $23,862 | Aggregate Future Lease Payments (in thousands) | Period | Amount | | :--------------- | :------- | | Remainder of 2022 | $2,631 | | 2023 | $5,359 | | 2024 | $5,467 | | 2025 | $4,964 | | 2026 | $4,892 | | Thereafter | $2,414 | | Total lease payments | $25,727 | | Present value of lease liabilities | $23,862 | Total Lease Costs (in thousands) | Period | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total lease costs | $1,253 | $3,041 | $2,454 | $4,561 | 3. Marketable Securities and Fair Value Measurements This section details the company's marketable securities portfolio, fair value measurements, and any impairment charges for the reported periods Marketable Securities (in thousands) | Type | June 30, 2022 Fair Value | December 31, 2021 Fair Value | | :------------------------ | :----------------------- | :----------------------- | | Corporate securities | $40,705 | $62,421 | | U.S. Treasury and agency securities | $19,515 | $13,845 | | Commercial paper | $14,559 | $23,570 | | Asset-backed securities | $7,772 | $6,281 | | Total | $82,551 | $106,117 | Marketable Securities by Maturity (in thousands) | Maturity | June 30, 2022 Fair Value | | :--------------- | :----------------------- | | Less than 1 year | $65,596 | | 1 - 3 years | $16,955 | | Total | $82,551 | - All available-for-sale securities have been classified as current because they are available for use in current operations[65] - The company did not recognize any other-than-temporary impairment charges on securities in a continuous loss position during the three and six months ended June 30, 2022 and 2021[67] 4. Condensed Consolidated Financial Statement Details This section provides detailed breakdowns of inventory, property and equipment, and accrued liabilities, highlighting key changes and components Inventory (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :--------------- | :-------------- | :---------------- | | Raw materials | $10,831 | $10,774 | | Finished goods | $11,095 | $11,688 | | Total inventory | $21,926 | $22,462 | Property and Equipment, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :------------------------ | :-------------- | :---------------- | | Property and equipment, gross | $37,723 | $34,813 | | Less: accumulated depreciation | $(22,677) | $(24,121) | | Property and equipment, net | $15,046 | $10,692 | - Construction in process, primarily deferred software development costs, increased to $7.65 million as of June 30, 2022, from $4.82 million at December 31, 2021, with the largest project expected for release in Q4 2022[72] Accrued Liabilities (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :------------------------ | :-------------- | :---------------- | | Accrued compensation and benefits | $17,282 | $24,003 | | Accrued tax liabilities | $5,833 | $1,020 | | Lease liability | $4,664 | $3,983 | | Other | $9,091 | $7,095 | | Total accrued liabilities | $36,870 | $36,101 | 5. Commitments and Contingencies This section outlines the company's significant commitments, including lease obligations and purchase commitments, and potential contingent liabilities - Aggregate future lease payments for non-cancellable operating leases totaled $25.7 million as of June 30, 2022, expiring through July 2027[78] - Open purchase commitments with third-party manufacturers in Taiwan totaled $39.0 million as of June 30, 2022, expected to be paid within one year[80] - The company provides indemnifications for intellectual property infringement and product/service performance, which have not had a significant impact on financial statements[81] 6. Equity Incentive Plans, Stock-Based Compensation and Stock Repurchase Program This section details equity incentive plans, stock-based compensation expenses, and the company's stock repurchase program activities - As of June 30, 2022, 14,126,916 shares were available for future grant under the 2014 Equity Incentive Plan[84] - As of June 30, 2022, 1,251,660 shares were available for future issuance under the Amended 2014 Employee Stock Purchase Plan[85] Stock-Based Compensation Expense (in thousands) | Period | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total stock-based compensation | $2,861 | $2,491 | $6,313 | $6,891 | - Under the 2021 stock repurchase program, the company repurchased 0.2 million shares for $3.4 million in Q2 2022 and 2.4 million shares for $31.8 million in H1 2022[91] - As of June 30, 2022, $61.2 million remained available for repurchases under the 2021 Program[91] 7. Net Income Per Share This section presents basic and diluted net income per share calculations, including the weighted-average shares outstanding and anti-dilutive exclusions Net Income Per Share (except per share amounts) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $10,416 | $6,616 | $16,765 | $9,273 | | Weighted-average shares outstanding - basic | 75,893 | 76,774 | 76,343 | 76,745 | | Weighted-average shares outstanding - diluted | 78,306 | 79,316 | 78,809 | 79,501 | | Net income per share (Basic) | $0.14 | $0.09 | $0.22 | $0.12 | | Net income per share (Diluted) | $0.13 | $0.08 | $0.21 | $0.12 | - 56 thousand and 225 thousand potentially dilutive shares were excluded from diluted EPS calculations for the three and six months ended June 30, 2022, respectively, as their effect would have been anti-dilutive[94] 8. Income Taxes This section details the company's income tax expense, unrecognized tax benefits, and the impact of tax regulations on its financial statements Income Tax Expense (in millions) | Period | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $3.2 | $0.5 | $4.4 | $0.7 | - The income tax provision for Q2 and H1 2022 primarily consisted of U.S. taxes, while for Q2 and H1 2021, it was primarily foreign taxes[95] - The company had $6.8 million of unrecognized tax benefits as of June 30, 2022, with no material change anticipated in the next twelve months[97] - The Tax Act's requirement for capitalization of R&D costs starting in 2022 is not expected to materially impact the income tax provision[99][100] 9. Geographic Information This section provides a breakdown of revenue by geographic region and the location of long-lived assets, reflecting changes in reporting segments - Revenue reporting changed to Americas, Asia Pacific, and EMEA, combining Japan and Asia Pacific (excluding Japan) into Asia Pacific[101] Revenue by Geographic Region (in thousands) | Region | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $38,553 | $28,836 | $71,511 | $55,106 | | Asia Pacific | $21,614 | $23,267 | $39,403 | $43,221 | | EMEA | $7,806 | $7,065 | $19,731 | $15,684 | | Total revenue | $67,973 | $59,168 | $130,645 | $114,011 | - Long-lived assets (property and equipment, net, and operating lease right-of-use assets) totaled $38.6 million as of June 30, 2022, with $35.3 million in the United States[101] 10. Revenue This section details contract balances, deferred revenue, and recognized revenue from prior periods, along with deferred contract acquisition costs Contract Balances (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :------------------------ | :-------------- | :---------------- | | Accounts receivable, net | $67,908 | $61,795 | | Deferred revenue, current | $80,022 | $73,132 | | Deferred revenue, non-current | $47,848 | $48,499 | - Total deferred revenue was $127.9 million as of June 30, 2022, with $80.0 million expected to be recognized within one year[109] - Recognized revenue from deferred revenues at the beginning of the period was $19.6 million for Q2 2022 and $44.2 million for H1 2022[104][105] - Deferred contract acquisition costs were $7.1 million (current) and $4.0 million (non-current) as of June 30, 2022. Amortization expense was $2.1 million for Q2 2022 and $4.2 million for H1 2022[107] 11. Subsequent Events This section discloses significant events occurring after the reporting period, including dividend declarations and their implications - A quarterly dividend of $0.05 per share was declared on August 2, 2022, payable September 1, 2022, to shareholders of record on August 15, 2022[110] - Future dividends are subject to Board review and approval, based on results, financial condition, cash requirements, and other factors[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, detailed analysis of revenue, cost of revenue, gross profit, operating expenses, and non-operating items, also discussing liquidity, capital resources, cash flows, contractual obligations, and critical accounting policies, highlighting key trends and factors influencing performance for the three and six months ended June 30, 2022, compared to 2021 Overview This section provides a high-level business description, product portfolio, revenue sources, and key financial highlights for the reporting period - A10 Networks is a leading provider of networking solutions focused on reliability, availability, scalability, and cybersecurity for cloud, on-premise, or hybrid environments[113] - Product portfolio includes Thunder ADC, CGNAT/CFW, and Thunder TPS for DDOS protection/SSLi, offered in various form factors and licensing models[114] - Revenue is derived from sales of hardware appliances with perpetual software licenses and related maintenance and support contracts[115] - In Q2 2022, Americas generated 57% of total revenue (up from 49% in Q2 2021), Asia Pacific 32% (down from 39%), and EMEA 11% (down from 12%)[119] - Service provider customers accounted for 65% of total revenue in Q2 2022 (up from 61% in Q2 2021), and enterprise customers 35% (down from 39%)[119] - Purchases by the top ten end-customers accounted for 49% of total revenue in Q2 2022 (up from 37% in Q2 2021), indicating reliance on a limited number of large customers[120] - As of June 30, 2022, cash and cash equivalents were $84.2 million, and marketable securities were $82.6 million. Cash provided by operating activities was $24.7 million for H1 2022, compared to $19.4 million for H1 2021[121] Results of Operations Total revenue increased 14.9% to $68.0 million for Q2 2022 and 14.6% to $130.6 million for H1 2022, driven by product and service revenue growth, while gross profit increased 19.7% to $54.5 million for Q2 2022 and 18.7% to $104.3 million for H1 2022, operating expenses increased 7.9% to $41.3 million for Q2 2022 and 8.5% to $83.2 million for H1 2022, and net income rose significantly, up 57.4% to $10.4 million for Q2 2022 and 80.8% to $16.8 million for H1 2022 Revenue This section analyzes the company's revenue performance, breaking down product and service revenue by geographic region and customer type for the reported periods Total Revenue (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Products revenue | $41,475 (61% of total) | $34,363 (58% of total) | $78,520 (60% of total) | $64,903 (57% of total) | | Services revenue | $26,498 (39% of total) | $24,805 (42% of total) | $52,125 (40% of total) | $49,108 (43% of total) | | Total revenue | $67,973 (100% of total) | $59,168 (100% of total) | $130,645 (100% of total) | $114,011 (100% of total) | - Total revenue increased $8.8 million (15%) in Q2 2022 and $16.6 million (15%) in H1 2022, primarily due to increases in the Americas and EMEA regions, partially offset by a decrease in Asia Pacific[129][130] - The overall revenue increase was driven by an $8.2 million increase from service provider customers in Q2 2022 (especially Americas, up $10.9 million) and a $15.0 million increase from service provider customers in H1 2022 (especially Americas, up $17.6 million)[129][130] - Products revenue increased 21% in both Q2 and H1 2022, driven by increased demand from service provider customers in the Americas and EMEA[131][132] - Services revenue increased 7% in Q2 2022 and 6% in H1 2022, attributable to increased PCS sales from a growing installed customer base[133] - Americas revenue increased 34% in Q2 2022 and 30% in H1 2022, primarily due to higher products revenue from service providers[134][135] - Asia Pacific revenue decreased 7% in Q2 2022 and 9% in H1 2022, due to lower products revenue from service provider customers[136][137] - EMEA revenue increased 10% in Q2 2022 and 26% in H1 2022, driven by higher products revenue from service provider customers[138][139] Cost of Revenue, Gross Profit and Gross Margin This section details the cost of revenue, gross profit, and gross margin for products and services, analyzing changes and contributing factors for the reported periods Cost of Revenue (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Products cost of revenue | $9,518 (15.9% increase) | $8,215 | $18,151 (18.6% increase) | $15,301 | | Services cost of revenue | $3,967 (26.7% decrease) | $5,415 | $8,173 (24.5% decrease) | $10,828 | | Total cost of revenue | $13,485 (1.1% decrease) | $13,630 | $26,324 (0.7% increase) | $26,129 | - Products cost of revenue increased due to higher products revenue and changes in product/geographic mix[143] - Services cost of revenue decreased due to the mix of services delivered (technical support, training, service costs)[144] Gross Profit and Gross Margin (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Products gross profit | $31,957 (77.1% margin) | $26,148 (76.1% margin) | $60,369 (76.9% margin) | $49,602 (76.4% margin) | | Services gross profit | $22,531 (85.0% margin) | $19,390 (78.2% margin) | $43,952 (84.3% margin) | $38,280 (78.0% margin) | | Total gross profit | $54,488 (80.2% margin) | $45,538 (77.0% margin) | $104,321 (79.9% margin) | $87,882 (77.1% margin) | - Products gross margin increased due to changes in product and geographic mix, and increased products revenue in the Americas[149] - Services gross margin increased due to the mix of services delivered[150] Operating Expenses This section provides an analysis of sales and marketing, research and development, and general and administrative expenses, highlighting key drivers and trends Operating Expenses (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales and marketing | $21,773 (10.2% increase) | $19,749 | $44,555 (14.7% increase) | $38,841 | | Research and development | $14,235 (5.5% increase) | $13,491 | $27,122 (1.3% decrease) | $27,472 | | General and administrative | $5,337 (5.0% increase) | $5,082 | $11,499 (11.3% increase) | $10,329 | | Total operating expenses | $41,345 (7.9% increase) | $38,322 | $83,176 (8.5% increase) | $76,642 | - Sales and marketing expenses increased due to higher employee headcount and associated personnel costs[154] - R&D expenses increased in Q2 2022 due to consulting costs but decreased in H1 2022 due to lower personnel costs, partially offset by consulting costs[157][158] - G&A expenses increased due to higher consulting costs for outsourced functions[161] - The company expects sales and marketing, R&D, and G&A expenses to remain at 2021 levels in 2022, with a disciplined focus on high-opportunity investments[155][159][161] Interest and Other Expense, Net This section discusses non-operating income and expenses, primarily focusing on foreign exchange gains and losses and their impact on financial results - Favorable changes in interest and other expense, net, were $0.6 million for Q2 2022 and $1.3 million for H1 2022, primarily due to foreign exchange gains and losses[163] - The company incurred $0.4 million in foreign exchange gains in Q2 2022 (vs. $0.1 million loss in Q2 2021) and immaterial foreign currency exchange losses in H1 2022 (vs. $1.3 million losses in H1 2021), mainly driven by Japanese Yen/U.S. Dollar fluctuations[163] Provision for Income Taxes This section details the company's income tax provision, including its composition and the primary factors influencing tax expense for the reported periods Income Tax Provisions (in millions) | Period | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax provision | $3.2 | $0.5 | $4.4 | $0.7 | - The income tax provision for Q2 and H1 2022 primarily consisted of U.S. federal and state taxes, compared to primarily foreign taxes in the same periods of 2021[164] Liquidity and Capital Resources This section assesses the company's financial liquidity, capital resources, and ability to meet future cash needs, including details on cash, marketable securities, and capital allocation programs - As of June 30, 2022, cash and cash equivalents were $84.2 million (including $2.6 million held outside the U.S.), and marketable securities were $82.6 million[165] - Working capital was $149.2 million, accumulated deficit was $160.6 million, and total stockholders' equity was $194.8 million as of June 30, 2022[165] - Management believes existing cash and marketable securities will be sufficient to meet anticipated cash needs for at least the next 12 months and beyond[166] - The company has a $100 million stock repurchase program (authorized October 2021) with $61.2 million available as of June 30, 2022[167] - A regular quarterly cash dividend of $0.05 per share was initiated in October 2021, with payments made in December 2021, March 2022, and June 2022[168] Statements of Cash Flows This section provides a detailed breakdown of cash flows from operating, investing, and financing activities, explaining significant changes between periods Summary of Cash Flow Activities (in thousands) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------ | :----------------------------- | :----------------------------- | | Operating activities | $24,740 | $19,436 | | Investing activities | $17,028 | $(27,133) | | Financing activities | $(36,451) | $(7,635) | | Net increase (decrease) in cash and cash equivalents | $5,317 | $(15,332) | | Cash and cash equivalents—beginning of period | $78,925 | $83,281 | | Cash and cash equivalents—end of period | $84,242 | $67,949 | - Cash provided by operating activities in H1 2022 was $24.7 million, driven by net income ($16.8 million) and non-cash charges ($10.1 million), partially offset by a $2.2 million decrease from changes in operating assets and liabilities[173] - Cash provided by investing activities in H1 2022 was $17.0 million, primarily from maturities of marketable securities ($39.1 million), partially offset by purchases of marketable securities ($21.6 million) and property and equipment ($5.0 million)[177] - Cash used in financing activities in H1 2022 was $36.5 million, primarily for stock repurchases ($31.8 million) and cash dividend payments ($7.7 million)[179] Contractual Obligations This section outlines the company's significant contractual commitments, including lease obligations and uncertain tax positions, and their expected timing of settlement - Contractual obligations for non-cancellable operating lease arrangements totaled $25.7 million as of June 30, 2022, with various expiration dates through July 2027[181] - The company has $6.8 million in tax liabilities related to uncertain tax positions as of June 30, 2022, with an unreliable estimate for timing of settlement[182] Critical Accounting Policies and Estimates This section describes the key accounting policies and estimates that require significant management judgment and their potential impact on the financial statements - Financial statements require estimates and assumptions for revenue recognition, allowances, marketable securities valuation, contingencies, and stock-based compensation[183] - No material changes to significant accounting policies occurred during the six months ended June 30, 2021[184] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily foreign currency risk and interest rate sensitivity, noting that foreign currency fluctuations, particularly involving the Japanese Yen, British Pound, and Euro against the U.S. Dollar, can impact operating income, though a hypothetical 10% change in exchange rates would not have a significant impact, and interest rate sensitivity relates to marketable securities, where a hypothetical 10% change in interest rates would not materially impact interest expense Foreign Currency Risk This section assesses the company's exposure to foreign currency fluctuations, particularly the Japanese Yen, and its potential impact on operating results - Majority of revenue contracts are in U.S. Dollars, except for Japan (Japanese Yen), while expenses are in local currencies (Americas, EMEA, Asia Pacific)[185] - Foreign currency exchange gains were $0.4 million in Q2 2022 (vs. $0.1 million losses in Q2 2021) and immaterial losses in H1 2022 (vs. $1.3 million losses in H1 2021), mainly driven by Japanese Yen/U.S. Dollar fluctuations[187][188] - A hypothetical 10% change in exchange rates would not have a significant impact on consolidated results of operations[188] Interest Rate Sensitivity This section evaluates the company's exposure to interest rate changes, primarily concerning marketable securities, and its potential impact on financial performance - Market risk for interest rates relates primarily to marketable securities, which had an aggregate fair market value of $82.6 million as of June 30, 2022[189] - A hypothetical 10% change in interest rates would not have a material impact on interest expense[189] Hypothetical Fair Values of Marketable Securities (in thousands) | Scenario | Fair Value as of 3/31/2022 | | :--------------- | :------------------------- | | -150 BPS | $85,551 | | -100 BPS | $83,441 | | -50 BPS | $83,147 | | 0 BPS | $82,852 | | +50 BPS | $82,245 | | +100 BPS | $81,939 | | +150 BPS | $81,632 | Item 4. Controls and Procedures This section details management's evaluation of the company's disclosure controls and procedures and internal control over financial reporting, concluding that as of June 30, 2022, the CEO and CFO found disclosure controls and procedures effective at a reasonable assurance level, with no material changes to internal control over financial reporting occurring during Q2 2022, despite remote work challenges Management's Evaluation of Disclosure Controls and Procedures This section details management's assessment of the effectiveness of the company's disclosure controls and procedures as of the reporting date - As of June 30, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[193] - Disclosure controls are designed to ensure timely recording, processing, summarizing, and reporting of information required for SEC filings[191] Changes in Internal Control over Financial Reporting This section reports on any material changes to the company's internal control over financial reporting during the quarter and ongoing monitoring efforts - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2022[194] - The company is monitoring and assessing the impact of COVID-19 and remote work on internal controls to minimize any impact on their design and operating effectiveness[194] Inherent Limitations on Effectiveness of Controls This section acknowledges the inherent limitations of control systems, emphasizing that they provide reasonable, not absolute, assurance of achieving objectives - Control systems provide only reasonable, not absolute, assurance of achieving objectives due to resource constraints and judgment application[196] - Controls may become inadequate over time due to changing conditions or deterioration in compliance[196] PART II. OTHER INFORMATION This part covers legal proceedings, comprehensive risk factors, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is involved in various legal proceedings with uncertain outcomes, where management assesses the probability and amount of potential losses, recording liabilities when probable and estimable, noting that judgments are subjective and may differ from actual outcomes, potentially harming the business - The company is involved in various legal proceedings, the outcomes of which are not within its complete control or may not be known for prolonged periods of time[198] - A liability for claims is recorded when a loss is deemed probable and the amount can be reasonably estimated, based on subjective judgments that may differ materially from actual outcomes[198] - Any adverse settlements or judgments in litigation could have a material adverse impact on the company's results of operations, cash balances, and cash flows[169] Item 1A. Risk Factors This comprehensive section outlines significant risks that could materially harm the company's business, financial condition, operating results, and stock price, categorizing these risks into those related to business operations and industry, intellectual property and legal/regulatory matters, and capitalization and financial markets, covering a wide range of potential challenges from market competition and technological changes to global economic conditions and legal compliance Risks Related to Our Business, Operations and Industry This section details risks concerning business operations, including market competition, product development, supply chain disruptions, and reliance on key customers - The COVID-19 pandemic could have a material adverse effect on operations, supply chain (e.g., global semiconductor shortage), and customer demand, potentially causing business interruptions and harming financial results[200][202][203] - Failure to anticipate market needs, timely develop new products/features, or achieve widespread market acceptance for application delivery solutions could significantly harm business and operating results[204][206][207][209] - Operating results are highly variable and unpredictable due to factors like the timing and size of large customer sales, reliance on end-of-quarter shipments, variations in product/geographic mix, and intense competition[214][215][217] - Intense competition from larger, well-established companies in traditional ADC, CGN, DDoS protection, and SSL decryption markets could lead to fewer customer orders, price reductions, and loss of market share[218][219][220][223] - Cloud-based computing trends present competitive and execution risks, requiring significant resources to develop new cloud solutions and adapt to evolving deployment and payment models[224] - Reliance on a limited number of large end-customers (e.g., service providers, accounting for approximately 65% of H1 2022 revenue) makes the company vulnerable to the loss or delay of expected purchases[226][229] - Real or perceived defects, errors, or vulnerabilities in products or services, or failure to prevent security breaches, could harm reputation, lead to declining sales, increased expenses, and potential litigation[251][252][253][255][256] - Dependence on third-party manufacturers (Lanner and AEWIN in Taiwan) exposes the company to supply disruptions, quality control problems, and geopolitical risks (e.g., Taiwan-China tensions)[246] - Use of open source software carries risks of license non-compliance and potential litigation, which could require licensing proprietary portions or redesigning products[257][258][260] Risks Related to Intellectual Property, Litigation, Laws and Regulations This section outlines risks related to intellectual property, legal proceedings, regulatory compliance, data security, and international trade policies - The company is subject to frequent intellectual property claims and litigation, which can be time-consuming, expensive, and may require paying damages/royalties or altering products[285][287] - Inadequate protection of intellectual property (patents, copyrights, trademarks, trade secrets) could harm competitive position, allow competitors access to technology, or incur significant enforcement expenses[290][291][292] - Exposure to UK political developments, including the effects of Brexit, creates economic uncertainty and potential adverse impacts on operating results and financial condition[295][298] - Enhanced U.S. tariffs, import/export restrictions, and Chinese regulations could increase costs, reduce profits, and negatively impact global economic conditions and the company's business[299][301] - Failure to protect and ensure confidentiality and security of data could lead to legal liability, reputational damage, and significant costs for security breaches or regulatory penalties (e.g., GDPR, CCPA)[302][303][304][306][307] - Non-compliance with various governmental laws and regulations (employment, environmental, anti-bribery, export/import controls, tax) could result in investigations, sanctions, fines, and adverse effects on business[310][311][313] - The ability to use net operating loss carryforwards may be limited by ownership changes, potentially increasing future tax liability[314] Risks Related to Capitalization and Financial Markets This section addresses risks associated with the company's capital structure, financial markets, stock price volatility, and shareholder value initiatives - Fluctuations in currency exchange rates, especially the Japanese Yen, can negatively affect results of operations, despite hedging practices[328] - Concentration of ownership (13% by executive officers/directors, 38% including 5%+ holders) may prevent new investors from influencing significant corporate decisions[329] - Future needs for additional funds may lead to dilution for existing stockholders if raised through equity or convertible debt, or restrictive covenants if through debt financing[330] - The price of common stock has been and may continue to be volatile due to