A10 Networks(US:ATEN)2022-11-02 16:00markdown [Note Regarding Forward-Looking Statements](index=4&type=section&id=Note%20Regarding%20Forward-Looking%20Statements) This section outlines the company's forward-looking statements, identifying key phrases, covered topics, risks, and official disclosure channels - Forward-looking statements are identified by words such as "believe," "may," "will," "estimate," "anticipate," and similar expressions conveying uncertainty of future events or outcomes[6](index=6&type=chunk) - Topics covered by forward-looking statements include the impact of COVID-19, semiconductor shortages, revenue growth, market needs, new product introductions, competition, liquidity, stock repurchase programs, and dividends[7](index=7&type=chunk) - Actual results may differ materially from forward-looking statements due to various risks, including those described in the "Risk Factors" section and the rapidly changing environment, such as the COVID-19 pandemic[8](index=8&type=chunk)[9](index=9&type=chunk) - The company uses its investor relations website, company blog, and corporate Twitter account to post important information for investors and for disclosing material non-public information[11](index=11&type=chunk) [Note Regarding COVID-19](index=5&type=section&id=Note%20Regarding%20COVID-19) This section details the ongoing impact of COVID-19 on operations, supply chain, financial performance, and responsive measures - The COVID-19 pandemic, declared in March 2020, continues to affect areas where the company operates and sells products and services, leading to significant deterioration of economic conditions in many countries[12](index=12&type=chunk) - The company implemented business practice modifications, including work-from-home policies and travel restrictions, which may still affect operations, contract manufacturers, and vendors[12](index=12&type=chunk) - Disruptions caused by COVID-19 may negatively affect revenue, results of operations, financial condition, liquidity, and capital investments in 2022 due to potential supply shortages or limitations on import/export/sales[12](index=12&type=chunk) - Measures taken include implementing work-from-home and social distancing, ensuring remote work capability, maintaining focus on profitability, and closely monitoring the supply chain[13](index=13&type=chunk) [PART I. FINANCIAL INFORMATION](index=8&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents A10 Networks' unaudited condensed consolidated financial statements, including balance sheets, income, equity, cash flows, and detailed accounting notes [Item 1. Condensed Consolidated Financial Statements (unaudited)](index=8&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(unaudited)) This chapter presents the company's core unaudited financial statements, including balance sheets, income, equity, and cash flows for specified periods [Condensed Consolidated Balance Sheets](index=8&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | **Assets:** | | | | Cash and cash equivalents | **$32,131** | **$78,925** | | Marketable securities | **$95,642** | **$106,117** | | Accounts receivable, net | **$73,500** | **$61,795** | | Inventory | **$21,289** | **$22,462** | | Total current assets | **$237,585** | **$284,019** | | Property and equipment, net | **$17,958** | **$10,692** | | Total assets | **$352,661** | **$393,085** | | **Liabilities:** | | | | Total current liabilities | **$122,279** | **$116,085** | | Total liabilities | **$191,927** | **$184,197** | | **Stockholders' Equity:** | | | | Total stockholders' equity | **$160,734** | **$208,888** | | Total liabilities and stockholders' equity | **$352,661** | **$393,085** | [Condensed Consolidated Statements of Operations](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | **Revenue:** | | | | | | Products | **$45,104** | **$39,815** | **$123,624** | **$104,718** | | Services | **$26,955** | **$25,545** | **$79,080** | **$74,653** | | Total revenue | **$72,059** | **$65,360** | **$202,704** | **$179,371** | | **Gross Profit:** | | | | | | Gross profit | **$57,294** | **$52,166** | **$161,615** | **$140,048** | | **Operating Expenses:** | | | | | | Sales and marketing | **$21,605** | **$21,354** | **$66,159** | **$60,195** | | Research and development | **$14,360** | **$13,578** | **$41,483** | **$41,050** | | General and administrative | **$5,661** | **$6,931** | **$17,160** | **$17,260** | | Total operating expenses | **$41,626** | **$41,863** | **$124,802** | **$118,505** | | **Income from Operations:** | | | | | | Income from operations | **$15,668** | **$10,303** | **$36,813** | **$21,543** | | **Net Income:** | | | | | | Net income | **$12,113** | **$74,886** | **$28,878** | **$84,159** | | **Net Income Per Share:** | | | | | | Basic EPS | **$0.16** | **$0.97** | **$0.38** | **$1.09** | | Diluted EPS | **$0.16** | **$0.94** | **$0.37** | **$1.05** | [Condensed Consolidated Statements of Comprehensive Income](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income | **$12,113** | **$74,886** | **$28,878** | **$84,159** | | Unrealized gain (loss) on marketable securities | (**$135**) | **$11** | (**$1,112**) | (**$96**) | | Comprehensive income | **$11,978** | **$74,897** | **$27,766** | **$84,063** | [Condensed Consolidated Statements of Stockholders' Equity](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total stockholders' equity (Beginning Balance) | **$194,759** | **$124,505** | **$208,888** | **$115,974** | | Repurchase of common stock | (**$47,499**) | — | (**$79,257**) | (**$11,213**) | | Payments for dividends | (**$3,849**) | — | (**$11,512**) | — | | Net income | **$12,113** | **$74,886** | **$28,878** | **$84,159** | | Total stockholders' equity (Ending Balance) | **$160,734** | **$203,595** | **$160,734** | **$203,595** | [Condensed Consolidated Statements of Cash Flows](index=12&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Activity | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by operating activities | **$38,773** | **$41,203** | | Net cash provided by (used in) investing activities | **$540** | (**$31,384**) | | Net cash used in financing activities | (**$86,107**) | (**$7,463**) | | Net increase (decrease) in cash and cash equivalents | (**$46,794**) | **$2,356** | | Cash and cash equivalents—end of period | **$32,131** | **$85,637** | [Notes to Condensed Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section details disclosures for consolidated financial statements, including accounting policies, financial instruments, commitments, equity plans, and revenue recognition [Description of Business and Summary of Significant Accounting Policies](index=13&type=section&id=Description%20of%20Business%20and%20Summary%20of%20Significant%20Accounting%20Policies) - A10 Networks, Inc. provides networking solutions focused on reliability, availability, scalability, and cybersecurity for cloud, on-premise, or hybrid environments[35](index=35&type=chunk) - The product portfolio includes Thunder Application Delivery Controller (ADC), Carrier-Grade Network Access Translation (CGNAT)/Convergent Firewall (CFW), Thunder Threat Protection System (TPS) for DDOS protection/Secure Socket Layer Insight (SSLi), and management tools like Harmony Controller and aGalaxy[36](index=36&type=chunk) - Revenue is derived from two sources: products (hardware, perpetual software, subscription offerings) and services (post contract support (PCS), professional services, training)[37](index=37&type=chunk) - The company sells globally to service providers and enterprises, with over **7,950** end-customers worldwide since inception, primarily through a high-touch sales organization and distribution channel partners[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk) | Customer | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Customer A (distribution partner) | * | **13%** | * | **10%** | | Customer B (end-customer) | **10%** | * | **10%** | * | | Customer C (end-customer) | * | **10%** | **13%** | * | [Leases](index=15&type=section&id=Leases) - The company leases various operating spaces in the United States, Asia, and Europe under non-cancellable operating lease arrangements expiring through July **2027**[55](index=55&type=chunk) | Metric | September 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------------- | | Right-of-use assets | **$22,388** | | Current lease liabilities (Accrued liabilities) | **$4,653** | | Non-current lease liabilities (Other non-current liabilities) | **$17,972** | | Total operating lease liabilities | **$22,625** | - The weighted-average remaining lease term is **4.64** years, and the weighted-average discount rate is **3.2%** as of September 30, 2022[59](index=59&type=chunk) | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total lease costs | **$3,665** | **$9,024** | [Marketable Securities and Fair Value Measurements](index=17&type=section&id=Marketable%20Securities%20and%20Fair%20Value%20Measurements) | Type | Sep 30, 2022 Fair Value (in thousands) | Dec 31, 2021 Fair Value (in thousands) | | :----------------------------------- | :------------------------------------- | :------------------------------------- | | Corporate securities | **$30,198** | **$62,421** | | U.S. Treasury and agency securities | **$40,715** | **$13,845** | | Commercial paper | **$16,524** | **$23,570** | | Asset-backed securities | **$8,205** | **$6,281** | | Total | **$95,642** | **$106,117** | - All available-for-sale securities are classified as current assets[63](index=63&type=chunk) - Gross unrealized losses on marketable securities totaled **$1,341 thousand** as of September 30, 2022[65](index=65&type=chunk) - No other-than-temporary impairment charges were recognized during the three and nine months ended September 30, 2022 and 2021[68](index=68&type=chunk) [Condensed Consolidated Financial Statement Details](index=18&type=section&id=Condensed%20Consolidated%20Financial%20Statement%20Details) This section provides further details on specific line items from the condensed consolidated financial statements, including inventory, prepaid expenses and other current assets, property and equipment, intangible assets, accrued liabilities, and deferred revenue [Inventory](index=18&type=section&id=Inventory) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Raw materials | **$11,933** | **$10,774** | | Finished goods | **$9,356** | **$11,688** | | Total inventory | **$21,289** | **$22,462** | [Prepaid Expenses and Other Current Assets](index=18&type=section&id=Prepaid%20Expenses%20and%20Other%20Current%20Assets) | Metric | September 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------------- | | Prepaid expenses | **$4,795** | | Deferred contract acquisition costs | **$7,805** | | Other | **$2,423** | | Total prepaid expenses and other current assets | **$15,023** | [Property and Equipment, Net](index=19&type=section&id=Property%20and%20Equipment,%20Net) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Equipment | **$26,810** | **$25,407** | | Construction in process | **$9,807** | **$4,823** | | Property and equipment, gross | **$41,281** | **$34,813** | | Less: accumulated depreciation | (**$23,323**) | (**$24,121**) | | Property and equipment, net | **$17,958** | **$10,692** | - Construction in process primarily consists of deferred software development costs related to several projects expected to be available for release in the fourth quarter of **2022**[74](index=74&type=chunk) - Depreciation expense was **$0.7 million** for the three months ended September 30, 2022, and **$2.0 million** for the nine months ended September 30, 2022[75](index=75&type=chunk) [Intangible Assets](index=19&type=section&id=Intangible%20Assets) - Purchased intangible assets, including developed technology and patents, were fully amortized as of December 31, 2021[76](index=76&type=chunk) - Amortization expense related to these assets was **$0.4 million** for the three months ended September 30, 2021, and **$0.7 million** for the nine months ended September 30, 2021[76](index=76&type=chunk) [Accrued Liabilities](index=19&type=section&id=Accrued%20Liabilities) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Accrued compensation and benefits | **$23,251** | **$24,003** | | Accrued tax liabilities | **$6,930** | **$1,020** | | Lease liability | **$4,653** | **$3,983** | | Other | **$6,638** | **$7,095** | | Total accrued liabilities | **$41,472** | **$36,101** | [Deferred Revenue](index=20&type=section&id=Deferred%20Revenue) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Products | **$9,794** | **$6,164** | | Services | **$116,373** | **$115,467** | | Total deferred revenue | **$126,167** | **$121,631** | | Less: current portion | (**$74,762**) | (**$73,132**) | | Non-current portion | **$51,405** | **$48,499** | [Commitments and Contingencies](index=20&type=section&id=Commitments%20and%20Contingencies) - The company has non-cancellable operating lease arrangements expiring through July **2027**, with rent expense of **$1.2 million** for Q3 2022 and **$3.7 million** for 9M 2022[80](index=80&type=chunk) - Open purchase commitments with Taiwan manufacturers totaled **$37.9 million** as of September 30, 2022, for finished goods, spare parts, and accessories, expected to be paid within one year[81](index=81&type=chunk) - The company provides indemnifications to customers against intellectual property infringement claims and guarantees of product/service performance, with no significant financial impact to date[82](index=82&type=chunk) [Equity Incentive Plans, Stock-Based Compensation and Stock Repurchase Program](index=20&type=section&id=Equity%20Incentive%20Plans,%20Stock-Based%20Compensation%20and%20Stock%20Repurchase%20Program) This section details the company's equity incentive plans, stock-based compensation expenses, stock option and award activities, and stock repurchase programs [Equity Incentive Plans](index=20&type=section&id=Equity%20Incentive%20Plans) - As of September 30, 2022, **13,293,128** shares were available for future grant under the **2014** Equity Incentive Plan[84](index=84&type=chunk) - As of September 30, 2022, **1,251,660** shares were available for future issuance under the Amended **2014** Employee Stock Purchase Plan[85](index=85&type=chunk) [Stock-Based Compensation](index=21&type=section&id=Stock-Based%20Compensation) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total stock-based compensation | **$3,505** | **$3,958** | **$9,818** | **$10,848** | | Cost of revenue | **$434** | **$351** | **$1,155** | **$1,197** | | Sales and marketing | **$1,193** | **$1,148** | **$3,335** | **$3,181** | | Research and development | **$826** | **$916** | **$2,455** | **$2,923** | | General and administrative | **$1,052** | **$1,543** | **$2,873** | **$3,547** | - As of September 30, 2022, unrecognized stock-based compensation expense was **$30.6 million**, to be recognized over a weighted-average period of **2.41** years[86](index=86&type=chunk) [Stock Options](index=21&type=section&id=Stock%20Options) - As of September 30, 2022, **377 thousand** stock options were outstanding, with a weighted-average exercise price of **$6.30** and an aggregate intrinsic value of **$2.632 million**[87](index=87&type=chunk) - The intrinsic value of options exercised was **$2.8 million** for the three months ended September 30, 2022, and **$4.5 million** for the nine months ended September 30, 2022[89](index=89&type=chunk) [Stock Awards](index=22&type=section&id=Stock%20Awards) - As of September 30, 2022, there were **2,515,276** RSUs and **815,162** PSUs outstanding[90](index=90&type=chunk) - Nonvested stock awards totaled **3,331 thousand** shares with an aggregate fair value of **$44.195 million** as of September 30, 2022[91](index=91&type=chunk) - The aggregate fair value of stock awards released was **$7.6 million** for the three months ended September 30, 2022, and **$11.5 million** for the nine months ended September 30, 2022[91](index=91&type=chunk) [Stock Repurchase Program](index=22&type=section&id=Stock%20Repurchase%20Program) - The **2021** Program authorized up to **$100 million** in common stock repurchases over twelve months and expired in October **2022**[92](index=92&type=chunk)[93](index=93&type=chunk) - During the nine months ended September 30, 2022, the company repurchased **6.1 million** shares for a total cost of **$79.3 million** under the **2021** Program[93](index=93&type=chunk) - A new **$50 million** share repurchase program (**2022** Program) was authorized on November 1, 2022, for the next twelve months[92](index=92&type=chunk)[93](index=93&type=chunk) [Net Income Per Share](index=22&type=section&id=Net%20Income%20Per%20Share) | Metric | 3 Months Ended Sep 30, 2022 (in thousands, except per share amounts) | 3 Months Ended Sep 30, 2021 (in thousands, except per share amounts) | 9 Months Ended Sep 30, 2022 (in thousands, except per share amounts) | 9 Months Ended Sep 30, 2021 (in thousands, except per share amounts) | | :----------------------------------- | :------------------------------------------------------------------- | :------------------------------------------------------------------- | :------------------------------------------------------------------- | :------------------------------------------------------------------- | | Net income | **$12,113** | **$74,886** | **$28,878** | **$84,159** | | Weighted-average shares outstanding - basic | **75,881** | **77,149** | **76,191** | **76,885** | | Weighted-average shares outstanding - diluted | **77,679** | **79,927** | **78,454** | **79,803** | | Basic EPS | **$0.16** | **$0.97** | **$0.38** | **$1.09** | | Diluted EPS | **$0.16** | **$0.94** | **$0.37** | **$1.05** | - Potentially dilutive shares excluded from diluted net income per share calculation due to anti-dilutive effects were **4 thousand** for the three months ended September 30, 2022, and **84 thousand** for the nine months ended September 30, 2022[97](index=97&type=chunk) [Income Taxes](index=23&type=section&id=Income%20Taxes) - Income tax expense was **$3.1 million** for the three months ended September 30, 2022, and **$7.5 million** for the nine months ended September 30, 2022, primarily consisting of U.S. state and federal taxes[98](index=98&type=chunk) - Income tax benefit was **$64.8 million** for the three months ended September 30, 2021, and **$64.1 million** for the nine months ended September 30, 2021, mainly due to a valuation allowance release on U.S. deferred tax assets[98](index=98&type=chunk) - The company had **$7.7 million** of unrecognized tax benefits as of September 30, 2022, with no material change anticipated over the next twelve months[99](index=99&type=chunk) - The company is currently under examination for transfer pricing practices in Japan for the years **2019** through **2021**, expected to conclude by the end of **2022**[100](index=100&type=chunk) [Geographic Information](index=24&type=section&id=Geographic%20Information) | Region | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Americas | **$35,995** (**50%**) | **$32,261** (**49%**) | **$107,506** (**53%**) | **$87,367** (**49%**) | | APJ | **$24,860** (**34%**) | **$22,111** (**34%**) | **$64,263** (**32%**) | **$65,332** (**36%**) | | EMEA | **$11,204** (**16%**) | **$10,988** (**17%**) | **$30,935** (**15%**) | **$26,672** (**15%**) | | Total revenue | **$72,059** (**100%**) | **$65,360** (**100%**) | **$202,704** (**100%**) | **$179,371** (**100%**) | - The company changed its geographic revenue presentation in Q1 **2022** to align with business management, with no impact on key metrics[103](index=103&type=chunk) | Asset Location | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | United States | **$36,866** | **$32,255** | | Japan | **$1,959** | **$422** | | India | **$856** | **$513** | | Other | **$665** | **$368** | | Total | **$40,346** | **$33,558** | [Revenue](index=24&type=section&id=Revenue) This section discusses contract balances, deferred contract acquisition costs, and remaining performance obligations, providing insights into revenue recognition [Contract Balances](index=24&type=section&id=Contract%20Balances) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Accounts receivable, net | **$73,500** | **$61,795** | | Deferred revenue, current | **$74,762** | **$73,132** | | Deferred revenue, non-current | **$51,405** | **$48,499** | - Revenue recognized from deferred revenues was **$20.3 million** for the three months ended September 30, 2022, and **$59.5 million** for the nine months ended September 30, 2022[109](index=109&type=chunk) [Deferred Contract Acquisition Costs](index=25&type=section&id=Deferred%20Contract%20Acquisition%20Costs) - Current deferred contract acquisition costs were **$7.8 million** and non-current were **$4.6 million** as of September 30, 2022[111](index=111&type=chunk) - Amortization expense for deferred commissions was **$2.7 million** for the three months ended September 30, 2022, and **$6.8 million** for the nine months ended September 30, 2022[111](index=111&type=chunk) [Remaining Performance Obligations](index=25&type=section&id=Remaining%20Performance%20Obligations) | Period | September 30, 2022 (in thousands) | | :-------------------------- | :-------------------------------- | | Within 1 year | **$74,762** | | Next 2 to 3 years | **$40,864** | | Thereafter | **$10,541** | | Total | **$126,167** | [Subsequent Events](index=25&type=section&id=Subsequent%20Events) - On November 1, 2022, the Board of Directors declared a quarterly cash dividend of **$0.06** per share, payable on December 1, 2022[114](index=114&type=chunk) - A new **$50 million** share repurchase program (**2022** Program) was authorized on November 1, 2022, for the next **12** months[115](index=115&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on financial condition and operations, including business overview, revenue, cost, expense analysis, and liquidity [Overview](index=27&type=section&id=Overview) - A10 Networks is a leading provider of networking solutions focused on reliability, availability, scalability, and cybersecurity for cloud, on-premise, or hybrid environments[118](index=118&type=chunk) - The product portfolio includes Thunder ADC, CGNAT/CFW, Thunder TPS for DDOS protection/SSLi, and management tools like Harmony Controller and aGalaxy, offered in various form factors and payment models[119](index=119&type=chunk) - Revenue is derived from products (hardware, perpetual software, subscription offerings) and services (post contract support (PCS), professional services, training), sold globally to service providers and enterprises[120](index=120&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk) - Geographic revenue split for Q3 **2022**: Americas **50%** (United States **41%**), APJ **34%** (Japan **21%**), and EMEA **16%**. Enterprise customers accounted for **38%** and service providers for **62%** of total revenue in Q3 **2022**[125](index=125&type=chunk) - Purchases by the ten largest end-customers accounted for **36%** of total revenue for the three months ended September 30, 2022, down from **45%** in the same period of **2021**[126](index=126&type=chunk) - As of September 30, 2022, cash and cash equivalents were **$32.1 million**, and marketable securities were **$95.6 million**. Cash provided by operating activities was **$38.8 million** for the nine months ended September 30, 2022[127](index=127&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) This chapter analyzes the company's financial performance for Q3 and 9M 2022 versus 2021, focusing on revenue, costs, gross profit, operating expenses, non-operating income, and income taxes [Revenue](index=30&type=section&id=Revenue) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Products revenue | **$45,104** | **$39,815** | **$123,624** | **$104,718** | | Services revenue | **$26,955** | **$25,545** | **$79,080** | **$74,653** | | Total revenue | **$72,059** | **$65,360** | **$202,704** | **$179,371** | - Total revenue increased by **$6.7 million** (**10%**) for the three months ended September 30, 2022, and by **$23.3 million** (**13%**) for the nine months ended September 30, 2022, compared to the same periods in 2021[138](index=138&type=chunk)[141](index=141&type=chunk) - Products revenue increased by **$5.3 million** (**13%**) in Q3 2022 and **$18.9 million** (**18%**) in 9M 2022, driven by increased demand from Enterprise customers in EMEA and Americas, and service provider customers in Americas, respectively[140](index=140&type=chunk)[142](index=142&type=chunk) - Services revenue increased by **$1.4 million** (**6%**) in Q3 2022 and **$4.4 million** (**6%**) in 9M 2022, primarily due to increased PCS sales from a growing installed customer base in the Americas and EMEA regions[142](index=142&type=chunk) | Region | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Americas | **$35,995** (**50%**) | **$32,261** (**49%**) | **$107,506** (**53%**) | **$87,367** (**49%**) | | APJ | **$24,860** (**34%**) | **$22,111** (**34%**) | **$64,263** (**32%**) | **$65,332** (**36%**) | | EMEA | **$11,204** (**16%**) | **$10,988** (**17%**) | **$30,935** (**15%**) | **$26,672** (**15%**) | [Cost of Revenue](index=33&type=section&id=Cost%20of%20Revenue) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Products cost of revenue | **$10,191** | **$7,859** | **$28,342** | **$23,160** | | Services cost of revenue | **$4,574** | **$5,335** | **$12,747** | **$16,163** | | Total cost of revenue | **$14,765** | **$13,194** | **$41,089** | **$39,323** | - Products cost of revenue increased by **29.7%** in Q3 2022 and **22.4%** in 9M 2022, primarily due to increased products revenue and changes in geographic and product mix[148](index=148&type=chunk) - Services cost of revenue decreased by **14.3%** in Q3 2022 and **21.1%** in 9M 2022, primarily driven by the mix of services delivered[149](index=149&type=chunk) [Gross Profit and Gross Margin](index=33&type=section&id=Gross%20Profit%20and%20Gross%20Margin) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total gross profit | **$57,294** | **$52,166** | **$161,615** | **$140,048** | | Total gross margin | **79.5%** | **79.8%** | **79.7%** | **78.1%** | | Products gross margin | **77.4%** | **80.3%** | **77.1%** | **77.9%** | | Services gross margin | **83.0%** | **79.1%** | **83.9%** | **78.3%** | - Products gross margin decreased by **2.9%** in Q3 2022 and **0.8%** in 9M 2022, primarily due to changes in product and geographic mix[152](index=152&type=chunk) - Services gross margin increased by **3.9%** in Q3 2022 and **5.6%** in 9M 2022, primarily driven by the mix of services delivered[153](index=153&type=chunk) [Operating Expenses](index=35&type=section&id=Operating%20Expenses) | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Sales and marketing | **$21,605** | **$21,354** | **$66,159** | **$60,195** | | Research and development | **$14,360** | **$13,578** | **$41,483** | **$41,050** | | General and administrative | **$5,661** | **$6,931** | **$17,160** | **$17,260** | | Total operating expenses | **$41,626** | **$41,863** | **$124,802** | **$118,505** | - Sales and marketing expenses increased by **$0.3 million** (**1.2%**) in Q3 2022 and **$6.0 million** (**9.9%**) in 9M 2022, primarily due to an increase in employee headcount[158](index=158&type=chunk) - Research and development expenses increased by **$0.8 million** (**5.8%**) in Q3 2022 and **$0.4 million** (**1.1%**) in 9M 2022, primarily due to increased consulting costs for outsourced R&D functions[161](index=161&type=chunk) - General and administrative expenses decreased by **$1.3 million** (**18.3%**) in Q3 2022 and **$0.1 million** (**0.6%**) in 9M 2022, primarily due to a decrease in employee headcount[162](index=162&type=chunk) [Non-Operating Income (Expense), Net](index=36&type=section&id=Non-Operating%20Income%20(Expense),%20Net) - Non-operating income (expense), net, had an unfavorable change of **$0.2 million** for Q3 2022 (driven by **$0.6 million** foreign exchange losses) and a favorable change of **$1.0 million** for 9M 2022 (driven by **$0.6 million** foreign exchange gains)[164](index=164&type=chunk) - Interest income increased by **$0.4 million** for both the three- and nine-month periods ended September 30, 2022[164](index=164&type=chunk) [Provision for Income Taxes](index=36&type=section&id=Provision%20for%20Income%20Taxes) - Income tax provision was **$3.1 million** for Q3 2022 and **$7.5 million** for 9M 2022, primarily U.S. federal and state taxes[165](index=165&type=chunk) - Income tax benefit was **$64.8 million** for Q3 2021 and **$64.1 million** for 9M 2021, mainly due to a **$62.9 million** valuation allowance release on U.S. deferred tax assets in Q3 2021[165](index=165&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) - As of September 30, 2022, the company had **$32.1 million** in cash and cash equivalents (including **$2.7 million** held internationally), **$95.6 million** in marketable securities, and **$115.3 million** in working capital[166](index=166&type=chunk) - Management believes existing cash and marketable securities will be sufficient to meet anticipated cash needs for at least the next **12** months and beyond[167](index=167&type=chunk) - The **2021** Stock Repurchase Program, which authorized up to **$100 million**, expired in October **2022**, with **$13.7 million** remaining available as of September 30, 2022[168](index=168&type=chunk) - A new **$50 million** share repurchase program (**2022** Program) was authorized on November 1, 2022[168](index=168&type=chunk) - The company paid quarterly cash dividends of **$0.05** per share in December 2021, March 2022, June 2022, and September 2022. The next dividend of **$0.06** per share will be paid in December 2022[169](index=169&type=chunk) [Statements of Cash Flows](index=37&type=section&id=Statements%20of%20Cash%20Flows) | Activity | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating activities | **$38,773** | **$41,203** | | Investing activities | **$540** | (**$31,384**) | | Financing activities | (**$86,107**) | (**$7,463**) | | Net increase (decrease) in cash and cash equivalents | (**$46,794**) | **$2,356** | - Cash provided by operating activities was **$38.8 million** for the nine months ended September 30, 2022, driven by net income (**$28.9 million**) and non-cash charges (**$15.4 million**), partially offset by a decrease from changes in operating assets and liabilities (**$5.5 million**)[174](index=174&type=chunk) - Cash provided by investing activities was **$0.5 million** for the nine months ended September 30, 2022, primarily from maturities and sales of marketable securities (**$54.5 million**) offset by purchases of marketable securities (**$45.7 million**) and property and equipment (**$8.3 million**)[178](index=178&type=chunk) - Cash used in financing activities was **$86.1 million** for the nine months ended September 30, 2022, mainly due to stock repurchases (**$79.3 million**) and cash dividend payments (**$11.5 million**), partially offset by proceeds from equity plans (**$4.7 million**)[179](index=179&type=chunk) [Contractual Obligations](index=39&type=section&id=Contractual%20Obligations) - Total contractual obligations amounted to **$24.3 million** as of September 30, 2022, primarily consisting of non-cancellable operating lease arrangements expiring through July **2027**[181](index=181&type=chunk) - The company also has **$7.7 million** in tax liabilities related to uncertain tax positions as of September 30, 2022, for which the timing of settlement cannot be reliably estimated[181](index=181&type=chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - The condensed consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and assumptions[182](index=182&type=chunk) - There have been no material changes to the company's significant accounting policies during the nine months ended September 30, 2021[182](index=182&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This chapter discusses the company's exposure to market risks, specifically foreign currency and interest rate sensitivity, and the measures taken to manage them [Foreign Currency Risk](index=39&type=section&id=Foreign%20Currency%20Risk) - The company's consolidated results are subject to fluctuations due to changes in foreign currency exchange rates, particularly the Japanese Yen, as most revenue contracts are in U.S. Dollars except for Japan[183](index=183&type=chunk) - Foreign currency exchange losses incurred were **$0.9 million** for the three months ended September 30, 2022, and **$1.0 million** for the nine months ended September 30, 2022[185](index=185&type=chunk) - A hypothetical **10%** change in exchange rates would not have a significant impact on the consolidated results of operations[185](index=185&type=chunk) [Interest Rate Sensitivity](index=39&type=section&id=Interest%20Rate%20Sensitivity) - The company's exposure to market risk for changes in interest rates primarily relates to its marketable securities portfolio, which includes corporate securities, U.S. Treasury and agency securities, commercial paper, and asset-backed securities[186](index=186&type=chunk) - As of September 30, 2022, the investment portfolio had an aggregate amortized cost basis of **$97.0 million** and a fair value of **$95.6 million**[186](index=186&type=chunk) - A hypothetical **10%** change in interest rates would not have a material impact on the company's interest expense[186](index=186&type=chunk) | Interest Rate Shift | Fair Value (in thousands) | | :------------------ | :------------------------ | | -150 BPS | **$96,359** | | -100 BPS | **$96,120** | | -50 BPS | **$95,882** | | 0 BPS (Actual) | **$95,642** | | +50 BPS | **$95,401** | | +100 BPS | **$95,160** | | +150 BPS | **$94,919** | [Item 4. Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) This chapter discusses management's evaluation of disclosure controls, changes in internal control over financial reporting, and inherent limitations of controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2022[190](index=190&type=chunk) - There were no material changes in internal control over financial reporting during the three months ended September 30, 2022[191](index=191&type=chunk) - Management acknowledges that control systems provide only reasonable, not absolute, assurance and are subject to inherent limitations[192](index=192&type=chunk) [PART II. OTHER INFORMATION](index=41&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, unregistered sales of equity securities, use of proceeds, and a list of exhibits [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) This chapter states the company is involved in various legal proceedings with uncertain outcomes, requiring management to assess potential losses - The company is involved in various legal proceedings with uncertain outcomes, requiring management to assess the probability and amount of potential losses[194](index=194&type=chunk) - Judgments are subjective and based on the status of proceedings, merits of defenses, and legal counsel, and actual outcomes may differ materially from estimates[194](index=194&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) This chapter outlines significant risks that could materially harm the company's business, financial condition, operating results, and stock price, categorized into business, IP, and capitalization [Risk Factor Summary](index=6&type=section&id=Risk%20Factor%20Summary) - Risks related to Business, Operations and Industry include the effects of COVID-19, anticipating market needs, timely product development, maintaining profitability, operating results variability, reliance on end-of-quarter shipments, intense competition, cloud-based computing trends, brand reputation, customer concentration, changes in deployment/payment models, gross margin fluctuations, international operations, personnel, strategic alternatives, adverse economic conditions, third-party manufacturers, supply shortages, product defects, warranty claims, open source software, interoperability, inventory management, support quality, IT systems, acquisitions, credit risk, and catastrophic events[15](index=15&type=chunk) - Risks related to Intellectual Property, Litigation, Laws and Regulations include IP litigation, IP protection, UK political developments (Brexit), enhanced U.S. tariffs/trade barriers, data confidentiality/security, personal data protection, governmental sales, compliance with laws/regulations, export/import controls, environmental laws, net operating loss carryforwards, tax law changes, accounting principles changes, internal controls, charter/Delaware law discouraging takeovers, and increasing attention on ESG matters[16](index=16&type=chunk) - Risks related to Capitalization and Financial Markets include fluctuations in foreign currency exchange rates, ownership concentration, ability to raise additional funds/stockholder dilution, volatility of common stock price, potential substantial sales of common stock, reports by security/industry analysts, changes to dividend program, and stock repurchase programs[18](index=18&type=chunk) [Risks Related to Our Business, Operations and Industry](index=41&type=section&id=Risks%20Related%20to%20Our%20Business,%20Operations%20and%20Industry) This section details risks associated with the company's business model, operations, and industry, including COVID-19 impact, market acceptance, product development, competition, customer concentration, and supply chain - The COVID-19 pandemic continues to pose risks, potentially affecting operations, financial condition, liquidity, and capital investments due to economic disruption, supply chain issues, and remote work challenges[196](index=196&type=chunk)[197](index=197&type=chunk)[199](index=199&type=chunk) - Failure to successfully anticipate market needs, timely develop new products/features, or achieve widespread market acceptance for new offerings could significantly harm the business[201](index=201&type=chunk)[204](index=204&type=chunk) - The company may not maintain profitability in future periods due to investments in sales, marketing, and R&D, general economic conditions, increasing competition, or failure to capitalize on growth opportunities[206](index=206&type=chunk)[209](index=209&type=chunk) - Operating results are highly variable and unpredictable due to factors like the timing and size of large customer sales, seasonal variations, product mix, and reliance on end-of-quarter shipments[210](index=210&type=chunk)[212](index=212&type=chunk)[216](index=216&type=chunk) - Intense competition from larger, well-established companies and new market entrants could lead to fewer customer orders, price reductions, reduced margins, and loss of market share[217](index=217&type=chunk)[220](index=220&type=chunk)[224](index=224&type=chunk) - Cloud-based computing trends present competitive and execution risks, requiring significant resources to develop new cloud solutions and adapt to evolving pricing and delivery models[225](index=225&type=chunk) - A limited number of large end-customers make concentrated purchases, and any loss or delay of expected purchases from these customers could materially affect operating results[227](index=227&type=chunk)[228](index=228&type=chunk)[230](index=230&type=chunk) - Dependence on third-party manufacturers, particularly in Taiwan, exposes the company to risks of delays, disruptions, and reduced control over quality and costs, exacerbated by global supply chain issues[250](index=250&type=chunk) - Reliance on limited sources for key components makes the company susceptible to supply shortages, price increases, and quality problems, which could delay deliveries and result in lost sales[254](index=254&type=chunk)[256](index=256&type=chunk) - Real or perceived defects, errors, or vulnerabilities in products or services could harm reputation, lead to lost sales, increased expenses, and potential litigation[257](index=257&type=chunk)[261](index=261&type=chunk) [Risks Related to Intellectual Property, Litigation, Laws and Regulations](index=58&type=section&id=Risks%20Related%20to%20Intellectual%20Property,%20Litigation,%20Laws%20and%20Regulations) This section addresses risks concerning IP protection, litigation, compliance with laws (export controls, environmental, tax, data privacy), and corporate governance - The company is exposed to intellectual property litigation, which can be time-consuming, expensive, and potentially adverse, requiring significant resources to prosecute, defend, or make products non-infringing[301](index=301&type=chunk)[304](index=304&type=chunk) - Inadequate protection of intellectual property (patents, copyrights, trademarks, trade secrets) could harm the company's competitive position or require significant expenses to enforce rights, especially in foreign countries[307](index=307&type=chunk)[309](index=309&type=chunk) - Exposure to UK political developments, including Brexit, creates uncertain political and economic environments, potentially impairing business transactions and causing currency volatility[312](index=312&type=chunk)[313](index=313&type=chunk) - Enhanced U.S. tariffs, import/export restrictions, Chinese regulations, or other trade barriers could negatively affect global economic conditions, increase costs, delay orders, and harm the business[315](index=315&type=chunk)[316](index=316&type=chunk) - Failure to protect and ensure the confidentiality and security of data could lead to legal liability, damage reputation, and result in significant costs for protection or remediation[319](index=319&type=chunk)[320](index=320&type=chunk)[323](index=323&type=chunk) - Failure to adequately protect personal data and comply with evolving data protection laws (e.g., GDPR, CCPA) could result in enforcement actions, significant fines, and reputational damage[326](index=326&type=chunk) - Sales to governmental organizations are subject to challenges such as high competition, long sales cycles, budgetary constraints, and the need for security clearances[329](index=329&type=chunk) - Non-compliance with governmental export and import controls, particularly for encryption technology, could lead to liability, penalties, and impaired ability to compete in international markets[331](index=331&type=chunk) - The ability to use net operating loss carryforwards may be limited by ownership changes, potentially increasing future tax liability[335](index=335&type=chunk) - Changes in tax laws or regulations or adverse outcomes from tax examinations could negatively affect operating results and financial condition[336](index=336&type=chunk) - Inability to maintain effective internal controls over financial reporting could adversely affect investor confidence and the value of common stock[341](index=341&type=chunk)[342](index=342&type=chunk) - Increasing attention on environmental, social, and governance (ESG) matters may negatively impact the business, impose additional costs, and expose the company to risks related to investor sentiment and reputation[349](index=349&type=chunk)[352](index=352&type=chunk) [Risks Related to Capitalization and Financial Markets](index=66&type=section&id=Risks%20Related%20to%20Capitalization%20and%20Financial%20Markets) This section covers financial market risks, including currency exchange rate fluctuations, ownership concentration, funding needs, stock price volatility, and dividend/repurchase program impact - Fluctuations in currency exchange rates, particularly the Japanese Yen versus the U.S. Dollar, could negatively affect operating income, despite hedging practices[353](index=353&type=chunk)[354](index=354&type=chunk) - Concentration of ownership among executive officers, directors, and affiliates (**8%** as of Sep 30, 2022, or **29%** including other large holders) may prevent new investors from influencing significant corporate decisions[355](index=355&type=chunk)[356](index=356&type=chunk) - The company may need to raise additional funds in future private or public offerings, which could result in significant stockholder dilution or restrictive covenants[357](index=357&type=chunk)[358](index=358&type=chunk) - The price of common stock has been and may continue to be volatile due to various factors, including company announcements, market trends, litigation, and general economic conditions, potentially causing investment value to decline[359](index=359&type=chunk)[361](index=361&type=chunk) - Sales of a substantial amount of common stock in the public markets, or the perception of such sales, could reduce the stock price and dilute voting power and ownership interest[363](index=363&type=chunk) - A reduction in, suspension, or elimination of dividend payments could negatively affect the stock price, as future dividends are subject to Board discretion and various factors[368](index=368&type=chunk) - Share repurchase programs do not obligate the company to acquire specific shares and may be modified or discontinued, potentially affecting stock price volatility and diminishing cash reserves without assurance of enhanced long-term stockholder value[369](index=369&type=chunk)[371](index=371&type=chunk)[373](index=373&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=69&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This chapter reports on the company's stock repurchase activities under the 2021 Program and the authorization of the new 2022 Program - During the three months ended September 30, 2022, the company repurchased **3.7 million** shares for a total cost of **$47.5 million** under the **2021** Program, which expired in October **2022**[374](index=374&type=chunk) - On November 1, 2022, a new **$50 million** share repurchase program (**2022** Program) was authorized for the next **12** months[375](index=375&type=chunk) | Periods | Total Number of Shares Purchased (in thousands) | Average Price Per Share | Dollar Value That May Yet Be Purchased Under the Plans or Programs (in thousands) | | :------------------ | :---------------------------------------------- | :---------------------- | :------------------------------------------------------------------------------ | | Sep 1 - 30, 2022 | **3,720** | **$12.77** | **$13,690** | [Item 6. Exhibits](index=70&type=section&id=Item%206.%20Exhibits) This chapter lists exhibits filed with the Form 10-Q, including corporate documents, certifications, and XBRL documents - Exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, and a Common Stock Repurchase Agreement dated September 8, 2022[380](index=380&type=chunk) - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections **302** and **906** of the Sarbanes-Oxley Act are filed[380](index=380&type=chunk) - Inline XBRL Document Sets for the condensed consolidated financial statements and the cover page of the Quarterly Report on Form 10-Q are included[380](index=380&type=chunk) [Signatures](index=71&type=section&id=Signatures) This chapter contains the signatures of the President, CEO, and CFO, certifying the report - The report is signed by Dhrupad Trivedi, President and Chief Executive Officer, and Brian Becker, Chief Financial Officer, on November 3, 2022[383](index=383&type=chunk)