Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
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¨
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36343
A10 NETWORKS, INC.
(Exact Name of Registrant as Specified in its Charter)
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| | |
Delaware | | 20-1446869 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
3 West Plumeria Drive, San Jose, California 95134 |
(Address of Principal Executive Offices and Zip Code) |
(408) 325-8668
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ | Smaller reporting company | ¨
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(Do not check if a smaller reporting company) | | Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 26, 2017, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 70,766,245.
A10 NETWORKS, INC. FORM 10-Q
TABLE OF CONTENTS |
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par value)
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| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 46,385 |
| | $ | 28,975 |
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Marketable securities | 85,773 |
| | 85,372 |
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Accounts receivable, net of allowances of $2,476 and $3,619, respectively | 41,370 |
| | 66,755 |
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Inventory | 15,385 |
| | 15,070 |
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Prepaid expenses and other current assets | 7,336 |
| | 5,137 |
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Total current assets | 196,249 |
| | 201,309 |
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Property and equipment, net | 8,266 |
| | 8,219 |
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Goodwill and intangible assets | 7,218 |
| | 7,940 |
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Other non-current assets | 4,930 |
| | 3,870 |
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Total assets | $ | 216,663 |
| | $ | 221,338 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 8,318 |
| | $ | 9,851 |
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Accrued liabilities | 25,396 |
| | 31,525 |
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Deferred revenue | 61,840 |
| | 61,334 |
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Total current liabilities | 95,554 |
| | 102,710 |
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Deferred revenue, non-current | 30,671 |
| | 31,574 |
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Other non-current liabilities | 794 |
| | 988 |
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Total liabilities | 127,019 |
| | 135,272 |
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Commitments and contingencies (Note 5) |
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Stockholders' equity: |
Common stock, $0.00001 par value: 500,000 shares authorized; 70,573 and 67,873 shares issued and outstanding, respectively | 1 |
| | 1 |
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Additional paid-in-capital | 344,817 |
| | 328,869 |
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Accumulated other comprehensive loss | (46 | ) | | (45 | ) |
Accumulated deficit | (255,128 | ) | | (242,759 | ) |
Total stockholders' equity | 89,644 |
| | 86,066 |
|
Total liabilities and stockholders' equity | $ | 216,663 |
| | $ | 221,338 |
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See accompanying notes to the condensed consolidated financial statements.
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | |
| | |
| | |
| | |
|
Products | $ | 32,100 |
| | $ | 38,797 |
| | $ | 71,806 |
| | $ | 75,171 |
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Services | 21,589 |
| | 18,333 |
| | 42,169 |
| | 35,763 |
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Total revenue | 53,689 |
| | 57,130 |
| | 113,975 |
| | 110,934 |
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Cost of revenue: | |
| | |
| | |
| | |
|
Products | 8,070 |
| | 9,804 |
| | 17,854 |
| | 18,502 |
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Services | 4,623 |
| | 4,405 |
| | 8,983 |
| | 8,934 |
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Total cost of revenue | 12,693 |
| | 14,209 |
| | 26,837 |
| | 27,436 |
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Gross profit | 40,996 |
| | 42,921 |
| | 87,138 |
| | 83,498 |
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Operating expenses: | |
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| | |
| | |
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Sales and marketing | 25,561 |
| | 26,773 |
| | 51,824 |
| | 53,541 |
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Research and development | 16,490 |
| | 14,486 |
| | 33,532 |
| | 29,263 |
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General and administrative | 6,989 |
| | 7,230 |
| | 14,150 |
| | 13,891 |
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Litigation and settlement expense | — |
| | 202 |
| | — |
| | 1,993 |
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Total operating expenses | 49,040 |
| | 48,691 |
| | 99,506 |
| | 98,688 |
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Loss from operations | (8,044 | ) | | (5,770 | ) | | (12,368 | ) | | (15,190 | ) |
Other income (expense), net: | |
| | |
| | |
| | |
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Interest expense | (64 | ) | | (126 | ) | | (108 | ) | | (252 | ) |
Interest and other income (expense), net | (26 | ) | | 1,020 |
| | 816 |
| | 1,235 |
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Total other income (expense), net | (90 | ) | | 894 |
| | 708 |
| | 983 |
|
Loss before income taxes | (8,134 | ) | | (4,876 | ) | | (11,660 | ) | | (14,207 | ) |
Provision for income taxes | 135 |
| | 59 |
| | 509 |
| | 263 |
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Net loss | $ | (8,269 | ) | | $ | (4,935 | ) | | $ | (12,169 | ) | | $ | (14,470 | ) |
Net loss per share: | |
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| | |
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Basic and diluted | $ | (0.12 | ) | | $ | (0.08 | ) | | $ | (0.18 | ) | | $ | (0.22 | ) |
Weighted-average shares used in computing net loss per share: | |
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| | |
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Basic and diluted | 69,770 |
| | 64,861 |
| | 69,173 |
| | 64,584 |
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See accompanying notes to the condensed consolidated financial statements.
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in thousands)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net loss | $ | (8,269 | ) | | $ | (4,935 | ) | | $ | (12,169 | ) | | $ | (14,470 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gain (loss) on marketable securities | — |
| | 32 |
| | (1 | ) | | 88 |
|
Comprehensive loss | $ | (8,269 | ) | | $ | (4,903 | ) | | $ | (12,170 | ) | | $ | (14,382 | ) |
See accompanying notes to the condensed consolidated financial statements.
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | |
| | |
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Net loss | $ | (12,169 | ) | | $ | (14,470 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
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Depreciation and amortization | 4,332 |
| | 3,717 |
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Stock-based compensation | 9,279 |
| | 8,481 |
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Other non-cash items | 386 |
| | 1,051 |
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Changes in operating assets and liabilities: | |
| | |
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Accounts receivable, net | 25,071 |
| | 17,535 |
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Inventory | (2,214 | ) | | 2,846 |
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Prepaid expenses and other assets | (3,196 | ) | | (479 | ) |
Accounts payable | (1,810 | ) | | (2,668 | ) |
Accrued liabilities | (5,544 | ) | | 348 |
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Deferred revenue | (397 | ) | | 2,960 |
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Other | 33 |
| | (65 | ) |
Net cash provided by operating activities | 13,771 |
| | 19,256 |
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Cash flows from investing activities: | |
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Purchases of marketable securities | (47,074 | ) | | (92,682 | ) |
Proceeds from sales and maturities of marketable securities | 46,542 |
| | 7,609 |
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Payment for acquisition | — |
| | (4,380 | ) |
Purchases of property and equipment | (1,513 | ) | | (2,588 | ) |
Net cash used in investing activities | (2,045 | ) | | (92,041 | ) |
Cash flows from financing activities: | |
| | |
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Proceeds from issuance of common stock under employee equity incentive plans | 7,207 |
| | 3,350 |
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Repurchase and retirement of common stock | (816 | ) | | — |
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Payment of contingent consideration | (650 | ) | | — |
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Other | (57 | ) | | (50 | ) |
Net cash provided by financing activities | 5,684 |
| | 3,300 |
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Net increase (decrease) in cash and cash equivalents | 17,410 |
| | (69,485 | ) |
Cash and cash equivalents - beginning of period | 28,975 |
| | 98,117 |
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Cash and cash equivalents - end of period | $ | 46,385 |
| | $ | 28,632 |
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Non-cash investing and financing activities: | |
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Common stock issued under asset purchase agreement | $ | — |
| | $ | 1,313 |
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Inventory transfers to property and equipment | $ | 1,899 |
| | $ | 1,112 |
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Purchases of property and equipment included in accounts payable | $ | 440 |
| | $ | 428 |
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See accompanying notes to the condensed consolidated financial statements.
A10 Networks, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
A10 Networks, Inc. (together with our subsidiaries, “we”, “our” or “us”) was incorporated in California in 2004 and reincorporated in Delaware in March 2014. We are headquartered in San Jose, California and have wholly-owned subsidiaries throughout the world including Asia and Europe. Our solutions enable our customers to secure and optimize the performance of their data center and cloud applications and secure their users, applications and infrastructure from internet, web and network threats at scale. Our product portfolio consists of six advanced application delivery and security products: Application Delivery Controllers (“ADC”), Lightning Application Delivery Service (“Lightning ADS”), Carrier Grade Network Address Translation (“CGN”), Threat Protection System (“TPS”), SSL Insight (“SSLi”) and Convergent Firewall (“CFW”). They are available in a variety of form factors, such as optimized hardware appliances, bare metal software, virtual appliances, and cloud-native software.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include those of A10 Networks, Inc. and its subsidiaries after elimination of all intercompany accounts and transactions.
We have prepared the accompanying unaudited condensed consolidated financial statement pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). As permitted under these rules and regulations, we have condensed or omitted certain financial information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
These financial statements have been prepared on the same basis as our annual financial statements and, in management's opinion, reflect all adjustments consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial information. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.
These financial statements and accompanying notes should be read in conjunction with the financial statements and accompanying notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2016 on file with the SEC (our “Annual Report”).
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Those estimates and assumptions affect revenue recognition and deferred revenue, allowance for doubtful accounts, sales return reserve, valuation of inventory, fair value of marketable securities, contingencies and litigation, acquisition related purchase price allocations, accrued liabilities, and the determination of fair value of stock-based compensation. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.
Significant Accounting Policies
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash, cash equivalents and marketable securities are held and invested in high-credit quality financial instruments by recognized financial institutions and therefore subject to minimum credit risk.
Our accounts receivable are unsecured and represent amounts due to us based on contractual obligations of our customers. We mitigate credit risk in respect to accounts receivable by performing periodic credit evaluations based on a
number of factors, including past transaction experience, evaluation of credit history and review of the invoicing terms of the contract. We generally do not require our customers to provide collateral to support accounts receivable.
Significant customers, including distribution channel partners and direct customers, are those which represent more than 10% of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date. Revenues from our significant customers as a percentage of our total revenue are as follows:
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| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Customer A (a distribution channel partner) | 10% | | * | | 11% | | * |
Customer B (a distribution channel partner) | * | | 11% | | * | | 11% |
Customer C (a direct customer) | * | | 10% | | * | | * |
* represents less than 10% of total revenue
As of June 30, 2017, one customer accounted for 15% of our total gross accounts receivable. As of December 31, 2016, three customers accounted for 15%, 13% and 11% of our total gross accounts receivable.
Recent Accounting Pronouncements Not Yet Effective
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede most of the existing revenue recognition guidance under U.S. GAAP. This ASU requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires the capitalization of incremental customer acquisition costs and amortization of these costs over the contract period or estimated customer life which will result in the recognition of a contract asset on our balance sheets. This standard is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The ASU allows for either full retrospective or modified retrospective adoption. We intend to adopt the standard in the first quarter of 2018 applying the modified retrospective method. While we are continuing to assess all potential impacts of the new standard, we currently do not believe this standard will have a material impact on revenue recognized in our condensed consolidated financial statements. We are in the process of evaluating both the impact of capitalizing and amortizing incremental customer acquisition costs, such as sales commissions on our service contracts, and the disclosure requirements relating to this standard.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new accounting standard primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This standard is effective prospectively for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This standard is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted, including adoption in any interim period. The amendments will be applied prospectively to an award modified on or after the adoption date. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that are of significance or potential significance to us.
2. Marketable Securities and Fair Value Measurements
Marketable Securities
Marketable securities, classified as available-for-sale, consisted of the following (in thousands):
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| | June 30, 2017 | | December 31, 2016 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Certificates of deposit | | $ | 13,500 |
| | $ | 4 |
| | $ | (1 | ) | | $ | 13,503 |
| | $ | 12,499 |
| | $ | 9 |
| | $ | — |
| | $ | 12,508 |
|
Corporate securities | | 42,516 |
| | 5 |
| | (31 | ) | | 42,490 |
| | 42,765 |
| | 9 |
| | (42 | ) | | 42,732 |
|
U.S. Treasury and agency securities | | 3,493 |
| | — |
| | (12 | ) | | 3,481 |
| | 5,190 |
| | — |
| | (14 | ) | | 5,176 |
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Commercial paper | | 9,463 |
| | 2 |
| | (1 | ) | | 9,464 |
| | 11,470 |
| | 1 |
| | (2 | ) | | 11,469 |
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Asset-backed securities | | 16,847 |
| | — |
| | (12 | ) | | 16,835 |
| | 13,493 |
| | — |
| | (6 | ) | | 13,487 |
|
| | $ | 85,819 |
| | $ | 11 |
| | $ | (57 | ) | | $ | 85,773 |
| | $ | 85,417 |
| | $ | 19 |
| | $ | (64 | ) | | $ | 85,372 |
|
During the six months ended June 30, 2017 and 2016, we did not reclassify any amount to earnings from accumulated other comprehensive loss related to unrealized gains or losses.
The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of June 30, 2017 (in thousands):
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| Amortized Cost | | Fair Value |
Less than 1 year | $ | 50,898 |
| | $ | 50,881 |
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Mature in 1 - 3 years | 34,921 |
| | 34,892 |
|
| $ | 85,819 |
| | $ | 85,773 |
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All available-for-sale securities have been classified as current based on management's ability to use the funds in current operations.
Marketable securities in an unrealized loss position consisted of the following (in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
As of June 30, 2017 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Certificates of deposit | $ | 3,499 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 3,499 |
| | $ | (1 | ) |
Corporate securities | 30,063 |
| | (25 | ) | | 1,498 |
| | (6 | ) | | 31,561 |
| | (31 | ) |
U.S. Treasury and agency securities | 3,480 |
| | (12 | ) | | — |
| | — |
| | 3,480 |
| | (12 | ) |
Commercial paper | 4,984 |
| | (1 | ) | | — |
| | — |
| | 4,984 |
| | (1 | ) |
Asset-backed securities | 16,835 |
| | (12 | ) | | — |
| | — |
| | 16,835 |
| | (12 | ) |
| $ | 58,861 |
| | $ | (51 | ) | | $ | 1,498 |
| | $ | (6 | ) | | $ | 60,359 |
| | $ | (57 | ) |
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| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
As of December 31, 2016 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Corporate securities | $ | 28,537 |
| | $ | (42 | ) | | $ | — |
| | $ | — |
| | $ | 28,537 |
| | $ | (42 | ) |
U.S. Treasury and agency securities | 5,176 |
| | (14 | ) | | — |
| | — |
| | 5,176 |
| | (14 | ) |
Commercial paper | 8,974 |
| | (2 | ) | | — |
| | — |
| | 8,974 |
| | (2 | ) |
Asset-backed securities | 10,664 |
| | (6 | ) | | — |
| | — |
| | 10,664 |
| | (6 | ) |
| $ | 53,351 |
| | $ | (64 | ) | | $ | — |
| | $ | — |
| | $ | 53,351 |
| | $ | (64 | ) |
Based on evaluation of securities that have been in a continuous loss position, we did not recognize any other-than-temporary impairment charges during the six months ended June 30, 2017 and 2016.
Fair Value Measurements
The following is a summary of our cash, cash equivalents and marketable securities measured at fair value on a recurring basis (in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash | | $ | 36,050 |
| | $ | — |
| | $ | — |
| | $ | 36,050 |
| | $ | 18,672 |
| | $ | — |
| | $ | — |
| | $ | 18,672 |
|
Cash equivalents | | 10,335 |
| | — |
| | — |
| | 10,335 |
| | 10,303 |
| | — |
| | — |
| | 10,303 |
|
Certificates of deposit | | — |
| | 13,503 |
| | — |
| | 13,503 |
| | — |
| | 12,508 |
| | — |
| | 12,508 |
|
Corporate securities | | — |
| | 42,490 |
| | — |
| | 42,490 |
| | — |
| | 42,732 |
| | — |
| | 42,732 |
|
U.S. Treasury and agency securities | | — |
| | 3,481 |
| | — |
| | 3,481 |
| | — |
| | 5,176 |
| | — |
| | 5,176 |
|
Commercial paper | | — |
| | 9,464 |
| | — |
| | 9,464 |
| | — |
| | 11,469 |
| | — |
| | 11,469 |
|
Asset-backed securities | | — |
| | 16,835 |
| | — |
| | 16,835 |
| | — |
| | 13,487 |
| | — |
| | 13,487 |
|
| | $ | 46,385 |
| | $ | 85,773 |
| | $ | — |
| | $ | 132,158 |
| | $ | 28,975 |
| | $ | 85,372 |
| | $ | — |
| | $ | 114,347 |
|
There were no transfers between Level 1 and Level 2 fair value measurement categories during the six months ended June 30, 2017 and 2016.
3. Condensed Consolidated Financial Statement Details
Inventory
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (in thousands) |
Raw materials | $ | 6,795 |
| | $ | 6,669 |
|
Finished goods | 8,590 |
| | 8,401 |
|
Total inventory | $ | 15,385 |
| | $ | 15,070 |
|
Property and Equipment, Net
|
| | | | | | | | | |
| Useful Life | | June 30, 2017 | | December 31, 2016 |
| (in years) | | (in thousands) |
Equipment | 1-3 | | $ | 45,252 |
| | $ | 41,815 |
|
Software | 1-3 | | 3,824 |
| | 3,801 |
|
Furniture and fixtures | 1-3 | | 865 |
| | 865 |
|
Leasehold improvements | 2-8 | | 2,775 |
| | 2,724 |
|
Construction in progress | | | — |
| | 258 |
|
Property and equipment, gross | | | 52,716 |
| | 49,463 |
|
Less: accumulated depreciation | | | (44,450 | ) | | (41,244 | ) |
Property and equipment, net | | | $ | 8,266 |
| | $ | 8,219 |
|
Depreciation expense on property and equipment was $1.8 million each for the three months ended June 30, 2017 and 2016, and $3.6 million and $3.7 million for the six months ended June 30, 2017 and 2016, respectively.
Goodwill and Intangible Assets
Goodwill as of June 30, 2017 and December 31, 2016 was $1.3 million.
Purchased intangible assets, net, consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
Developed technology | $ | 5,050 |
| | $ | (1,010 | ) | | $ | 4,040 |
| | $ | 5,050 |
| | $ | (505 | ) | | $ | 4,545 |
|
Patents | 2,936 |
| | (1,065 | ) | | 1,871 |
| | 2,936 |
| | (848 | ) | | 2,088 |
|
Total | $ | 7,986 |
| | $ | (2,075 | ) | | $ | 5,911 |
| | $ | 7,986 |
| | $ | (1,353 | ) | | $ | 6,633 |
|
Amortization expense related to purchased intangible assets was $0.4 million and $33,000 for the three months ended June 30, 2017 and 2016, respectively, and $0.7 million and $0.1 million for the six months ended June 30, 2017 and 2016, respectively. Purchased intangible assets are amortized over a remaining weighted average useful life of 4.1 years.
Future amortization expense for purchased intangible assets as of June 30, 2017 is as follows (in thousands): |
| | | | |
Fiscal Year | | |
Remainder of 2017 | | $ | 721 |
|
2018 | | 1,442 |
|
2019 | | 1,442 |
|
2020 | | 1,442 |
|
2021 | | 864 |
|
| | $ | 5,911 |
|
Accrued Liabilities
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (in thousands) |
Accrued compensation and benefits | $ | 18,968 |
| | $ | 22,326 |
|
Accrued tax liabilities | 1,787 |
| | 3,340 |
|
Other | 4,641 |
| | 5,859 |
|
Total accrued liabilities | $ | 25,396 |
| | $ | 31,525 |
|
Deferred Revenue
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (in thousands) |
Deferred revenue: | | | |
Products | $ | 3,319 |
| | $ | 4,182 |
|
Services | 89,192 |
| | 88,726 |
|
Total deferred revenue | 92,511 |
| | 92,908 |
|
Less: current portion | (61,840 | ) | | (61,334 | ) |
Non-current portion | $ | 30,671 |
| | $ | 31,574 |
|
4. Credit Facility
In November 2016, we entered into a loan and security agreement (the “2016 Credit Facility”) with Silicon Valley Bank ("SVB"), as the lender. The 2016 Credit Facility provides a three-year, $25.0 million revolving credit subfacility, which includes a maximum of $25.0 million letter of credit subfacility. When the balance of our cash, cash equivalents and marketable securities minus outstanding revolving loans and letters of credit equals or exceeds $50.0 million, loans may be advanced under the 2016 Credit Facility up to the full $25.0 million. When the balance of our cash, cash equivalents and marketable securities minus outstanding revolving loans and letters of credit falls below $50.0 million, loans may be advanced under the 2016 Credit Facility based on a borrowing base equal to a specified percentage of the value of our eligible accounts receivable. The loans bear interest, at our option, at (i) the prime rate reported in The Wall Street Journal, minus 0.50% or (ii) a LIBOR rate determined in accordance with the 2016 Credit Facility, plus 2.50%. We are required to pay customary closing fees, commitment fees and letter of credit fees for a facility of this size and type.
Our obligations under the 2016 Credit Facility are secured by substantially all of our assets, excluding our intellectual property. The 2016 Credit Facility contains customary affirmative and negative covenants. In addition, the 2016 Credit Facility requires us to maintain compliance with an adjusted quick ratio of not less than 1.50:1.00, as determined in accordance with the 2016 Credit Facility. As of June 30, 2017, we had no outstanding balance under the 2016 Credit Facility and were in compliance with all facility covenants.
5. Commitments and Contingencies
Legal Proceedings
From time to time, we may be party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to intellectual property matters. Some of these proceedings have involved, and may involve in the future, claims that are subject to substantial uncertainties and unascertainable damages.
Lease Commitments
We lease various operating spaces in the United States, Asia and Europe under non-cancelable operating lease arrangements that expire on various dates through April 2022. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses. We recognize rent expense under these arrangements on a straight-line basis over the term of the lease.
Guarantees and Indemnifications
In the normal course of business, we provide indemnifications to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Other guarantees or indemnification arrangements include guarantees of product and service performance, and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions, and our guarantees and indemnification arrangements have not had any significant impact on our consolidated financial statements to date.
6. Equity Incentive Plans and Stock-Based Compensation
Equity Incentive Plans
2014 Equity Incentive Plan
The 2014 Equity Incentive Plan (the “2014 Plan”) provides for the granting of stock options, restricted stock awards, restricted stock units (“RSUs”), performance-based RSUs (“PSUs”), stock appreciation rights, performance units and performance shares to our employees, consultants and members of our board of directors. In June 2015, our board of directors adopted and our stockholders approved an amendment and restatement of the 2014 Plan, which increased the number of shares available for issuance under the 2014 Plan by the number of shares granted under the 2008 Stock Plan (the “2008 Plan”) that were or may in the future be canceled or otherwise forfeited or repurchased after March 20, 2014. A maximum of 8,310,566 shares may become available from such awards granted under the 2008 Plan for issuance under the 2014 Plan.
As of December 31, 2016, we had 4,241,980 shares available for future grant. Annually, the shares authorized for the 2014 Plan increase by the least of (i) 8,000,000 shares, (ii) 5% of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our Board of Directors. On January 1, 2017, the number of shares in the 2014 Plan increased by 3,394,376 shares, representing 5% of the prior year end’s common stock outstanding. In addition, 266,799 shares granted under the 2008 Plan that had been canceled, forfeited or repurchased during the year ended December 31, 2016 became available for issuance under the 2014 Plan.
As of June 30, 2017, we had 5,927,133 shares available for future grant plus an additional 81,188 shares granted under the 2008 Plan that have been canceled, forfeited or repurchased during the six months ended June 30, 2017.
2014 Employee Stock Purchase Plan
The 2014 Employee Stock Purchase Plan (the "2014 Purchase Plan") provides for twenty-four month offering periods with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at the beginning of the offering period or the end of the purchase period, whichever is lower. If the market value of our common stock at the end of the purchase period is less than the market value at the beginning of the offering period, participants will be withdrawn from the then current offering period following their purchase of shares, and automatically will be enrolled in the immediately following offering period. Participants may contribute up to 15% of their eligible compensation, subject to certain limits.
Employees purchased 524,101 shares at an average price of $6.49 and 552,554 shares at an average price of $3.88 for the six months ended June 30, 2017 and 2016, respectively. The intrinsic value of shares purchased during the six months ended June 30, 2017 and 2016 was $0.9 million and $1.3 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares. As of June 30, 2017, we had 3,579,959 shares available for future issuance under the 2014 Purchase Plan.
Stock-Based Compensation
A summary of our stock-based compensation expense is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Stock-based compensation by type of award: | | | | | | | |
Stock options | $ | 791 |
| | $ | 1,081 |
| | $ | 1,610 |
| | $ | 2,181 |
|
Stock awards | 3,351 |
| | 3,423 |
| | 6,300 |
| | 6,383 |
|
Employee stock purchase plan | 821 |
| | (635 | ) | | 1,369 |
| | (83 | ) |
| $ | 4,963 |
| | $ | 3,869 |
| | $ | 9,279 |
| | $ | 8,481 |
|
| | | | | | | |
Stock-based compensation by category of expense: | | | | | | | |
Cost of revenue | $ | 382 |
| | $ | 224 |
| | $ | 665 |
| | $ | 589 |
|
Sales and marketing | 1,888 |
| | 1,732 |
| | 3,424 |
| | 3,817 |
|
Research and development | 1,823 |
| | 1,090 |
| | 3,487 |
| | 2,521 |
|
General and administrative | 870 |
| | 823 |
| | 1,703 |
| | 1,554 |
|
| $ | 4,963 |
| | $ | 3,869 |
| | $ | 9,279 |
| | $ | 8,481 |
|
As of June 30, 2017, we had $47.2 million of unrecognized stock-based compensation expense related to unvested stock-based awards which will be recognized over a weighted-average period of 2.6 years.
The fair value of the options was estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Expected term (in years) | 4.7 | | * | | 4.7 | | 4.9 |
Risk-free interest rate | 1.74% | | * | | 1.74% | | 1.42% |
Volatility | 42% | | * | | 42% | | 49% |
Dividend rate | —% | | * | | —% | | —% |
* We did not grant stock options during the three months ended June 30, 2016.
The fair value of the employee stock purchase rights was estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
| | | |
| Three and Six Months Ended June 30, |
| 2017 | | 2016 |
Expected term (in years) | 1.3 | | 1.3 |
Risk-free interest rate | 1.12% | | 0.65% |
Volatility | 38% | | 43% |
Dividend rate | —% | | —% |
Stock Options
The following tables summarize our stock option activities and related information:
|
| | | | | | | | | | | | |
| Number of Shares (thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (thousands) |
Outstanding as of December 31, 2016 | 7,868 |
| | $ | 4.82 |
| | | | |
Granted | 135 |
| | $ | 8.42 |
| | | | |
|
Exercised | (1,130 | ) | | $ | 3.37 |
| | | | |
Canceled (1) | (350 | ) | | $ | 6.38 |
| | | | |
|
Outstanding as of June 30, 2017 | 6,523 |
| | $ | 5.07 |
| | 5.7 | | $ | 23,134 |
|
Vested and exercisable as of June 30, 2017 | 5,097 |
| | $ | 4.93 |
| | 5.1 | | $ | 18,819 |
|
|
| |
(1) | Includes 81,188 shares of canceled stock options from the 2008 Plan that became available for issuance under the 2014 Plan. |
As of June 30, 2017, the aggregate intrinsic value represents the excess of the closing price of our common stock of $8.44 over the exercise price of the outstanding in-the-money options.
The following table provides information pertaining to our stock options (in thousands, except weighted-average fair value):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Fair value of options granted | $ | 426 |
| | $ | 1,603 |
|
Weighted-average fair value of options granted | $ | 3.15 |
| | $ | 2.38 |
|
Intrinsic value of options exercised | $ | 6,429 |
| | $ | 832 |
|
Stock Awards
We have granted RSUs to our employees, consultants and members of our board of directors, and PSUs and market performance-based restricted stock units (“MSUs”) to certain executives.
In 2014 and 2015, we granted 540,000 MSUs and 40,000 MSUs, respectively, to certain executives. These MSUs will vest if the closing price of our common stock remains above certain predetermined target prices for 20 consecutive trading days within a 4-year period following the grant date, subject to continued service by the award holder. None of these MSUs were vested as of June 30, 2017.
In February 2016, we granted 547,000 PSUs with certain financial and operational targets. Actual performance resulted in participants achieving 80% of target, or approximately 414,000 shares, which will vest in annual tranches through February 2020 subject to continued service vesting requirements.
In October 2016, we granted 60,641 PSUs with certain financial and operational targets. To the extent they become eligible to vest upon achievement of the performance targets, these PSUs additionally are subject to service condition vesting requirements with scheduled vesting dates of March 2017 through June 2018. As of June 30, 2017, 12,128 shares had vested, 12,128 shares were forfeited, and the remaining shares were unvested and are eligible to vest based on achievement of performance targets.
In March 2017, we granted 395,383 PSUs with certain financial targets. These PSUs will vest between ranges of 0% and 150% based on the actual performance, and are subject to service condition vesting requirements with 25% of the PSUs that become eligible to vest upon achievement of the performance targets scheduled to vest on each of the first, second, third and fourth year anniversaries following February 2017. None of these PSUs were vested as of June 30, 2017.
The following table summarizes our stock award activities and related information:
|
| | | | | | | | | | | | |
| Number of Shares (thousands) | | Weighted-Average Grant Date Fair Value | | Weighted-Average Remaining Vesting Term (years) | | Aggregate Intrinsic Value (thousands) |
Outstanding as of December 31, 2016 | 5,959 |
| | $ | 5.81 |
| | | | |
Granted | 2,732 |
| | $ | 8.73 |
| | | | |
Released | (1,133 | ) | | $ | 6.13 |
| | | | |
Canceled | (623 | ) | | $ | 5.64 |
| | | | |
Outstanding as of June 30, 2017 | 6,935 |
| | $ | 6.92 |
| | 1.8 | | $ | 58,533 |
|
The aggregate intrinsic value of outstanding awards is calculated based on the closing price of our common stock of $8.44 on June 30, 2017.
The aggregate fair value of stock awards released as of the respective vesting dates was approximately $10.2 million and $1.8 million for the six months ended June 30, 2017 and 2016, respectively.
Stock Repurchase Program
On October 27, 2016, we announced that our board of directors authorized a share repurchase program for up to $20.0 million of our common stock over 12 months. Under the repurchase authorization, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. The repurchase authorization may be commenced, suspended or discontinued at any time at our discretion.
During the six months ended June 30, 2017, we repurchased 99,735 shares at an average price of $8.18 as a part of a publicly announced program. The repurchased shares were retired upon delivery to us. As of June 30, 2017, we had $17.4 million remaining authorized to repurchase shares.
7. Net Loss Per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding for the period plus potential dilutive common shares, including stock options, RSUs and employee stock purchase rights, unless the potential common shares are anti-dilutive. Since we had net losses in the three and six months ended June 30, 2017 and 2016, none of the potential dilutive common shares were included in the computation of diluted shares for these periods, as inclusion of such shares would have been anti-dilutive.
The following table presents common shares related to potentially dilutive shares excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Stock options, RSUs and employee stock purchase rights | 12,340 |
| | 13,567 |
| | 12,761 |
| | 11,736 |
|
Common stock subject to repurchase | 2 |
| | 28 |
| | 2 |
| | 28 |
|
| 12,342 |
| | 13,595 |
| | 12,763 |
| | 11,764 |
|
8. Income Taxes
We recorded income tax expense of $0.1 million each for the three months ended June 30, 2017 and 2016 and $0.5 million and $0.3 million for the six months ended June 30, 2017 and 2016, respectively, which primarily consisted of foreign taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the
financial statements and their respective tax bases using tax rates expected to be in effect during the years in which the basis differences reverse.
We believe it is more likely than not that our federal and state net deferred tax assets will not be fully realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of our deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such deferred tax assets will not be realized. Accordingly, we continue to maintain a valuation allowance against all of our U.S. and certain foreign net deferred tax assets as of June 30, 2017. We will continue to maintain a full valuation allowance against our net federal, state and certain foreign deferred tax assets until there is sufficient evidence to support recoverability of our deferred tax assets.
We had $3.3 million of unrecognized tax benefits as of June 30, 2017 and December 31, 2016. We do not anticipate a material change to our unrecognized tax benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business.
Accrued interest and penalties related to unrecognized tax benefits are recognized as part of our income tax provision in our condensed consolidated statements of operations.
We are subject to taxation in the United States, various states, and several foreign jurisdictions. Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2004 through the current period. We are currently under examination by the Internal Revenue Service for our 2015 and 2014 tax returns.
9. Geographic Information
The following table is a summary of revenue by geographic regions based on ship to location (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
United States | $ | 28,636 |
| | $ | 31,345 |
| | $ | 59,292 |
| | $ | 60,945 |
|
Japan | 8,406 |
| | 10,954 |
| | 21,485 |
| | 21,838 |
|
Asia Pacific, excluding Japan | 8,661 |
| | 7,746 |
| | 18,902 |
| | 14,477 |
|
EMEA | 6,786 |
| | 5,860 |
| | 11,994 |
| | 10,927 |
|
Other | 1,200 |
| | 1,225 |
| | 2,302 |
| | 2,747 |
|
Total revenue | $ | 53,689 |
| | $ | 57,130 |
| | $ | 113,975 |
| | $ | 110,934 |
|
Our long-lived assets which include property and equipment, net and intangible assets, net is primarily located in the United States. No other geographic regions comprised 10% or more of our long-lived assets as of June 30, 2017 and December 31, 2016.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the MD&A contains forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
These forward-looking statements include, but are not limited to, statements concerning the following:
| |
• | our ability to maintain an adequate rate of revenue growth; |
| |
• | our ability to successfully anticipate market needs and opportunities; |
| |
• | our business plan and our ability to effectively manage our growth; |
| |
• | costs associated with defending intellectual property infringement and other claims, if any; |
| |
• | loss or delay of expected purchases by our largest end-customers; |
| |
• | our ability to further penetrate our existing customer base; |
| |
• | our ability to displace existing products in established markets; |
| |
• | our ability to expand our leadership position in next-generation application delivery and server load balancing solutions; |
| |
• | continued growth in markets relating to network security; |
| |
• | our ability to timely and effectively scale and adapt our existing technology; |
| |
• | our ability to innovate new products and bring them to market in a timely manner; |
| |
• | our ability to expand internationally; |
| |
• | the effects of increased competition in our market and our ability to compete effectively; |
| |
• | the effects of seasonal trends on our results of operations; |
| |
• | our expectations concerning relationships with third parties; |
| |
• | the attraction and retention of qualified employees and key personnel; |
| |
• | our ability to achieve or maintain profitability while continuing to invest in our sales, marketing and research and development teams; |
| |
• | variations in product mix or geographic locations of our sales; |
| |
• | fluctuations in currency exchange rates; |
| |
• | increased cost requirements of being a public company and future sales of substantial amounts of our common stock in the public markets; |
| |
• | the cost and potential outcomes of litigation, if any; |
| |
• | our ability to maintain, protect, and enhance our brand and intellectual property; |
| |
• | future acquisitions of or investments in complementary companies, products, services or technologies; and |
| |
• | our ability to effectively integrate operations of entities we have acquired or may acquire.
|
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
Overview
We are a leading provider of software and hardware solutions designed to address our customers’ needs for secure application services. Our solutions enable our customers to secure and optimize the performance of their data center and cloud applications and secure their users, applications and infrastructure from internet, web and network threats at scale. We deliver a broad portfolio of hardware, software, and cloud offerings to our customers. These solutions are designed to give customers the visibility, performance, and security their applications need across both on-premise and cloud environments to produce greater agility for their businesses. Our customers include cloud providers, web-scale companies, service providers, government organizations and enterprises.
Our product portfolio seeks to address many of the aforementioned challenges and solution requirements. The portfolio consists of six advanced application delivery and security products; Application Delivery Controllers (“ADC”), Lightning Application Delivery Service (“Lightning ADS”), Carrier Grade Network Address Translation (“CGN”), Threat Protection System (“TPS”), SSL Insight (“SSLi”) and Convergent Firewall (“CFW”). They are available in a variety of form factors, such as optimized hardware appliances, bare metal software, virtual appliances, and cloud-native software.
We derive revenue from sales of products and related support services. Products revenue is generated primarily by sales of hardware appliances with perpetual licenses to our embedded software solutions. We also derive revenue from licenses to, or subscription services for, software-only versions of our solutions. We generate services revenue primarily from sales of maintenance and support contracts. Our customers predominantly purchase maintenance and support in conjunction with purchases of our products. In addition, we also derive revenue from the sale of professional services.
We sell our products globally to service providers and enterprises that depend on data center applications and networks to generate revenue and manage operations efficiently. Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial, gaming, education and government. Since inception, our customer base has grown rapidly. As of June 30, 2017, we had sold products to approximately 5,800 customers across 82 countries.
We sell substantially all of our solutions through our high-touch sales organization as well as distribution channel partners, including distributors, value added resellers and system integrators, and fulfill nearly all orders globally through such partners. We believe this sales approach allows us to obtain the benefits of channel distribution, such as expanding our market coverage, while still maintaining face-to-face relationships with our end-customers. We outsource the manufacturing of our hardware products to original design manufacturers. We perform quality assurance and testing at our San Jose, Taiwan and Japan distribution centers, as well as at our manufacturers’ locations.
During the first half of 2017, 52% of our total revenue was generated from the United States, 19% from Japan and 29% from other geographical regions. During the first half of 2016, 55% of our total revenue was generated from the United States, 20% from Japan and 25% from other geographical regions. Our enterprise customers accounted for 56% and 58% of our total revenue during the first half of 2017 and 2016, respectively. Our service provider customers accounted for 44% and 42% of our total revenue during the first half of 2017 and 2016, respectively.
As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers, including service providers, in any period. During the first half of 2017 and 2016, purchases from our ten largest end-customers accounted for 40% and 35% of our total revenue, respectively. Sales to these large end-customers have typically been characterized by large but irregular purchases with long sales cycles. The timing of these purchases and the delivery of the purchased products are difficult to predict. As a consequence, any acceleration or delay in anticipated product purchases, by or deliveries to, our largest customers could materially impact our revenue and operating results in any quarterly period. This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict.
As of June 30, 2017, we had $46.4 million of cash and cash equivalents and $85.8 million of marketable securities. Cash generated by operating activities was $13.8 million during the first half of 2017 as compared to $19.3 million during the same period of 2016.
We intend to continue to invest for long-term growth. We have invested and expect to continue to invest in our product development efforts to deliver new products and additional features in our current products to address customer needs. In addition, we may expand our global sales and marketing organizations, expand our distribution channel partner programs and increase awareness of our solutions on a global basis. Additionally, we will be investing in general and administrative resources to meet the requirements to operate as a public company. Our investments in growth in these areas may affect our short-term profitability.
Results of Operations
A summary of our condensed consolidated statements of operations for the three months ended June 30, 2017 and 2016 is as follows (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2017 | | 2016 | | Change |
| Amount | | Percent of Total Revenue | | Amount | | Percent of Total Revenue | | Amount | | Percent |
Revenue: | |
| | | | |
| | | | | | |
Products | $ | 32,100 |
| | 59.8 | % | | $ | 38,797 |
| | 67.9 | % | | $ | (6,697 | ) | | (17 | )% |
Services | 21,589 |
| | 40.2 |
| | 18,333 |
| | 32.1 |
| | 3,256 |
| | 18 | % |
Total revenue | 53,689 |
| | 100.0 |
| | 57,130 |
| | 100.0 |
| | (3,441 | ) | | (6 | )% |
Cost of revenue: | |
| | | | |
| | | | | | |
Products | 8,070 |
| | 15.0 |
| | 9,804 |
| | 17.2 |
| | (1,734 | ) | | (18 | )% |
Services | 4,623 |
| | 8.6 |
| | 4,405 |
| | 7.7 |
| | 218 |
| | 5 | % |
Total cost of revenue | 12,693 |
| | 23.6 |
| | 14,209 |
| | 24.9 |
| | (1,516 | ) | | (11 | )% |
Gross profit | 40,996 |
| | 76.4 |
| | 42,921 |
| | 75.1 |
| | (1,925 | ) | | (4 | )% |
Operating expenses: | |
| | | | |
| | | | | | |
Sales and marketing | 25,561 |
| | 47.7 |
| | 26,773 |
| | 46.9 |
| | (1,212 | ) | | (5 | )% |
Research and development | 16,490 |
| | 30.7 |
| | 14,486 |
| | 25.4 |
| | 2,004 |
| | 14 | % |
General and administrative | 6,989 |
| | 13.0 |
| | 7,230 |
| | 12.6 |
| | (241 | ) | | (3 | )% |
Litigation and settlement expense | — |
| | — |
| | 202 |
| | 0.3 |
| | (202 | ) | | (100 | )% |
Total operating expenses | 49,040 |
| | 91.4 |
| | 48,691 |
| | 85.2 |
| | 349 |
| | 1 | % |
Loss from operations | (8,044 | ) | | (15.0 | ) | | (5,770 | ) | | (10.1 | ) | | (2,274 | ) | | 39 | % |
Other income (expense), net: | |
| | | | |
| | | | | | |
Interest expense | (64 | ) | | (0.1 | ) | | (126 | ) | | (0.2 | ) | | 62 |
| | (49 | )% |
Interest and other income (expense), net | (26 | ) | | — |
| | 1,020 |
| | 1.8 |
| | (1,046 | ) | | (103 | )% |
Total other income (expense), net | (90 | ) | | (0.1 | ) | | 894 |
| | 1.6 |
| | (984 | ) | | (110 | )% |
Loss before income taxes | (8,134 | ) | | (15.1 | ) | | (4,876 | ) | | (8.5 | ) | | (3,258 | ) | | 67 | % |
Provision for income taxes | 135 |
| | 0.3 |
| | 59 |
| | 0.1 |
| | 76 |
| | 129 | % |
Net loss | $ | (8,269 | ) | | (15.4 | )% | | $ | (4,935 | ) | | (8.6 | )% | | $ | (3,334 | ) | | 68 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2017 | | 2016 | | Change |
| Amount | | Percent of Total Revenue | | Amount | | Percent of Total Revenue | | Amount | | Percent |
Revenue: | |
| | | | |
| | | | | | |
Products | $ | 71,806 |
| | 63.0 | % | | $ | 75,171 |
| | 67.8 | % | | $ | (3,365 | ) | | (4 | )% |
Services | 42,169 |
| | 37.0 |
| | 35,763 |
| | 32.2 |
| | 6,406 |
| | 18 | % |
Total revenue | 113,975 |
| | 100.0 |
| | 110,934 |
| | 100.0 |
| | 3,041 |
| | 3 | % |
Cost of revenue: | |
| | | | |
| | | | | | |
Products | 17,854 |
| | 15.7 |
| | 18,502 |
| | 16.7 |
| | (648 | ) | | (4 | )% |
Services | 8,983 |
| | 7.9 |
| | 8,934 |
| | 8.0 |
| | 49 |
| | 1 | % |
Total cost of revenue | 26,837 |
| | 23.6 |
| | 27,436 |
| | 24.7 |
| | (599 | ) | | (2 | )% |
Gross profit | 87,138 |
| | 76.4 |
| | 83,498 |
| | 75.3 |
| | 3,640 |
| | 4 | % |
Operating expenses: | |
| | | | |
| | | | | | |
Sales and marketing | 51,824 |
| | 45.5 |
| | 53,541 |
| | 48.3 |
| | (1,717 | ) | | (3 | )% |
Research and development | 33,532 |
| | 29.4 |
| | 29,263 |
| | 26.4 |
| | 4,269 |
| | 15 | % |
General and administrative | 14,150 |
| | 12.4 |
| | 13,891 |
| | 12.5 |
| | 259 |
| | 2 | % |
Litigation and settlement expense | — |
| | — |
| | 1,993 |
| | 1.8 |
| | (1,993 | ) | | (100 | )% |
Total operating expenses | 99,506 |
| | 87.3 |
| | 98,688 |
| | 89.0 |
| | 818 |
| | 1 | % |
Loss from operations | (12,368 | ) | | (10.9 | ) | | (15,190 | ) | | (13.7 | ) | | 2,822 |
| | (19 | )% |
Other income (expense), net: | |
| | | | |
| | | | | | |
Interest expense | (108 | ) | | (0.1 | ) | | (252 | ) | | (0.2 | ) | | 144 |
| | (57 | )% |
Interest and other income (expense), net | 816 |
| | 0.7 |
| | 1,235 |
| | 1.1 |
| | (419 | ) | | (34 | )% |
Total other income, net | 708 |
| | 0.6 |
| | 983 |
| | 0.9 |
| | (275 | ) | | (28 | )% |
Loss before income taxes | (11,660 | ) | | (10.3 | ) | | (14,207 | ) | | (12.8 | ) | | 2,547 |
| | (18 | )% |
Provision for income taxes | 509 |
| | 0.4 |
| | 263 |
| | 0.2 |
| | 246 |
| | 94 | % |
Net loss | $ | (12,169 | ) | | (10.7 | )% | | $ | (14,470 | ) | | (13.0 | )% | | $ | 2,301 |
| | (16 | )% |
Revenue
Our products revenue primarily consists of revenue from sales of our hardware appliances upon which our software is installed. Such software includes our ACOS software platform plus one of our ADC, CGN, TPS, SSLi or CFW solutions. Purchase of a hardware appliance includes a perpetual license to the included software. We recognize products revenue at the time of shipment, provided that all other revenue recognition criteria have been met. As a percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.
We generate services revenue from sales of post-contract support (“PCS”), which is bundled with sales of products and professional services. We offer tiered PCS services under renewable, fee-based PCS contracts, primarily including technical support, hardware repair and replacement parts, and software upgrades on a when-and-if-released basis. We recognize services revenue ratably over the term of the PCS contract, which is typically one year, but can be up to five years.
A summary of our total revenue is as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2017 | | 2016 | | Change |
| Amount | | Percent of Total Revenue | | Amount | | Percent of Total Revenue | | Amount | | Percent |
Revenue: | | | | | | | | | | | |
Products | $ | 32,100 |
| | 60 | % | | $ | 38,797 |
| | 68 | % | | $ | (6,697 | ) | | (17 | )% |
Services | 21,589 |
| | 40 |
| | 18,333 |
| | 32 |
| | 3,256 |
| | 18 | % |
Total revenue | $ | 53,689 |
| | 100 | % | | $ | 57,130 |
| | 100 | % | | $ | (3,441 | ) | | (6 | )% |
Revenue by geographic region: | |
| | | | |
| | | | |
| | |
|
United States | $ | 28,636 |
| | 53 | % | | $ | 31,345 |
| | 55 | % | | $ | (2,709 | ) | | (9 | )% |
Japan | 8,406 |
| | 16 |
| | 10,954 |
| | 19 |
| | (2,548 | ) | | (23 | )% |
Asia Pacific, excluding Japan | 8,661 |
| | 16 |
| | 7,746 |
| | 14 |
| | 915 |
| | 12 | % |
EMEA | 6,786 |
| | 13 |
| | 5,860 |
| | 10 |
| | 926 |
| | 16 | % |
Other | 1,200 |
| | 2 |
| | 1,225 |
| | 2 |
| | (25 | ) | | (2 | )% |
Total revenue | $ | 53,689 |
| | 100 | % | | $ | 57,130 |
| | 100 | % | | $ | (3,441 | ) | | (6 | )% |
|
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2017 | | 2016 | | Change |
| Amount | | Percent of Total Revenue | | Amount | | Percent of Total Revenue | | Amount | | Percent |
Revenue: | | | | | | | | | | | |
Products | $ | 71,806 |
| | 63 | % | | $ | 75,171 |
| | 68 | % | | $ | (3,365 | ) | | (4 | )% |
Services | 42,169 |
| | 37 |
| | 35,763 |
| | 32 |
| | 6,406 |
| | 18 | % |
Total revenue | $ | 113,975 |
| | 100 | % | | $ | 110,934 |
| | 100 | % | | $ | 3,041 |
| | 3 | % |
Revenue by geographic region: | |
| | | | |
| | | | |
| | |
|
United States | $ | 59,292 |
| | 52 | % | | $ | 60,945 |
| | 55 | % | | $ | (1,653 | ) | | (3 | )% |
Japan | 21,485 |
| | 19 |
| | 21,838 |
| | 20 |
| | (353 | ) | | (2 | )% |
Asia Pacific, excluding Japan | 18,902 |
| | 17 |
| | 14,477 |
| | 13 |
| | 4,425 |
| | 31 | % |
EMEA | 11,994 |
| | 10 |
| | 10,927 |
| | 10 |
| | 1,067 |
| | 10 | % |
Other | 2,302 |
| | 2 |
| | 2,747 |
| | 2 |
| | (445 | ) | | (16 | )% |
Total revenue | $ | 113,975 |
| | 100 | % | | $ | 110,934 |
| | 100 | % | | $ | 3,041 |
| | 3 | % |
Total revenue decreased by $3.4 million, or 6%, during the second quarter of 2017 as compared to the same period of 2016. This decrease was due to a $6.7 million decrease in products revenue, partially offset by $3.3 million increase in services revenue. Revenue from enterprise and service provider customers decreased 5% and 7%, respectively, in the second quarter of 2017 as compared to the same period of 2016.
Total revenue increased $3.0 million, or 3%, during the first half of 2017 as compared to the same period of 2016. This increase was due to a $6.4 million increase in services revenue, partially offset by a $3.4 million decrease in products revenue primarily attributable to a decline in ADC products revenue. Revenue from service provider and enterprise customers increased 8% and decreased 1%, respectively, during the first half of 2017 as compared to the same period of 2016.
Products revenue decreased $6.7 million, or 17%, and $3.4 million, or 4%, during the second quarter and the first half of 2017, respectively, as compared to the same periods of 2016. The decrease was primarily attributable to decreases from the United States and Japan as a number of deals in our pipeline did not close during the second quarter of 2017.
Services revenue increased $3.3 million, or 18%, and $6.4 million, or 18%, during the second quarter and the first half of 2017, respectively, as compared to the same periods of 2016. The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base. During the first half of 2017, services revenue recognized from our installed customer base with contracts existing at the beginning of the year grew by 20% as compared to the same measure during the first half of 2016.
During the second quarter of 2017, $28.6 million, or 53% of total revenue, was generated from the United States, which represents a 9% decrease as compared to the same period of 2016. During the first half of 2017, $59.3 million, or 52% of total revenue, was generated from the United States, which represents a 3% decrease as compared to the same period of 2016. The decrease was primarily due to lower products revenue, partially offset by higher services revenue attributable to the increase in PCS sales in connection with our increased installed customer base.
During the second quarter of 2017, $8.4 million, or 16% of total revenue, was generated from Japan, which represents a 23% decrease as compared to the same period of 2016. During the first half of 2017, $21.5 million, or 19% of total revenue, was generated from Japan, which represents a 2% decrease as compared to the same period of 2016. The decrease was primarily due to lower products revenue, partially offset by higher services revenue from PCS sales in connection with our increased installed customer base.
During the second quarter of 2017, $8.7 million, or 16% of total revenue, was generated from Asia Pacific regions excluding Japan, which represents a 12% increase as compared to the same period of 2016. During the first half of 2017, $18.9 million, or 17% of total revenue, was generated from Asia Pacific regions excluding Japan, which represents a 31% increase as compared to the same period of 2016. The increase was primarily due to higher products revenue and to a lesser degree higher services revenue from PCS sales in connection with our increased installed customer base.
During the second quarter of