Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
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
¨

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)
 
 
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.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨

(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
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


PART I. FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A10 NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par value)

 
June 30,
2017
 
December 31,
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
46,385

 
$
28,975

Marketable securities
85,773

 
85,372

Accounts receivable, net of allowances of $2,476 and $3,619, respectively
41,370

 
66,755

Inventory
15,385

 
15,070

Prepaid expenses and other current assets
7,336

 
5,137

Total current assets
196,249

 
201,309

Property and equipment, net
8,266

 
8,219

Goodwill and intangible assets
7,218

 
7,940

Other non-current assets
4,930

 
3,870

Total assets
$
216,663

 
$
221,338

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
8,318

 
$
9,851

Accrued liabilities
25,396

 
31,525

Deferred revenue
61,840

 
61,334

Total current liabilities
95,554

 
102,710

Deferred revenue, non-current
30,671

 
31,574

Other non-current liabilities
794

 
988

Total liabilities
127,019

 
135,272

Commitments and contingencies (Note 5)

 

Stockholders' equity:
Common stock, $0.00001 par value: 500,000 shares authorized; 70,573 and 67,873 shares issued and outstanding, respectively
1

 
1

Additional paid-in-capital
344,817

 
328,869

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




See accompanying notes to the condensed consolidated financial statements.


2


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 

 
 

 
 

 
 

Products
$
32,100

 
$
38,797

 
$
71,806

 
$
75,171

Services
21,589

 
18,333

 
42,169

 
35,763

Total revenue
53,689

 
57,130

 
113,975

 
110,934

Cost of revenue:
 

 
 

 
 

 
 

Products
8,070

 
9,804

 
17,854

 
18,502

Services
4,623

 
4,405

 
8,983

 
8,934

Total cost of revenue
12,693

 
14,209

 
26,837

 
27,436

Gross profit
40,996

 
42,921

 
87,138

 
83,498

Operating expenses:
 

 
 

 
 

 
 

Sales and marketing
25,561

 
26,773

 
51,824

 
53,541

Research and development
16,490

 
14,486

 
33,532

 
29,263

General and administrative
6,989

 
7,230

 
14,150

 
13,891

Litigation and settlement expense

 
202

 

 
1,993

Total operating expenses
49,040

 
48,691

 
99,506

 
98,688

Loss from operations
(8,044
)
 
(5,770
)
 
(12,368
)
 
(15,190
)
Other income (expense), net:
 

 
 

 
 

 
 

Interest expense
(64
)
 
(126
)
 
(108
)
 
(252
)
Interest and other income (expense), net
(26
)
 
1,020

 
816

 
1,235

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

Net loss
$
(8,269
)
 
$
(4,935
)
 
$
(12,169
)
 
$
(14,470
)
Net loss per share:
 

 
 

 
 

 
 

Basic and diluted
$
(0.12
)
 
$
(0.08
)
 
$
(0.18
)
 
$
(0.22
)
Weighted-average shares used in computing net loss per share:
 

 
 

 
 

 
 

Basic and diluted
69,770

 
64,861

 
69,173

 
64,584


 See accompanying notes to the condensed consolidated financial statements.



3


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in thousands)

 
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.


4


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net loss
$
(12,169
)
 
$
(14,470
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
4,332

 
3,717

Stock-based compensation
9,279

 
8,481

Other non-cash items
386

 
1,051

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
25,071

 
17,535

Inventory
(2,214
)
 
2,846

Prepaid expenses and other assets
(3,196
)
 
(479
)
Accounts payable
(1,810
)
 
(2,668
)
Accrued liabilities
(5,544
)
 
348

Deferred revenue
(397
)
 
2,960

Other
33

 
(65
)
Net cash provided by operating activities
13,771

 
19,256

Cash flows from investing activities:
 

 
 

Purchases of marketable securities
(47,074
)
 
(92,682
)
Proceeds from sales and maturities of marketable securities
46,542

 
7,609

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:
 

 
 

Proceeds from issuance of common stock under employee equity incentive plans
7,207

 
3,350

Repurchase and retirement of common stock
(816
)
 

Payment of contingent consideration
(650
)
 

Other
(57
)
 
(50
)
Net cash provided by financing activities
5,684

 
3,300

Net increase (decrease) in cash and cash equivalents
17,410

 
(69,485
)
Cash and cash equivalents - beginning of period
28,975

 
98,117

Cash and cash equivalents - end of period
$
46,385

 
$
28,632

Non-cash investing and financing activities:
 

 
 

Common stock issued under asset purchase agreement
$

 
$
1,313

Inventory transfers to property and equipment
$
1,899

 
$
1,112

Purchases of property and equipment included in accounts payable
$
440

 
$
428



See accompanying notes to the condensed consolidated financial statements.

5


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

6


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:

 
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 Impairmentwhich 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.


7


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):
 
 
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

Commercial paper
 
9,463

 
2

 
(1
)
 
9,464

 
11,470

 
1

 
(2
)
 
11,469

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):
 
Amortized Cost
 
Fair Value
Less than 1 year
$
50,898

 
$
50,881

Mature in 1 - 3 years
34,921

 
34,892

 
$
85,819

 
$
85,773


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):
 
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
)


8


 
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):
 
 
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



9


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



10


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.

11



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.


12


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:

13



 
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.


14


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

15


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.



16


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

17


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 201752% of our total revenue was generated from the United States, 19% from Japan and 29% from other geographical regions. During the first half of 201655% 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.

18




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
 %



19


 
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.


20


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.


21


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