ATEN - A10 Networks: Navigating A Challenging Year

2023-09-09 06:41:28 ET

Summary

• A10 Networks, Inc. is a cybersecurity firm based in San Jose, CA, offering network solutions products.
• The company gets the majority of its sales from outside of the United States and is navigating a challenging environment here in 2023.
• The company has a strong balance sheet with no long-term debt and $153 million in cash and marketable securities.
• FY2024 is projected to see sales growth return for A10 Networks, and the company is buying back stock, and the stock pays a small quarterly dividend.
• Time to start accumulating the shares?  An investment analysis follows in the paragraphs below.

Train hard, fight easy .”? John Steele

Today, we take our first look at A10 Networks, Inc. ( ATEN ) , as this cybersecurity firm goes in the spotlight. This cybersecurity and infrastructure solution provider has been challenged with sales growth so far in 2023, but analyst firms believe revenues will revive in FY2024. The stock has seen a pullback in its shares so far this year. The equity appears somewhat reasonably valued and sports a small dividend yield (1.65%) as well. An analysis of A10 Networks follows below.

Company Overview:

A10 Networks, Inc. is based in San Jose, CA. This network solutions provider offers a variety of products to its customer based. These include the following :

Thunder Application Delivery Controller that provides advanced server load balancing; Lightning ADC, a cloud-native software-as-a-service platform to boost the delivery and security of applications and microservices; and Thunder Carrier Grade Networking product, which offers standards-compliant address and protocol translation services for service provider networks ."

The stock currently trades around $14.50 a share and sports an approximate market capitalization of $1.1 billion.

The company is unusual for an American based tech concern, as it gets the majority of its revenues from overseas. The company gets just less than an approximate 60%/40% split between product/services revenue.

Second Quarter Results:

The company reported second quarter earnings on July 25th. A10 Networks posted a non-GAAP profit of 19 cents a share, a penny above expectations. GAAP net income came in at $11.6 million or 15 cents a share, up from 13 cents a share in the same period a year ago. Adjusted EBITDA margin increased by nearly 250 basis points compared to 2Q2022 to a record 26.6%.

Revenues fell just over three percent on a year-over-year basis to $65.8 million, a tad under the consensus. It should be noted that sales were up 14% on a sequential basis from the first quarter of this year. Adjusted EBITDA came in $17.4 million, equating to 26.4% of revenue. Product sales made up $39.1 million of overall revenues, while services contributed $26.7 million.

Deferred revenue totaled $132 million at the end of the quarter, up three percent year-over-year. Management noted that its clients in North America were taking a ' cautious and conservative approach to planned spending ' while business in the rest of the company's regions were more robust.

Latin America accounted for the majority of the company's sales for the quarter. It came in at $36.9 million for the quarter. This is down just over four percent from 2Q2022, but over 23% sequentially from the first quarter.

Analyst Commentary & Balance Sheet:

Since second quarter results hit, both Craig-Hallum ($19 price target) and BWS Financial ($24 price target) have reissued their Buy ratings on ATEN, while BTIG has maintained their Hold ratings on the shares.

Approximately three percent of the outstanding float in the stock is currently held short. Numerous insiders have been frequent sellers of the stock throughout 2023. Collectively, they have sold just north of $3 million worth of equity so far this year. There have been no insider purchases in many, many years.

A10 Networks ended the first half of 2023 with approximately $153 million worth of cash and marketable securities on its balance sheet. The firm has no long-term debt. The company repurchased $6.2 million worth of its own shares in the second quarter.

Verdict:

The company made 74 cents a share in FY2022 on $280 million of sales. The current analyst firm consensus has earnings coming in at 80 cents a share in FY2023 on flat sales, followed by a profit of 94 cents a share in FY2024 as revenues rise 10%.

Application delivery and security software is a solid long-term niche to be in, even as revenues will be flat this year. Sales growth should return in FY2024, and the stock seems reasonably priced at 15 times forward earnings. The company has a strong balance sheet, is buying back stock and pays a small dividend payout. That said, there is no compelling reason to own this equity at these trading levels. If the stock drifted down to the $11 to $12 level where the shares would be valued at 12–13 times forward earnings with just north of a two percent yield, I would probably start to accumulate a small stake in A10 Networks at that point in time. Until then, I am on the sidelines with this name.

The need for security often kills the quest for innovation.”? Haresh Sippy

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