June 12, 2020 - 2:58pm EST by
2020 2021
Price: 6.50 EPS .25 .41
Shares Out. (in M): 79 P/E 25 15
Market Cap (in $M): 515 P/FCF 15 9
Net Debt (in $M): -130 EBIT 25 40
TEV (in $M): 385 TEV/EBIT 15 9

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A10 Networks is an under-the-radar player in the Application Delivery Controller (ADC), Distributed Denial of Service (DDoS), and Carrier Grade Networking (CGN) markets.  The company has top notch products but had lacked a clear go to market strategy under the former CEO.  A new CEO, Dhrupad Trivedi, came in six months ago and is reinvigorating the company’s sales efforts to win market share.  Dhrupad is well qualified (overqualified?) for the CEO position at A10 having been an Executive Vice President of Network Solutions at Belden, a $2 billion revenue signal transmission company for many years and a Vice President of corporate development at JDS Uniphase, a large-cap optical components and systems company, from 1998 to 2010.  The former A10 CEO was the company’s founder and while he was a terrific product innovator, he was not geared toward sales and operations.  We think the management change can get the company moving in the right direction.

Dhrupad is focusing on making the company more efficient in two ways.  First, he is cutting unnecessary costs to make the company leaner and to give it more operating leverage for its revenue acceleration stage.  He is cutting $10 million out of operating expenses, primarily in the general and administrative (G&A) and sales and marketing (S&M) lines.  The company recently switched auditors from Deloitte & Touche, a big 4 firm, to Armanino LLP, a regional firm.  Armanino has a good reputation and is much cheaper than Deloitte & Touche.  In sales and marketing he flattened the organization, taking out a couple of layers of redundant management.  The results of the beginning of this cost cutting can be seen in the company’s Q1 2020 results, where it generated $4.1 million in non-GAAP operating income on $53.8 million in revenue versus a loss of $5.9 million in non-GAAP operating income on revenue of $50.3 million in the prior year quarter.  The combination of higher revenue and lower operating costs in a powerful one that can be seen in these results.


A10’s business is split between enterprise customers and service provider customers.  The current mix is 65% service provider and 35% enterprise, a mix that the company thinks will stay consistent over the next few years.  The service providers are addressed with a direct salesforce, which has done a decent job over time but can be improved on.  As mentioned above, Dhrupad has cut some excess management layers in the salesforce and has upped the quality of the salespeople overall.  The enterprise side has been more of a challenge for the company with not enough salespeople to address the tens of thousands of enterprises in the world.  Dhrupad is now focusing on indirect channels to get more coverage in this marketplace.  Earlier this year the company inked a deal with Oracle for Oracle to resell A10 products into its customer base.  Earlier this week, A10 signed a deal with Dell to offer preconfigured A10 virtualized software on Dell’s hardware platforms.  Both companies tweaked their products to get a final solution, showing commitment to the relationship.  While the company will not endorse these numbers, you can get a sense of Dell’s scale in this area by noting that F5 Networks, an A10 competitor that used to have a reseller relationship with Dell, generated $100 million in revenue a year from that relationship.  It is way too early to predict that kind of success for A10 but it gives you a sense of the potential.


A10’s products address both the availability and security of applications.  Its ADC products direct traffic between web servers to make sure that no one server gets overloaded with traffic.  For example, Amazon has many servers handling incoming purchase requests and an ADC would sit in front of these servers and act like a traffic cop, directing traffic and making sure there is an even flow and no one server gets overloaded.  A10’s DDoS products protect websites from an attack known as a distributed denial of service attack, where the attacker tries to flood the webs servers with so many requests that they break down and cannot function.  A10’s CGN product provides high-performance, transparent network address, and protocol translation, enabling service providers and enterprises to extend IPv4 connectivity and transition to IPv6 standards.  IPv4 and IPv6 are the IP addressing functions of the Internet.  IPv4 was the original addressing protocol but it ran out of addresses so then IPv6 was devised.  In the current network, both types of addresses are out there so a product is needed to translate from one to another.  A10’s ADCs, DDoS products, and CGN products all have leading functionality and scalability, which is why they count so many service providers as customers.  Microsoft is a big customer for A10’s DDoS product, which protects the company’s Azure cloud product line and its Office 365 product.  In 2019 Microsoft did $19 million in revenue with A10, or 9% of total revenue.  In Q1 2020, Microsoft stepped up and did $10 million in revenue, or 19% of total revenue.  A10 has said that Microsoft should do more this year than last year but will not forecast the actual number at this point. 


The company currently has a $500 million market cap with $130 million in net cash on the balance sheet.  We are forecasting $230 million in revenue this year and $250 million in revenue next year.  The 11% year-over-year growth will be a result of the work the company is doing on the direct salesforce plus the new relationships with Oracle and Dell on the indirect side.  Also, service providers enabling their networks for 5G will induce additional demand for A10’s products.  The company is super-underfollowed, with no sell-side analysts covering it, even though it has a half a billion-dollar market cap.  On a multiple basis, the company trades at 1.5x 2021E sales, a huge discount to F5 which trades at 3.4x sales.  We think A10, which we believe has more growth potential than F5, should trade at least at 3x sales, which would imply a $11.25 stock price and 70% upside from current prices. 





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Revenue acceleration as the Dell partnership kicks in combine with lowered operating expenses will cause margins to jump and the stock will rerate

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