IPO Preview: A10 Networks

Mar.21.14 | About: A10 Networks, (ATEN)

Summary

Customers can accelerate, secure and optimize the performance of their data center applications and networks.

Long-standing lawsuit with Brocade Communications is now settled.

New product launched in January 2014.

Based in San Jose, CA, A10 Networks (NYSE:ATEN) scheduled a $175 million IPO on the NYSE with a market capitalization of $826 million at a price range midpoint of $14 for Friday, March 21, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint managers: Morgan Stanley, BofA Merrill Lynch, J.P. Morgan

Co-Managers: RBC Capital Markets, Pacific Crest, Oppenheimer & Co.

End of lockup (180 days): Wednesday, September 17, 2014

End of 25-day quiet period: Tuesday, April 15, 2014

Summary
ATEN's solutions enable enterprises, service providers, Web giants and government organizations to accelerate, secure and optimize the performance of their data center applications and networks.

New product: ATEN is a new entrant into the Distributed Denial of Service (DDoS) Threat Protection System and first publicly launched its Distributed Denial of Service Threat Protection System (DDoS detection and mitigation solution) in January 2014.

Lawsuit settled: ATEN's long-standing lawsuit with Brocade Communications is now settled. Some ATEN customers said they would not make further purchases until that lawsuit was settled (see below).

Valuation

Glossary

Mrkt

Price /

Price /

Price /

Price /

Gross

Compare

Cap (MM)

Sls

Erngs

BkVlue

TanBV

Margin %

A10 Networks

$826

5.0

-49.8

7.9

8.0

76%

F5 Networks (NASDAQ:FFIV)

$8,490

5.3

29.5

5.8

9.1

82%

Radware (NASDAQ:RDWR)

$753

3.7

43.7

2.6

2.9

80%

Citrix Systems (NASDAQ:CTXS)

$11,140

3.7

25.9

3.4

11.8

83%

Brocade (NASDAQ:BRCD)

$4,350

1.9

15.0

1.9

6.4

65%

Click to enlarge

In terms of stock price, only FFIV has done well over the past three months.

Conclusion

ATEN should be able to increase sales with the Brocade lawsuit settled, although the new sales lead time is relatively long.

The new product introduced in January '14 could also help top-line revenue.

ATEN is priced in range with F5 Networks, Radware, Citrix Systems except ATEN has been losing money.

The rating on ATEN is buy.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

ATEN is a leading provider of application networking technologies.

ATEN's solutions enable enterprises, service providers, Web giants and government organizations to accelerate, secure and optimize the performance of their data center applications and networks.

Three solutions

ATEN currently offers three software based advanced application networking solutions.

These are

-- Application Delivery Controllers, or ADCs, to optimize data center performance,
-- Carrier Grade Network Address Translation, or CGN, to provide address and protocol translation services for service provider networks, and a
-- Distributed Denial of Service (DDoS) Threat Protection System, or TPS, for network-wide security protection.

ATEN is a new entrant into the DDoS market and first publicly launched its Distributed Denial of Service Threat Protection System (DDoS detection and mitigation solution) in January 2014.

ATEN delivers these solutions both on optimized hardware appliances and as virtual appliances across its Thunder Series and AX Series product families.

Revenue
ATEN's products revenue is generated primarily by sales of hardware appliances with perpetual licenses to software solutions.

ATEN generates services revenue primarily from sales of maintenance and support. End-customers predominantly purchase maintenance and support in conjunction with purchases of products.

Brocade Communications Litigation
In recent years, ATEN's financial performance was affected by a protracted, but now settled, intellectual property litigation with Brocade Communications Systems, Inc.

Since the litigation commenced in August 2010, ATEN incurred substantial legal expenses in each financial period, as shown in results of operations.

In addition, the agreement to settle the litigation in May 2013 resulted in the cash payment by ATEN of an aggregate of $75.0 million in the second and third quarters of 2013, plus interest.

ATEN also believe that the presence of such litigation, and the uncertainty it created in the market, affected revenue during these periods, especially following the issuance of injunctions in the litigation in the first quarter of 2013.

Although such injunctions did not prevent ATEN from selling redesigned products, certain customers informed ATEN that they would not purchase any of products until ATEN settled the dispute.

In particular, total revenue for the quarters ended March 31 and June 30, 2013 grew 12% and 7% year over year, as compared to growth of 27% and 23% in the quarters ended September 30 and December 31, 2013, year over year.

ATEN chose to invest in product development and sales and marketing during the period of the Brocade litigation in order to best position the portfolio and presence in the market in anticipation of the time that the litigation was over.

To calculate Adjusted EBITDA ATEN excluded the Brocade litigation settlement and associated litigation fees and expenses. This facilitates comparisons of operating performance on a period-to-period basis.

Customers
End-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial and education. Since inception, ATEN's customer base has grown rapidly.

As of December 31, 2013, ATEN had sold products to more than 2,900 customers across 65 countries, including three of the top four United States wireless carriers, seven of the top ten United States cable service providers, and the top three wireless carriers in Japan, in addition to other global enterprises, Web giants and governmental organizations.

End-customers often follow an initial purchase with subsequent additional purchases. For example, the top 25 end-customers, as measured by revenue generated in 2012 and 2013, have, on average, made follow-on purchases in 81% of the quarters following their initial purchase.

Customer concentration
Sales to NTT DoCoMo, Inc., through a reseller, accounted for 32% of total revenue during the year ended December 31, 2012 and 13% of total revenue during the year ended December 31, 2013.

In addition, during the years ended December 31, 2012 and 2013, purchases from the ten largest end-customers accounted for 49% and 43% of total revenue.

The composition of the group of these ten largest end-customers changes from period to period, but often includes service providers, who accounted for 53% and 47% of total revenue during the years ended December 31, 2012 and 2013.

Sales to these large end-customers have typically been characterized by large but irregular purchases with long initial sales cycles. After initial deployment, subsequent purchases of products typically have a more compressed sales cycle.

Sales & distribution
ATEN sells substantially all of its solutions through a 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.

ATEN believes this sales approach allows ATEN to obtain the benefits of channel distribution, such as expanding market coverage, while still maintaining face-to-face relationships with end-customers.

International
During the year ended December 31, 2013, 48% of total revenue was generated from the United States, 28% from Japan, 11% from the Asia Pacific region, excluding Japan, 8% from EMEA, and 5% from other geographical regions.

Advanced Core Operating System (ACOS)

ATEN's products are built on its Advanced Core Operating System, or ACOS, platform of advanced network technologies, which is designed to enable its products to deliver substantially greater performance and security relative to prior generation application networking products.

ATEN's software-based ACOS architecture also provides the flexibility that enables it to expand its business to offer additional products to solve a growing array of networking and security challenges arising from increased Internet cloud and mobile computing.

History

ATEN company was founded in 2004 to create efficient, application-aware application networking performance and security solutions.

Through development of the ACOS platform, accompanied by a sustained high level of innovation and continued feature development, ATEN has produced a growing portfolio of application networking products.

In 2005, ATEN released its first product, and in 2007, ATEN introduced its AX Series of ADCs to optimize data center performance.

In 2009, ATEN added security capabilities to its AX Series.

In 2010, ATEN further expanded its AX Series products to provide its CGN solution that extends the life of increasingly scarce IPv4 address blocks and their associated infrastructure, and provides migration solutions to the IPv6 addressing standard.

In May 2013, ATEN released its Thunder Series, a family of physical and virtual appliances that integrate an application delivery controller with security, network control and management tools. Thunder Series products can provide both ADC and CGN solutions, as well as network-wide security protection through ATEN's TPS solution.

ATEN delivers these solutions both on optimized hardware appliances and as virtual appliances across its Thunder Series and AX Series product families.

Dividend Policy

No dividends are planned.

Intellectual Property

As of December 31, 2013, ATEN had 33 issued patents and 41 patent applications pending in the United States relating to its next-generation application delivery controllers and platform.

ATEN's issued U.S. patents, excluding an older set of 15 patents that it acquired, expire between 2026 and 2031. ATEN has 17 issued patents and 34 patent applications pending overseas.

Competition

ATEN believes that its main competitors fall into three categories:

Companies that sell products in the traditional Application Delivery Controllers-ADC market. In the ADC market, ATEN believes it is well established in this market and it competes against other companies that are well established in this market, including F5 Networks, Inc., Brocade Communications Systems, Inc., Cisco Systems, Inc., Citrix Systems, Inc., and Radware Ltd.

Companies that sell Carrier Grade Network Address Translation--CGN products. ATEN's purpose-built CGN solution competes primarily against products originally designed for other networking purposes, such as edge routers and security appliances from vendors such as Alcatel-Lucent USA Inc., Cisco Systems, Inc. and Juniper Networks, Inc.

Companies that sell traditional DDoS mitigation products. ATEN is a new entrant into the DDoS market and first publicly launched its Distributed Denial of Service Threat Protection System (DDoS detection and mitigation solution) in January 2014.

ATEN believes its principal competitors in this market are Arbor Networks, Inc., a subsidiary of Danaher Corporation, and Radware.

5% stockholders

Lee Chen 21.2%

Entities affiliated with Summit Partners, L.P. 18.8%

Entities affiliated with Mitsui & Co., Ltd. 12.7%

Peter Y Chung 18.8%

Use of proceeds

28% of the IPO proceeds are going to selling shareholders. ATEN itself expects to net $112.7 million from its IPO. Proceeds are allocated as follows:

  • general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures although ATEN does not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes.
  • based on its current operating assumptions, ATEN estimates that it will use between $20 million and $30 million of its net proceeds from this offering to fully implement its growth strategies described in the prospectus.

Disclaimer: This ATEN IPO report is based on a reading and analysis of ATEN's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.