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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
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 Logo JPEG.jpg
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.)
2300 Orchard Parkway, San Jose, California 95131
(Address of Principal Executive Offices and Zip Code)
(408) 325-8668
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.00001 par valueATENNew York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 filerxAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
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 April 26, 2024, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 74,455,219.




A10 NETWORKS, INC.
FORM 10-Q

TABLE OF CONTENTS
 Page No.
 
1


NOTE REGARDING FORWARD-LOOKING STATEMENTS

    The Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 strategy, business plan and our ability to effectively manage our growth and business operations;
• our expectations with respect to recognizing revenue related to remaining performance obligations;
• our plans to introduce new products;
• loss or delay of expected purchases by our largest end-customers;
• our expectations concerning relationships with third parties;
• our expectations with respect to the realization of our tax assets and our unrecognized tax benefits;
• our plans with respect to the repatriation of our earnings from our foreign operations;
• our ability to maintain profitability while continuing to invest in our sales, marketing, product development, distribution channel partner programs and research and development teams;
• our expectations regarding our future costs and expenses;
• variability of our gross margin and the factors affecting it;
• our expectations with respect to liquidity position and future capital requirements;
• our stock repurchase program and our quarterly cash dividends;
• our accounting policies and estimates;
• fluctuations in currency exchange rates;
• the cost and potential outcomes of litigation; and
• future acquisitions of or investments in complementary companies, products, services or technologies.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” and elsewhere in our Annual Report on Form 10-K filed with the SEC on February 29, 2024. 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. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: execution risks related to closing key deals and improving our execution; the continued market adoption of our products; our ability to successfully anticipate market needs and opportunities; our timely development of new products and features; our ability to maintain profitability; any loss or delay of expected purchases by our largest end-customers; our ability to maintain or improve our competitive position; competitive and execution risks related to cloud-based computing trends; our ability to attract and retain new end-customers and our largest end-consumers; our ability to maintain and enhance our brand and reputation; changes demanded by our customers in the deployment and payment model for our products; continued growth in markets relating to networking and network security; the success of any future acquisitions or investments in complementary companies, products, services or technologies; the ability of our sales and other teams to execute well; our ability to shorten our close cycles; the ability of our channel partners to sell our products; variations in product mix or geographic locations of our sales; risks associated with our presence in international markets; any unforeseen need for capital which may require us to divert funds we may have otherwise used for the dividend program or stock repurchase program; a significant decline in global macroeconomic or political conditions that have an adverse impact on our business and financial results; business interruptions related to our supply chain; our ability to manage our business and expenses if customers cancel or delay orders; weaknesses or deficiencies in our internal control over financial reporting; and our ability to timely file periodic reports required to be filed under the Securities Exchange Act of 1934, as well as other risks identified in the “Risk Factors” section contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.

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. Any
2


forward-looking statements made by us in this report speak only as of the date of this report, and we do not intend to update these forward-looking statements after the filing of this report, except as required by law.

Our investor relations website is located at https://investors.A10networks.com. We use our investor relations website, our company blog (https://www.a10networks.com/blog) and our corporate X (formerly Twitter) account (https://x.com/A10Networks) to post important information for investors, including news releases, analyst presentations, and supplemental financial information, and as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our investor relations website, our company blog and our corporate X account, in addition to following press releases, SEC filings and public conference calls and webcasts. We also make available, free of charge, on our investor relations website under “SEC Filings,” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports as soon as reasonably practicable after electronically filing or furnishing those reports to the SEC.

3




PART I. FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A10 NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par value)
March 31, 2024December 31, 2023
ASSETS
Current assets:  
Cash and cash equivalents$122,909 $97,244 
Marketable securities59,163 62,056 
Accounts receivable, net of allowances of $1,181 and $405, respectively55,906 74,307 
Inventory24,895 23,522 
Prepaid expenses and other current assets13,225 14,695 
Total current assets276,098 271,824 
Property and equipment, net30,254 29,876 
Goodwill 1,307 1,307 
Deferred tax assets, net62,323 62,725 
Other non-current assets25,676 24,077 
Total assets$395,658 $389,809 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:  
Accounts payable$5,049 $7,024 
Accrued liabilities24,466 21,388 
Deferred revenue83,345 82,657 
Total current liabilities112,860 111,069 
Deferred revenue, non-current57,561 58,677 
Other non-current liabilities10,928 12,187 
Total liabilities181,349 181,933 
Commitments and contingencies (Note 2 and Note 6)
Stockholders' equity:
Common stock, $0.00001 par value: 500,000 shares authorized; 89,309 and 89,003 shares issued and 74,434 and 74,359 shares outstanding, respectively1 1 
Treasury stock, at cost: 14,875 and 14,644 shares, respectively(153,948)(150,909)
Additional paid-in-capital491,164 486,958 
Dividends paid(42,091)(37,619)
Accumulated other comprehensive income (loss)(59)(71)
Accumulated deficit(80,758)(90,484)
Total stockholders' equity214,309 207,876 
Total liabilities and stockholders' equity$395,658 $389,809 
See accompanying notes to the condensed consolidated financial statements.

4


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 Three Months Ended March 31,
 20242023
Net revenue:
Products$30,069 $31,182 
Services30,606 26,509 
Total net revenue60,675 57,691 
Cost of net revenue:
Products6,799 6,083 
Services4,645 4,133 
Total cost of net revenue11,444 10,216 
Gross profit49,231 47,475 
Operating expenses:
Sales and marketing21,214 22,334 
Research and development14,063 11,665 
General and administrative6,741 7,309 
Total operating expenses42,018 41,308 
Income from operations7,213 6,167 
Non-operating income (expense), net:
Interest income1,681 973 
Other income (expense), net2,326 (2,218)
Non-operating income (expense), net4,007 (1,245)
Income before provision for income taxes11,220 4,922 
Provision for income taxes1,494 964 
Net income $9,726 $3,958 
Net income per share:
Basic$0.13 $0.05 
Diluted$0.13 $0.05 
Weighted-average shares used in computing net income per share:
Basic74,451 74,001 
Diluted75,318 75,541 


 See accompanying notes to the condensed consolidated financial statements.


5


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 Three Months Ended March 31,
 20242023
Net income $9,726 $3,958 
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on marketable securities, net of tax(39)527 
Unrealized gain on cash flow hedge, net of tax51 36 
Comprehensive income$9,738 $4,521 


See accompanying notes to the condensed consolidated financial statements.

6


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)

Three Months Ended March 31, 2023Common StockTreasury stock, at costAdditional Paid-in CapitalDividends PaidAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at December 31, 202273,738 $1 $(134,934)$466,927 $(19,802)$(726)$(130,454)$181,012 
Common stock issued under employee equity incentive plans459 — — 473 — — — 473 
Stock-based compensation expense— — — 3,941 — — — 3,941 
Payments for dividends— — — — (4,446)— — (4,446)
Unrealized gain on marketable securities, net of tax— — — — — 527 — 527 
Unrealized gain on cash flow hedge, net of tax— — — — — 36 — 36 
Net Income— — — — — — 3,958 3,958 
Balance at March 31, 202374,197 $1 $(134,934)$471,341 $(24,248)$(163)$(126,496)$185,501 


Three Months Ended March 31, 2024Common StockTreasury stock, at costAdditional Paid-in CapitalDividends PaidAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at December 31, 202374,359 $1 $(150,909)$486,958 $(37,619)$(71)$(90,484)$207,876 
Common stock issued under employee equity incentive plans305 — — 89 — — — 89 
Repurchase of common stock(230)— (3,039)— — — — (3,039)
Stock-based compensation expense— — — 4,117 — — — 4,117 
Payments for dividends— — — — (4,472)— — (4,472)
Unrealized loss on marketable securities, net of tax— — — — — (39)— (39)
Unrealized gain on cash flow hedge, net of tax— — — — — 51 — 51 
Net Income— — — — — — 9,726 9,726 
Balance at March 31, 202474,434 $1 $(153,948)$491,164 $(42,091)$(59)$(80,758)$214,309 


See accompanying notes to the condensed consolidated financial statements.
7


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three Months Ended March 31,
 20242023
Cash flows from operating activities:
Net income$9,726 $3,958 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization2,692 2,106 
Stock-based compensation3,839 3,742 
Other non-cash items456 (169)
Changes in operating assets and liabilities:
Accounts receivable17,684 5,687 
Inventory(2,187)(1,522)
Prepaid expenses and other assets1,549 1,519 
Accounts payable(2,707)(676)
Accrued liabilities1,820 (16,997)
Deferred revenue(428)1,506 
Net cash provided by (used in) operating activities32,444 (846)
Cash flows from investing activities:
Proceeds from sales of marketable securities4,391  
Proceeds from maturities of marketable securities39,899 29,263 
Purchases of marketable securities(40,722)(21,221)
Capital expenditures(2,925)(2,675)
Net cash provided by investing activities643 5,367 
Cash flows from financing activities:
Proceeds from issuance of common stock under employee equity incentive plans89 473 
Repurchase of common stock(3,039) 
Payments for dividends(4,472)(4,446)
Net cash used in financing activities(7,422)(3,973)
Net increase in cash and cash equivalents25,665 548 
Cash and cash equivalents—beginning of period97,244 67,971 
Cash and cash equivalents—end of period$122,909 $68,519 
Non-cash investing and financing activities:
Transfers between inventory and property and equipment$813 $824 
Purchases of property and equipment included in accounts payable$732 $142 

See accompanying notes to the condensed consolidated financial statements.
8


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, the “Company”, “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.

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our product portfolio seeks to address many of the cyber protection challenges and solution requirements. The portfolio consists of six secure application solutions; Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”), and two intelligent management and automation tools; Harmony Controller and aGalaxy TPS. Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, containerized software, virtual appliances and cloud-native software. Our customers include leading service providers (cloud, telecommunications, multiple system operators, cable), government organizations, and enterprises.

We derive revenue from two sources: (i) products revenue, which includes hardware, perpetual software license and subscription offerings, which include term-based license agreements; and (ii) services revenue, which includes post contract support (“PCS”), professional services, training and software-as-a-service offerings. Revenue for term-based license agreements is recognized at a point in time when the Company delivers the software license to the customer and over time once the subscription term has commenced. For our software-as-a-service offerings, our customers do not take possession of the Company’s software but rather we provide access to the service via a hosting arrangement. Revenue in these arrangements is recognized over time as the services are provided. A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors. Our customers predominantly purchase PCS services in conjunction with purchases of our products. We recognize services revenue ratably over the term of the PCS contract, which is typically one year, but can be up to seven years.

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. We report two customer verticals: service providers and enterprises, and we report customer revenues in three broad geographic regions: the Americas, APJ and EMEA regions. The Americas region comprises the United States and all other countries in the Americas (excluding the United States). The APJ region comprises Japan and all other countries in APAC (excluding Japan). The EMEA region comprises Europe, Middle East and Africa. We believe this geographic revenue view is consistent with how we evaluate our financial performance.

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.

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.

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 statements pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC” or the “Commission”). 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 (“U.S. GAAP”). The unaudited condensed consolidated balance sheet as of December 31, 2023 has been derived from our audited financial statements, which are included in our 2023 Annual Report on Form 10-K for the year ended December 31, 2023 on file with the SEC (the “2023 Annual Report”).
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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 the 2023 Annual Report.

Use of Estimates

The preparation of 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, the allowance for credit losses for potential uncollectible amounts, the sales return reserve, the valuation of inventory, the fair value of marketable securities, contingencies and litigation, accrued liabilities, deferred commissions 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

The Company’s significant accounting policies are disclosed in Part IIItem 8, “Financial Statements and Supplementary Data” of the 2023 Annual Report filed with the SEC on February 29, 2024. There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2024.

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 are 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 (end-customers), are those which represent 10% or more 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 end-customers as a percentage of our total revenue are as follows:
Three Months Ended March 31,
Customers20242023
Customer A14%*
Customer B11%15%

* represents less than 10% of total revenue
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As of March 31, 2024, one customer accounted for 19% of our total gross accounts receivable. As of December 31, 2023, one customer accounted for 19% of our total gross accounts receivable.

Recent Accounting Standards Not Yet Adopted

In November 2023, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280, on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We do not expect the adoption of this accounting standard to have an impact on our consolidated financial statements, but will require certain additional disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2023-09.

There have been no other recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the three months ended March 31, 2024 that are of significance or potential significance to us.


2. Leases

The Company leases various operating spaces in the United States, Asia and Europe under non-cancellable operating lease arrangements that expire on various dates through July 2027. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses.

The table below presents the Company’s right-of-use assets and lease liabilities as of March 31, 2024 (in thousands):
As of March 31, 2024As of December 31, 2023
Operating leases
Right-of-use assets:
Other non-current assets$15,155 $16,376 
Total right-of-use assets$15,155 $16,376 
Lease liabilities:
Accrued liabilities$5,000 $4,998 
Other non-current liabilities10,558 11,822 
Total operating lease liabilities$15,558 $16,820 

The aggregate future lease payments for non-cancelable operating leases as of March 31, 2024 were as follows (in thousands):

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Remainder of 2024$4,059 
20254,945 
20264,893 
20272,441 
Total lease payments16,338 
Less: imputed interest(780)
Present value of lease liabilities$15,558 

The components of lease costs were as follows (in thousands):
Three Months Ended March 31,
20242023
Operating lease costs$1,085 $1,110 
Short-term lease costs116 127 
Total lease costs$1,201 $1,237 

Average lease terms and discount rates for the Company’s operating leases were as follows:
Three Months Ended March 31,
20242023
Weighted-average remaining term (years)3.154.07
Weighted-average discount rate3.2%3.2%

Supplemental cash flow information for the Company’s operating leases were as follows (in thousands):
Three Months Ended March 31,
20242023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$1,354 $1,357 
Right-of-use assets obtained in exchange for new lease liabilities$ $ 

3. Marketable Securities and Fair Value Measurements

Marketable Securities

Marketable securities, classified as available-for-sale, consisted of the following (in thousands):
As of March 31, 2024As of December 31, 2023
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Corporate securities$12,749 $ $(15)$12,734 $15,393 $2 $(2)$15,393 
U.S. Treasury and agency securities43,889 1 (61)43,829 39,963 6 (32)39,937 
Commercial paper    998   998 
Debt securities$56,638 $1 $(76)$56,563 $56,354 $8 $(34)$56,328 
Publicly held equity securities - Level 12,600 5,728 
Total marketable securities$59,163 $62,056 

During the three months ended March 31, 2024 and 2023, we did not reclassify any amount to earnings from accumulated other comprehensive income (loss) related to unrealized gains or losses.
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The following table summarizes the cost and estimated fair value of our marketable securities based on stated effective maturities as of March 31, 2024 (excluding publicly held equity securities, in thousands):
As of March 31, 2024Amortized CostFair Value
Less than 1 year$52,088 $52,028 
Mature in 1 - 3 years4,550 4,535 
Total$56,638 $56,563 
All available-for-sale securities have been classified as current because they are available for use in current operations.

Marketable securities in an unrealized loss position as of March 31, 2024 consisted of the following (in thousands):
Less Than 12 Months12 Months or MoreTotal
As of March 31, 2024Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Corporate securities$12,734 $(15)$ $ $12,734 $(15)
U.S. Treasury and agency securities33,332 (48)6,432 (13)39,764 (61)
Total$46,066 $(63)$6,432 $(13)$52,498 $(76)

Marketable securities in an unrealized loss position as of December 31, 2023 consisted of the following (in thousands):
Less Than 12 Months12 Months or MoreTotal
As of December 31, 2023Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Corporate securities$9,418 $(2)$ $ $9,418 $(2)
U.S. Treasury and agency securities24,304 (32)  24,304 (32)
Total$33,722 $(34)$ $ $33,722 $(34)

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 three months ended March 31, 2024 and 2023.

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):
 As of March 31, 2024As of December 31, 2023
 Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash$77,050 $— $— $77,050 $52,451 $— $— $52,451 
Cash equivalents45,859 — — 45,859 44,793 — — 44,793 
Corporate securities— 12,734 — 12,734 — 15,393 — 15,393 
U.S. Treasury and agency securities13,233 30,596 — 43,829 12,701 27,236 — 39,937 
Commercial paper—  —  — 998 — 998 
$136,142 $43,330 $— $179,472 $109,945 $43,627 $— $153,572 
Publicly held equity securities - Level 12,600 5,728 
Total marketable securities$182,072 $159,300 
There were no transfers between Level 1 and Level 2 fair value measurement categories during the three months ended
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March 31, 2024 and 2023.

4. Derivatives

Foreign Exchange Forward Contracts

The Company uses derivative financial instruments to manage exposures to foreign currency that may or may not be designated as hedging instruments. The Company’s objective for holding derivatives is to use the most effective methods to minimize the impact of these exposures. The Company does not enter into derivatives for speculative or trading purposes. The Company enters into foreign exchange forward contracts primarily to mitigate the effect of gains and losses generated by foreign currency transactions related to certain operating expenses and remeasurement of certain assets and liabilities denominated in foreign currencies.

For foreign exchange forward contracts not designated as hedging instruments, the fair value of the derivatives in a net gain or not loss position are recorded in prepaid expenses and other current assets in the consolidated balance sheets. Changes in the fair value of derivatives are recorded in other income, net in the consolidated statements of operations. As of March 31, 2024 and December 31, 2023, foreign exchange forward currency contracts not designated as hedging instruments had the total notional amount of $43.3 million and $34.5 million, respectively. These contracts have maturities of less than 30 days. For the three months ended March 31, 2024 and 2023, the Company recorded net losses of $0.2 million and $0.6 million, respectively, in its consolidated statements of operations related to these contracts.

For foreign exchange forward contracts designated as hedging instruments, unrealized gains and losses arising from these contracts are recorded as a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. The hedging gains and losses in accumulated other comprehensive income (loss) in the consolidated balance sheet are subsequently reclassified to expenses, as applicable, in the consolidated statements of operations in the same period in which the underlying transactions affect the Company’s earnings. As of March 31, 2024, no foreign exchange forward currency contracts designated as hedging instruments were outstanding and as of December 31, 2023, foreign exchange forward currency contracts designated as hedging instruments had a notional amount of $10.8 million. These contracts have 30 days maturities.

5. Condensed Consolidated Financial Statement Components

Accounts Receivable Allowance for Credit Losses

The following table presents the change in the Company’s accounts receivable allowance for credit losses (in thousands):

As of March 31, 2024As of December 31, 2023
Allowance for credit losses, beginning balance$405 $32 
Increase (decrease) in allowance1,562 1,181 
Write-offs(786)(808)
Allowance for credit losses, ending balance$1,181 $405 

Inventory

Inventory consisted of the following (in thousands):
As of March 31, 2024As of December 31, 2023
Raw materials$17,585 $15,473 
Finished goods7,310 8,049 
Total inventory$24,895 $23,522 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):
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As of March 31, 2024As of December 31, 2023
Prepaid expenses$5,636 $6,143 
Deferred contract acquisition costs5,789 6,177 
Other1,800 2,375 
       Total prepaid expenses and other current assets$13,225 $14,695 

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):
Useful LifeAs of March 31, 2024As of December 31, 2023
(in years)
Equipment1 - 5$33,148 $31,174 
Software1 - 33,846 5,339 
Furniture and fixtures1 - 7531 520 
Leasehold improvementsLease term3,425 3,207 
Construction in process14,860 13,731 
Property and equipment, gross55,810 53,971 
Less: accumulated depreciation(25,556)(24,095)
Property and equipment, net$30,254 $29,876 

Construction in process primarily consists of deferred software development costs related to several software-as-a-service projects that will take longer than one year to complete.

Depreciation expense on property and equipment was $1.5 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively.

Internally Developed Software to be Marketed and Sold

During the three months ended March 31, 2024, no costs were capitalized associated with internally developed software to be marketed and sold. During the three months ended March 31, 2023, costs associated with internally developed software to be marketed and sold totaled $0.1 million. During the three months ended March 31, 2024 and 2023, amortization cost totaled $0.1 million in each period, respectfully. As of March 31, 2024, the unamortized capitalized internally developed software balance was $2.9 million and is included in other non-current assets. Internally developed software typically has a useful life of 6 years once it’s released and is generally available to customers.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
As of March 31, 2024As of December 31, 2023
Accrued compensation and benefits$8,899 $7,633 
Accrued tax liabilities3,332 1,429 
Lease liability5,000 4,998 
Other7,235 7,328 
Total accrued liabilities$24,466 $21,388 
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Deferred Revenue

Deferred revenue consisted of the following (in thousands):
As of March 31, 2024As of December 31, 2023
Deferred revenue:
Products$15,131 $14,917 
Services125,775 126,417 
Total deferred revenue140,906 141,334 
Less: current portion(83,345)(82,657)
Non-current portion$57,561 $58,677 

6. Commitments and Contingencies

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 July 2027. 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. See Note 2 – Leases for the Company’s aggregate future lease payments for the Company’s non-cancelable operating leases as of March 31, 2024.

Rent expense was $1.2 million for both the three months ended March 31, 2024 and 2023.

Purchase Commitments

We have open purchase commitments with third-party contract manufacturers with facilities in Taiwan to supply nearly all of our finished goods inventories, spare parts, and accessories. These purchase orders are expected to be paid within one year of the issuance date. We had open purchase commitments with manufacturers in Taiwan totaling $11.1 million as of March 31, 2024.

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 condensed consolidated financial statements to date.

7. Equity Incentive Plans, Stock-Based Compensation and Stock Repurchase Program

Equity Incentive Plans

2014 Equity Incentive Plan and 2023 Stock Incentive Plan

The 2014 Equity Incentive Plan (the “2014 Plan”) was in effect until it was replaced by the 2023 Stock Incentive Plan (the “2023 Plan”) on April 1, 2023. No further grants will be made under the 2014 Plan. Both the 2014 Plan and 2023 Plan provide for the granting of stock options, restricted stock awards, restricted stock units (“RSUs”), market performance-based RSUs (“PSUs”), stock appreciation rights, performance units and performance shares to our employees, consultants and members of our Board of Directors. As of March 31, 2024, we had 4,379,799 shares available for future grant under the 2023 Plan.

Like the 2014 Plan, shares authorized for the 2023 Plan increase annually by the lesser 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 lesser
16


amount as determined by our Board of Directors. Our Board of Directors determined current shares authorized under the 2023 Plan were sufficient for the time being and decided not to increase the number of shares authorized on January 1, 2024.

2014 Employee Stock Purchase Plan

The 2014 Employee Stock Purchase Plan, as amended (the “Amended 2014 Purchase Plan”) provides employees with an opportunity to purchase our common stock through accumulated contributions, up to a maximum of 10% of eligible compensation, with offering periods of six months in duration, beginning on or about December 1 and June 1 each year. As of March 31, 2024, the Company had 812,277 shares available for future issuance under the Amended 2014 Purchase Plan.

Stock-Based Compensation

A summary of our stock-based compensation expense is as follows (in thousands):
Three Months Ended March 31,
20242023
Stock-based compensation by type of award:
Stock awards$3,532 $3,443 
Employee stock purchase rights307 299 
$3,839 $3,742 
Stock-based compensation by category of expense:
Cost of net revenue$457 $412 
Sales and marketing1,033 1,165 
Research and development869 831 
General and administrative1,480 1,334 
$3,839 $3,742 

As of March 31, 2024, the Company had $33.7 million of unrecognized stock-based compensation expense related to unvested stock-based awards, including common stock acquired under our Amended 2014 Purchase Plan, which will be recognized over a weighted-average period of 2.73 years.

Stock Options

The following table summarizes our stock option activities and related information:
 Number of Shares (thousands)Weighted-Average Exercise Price Per ShareWeighted-Average Remaining Contractual Term
(years)
Aggregate Intrinsic Value (thousands)
Outstanding as of December 31, 202380 $4.63 
Exercised(20)4.40 
Canceled(3)12.19 
Outstanding as of March 31, 202457 4.38 0.72$529 
Vested and exercisable as of March 31, 202457 $4.38 0.72$529 

As of March 31, 2024, the aggregate intrinsic value represents the excess of the closing price of our common stock of $13.69 over the exercise price of the outstanding in-the-money options.

The intrinsic value of options exercised was $0.2 million and $0.7 million during the three months ended March 31, 2024 and 2023, respectively.
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Stock Awards

The Company has granted RSUs to its employees, consultants and members of its Board of Directors, and PSUs to certain executives and employees. The Company’s PSUs have market performance-based vesting conditions as well as service-based vesting conditions. As of March 31, 2024, there were 2,389,566 RSUs and 900,590 PSUs outstanding.

The following table summarizes our stock award activities and related information:
Number of Shares (thousands)Weighted-Average Grant Date Fair Value Per ShareWeighted-Average Remaining Vesting Term
(years)
Aggregate Fair Value (thousands)
Nonvested as of December 31, 20233,017 $13.15 
Granted602 12.38 
Released(285)10.32 
Canceled(44)13.73 
Nonvested as of March 31, 20243,290 $13.25 2.04$45,042 

The aggregate fair value of stock awards released was $2.9 million and $3.0 million for the three months ended March 31, 2024 and 2023, respectively.

Stock Repurchase Programs

On November 1, 2022, the Company announced its Board of Directors authorized a stock repurchase program of up to $50 million of its common stock over a period of twelve months (the “2022 Program”). Through March 31, 2023, no shares had been repurchased under the 2022 Program. This repurchase program was active for twelve months and expired in the second half of 2023.

On November 7, 2023, the Company announced its Board of Directors authorized a new stock repurchase program of up to $50 million of its common stock over a period of twelve months (the “2023 Program”). During the three months ended March 31, 2024, the Company repurchased 0.2 million shares for a total cost of $3.0 million under the 2023 Program.

Under the Company’s stock repurchase programs, repurchased shares are held in treasury at cost. The Company’s stock repurchase programs do not obligate it to acquire any specific number of shares. Shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

8. Net Income Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding for the period. Diluted net income per share applying the treasury stock method is computed using the weighted average number of common shares outstanding for the period plus potential dilutive common shares, including stock options, RSUs, PSUs and employee stock purchase rights, unless the potential common shares are anti-dilutive.

Basic and diluted net income per share are calculated as follows (in thousands, except per share amounts):
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Three Months Ended March 31,
20242023
Basic and diluted net income per share
Numerator:
Net income$9,726 $3,958 
Denominator:
Weighted-average shares outstanding - basic74,451 74,001 
Effect of dilutive potential common shares from stock options, stock awards and employee stock purchase plan867 1,540 
Weighted-average shares outstanding - diluted75,318 75,541 
Net income per share:
Basic$0.13 $0.05 
Diluted$0.13 $0.05 

The following table presents common shares related to potentially dilutive shares excluded from the calculation of diluted net income per share as their effect would have been anti-dilutive (in thousands):

Three Months Ended March 31,
20242023
Stock options, restricted stock units and employee stock purchase rights65 186 

9. Income Taxes

We recorded a provision for income tax $1.5 million and $1.0 million for the three months ended March 31, 2024 and 2023, respectively. The Company’s income tax provision for the three months ended March 31, 2024 and 2023 primarily consisted of U.S. federal and state taxes.

We had $8.1 million of unrecognized tax benefits as of March 31, 2024. 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 provision for income taxes 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 2005 through the current period. We are not currently under examination by any taxing authorities.


10. Geographic Information

We report customer revenues in three broad geographic regions: the Americas, APJ and EMEA regions. The Americas region comprises the United States and all other countries in the Americas (excluding the United States). The APJ region
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comprises Japan and all other countries in APAC (excluding Japan). The EMEA region comprises Europe, Middle East and Africa. We believe this geographic revenue view is consistent with how we evaluate our financial performance.

The following table depicts the disaggregation of revenue by geographic region based on the ship to location of our customers (in thousands):
Three Months Ended March 31,
20242023
Americas$27,442 $29,956 
United States23,144 24,121 
Americas-other4,298 5,835 
APJ25,043 15,760 
EMEA8,190 11,975 
Total net revenue$60,675 $57,691 

The following table is a summary of our long-lived assets which include property and equipment, net and operating lease right-of-use assets based on the physical location of the assets (in thousands):
As of March 31, 2024As of December 31, 2023
United States$42,761 $43,782 
APAC1,426 1,094 
Japan925 1,096 
EMEA297 280 
Total$45,409 $46,252 

11. Revenue

We report two customer verticals: service providers and enterprises. Revenue generated from service providers and enterprises was as follows (in thousands):
Three Months Ended March 31,
20242023
Service providers$37,661 $32,566 
Enterprises23,014 25,125 
Total$60,675 $57,691 

Contract Balances
The following table reflects contract balances with customers (in thousands):
 As of March 31, 2024As of December 31, 2023
Accounts receivable, net$55,906 $74,307 
Deferred revenue, current83,345 82,657 
Deferred revenue, non-current57,561 58,677 

We receive payments from customers based upon billing cycles. Invoice payment terms usually range from 30 to 90 days.

Accounts receivable are recorded when the right to consideration becomes unconditional.

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Contract assets include amounts related to our contractual right to consideration for performance obligations not yet billed and are included in prepaid and other current assets in the condensed consolidated balance sheets. The amounts were immaterial as of March 31, 2024 and December 31, 2023.

Deferred revenue primarily consists of amounts that have been invoiced but not yet been recognized as revenue and consists of performance obligations pertaining to support and subscription services. We recognized revenue of $27.2 million and $25.2 million during the three months ended March 31, 2024 and 2023, respectively, related to deferred revenues at the beginning of the respective periods.
Deferred Contract Acquisition Costs
We capitalize certain contract acquisition costs consisting of incremental sales commissions incurred to obtain customer contracts. Deferred commissions related to product revenues are recognized upon transfer of control to customers. Deferred commissions related to services revenue are recognized as the related performance obligations are met. Deferred commissions that will be recognized during the succeeding 12-month period are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other non-current assets. Amortization of deferred commissions is included in sales and marketing expense.
As of March 31, 2024, the current and non-current portions of deferred contract acquisition costs were $5.8 million and $4.1 million, respectively. As of December 31, 2023, the current and non-current portions of deferred contract acquisition costs were $6.2 million and $4.4 million, respectively. Related amortization expense was $2.0 million and $1.9 million for the three months ended March 31, 2024 and 2023, respectively.

We had no impairment loss in relation to the costs capitalized and no asset impairment charges related to contract assets during the three months ended March 31, 2024 and 2023.

Remaining Performance Obligations
Remaining performance obligations represent contracted revenues that are non-cancellable and have not yet been recognized due to unsatisfied or partially satisfied performance obligations, which include deferred revenues and amounts that will be invoiced and recognized as revenues in future periods.
We expect to recognize revenue on the remaining performance obligations as follows (in thousands):
As of March 31, 2024
Within 1 year$83,345 
Next 2 to 3 years54,135 
Thereafter3,426 
Total$140,906 

11. Subsequent Events

On April 30, 2024, the Company announced its Board of Directors declared a quarterly cash dividend. The dividend, in the amount of $0.06 per share outstanding, will be paid on June 3, 2024 to stockholders of record on May 15, 2024 as a return of capital. Future dividends will be subject to further review and approval by the Board in accordance with applicable law. The Board reserves the right to adjust or withdraw the quarterly dividend in future periods as it reviews the Company’s capital allocation strategy from time-to-time.



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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 that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Note Regarding Forward-Looking Statements” and other risk factors contained in Part I, Item 1A “Risk Factors” in our 2023 Annual Report.

Overview

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our product portfolio seeks to address many of the cyber protection challenges and solution requirements. The portfolio consists of six secure application solutions; Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”), and two intelligent management and automation tools; Harmony Controller and aGalaxy TPS. Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, containerized software, virtual appliances and cloud-native software. Our customers include leading service providers (cloud, telecommunications, multiple system operators, cable), government organizations, and enterprises.

We derive revenue from two sources: (i) products revenue, which includes hardware, perpetual software license and subscription offerings, which include term-based license agreements; and (ii) services revenue, which includes post contract support (“PCS”), professional services, training and software-as-a-service offerings. Revenue for term-based license agreements is recognized at a point in time when the Company delivers the software license to the customer and over time once the subscription term has commenced. For our software-as-a-service offerings, our customers do not take possession of the Company’s software but rather we provide access to the service via a hosting arrangement. Revenue in these arrangements is recognized over time as the services are provided. A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors. Our customers predominantly purchase PCS services in conjunction with purchases of our products. We recognize services revenue ratably over the term of the PCS contract, which is typically one year, but can be up to seven years.

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. We report two customer verticals: service providers and enterprises, and we report customer revenues in three broad geographic regions: the Americas, APJ and EMEA regions. The Americas region comprises the United States and all other countries in the Americas (excluding the United States). The APJ region comprises Japan and all other countries in APAC (excluding Japan). The EMEA region comprises Europe, Middle East and Africa. We believe this geographic revenue view is consistent with how we evaluate our financial performance.

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.

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.

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During the three months ended March 31, 2024, (i) 45% of our total revenue was generated from the Americas region, of which 38% was generated from the United States, (ii) 41% from the APJ region, of which 31% was generated from Japan, and (iii) 14% from the EMEA region. During the three months ended March 31, 2023, (i) 52% of our total revenue was generated from the Americas region, of which 42% was generated from the United States, (ii) 27% from the APJ region, of which 18% was generated from Japan, and (iii) 21% from the EMEA region. One of our priorities is to strengthen our sales efforts in North America. Our enterprise customers accounted for 38% and 44% of our total revenue during the three months ended March 31, 2024 and 2023, respectively, and our service provider customers accounted for 62% and 56% of our total revenue during the three months ended March 31, 2024 and 2023, 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 and enterprise customers, in any period. Purchases by our ten largest end-customers accounted for 44% and 33% of our total revenue for the three months ended March 31, 2024 and 2023, 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. Consequently, 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 March 31, 2024, we had $122.9 million of cash and cash equivalents and $59.2 million of marketable securities. Cash provided by operating activities was $32.4 million during the three months ended March 31, 2024, compared to cash used in operating activities of $0.8 million in the same period of 2023.

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. Our investments in growth in these areas may affect our short-term profitability.

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Results of Operations

A summary of our condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023 is as follows (dollars in thousands):
Three Months Ended March 31,
20242023Increase (Decrease)
AmountPercent of Total RevenueAmountPercent of Total RevenueAmountPercent
Net revenue:
Products$30,069 49.6 %$31,182 54.1 %$(1,113)(3.6)%
Services30,606 50.4 26,509 45.9 4,097 15.5 
Total net revenue60,675 100.0 57,691 100.0 2,984 5.2 
Cost of net revenue:
Products6,799 11.2 6,083 10.5 716 11.8 
Services4,645 7.7 4,133 7.2 512 12.4 
Total cost of net revenue11,444 18.9 10,216 17.7 1,228 12.0 
Gross profit49,231 81.1 47,475 82.3 1,756 3.7 
Operating expenses:
Sales and marketing21,214 35.0 22,334 38.7 (1,120)(5.0)
Research and development14,063 23.2 11,665 20.2 2,398 20.6 
General and administrative6,741 11.1 7,309 12.7 (568)(7.8)
Total operating expenses42,018 69.3 41,308 71.6 710 1.7 
Income from operations7,213 11.9 6,167 10.7 1,046 17.0 
Non-operating income (expense), net:
Interest income1,681 2.8 973 1.7 708 72.8 
Other income (expense), net2,326 3.8 (2,218)(3.8)4,544 (204.9)
Non-operating income (expense), net4,007 6.6 (1,245)(2.2)5,252 (421.8)
Income before provision for income taxes11,220 18.5 4,922 8.5 6,298 128.0 
Provision for income taxes1,494 2.5 964 1.7 530 55.0 
Net income$9,726 16.0 %$3,958 6.9 %$5,768 145.7 %

Net Revenue

We derive revenue from two sources: (i) products revenue, which includes hardware, perpetual software license and subscription offerings, which include term-based license agreements; and (ii) services revenue, which includes post contract support (“PCS”), professional services, training and software-as-a-service offerings.

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 or more of our ADC, CGN, TPS, SSLi or CFW solutions. Purchase of a hardware appliance includes a perpetual license to the included software. With respect to sales of our hardware appliances, we recognize products revenue upon transfer of control, generally at the time of shipment, provided that all other revenue recognition criteria have been met. Revenue for term-based license agreements is recognized at a point in time when we deliver the software license to the customer and the subscription term has commenced. 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 technical 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-available basis. We recognize services
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revenue ratably over the term of the PCS contract, which is typically one year, but can be up to seven years. For our software-as-a-service offerings, our customers do not take possession of our software but rather we provide access to the service via a hosting arrangement. Revenue in these arrangements is recognized over time as the services are provided. Additionally, an immaterial portion of our services revenue comes from subscription revenue. We offer several services by subscription, primarily through either term-based license agreements or as a service through our cloud-based platform.

A summary of our total revenue is as follows (dollars in thousands):

Three Months Ended March 31,
20242023Increase (Decrease)
AmountPercent of Total RevenueAmountPercent of Total RevenueAmountPercent
Net revenue:
Products$30,069 50 %$31,182 54 %$(1,113)(4)%
Services30,606 50 26,509 46 4,097 15 
Total net revenue$60,675 100 %$57,691 100 %$2,984 %
Net revenue by geographic region:   
Americas$27,442 45 %$29,956 52 %$(2,514)(8)%
United States23,144 38 %24,121 42 %(977)(4)%
Americas-other4,298 %5,835 10 %(1,537)(26)%
APJ25,043 41 %15,760 27 %9,283 59 %
EMEA8,190 14 %11,975 21 %(3,785)(32)
Total net revenue$60,675 100 %$57,691 100 %$2,984 %

Total net revenue increased $3.0 million, or 5%, during the three months ended March 31, 2024, compared to the same period of 2023. Changes in revenue were due primarily to (i) a $9.3 million increase in the APJ region, comprised of an increase in the Japan region of $8.8 million and an increase in APAC of $0.5 million, (ii) a $3.8 million decrease in the EMEA region, and (iii) a $2.5 million decrease in the Americas region, comprised of a decrease in Americas-other of $1.5 million and a decrease in the United States of $1.0 million. The overall increase in revenue was attributable to a $5.1 million increase in revenue from service provider customers, partially offset by a $2.1 million decrease in revenue from enterprise customers during the three months ended March 31, 2024 compared to the same period of 2023. Products revenue decreased $1.1 million, of which the EMEA region decreased $4.6 million and the Americas region decreased $3.9 million, partially offset by an increase of $7.5 million in the APJ region for the three months ended March 31, 2024, compared to the same period of 2023. Services revenue increased $4.1 million, comprised of increase of $1.8 million, $1.4 million and $0.8 million in the APJ, Americas and EMEA regions, respectively, for the three months ended March 31, 2024, compared to the same period of 2023.

Products revenue decreased $1.1 million, or 4%, during the three months ended March 31, 2024 compared to the same period of 2023, as a result of a decrease in demand from our enterprise customers in the EMEA and Americas regions.

Services revenue increased $4.1 million, or 15%, during the three months ended March 31, 2024, compared to the same periods of 2023, primarily attributable to an increase in PCS sales as a result of our growing installed customer base, especially in the APJ and Americas regions.

During the three months ended March 31, 2024, $27.4 million, or 45% of total revenue, was generated from the Americas region, which represents an 8% decrease in revenue compared to the same period of 2023. The decrease was primarily due to lower products revenue due to a decrease in demand from our enterprise customers.

During the three months ended March 31, 2024, $25.0 million, or 41% of total revenue, was generated from the APJ region, which represents a 59% increase compared to the same period of 2023. The increase was primarily due to higher services revenue due to an increase in demand from our service provider customers.

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During the three months ended March 31, 2024, $8.2 million, or 14% of total revenue, was generated from the EMEA region, which represents a 32% decrease compared to the same period of 2023. The decrease was primarily due to lower products revenue due to a decrease in demand from our enterprise customers.

Cost of Net Revenue, Gross Profit and Gross Margin

Cost of Net Revenue

Cost of products revenue is primarily comprised of cost of third-party manufacturing services and cost of inventory for the hardware component of our products. Cost of products revenue also includes warehouse personnel costs, shipping costs, inventory write-downs, certain allocated facilities and information technology infrastructure costs, and expenses associated with logistics and quality control.

Cost of services revenue is primarily comprised of personnel costs for our technical support and training teams. Cost of services revenue also includes the costs of inventory used to provide hardware replacements to end- customers under PCS contracts and certain allocated facilities and information technology infrastructure costs.

A summary of our cost of net revenue is as follows (dollars in thousands):

Three Months Ended March 31,Increase (Decrease)
20242023AmountPercent
Cost of net revenue:
Products$6,799 $6,083 $716 11.8 %
Services4,645 4,133 512 12.4 
Total cost of net revenue$11,444 $10,216 $1,228 12.0 %

Products cost of revenue increased 11.8% during the three months ended March 31, 2024 compared to the same periods of 2023, primarily due to an increase in products revenue.

Services cost of revenue increased 12.4% during the three months ended March 31, 2024 compared to the same periods of 2023, primarily driven by the mix of services delivered, which include technical support, training and service costs.

Gross Margin

Gross margin may vary and be unpredictable from period to period due to a variety of factors. These may include the mix of revenue from each of our regions, the mix of our products sold within a period, discounts provided to customers, inventory write-downs and foreign currency exchange rates.

Our sales are generally denominated in U.S. Dollars; however, in Japan, our sales are denominated in Japanese Yen.

Any of the factors noted above can generate either a favorable or unfavorable impact on gross margin.

A summary of our gross profit and gross margin is as follows (dollars in thousands):

Three Months Ended March 31,
20242023Increase (Decrease)
AmountGross Margin AmountGross MarginAmountGross Margin
Gross profit:
Products$23,270 77.4 %$25,099 80.5 %$(1,829)(3.1)%
Services25,961 84.8 22,376 84.4 3,585 0.4 
Total gross profit$49,231 81.1 %$47,475 82.3 %$1,756 (1.2)%

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Products gross margin decreased 3.1% during the three months ended March 31, 2024 compared to the same period of 2023, primarily due to product and regional mix.

Services gross margin increased 0.4% during the three months ended March 31, 2024 compared to the same period of 2023, primarily driven by the mix of services delivered, which include technical support, training and service costs.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. The largest component of our operating expenses is personnel costs which consist of wages, benefits, bonuses, and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation.

A summary of our operating expenses is as follows (dollars in thousands):
Three Months Ended March 31,Increase (Decrease)
20242023AmountPercent
Operating expenses:
Sales and marketing$21,214 $22,334 $(1,120)(5.0)%
Research and development14,063 11,665 2,398 20.6 
General and administrative6,741 7,309 (568)(7.8)
Total operating expenses$42,018 $41,308 $710 1.7 %
Sales and Marketing

Sales and marketing expenses are our largest functional category of operating expenses and primarily consist of personnel costs. Sales and marketing expenses also include the cost of marketing programs, trade shows, consulting services, promotional materials, demonstration equipment, depreciation and certain allocated facilities and information technology infrastructure costs.

Sales and marketing operating expenses decreased $1.1 million, or 5.0%, in the three months ended March 31, 2024, compared to the same period in 2023, primarily due to a decrease in personnel costs.    

In 2024, we expect sales and marketing expenses to increase from 2023 levels in line with overall revenue growth as we apply a disciplined approach to focus our investments in areas that offer the greatest opportunities.

Research and Development

Research and development efforts are focused on new product development and on developing additional functionality for our existing products. These expenses primarily consist of personnel costs, and, to a lesser extent, prototype materials, depreciation and certain allocated facilities and information technology infrastructure costs. We expense research and development costs as incurred.

Research and development operating expenses increased $2.4 million, or 20.6%, in the three months ended March 31, 2024, compared to the same period in 2023, primarily due to an increase in personnel costs.

In 2024, we expect research and development expenses to increase from 2023 levels reflecting strategic investments in our growth priorities, including cybersecurity technology.

General and Administrative

General and administrative expenses primarily consist of personnel costs, professional services and office expenses. General and administrative personnel costs include executive, finance, human resources, information technology, facility and legal related expenses. Professional services primarily consist of fees for outside accounting, tax, external legal counsel (including litigation), recruiting and other administrative services.

General and administrative operating expenses decreased $0.6 million, or 7.8%, in the three months ended March 31, 2024, compared to the same period in 2023, primarily due to a decrease in professional services costs.

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In 2024, we expect general and administrative expenses to increase modestly as we apply a disciplined approach to focus our investments in areas that offer the greatest opportunities.

Non-Operating Income (Expense), Net

Non-Operating income (expense), net, consists primarily of foreign currency exchange gains and losses, partially offset by interest income earned on our cash and cash equivalents and marketable securities.

Non-operating income (expense), net, had a favorable change of $5.3 million for the three months ended March 31, 2024, compared to the same period of 2023. The favorable change for the three months ended March 31, 2024, compared to the same period of 2023, was primarily driven by a favorable change of $3.8 million in foreign exchange gains and losses. Foreign currency exchange gains and losses are primarily a result of fluctuations in the Japanese Yen versus the U.S. Dollar. Interest income increased $0.7 million and fair value adjustments increased $0.7 million for the three months ended March 31, 2024, compared to the same period of 2023, respectively.

Provision for Income Taxes

We recorded income tax provisions of $1.5 million and $1.0 million for the three months ended March 31, 2024 and 2023, respectively. Our income tax provisions for the three months ended March 31, 2024 and 2023 primarily consisted of U.S. federal and state taxes.

Liquidity and Capital Resources

As of March 31, 2024, we had cash and cash equivalents of $122.9 million, including $2.2 million held outside the United States in our foreign subsidiaries, and $59.2 million of marketable securities. We currently do not have any plans to repatriate our earnings from our foreign operations. As of March 31, 2024, we had working capital of $163.2 million, accumulated deficit of $80.8 million and total stockholders’ equity of $214.3 million. Our marketable securities are highly liquid and are classified as available for sale should the Company decide to quickly raise cash at any time in the future.

We plan to continue to invest for long-term growth, and our investment may increase. We believe that our existing cash and cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months and beyond. Our future capital requirements will depend on many factors, including our growth rate, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced product and service offerings and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.

On November 1, 2022, the Company announced its Board of Directors authorized a new stock repurchase program (the “2022 Program”) of up to $50 million of its common stock over a period of twelve months. Under all programs, repurchased shares are held in treasury at cost. The Company’s stock repurchase programs do not obligate us to acquire any specific number of shares. Shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. Through March 31, 2023, no shares had been repurchased under the 2022 Program.

On November 7, 2023, the Company announced its Board of Directors authorized a new stock repurchase program of up to $50 million of its common stock over a period of twelve months (the “2023 Program”). During the three months ended March 31, 2024, the Company repurchased 0.2 million shares for a total cost of $3.0 million under the 2023 Program.

In October 2021, our Board approved the initiation of a regular quarterly cash dividend on our common stock. In the three months ended March 31, 2024, the Company paid a cash dividend of $0.06 per share outstanding, for a total of $4.5 million as a return of capital. In the three months ended March 31, 2023, the Company paid a cash dividend of $0.06 per share outstanding, for a total of $4.4 million as a return of capital. The next dividend, in the amount of $0.06 per share, will be paid on June 3, 2024 to stockholders of record on May 15, 2024 as a return of capital. We currently anticipate that we will continue to pay comparable quarterly cash dividends in the future. However, the payment, amount and timing of future dividends remain within the discretion of our Board and will depend upon our results of operations, financial condition, cash requirements, and other factors.

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As described in Part II – Item 1, “Legal Proceedings” of this Quarterly Report on Form 10-Q, from time to time we are involved in ongoing litigation. Any adverse settlements or judgments in any litigation could have a material adverse impact on our results of operations, cash balances and cash flows in the period in which such events occur.    

Statements of Cash Flows

The following table summarizes our cash flow related activities (in thousands):
 Three Months Ended March 31,
 20242023
Cash provided by (used in):
Operating activities$32,444 $(846)
Investing activities643 5,367 
Financing activities(7,422)(3,973)
Net increase in cash and cash equivalents$25,665 $548 

Cash Flows from Operating Activities

Our cash provided by operating activities is driven primarily by sales of our products and management of working capital investments. Our primary uses of cash from operating activities have been for personnel-related expenditures, manufacturing costs, marketing and promotional expenses and costs related to our facilities. Our cash flows from operating activities will continue to be affected principally by the extent to which we increase spending on our business and our working capital requirements.

During the three months ended March 31, 2024, cash provided by operating activities was $32.4 million, consisting of net income of $9.7 million, non-cash charges of $7.0 million and an increase in cash resulting from the net change in operating assets and liabilities of $15.7 million. Our non-cash charges consisted primarily of depreciation and amortization expenses of $2.7 million and stock-based compensation expense of $3.8 million. The net change in our operating assets and liabilities primarily reflects cash inflows from the changes in accounts receivable of $17.7 million, prepaid expense and other assets of $1.5 million and accrued liabilities of $1.8 million, partially offset by cash outflows from accounts payable of $2.7 million, inventory of $2.2 million and deferred revenue of $0.4 million.

The favorable change in accounts receivable was attributed to timing of billing and cash collections. The favorable change in prepaid expenses and other assets was primarily due to changes in the balance of prepaid marketing. The favorable change in accrued liabilities was attributed to variable cash compensation payments. The unfavorable change in accounts payable was attributable to the timing of payments to vendors. The unfavorable change in inventory was attributable to the timing of product shipments. The unfavorable change in deferred revenue was attributable to the timing of service contract bookings.

During the three months ended March 31, 2023, cash used in operating activities was $0.8 million, consisting of net income of $4.0 million and non-cash charges of $5.7 million, partially offset by a decrease in cash resulting from the net change in operating assets and liabilities of $10.5 million. Our non-cash charges consisted primarily of depreciation and amortization expenses of $2.1 million and stock-based compensation expense of $3.7 million. The net change in our operating assets and liabilities primarily reflects cash outflows from the changes in accrued liabilities of $17.0 million, inventory of $1.5 million and accounts payable of $0.7 million, partially offset by cash inflows from changes in accounts receivable of $5.7 million, prepaid expense and other assets of $1.5 million and deferred revenue of $1.5 million.

The unfavorable change in accrued liabilities was attributed to variable cash compensation accruals. The unfavorable change in inventory was attributable to the timing of product shipments. The unfavorable change in accounts payable was attributable to the timing of payments to vendors. The favorable change in accounts receivable was attributed to timing of billing and cash collections. The favorable change in prepaid expenses and other assets was primarily due to the release and return of a security deposit. The favorable change in deferred revenue was attributable to the timing of service contract bookings.

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Cash Flows from Investing Activities

During the three months ended March 31, 2024, cash provided by investing activities was $0.6 million, consisting of maturities of marketable securities of $39.9 million and sales of marketable securities of $4.4 million, partially offset by purchases of market