A10 Networks Inc.

A10 Networks Inc. (NYSE: ATEN) is a provider of software and hardware solutions. The company's solutions enable its customers to secure and optimize the performance of their data centre and cloud applications and secure their users, applications and infrastructure from Internet, Web and network threats at scale.

Key highlights

• Consistent Free cash flow Generation: The company is consistently generating free cash flows. In Q4 2020, the company generated a net free cash flow of USD 158.1 million against USD 159.1 million in the quarter ending on September 30, 2020. In Q4 2020, the group also purchased 2.7 million shares at an average price of USD 7.11 per share. For FY2020, the group generated free cash flow of USD 158 million, increased by USD 28 million, compared to USD 130 million in the previous corresponding period.

Source: Company

• Robust financial matrix: The company continuously showed a spirited performance across the revenues and operating income. On a sequential basis, the company registered a growth of 11% in revenue and 35% in operating income.

Source: Company

• Steady recurring revenues: The group demonstrated tremendous resiliency and performed very well in a challenging operating environment. In Q4 2020, the group clocked USD 28.4 million of recurring revenue, compared to USD 24.8 million in the previous corresponding period. The company is targeting to exit FY21 with recurring revenue of USD 120 million. 

Source: Company 

• Strong cash position: The company has a strong balance sheet and sufficient liquidity to support its business objectives in the coming fiscal year. The group ended the year with USD 158.1 million in cash and cash equivalents, compared to USD 129.9 million as of December 31, 2019.

Financial overview of Q4 2020 (In thousands of USD)

Source: Company

• In Q4 2020, the company posted total revenue of USD 62.6 million, against USD 60.3 million. The rise in revenue was primarily due to healthy performance from both segments.
• On the back of lower cost of sales, the company posted decent growth in its gross profit in the reported quarter, which stood at USD 49.1 million, against USD 46.8 million in the previous corresponding period.
• The company successfully minimized its operating expenses in Q4 2020, and reported USD 41.4 million, against USD 46.7 million in Q4 2019.
• Net income saw a mammoth rise to USD 7.8 million in Q4 2020, against USD 0.051 million. The increase in revenue and minimized operating expenses played a significant role in this rise in net income.

Risks associated with investment

The company is exposed to risks of varying degrees of significance, which could affect its ability to achieve the strategic objectives for growth. As the company is in the Information technology sector hence, the significant risk of technological change arises. Other risks are also there such as the company’s business strategy, evolving industry standards, intense competition, Currency fluctuations etc. 

Valuation Methodology (Illustrative): EV to EBITDA 

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

FY20 was a dynamic year for the company, as it registered full-year earnings of USD 17.8 million compared to last year’s net loss of USD 17.8 million while successfully navigating through a challenging economy. The group’s continuous focus on execution and cost discipline drove USD 55.3 million in cash from operations, funding a sizable stock buyback while preserving the strong balance sheet position to navigate uncertain markets. Furthermore, the group’s strategic focus is to drive its portfolio and continue to invest in faster growth opportunities like cybersecurity, 5G and cloud - leveraging its historic leadership position in those markets. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of USD 9.80 on February 11, 2021. We have considered Netscout Systems Inc, F5 Networks Inc, Citrix Systems Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

CBAK Energy Technology, Inc

CBAK Energy Technology, Inc. (NASDAQ: CBAT) is engaged in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium-ion high power rechargeable batteries. The application of its products and solutions caters to the electric vehicles, light electric vehicles, electric tools, transportation and energy storage segments. The primary product of the company is model 26650 lithium cells, which accounted for ~55% of sales during 2020.

Key Updates:

• Placement of Common Shares: Recently, the group confirmed a direct placement of  8,939,976 common shares at a price consideration of USD 7.83 per share. The total value of the placement stood at ~USD 70 million. In addition to this, the company also issued Series A-1 Warrants to the investors to purchase a total of 4,469,988 shares of common stock and Series A-2 Warrants to purchase up to 2,234,992 shares of common stock, both of which were issued at an exercise price of USD 7.67 per share. The above funds would be used to execute company’s upcoming business plans, repayment of debts, and for working capital purposes.

• New Product Development: The group is developing model 32140 large-sized cylindrical “tabless” battery and has passed internal technical and pilot plant tests. The above model can be used in several end applications such as light electric vehicles, electric vehicles, electric tools and energy storage. The above model would be manufactured in its Nanjing facilities from the second half of FY21.

Q3FY20 Financial Highlights:

• CBAT announced its third-quarter result, wherein the group posted net revenues of USD 10.620 million, stood higher than USD 8.089 million in the previous corresponding period (pcp).
• Gross profit stood significantly higher at USD 1.374 million, from USD 0.658 million in pcp.
• The group reported an operating profit of USD 0.393 million, as compared to an operating loss of USD 1.500 million in the previous corresponding period. The improvement was primarily due to a decline in total operating expenses (USD 0.981 million versus USD 2.158 million in pcp).
• Net income stood at USD 0.041 million, as compared to a loss of USD 1.787 million in pcp.
• The group posted cash and cash equivalents of USD 1.299 million, while total assets were recorded at USD 102.071 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk associated with investment

The company has one primary product, and the future operations would depend upon the completion of its production facilities, which would be further used for the manufacturing of the upcoming products. Thus, delay in funding of the above facilities might affect the product launch and might dampen the overall performance.

Stock Recommendation:

The group has collaborated with Jiangsu Gaochun Economic Development Zone Development and would develop light electric vehicle projects. The company has built a manufacturing plant in Tianjin City, China, which has an annual production capacity of 200,000 electric bicycles. Moreover, the company reported higher finance costs, due to higher debt component, and continuation of the above trend would dampen the profitability of the company. The company has an impressive product pipeline, while the commercialization of the products would require high capital investments. On the valuation front, the stock is trading at a price to sales multiple of 23.99x, which is significantly higher compared to the industry average of 1.82x. Hence, considering the above factors, we recommend an ‘Avoid’ rating on the stock at the closing price of USD 7.30 on February 11, 2021.

CBAT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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