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spk02: Good day, and welcome to the A10 Network's first quarter 2021 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Rob Fink of FNKIR. Please go ahead.
spk00: Thank you, Operator, and thank you all for joining us today. This call is being recorded and webcasted live, and it may be accessed for at least 90 days on ATEN Network's investor relation website at atennetworks.com. Hosting the call today are Drew Pettrivedi, ATEN's President and CEO, and CFO Brian Becker. Before we begin, I would like to remind you that shortly after the market closed, 810 issued a press release announcing its first quarter 2021 financial results. Additionally, 810 published a presentation and supplemental trended financial statements. You may access the press release presentation and financial statements on the investor relations section of the company's website. During the course of today's call, management will make forward-looking statements. including statements regarding projections for future operating results, continued reductions in operating expenses, continued efforts to improve operational efficiency, and focus on driving growth, business optimization, and overall profitability. Our belief that we can continue to build upon customer momentum going forward, our expectations regarding future opportunities, and our ability to execute on those opportunities our expectations for future market growth, and the general growth of our business. The development and performance of our products and the anticipated customer benefits from the use of our products, our expectations and priorities with respect to 5G. These statements are based on current expectations and beliefs as of today, April 27, 2021. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond the company's control, such as the potential impact of COVID-19 pandemic on the business and its operations that could cause actual results to differ materially, and you should not rely on them as predictions for future events. ATEN does not intend to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. For more detailed description of these risks and uncertainties, please refer to our most recent 10-K. Please note that, with the exception of revenue, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP, and they may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found on the press release issued earlier today and on the trended quarterly financial statements posted on the company's website. With all that said, I would now like to turn the call over to Drupad. Drupad, the call is yours.
spk04: Thank you, Rob, and thank you all for joining us today. This was another solid quarter for ATEN, particularly in our strategic initiatives to grow recurring revenue and security solutions. Our deferred revenue, which is a good proxy for our recurring revenue, grew by 11.8% year-over-year to $113.2 million. This is contracted revenue which will be recognized in future periods, creating a solid and growing base for us and giving us greater visibility into our future results. Despite the expected timing impacts in Japan, overall revenues grew 2% year-over-year to 54.8 million in line with expectations. Our full year for Japan remains unchanged and positive. Aligned with our strategic goals, our recurring revenue continues to grow faster than our overall revenue. In fact, it increased 8% year-over-year and recurring revenue is becoming an increasingly large portion of our overall revenue mix, supporting our long-term business model. This was our fifth consecutive quarter of organic growth. We have refined our go-to-market strategy, establishing strategic relationships with partners and resellers, streamlining our sales organization around the globe, to focus on the most promising and profitable opportunities. This strategy is enabling us to successfully transition from a provider of commoditized solutions to a strategic integrator providing best-in-class security solutions in several growth-oriented technological areas. The evidence of this is seen in our deferred contracted revenue growth and the progress we have made in selling security solutions. Security solutions as a percent of our revenue mix have been steadily increasing. On a trailing 12-month basis, security solutions represented 57% of our revenue compared to about 50% of revenue for the trailing 12 months ending December 31st, 2020. In particular, we are well positioned in cybersecurity, 5G rollout, and network availability, including DDoS prevention. Each of these areas enjoy broad tailwinds, and our offerings are best in class and differentiated. Additionally, new planned federal infrastructure investments further support these catalysts in the U.S. During the quarter, we had important wins aligned with our strategic goals. A large higher education network in Northern Europe was under heavy cyber attacks. ATEN was able to help them navigate this challenging time with remote students and also provide a much more comprehensive protection solution that includes multiple elements of protection versus point products from our competitors. Our ability to rapidly deploy a new technical solution and leverage our global support footprint were further enablers. The result is that 600,000 subscribers now have a more secure, robust, and available e-learning platform. Also, an online gaming platform in the Americas saw large growth in that traffic after COVID-related shutdowns. This strained their networks in terms of capacity as well as increased risk of cyber attack. ATEN was able to provide them a better price per subscriber, smaller footprint, and more security. This competitive win was against a very large global networking giant. ATEN won this business because our solution ultimately provided better performance with lower capex and lower opex for the customers. The customer plans to deploy the same solution to other sites in the future. The inherent leverage of our business model is enabling us to grow our profitability faster than we grow our revenue. Due in part to continued disciplined execution, we grew our adjusted EBITDA by 80.9% and our EPS by 135%. compared to the first quarter of last year, both ahead of expectations. Our first quarter adjusted EBITDA was $13 million, representing a solid start to the new year. At the same time, we have increased our investments in areas that support accelerated growth while maintaining our current financial goals. With that, I'd like to turn the call over to Brian for a detailed review of the fourth quarter and full year. Brian?
spk06: Brian Becker- Thanks, Drupad. As Drupad shared, revenue in the first quarter was $54.8 million, up 2 percent year-over-year. First quarter product revenue was $30.5 million, representing 55.7 percent of total revenue. Services revenue was $24.3 million, or 44.3 percent of total revenue. Moving to our revenue from a geographic standpoint, revenue from Japan was $13.6 million, down $4 million, or 22.8 percent year-over-year. Asia-Pacific revenue, excluding Japan, was $6.3 million, compared with $4.9 in the first quarter last year. EMEA was $8.6 million, up 49 percent. And revenue from the Americas was $26.3 million, compared with $25.4 million in the first quarter last year. Revenue from the Americas increased 3.3% in the quarter due to stronger commercial execution, and we expect that to continue throughout 2021. EMEA revenue grew 48.5%, and APAC, excluding Japan, grew 29.8%. These regions offset the expected 22.8% decline in revenue from Japan. Book-to-bill in Japan was 1.2 to 1, in line with full-year growth expectations. Recurring revenue, defined as support and subscription revenue, grew 8% year-over-year to $25.6 million in the first quarter. As a reminder, our recurring revenue for 2019 was $94 million, growing to approximately $105 million last year. During 2021, we anticipate this transition to be neutral to our operating margins, As you can see in our balance sheet, our deferred revenue was $113 million, up 11.9 percent, compared to $101.3 million as of March 31, 2020. With the exception of revenue, all of the metrics discussed on this call are on a non-GAAP basis unless otherwise stated. A full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website. Gross margin in the first quarter was 78.9 percent, up 53 basis points year-over-year, due to a more favorable product mix. Non-GAAP operating expenses in Q1 were 32.5 million, down 14.6% from 38 million year-over-year. Our continued focus on execution to maximize efficiency and profitability in all areas contributed to this overall year-over-year decline. We continue to allocate resources to the most important long-term growth opportunities and optimize our global footprint to further improve execution. In addition, Q1 operating expenses also benefited by approximately $1.9 million year over year due to continued COVID-related restrictions, of which approximately $1.2 million from deferred marketing events and approximately $700,000 from reduced travel. We reported $10.8 million in non-GAAP operating income compared with $4.1 million in the year-ago quarter. We also continued to improve our adjusted EBITDA significantly, which came in at $13 million for the quarter, a $5.8 million improvement over the last year. Non-GAAP net income for the quarter was $9.4 million, or $0.12 on a per share basis. Diluted weighted shares used for computing non-GAAP PPS for the first quarter were approximately 79.6 million shares. On a GAAP basis, Net income for the quarter was $2.7 million, or $0.03 per share, compared with a net loss of $297,000, or $0 per share, in the first quarter last year. As of March 31st, 2021, we had $161 million in total cash and cash equivalents, compared with $158.1 million at the end of 2020, and $142.9 million as of March 31st, 2020. For the quarter, we generated $2.3 million of cash from operating activities due to the changes in our expense structure and the financial leverage of our business model. We generated $1.5 million in free cash flow for Q1. As a reminder, we define free cash flow as net cash provided by operations less capital expenditures. Capital expenditures is the purchase of property and equipment. On September 17th, the company announced a share repurchase plan for up to $50 million worth of our common shares over the next 12 months. We repurchased approximately 10,000 shares at an average price of $8.96 for a total of $88,000 during the period. During the quarter, we instituted a 10 plan to manage our purchases. We intend to review our plan from time to time subject to compliance with rule 10 . We are reiterating our full year outlook today as provided in the conference call accompanying our fourth quarter and full year results. On an annual basis, we expect to generate organic growth of 6% to 8%. We expect sequential growth in each remaining quarter of 2021. This expectation is based on the quality and quantity of our sales funnel, market momentum, and book to build that exceeds one in the first quarter. We expect to grow our bottom line faster than our top line. and we anticipate security solutions will continue to become a larger portion of revenue mix, and we expect this part of our business to grow at approximately 10%. I'll now turn the call back over to Drupad for closing comments.
spk04: Thank you, Brian. In summary, I'm really excited about our prospects and growth outlook for 2021. We are increasingly viewed as a value-added leader in security solutions with best-in-class offering and market tailwinds. Our initiatives to grow our recurring revenue are clearly working, and this is helping us increase our profitability. We are well positioned for a strong 2021. Operator, you can now open the call up for questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Hamed Korsand from BWS Financial. Please go ahead.
spk05: Hi. So first off, could you just talk about the momentum you're seeing in your business? Is that coming from new customers, existing customers?
spk04: Sure, yeah. I would say, Hamid, that two sides of it, right? So if you recall, about 80% of our business comes from existing customers, 20% from new customers. With existing customers, we definitely see positive momentum as it relates to growing their infrastructure, whether it's for 5G or 5G readiness or enterprise networks. As it relates to new customers, we continue to add new customers. continuously as well. And so we are seeing pretty robust growth from Japan, EMEA, Asia, as well as America, as it relates to adding new customers who will continue to grow and become more relevant, right? So we are seeing both dimensions of it. One is existing infrastructure, investment protection or greenfield investment, and addition of new customers.
spk05: Andrew, compared to the last call from a couple months ago, what's changed? It sounds like you have better clarity now. What are you seeing from customers that's giving you that clarity where you didn't have it going into Q1?
spk04: Yes, I think there's two sides to that, Ahmed. The first is, as obviously everybody appreciates, there's uncertainties we can't control, whether it's COVID impact in India or elsewhere. But what we are seeing different is either there are large customers who had paused quite a bit last year, but have growing optimism with vaccines and things opening up, et cetera, where they are doing catch-up investments or beginning to look at newer investments. So moving from purely reactive mode of how do we deal with people working from home to how do we keep up with the infrastructure, right? So that's, I would say, one area we definitely see. The second place where we see a positive momentum is As we have evolved to selling broader security solutions, and what I mean by that is connecting our value proposition to the customer's economic goals, which is kind of trying to compete on a commodity product, we continue to see very good traction with customers as it relates to working with us, engaging us more broadly, and buying more categories of products from us.
spk05: Okay, my last question is, was there any 10% customer this quarter?
spk06: No. This is Brian. No, we don't have a 10% customer in either revenue or balance sheet items up to Q1 2021.
spk03: Thank you. Thank you.
spk02: Our next question comes from Anya Soderstrom from Sedoti. Please go ahead.
spk01: Hi, thank you for taking my question. Can you talk a little bit about the funnel or what you see in there and are you able to quantify anything about that?
spk04: Yeah, this is Drupad. So good question. I think, you know, typically when we look at our outlook for the next quarter and full year, we tend to at least try to look for as many lead indicators as we can. So in that context, when we look at how our funnel is evolving in the different regions, and then in service provider and enterprise market, and when we look at our historical conversion rates on that, we feel very confident to say full year growth of six to 8%, right? So it's really connecting multiple lead indicators to our outlook for the year. And you saw the phenomenon with Japan where, based on the funnel, we had high confidence that on a full year basis, we think they will be positive and in line with what we expect. But based on the funnel, we also understood there would be some timing impact on that. So it's more Ania getting more analytics and better lead indicators
spk01: to project as well as we can and based on those we feel confident reiterating the full year growth numbers okay thank you you mentioned japan it was very strong for you in last quarter when when america was a little bit slower for you and now since that that has shift can you just talk about what's driving that shift and what you're seeing in the different regions
spk04: Sure. So I think Japan, the phenomenon we had spoken was originally, you know, some of our large service provider customers there were planning to make investment in advance of the Olympics and be prepared with all that capacity and experience in place. as the Olympics were downsized and rescaled and all the up and down that went with it, and ultimately concluded where no one externally is going to be visiting Japan. What we anticipated and saw is our customers are still planning the same capacity increases, which are driven by network demand. but they don't feel that timing needs to be right up front and it's more spread out through the year. So in that case, Japan continues to be one of our most balanced regions, one of our best performing regions, and that will not change this year. We just saw a timing impact. When it comes to North America, I would say if you go back to last year in Q2 and Q3 and Q4, we spoke about readdressing the need to improve commercial execution there, including leadership processes, how we organize territories, et cetera. And I would say a lot of the improvement you've seen in Q1 is a reflection of where our commercial execution in America continues to improve relative to what we always used to have from Japan. So we think that gives us an opportunity and a foundation to build on growth from there. And as you heard earlier, we did this in a very balanced way without a single large customer affecting it. So it's a result of improving commercial execution in America.
spk01: Okay, thank you. And can you also talk a little bit about the partnerships with Dell and Ericsson, how those are developing and when we see some positive impacts from those?
spk04: Yeah, of course. So I think, you know, I'll Talk about the two separately. So we announced the partnership with Dell in September. And as we talked about, we continue to work with them jointly to take it to market. And that includes joint sales calls and marketing and all of that. As we expected, the funnel is continuing to grow and in line with our expectations. And we absolutely are looking at line of sight to multiple deals, which will be meaningful for us by the second half. So I would say the Dell partnership is progressing along the lines of what we have said before, and they will start to impact and become meaningful as well. With regards to Ericsson, it's similar. We work with them on a next generation software platform and have been on track as it relates to doing customer trials and trying to build that pipeline. As you heard maybe from Ericsson's call, 5G was a little bit slowed down with COVID, but they are extremely optimistic about the future and growth that would come from it. And in the meantime, we continue to work with Ericsson as well as other service providers. on their existing networks that move them towards 5G readiness. So both of those are on track and exactly as we have said before, we expect them to be meaningful in our results by the second half.
spk01: Okay. And can you also just talk a little bit about what you see in the enterprise channel just in general?
spk04: Sure. So I think what, you know, if you If you kind of look at enterprise in terms of different verticals that make it up, our business is mostly by design targeted at large enterprise, which includes financial and gaming companies and so forth. And the reason for that is our value proposition is most differentiated there in terms of throughput, latency, and security. So within the enterprise, the small to mid-enterprise market. Of course, we look forward to addressing it broader with our Dell partnership. But in the meantime, our focus is on the large enterprise. And we certainly see continued positive tailwinds as it relates to they are worried about more security after some recent public breaches that everyone knows about. They continue to see more volume and demand for gaming platforms as people do that more and more and media stuff. So we continue to see that as a pretty stable tailwind for us in large enterprise. And small to mid enterprise, I think, Obviously, we talked about what we are doing, and beyond that, of course, there is general market sentiment of enterprise outlook improving in the year, and we certainly look forward to that, and that can only help us, right? But it's not a major driver today for us.
spk01: Thank you. And then in terms of the recurring revenue dynamics, well, it's It grew year over year. It sort of contracted sequentially. How should we think about it? Is any seasonality there, or how should we think about that?
spk06: Right. I mean, I know we've talked about this to some extent. I mean, it's a small portion of our overall revenue at 10% today, but it's growing faster than our normal run rate revenues. From an overall recurring revenue perspective, half of it is support and service, and the other half is software and subscription. We're seeing good traction in the marketplace, and we expect to see that begin to benefit us as we continue on into 2021 and into the next year. Obviously, with subscription revenues, you can see the impact more prominently at this point on our balance sheet and the deferred revenue, as I said, was growing pretty significantly year over year in the Q1 outlook.
spk04: Yeah, that's right, Brian. And just to add to that, Anya, because this is a strategic initiative with focus to grow faster in the startup or ramp-up phase, yeah, you will see some fluctuation, right? And that's why we also tend to look at it as on a trailing 12-month basis, is it growing or shrinking? And as we progress, you should see that variation reduce more and more to where it not a quarterly phenomenon, but it's continuously up. But as we are ramping up, there is a little bit of that variation, right? But if you look at it trended, you will see the trend clearly.
spk01: Okay, thank you. And then lastly, your balance sheet, you have a pretty strong balance sheet and expect to have strong cash flow generation. What's your capital allocation priorities? And I was a little bit surprised to see you didn't buy back more shares this quarter. Do you have any comments around that?
spk04: Sure. Good question. I think capital allocation priorities for us first is funding and driving organic growth. We continue to look at that as the best way to drive our business model and profitability. Second, of course, is the buyback. And you are correct, Tanya. I think we, as Brian mentioned, we moved to where we are doing it through a 10B51 plan. And we will periodically review that. And certainly, right, we have significant authorization on buyback. And we do see that as a good use of capital, especially as we continue to believe in the business more and more. So we'll continue to revisit that. And beyond that, I think we look at, as we have said before, if there are opportunities in the market that allow us to accelerate our growth with a small bolt-on or product-type acquisition, then we will evaluate it, but very carefully because we want to create the foundation first that we can then build upon and accelerate. But our focus will be on does this help us grow faster based on the tail burn. So, but yeah, and we'll continue to revisit those, of course, all the time.
spk01: Okay, great. Thank you so much for what's up for me.
spk04: Thank you.
spk02: As a reminder, if you have a question, please press star then one to be joined into the queue. Our next question comes from Hendy Susanto from Gabelli Funds. Please go ahead.
spk03: Good evening, Drupal and Brian. Good evening. Hi, Alec. Hi. First question, may I revisit the prior discussion on enterprise and potential market improvement? There are expectations that enterprise IT will benefit from economy reopening, hopefully in the second half of 2021. Would you share more colors on the outlook for enterprise throughout the remainder of 2021 and whether you have normal visibility or like, less visibility into that?
spk04: Sure, yeah. No, good question. So, you know, we don't publish specific goals for each vertical, but absolutely we expect uh in the back half of 2021 uh that we will continue to see improved year-over-year performance in the enterprise segment uh especially in north america right so we definitely see that phenomenon and it relates to both improving sort of demand and network and security needs for large enterprise but also hopefully a broader reopening of people beginning to invest again in mid and small enterprise, right? So we are definitely optimistic. And when we look at our improvement in growth year over year, that is one of the key things we are counting on and working towards.
spk03: Got it. And the second question, do you have any qualitative insight on further benefit of Tokyo Olympics? Will it be reasonable to assume sales contribution related to Tokyo Olympics in Q2 and Q3?
spk04: Yeah, I think that's a good question. So the way to think about it is really absolutely we will see that, but it will be now more spread out as network growth uh in the region not only tied to the olympics right so it's still there is still growth in subscribers there is still growth in security needs and so we will see that and you are correct uh as you know we mentioned earlier our full year outlook for japan is still very optimistic and positive uh based on deals that we expect to happen in q2 q3 and q4
spk03: Or even Q4. Okay, got it. That's helpful. And then last question, Drupal. Can you share what types of subscription APAN currently offer? Like what type of flavors? And then the business model?
spk04: Sure. So I think it's multiple ideas, right? So I'll go through the specific one. So because service providers consume products differently than enterprise, So for enterprise customers, it could be something that they are paying monthly or yearly. It could be a term subscription, or it should be where they get a monthly security update. But it's aligning with their consumption model of us providing updates and value add to them throughout that period. The second dimension of it is where we are working with customers who are also selling subscription back-to-back based on our subscription. So based on number of users or volume of data, there is a proportional subscription as well. So those are just two ideas or flavors of it. And because our customer base is still two-thirds service providers, it's a little bit different than a typical company targeting small enterprises.
spk03: Thank you, Grupal. Thank you, Brian. Thank you. Thank you, Andy.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Draupad Trivedi for any closing remarks.
spk04: Thank you. Thank you to all of our investors, employees, and customers. As we said in the call, Q1 2021 was a solid start for us to the year, and we really look forward to growth from our strategic initiatives positioning us well for a strong full year. Thank you.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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