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spk02: Good afternoon, and thank you for attending today's ATEN Networks Q1 2022 earnings call. My name is Sam, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. This time, I'd now like to turn the call over to our host, Rob Fink of FNKIR. Rob, please proceed.
spk08: Thank you, Operator, and thank you all for joining us today. This call is being recorded and webcasted live and may be accessed for at least 90 days via the A10 Networks website at atennetworks.com. Hosting the call today are Drew Petrovedi, President and CEO, and CFO Brian Becker. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its first quarter 2022 financial results. Additionally, 810 published a presentation and supplemental trended financial statements. You may access the press release, presentations, and the 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 its projections for future operating results, including potential revenue growth, industry and customer trends, and its focus and investment in code of market strategy and infrastructure, a capital allocation strategy, M&A opportunities, supply chain constraints and expectations and positioning, and repurchases and dividend programs and its market share. These statements are based on current expectations and beliefs as of today, May 3rd, 2022. 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 the COVID-19 pandemic on its business and operations that could cause actual results to differ materially, and you should not rely on them as predictions of future results. A-10 does not intend to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law. For a 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 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 that may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release that was issued today and on the trended quarterly financial statements posted on the company's website. With all that said, I'd like to turn the call over to Drupad. Drupad, the call is yours.
spk01: Thank you, Rob, and thank you all for joining us today. Driven by continued adoption of our security-led solutions, Revenue increased more than 14 percent year-over-year, positioning us to deliver revenue growth at the high end of our full-year guidance range. As expected, we continue to see leverage in our business model with improvements in gross margin, operating income, and earnings per share. We generated $15.9 million in cash from operations ending the quarter with $164.7 million in cash and cash equivalents after repurchasing $28.3 million in stock and returning $3.9 million in cash to shareholders in the form of a dividend during the quarter. As discussed at our recent analyst day, we have developed a sustainable business model, and our goal is to achieve the rule of 40, meaning a combined revenue growth and EBITDA margin of 40% or greater, in line with highly valued cybersecurity companies. The first quarter results continue to build upon that foundation and demonstrate that our model is working in spite of multiple macro headwinds. Security-led solutions continue to serve as a durable secular catalyst for our growth. We have built security into every facet of our business, helping differentiate our technology solutions with focus on customer centric innovation that delivers business value for our clients. We all continue to see high profile cybersecurity incidents, including recent ransomware situations impacting large technology organizations here in the States, as well as the several state sponsored cyber attacks taking place around the world, including Ukraine. Headlines about cybersecurity intrusion seem to be a weekly, if not a daily occurrence, with attacks moving beyond isolated incidents involving small groups or individuals to state-sponsored, sophisticated, and large scale, targeting key infrastructure, government agencies, and utility companies alike. As a result, CIOs and IT leaders are increasingly focused on security first. Our ability to integrate security and encryption capabilities into all of our networking solutions sets us apart. ATAN has differentiated itself as a leader in security-led infrastructure solution, including the zero trust architecture with superior networking performance and best-in-class cybersecurity protection. As a result, we are winning in our target markets and applications. Our global customers also continue to expand their global IT networks in an effort to handle more traffic and data. ATEN's product suite allows our customers to increase traffic capacity and throughput without sacrificing security. In fact, we build DDoS recognition and mitigation capabilities as well as malware protection and privacy safeguards into nearly all our networking offerings, enabling our customers to improve their resiliency while expanding their networks. Let me highlight some key areas of progress within our business. Security-led product revenue increased 20.1% year over year in the quarter, with North America being the leading driver of this growth. From a geographical perspective, revenue from the Americas grew 25.5% year-over-year to 33 million, reflecting our investment on commercial initiatives in the Americas. AMIA revenue increased year-over-year from 8.6 million to 11.9 million. Asia, including Japan, declined from 20 million to 17.8 million. This is a consequence of continued depressed economic outlook in those countries and the lingering impact of COVID-19. Within APJ, Japan went from 13.6 million to 11.5 million in Q1 2022, inclusive of a significant foreign exchange headwind and in line with our expectations. Our diversification continues to provide a resilient foundation. We continue to focus our investment in growth opportunities with balanced profitability and a focus on achieving our stated rule of 40 goals. A key part of this strategy is improving our ability to cross-sell solutions to our customers while continuing to reduce their overall capex and opex. Over the past year, our product revenue growth rate with existing customers has consistently exceeded our target growth rate, demonstrating our ability to successfully leverage our strong install base and bolsters our confidence in delivering 10 to 12% consolidated growth. We have proven our ability to grow, invest for future growth, return capital to shareholders, and bolster our Fortress balance sheet. We will maintain a disciplined, flexible, and opportunistic capital allocation strategy, exploring all options while demonstrating rigor in evaluating potential uses of shareholder capital. As I'm sure you are all aware, supply chain issues continue throughout our industry. ATEN has been able to successfully navigate these issues to date. Our customers are looking for supply assurance and we have been able to meet those requirements so far. ATAN is well positioned in a growing market and this is proven by our strong financial performance. Cybersecurity remains the primary catalyst for our growth. We are now well positioned to achieve the high end of our full year targets around top line growth of 10 to 12% and expanding EBITDA in the range of 26 to 28%. With that, I'd like to turn the call over to Brian for a detailed review of the quarter. Brian?
spk00: Thank you, Drupad. As Drupad mentioned, revenue in the first quarter was $62.7 million, up 14.3% year-over-year. Product revenue, which is a lead indicator for future revenues, was $37 million, representing 59.1% of total revenue. up 21.3 percent year-over-year. Services revenue, which includes maintenance and support revenue, was 25.6 million, or 40.9 percent of total revenue. Moving to our revenue from a geographic standpoint, revenue from the Americas, including Latin America, was 33 million, which was up 25.5 percent. Revenue from AMEA was 11.9 million compared to 8.6 last year. Revenue from Asia, including Japan, was $17.8 million, down 10.8% compared to $20 million in the first quarter last year. This is inclusive of the strong headwind from foreign currency exchange rates mentioned by Drupad earlier. As you can see on our balance sheet, our deferred revenue was $121.3 million as of March 31, 2022. That's up 7.2% year over year. Please note that this is in line with typical seasonality. Recurring revenue, defined as support and subscription revenue, grew 8.9% year-over-year to $27.9 million in the first quarter, which is within our target range of between 45% and 50% of revenue. 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 80.2%. As Drupad mentioned, thus far we have been able to successfully mitigate the impact of industry-wide global supply chain constraints and input cost increases. Non-GAAP operating expenses in Q1 were $38.6 million compared to $32.5 million in the first quarter last year, reflecting increasing investment in our growth priorities, including cybersecurity and commercial execution. We reported $11.7 million in non-GAAP operating income compared to $10.8 million in the year-ago quarter. Adjusted EBITDA was $13.5 million for the quarter, or 21.4% of revenue. Non-GAAP income for the quarter was $10 million, or $0.13 on a per share basis. Diluted weighted shares used for computing non-GAAP EPS for the first quarter were approximately 79.3 million shares. On a GAAP basis, net income for the quarter was $6.3 million, or $0.08 per share, compared with net income of $2.7 million, or $0.03 per share in the first quarter last year. For the quarter, we generated $15.9 million of cash from operating activities. We generated $12.8 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. As of March 31, 2022, we had $164.7 million in total cash and cash equivalents. which compares to 161 million in the year-ago quarter, growth of which includes 32.2 million of share repurchases and quarterly dividend during the quarter. We continue to carry no debt. During the quarter, we repurchased 2.1 million shares at an average price of $13.35 per share, totaling $28.3 million. We have $64.6 million remaining in our $100 million share repurchase program. Since January of 2020, we have repurchased 8.7 million shares at an average price of $9.06, totaling $79.1 million. In addition, the Board has approved a quarterly cash dividend of $0.05 per share to be paid on June 1 to shareholders of record on May 16. In total, we have returned more than $30 million to shareholders in the quarter between share repurchases and the dividend. As Drupad mentioned, we are now well positioned to achieve the high end of our full year revenue target of 10 to 12% growth and full year adjusted EBITDA of 26 to 28%. I'll turn the call back over to Drupad for closing remarks.
spk01: Thank you, Brian. The first quarter represented a strong start to the year for A10. Our position as a trusted partner with security-led solutions is helping us to deliver consistent results and outpace the market. We are well diversified in terms of product mix, regional sales and customer mix, enabling a more durable business model in spite of macro headwinds. I would also like to thank all employees, customers, and shareholders of ATEN for their continued support. Operator, you can now open the call up for questions.
spk02: Thank you, Drupa. We will now begin the Q&A session. If you'd like to ask a question, please press star one and to remove that question, it is star two. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Christian Schwab of Craig Hallam Capital. Christian, your line is open.
spk05: Great, thank you. Congratulations once again for another solid report and consistent results here. Can you help – almost every company I follow is facing some challenges in the supply chain in one way or the other. And you guys have just done a wonderful job of handling the supply chain issues. Can you help us better understand what you saw or what you've done to – be able to perform at such a consistent level and then continue to raise expectations?
spk01: Yes, thank you, Christian. Yeah, no, let me talk to that a little bit. So, of course, you know, if you look at the broader pictures, our suppliers, especially on things like Silicon are the same suppliers you hear about, right? So, some of the things that I think have helped us mitigate this, I'll walk through some of those examples that hopefully helps. So, you know, about two, two and a half years ago, right, we started really putting in much more stringent, longer term planning processes around supply, demand, commercial initiatives and operational capabilities, et cetera, so that we are driving a mix in line with customer needs, but one that we can deliver. And so that was a good foundation for us to start from. Second thing we had to do as things got harder from an input cost and delivery perspective was we took initiatives around our footprint and simplifying it as well as regionalizing it where it made sense with our footprint, obviously in Japan, UK, Taiwan, and US. Third thing for us is as we saw very early signs beginning of 2020 you know, anticipating what could be worst case scenario on sort of non-silicon components, right? We started developing at least more second sources for some of those components around the world. And last, I would say, you know, we have been much more deliberate on focusing on what portfolio is most relevant to our customers, simplifying some of our SKUs if we have to, but then putting ourselves in the best position to deliver, right? And so far, it has not obviously impacted our ability to deliver, and we'll continue to monitor it closely and try to find new levers as we need to.
spk05: Yeah, congratulations on that. Thanks for that extra clarity. I guess my last question is, in the current security environment where you guys are outperforming, Can you just give us an update on, you know, in general, who you're competing against most often? And is it different, you know, in different geographies, you know, in the Americas, you know, say versus Japan, for example?
spk04: Sure.
spk01: Yeah, no, good question. So I think, you know, so I'll answer your question directly and then give you the subtlety as well. Typically, you know, we are competing with people who have installed footprint in the DDoS marketplace. So oftentimes it will be someone like Arbor Networks, which is part of NETSCARP now. Other times we would be competing with a broader solution, which includes many different things as well. So at our service provider customers, it could be, you know, working on a solution where we are competing with someone like Juniper Networks, for example, as well. It does not vary tremendously by geography. It varies a little bit in the sense that in some of the developing nations, you will see local competitors who are purely price driven. But when we look at the customer set that we target, those customers are generally looking right for high reliability and high resilience and high level of expertise versus the lowest cost, which may be true for kind of small mid-enterprise segment, right? So by virtue of our product positioning and performance, right, we are typically competing with high-end performers and those are most often the companies that we would run into. Now, it does change the landscape when we also say we, you know, we are selling products for SSL encryption. We are also integrating all those products with our other product platforms, right? So when you compare it to that, that's not an apples to apples, but I hope that gives you a flavor for the mix we compete with.
spk05: Yeah, that's great. Congratulations on a solid quarter in this environment and race guide. That's it. Thank you.
spk02: Thank you, Christian. Thank you, Christian. The next question is from Anya Soderstrom of Sudoti. Anya, your line is open.
spk03: Hey, thank you for taking my questions. Congratulations on the contained great results. So I'm just curious for the product's gross margin, it's sort of contracted a bit sequentially. What drove that and what can we expect from that going forward?
spk01: Yeah, no, and I think I'll let Brian comment to it more. So nothing unusual, Ania, to note on that. I think, of course, right, there is a little bit of variation with product mix, and it's not a lot. It's very little that we see slightly quarter to quarter. And, you know, as we look at, obviously, year-over-year trends, right, you will see some impact of volume if you look at sequential Q4 to Q1, obviously. But if you do Q1 to Q1, you can see that trend line. And within that margin, obviously, we are also absorbing or accommodating all the input cost inflation in the market right now, right? Whether it's from FedEx or our chip suppliers, right? So we think net inclusive of those impact as well as product mix is kind of where we end up. Brian, anything to add?
spk00: Yeah, no, that's exactly it. You know, our product gross margins are relatively consistent while fluctuating very slightly. It's really just a matter of the mix of products and services that we're selling.
spk03: And then in terms of, you know, input cost inflation, and I would also assume to some extent labor, increasing labor costs, how are you able to mitigate that?
spk01: Sure, yeah. So I think, you know, that there are several things we have been doing right. So those obviously continue to be relevant to us. So in the last several quarters, we have continued to, simplify the business, continue to address things that were structural things we could do to get better cost structure in place. And we obviously had initiatives in place around PPV and logistics and things like that that ultimately, you know, have ended up being required just to offset the input costs, right? So those have been things we put into place several quarters ago as a goal towards continuing to improve our portfolio and margin. And a lot of those have helped us offset kind of cost inflation. On labor and operations cost inflation, obviously we face the same phenomenon, but as I think we noted a little bit on the analyst day, as a company, you know, I also focus a lot on delivering productivity that helps us offset some of those inflationary costs, right? So not 100%, but that has helped us offset those, whether it's on materials, operations, or people's life.
spk03: Okay, that was helpful. And then in terms of... For me, it seems like the Americas was very strong for you. What are you seeing in Europe, given the geopolitical environment there and the increased sort of cyber warfare that's going on there?
spk01: Yeah, so I think, you know, we talked about it, right, so far as AMIA grew year over year. I think we are seeing two things, right? So one is, you know, we don't have any direct impact from the conflict there, so that's not relevant to us either plus or minus. But what we are seeing is two things. One, as people become more conscious of cybersecurity, whether it's a budgeted topic or not, there is increased importance in doing more to protect themselves. And we are beginning to see that activity and your typical sales cycle is six to nine months, right? So we do expect that to result in more people prioritizing cybersecurity in their budgets. We see a little bit of hesitation because customers are uncertain, right, of the outlook and economy and what can happen. But I think what we see as more interest and importance of cybersecurity is, you know, higher than the uncertainty that is causing them to be worried right now.
spk03: And how sensitive do you think you are to sort of a flowing economy and inflation? I mean, it seems like you have a pretty critical solution, right?
spk01: Yeah, no, that's right. That's right. So I think that's exactly right, Anya. So for us, you know, cybersecurity, we see it as leading with that. And by the way, also all our products around network build-out and throughput and data management are very strong. secular trends, right? So whether inflation is slightly up or slightly down, people are still going to use the internet and want to be more secure. And as they see more public incidents, right, it raises the awareness as well. I think more, you know, on the mid-enterprise side, you would see caution with interest rates and economy slowdown about initiatives that were more about the things like digital transformation or doing all of those ambitious IT projects, right, where cybersecurity is a more urgent and critical need. So we certainly see that as a more secular phenomenon right now.
spk03: Okay. Thank you. That was all for me.
spk02: Thank you. Thank you, Anya. The next question is from Hamed Korsandi of BWS. Hamed, your line is open.
spk07: Hi. So first question was, given that security is about a six to nine monthly time, what is the conversation that starts now? I mean, how are you doing the promotions? Is it all security related, even to the service providers?
spk01: It's, yeah, so I think, you know, typically, so I mean, obviously, one of the things in cybersecurity, right, is for every incident that is public, there is a lot more things the companies see that are not public, right? So they are themselves obviously also seeing different ways they are trying to be attacked and compromised on data. So the conversation for us is more about having, you know, more secure integrated infrastructure that is more. So for a mobile carrier, it would be you have so many subscribers, you want to now have so many more and you want to offer these new revenue services, here is how we can help you do that with your infrastructure and make you more secure. Or it could be as they are seeing more and more cyber attacks, right, we work with them to develop and deploy something like the Zero Trust Framework, which is not only our products, right? That includes things outside of what we do. But as a trusted advisor, work with them to say, here's what you should monitor. And, you know, we publish a lot of threat intelligence, which talks about the kinds of threats we see and how people can mitigate or remediate. So a lot of it is around being seen first as a trusted expert in security but at the same time being able to deliver that with a network infrastructure build out that also gives them lower CAPEX and OPEX as it relates to data management. So it's, I mean, without getting very specific, Hamid, obviously we have specific commercial initiatives that focus on if there is a new infrastructure bill, how can those customers benefit from it? If there are new types of cyber attacks we are seeing, how do we advise our customers? And when they choose to spend money, they might spend it with us, right? So we typically at any point in time would have three most, and occasionally I would prefer two, very clear commercial initiatives around what is happening, what is most relevant to our customers, and how do we solve that problem versus, you know, here's products we got, right?
spk06: Okay. And then given that there's no code restrictions in many markets, is this a proper sales and marketing expense for you going forward, or are you looking to attend more conferences and so forth where you could spend more on sales and marketing?
spk01: Yes, I think, you know, if you look at it on a trended basis, Ahmed, I think the way to look at it is compared to last year, we certainly see a resumption of sales and marketing travel and activities. I think, you know, it's not going to go back to 100% of what it was a few years ago, but maybe 70, 75%. And so you can see that reflected right in our sales and marketing now reflects some amount per quarter that relates to that discretionary spending that had stopped but hopefully it's toward lead generation right so then it's okay the only other way I think sales and marketing to think about is on incremental revenue obviously right we will incur the variable sales expense as we grow that so while we get some obviously productivity as well we also expect With increasing revenue, variable sales compensation goes up. And on a year-over-year basis, travel and entertainment and event spending goes up on a year-over-year basis, roughly $2 million a year.
spk07: Okay. Do you have any 10% customers this quarter?
spk01: We have one.
spk07: All right. And then my last question was,
spk06: Are you winning large deals or are they pretty much in the smaller range of the sales size?
spk01: It's both, right? I mean, so I think if you look at our average deal size, it may be a hundred K maybe, but there are deals that are, you know, 20,000 and there are deals that are several million, right? So, uh, and a lot of these deals progress, right? So, Typically, we will get a first deal that's one location, one site, and then they deploy it, they try it out, and then they add so many more. So it's a progression, and even within an existing customer. So our first deal will not be the biggest deal, but they will typically continue delivering revenue every year. Okay. Thank you.
spk02: Thank you. Thank you, Ahmed. Next question is from Hendy Susanto of Gabelli. Hendy, your line is open.
spk04: Good afternoon, Rupat and Brian. Congrats on strong Q1.
spk01: Thank you, Hendy.
spk04: Rupat, some companies talk about longer lead times and then a stronger order visibility that gives higher conviction on the pipeline and then the the continued strength throughout 2022. Can you talk about order feasibility and your convictions on the pipeline?
spk01: Yeah, no, sure. So I think, you know, for us, I think we have continued to refine our processes. We typically look at our sales forecast, our outlook on revenue from several different points of view. one of which would be our own 12-month funnel, three-month funnel, nine-month funnel, et cetera, and understanding kind of the rates at which those translate. Second is we obviously look at market lead indicators, not necessarily what happened last quarter and how those lead indicators, whether it's Gartner IT spending on cybersecurity, CapEx, Delco, et cetera, et cetera. So that's the second thing we look at. And there's a couple other factors. So we look at multiple factors when we think of outlook and what we commit. And you can see, right, hopefully we have demonstrated some consistency on that front. I would say, yeah, lead times are extending from our suppliers. I think our customers are generally, you know, of course, concerned about that. But our outlook when we think of Q2 or full year is not based on any, you know, specific customer orders or things like that. It's based on our engagement, the deal visibility we have. And, you know, we talk about obviously cycle time is roughly six to nine months, right? So we should have a pretty good perspective on that versus be surprised with one month to go. And so we look at multitude of those factors. And so for us, I would say visibility is, I think we talked about the headwinds and tailwinds, right? So things that are giving us a little bit better visibility is increased relevance and importance of cybersecurity. Second is we continue to see people wanting to use and extend their assets more towards data and connectivity, versus maybe three years ago, they were looking at radical transformation. Headwinds for us obviously are, we talked about, there could be some customer uncertainty around economy and interest rate and things like that, which may cause them to defer spending by a quarter or something, but generally we are tracking them on a project by project basis, not on a large macro one number basis. So we would try to keep visibility on where the project is and budget is and approvals are and all of that. So far as I would say, compared to one year ago, visibility is not worse. I would say it's slightly better. And compared to two years ago, it's definitely better.
spk04: Thank you, Rupat. That's very insightful. And then, Drupad, you stated that the main growth drivers this year is security. Can you help break down, let's say, the growth in security in service providers versus enterprise? And then I'm also wondering what the state of application delivery controller outlook. I assume that you're still gaining market shares in application delivery controller. And then if I look at your top line growth, I'm wondering whether it's reasonable to think that, let's say, growth in security is somewhat close to 20% plus and minus, and then the remainder comes from application delivery controller.
spk01: Yeah, I think so. So, you know, in our analyst day, we talked about three categories, right? Standalone ADC, CGN, CFW, or firewall, and then DDoS SSLI. And I think, Henry, your observation is correct. So for us, standalone ADC is not declining, but it is less than the fleet average. And by the way, the reason it is not declining is because we are continuing to invest and innovate in it with more security embedded features, right? And then if you look at DDoS, SSL, ICFW, all the security-oriented products, Those are certainly growing north of the average. And I would say we saw growth this quarter in both service provider and enterprise and in security and non-security. So it's not a big difference or a drag for us. But remember that for us, our enterprise focus is large enterprise. which tends to be, like, customers who are worried about critical data, availability, uptime, and security. So they are closer to, you know, other companies that are delivering services as well.
spk05: Thank you, Rupal. Thank you, Brian.
spk02: Thank you, Andy. Thank you, Andy. Thank you. There are no further questions waiting at this time, so I'd like to turn the call back over to Drupad for any closing remarks.
spk01: Thank you. And thanks to all of our shareholders for joining us today and for your continued ongoing support of ATEN. Thank you.
spk02: That concludes the ATEN Network's Q1 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.
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