A10 Networks, Inc.

Hello everyone and welcome to the A10 Network's Third Quarter 2024 Financial Results Call. My name's Lydia and I'll be your operator today. After the prepared remarks, there'll be an opportunity for you to ask questions. If you'd like to ask a question, you can do so by pressing star four, three, one on your telephone keypad. I'll now hand you over to Tom Bauman to begin. Please go ahead.

Thank you all for joining us today. This call has been recorded in webcast live and may be accessed for at least 90 days via the A10 Network's website at atannetworks.com. Hosting the call today are Drupad Chavedi, A10's 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 Third Quarter 2024 Financial Results. Additionally, A10 published a presentation and supplemental Trended Financial Statements. You may access the press release presentation and Trended 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, demand, industry and customer trends, strategy, potential new products and solutions, our capital allocation strategy, profitability, expenses and investments, positioning and our repurchase and dividend programs. These statements are based on current expectations and beliefs as of today, November 7th, 2024. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially and you should not rely on them as predictions of future events. A10 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 10K and quarterly report on Form 10Q. 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. It 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 today and on the trended quarterly financial statements posted on the company's website. Now I would like to turn the call over to Drupal Chavetti, President and CEO of A10 Networks.

Thank you, Tom, and thank you all for joining us today. This was a balanced quarter for A10 with improved performance from both enterprise and service provider sectors. Enterprise revenue increased 5% -to-date and is up 9% on a trailing development basis, validating our new roadmap and increased focus on these customers. Growth with enterprise customers is part of our ongoing strategic focus on driving predictable performance through diversification. Indeed, diversification remains core to our overall strategy enabling A10 to navigate challenging conditions more consistently than peers and over the long-term driving growth that outpaces the broader market segment. Service provider revenue was up 2% -to-date after being down in the first half of 2024. While the North American segment of this business remains volatile, the overall trend is encouraging. For the past several quarters, we have communicated that the short-term headwinds impacting our service provider customers will likely pose less of a long-term challenge for A10 as our security-led solutions are less and less optional, even when macro uncertainties force customers to spend more cautiously. We communicated in Q2 that opportunities in the pipeline were not lost, just delayed. This quarter validated those expectations. We do not yet have sufficient visibility to state that the North American service provider market has stabilized, but we are cautiously optimistic that the worst is behind us. Our strong competitive position is due to our focus on security solutions. Our security-led revenue increased 10% -to-date. Customer decisions to bolster security may be delayed, but they cannot be canceled. This is true both of enterprises who experience more and more cybersecurity threats every day and service providers who must safeguard critical networks to service existing customers and to add new ones. We recently announced that we are expanding our security-led offering and laid out a longer-term blueprint for further expansion, including integration of AI capabilities throughout the portfolio. These new solutions leverage our existing presence and our -decade-long track record of enabling -in-class throughput, low latency, and high levels of cybersecurity, all while focusing on industry-leading, low total cost of ownership. Over the next few months, ATAN will continue to introduce additional tools, solutions, and capabilities to better enable positive business outcomes for our customers. Our goal is to create an integrated solution that reduces cybersecurity risk, improves the user experience, and simplifies the IT infrastructure of our customers, including AI build-outs. Overall, we anticipate adding new AI-based capabilities harnessing machine learning to better identify and mitigate threats. We are also creating solutions specifically targeting threats and vulnerabilities that AI deployments can create, launching new approaches to address these threats. Our infrastructure solutions help customers improve the performance and resiliency of their applications. From an infrastructure standpoint, we will integrate AI to predict future network performance. With ATAN control, we will enable centralized management for all ATAN products, including partner products. With ATAN Defend, we are developing solutions that will help our customers protect their mission-critical applications and infrastructure from an ever-growing number of cyber threats. This includes protecting web applications, providing AI-enabled protection from bots and DDoS attacks and threat intelligence to proactively identify potential threats. Our priorities continue to be a mix of internal investments to support innovation, returning capital to shareholders, and evaluating strategic opportunities to accelerate growth. You are seeing the results of our internal investment reflected in this blueprint, and we continue to consistently return capital to shareholders. Our strong third-quarter performance demonstrate the upside that is built into our business model. We maintain robust profitability in line and slightly ahead of our targets in the quarter. During the third quarter, we expanded operating margins, EBITDA margins, and net margins as incremental revenue disproportionately fell to the bottom line. At the same time, it is important to note that we have increased our R&D investment more than 15% -over-year. We generated more than 21 million in cash from operations, keeping us on track for full-year targets. Our EPS in the quarter benefited from non-recurring foreign currency factors, but even excluding these benefits, our net margin and operating income expansion demonstrate the leverage and systemic profitability built into our operating model. We have continued to buy back stock, and our cash flow has more than funded our buy back and dividend programs. With that, I'd like to turn the call over to Brian for a detailed review of the quarter. Brian?

Thank you, Drupid. Third quarter revenue was 66.7 million, an increase of .5% -over-year. As Drupid described, -to-quarter volatility in the North American service provider sector persists, but we delivered meaningful growth and sales to both service provider and enterprise customers. Product revenue for the quarter was 36.9 million, representing 55% of total revenue. Services revenue was 29.9 million, or 45% of total revenue. Third quarter recurring revenue increased 6% compared to the third quarter last year. Deferred revenue increased 6%, demonstrating stronger product sales in the third quarter and continued demand for our cyber-led solutions. As you can see on our balance sheet, deferred revenue was 144.2 million as of September 30th, 2024, as I mentioned, 6% up -over-year, and as Drupid indicated in his opening remarks. 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. Growth margin in the third quarter was 81.3%, in line with our stated goal of 80 to 82%. Adjusted EBITDA was 17.8 million for the quarter, reflecting .7% of revenue, in line with our goal of 26 to 28%. Non-GAAP net income for the quarter was 15.9 million, or 21 cents per diluted share, compared to 12 million, or 16 cents per diluted share in the year-ago quarter. Diluted weighted shares used for computing non-GAAP EPS for the third quarter were approximately 74.8 million shares, compared to 75.8 million shares in the year-ago quarter. On a GAAP basis, net income for the quarter was 12.6 million, or 17 cents per diluted share, compared to net income of 6.5 million, or nine cents per diluted share in the year-ago quarter. As Drupid mentioned, several non-recurring and non-operational benefits resulted in higher than normal earnings per share. This was largely related to foreign currency exchange rates and interest income. Turning to the -to-date results, revenue was 187.5 million, up .4% -over-year. -to-date non-GAAP gross margin was .4% in line with our target range. We reported 39 million in non-GAAP operating income, down 3.6%, compared with 40.4 million in the first nine months last year. Adjusted EBITDA was 47.2 million, reflecting .2% of revenue. Non-GAAP net income for the first nine months was 41.9 million, or 56 cents per diluted share, up from 36.5 million, or 48 cents per diluted share in the year-ago period. On a GAAP basis, net income for the first nine months was 31.8 million, or 42 cents per diluted share, compared with net income of 22 million, or 29 cents per diluted share. During the quarter, we generated 21 million in cash from operations, as Drupid mentioned earlier. And -to-date cash generated by operations was 64.8 million, in line with our full year targets. Turning to the balance sheet, as of September 30th, 2024, we had 182.1 million in total cash, cash equivalents and marketable securities, compared to 159.3 million at the end of 2023. During the quarter, we paid 4.4 million in cash dividends, and we purchased 9.4 million worth of shares. We also continue to carry no debt. The board has approved a quarterly cash dividend of six cents per share, to be paid on December 2nd, 2024, to shareholders of record on November 18th, 2024. We have 25.4 million remaining in our 50 million share of purchase authorization, as of September 30th. We continue to target gross margins of 80 to 82%, and adjusted EBITDA margins of 26 and 28% on a full year basis. I'll now turn the call back over to Drupid for closing comments.

Thank you, Brian. Increasingly, A10 is outperforming our peer set amidst ongoing market volatility. The buying cadence from service providers is improving, and our ability to execute in driving demand from enterprise is improving simultaneously. Additionally, our investments in R&D are expected to result in additional solutions, leveraging our growing position in cybersecurity, further enhancing our growth profile. And we have proven the ability to translate incremental revenue into significantly higher profitability levels. I am confident we have the right strategy delivering the most important business outcomes for our customers, and a durable business model. Operator, you can now open the call up for questions.

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. Our first question comes from Trevor Rambo with BTIG. Please go ahead, your line is open.

Great, thanks for taking my question, guys. It's Trevor Ron for GreyPAL. And congrats on some nice results in the quarter. So to start, it was good to see ST spending come back, and to see some strength in that segment. How should we expect demand there to continue throughout the rest of the year, and maybe into next year? Just any more color on what you're seeing in that segment would be great.

Sure, yeah, so I would say that, you know, as we noted earlier, we expect to see some level of volatility in the space, but overall trend is improving and stabilizing more, given sort of post-election outcomes on things like interest rate that can, you know, get modulated a little bit up or down, right? But overall, I would say that we certainly feel from a customer demand perspective, we are seeing more positive signs where they are beginning to resume investments and plans for that infrastructure growth, whether it's to support AI or just cloud and so forth. So overall, I would say we feel that it's trending towards where it's in line with what we expect long term from that segment. Hard to say whether every next quarter is gonna be perfect, but certainly the trend line is turning in a different direction than before.

Awesome, that's good color. Thank you for that. And maybe on the other segment with enterprise revenue, I know you guys said it was more in line with your expectations, but only up 3% about year over year, which was down from the previous year and last quarter. Just any puts and takes of what you're seeing in that segment or anything you wanna call out that's one time or just overall what you're seeing for demand there would be great. Thank you.

Yeah, great question. And so I think a couple of points to note. So one is, remember for us, the focus in enterprise segment is predominantly large enterprise and not necessarily small and mid enterprise. So what this is reflective of is when we look at our funnel and opportunities in front of us, we see this line continuing to improve on a dollar basis, not just as percent of total revenue. And you are correct, I think we had a good quarter in enterprise last year. But if you look at from a year to date or trailing 12 month perspective, I would say those numbers compare favorably to what you might be seeing from industry overall and certainly write some of the larger enterprise companies. So that's the basis for us to say that our view is we continue to make progress in that segment. And the sign of that is our trailing 12 month or nine month growth is above industry average and that we continue to grow on a dollar basis. That's probably how to think about it.

Great, thanks for the comment. That's it for me. Congrats on a good quarter guys.

Thanks,

Terrence. Our next question comes from Hamed Korsand with BWS Financial. Your line is open.

Hi, so first question I had was, your accounts receivable went up quite a bit this quarter compared to Q2. What's the plan there to manage that and are you seeing any delays as far as getting paid?

Yeah, no, good question. And you're exactly right. We are not concerned with the trend. What we're seeing is the impact of some linearity during the period, but it's still a good result. I think what you're seeing on the statement of cash flows, however, is period over period, we are seeing an improvement at this time of the year. But I think it's really reflective of timing of the year. I think we usually see a little bit of a drag in terms of placing orders in Q2, but then as we got closer to Q3, we start to see things improve and hope to see linearity return to normal. But as we have talked about before, looking at as a percent of revenue, the reserve against income is extremely small, reflecting the health of the aging in general.

Yeah, exactly. And I think the easiest way to think about it is the aging of our receivables is in line or better than we normally see. So there's no concern in that regard.

Okay, and then could you just bridge your two comments here? One about the volatility in the service provider continuing, and then the other comment being that you're optimistic to the worst is behind. What's the, just bridge it if you could for me as to bring it together.

Yeah, no problem. Good observation. So what I meant by that, Hamid, is if you remember in Q2, we had said after the call that because we still see a little bit caution on spending by service providers, we can see movements of few billion dollars between quarters, but that when you look at it from a longer trend perspective, we not see that as a concern. So I would say the way to bridge it is our service provider business outside of North America was already doing fine and is still doing fine. Our North America business is a little bit volatile, as you can see that if you look at Q2 and Q3, there's a slight movement between them. But if we do a trend line of what we are seeing in the funnel, the opportunities and close rates and so forth, as well as customer conversations around their plans to use capital, that is more favorable than say six months ago or 12 months ago, right? So that's the combination of factors to bridge that.

Okay, and do you think that you could grow from here or it's just you don't have that clarity yet?

I think that we think we grow from here, but it's hard to say exactly on a quarterly basis what that percentage is, right? But the trend would be positive, that's correct.

Great, thank you. No problem, thank you,

Amit. And that question comes from Christian Schwab with Craig Hallam Capital Group. Your line is open.

Great, I'm sorry I was kind of missing. I thought you said that your security led business in the quarter grew 10%, did I hear that correct?

Yeah, that is correct. Security led on a complete basis grew from 59% of total revenue to 69% of revenue.

On a year to date basis, Christian, not in quarter. And

on a year to date basis, 10%, yes.

Okay, and then what is your future expectation for that portion of your business? Is 10% the new normal or do you think it could be higher than that?

Yeah, I think in the near future we think 10 to 12 is appropriate. But yeah, that's baked into our plan and we think that that's a reasonable expectation.

Okay, great. And then my last question just is regarding potential strategic alternatives or initiatives regarding M&A, is there anything new to report on opportunities for you to layer in other businesses or is there really not much effort there right now?

Yeah, I would say that there is effort there right now. I mean, I would say in period and even year to date we have looked at assets that are scalable, that would be more consolidation-oriented ideas as well as assets that accelerate our security portfolio. And we'll continue to do that. We are pretty active, but also very cautious on how we deploy capital relative to defending the business model long-term while also accelerating growth. So it is pretty active, right? We have partnerships, we have exploration and other discussions, but so it's not a secondary priority but I would say we are very mindful on how we choose to use capital when it comes to doing something.

Fantastic, no other questions, thank you.

Thank you, appreciate it.

Thank you, and our next question comes from Anya Soderstrom with Sudoti. Your line is open.

Hi, thank you for taking my questions and congratulations on the next progress here. I'm curious with the new solutions you are about to, or capabilities about to release and increase in the R&D, will those capabilities be an upsell and how should we think about the margin profile going forward?

Oh, and a good question Anya. So I think the margin profile, we feel good about continuing to drive 80 to 82% gross margin, which is obviously a good profile even if you are a SaaS company, right? So we think we continue to drive that through a mix of product mix as well as productivity and other initiatives we have in place. I would say that with a lot of the new products and solutions, our goal is to expand the number of categories and products we can sell to existing or new customers. And from a margin perspective, in line with our customer target, right? We will obviously, and we already do support a mix of hardware, software, or other consumption models. But as we plan that out, we believe we can continue to deliver 80 to 82% gross margin.

Okay, thank you. And in terms of your catch position with a nice increase there, could you pick a little more aggressive on buybacks or how you think about the buybacks?

Yeah, I mean, we continue to be consistent about our priorities around link cash and capital. First priority is to reinvest in the business, drive growth, as Drupad mentioned, we see a good increase of over 15% from an RD perspective on a non-GAAP basis. But yeah, we continue to look at ways to return value to shareholders through the share repurchase program and the dividend. Obviously, the repurchase program is not an accelerated program that we filed a protection against, so it's an opportunistic endeavor, which requires us to be mindful of guardrails around volume and pricing. So we do what we can when we can. But yeah, those are our main priorities around cash deployment.

Yeah, and we'll continue, I think, Anya, to do buybacks, and we think that's a great use of our capital as well. But at the same time, we want to find the right balance between buyback versus organic investment versus strategic investment, right? So that's the balance. And as Brian said, sometimes that is determined by volume and capacity limits on what we can and cannot do in period. But it's something we think is an important part of our capital strategy.

Okay, thank you. Now it's all from me. Thank you, Anish. Thank you. We have no further questions, so I'll pass you back to Drew Pachive for any closing comments.

Thank you. And thank you to all of our shareholders for joining us today, and thanks to all the A10 employees around the world for your continued support. And we look forward to a great quarter ahead. Thank you.

This concludes our call. Thank you for joining. You may now disconnect your line.