A10 Networks (ATEN) Q4 2019 Earnings Call Transcript | The Motley Fool

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A10 Networks (NYSE: ATEN)
Q4 2019 Earnings Call
February 11, 2020, 4: 30 pm ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the A10 Networks fourth-quarter and year-2019 financial results conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Mammone, investor relations for A10 Networks. Please go ahead.

Chris Mammona For any inquiries, We're here to answer you. Investor Relations

Thanks, Chad, and thank you all for joining us today. This call is being recorded and webcast live and may be accessed for one year via the A10 Networks' website, a10networks.com. Members of A10's management team joining me today are Dhrupad Trivedi, president and CEO; and Tom Constantino, CFO. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its fourth-quarter 2019 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 our projections for our future operating results; our focus on driving organic growth, business optimization and overall profitability; the strength and capabilities of our talent base; our unique position to help our customers; 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; commitment to innovation and bringing new solutions to market; our expectations for future market growth and the general growth of our business; the development and performance of our products; our current and future strategies; our beliefs relating to our competitive advantages; anticipated customer benefits from use of our products; our expectations and priorities with respect to 5G; and our investment in our product road map and channel partnerships in our enterprise vertical. These statements are based on current expectations and beliefs as of today, February 11, 2020.

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 results. A10 disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-Q and 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 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 issued today and on the trended quarterly financial statements posted on the company's website. We will provide our current expectations for the first quarter of 2020 on a non-GAAP basis. However, we are unable to make available a reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis due to high variability and low visibility with respect to the charges which are excluded from these non-GAAP measures.

Now I would like to turn the call over to Dhrupad Trivedi, president and CEO of A10 Networks.

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Thank you, Chris, and thank you all for joining today. I am thrilled to join A10 Networks at an exciting time for the business. A10 occupies an attractive area within networking and security as companies increasingly focus on delivering business outcomes while managing the operational complexities from proliferation of IoT, shift to hybrid cloud environment and ever-increasing complexity of the cybersecurity landscape. Service providers around the world also face the same challenges while getting ready for 5G technology to support many of these consumption trends.

Based on our legacy, A10 is well-positioned to help our customers address these emerging themes. We deeply understand their applications and have a strong talent base to support them through these digital transformations. A10 services a loyal and enviable customer base who are industry leaders, and we are committed to enabling the success of our customers. We are pleased to report fourth-quarter revenue of $ 60.3 million, which represents 14% sequential growth.

For the full year, A10 reported $ 212.6 million in total revenue. Recurring revenue increased from $ 91 million in 2018 to $ 95 million in 2019. In Q4, the revenue strength was driven by solid quarter-over-quarter growth in all of our main geographic regions. We saw the most strength from our service provider clients in Japan, South Korea and the Middle East, who are the furthest along in supporting 5G rollouts.

In addition to driving organic growth, the management team is focused on operational excellence to drive profitability as we grow the business. We finished the fourth quarter with our highest-ever adjusted EBITDA of $ 10 million, beating our guidance range and representing an improvement of 105% over the prior-year quarter. This resulted in non-GAAP earnings of $ 0.10 per share during the fourth quarter, also above the high end of our guidance range. Tom will give further detail on our financial performance during his remarks.

Q4 marked continued momentum in the market surrounding 5G-related opportunities. We announced our Orion 5G Security Suite, which brings our customers an integrated version of the highest performing network security, scalability, agility and analytics. This solution is directly helping our customers deploy 5G or get ready for it with their existing 4G networks efficiently. The A10 solution, virtual or physical, results in lower latency, larger scale, higher reliability and lower total cost of ownership.

We are pleased with the level of customer interest in this offering, building upon our leadership in deploying high-performing secure 5G network for our service provider clients in South Korea, Japan and Middle East. We begin 2020 with more than 10 active 5G deployments around the world. While we are encouraged by this level of activity, it is important to remember what a massive undertaking it is for service providers to execute their 5G rollout and supporting those deployments takes considerable time, capex budgets and technical effort to fully materialize. In Q4, we benefited from a sizable order from our largest web giant customer in North America.

As we continue to have a strong market position with all of our existing web giant customers, we are also dependent on their investment cycles, which can last multiple years and result in variable demand levels. Our enterprise vertical continues to improve, with focus on enhancing commercial execution. Our install base is strong. We enter 2020 supporting over 50,000 installations with over 500,000 apps running on A10 technology.

We are a top three ADC supplier and see meaningful growth opportunities as our install base moves to multi-cloud infrastructures. We also continue to invest in the product road map and channel partnerships that will further enhance execution in this space. We added a total of 840 new customers in 2019 and believe that we can continue to build upon that momentum going forward with strong focus on improving execution in all areas. To that end, I'm proud to be able to highlight some signature recent wins.

First, a large mobile network operator and repeat A10 customer in South Korea selected A10 for its Gi-LAN solution supporting secure 5G services and network address translation in its core network operation center and mobile edge cloud, covering approximately 7 million subscribers by the end of 2020. Second, a major airline in Latin America selected A10's virtual ADC software technology and management platform to support its migration of workloads to the Oracle Cloud infrastructure and to help manage a multi-cloud network environment for air toward communications. A10 was selected because of its certification as an Oracle Cloud infrastructure partner and its ability to achieve the rigorous performance requirements. As we begin 2020, we have a strong product road map and focused on commercial execution to build upon our install base, as well as add new customers.

Service providers and enterprise customers are addressing different business goals, and we will continue to adapt our solutions and expertise to help them win. Tom, over to you.

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Thank you, Dhrupad. Fourth-quarter revenue was $ 60.3 million, 14% sequentially from $ 52.8 million reported in Q3, above the high end of our guidance range and down 2% year over year. Fourth-quarter product revenue was $ 36.9 million, representing 61% of total revenue. Service revenue was $ 20.5 million or 39% of total revenue.

Security-driven product revenue comprised 56% of total product revenue in Q4. For the full-year 2019, recurring revenue was approximately $ 95 million. Moving to our revenue from a geographic standpoint. For the seasonally strong fourth quarter, revenue from the Americas increased 21% sequentially to $ 27.5 million, compared with $ 22.8 million in the third quarter and was down 4% year over year.

In Japan, revenue was $ 16.3 million, up 7% sequentially and flat year over year. We achieved double-digit growth in revenue from APAC, excluding Japan, which was $ 9.3 million, up 11%, compared with $ 8.4 million in Q3, and EMEA, where revenue was $ 7.2 million, an increase of 10% when compared with $ 6.5 million in the third quarter. Both of these regions were down modestly on a year-over-year basis. Service provider revenue in the quarter was 64% of total revenue and enterprise revenue was 36%.

We have revised our reporting to reflect the typical purchasing patterns of our largest web giant customers, which are similar to other service provider customers. In the fourth quarter, our largest web [Audio gap] provider contributed $ 9.1 million in revenue. As we move beyond revenue, all further metrics discussed on this call are on a non-GAAP basis. [Audio gap] Our fourth-quarter total gross margin was the highest of the year at 78.5%, 40 basis points better than Q3 and above the high end of our guidance range.

Fourth-quarter product gross margin was 77.6%, 100 basis points better than last quarter and also up from 76.8% in Q4 2018. Service gross margin in the quarter came in at 79.9%, compared to 80.2% last quarter and 80.6% in Q4 of 2018. Full-year gross margin for A10 was 77.8%, and this is a level that we expect to maintain or improve upon going forward. We ended the quarter with headcount of 819, compared to 870 at the end of Q3, reflecting the actions taken to reduce total headcount in the fourth quarter, as we communicated on last quarter's call.

We believe the annualized savings from this rationalization and other cost savings measures will enable a reduction in opex in 2020, compared to 2019 of approximately $ 10 million. Non-GAAP operating expenses in Q4 were $ 39.7 million, excluding $ 2.5 million of restructuring costs. Opex was roughly in line with last quarter on an absolute dollar basis, 12% lower than $ 45.1 million in the prior-year fourth quarter. Further reductions in variable compensation, rationalized headcount and disciplined G&A spending all contributed to this year-over-year decline.

We reported $ 7.7 million in nonoperating income. We also continued to improve our adjusted EBITDA significantly, which came in at $ 10 million for the fourth quarter, more than doubling the adjusted EBITDA, both for Q3 and the year-ago period, beating the high end of our guidance range and represents our highest -ever quarterly adjusted EBITDA results. As Dhrupad mentioned earlier, this reflects our intense focus on improving profitability. Non-GAAP net income for the quarter was approximately $ 7.8 million or $ 0.10 on a per share basis and above the high end of our guidance range.

Diluted weighted shares used for computing non-GAAP EPS for the quarter were approximately 79.2 million shares. Moving to the balance sheet. Average day sales outstanding were 82 days, compared with 79 days in the prior quarter. At December 31, 2019, we had $ 129.9 million in total cash and marketable securities, compared with $ 122.6 million at the end of September.

Before I provide guidance for the coming quarter, I would like to echo Dhrupad's excitement about the next chapter for A10. Moving into 2020, we will continue to focus on profitable growth by way of driving operational excellence. We plan to build upon our early success in helping our customers prepare for 5G. Moving on to our outlook for the first quarter of fiscal 2020.

We currently expect revenue to be in the range of $ 51 million to $ 53 million, representing year-over-year revenue growth of 5% at the high end of that range. We expect first-quarter gross margin to be in the 76% to 78% range and operating expenses to be between $ 37.5 million and $ 38.5 million. We expect our first-quarter non-GAAP income to be between $ 0.01 and $ 0.03 on a per share basis, using a share count of approximately 81 million diluted shares. Finally, we expect our first-quarter adjusted EBITDA to be between $ 3.7 million and $ 5 million.

Operator, you can now open the call up for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question will come from Hamed Khorsand with BWS Financial. Please go ahead.Hamed KhorsandHi, thanks for taking my questions. Excuse me if there's noise in the background.

First off, could you talk about the product mix having an impact on gross margins? And given the web giant order, how much can you see going forward with the volatility and the product mix on the gross margin line?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Well, gross margin is typically a result of the geographic mix where the revenue comes from. Seasonally, we do see, typically, in Q1, that comes down a little bit typically with normal seasonality. But it's normally just a factor of where the revenue is coming from. Some regions are obviously more profitable than others for us in that regard.

The large web giant that we have, we do expect to have some demand in 2020 from that web giant as well. And that's factored into our guidance range for Q1.

Hamed khorsand For any inquiries, We're here to answer you. BWS Financial - Analyst

OKAY. And then what kind of pipeline are you seeing as far as 5G is concerned and where you stand with some of the customers that are still early in the 5G deployment?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Yeah. 5G, it's still very early stages for 5G generally and a lot of service providers are still figuring out what they need in terms of the architecture. And the install base that we have, it's very early stages for them. We've had some really strong early success in South Korea, who's furthest ahead from what we see in the world.

So they're well-established in that, but there will be continued business from those accounts. Japan, obviously, as well is ahead of things in terms of preparing for the Olympics. But this is going to be a long race. So we'll see a long tail of this process.

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Yeah. And maybe, Tom, I can add to that a couple of more comments that might be helpful. So I think the way we approach 5G today is that globally, service providers are either going to start building out 5G or they're going to get ready for 5G with their 4G LTE and other solutions, right? So our success today is not just greenfield 5G build-outs, but also service providers that we are enabling to do a migration without having to replace everything. So that's one element of it.

As it comes to the design wins, I think the sequence of 5G is usually, it starts with selling and purchase of a spectrum then radio infrastructure then small cell build-out and then services and software. In certain countries, like the ones we mentioned, there has been a specific boost by government spending and other priorities, including net service providers to build out new 5G structure and they are early adopters. In the rest of the regions, I think our focus is today on design wins, whether it's for 5G or 4G upgrades, toward the goal that when they do start deploying and building out, we are already selected as the choice, right? So I think you could say that for some years to come, you will see those design wins translate into revenue. But that will be dependent on, for example, the carrier's ability to invest in capex at that time, etc.

But our focus is if we have the right technology and we are selected for 5G or 4G upgrade, we are positioned very well for years to come.

Hamed khorsand For any inquiries, We're here to answer you. BWS Financial - Analyst

Are you seeing any kind of competitions feed up for you on the security front when it comes to 5G? Are you seeing competitive pressures?

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Yeah. So we are not seeing competitive pressure in terms of exactly what we do, right? So I think we tend to not be competitive head-to-head with people who do pure-play security or pure-play radios and things like that. For us, our solution is uniquely integrated in the service provider and allows them to do things in a more scalable, more secure way. So of course, the competition is going to be what are their alternatives to doing that, even if it's not a one-for-one replacement, right? So that's more of what it is and to the degree that we can demonstrate lower total cost of ownership.

It's actually as much a competitive advantage as anything to do with technology.

Hamed khorsand For any inquiries, We're here to answer you. BWS Financial - Analyst

And then your guidance implies that you're pretty much immediately seeing that annualized savings in Q1 on the opex line. Is there more cost savings you can implement? Or is this pretty much it for 2020?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Well, the full effect of what we announced last quarter won't be seen until we get into Q2. So we've got a little bit more to go in Q2. And then as you can imagine, we're in a constant mode of looking for how to become more efficient. So we'll just be in that mindset all year.

But in terms of the specifics of the actions we took, the full impact of that will be seen in Q2.

Hamed khorsand For any inquiries, We're here to answer you. BWS Financial - Analyst

OKAY. And my last question was that there was a 8-K with Lee Chen resigning. And what was the reasons behind that? And is he going to sell all his stock immediately or anything like that?

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

This is Dhrupad. So I would say, as per our filing, Lee notified the board of directors on February 3 prior to the quarterly board meeting that he would resign from the board of directors effective immediately, right? And this was a personal choice made by him. And I would say, since I joined the company, he has been tremendously supportive in terms of transition, helping with customer insights, helping with team insights and all of that. So I think - and Tom, he has done even more to help make sure that the company is up to speed and running.

Beyond that, I think, obviously, I'm sure there are more legal complications and other discussions on the remaining questions. So I cannot speculate on them right now. But I think, I would say, we certainly see Lee as somebody who wants the company that he founded and built to be very successful going forward, right? And I don't see anything other than that today.

Hamed khorsand For any inquiries, We're here to answer you. BWS Financial - Analyst

OKAY. Thank you for your time.

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Yeah No problem.

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Thanks, Hamed.

Operator

And the next question will come from Nehal Chokshi with Maxim Group. Please go ahead.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

Yes. Congrats on the strong results relative to the guidance. This has been happening all throughout calendar '19, but long-term deferred revenue has been up year over year while short-term has not been. Can you explain that dynamic?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

The deferred revenue trends, they do reflect a trailing effect of a decline in product revenue, unfortunately. So if you look at product revenue in 2019, it was down double digit, right? And so the deferred revenue is mainly a buildup of support contracts that are deferred revenue in nature. And it gets sold as an attach to a product sale. So that's really what you're seeing there.

If you look at our service revenue line, that is up. So it's still trending in the right direction in terms of the revenue, but the deferred revenue does get impacted by - as a tail to the decline in the product revenue.

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

And I think maybe, Tom, the other data point that's relevant is we have not seen our attach rate drop. But because of decline in product revenue, the associated attach revenue that would come with support, subscription, maintenance, all that has declined. And only other component of that is professional services, which is not down either.

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Right.

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

So it's just the attachment rate to the product revenue, which is down, showing up in that deferred revenue.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

OKAY. I mean it's not just simply that the product revenue is down year over year. That's driving an install base decline because whatever might be coming off with renewal three, four, five years ago, that amount, it's not as much as what you saw this current December quarter - throughout 2019. Correct?

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Yeah, that's correct. I mean you have to think of it like a waterfall, exactly like you are describing. So, yeah.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

OKAY. All right. But then the long-term deferred revenue is going up. And so what is the driver of that mechanic?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

That's going to be more a factor of the - a couple of things. One is going to be the nature of the contracts that are purchased. So they're typically one-, three- or five-year, right? So if we're selling a kind of longer-term contract, then you're going to see more of it sitting in long term. And that's the majority of it.

It also does move depending upon rev rec, carve-out impacts. But it's, for the most part, just tied directly to the duration of those contracts, the more long term in nature they are.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

All right. Increasing duration of support contracts. That has something to do with the subscription ramp that you guys have been talking about, right?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

And so that's -

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Subscription is also in there. So I think as the industry move toward wanting to consume products as a subscription rather than a capex purchase upfront, we certainly are aligned with supporting our customers. And while it's not a meaningful driver of that today, that is where we would like that subscription-based recurring revenue to keep coming.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

OKAY. And can you share any specific metrics on the subscription ramp?

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Yeah. We don't break it out separately today.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

OKAY. All right. And then, Dhrupad, you mentioned that you have a strong product road map for 2020. And I think you related that specifically to an improving enterprise performance as you expected.

A, can you verify that? And then b, if that is indeed the case, can you give a little bit more details on what this product road map consist of and why would it improve your enterprise performance?

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Yeah, sure. And I'll probably start by saying the product road map, focus and improvement are both service provider and enterprise. I think on the service provider side, obviously, based on the design wins and the customer traction, we feel we are on track, right, and we need to do more, which we will. I think on the enterprise side, the two things that are very relevant is a lot of our legacy install base is historically been on-prem-oriented customers, and our road map will more actively address customers to operate.

And like an example, we install in multiple environments, which could include on-prem, public cloud, private cloud, hybrid. And to enable that, obviously, we need to make it easier for our customers and our channel partners to consume those products, right? So I think the biggest thing you will see from a road map perspective is focused on looking at the customer application and customer buying patterns and aligning to that. And the second is, obviously, as you know, we already have sort of leading performance and things like scalability and agility and so forth, which we will continue to invest in to maintain that. But the real thing that is a little different would be further adapting that to be consumed by enterprise customers and alongside our channel partners as well.

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dhrupad Trivedi for any closing remarks.

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Thank you. And thank you to all of our shareholders for joining us today and for your support. We believe that our focus and commitment to profitable growth and improving the operating leverage of our business model will reward our shareholders. I look forward to meeting and spending more time with you as we move forward together.

Thank you, and have a good day.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Chris Mammona For any inquiries, We're here to answer you. Investor Relations

Dhrupad Trivedi For any inquiries, We're here to answer you. President and Chief Executive Officer

Tom constantino For any inquiries, We're here to answer you. Chief Financial Officer

Hamed khorsand For any inquiries, We're here to answer you. BWS Financial - Analyst

Nehal Chokshi For any inquiries, We're here to answer you. Maxim Group LLC - Analyst

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