Q3 2019 Earnings Call

Good day and welcome to the 10 networks third quarter, <unk> 29 chain conference call.

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Place night. This event is being recorded.

I would now like to turn the conference I'll kick, Chris My mining Investor Relations. Please go ahead.

Thank you for thank you all for joining US today. This call is being recorded.

Castlight and may be accessed for one year via the ATM networks website Aten networks Dot com.

Members of eight cents a management team joining me today, our lead Gen founder and CEO , Chris White VP of worldwide sales and Tom Constantino CFO .

Before we begin.

Like remind you that shortly after the market close today.

It's a network issued a press release announcing a stark work 2019 financial result.

Additionally, 810 published a presentation along with his prepared comments for this call and supplemental trended financial statements.

You may access the press release presentation prepared remarks, and trended financial statements on the Investor Relations section of the company's website a.

During the course of today's call management will make forward looking statements, including statements regarding our projections for our future operating results, including our belief that we will see a sequential increase in revenue during the fourth quarter increased recurring revenue for 2020.

Our focus on business optimization, and overall profitability, including grow reduction enforce our pursuit of potential alternatives to create shareholder value.

Our CEO succession plan the capabilities of our sales team, we're finding of our marketing engine or expectations regarding future opportunities and our ability to execute on those opportunities our commitment to innovation and bringing new solutions to market.

Our expectations for future market growth in general growth of our business.

The development and performance of our products, our current and future strategies or lease relating to our competitive advantage as anticipated customer benefits from the use of our products or expectation that priorities with respect to Fiveg response, it's a new security threats, our partnerships with technology providers on sales partnerships and our ability to penetrate certain markets.

These statements are based on current expectations or beliefs as of today October 29 2019.

These forward looking statements involve a number of risks and uncertainties some of which are beyond our control that could cause actual results could differ materially you should not rely on that must predictions of future. That's 810 disclaims any obligation to update but information contained in these forward looking statements, whether as a result of new information future events or otherwise.

Deep Fry 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 by name from ever just got today are on a non-GAAP basis and haven't adjusted to exclude certain charges.

non-GAAP financial measures are not intended to be considered in isolation or are they substitute for results prepared in accordance with gap and maybe 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 fourth quarter of 2019 on a non-GAAP basis. However, we are unable to make available a reconciliation of non-GAAP guidance matters. The corresponding GAAP measures on a forward looking basis due to high variability and low visibility with respect to discharges, which are excluded from these non-GAAP measures.

Now I'd like to turn the call over till each I'm founder and CEO of Aten networks.

Thank you Chris Thank you all for joining us today.

We are pleased to Delever result for the quarter not watching like this revenue expectation for schedule goals and battling then the guidance range for gross margin and operating expenses that we communicated doing all previous earnings call.

We've delivered revenue of could keep $2.8 million.

non-GAAP gross margin of 78.1%.

EBITDA of $4 million and reported two cents non-GAAP earnings per share.

We believe we will see further uptick in revenue during Q4.

We continue to see strong engagement with customers well adopting all secure application services for more to call and Fiveg environments.

During my recent visit to Japan, and Middle East.

Many of our customer come they optimism about the demand for they all Fiveg somebody says.

And are planning to be Oh, Dear Fiveg transport infrastructure over the next several years.

Security remains a top concern for customers and.

And all that differentiate itself for the treatment security solutions continue to gain traction.

During Q3.

Yes.

Industry, leading innovation with the college excess proxy, which provides strong girls security better performance and the interest user experience for software I'll say Sobi SAS applications, such as Microsoft Office 365.

So I'll walk me seeing Hell, we were recognized we slow we know circle.

He just bought a war for flight GE security and and as we fight innovations.

Eight has finally security solutions continued to drive a number of significant wins during the quarter.

So on the CFW was adopted at SK telecom for the world's first Fiveg commercial service.

And we took sell for Hyperscale, what's realized carry with great net services.

In the Middle East, we also secured a one need impastato Fiveg design win we said mobile operators.

Moving on from strategic topic.

All lost owning call we are not supposed the formation of a strategy committee of the ball directives Aswell as CEO succession plan.

Your strategy Camille continues to evaluate opportunities to maximize shareholder value.

Meanwhile, so it's come easy continue to evaluate CEO candidates.

We remain fully committed to my role as CEO of Aten networks, and well work closely with the team to help ensure smooth transition to my successor when that time Collins.

In summary.

Great Okapi does not a bit need you to navigate you effect could be through a dynamic business environment closing all this year.

Heading into 2020 .

I believe we like a strong position to compete new to drive customer engagements and success is a wrong all core strategic security solutions in Fiveg at Monte Carlo.

And that's kind of keep doing shift underway with respect to all recording revenue.

We are targeting $100 million in recording high margin mentioned us and subscription revenue in 20 countries.

With that I like to turn the call over to Tom to review the details of also quarter financial performance and fourth quarter guidance Paul.

Thank you Amy third quarter revenue was $52.8 million up 7% sequentially from $49.2 billion reported in Q2 and above the midpoint of our guidance range.

The year over year decline in revenue, it's driven by fluctuating demands from our largest one giant account in North America.

Third quarter product revenue was $30.1 million, representing 57% total revenue.

Service revenue was $22.8 million were 43% to total revenue.

Security products revenue comprised 44% total product revenue in Q3.

Moving to our revenue from a geographic standpoint for the third quarter revenue from North America decreased 27% year over year $19.6 million.

Compared with $27 million from the same period last year.

In Japan revenue was $15.2 million up 8% year over year.

Revenue from ATAC, excluding Japan was $8.4 million compared with nine point Threemillion Q3, or two tells me too.

In E. M E revenue was $6.5 million, a decrease of 19% when compared with $8.1 million than a year ago period.

Revenue from watching him continued to grow it came in at 3.3 point $2 million up 56%.

<unk> $2 million last year.

Service provider revenue in the quarter was 50% the total revenue enterprise revenue was 38% and what giant revenue rounded just 4%.

I was removed beyond revenue all further metrics discussed on this call on a non-GAAP basis unless stated otherwise.

We delivered third quarter total gross margin of 78.1% 10 basis points better than Q2, and also above our guidance range.

Q3 marks our highest gross margin performance so far this year.

Third party gross.

<unk> third party product gross margin was 76.5% compared with 74.4% last quarter and 77.1% in Q3 or 2018.

Product gross margin was negatively impacted by geographic mix versus the prior year period.

Service gross margin in the quarter came in at 80.2% compared to 82.4% last quarter is 81.8% in Q3 2018.

We ended the quarter with headcount at 870, compared with 862 at the end of last quarter, the slight incremental headcount.

Reflects our ongoing strategy to expand technical talent and lower costs locations.

non-GAAP operating expenses.

Came in at $39.4 million inline with last quarter, and about 13% lower compared to $45.1 million in the prior year.

Further reductions in variable compensation as well as rationalizations and GSK spending in the midst of the weaker Remy performance contributed to this quarterly decline.

We're profitable on a non-GAAP operating income basis, this quarter reporting $1.8 million and adjusted EBITDA of $4 million.

non-GAAP net income for the quarter was approximately $1.8 million for two cents on a per share basis also rebounding from net losses reported over the past few quarters.

Basic and diluted weighted shares used for computing non-GAAP EPS for the third quarter were approximately 79.1 million shares.

Moving to the balance sheet everyday average day sales outstanding were 79 days compared with 84 days in the prior quarter.

At September Thirtyth, 2019, we had $122.6 million and total cash and marketable securities compared with $119.3 million at the end of June .

Moving onto our outlook for the fourth quarter.

As previously indicated we anticipate another sequential increase in total revenue.

Currently we expect fourth quarter revenue scheme, the range of $55 million to $69 million, representing sequential revenue growth of 8% at the midpoint.

We expect fourth quarter gross margin to be into 76% to 78% range and operating expenses to be between 39 million and $40 million, excluding onetime charges for severance and restructuring costs.

As part of our continuous focus on business optimization and overall profitability, we're planning a global global reduction enforce the 5%.

The full benefit from these reductions should be realized by Q2 2020.

Related severance and restructuring charges are expected to be approximately $2 million in the fourth quarter.

We expect our fourth quarter non-GAAP net income to be between four cents, an eight cents on a per share basis, using the share count of approximately 80 million diluted shares.

Finally, we expect our fourth quarter adjusted EBITDA to be between 5.4 $8.2 million.

With that I will turn the call over to Chris.

Thank you Tom.

Looking at the dynamics within the quarter North America revenue grew 28% versus last year, which far and away with the biggest driver of the company, 7% overall sequential growth.

Furthermore, our win rate remains high and we continue to see Oh, the overall quality of the pipeline strengthen.

That said demand from our largest installed base in North America remains challenging.

Although the largest sides deals primarily in our enterprise and web Giants verticals continue to be pushed into future quarters. We're starting to see increased traction in smaller size deal activity from our strategic accounts in North America.

And this at the very least as a positive early indicator.

These improved demand.

This improved demand enabled us to deliver revenue above the midpoint of our guidance range for Q3. Accordingly. This higher traction activity has extended into the current period positioning us well, what we believe will be another sequential increase in revenue in Q4 as indicated by our guidance.

In Fiveg, we're pleased to report.

Customers, who have selected a 10 over the past year are beginning to expand their deployment.

810 networks is focused on Fiveg security solutions with multiple proven tier one fiveg deployment required continued hyperscale lower latency agility canned advanced security as an example, we saw significant continued expansion of our Fiveg security technology footprint with one of the largest carriers in the middle East.

Intel is the latest industry tightened to recognize Aten networks, Fiveg security and an athlete Guy innovation at superior and enabling service providers worldwide recently awarding us with the winner Circle meters Board Award. This at the top honor in the Intel Network builders program, which aims to accelerate network transformation.

Fostering innovation in solution development.

As a member of the until network builders ecosystem Aten networks has contributed to the acceleration of network transformation, but working closely with Intel and its ecosystem.

Our international product bookings were stable versus the previous quarter and year on a year over year basis, we delivered strong product revenue growth in Japan, and Latin America.

During the quarter, we added 185 new customers.

Year to date, new customer adds are up 5%. In addition to the number of new logos. We were pleased with the expansions we generated with our existing customers highlighted by the following recent customer engagements.

One of the largest broadband service providers in North America selected our CFW IP SEC solution to secure it's Jerry tunnels for delivering intern network IP the speed and reliability of 810 solutions were significant differentiators in this competitive multimillion dollar win against lower priced alternatives.

We were placed an incumbent mobile provider in EMEA several of our Thunder solutions. One this new multi million dollar engagement based on our speed scalability and unique focus on bundling 80 see CGM and CFW features into a solution set capable of supporting this customer's plan.

For a full fiveg rollout by 2021.

Expanding with new service providers like this one across the globe is a key initiative for the sales team. We're pleased to see our international progress in Q3.

Additionally, we secured follow on Fiveg orders with leading mobile providers in South Korea based in large part on our differentiated features and Atens harmony controller versus alternatives in the our marketplace.

Our product portfolio is strong our win rate remains high and we're committed to continuous innovation and refinement to our go to market engine. We had a very clear vision, we're eager to capitalize on the fast growing areas of our market and our team is energized about the market opportunity for our solutions.

Operator, you can now open the call for questions.

[laughter].

Thank you we will now begin the question answer session.

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At this time, we'll pause momentarily to assemble lever off though.

Thank you see there are not questions. At this time of this does conclude that question answer session I would now like to turn the conference back five its management for any closing remarks.

Thank you and all of all shareholders will join US today for your support Thank you and good day.

Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.