Q2 2020 A10 Networks Inc Earnings Call
Good day and welcome to the Aten networks second quarter 2020 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist why pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Rob thing.
Okay IR. Please go ahead Sir.
Thank you operator, thank you all for joining US today. This call is being recorded in Webcasted lives and will be accessible for at least 90 days via Aten networks website.
Works out.
Hosting the call today or group had trivedi eight cents, president and CEO, Tom Caputo CFO.
Before we begin I would like to remind you that shortly after the market closed today ATM networks issued a press release announcing its second quarter 2020 financial results.
Additionally, the company published a presentation.
Medical trended financial State Street next to its website you can access the press release presentation and trended financial statements on the Investor Relations section of the site.
During the course of today's call manageable make forward looking statements, including statements regarding their projections for future operating results.
And your reductions in operating expenses continued efforts to improve operational efficiency, they're focused on driving growth business optimization and overall profitability. There, believing that we can continue to build upon customer momentum going forward and their expectations regarding future opportunities and their ability to.
Skewed on those opportunities your expectations for future market growth and the general growth of its business the development and performance of their products unanticipated customer benefits from use of their products their expectations and priorities with respect to fiveg.
These statements are based on current expectations and beliefs as of today July 28 2020.
These forward looking statements involve a number risks and uncertainties some of which are beyond the company's control such as the potential impact the cobot 19 pandemic on the business an operation that could cause actual results to differ materially and you should not rely on them as predictions for future events.
He 10 does not intend to update information contained in these forward looking statements whether as a result of new information future events or otherwise for more detailed description of the risks and uncertainties. Please refer to the company's most recent and Q the 10-K.
Please note that with the exception up revenue financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain charges.
Non-GAAP financial measures are not intended to be considered in isolation, whereas a substitute for results prepared in accordance with yeah I may be different from non-GAAP financial measures presented by other companies.
Alright reconciliation between GAAP and non-GAAP measures can be found in the company's press release issued earlier 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 drew pad drew bed the called yours.
Thank you Rob and thank you all for joining us today.
Giving the second quarter, we continue to make progress on other business transformation.
While the environment I mean highly finale.
Sales cycles elongated by the public pandemic and business risk reduction in different markets.
He doesn't continue to focus on execution and fundamental progress.
I want to take our entire team of employees and partners for their professionalism and flexibility during this unprecedented environment.
To date, we have experienced a modest and manageable obviously like game related impact on our business with only.
Like impact on our supply chain.
Customers are taking longer to make decisions and some larger deployments have been delayed as our customers deal that business this direction and challenges related to the pandemic.
We do not believe we have lost any business and we continue to enjoy strong and steady demand part of it solution.
In fact, we delivered increases in both product and service revenue.
Back to last year, despite these deep covert related slowdown and dealing.
Overall.
Revenue in the second quarter was $52.5 million up 6.7% year over year.
From you need to know standpoint, although revenue in Japan Asia has been more impacted than other area.
And we were able to offset these challenges with strong revenue in other geographies.
Increasingly our geographic diversification with a global footprint for white, the Lindsay and flexibility for the business.
Additionally, our strong balance sheet with hundred and $43.4 million in cash and marketable securities and no debt.
Positioned us well to weather the storm.
While investing in innovation for our customers.
We continue to take structural actions to streamline our business model, which will continue to boast a disadvantage.
We remain laser focused on improving over execution to maximize growth and profitability.
As part of then we continue to evaluate our investment decisions with the goal of actively aligning resources to the best opportunities.
And driving efficiencies in all functions.
I'll, let it does in the second quarter demonstrate progress against these objectives.
During the quarter compared to the same period last year and on a non-GAAP basis.
Achieved an 8.2 million dollar improvement in operating income.
A 7.4 million dollar improvement in non-GAAP net income.
On a 2.3 million dollar improvement in revenue.
We continue to believe we can reduce our total annualized operating expenses in line with our strategic initiated and deliver sustained profitability.
We previously stated we would reduce operating expenses for the full year by $10 million.
Paid to 2019.
We are raising that going to at least $14 million for the full year.
Even as we expect sales and marketing expenses go up based on economies around the was beginning to open up in second half of the.
Our gross margins in the second quarter, what inline with our expectation.
Yeah, I did you talked about 95, new customers in Q2.
And believed that we can continue to build upon that momentum going forward with strong focus on improving execution in all the idea.
To that and I'm proud to highlight some signature when from the quarter.
Well, we closed the deal with a new service provider pound in eastern Europe, and acquiring network address translation technology to support that network tropical.
Yeah, Dan solution was selected due to superior product performer.
Second in large investment bank of the cladding and upgraded secure application delivery solution.
Elect that he can opt any competitive proof of concept analysis performed by the customer.
We've had awarded this business due to over demonstrated low latency.
Because he just said rich analytic capabilities and reputation for providing strong customer support.
Finally, a government agency in Latin America.
Flooding is solution to enhance it some visibility and inspection up cross it's Nicolas Tropic.
Elected 810 'cause it plays.
Incumbent vendor.
He doesn't want selected based on its Boston 80 feet performance.
Demonstrated security enhancements and a unified management platform within it and harmony solution.
During Q2, the covert related disruption had more can back on Japan Asia.
In Japan, the postponement of the Tokyo Olympic games.
Hi, good project towards end of the yard or in some cases next year.
Many of the Asian economies, what locked down due to quick 19 concerns.
In the second quarter revenues in Japan in Asia Pacific decreased by $3.2 million compared to the same quarter last year.
This was offset by a 5.5 million dollar improvement in North American revenues, and a 1.1 million dollar improvement in revenue from Europe and Middle East.
Our improving results in Americas, what does it then by expected strong demand from a large web giant accounting for greater than 10% off Q2 revenue and included in the service provider category.
It is important to note that while we continue to have a strong market position with service providers.
We had also dependent on that investment cycles, which can last multiple years and result in Beatty other demand levels.
We continue to drive demand from a diverse global customer base.
And that gives us the best opportunity to deliver.
Solid consolidated results, even a short time demand patterns fluctuate.
In the meantime, we continue to take structural actions going through our business model.
I'm truly excited about the progress we have made on rapidly adjusting our product road map and put for you to better align with market and customer trends and deliver the most meaningful business outcomes for them.
These ongoing actions could eat a strong foundation for sustainable growth into future in conjunction with <unk> adjustment in the go to market strategy.
The recently announced partnership with Dell is an example of where we can create value weidenbach nothing with a strong player in the market.
With that I'd now like to kind of caught on what Tom to review the quarterly operating results in more detail doll.
Thank you for your but.
A strip of shared revenue in the second quarter was $52.5 million up 6.7% year over year.
Second quarter products revenue was $29.2 million, representing 55.6% a total revenue.
Service revenue was $23.3 million or 44.4% told revenue.
Security driven product revenue comprised 56% of total product revenue in Q2.
As a reminder, negate beginning in the fourth quarter 2019.
Visor reporting to include our largest website customers within the service provider vertical.
Moving to our revenue from a geographic standpoint revenue from the Americas increased 29% from a year ago period.
$24 million compared with $18.5 billion for the second quarter last year.
[noise] in Japan revenue was.
Okay.
[noise] revenue was $12.9 million down 2 million from a year ago period, due partially to the impact of the delay of the Tokyo Olympics.
Specific revenues, excluding Japan declined $1.2 million from $9.2 million in the second quarter of 2000 $18 million to $8 million in the second quarter. This year.
And finally in EMEA revenue was $7.7 million, an increase of 17% when compared with $6.6 million in the second quarter last year.
As we moved beyond revenue all further metrics discussed on this call on a non-GAAP basis unless stated otherwise.
A full reconciliation of GAAP to non-GAAP results are provided in the press release in our trended quarterly financial statements posted on our website.
Our second quarter total gross margin was 78.8%.
Second quarter product gross margin was 77.7%.
Later 28 basis points better than a year ago period due to favorable product mix from increased software revenue.
Services gross margin in the quarter came in at any point supersonic compared to 82.4% in Q2 of 2019 due to higher compensation related expenses for services personnel.
We ended the quarter headcount of 758 compared with 785 at the end of Q1, reflecting the actions taken to focus on the appropriate and strategic priorities and maximize productivity.
The strip it indicated earlier, we entered 2020, what the stated goal to reduce operating expenses for the year by $10 million.
Based on our progress to rationalize expenses during the first half of the here we are revising back to a reduction of at least 14 million, even with an expected increase in sales and marketing expenses.
The second half of the year as economies start opening up.
We also continue to evaluate optimization of product related investments aligned with our strategic objectives to drive growth and profitability.
Non-GAAP operating expenses in Q2 was $34.1 million down 10.2% sequentially from 38 million in the first quarter, this year and down 13.2% compared with $39.3 million in the prior year second quarter.
Our continued focus on execution to maximize efficiency and profitability in all areas contributed to this year over year decline.
We reported $7.2 million and non-GAAP operating income.
We also continued to improve our adjusted EBITDA significantly which came in at $9.8 million for the quarter.
<unk> 8.4 million dollar swinging for the year ago period.
A strip as mentioned earlier this reflects our focus on and commitment to improving profitability.
Non-GAAP net income for the quarter was approximately $7.1 million or nine cents on a per share basis.
Diluted weighted shares used for computing non-GAAP EPS for the second quarter were approximately 80 million shares.
On a GAAP basis net income for the quarter was $3.8 million or five cents per share compared to a GAAP net loss of 5.8 million or minus eight cents per share in the second quarter last year.
Moving to the balance sheet average day sales outstanding were 80 days compared with 73 days in the prior quarter.
This trend reflects typical seasonal timing of our revenue in collections.
At June 32020, we had $143.4 million in total cash and marketable securities compared with $129.9 million at the end of December.
During the quarter, we generated $10.5 million in cash from operating activities due to the structural changes in our expense profile in the financial leverage of our business model.
Due to the uncertainty it environment and the inability to predict the course of the current pandemic, we've decided to continue to suspend our practice of providing full quarterly guidance.
We remain committed to advance their goals for profitable growth and our efforts to advance initiatives to improve operational efficiency.
As the global economies continue to be open, we anticipate higher marketing and sales expenses when compared to the second quarter 2020.
However, the structural changes we have made in or business already position us for significant decreases in total operating expenses on a year over year basis.
In addition, we expect to maintain profitability in the third quarter as we continue to make progress on a long term operating model.
We expect gross margin to be consistent with historical range of 76% to 78%.
Operator, you can now open the call for questions.
Thank you well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble roster.
And our first question will come from on your daughter Strom with Sidoti. Please go ahead.
Thank you.
Taking my question I congratulations good quarter, it's not a if you can just that can you hear me.
Yes, I got it.
[laughter] designed to make sure aside you can just maybe elaborate a little bit expense reduction you seems like you did a good job there and it's more to take out.
And you had anticipated and can you just elaborate.
<unk> expenses that that is fun on any comment related.
<unk> expenses, you have taken out no you were alluding to the traveling and markets.
Anything else to think about their expenses.
Yeah charge. So I think that's two categories right down yeah, and I would say up from a covert 19 perspective do you are correct. The main impact would be related to the idea that during the second quarter, particularly up.
That was almost a company please on travel likely sales and marketing activities and so forth also marketing events that typically part of that spending by then.
We had already adapt that if you will to more digital presence that tetra. So that I think you say colgate related impact that.
Well, obviously start to come back and we would look for it to come back to support organic growth going forward. So that's the only one in that type of category. The structural cost changes that we are driving up how can do with if you look at the different categories.
On sales and marketing side and engineering side.
They have more to do with a one.
Making changes in the organization and leadership at that dropped to drive a higher performance level and Hyatt expectation and productivity.
Secondly, creating a tighter focus on what are the biggest customer problems, we are solving and how do we take it to market in the most effectively right in that process. We continue to look for.
Ways to leverage.
Nobody knows what to do that sales, how do you bet leverage that debt equity structure et cetera.
Yep.
And then on the DNA side, I think our thinking is related to a.
Eight driving productivity and efficiency and second is a.
Really being more aggressive on functions that are not customer impacting service our support impacting so that we are best positioned to continue to fund innovation right that other customers see value in which is good for employees customers and met does everybody longer.
Thank you that looks good color and then yet you mentioned that partnership.
I'm good.
Hi, Matt from that.
Yeah.
What kind of expect how pardon.
Scott and what can we expect.
Well I'm for wide like how much are you pushing.
Yeah and ship.
In a good good question on you and I would say you know first of all I'm I'm very excited because that's a way for us to get to effective market coverage.
Better eat and more cost effectively as well and.
That is probably the one area, where you know we.
A slight impact from Colvin, a in a sense all sales cycles out elongated typically alerts sales cycle, maybe six months.
And with the New partners right, we have seen the same in bad debt as anyone else in any other business.
But we do see that as an important part as we build up the pipeline and stopped seem doesn't materialize or.
Most likely next year, and hopefully somewhat queuing up into fourth quarter as well, but typically the sales cycle. It takes six months and you know we ought to engage with partners on actual opportunities.
But they need to mature and then we'll have a steady pipeline. So it'll be a really important bardolph. Our go to market strategy dumbed offered each as well as efficiency over eating those customers right and we talked a little bit as well about on the enterprise side, particularly beating that.
Leveraging partners and channels is is certainly an 80 I'll opportunity for US in addition to driving productivity.
Okay. Thank you and then at last one.
The weakening U.S. dollar I, you have a lot of international exposure.
How are you seeing that saying out the hedging anything.
Yes, that's something that we should be concerned about.
Yeah, I know, it's not gone and I'll, let Tom add to it right, but other transactions out U.S. dollar denominated except for Japan, I think and that's why except for Japan I'm sure you manage that risk cycle, yes, and we do and we do deployed or.
Hedging strategies to the extent that we have.
You know risk because of the young to U.S. dollar ratio.
Okay.
Thank you so am I still look out for me.
Okay. Thank you. Thank you.
Our next question will come from Hendi, Susanto Gabel or funds. Please go ahead.
Good evening, Drupa and Palm and then congrats on positive Q2 results.
Thank you Andy.
I do but could you talk more about the enterprise and business environment and I.
I assume that feasibility slow up at the same time like many companies talk about digital transformation, taking place and the prices. So what is your view on enterprise segment.
Yeah. So.
Certainly and I think you know the.
Yeah, I would probably split that is you know you as you mentioned correctly you will hear us have other enterprise companies comment on enterprise market being really good are really bad and I think the VI segmented further delays.
Lot of the enterprise IP project like originally scheduled and line than budgeted based on the people read idea of everything becomes digital you said more services micro services at Tetra.
Those are the plan today, we are seeing possibly a slowdown our push out because customers are dealing with more urgent topics.
In the Enterprise Park.
That is a second portion off activity with more and more to work and more need to move faster to cloud et cetera.
Companies aren't investing more in things that add capacity and flexibility more security with people being remote et cetera, and that's where the enterprise exposure is positive right and you will see companies.
As a report on both sides out that range.
So far that's really the they refocus on that market is especially with large enterprise.
As a premium on performance low latency high security and ease of use therefore, better opex for the customer we certainly see that other positive trend and expect that could be the case right and if you see one of the cases I highlighted was a lot.
Financial Forum.
Who was faced with.
Adding capacity, adding more security, but to really worried about latency. So up in cases, where that is a premium for that and that is a path for us. We see started any positive trends in the enterprise out we see slowed down back at the enterprise what additional budget blood based on but equally.
Kind of planning Horizon, right, then and that is typically pushed out by a couple of quarters right now because the IP group side dealing with more urgent dumping.
I don't if that answers. Your question, yes, that's very helpful and then but as the economy of the opens or do you prioritize like certain markets like among different geographies.
Sure. So I think you know as you'd off thoughts you have a strong presence in Japan, we data going through a difficult period as well and we hope that comes around and we are positioned very well, but oh product and customers.
Second is for US. We also have made some progress last quarter with expanding our footprint and design.
School in Europe market, as well, which is good progress for us as a company.
So as the economy opens up a little bit in Europe, or even the today to this pick that do within Europe kind of deals that travel up we expect that to be an 80 up our us with especially focus on.
Critical applications with high Friday night.
And in the North America side or on the service provider.
Part of the business, we saw some business up and down in a sense all companies that color shut down for so many weeks and therefore on even can do anything but we also saw a lot of goals at missiles cloud companies are actively looking to add capacity and security features right and what.
We see there again is a focus for us which is.
Yes, we can help them with all the fiveg related things, but in the meantime, we have good engagement or working with them on that existing infrastructure, oh, and enhancing that and getting more and more ready for Fiveg and lastly on enterprise as I said, you know like it was not happened overnight, but I feel really.
Good about things, we put in place with bought another than channels and so forth.
That will create a good foundation for us to again focus on high value applications, where we bring the most value for customers.
And then but which we got to partnership with Dell or how should we think about the targets or are your focus will be enterprise service provider or both.
So I think it can be both really right, but enterprise of course, there they have a great footprint and exposure. So you know we will collaborate with them off course on either and and the way to think about it is a typical service provider sale as high does tie technology.
Because that you know the nature of what they do and on the enterprise side, we expect to get more Oh look just at each and access and integration with other solutions right. So we see in a positive in those ways and as I said, you know typical sales cycle.
It is like six months and I wish it wasn't much faster, but we are very actively engage with.
Finding opportunities and building pipeline, where you know it had one day, just an attractive to both of us right.
I can give you a number yet, but I'm certainly happy to update as we move forward into next quarter and beyond where the pipeline stands and what progress we're making.
But may I know, how do you plan to position eight them networks for OTI T. applications.
So I think.
When you think about that industry, the place, where we intersect with the over the top application to really is up.
As those providers out creating data centers and huge amounts of content that they have to process and then.
Good AD insertion and package it and different formats and all of that at the backend of that requires building large amounts of data and data up arm servers at tetra up.
And as you can imagine of course that is a premium to maintaining high quality of service independent golf how that.
Onton repackage and distribute it filled up in those scenarios. Our goal is really to work with the OTI keep the wider and indebted backend where they are trying to handle lot of need I know secure way and that's really our intersection point like he does for you know game.
In companies for example, right. So that that's already intersection find it's not at the device level, but it's at the core level.
Got it and then one last question I will ask Tom So Tom eight that increased its annual cost reduction to like 14 million. If I look at last year operating expense. It was at like 163. So it's still Romit say about like 148, and then if I look at the first half.
And do some calculation it would imply that second half operating expense will be 76 million. So does that mean that all the cost action plans have been completed.
No. We're we're constantly.
Looking at how do we optimize right and so we.
We're always looking to get us as lean as we think we can be in us, especially because we can be.
So we're going to continue to to monitor that but we felt comfortable enough with where we're at now to.
To.
Raise that that bar for the full year.
The numbers et cetera are.
Yeah, that's right on where we expect to be.
Okay, and I had I would say that blondes out not completed because the original plan for the 10 million water based on a full yet impact so they're not completed in Q1 for example, right, but I would say that two elements are that is a structural element and then there was a time based element gravy got.
You know temporarily downtick on sales and marketing and travel and so forth right. So I would say the fundamental structural stuff is still ongoing as the cost for the full year and Q2, obviously, we saw slight benefit from the reduce trial.
Got it. Thank you group I think it's Tom and it all the best for the remainder of trying to get Wendy.
Thank you thank you Andy.
Our next question will come from how midcourse coarse sand with BW S. financial Please go ahead.
Hi, I'm so.
Let's start off is there a specific area, where you're seeing the most amount of new customer additions this past quarter.
Oh I think so how does it do but I think up for us It was pretty broad based so when you look at what addition up 94 customers vessel that we announced a I'd say a 95. It was Ah you got some in Japan Asia Pacific AMEA.
As well as Amedica light and I would say nothing different than usual.
In that sense.
Okay, and then what are you seeing with customers, causing you guys to have a lack of revenue outlook and is it purely the elongated process or is it budgets being cut.
Yeah. Good good question. So I think I've from that perspective, I would say, it's more the ladder and it's two things, though Hamid I think one is.
There are places today like maybe sell.
That out in a lock down the bad it is impossible for them to actually even go and pick up good right. So in those cases, the uncertainties coming from trying to predict country ex when they might be been can do that.
And so those can be material dollars. So that's more a question off.
Business disruption.
Rather than anything else.
Budget pie, we have not seen as a major issue so far and part of it probably has to do with the fact that the sweet spot for us really is where.
Service providers are trying to deal with more subscribers more capacity more data on that networks.
And on the enterprise on large enterprise data dealing with people going into more and trying to support yet more distributed and Latam and so.
We have not seen it in the sense of budgets being canceled could do something else.
But you know of course that is a slow down off where.
If I started an MSR was closed for two months in Q2, we don't see any progression in our sales cycle right. So it's like sales cycle and business Lockdowns I don't do it.
Okay and then.
What is the your sales team could not achieved during walk down that requires a higher marketing expense.
So I think a couple of things. So one is obviously you know if you think about hollow, let's say the steam approaches it right or we don't want to existing customers. They have been pretty effective at calling on them and continuing to sell more products are same products up.
The hardest thing to do in that environment is.
Adding new customers that are significant because those engagements typically need onsite demos I tried to try to right. So I think.
That 80 out where it would impact us really easing generation all opportunities for future.
And you know, while we are fine neither Tom and demand is good you know I of course always want to be paranoid about am I.
Bringing in enough new.
Opportunities new customers new stream to continue growing right. So I think that.
Getting to kind of way, we need to get to in the near dumb is not the crux off it it's really much more to do it how do we then continue to enhance and build upon that far out quarters.
Okay, great. Thank you.
Thank you.
This concludes our question and answer session I will like to turn the conference over to drew pet Trivedi for any closing remarks. Please go ahead Sir.
Thank you and thank you to all of our shareholders for joining us today and for your support.
He then continues to execute well amidst the challenging and uncertain environment.
And our strong balance sheet global presence and improved profitability position us for continued success.
Thank you again for your support and have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.