Q3 2020 A10 Networks Inc Earnings Call
Good afternoon, welcome to eight <unk>.
<unk> third quarter 2020 financial results conference call.
Participants will be in listen only mode should you need assistance, placing conference specialist by pressing star key followed by zero.
Today's presentation will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Rob Fink. Please go ahead.
Thank you operator, and thank you all for joining us today.
Today's call is being hosted by management team drew Petro, Betty President and CEO, and Brian back or interim CFO.
Before we begin I'd like to remind you that shortly after the market closed today Aten networks issued a press release announcing its third quarter 2020 financial results.
Additionally, 810 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 todays call management will make forward looking statements, including statements regarding to projections for.
Future operating results continued reductions in operating expenses continued efforts to improve operational efficiency focus on driving growth business optimization and overall profitability. Our belief that we can continue to build upon customer momentum going forward.
Patients regarding future opportunities.
Ability to execute on those opportunities.
Expectations for future market growth and the general growth of business development and performance of its products and anticipated customer benefits and use.
And expectations on priorities with respect to Fiveg.
These statements are based on current expectations and beliefs as of today October 27 2020.
These forward looking statements involve a number of risks and uncertainties some of which are beyond the company's control such as the potential impact the carbonite team on its business and operations 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 a more detailed description of these risks and uncertainties. Please refer to the company's 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 they 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.
With all that said I'd like to turn the call over to drew Petru Betty and then see how they tend that works through bad the call is yours.
Thank you Rob and thank you all joining us today.
This quarter was I think the combination of our business transformation to date.
He has been approximately one year since I joined eight and that the field.
In the fourth quarter. After my appointment in Q4 2019.
Hey, Dan reported negative organic growth and roughly.
Operating income.
With operating expenses of 46.8 million on a GAAP basis inclusive of 2.5 million nobody stopped cutting expense.
As a company, we have significantly the U.S. and the growth potential and owning power why they do a thing annual operating expenses by 23.3 million and reallocating resources to the best market opportunity.
This combined with improved commercial execution.
And focus on business outcome.
Our customers positions us for sustained performance into the future.
Any wobbling number of new routes to market with focus on solution selling will allow us to reach a broader set of customers efficiently and in line with market daily.
This quarter, we reported our third consecutive quarter of greater than 6% organic growth in spite of what we'd 19 headwinds.
We accomplished this while simultaneously cutting cost in.
In fact, our operating expense base line is between 34 and $35 million on a non-GAAP basis.
Selecting an approximate 25% reduction in l.
The steady state cost structure over the past two years.
Enabling improved and record profit ghibli.
I think it's important to take a step back and look at the progress we have made that stop nature and efficient profitable organization.
Good day weekend is on a much more solid footing.
We generated 10 million in operating income in the third quarter.
12.5 million in adjusted EBITDA, and 10 million and that didn't go.
We have a strong balance sheet with 159.1 million in cash and consistent growing profitably.
Effectively we have removed significant risk from our model.
And physician 810 for long term sustainable growth building up on our long history.
And with our strong consistent free cash flow.
We are positioned to implement an aggressive share repurchase.
Networks across the globe by being stressed with unprecedented usage and increasing demand for bandwidth capacity.
Underscoring the need for critical communications infrastructure combined.
With the ability to navigate.
Ever increasing volume and sophistication of cyber attacks.
The macro tailwinds on cloud computing Internet of things growth in data and convergence up networks.
Exactly aligned with our value proposition to customers and enables them to achieve better ROI security and flexibility, thereby positioning them to deliver better service levels the dad customs.
Many of our customers are looking for solutions that help them manage that existing infrastructure, while they continue to migrate part of that infrastructure to the cloud.
Our solutions are now they like to support them to achieve their business goals in an on Prem.
Cloud or hybrid environment.
There's been a wide investment protection as well as a much more flexible approach to navigating uncertain die.
Increasingly we are winning business they differentiated solutions based approach.
Hey, Dan is an enabler of technology and solutions that facilitate secured network expansion and added capacity.
We offer multiple product capabilities unified by a common management and analytics platform.
Which ultimately helps customers with best in class features.
Combined with reduced operating complexity.
This is especially valuable.
While they are also dealing with rapidly changing budget priorities and addressing skill gaps in areas like cyber security.
Another risk mitigating for our business transformation is diversification.
We have always had significant geographic diversity, it competitive I'd want age and strategic differentiator with roughly half of our business in regions outside of the United States.
We have diversity in our end market verticals with exposure to cloud providers service providers large enterprise and mid enterprise customers.
During Q3 demand in Japan improved as expected after a strong hold 19 impact in Q2.
Like most companies we saw headwinds in the Americas.
Related to delays and pushouts, resulting from the pandemic.
Once again this makes demonstrated the importance of geographic diversity.
As a result, our operating results in Q3, what generally in line with expectations.
With solid growth any brewing profit Ghibli Dee Ann.
As we continue to navigate a rapidly changing economic and lock.
The environment remains highly fluid with sales cycle elongate did by the public 19 pandemic.
And the timing of project meeting you.
You do profit delays at customers and business locked down.
Why they didn't continues to execute.
Overall Q3 revenue was 56.6 million up 7.1% year over year.
This growth combined with continued focus on productivity yielded record GAAP net income of 6.5 million and direct card adjusted EBITDA of 12.5.
With that I'd like to welcome and turn the call over to Brian Becker Brian.
Brian has served as our vice President of Finance and corporate controller for two years and he was appointed interim CFO in September Brian.
Brian.
Thank you drew up and excited to be here today.
That's true, but shared revenue in the third quarter was 56.6 million up 7.1% year over year.
Third quarter product revenue was 32.2 million, representing 56.9% of total revenue.
Service revenue was 24.4 million or 43.1% of total revenue.
Security driven product revenue comprised 58.9% of total product revenue in Q3.
As a reminder, beginning in fourth quarter of 2019, we revised our reporting to include our largest web jive customers within the service provider vertical.
Moving to our revenue from a geographic standpoint revenue from the Americas was 22 million compared with 22.8 million in the third quarter last year and.
In Japan revenue was 18 million up 2.9 million or 18.9% year over year Egypt.
Asia Pacific revenue, excluding Japan was 8.7 million up 3.8% and AMEA was 7.9 million up 20.8%.
As we move beyond revenue all further metrics discussed on this call are on a non-GAAP basis, unless otherwise stated.
For a reconciliation of GAAP to non-GAAP results are provided in our press release and on our website.
Third quarter total gross margin was 77.6% down 50 basis points year over year due to less favorable product mix.
Services gross margin in the quarter came in at 79.2% compared to 80.2% in Q3 of 2019 due to lower volume.
We ended the quarter with a head kind of 744 compared with 753 at the end of Q2, reflecting the actions taken to focus on the appropriate strategic priorities and maximizing productivity.
Non-GAAP operating expenses in Q3 were 33.9 million down 14% from 39.4 million year over year.
Our continued focus on execution to maximize efficiency and profitability in all areas contributed to year over year decline.
We reported 10.3 million and non-GAAP operating income.
We also continued to improve our adjusted EBITDA significantly which came in at 12.5 million for the quarter and $8.5 million swing year over year.
Drew had mentioned earlier this reflects our focus on and commitment to improving profitability.
Non-GAAP net income for the quarter was approximately 10.3 million or 31 cents on a per share basis.
Diluted weighted shares used for computing non-GAAP EPS for the third quarter was approximately 80.4 million shares.
On a GAAP basis net income for the quarter was 6.5 million or eight cents per share compared to GAAP net loss of 174000 or zero cents per share in the third quarter last year.
Moving to the balance sheet average days sales outstanding were 69 days compared with 80 days in the prior quarter. This trend reflects typical seasonal timing of our revenue and collections.
At September Thirtyth 2020, we had 159.1 million and total cash and cash equivalents compared with 129.9 million at the end of December.
During the quarter, we generated 15.9 million in cash from operating activities due to the changes in our expense structure and financial leverage of our business model.
We generated 14.9 million in free cash flow during the quarter.
On September 17th the company announced a share repurchase plan for up to $50 million of common shares over the next 12 months.
Due to the uncertainty in the environment and the inability to protect the course of the current pandemic, we're suspending our practice of providing for quarterly guidance, we remain committed to advancing our goals for profitable growth in our efforts to advance initiatives to improve operational efficiency.
As the global economies continue to reopen we anticipate higher marketing and sales expenses when compared to the third quarter of 2020. However.
However, structural changes we have made in our business already positioned us for significant decreases and total operating expenses on a year over year basis.
On an annual basis, we expect to generate organic growth of approximately 6% to 8% with higher bottom line growth than our top line.
We expect to maintain profitability in the fourth quarter as we continue to make progress on a long long term operating model and.
Yeah, we expect fourth quarter gross margins to be consistent with our historical range of 76% to 78%.
Operator, you can now open up the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
I guess in a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then tip.
At this time, we will pause momentarily to assemble our roster.
Our first question is from them.
[laughter] coarse sand from beat that for you EPS financial go ahead.
Hi, Thanks for taking my question. So first off I, just want to understand the as far as the Japan coming back was that purely related delays that you saw was well. These sales booked in the past or were these brand new and you were able to close them.
Yeah. So how did this it too but the good questions I think it was a mix all two things. So the two phenomena two things happening in Japan were up dad was activity in Q2, we had gotten delayed until some of those deals did get closed in Q3.
But we also saw.
Some movement that customers are reassessing that longer term plans because.
Why did the Olympics is not yet gotten suddenly that's been re scope and that is any impact on planning. So we saw some of those audits being broken up into potentially smaller deals et cetera. So a lot of these ideals that war, obviously had to because the sales cycle is typically six to nine months.
But at the same time, we saw some resumption all things coming into the funnel as well like which is positive although nuanced by the fact that the Olympics at least get a little bit so.
So we expect that to still be good thing, but not maybe as much as before.
[laughter] and then are you seeing any.
Any benefit from these extensions of work from home learn from home movements and as far as the companies and how they're prioritizing their spending.
So we see that a at an indirect level right, so where do we see that ease as that extension of cars that.
That is a more distributed nature of dropping Gan data and video volume and ultimately that creates the back fresh air for service providers and cloud providers doing last in more capacity or more flexibility are more security.
So all that intersection wind is site at that level in the core of the network is that did you see that connection.
A lot of questions are you seeing any traction on the Fiveg front.
Yeah, we we are and I think you know five G., obviously continues to be a mix thing, which is a greenfield five g. and then there's a lot of fiveg, which is not native RPR fiveg. So we participate in both.
So as it relates to brand new Greenfield Fiveg deployments, those I typically delayed a little bit due to pull we'd 19 up however bear out the fiveg is under they already or they are planning to.
And has that gotten networks, we continue to see positive momentum there right. So our value proposition that is really around greenfield fiveg, but also fiveg readiness and that has given us a more balanced exposure.
Okay. Thank you.
Our next question is from I'm, just so much Tom from Sidoti go ahead.
Hi, Thank you for taking my question and congratulations on a good quarter again and.
So my first question is you mentioned that the North America, Yeah, we're slowing down a little bit and that's the quarter how west.
How did that play out during the quarter and what do you see it going into the fourth quarter.
Yeah no. Good question on N.. Thank you.
The North America, I would say the phenomenon I would differentiate it.
Between small and mid enterprise large enterprise and service provider so.
Let me see a slowdown was all just be more on the mid enterprise side.
Which you know many other companies have talked about as well right, which relates to companies are testing the budget priorities and timing of that IP spend.
What's is having to compete with other priorities like remote work insecurity up so as we thought like through the quarter, what we the baby site was.
Rejected plans to deploy a either equipment or software.
Even though they have their blonde and schedule eventually got delayed or pushed out because customers.
Were dealing with either a lock down our you know it just depends on what you would do so so we did see especially on enterprise side Oh. It is that we were sure would be happening in cuti getting delayed up.
I would say that part is probably the hardest to predict on how much off that don's back around in Q4 up because it's really you know more macro phenomena right or not but.
I think about our products our competitors our landscape and on the service provider side. I think you know we continue to see as the capex radiation outdoors that that moves like but overall I would say that trend is positive as they continue to add capacity. So.
It's more to do with the enterprise market and where people are the assessing plans and budgets and bodies right, where we see those delays are departments.
Thank you and are you seeing any sort of other difficulties among your customers or is it more rhetoric about just a reshuffling on and maybe pushing that hard.
Checks out.
I think that's the single biggest one I don't think we have seen needle cancellation sell or things like that I think we haven't seen a like.
Given the difficulty in getting the right people to do things, but.
But it has been definitely related to budget Friday di di shuffling, just based on uncertainty that they had also dealing with.
Okay. Thank you and then in terms of the good thing is sales expenses, you say you're expected to come back and ask that were able to start maybe traveling again and thanks opening an office.
To what extent, they expect that to come back and and and what do you see any further cost savings. There that you are getting used to doing business more efficiently, maybe remotely or yeah. They had a computer [laughter] virtually.
Yeah Yeah.
Yeah, no not that good question I think you know I would separate the two things I tell floors up we continue to look at structural cost.
Auctions it just separate the temporary benefit I think it's two to four right one is.
That is all already by the way travel that has opened up we didnt box up your all within Asia.
And so we may see that already coming in little bit right. So it's not all of it but at least some all that activity and we didn't you at night, but not international as much.
On the marketing side certainly as you noted we have continued to.
Substitute online or what you are live and then even our user group will be virtual as a way to.
Replicate the notion off you know doing lot of local events and gatherings and so forth. So I didn't get that is certainly a we are becoming more efficient and that he will continue to be a hybrid model in the future where not everything will go back to all in Burleson right. So certainly that's an area we expect to fill up.
I think that's I won't be it will pick up because of you already see traveling opening up and.
We continue to invest in what you'll events as well, but it may not be all debate that is correct yes.
Okay. Thank you that's all for me. Thank you so much.
Thank you. Thank you.
Our next question is from Hendi Susanto from Gabelli funds go ahead.
Good evening, good pot and Brian Great Q3 results.
Thank you.
Oh, My first question I would like to ask about the 7% year over year growth in enterprise felt following multiple quarters of negative growth.
How do you characterize the enterprise helpful. We're four months I think it's up it's very possible mm went when I when I look from that perspective I would.
Back to you know inside in terms of Winder, eight and kind of maybe they bought this outgrow the enterprise, especially in light of the license was out today to to caucus ideas that you mentioned.
Yeah, No good question and I would say.
You know the opportunities for us there have had to do with two things right. So one is as.
Many of you remember.
We focused a lot on commercial execution working with the channel is better and.
And so forth and so we expect certainly that improving commercial execution to help us with growth in the enterprise side and that true globally for us. The second part of it is I would say, we still have you know bolt continued to.
Focus on improving that in the future by better working with partners that we have talked about but also focusing on products being easier to use whether it's on prem or in the cloud multi cloud up which you know resonates with what our customers are facing.
Thing as a reality like wise.
That they are not looking at option of ripping out everything we.
While they are dealing with all the other uncertainties. So so what approach is really to align our solution selling to a problem. They are trying to solve now independent off deciding what form factor and whether it's cloud or not and as we have made progress in creating that I think we have seen some positive.
Momentum to grow in those areas.
Right [laughter], but what's to be able to share insights into your product road map and shopper need for privacy infrastructure, but then we do rely on the current existing product portfolio or are there new products that aid and is developing now.
Sure Yeah. So I think you know for us as we look at the opportunity with service providers. There's two dimensions off it. So one is up we have existing products that actually create more value for customers. When they are used with other products.
Because we have a common way to manage and have a common interface to them right. So.
One area of growth for us is.
To enable our product portfolio across multiple things to create unique fiveg solutions, whether its security are firewalls or whatever.
And so that's one really important part of our innovation and road map is alignment with our customer metrics and customer outcomes.
The second is certainly from a technology perspective, we continue to monitor developments, there and ER and you know we have.
I'll just do you have plans to continue to release, new products, but aligned with sort of the customer use cases or more so than than any specific brought a technology.
Got it and.
And then last question for me. So eight then doesn't give Q4 guidance that is understandable.
There are some but inside or data points that we should have in mind. When it comes to Q fours in terms of just another is the despite all my call. Good bye bye.
[noise] up no. That's a good question Hendi and I think you know in Bryan section he talked about two or three things, which I think are relevant right. So we expect of course gross margins to be consistent with our historic range.
Certainly we expect to maintain profitability.
And I think the uncertainty for US is most on topline with you know you have uncertainty coming on but election with gold would shut downs and openings around the world. So.
So that's the Abbvie are navigating right in terms of where do we go now.
Seasonally Q4 would be stronger than Q3, but what I don't know is you know a locked down in two countries. Good to have a bigger impact than seasonality right. So that's the guidance.
Thank you Ryan Thank you bye.
Thank you Andy thank.
Thank you.
This concludes our question and answer session I would now like to turn the conference back over to Joe.
Go ahead.
Thank you.
Thank you to all our shareholders for joining us today and for your continued support.
Hey, Dan continues to execute well amidst a challenging and uncertain environment.
And our strong balance sheet global presence and improve profitability position us for continued success.
Thank you and have a good day.
The conference has now concluded. Thank you for the tandem todays presentation you may now disconnect.