Q4 2020 A10 Networks Inc Earnings Call
[music].
Good day.
Looking to the Aten networks fourth quarter 2020 financial results Conference call.
All participants will be on listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by a zero.
After today's presentation there'll be an opportunity to ask a question.
To ask a question you May Press Star then one on your Touchtone phone.
If you would like to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to where I think a F N K, Iowa. Please go ahead.
Thank you operator, and thank you everyone for joining us today.
This call is being recorded and webcast live and may be accessed for at least 90 days on a <unk> investor Relations website at a 10 networks Dot com.
Hosting the call today are a true petro about a eight tenths, president and CEO and Brian Becker 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 fourth quarter 2020 financial results.
Additionally, the company published a presentation and supplemental supplemental trended financial statements.
You may access the press release presentations on 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 positioning industry trends and opportunities strategy, including diversification portfolio manager a man recurring revenue deferred revenue operating margin growth and profitability and volatility. These.
Statements are based on current expectations and beliefs as of today February nine 2021.
These forward looking statements involve a number of risks and uncertainties. So much are beyond the company's control such as the potential impact of COVID-19 on its business and operations that could cause actual results to differ materially and you should not rely on them as predictions as future events a.
10 does not intend to update the information contained.
And these forward looking statements, whether as a result of new information future events or otherwise except required by law for more detailed description of these risks and uncertainties. Please refer to the company's most recent 10-K.
Please note 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 any results prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies a re.
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 now like to turn the call over to true pad Droop Ed the call is yours.
Thank you Rob and thank you all for joining us today.
The fourth quarter represented a strong end to a solid year for us.
We have established a foundation for sustainable growth and profitability.
In fact, we reported our fourth consecutive quarter of positive year over year organic growth delivering total growth of six per cent for the year.
Importantly, we have refined our go to market strategy, establishing strategic relationships with partners and resellers streamlining our sales organization around the globe.
Focus on the most promising and profitable opportunities and transition from a provider of Commoditized solutions.
To a strategic integrator, providing best in class solutions in several growth oriented technological area.
In particular, we are well positioned in cyber security.
<unk> rollout.
And network availability, including Ddos attack prevention.
Each of these areas represent strong multiyear secular opportunities for us.
They enjoy broad tailwind.
And our offerings on not only best in class, but differentiated by building upon strong historical leadership in these segments.
<unk> has been built over 10 years.
Let me speak to some of our solution based approaches and how they are resonating with customers.
A major service provider in Japan was faced with growth in mobile internet traffic as well as increased volume on cyber security attacks.
Eaton was able to provide an integrated solution that include a multiple functions.
Well able to operate efficiently at Hyperscale.
And provided the best path for them as they continue to grow that network.
All while adding more security.
Our solution was chosen for a technical performance alignment with customers' business metrics.
And a reduction in the customers' opex with ease of management.
In another example, one of our important service provider customers was planning to expand that existing five G rollout.
In spite of Covid related restrictions eight and was able to work with a customer to deliver a virtualized solution that help them to address a growing internet dropping.
This was an important step as it demonstrates that aegon can support customers solutions based on bad meat, which can sometimes be a mix of what you liked and physical solutions.
Government agencies have been faced with increasing external cyber attacks during 2020.
H N was able to partner with a government agency in Southeast Asia.
To deploy our Ddos protection solution to protect them and widened services from disruption.
Our solution was chosen because it was easy to deploy indeed.
Integrated well with debt infrastructure.
And most importantly provided a strongest protection in technical evaluation.
Two a day eight and has a global presence.
Helping us navigate the Covid challenge demand environment.
We have revenue diversity mitigating our reliance on large customers and individual product offering.
Throughout the last year, our primary focus was to a believer growth, while maintaining cost discipline and maximizing our efficiency in all functional areas.
With that foundation in place.
We are turning our focus in 2021 towards portfolio management, there's a.
Includes broader security led solutions one of our customers.
Enabling five G and five G readiness.
And increasing our recurring revenue in line with our customer's business goals.
This effort will make all of our business.
Even more sustainable.
While increasing our visibility into our quarterly performance.
Our goal is to grow on a recurring revenue faster than our overall revenue.
For perspective.
L a recurring revenue.
On December 31st 2019 was $94 million.
And grew to approximately 105 million by end of last year.
During 2021, we anticipate this transition to be neutral to our operating margin.
As we invest that incremental revenue into back end support to grow the stream.
Beginning in 2022, we expect this initiative to be slightly accretive to our operating margin.
As part of this initiative beginning in.
In the first quarter, we plan to call out total recurring revenue and deferred revenue.
Deferred revenue represents a leading indicator of future revenue and can provide some insight into a total lifetime value on a customer relationship.
It represents contracted revenue that has not yet been recognized.
This initiated a strategically important.
It adds a new pillar all sustainable growth in line with our customers' needs.
While we are benefiting from macro tailwind related to cloud computing internet of things growth in data and the convergence of networks.
Trends, which closely align with our value proposition to customers.
Ultimately our long term success is based on choosing the right opportunities and on execution.
The last year has demonstrated our ability to build up on our technical foundation and improve execution.
And the impact of that is evident in the sustainable and profitable growth regenerate.
With that I'd like to turn the call over to Brian for a detailed review of the fourth quarter and full year Brian.
Thank you drew a bit.
As a group a share revenue in the fourth quarter was $62 7 million up 4% year over year.
Fourth quarter product revenue was $37 7 million, representing 60% a total revenue.
Services revenue was $24 9 million a 40% of total revenue.
Security driven product revenue comprised 53 per cent a total product revenue in Q4.
Moving to revenue from a geographic standpoint revenue from Japan was $18 5 million up $2 3 million or a 14% year over year.
As a Pacific revenue, excluding Japan was $8 2 million compared to $9 three in the fourth quarter last year.
EMEA was $9 2 million up 28 per cent.
Revenue from the Americas was $26 8 million compared to $27 5 million in the fourth quarter last year.
With the exception of revenue all of the metrics discussed on this call on a non-GAAP basis, unless otherwise stated a full reconciliation of GAAP to non-GAAP results are provided in a press release and on our website.
Gross margin in the fourth quarter was 79, 6% up a 112 basis points year over year due to a more favorable product mix.
We ended the quarter with head count of 749, compared with 748 at the end of Q3 and 819 at the end of last year. This reflects the actions taken to focus on the appropriate strategic priorities and to maximize productivity.
Non-GAAP operating expenses in Q4 was $36 million down, 9% from $39 7 million year over year or.
A continued focus on execution to maximize efficiency and profitability in all areas.
Tribute to this year over year decline.
At the same time, we continue to reallocate resources to the most important long term growth opportunities and to optimize our global footprint to further improve execution.
We reported $13 9 million a non-GAAP operating income an increase of more than 80 per cent compared to $7 7 million a year ago quarter.
We also continued to improve our adjusted EBITDA significantly which came in at $16 1 million for the quarter, a $6 $1 million improvement year over year, which reflects our continued focus on and commitment to improving profitability.
Non-GAAP net income for the quarter was $13 9 million or 18 cents on a per share basis diluted weighted shares used for computing non-GAAP EPS for the fourth quarter were approximately $78 8 million shares.
On a GAAP basis net income for the quarter was $7 8 million or <unk> 10 per share compared with $51000 or zero cents per share on the fourth quarter last year.
Turning to our full year results revenue for 2020 was $225 5 million up 6% over the prior year.
For the full year 2020 product revenue was $129 million, representing 58% a total revenue.
Services revenue was $95 7 million a 42% a total revenue from 2020.
Security a different product revenue comprised 58% a total product revenue for a full year.
By geography revenue from the Americas was $98 2 million for the full year 2020, compared to $89 9 million a 2019.
In Japan revenue was $67 1 million up $7 6 million or a 13% year over year.
Asia Pacific revenue, excluding Japan was $29 8 million down, 17% EMEA was $30 6 million up 11%.
With the exception a revenue all of the following financial metrics are on a non-GAAP basis, unless otherwise stated.
Full year 2020, total gross margin was $78 6 million up 87 basis points compared with 77, 8% last year. This is due to a more favorable product mix.
Gross margin for 2020 was 79, 8%, which is down compared to 86% for all of 2019.
Due to the impact of Covid shutdown as a leading to fewer direct customer engagements.
Non-GAAP operating expenses for the full year 2020 were a $142 1 million down 13% from a $162 7 million in 2019.
We reported $35 3 million and non-GAAP operating income for the full year of 2020, and adjusted EBITDA, a $45 6 million.
Adjusted EBITDA improved by $33 9 million over last year again, reflecting our continued focus on a commitment to improving profitability while driving growth.
Non-GAAP net income for the full year 2020 was $35 3 million.
On a 44 on a per share basis.
Diluted weighted shares used for a computing non-GAAP EPS for the full year were approximately 80 million shares.
On a GAAP basis net income for the full year of 2020 was $17 8 million or <unk> 22 per share compared to a GAAP net loss of $17 8 million or <unk> 23 cents per share for 2019.
As of December 31, 2020, we had $158 1 million, a total cash and cash equivalents.
Compared to a $129 9 million at the end of 2019.
For the full year, we generated 50, $355 3 million in cash from operating activities due to the changes in our expense structure and a financial leverage of our business model, we generated $51 7 million in free cash flow for 2020, and $15 8 million in the fourth quarter alone.
As a reminder, we define free cash flow as net cash provided by operations less capital expenditures capital expenditures as the purchase of property and equipment.
In 2020, the company announced a share repurchase plan for up to $50 million of our common shares over the next 12 months.
During the quarter, we repurchased two 7 million shares.
At an average price of $7 on 11 cents for a total of $19 $2 million.
I point out that we ended the year with cash and cash equivalents of a $158 1 million just $1 million lower than cash and cash equivalents as of September 30th.
This while spending $19 2 million on share repurchases in the quarter.
This speaks to a strong positive cash flows.
And we were able to fund the entire stock buyback with cash generation for preserving our strong balance sheet.
As a global economies continue to reopen we remain laser focused on driving sustainable balance of growth and profitability.
On an annual basis, we expect to generate growth.
A six 8% with higher non-GAAP bottom line growth on our topline in.
In addition, we expect to maintain a GAAP profitability going forward.
We also expect some somewhat higher quarter to quarter volatility, particularly in Japan, if they're a decisions to further delay or cancel the 2020 Olympic games.
Operator, you can now open the call up for questions.
Thank you we will.
Now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
So withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble a wrong okay.
Our first question comes from and then of course then with.
E. W. S financial please go ahead.
Hi, So first off just wanted to ask you on you're talking about on your slide presentation about smoothed Global Inc.
Issues going on in the lower visibility could you expand upon a what are you seeing that's a you know a lower visibility if you're mostly a software oriented a company.
Yeah.
Yeah have a thanks, it's a true but.
So I think.
As a as we reiterated at the end right, we still expect to achieve a growth of 6% to 8% right. So that is that is independent of all of those observations.
When we talk about the uncertainty on timing a that typically relate to <unk>.
Operating in regions, which might be in a physical shut down for 60 days and a yes.
Even though it's predominantly software a we are typically depending on the customers' networks group I D Department, Our security Department a.
Being available to Don on the network estate and a complete all of those criteria. So so the connection for US is not in terms of a man it's simply the slight aviation that we expect a.
Which I would say, it's no different than what we saw.
All in 2020 and manage D. A.
And like everyone. We remain very optimistic that the vaccine that kind of subsides much much more so in the second half rate, but nothing different than 2020 simply a reflection of uncertainty when business is not able to operate in that in a lot.
Okay, and then what have you seen in your business since the solar winds hacking incident.
Yeah no. Good question. So I think you know.
Cyber security as a category in general a benefit or a get a boost in attention whenever there is a large public incident similar to what we saw a target a few years ago a.
A little.
This incident like many others has certainly raised a two things one is a van ness on the Netherlands risk and exposure that comes from sort of ubiquitous connectivity everywhere.
And I think that second need as people prioritize where to invest and what to do first with a new kind of working environment.
Certainly raised.
The.
The ranking of cyber security as a budget item a.
As a day debuted those priorities. So we certainly seen a heightened.
We're in a conversation and potential to get budget allocation.
At the same time I would also say that typically cyber security is a complex topics a while we do see all of those positive trends.
Typically customers will do a more.
Multiple things to become more secure which could range from cleaning employees not a click on emailed that look suspicious to installing a ddos protection and so forth right. So we absolutely see an increased awareness increased budget allocation hopefully a.
And certainly our value proposition.
Led by cyber security a red.
As a nature, even more now with these customers.
And have you got an award from your number one customer as to what their budget outlook looks like for a time.
Yeah. So I think you know of course, all on a customer that number one time, a die, but I would say when we look at some of the larger customers do you think about a day at a highly focused including this one on a growing.
Growing debt capacity to support and run more data and becoming more secure a.
We see trends that are consistent with that plan to continue enhancing and expanding that.
Okay.
It'll be a volatile quarter on quarter, depending on how their spending.
It will be but it was in 2020 as well right. So I think it's something.
We try to understand better manage it and we'll.
We will continue to do what we did in 2020, right then and you need to get more insights. So we can be more precise.
Okay, great. Thank you.
Thanks.
Our next question comes from on you said a strong with Sidoti. Please go ahead.
Hi, Thank you for taking my question.
So the first one is you've.
You've been talking about a mid empty price in North America, a slowdown in the third quarter due to a budgetary Pratt sizing and what have you seen there on the fourth quarter and going into the first quarter.
Yeah, no. Thanks, and you had a good.
Good question. So, yes, we did see that and that was sort of an industry phenomenon and I think what we are seeing nabil debt is obviously still concern on ongoing a bar.
Covid environment, but I think people are also turning to look a little bit more forward and expecting a more optimistic outlook by second half at the latest but we already see a.
I would say slightly improving signs off where people are revisiting. The priorities were the first instinct was as things change and people work from home, how do you support that and make it safe and I think now evolving back to a how do we make the infrastructure better.
And go back to some of that original filing around the business. So we do see that as a positive trend.
It's not suddenly back on but it is not trending I think it is trending towards a bonded.
Okay. Thank you and also have lost them.
That was the fourth quarter trending on how much a trending going into the first quarter just in general.
That just tells me on that but I think.
Yeah no it's good.
So you know I would say when we look at a business globally that is of course differences, but in general.
We saw that our value proposition on security led solutions continues to gain positive momentum.
And I think you know.
Even as we look at by region in General as you can see our numbers as a lawyer affected in Asia Pacific, Excluding Japan of course, a lot by Covid.
But beyond that everywhere, we are seeing positive momentum as well.
Okay. Thank you and then you were mentioning a about investing in your own infrastructure to be able to support the growth in 2021 can you just elaborate a little bit about that.
Oh sure, Yeah, and I I think to be clear what I meant a we continue to drive business efficiency, and we will reinvest that too.
Interest in the most important priorities right. So we are not planning to build a major data centers that is not a plan. Our capex profile is not going to be different like a I think it's more related to saying.
How do we further accelerate what growth we can achieve with cyber security led solution, which may require us to add newer capabilities and vs to support our customers right. So it's more related to a reallocation.
Those priorities what is maybe some of our older product lines.
Okay. Thank you and does that have to do also with a printing you did have the portfolio on the fourth quarter.
Yes, so I think that's exactly right. So we continue to look at our portfolio in terms of growth and profitability and make sure that we are.
Putting our current opex level.
On the most important.
Priorities for our customers as well so that's exactly consistent with that.
Okay. Thank you that was all from me.
Thanks again.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Hendi <unk> with it.
Please go ahead.
Good afternoon true patent Brian.
Hello.
On a first question in a service providers in 'twenty to 'twenty three eight that benefited from the needs for more capacity security and flexibility a.
Throughout the year, and then and then a somewhat driven by COVID-19 also and then looking into the first off a 'twenty 'twenty one a coffee a pandemic.
It's it's.
Still a problematic.
So what should be our expectation in terms of service providers in terms of capacity security inflexibility applications in 'twenty and a first half of 'twenty or 'twenty. One should we expect from like moderation or should we expect a trend to continue.
Yeah.
Yeah No. Good question, Andy So I would say you are correct in 2020 with the service provider segment.
What we saw was a phenomenon that.
When they were originally building capacity and security for a more centralized version of operating a.
They had to adapt to doing a more distribute a collision right now as.
As we go into the next year I don't see that moderating are dramatically accelerating a we expect that to be pretty consistent because inc.
In general our business did eyes from the fact that.
Whether you call it internet of things or something else as more and more things are connected it generates more data needs to have more security and ultimately flow through a network right. So that need is independent of whether it's a remote work or not.
Second a b you know.
A lot about recent high profile cyber attacks.
And the volume and complexity of doors continues to grow so we expect service provider that they had cloud telco on a missile.
To continue to enhance their networks to be at a protected as well.
And the last thing I would say as we navigated the landscape last year between helping service providers get ready for a five G.
As well as those who are holding out by G and we expect that trend to be also stable will be gone.
We are not counting on.
One extreme on the other REIT, we are able to help them in both those environments and so as that continues.
We benefit with a <unk> takes off faster and if it doesn't take off faster, we still benefit because existing customers use us for investment protection and enhancing their networks.
And then a second question, but you talked about portfolio management as a focus in 'twenty 'twenty. One and then you also talk about the broader security applications five G and then increasing recurring revenue.
In terms of your product portfolio and a product roadmap.
Yeah.
Can you give more colors like Oh, my God, low whether or not we might see like a time windows like differences in your portfolio upgrades or it's more of a consummation of like putting like more a features that address the complexity and debt to alluded before.
Yeah, I know a good question. So I think I would say a for us really as we said at the outset dry V. A.
Managing that in the context, I was saying, where we have product line that are non.
Not achieving profitability goals and not accretive to our growth target. How do we are not going to just discontinue them, but how do we refocus or a.
Investment on to foster growth right. So that's the idea of a portfolio management, it's not saying, we discontinue these for a product or something like that.
And because we still need to deliver a net growth.
Second thing I would say is a road map is really oriented around a looking.
Looking at our customers' evolving needs a.
And you will see some.
Product releases and stuff that can support the idea that if you on a service provider customer.
What are you worried about today and how will we keep adding features consumption models all of those things to our portfolio.
So that we improve the ease of use for that customer and align with their business goes right. So.
And that could include not just.
You know new hardware on new software it could have to do without a consumer products, how we partner with them, how we work with channel all of those things so so.
So it really is around.
Maintaining or improving our business model.
But at the same time, finding ways to improve our growth profile.
By focusing on the right opportunities and aligning with customers.
And when do you mentioned increasing recurring revenue.
That imply a let's say like new.
Let's say like a subscription based services.
Yeah. It's a part is it's a combination and you know, we'll obviously as I say, starting with quarter, one talk about that more so a.
In the enterprise market for small and mid enterprise customers.
They have a very very strong bias to consume things as a service.
So the first step we are doing is not building a big data center for that right. That's not what we are doing.
Our service provider customers build on operate that own data centers.
But a interesting new consumption models.
Which align with their use a public cloud or not and so forth. So so it'll be a combination of software subscription and services.
Got it and then.
A question for Brian first question, Brian When you mentioned the goal of maintaining GAAP profitability math verify whether debt is on an annual basis or on a quarterly basis.
Of course.
When I was speaking about 6% to 8% revenue growth and maintaining a GAAP profitability that is on an annual basis, but we intend on managing expectations on a quarterly outlook two to deliver the same.
Got it.
Any any guidepost on opex on considering that there's a mix of dynamics between a possible return of like sales and marketing travel and a event.
Events, a versus let's say like the fact that we're still day.
With a band on making the first half.
Sure Yeah, non-GAAP Opex for 2020 was a $142 million.
We expect that to continue with the return of.
Salespeople on marketing going back to normal we lost about $4 million, a $5 million last year and we expect some of some of that if not all of a that's a return on 2021.
So one on a 40 million as a baseline plus like four to 5 million.
Of like some.
Let's say like a return of traveling on expenses.
Oh that sounds about right I might I might suggest a 142.
Oh, Okay, Oh, sorry.
Yep Yep 142 based on four to 5 million weighted.
I see got it okay. Thank you would report thank you Brian.
And thank you and thanks for your questions.
This concludes our question and answer session I would like to turn the conference back up at a true pad trivedi for any closing remarks.
Thank you.
And thank you to all of our shareholders for joining us today and for your support.
<unk> continues to execute amidst a challenging and uncertain environment and a a strong balance sheet global presence and improve profitability position us for continued success I would also like to thank all the employees of a den who put in tremendous hard work and focus in 2022 achieved as a result.
Thank you and have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.