Q1 2021 A10 Networks Inc Earnings Call
Yeah.
Good day and welcome to the Aten networks first quarter 2021 financial results conference call all participants will be in a listen only mode.
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After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
Draw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Rob Fink of F. N K I R. Please go ahead.
Thank you operator, and thank you all for joining us today.
Call is being recorded and webcast a live they may be accessed for at least 90 days on a 10 networks investor relation website at a 10 networks Dot com.
Hosting the call today are drew Petrova, Eddie <unk>, President and CEO.
CFO, Brian Becker.
Before we begin I would like to remind you that shortly after the market closed a 10 issued a press release announcing its first quarter 2021 financial results.
Additionally, a 10 published a presentation and supplemental trended financial statements you may accident the.
A press release presentation and financial statements on the Investor Relations section of the company's website.
Okay.
During the course of today's call management will make forward looking statements, including statements regarding projections for future operating results continued reductions in operating expenses continued efforts to improve operational efficiency.
Focus on driving growth business off of the optimization and overall profitability.
Our belief that we can continue to build upon customer a month I'm going forward, our expectations regarding future opportunities and our ability to execute on the opportunities.
Expectations for future market growth and the general growth of our business the.
The development of performance of our products and the anticipated customer of benefits from the use of our products, our expectations and priorities with respect of five G D.
These statements are based on current expectations and beliefs as of today April 27, 'twenty 'twenty. One of 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 of COVID-19 pandemic on the business and its operations that could cause actual results to differ.
We're a materially and you should not rely on them as predictions for future events.
A 10 does not intend to update the information contained in the forward looking statements whether as a result of new information future events or otherwise for a more detailed description of these risks and uncertainties. Please refer to our most recent 10-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 non-GAAP measures can be found in the press release issued earlier today and on the trended quarterly financial statements posted on the company's website.
So all of that said I would now like to turn the call over to drew pet drew pet the call is yours.
Thank you Rob and thank you all for joining us today.
There's a lots of another solid quarter for a day.
Particularly in the other strategic initiatives to grow a recurring revenue and security solutions.
Of our deferred revenue, which is a good proxy what other recurring revenue grew by 11, 8% year over year $213 2 million.
This is contracted revenue, which will be recognized in future periods, creating a solid and growing base Flores and giving us greater visibility into all of our future results.
Despite the expected timing impacts in Japan overall revenues grew 2% euro over the year to $54 8 million in line with expectations.
Of our full year for a Japan remain unchanged and positive.
Aligned with our strategic goals, our recurring revenue continues to grow faster than our overall revenue.
In fact, it increased 8% year over year and recurring revenue is becoming an increasingly large portion of.
All of our overall revenue mix.
Supporting our long term business model.
This was our fifth consecutive quarter of organic growth.
We have refined our go to market strategy, establishing strategic relationships with partner than to the sellers.
Green lining of a sales organization around the globe to.
The focus on the most promising and profitable opportunity.
This strategy is enabling us to successfully transform just yet from a provider of commoditized solution to a strategic integrated theyre, providing best in class security solutions in that we're a growth oriented technological etfs.
The evidence of the Athene in our deferred contract revenue growth.
The progress we have made in selling security solutions.
Security solutions as a percent of all of our revenue mix.
Have been steadily increasing.
On a trailing 12 month basis security solutions represented 57% of all the revenue.
Back to about 50% of revenue, while the trailing 12 months ending December 31st 2020.
In particular, we are well positioned in cyber security five G rollout and network availability, including Ddos prevention.
Each of these ADR enjoyed broad tailwind.
And of our offering a best in class and differentiate it.
Additionally, new plant federal infrastructure investment further support these catalysts in the U S.
During the quarter, we had important wins align with our strategic goals.
A large higher education network of Northern Europe was under a heavy cyber attacks.
And why are they willing to help them navigate this challenging time with the remote students and also provide a much more comprehensive protection solution that includes multiple elements of protection what is behind the products from other competitors.
Our ability to rapidly deploy a new technical solution and leverage our global support footprint.
Total debt enablers.
The result of that 600000 subscribers now have a more secure robust and available E learning platform.
Also and online gaming platform in the Americas saw a large growth in debt dropping after the COVID-19 related shutdowns.
The strain that networks in terms of capacity as well as increased the risk of cyber attacks.
Dan was able to provide them a better price per subscriber smaller footprint and more security.
This competitive win was against a very large global networking giant.
A N one does business because our solution ultimately provide a better performance.
The lower Capex and lower Opex for the customer.
The customer plans to deploy the same solution to other sites in the future.
The inherent leverage of our business model is enabling us to grow all of our profitability.
Faster than we grow our revenue.
Due in part of the continued disciplined execution, we grew over the adjusted EBITDA by 89% and our EPS by a 135 per cent compared to the first quarter of last year, both ahead of expectations.
Our first quarter adjusted EBITDA was $13 million, representing a solid start to the new year.
At the same time, we have increased our investment in ADR.
That's a board accelerated growth, while maintaining our current financial goals.
With that I'd like to turn the call over to Brian What a detailed review of the fourth quarter and full year, Brian. Thanks.
Thanks Rupert.
As drip of shared revenue in the first quarter was $54 8 million up 2% year over year.
First quarter product revenue was $30 5 million, representing 55, 7% of total revenue.
Services revenue was $24 3 million or $44 three per cent of total revenue.
Moving to a revenue from a geographic standpoint revenue from Japan was $13 6 million down $4 million or 22, 8% year over year.
Asia Pacific revenue, excluding Japan was $6 3 million compared with $4 nine in the first quarter last year.
EMEA was $8 6 million up 49% and revenue from the Americas was $26 3 million compared with $25 4 million in the first quarter last year.
Revenue from the Americas increased three 3% in the quarter due to stronger commercial execution and we expect that to continue throughout 2021.
EMEA revenue grew 48, 5% and APAC, excluding Japan grew 29, 8%. These regions off offset the expected to 22, 8% decline of revenue from Japan booked.
Book to Bill in Japan was 1.2, the one in line with full year growth expectations.
Recurring revenue to find out of support and subscription revenue.
Grew 8% year over year to $25 6 million in the first quarter.
As a reminder, a recurring revenue for 2019 was $94 million growing to approximately a $105 million last year.
During 2021, we anticipate this transition to be neutral to our operating margins.
As you can see in a balance sheet, our deferred revenue was a $113 million up 11, 9% compared to a $101 3 million as of March 31 2020.
With the exception of revenue all of the metrics discussed on this call a on a non-GAAP basis, unless otherwise stated a fee.
Full reconciliation of GAAP to non-GAAP results are provided in a press release and on our website.
Gross margin in the first quarter was 78, 9% of 53 basis points year over year due to a more favorable product mix.
Non-GAAP operating expenses in Q1 were $32 5 million down 14, 6% from 38 million year over year.
Our continued focus on execution to maximize efficiency and profitability in all areas contributed to this overall year over year decline.
We continue to allocate resources to the most important long term growth opportunities and to optimize our global footprint to further improve execution.
In addition, Q1 operating expenses also benefited by approximately $1 9 million year over year due to continued COVID-19 related restrictions of which approximately $1 2 million from deferred marketing events and approximately 700000 from reduced travel.
We reported a $10 8 million of non-GAAP operating income compared with $4 1 million in the year ago quarter.
We also continued to improve our adjusted EBITDA significantly which came in at $13 million for the quarter, a $5 8 million improvement over the last year.
Non-GAAP net income for the quarter was $9 4 million or 12 cents on a per share basis.
The diluted weighted shares used for computing non-GAAP EPS for the first quarter were approximately $79 six shares $679 6 million shares.
On a GAAP basis.
Net income for the quarter was $2 7 million or a three cents per share compared with a net loss of 297000 or zero cents per share in the first quarter last year.
As of March 31, 2021.
We had $161 million of total cash and cash equivalents compared with $158 1 million at the end of 2020, and a $142 9 million as of March 31 2020.
For the quarter, we generated $2 $3 million of cash from operating activities due to the changes in our expense structure and the financial leverage of our business model.
We generated $1 5 million in free cash flow for Q1.
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.
Yeah.
On September 17th the company announced a share repurchase plan for up to $50 million worth of a common shares over the next 12 months, we've repurchased approximately 10000 shares at an average price of $8. A 96 cents for a total of $88000 during the period.
During the quarter, we instituted a 10th of five one plan to manage our purchases we intend to review our plan from time to time subject to compliance with rules tend be a five one.
We are reiterating our full year outlook today as provided in the conference call of a coupling our fourth quarter and full year results.
On an annual basis, we expect to generate organic growth of 6% to 8%.
We expect sequential growth in each remaining quarter of 2021 the.
This expectation is based on the quality and quantity of our sales funnel.
Market momentum and book to Bill that exceeds one in the first quarter.
We expect to grow our bottom line faster than our top line.
And we anticipate security solutions will continue to become a larger portion of revenue mix and we expect this part of our business to grow at approximately 10%.
I'll now turn the call back over to <unk> for closing comments.
Thank you Brian.
In summary, I'm really excited about our prospects and growth outlook for 2021.
We are increasingly viewed as a value added leader in security solutions with best in class offering and market tailwind.
Our initiatives to grow a recurring revenue a key.
Here, the working and this is helping us increase our profitability.
We are well positioned for a strong 2021.
Operator, you can now open the call up 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.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time, you're a question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble a roster.
Our first question.
It comes from Amit of course, and with from the W. S. Financial. Please go ahead.
Hi, So first off could you just talk about the momentum you're seeing in your business is that coming from a new.
New customers existing customers.
Sure Yeah. So.
I would say a debt to two sides of it right. So if you recall about 80% of our business coming from existing customers 20 per cent from new customers.
With existing customers, we definitely see positive momentum as it relates to growing their infrastructure, whether it's four five G. Our <unk> our enterprise networks.
As it relates to new customers.
We continue to add.
New customers.
Continuously as well and so we are seeing a.
A pretty robust growth from Japan.
Japan, EMEA Asia as well as America as it relates to adding new customers, who will continue to grow and become more relevant right. So we are seeing a.
The both dimensions of it one is existing infrastructure investment protection are Greenfield investment and addition of new customers.
Andrew but the it.
Compared to the last the call it a chunk of it.
A couple of months ago.
What's changed it sounds like you have better clarity now what are you seeing from customers, that's giving you that clarity where you didn't have it going into Q1.
Yeah.
Yes, I think the two two sides to that how might the first is as as obviously you know everybody. Appreciate there's uncertainties, we can't control, whether it's COVID-19 impact in India or elsewhere, but what we are seeing different D. A.
Either they're a large customers who had was quite a bit last year.
But have growing optimism with a.
Vaccines and things opening up et cetera, a where they are doing catch up investments are beginning to look at newer investments of moving from.
The only reactive more of how do we deal with people working from home to how do we keep up with the infrastructure right. So that I would say 180, a we definitely see a.
The second place, where we see a positive momentum is as of the how a wall to selling broader security solutions and what I mean by that is connecting our value proposition to the customers economic goals, what is kind of trying to compete on a commodity product.
We continue to see very good traction.
Traction with customers as it relates to a working with us engaging us more broadly and buying more categories of products from us.
Okay and my last question is was there any 10% customer this quarter.
No the.
This is Brian no, we don't have a 10% customer in either revenue or a balance sheet items.
Now for a cure.
What do you want.
Thank you.
Thank you.
Our next question comes from Anya sort of a strong from Sidoti.
Please go ahead.
Hi, and thank you for taking my question.
Can you talk a little.
About the funnel are and what you're seeing there and are you able to quantify the thing about that.
Yeah I'd say this is good that the good question I think typically a.
When we looked at what the outlook for the next quarter and full year, a we tend to at least try to look part of as many need indicators as the Gan.
So in that context, when we look at how our funnel is evolving in the different regions and then in service provider of an enterprise market and when we look at our historical conversion rates on that a.
We feel very confident to say a full year growth of six to eight per se right. So.
It really connecting multiple lead indicators to our outlook for the year a.
And you saw the phenomenon of the Japan, where based on the funnel.
At a high confidence that on a full year basis, we think there will be a.
Positive and in.
In line with what we expect but based on the funnel. The also I missed that would be some timing impact on that so it's more on youre getting.
A more analytics and better lead indicators to project as well as we can and based on those we feel confident reiterating the full year growth numbers.
Okay. Thank you and me you mentioned in Japan. It was very strong for you in last quarter of Ben well when America most of a little bit slower for you a notice that that has shift can you just talk about what's driving that she is from what you're seeing in the different regions.
Sure. So so I think Japan the phenomenon, we ex spoken was a.
Oh originally you know some of our large service provider customers. There a we're planning to make investment in advance of the Olympics and the bag with all of that capacity and experience in place as the Olympics were downsized and rescheduled and all of the.
And all of that went with it and ultimately concluded there no one externally is going to be visiting Japan.
What we anticipated and saw a our customers are still planning the same capacity increases the got driven by network demand, but they don't feel that timing needs to be a right upfront and it's more spread out through the year.
So in that case like Japan continues to be one of our most balanced regions one of our best performing regions and that will not change. This year, we just saw a timing impact.
When it comes to North America, I would say if you go back to last year in Q2, and Q3 and Q4.
We spoke about a re.
We are addressing the needs to improve commercial execution, there, including you know leadership processes. How we are organized territories et cetera, and I would say the.
A lot of the improvement <unk> seen in Q1 is a reflection of where our commercial execution in Americas continues to improve relative to what we always used to have from Japan. So we think.
That gives us an opportunity and a foundation to build on growth from there and as you heard earlier right. We did this in a very balanced way without a signal in a large customer affecting it right. So it's a it's a result of improving commercial execution in Americas.
Okay. Thank you and kill.
He also got a little bit about the price shifts with Dell and Exxon had those saw a M.
Developing and when you when we succeed when we can see some.
Positive impacts from <unk>.
Yes of course.
So I think.
Talk about the two separately, though.
We announced the partnership with Dell in September and as we talked about the continued to a work with them jointly to take it to market and that includes a joint sales calls and marketing and all of that a.
As we expected the funnel is continuing to grow a.
And in.
In line with our expectations and we absolutely are.
Looking at a line of sight to multiple deals, which will be meaningful for us by the second half. So I would say the Dell partnership is progressing along the lines of what we have said before and they will start to.
And back then become meaningful as well.
With regards to Ericsson it's similar.
We work with them on a next generation software platform and have been on track as it relates to a.
Doing customer trials, then trying to build that pipeline a S.
As you know you heard maybe from Ericsson's call a five G was a little bit slowed down with COVID-19, but they are extremely optimistic about the future and growth that would come from it and in the meantime, right. We continue to work with Ericsson as well as other service providers on a.
The existing networks that more of them towards the <unk> readiness. So both of those are on track and exactly as we have said before we expect them to be meaningful in our results by the second half.
Okay and can you also just talk a lot of a little bit about what you're seeing the MTO price channel.
Just a genre.
Sure.
So I think what a you know of a few if you kind of look at enterprise and tons of different verticals that make it up a our business a mostly by design target day that large enterprise a which.
Which includes financial debt gaming companies and so forth.
And the reason for that is our value proposition is most differentiated day in terms of throughput latency and security. So we.
Within the enterprise.
The small to mid enterprise market.
Of course, we look forward to addressing a broader of with our Dell partnership but.
But in the meantime, right. Our focus is on these large enterprise and we certainly see continued.
Positive tailwind as it relates to they are worried about more security. After some of these end of the breaches that everyone knows about a day.
We continue to see more.
Volume and demand for gaming platform that people do that more and more and media stuff. So so we continue to see that as a pretty stable tailwind for us in large enterprise and small to mid enterprise siding.
Obviously, we talked about what we are doing and beyond that of course that is general market sentiment of enterprise outlook, improving and the year and we certainly look forward to that and that can only help us right, but it's not a major driver of today for us.
Thank you and then a in terms of the recurring revenue dynamics.
Well, it's it it's true year over year, it's sort of contracted a.
Sequentially of how how should we think of ice in it and is this analogy there I should think about that.
Right I know we've talked about this the stomach stents I mean, it's a small portion of our overall revenue a 10% today, but it is growing faster than that or a normal run rate revenues.
From a overall recurring revenue perspective have a bit of support and service and the other half is software and subscription.
We're seeing good traction in the marketplace and we expect to see that begin to benefit us as we continue on into 2021 and into the next year of.
Obviously with subscription revenue as you know you can.
You can see the impact more prominently at this point on our balance sheet and the deferred revenue as I said was growing pretty significantly year over year of the Q1 outlook.
Yeah, that's right, Brian and just to add to that on yet because this is a strategic initiative with walk us to grow faster in the startup of our ramp up the yeah, you will see some fluctuation right and that's why.
We also tend to look at it as on a.
Trailing 12 month basis, as a growing or shrinking.
And as we progress.
You should see that radiation and reduce more and more to wear.
Not a quarterly phenomenon, but it's a continuous yet so but as we are ramping up that is a little bit of that of aviation side, but if you look at the blended you will see the trend clearly.
Okay. Thank you and then lastly, your your balance sheet kind of a pretty strong balance sheet and expect to have kind of strong cash flow generation.
We're a capital allocation priorities.
And that was a little bit surprised to see a you didn't buy back more shares this quarter do you have any comments around that.
Sure Yeah no. Good question, so I think capital allocation priorities brought us plus day.
Funding of driving organic growth right. So we continue to look at that as the best way to.
Drive our business model and profitability.
Second of course is the buyback and you are correct Tanya I think we are.
As Brian mentioned, we moved to where we are doing it through a debt would be five one plan and we will periodically review that and certainly like you have a significant authorization on buyback and we do see that as a.
A good use of capital, especially as we continue to believe in the business more of that more so we'll continue to revisit that.
And beyond that I think we look at as we have said before.
If there are opportunities in the market that allow us to accelerate our growth.
With.
A small bolt on a product product type acquisition, then we will evaluate did but a very carefully because we wanted to create a foundation for us that we can then build upon an accelerate a bit.
Our focus will be on does this help us.
The crude oil faster based on the tailwind Phil.
But the other we'll and we'll continue to revisit those of course, all the time.
Okay, great. Thank you so much of what's out from me.
Thank you.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Hendi <unk> from Gabelli funds. Please go ahead.
But he was named group out there Brian.
Good evening.
Hi, a first question man of the pieces.
The prior to the discussion on enterprise and a potential market improvement.
The our expectation the enterprise I T will benefit from economies of the opening.
Hopefully in the second half of 2021.
Could you share more color on the outlook for enterprise throughout the remainder of 2021 and the weather you have.
The normal feasible at the or.
Like less visibility.
Into that.
Sure Yeah no good question so.
We don't we don't publish specific goals for each vertical but absolutely we expect.
In the back half of 2021 a that we will continue to see improved year over year performance in the enterprise segment.
Especially in North America right. So.
We definitely see that phenomenon and it relates to board.
Brewing sort of demand and network and security need for a large enterprise, but also a hopefully a broad a reopening of people beginning to invest again in mid and small enterprise right. So a so we are definitely optimistic and when we look at our improvement in growth year over year.
Sure.
That is that is a.
One of the key things, we are counting on and working towards.
Got it and the second question is do you have any qualitative insight on.
The benefit of Tokyo Olympics will it be a reasonable to assume sales contribution related to talk to all of <unk> in Q2 and Q3.
Yeah. So no I think that's a good question. So the way to think about a it's really a.
Absolutely, we will see that but it will be now more spread out as the network growth.
In the region not only tied to the Olympics right. So it still that is still a growth in subscribers, there's still growth in security needs and so we will see that and you are correct.
As we mentioned earlier, our full year outlook for Japan is still very optimistic and positive.
Based on deals that we expect to happen in Q2, Q3 and Q4.
Okay I'll, even Q4, Okay got it that's helpful and then last questions a robot.
Can you share what types of subscription ate them currently offer like what type of flavor.
And then the business model.
Sure. So I think there's it's a it is multiple ideas right. So I'll go through the specific one so because service providers and the old products differently than enterprise.
So for the enterprise customers it could be something that they are paying monthly or yearly it could be a dome subscription or it should be where they get a monthly security update.
But a aligning with their consumption model of a.
The us providing updates and value add to them throughout that period.
The second dimension of it is a where we are working with customers.
Who are also selling subscription back to back based on our subscription so based on a number of users or volume of data.
That is a proportional subscription as well. So those are just two ideas of our flavors of it and the.
Because our customer base is still do the service providers.
It's a little bit different than a typical company targeting small enterprise.
Thank you robot Thank you Brian.
Thank you thank you Andy.
This concludes our question and answer session I would like to turn the conference back over to Joe Petro Betty for any closing remarks.
Thank you.
Thank you to all of our investors employees and customers.
As we said in the call.
Q1, 2021 was a solid start force did a year and we really look forward to.
Growth from other strategic initiatives positioning us well for a strong full year. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.