Q3 2021 A10 Networks Inc Earnings Call
Good day and welcome to the Aten networks Q3, 2021 earnings conference call.
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I would now like to turn the conference over to Geoff Stanley <unk>.
10 Investor Relations. Please go ahead.
Thank you all for joining US today. This call is being report recorded and webcast live and may be accessed for at least 90 days via the Aten networks website at H N networks dotcom.
As of eight tenths management team joining me today are Jupiter, Betty President and CEO and CFO, Brian Becker before we begin I would like to remind you that shortly after the market close today, a 10 networks issued a press release announcing its third quarter 2021 financial results. Additionally, Aten 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.
During the course of today's call management will make forward looking statements, including statements regarding our projections for anticipated future financial results quarterly dividend payments and our expectations that we expect to utilize our entire net operating loss carryforwards in future periods future growth and continued improvements to our business model our visibility of future.
Patients and confidence in our ability to accelerate growth beyond previous targets and our ability to continue to return capital to shareholders. These statements are based on current expectations and beliefs as of today October 28, 2021. These forward looking statements involve a number of risks and uncertainties some of which are beyond our control such.
As the potential impact of the COVID-19 pandemic on our business and operations that could cause actual results to differ materially and you should not rely on them as predictions of future events. A 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 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 may be different from non-GAAP financial measures presented by other companies a rep.
Conciliation 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 I would now like to turn the call over to Jupiter, Betty President and CEO of Aten networks.
Thank you Jack and thank you all for joining us today.
This was another strong quarter for <unk>.
With revenue growth above our expected range and profitability growth that was double our revenue growth rate.
Again, demonstrating the earnings power of our business model.
This quarter validates the strategic changes, we have made to focus on high value opportunities and regions.
Jim lining and adjusting our sales and marketing organization to better address these high value opportunities and focusing on differentiated security led offerings that drive recurring revenue.
D V at a faster growing company outpacing the overall industry and we are much more profitable with a strong balance sheet and robust cash flow.
We delivered 15% year over year growth in the quarter.
Resulting in 10% growth for the first nine months of 2021.
As a reminder, our growth target was 6% to 8% at the beginning of the year.
We are ahead of that for the year based on better than expected traction from our strategic initiatives.
Portfolio transformation.
And improving execution.
Overcoming the impact of the pandemic and supply chain constraints.
All of the underlying metrics, including sales mix and.
And revenue geography are in line with our expectations and highly encouraging.
Let me highlight some key areas of progress.
Security led solutions increased 18% year over year in the quarter.
With North America being the leading driver of this growth.
Increasingly <unk>.
Dan This is differentiating itself as a leader in security led solutions.
Including the Zero Trust architecture.
In addition, the ability of our solutions built upon a common platform to deliver superior throughput security and availability directly drive lower capex and opex for our customers.
As a result, we are taking market share.
For example in the quarter a U S based tier one service provider wanted to deploy DNS or https. Our DLH.
To increase user privacy and security, while also maintaining more control over network dropping.
<unk> delivered the best price to performance ratio and reliability of any of the solutions the service provider contradictory.
While also providing excellent support during the customer evaluation and solution deployment.
The customer plans to rely on <unk> for future <unk> deployments when they are ready to expand.
<unk> is a critical part of Zero Trust security strategy.
As you may have read in the news and increasing target for cyber attacks is municipal utility company.
When a large Japanese utility provider thought and SSL visibility solution to address this challenge.
<unk> was able to answer the call and keep the lights on.
The utility company chose <unk>, leading security solution in order to decrypt traffic across all ports and multiple protocols, eliminating the encryption blind spot and enabling their security infrastructure to inspect previously invisible traffic.
Detect hidden threats and defend against it.
And a final example from Q3.
Leading telecom provider in northern Europe had seen a significant increase of Ddos attack.
On both their own and our customers' network dropping.
These attacks were increasing in both size and frequency.
While they had a strong ddos detection system in place.
Could not mitigate and corrupt the affected traffic at speeds that did not negatively impact the experience of their customers and internal users.
They chose <unk> to provide a clean traffic solution.
Cause of the effectiveness mitigation modes, we can provide and the ability to manage multi attack vectors at speed.
Another key area of progress is improving commercial execution in North America.
Revenues in the Americas, which includes Latin America increased 47% year over year in Q3 and is up 22% year to date.
The sales funnel and our bookings as well as improving market conditions.
Give us confidence that we are well aligned with secular tailwind, including cyber security <unk> and cloud.
Led by our security solutions, we are capturing market share driving largest sales and a more diversified customer base.
We continue to see strong growth in our long term deferred revenue, which grew 16% year over year in Q3.
We believe again is well positioned with a compelling portfolio.
That is increasingly selling faster growing markets, resulting in consistent financial performance.
Cybersecurity is the prime catalyst for our growth.
And we are a proven partner to address ransomware attack hacks and Ddos attacks.
With that I'd like to turn the call over to Brian What a detailed review of the quarter Brian.
Thank you drop it as group had mentioned revenue in the third quarter was $65 $4 million of 15, 5% year over year.
<unk> revenue, which is a lead indicator for future revenue was $39 8 million, representing 69% total revenue up 23, 7% compared to $32 2 million in the third quarter last year.
Services revenue, which includes maintenance and support revenue was $25 5 million or 39, 1% of total revenue.
Up four 6% compared to $24 4 million in the third quarter last year.
Moving to our revenue from a geographic standpoint revenue from the Americas, including Latin America was $32 3 million up more than $10 million or <unk> 46, 9%.
Revenue from EMEA was $11 million compared to seven 9 million last year.
Revenue from Asia, including Japan was $22 1 million down 17, 2% or $4 6 million compared to $26 7 million in the third quarter last year.
As <unk> said revenue from the Americas increased due to stronger commercial execution and improving market conditions for cyber security solutions, which we expect to continue.
As you can see on our balance sheet.
Our deferred revenue was $117 1 million as of September 32021, up 14, 8% compared to $102 million.
At September 30 of 2020.
Recurring revenue is defined as support and subscription revenue grew 3% year over year.
With the exception of revenue all metrics discussed on this color on a non-GAAP basis, unless otherwise stated a full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website.
Gross margin in the third quarter was 84%, we successfully mitigated the impact of industry wide global supply chain constraints and price increases.
Non-GAAP operating expenses in Q3 were $38 1 million compared to $33 9 million in the third quarter last year, reflecting increasing investment in our strategic priorities, including cyber security and commercial execution.
We reported $14 5 million and non-GAAP operating income compared with $10 million in the year ago quarter.
We also continued to improve our adjusted EBITDA significantly delivering a record $16 8 million for the quarter, a $4 $3 million improvement year over year. This represents a 25, 7% adjusted EBITDA margin for the quarter.
Non-GAAP income for the quarter was $13 $7 million, representing 29% of revenue or 17 on a per share basis.
Diluted weighted shares used for computing non-GAAP EPS for the third quarter were approximately $79 9 million shares.
On a GAAP basis.
Net income for the quarter was $74 9 million or <unk> 94 per share compared with net income of $6 5 million or eight cents per share in the third quarter last year.
Approximately $65 4 million of net income or <unk> 82 per share was related to a nonrecurring tax benefit as a consequence of our sustained profitability over the last four quarters.
For the quarter, we generated $21 8 million of cash from operating activities, resulting from organic growth in the financial leverage of our business model.
We generated $20 8 million in free cash flow for Q3.
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.
Turning to the year to date results.
Revenue for the first nine months of 2021 was 179 4 million compared to $162 9 million for the first nine months of 2020.
We reported $36 4 million in non-GAAP operating income compared with $21 4 million in the first nine months of last year.
Year to date, adjusted EBITDA was $43 million, a $13 6 million or 46% improvement year over year.
Yes.
Non-GAAP net income was $33 6 million or <unk> 42 cents on a per share basis on.
On a GAAP GAAP basis inclusive of the nonrecurring tax benefit.
Year to date net income was $84 2 million or $1 <unk> per share compared with net income of $10 million or <unk> 12 per share last year.
As of September 32021, we had $187 5 million in total cash and cash equivalents compared with $158 1 million at the end of 2020.
We continue to carry no debt.
In September of last year, the company approved a share repurchase plan for up to $50 million of our shares common shares over the next 12 months. Following the third quarter. There was no share repurchase activity under the plan.
But that plan having expired the board of directors has now approved a new $100 million stock repurchase plan.
In addition, the board has approved a quarterly cash dividend of <unk> <unk> per share to be paid subject to any prior application by the board on December 15th to shareholders of record on November 12.
Based on year to date results are growing deferred revenue and improved visibility we are increasingly confident in our ability to deliver consistent financial results.
For the fourth quarter of 2021, we expect to generate revenue growth of approximately 10% and we anticipate this growth rate to continue into 2022.
This expectation is based on the quality and quantity of our sales funnel market momentum and improving execution.
We expect to grow our bottom line faster than our top line.
We anticipate security solutions will continue to become a larger portion of our revenue mix.
And we anticipate conducting an analyst day in early 2022 at the end of the event.
We expect to provide additional information about our business and future opportunities.
I'll now turn the call back over to drew for closing comments.
Thank you Brian.
In summary, this was another strong quarter for you Dan.
One of the strongest in our company history building upon a great Foundation and our year to date results are ahead of plan.
The systematic improvements we have made in our organization and our business model are driving sustained organic growth and improving customer acceptance of our solutions.
This is driving meaningful financial benefits, including improving operating and EBITDA margins, enabling us to fund a significant stock repurchase plan and begin paying a quarterly cash dividend all while continuing to generate free cash flow to continue growing the business.
We are well diversified in terms of product mix regional sales mix and customer mix.
Helping to insulate us to some degree from volatility within the dynamic industries, we serve.
More importantly, we are capturing our market share with proprietary and differentiated security led solutions, enabling us to outpace the market.
We are strategically well positioned to benefit from significant and growing catalysts, including cyber security and the fiber rollout.
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 youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from.
Corresponding with.
Dws financial please go ahead.
Hi, Justin.
First a couple of housekeeping questions.
They're a 10% customer in the quarter.
Yes.
Okay and then.
Yeah.
What's the split between software and hardware.
I think we've discussed in the past, we sell a unified solution hardware software integrated into our platform on a standalone basis, our software sales are approximately 10%.
Okay and then.
I wanted to ask you is.
Do you think any of the.
Gains that you had in sales or in revenue beyond your original guidance was that related to your competitors, having issues supply chain or was this purely.
Wins based on quality and price.
So how much is <unk>.
Good question, So I think typically.
As you know two thirds of our customer base of service provider and one third is enterprise and even within that one third its mostly large enterprise. So this is not the profile of customers that is typically qualifying and running toward three different solutions at the same time in allocating shared every quarter right. So.
In general.
We would work with our customers six to nine month cycle to get designed in and integrate data into their operating system that business processes. So.
For us it would be more an impact of what that revenue will either unable to realize because of supply chain constraints.
More so than degree pick up orders because the competitor couldnt right, because it's a long cycle. So.
On the tail end of enterprise that is possible, but most of our growth comes from.
High performance value and customers and in those cases, it was because of them growing that infrastructure.
Second being more concerned about cyber security.
And especially in light of government guidelines and things like that and obviously our ability to then fulfill that.
And translate to revenue.
Okay and then.
The guidance suggests that this was more than just a one off pent up demand from Covid reopening.
Is it.
All because security is becoming more and more important is it five G related as far as five G. The appointments are concerned.
Sure Yeah, I think as we noted on the call on a year to date basis, our growth was about 10%.
And.
I would say the bigger driver for improving market for us is really related to cyber security and the fact that we are able to provide more integrated more differentiated solutions.
We do see.
Signs on <unk> side for new build out but as you have noted in previous calls.
While <unk> remains a tailwind for US we certainly also continued to do a lot of business.
Boarding existing deployments with service providers around security and traffic management.
Okay. Thank you.
Thank you.
Okay, and if you'd like to ask a question. Please press Star then one.
Next question comes from Christian Schwab with Craig Hallum. Please go ahead.
Hey, guys. This is Tyler on behalf of Christian Thanks for letting us ask a couple questions.
Congrats on the strong results and guidance here.
I guess first question a little bit of a clarification.
You, obviously outperformed your 6% to 8% growth. This year and you said you expect that 10% to growth to continue in the future is that a comment for the full year 2022.
No I think that a good question I think it's not then I think that's why we.
Pointed out that we plan to hold an analyst day in Q1 to talk more specifically about drivers and things about our business.
I think it's more reflective that we do not see this as.
A temporary trend and it continues.
Going forward for now right, but we are not suggesting are providing that full year guidance, which we will do in much more detail at the analyst day.
Okay perfect that's great I appreciate that clarification.
And then a question on supply chain I think it's top of mind of a lot of people and it's great to hear you guys are are mitigating those impacts to yourself.
Just wondering if there's.
Potentially any indirect impact you guys might be seen or benefit.
I understand your lead times are extended but you know maybe customers lead times. Our customers plant is scheduled for may be extended this is there potentially any benefit or anything there.
Any color there you can maybe provide.
Yes, no. Good question I would say that the nature of that impact for us really is that.
Customers have a need right now and to the degree that we are able to fulfill that and deploy things on their timeline.
Certainly that one day just to us.
Typically they are also prioritizing multiple types of projects and to the degree that we are able to meet that timeline.
Is also beneficial to us right.
There may be as as I said before.
Instances in small to mid enterprise, where there are multiple vendors and we are the one who could supply in time.
But in general for US, it's more that we are able to align with and fulfill the customer timeline.
Obviously related to things like security can be quite important to them.
Alright that makes perfect sense.
And then final question a little bit on the model maybe for Bryan.
Your Opex is a little bit elevated in the back half of the year here.
Standing revenues up and you guys are making these.
These investments for growth that you are clearly capturing so I'm just wondering how we should maybe think about opex.
It's a 40 million quarterly run rate into next year, a good way to think about that and I guess.
Do you expect next year to two.
Row revenue faster than Opex.
Yes, good question.
We are experiencing a pickup in operating expenses, mostly related to driving growth in revenue so be it commissions or travel on the events <unk> investment in strategic initiatives be it product or other elements.
On a go forward basis, I mean, it's running a little higher than I would expect for the full year next year on a quarterly basis, but it's a good indicator of where we're at.
<unk> for market growth given the 15%.
Alright, perfect and I think Tyler just a comment to add to your specific question you should expect opex to grow at a slower pace than revenue as it has for the last eight quarters and the proof of that is in the EBITDA as a percent of revenue.
It's every quarter right, so which was the case this quarter, we had close to 25%.
That's great Alright, I appreciate that that's all for us thanks, guys.
Alright, thank you.
Our next question comes from Anja Soderstrom with.
Sidoti. Please go ahead.
Hi, and thank you for taking my question and congratulations on the strong quarter.
I wanted to follow up on the supply chain question.
You may comments that you had some headwinds this quarter, but despite that you have.
Our margin performance.
Should we assume then that the.
The margins are going to be better this quarter.
Or do you expect further headwinds in the supply chain.
Yes, great question.
I would say, we have navigated to supply chain crisis fairly well our sales cycle of six to nine months. So some of this you're seeing as a as a lag.
Higher period management and execution, but.
As its been trending we're always guided between 78% to 80% margins, which I think is about the right range.
Looking forward.
Okay.
Affected by product mix and regional mix as much as well right. So we continue to navigate it but thats the range that content.
Okay. Thank you and if most of the growth coming from existing existing customers or do you add new logos as well.
I think it's both so consistent with what we said in the past about 80% of our business growth comes from existing customers about 20% from new and I think that trend is still true.
And we continue to add new logos as well right and so I think it's same profile as what we have to yet.
Okay, and then in terms of new contract wins could you sort of speak to them.
Yes sort of.
Duration and magnitude of those compared to past win.
So currently obviously, we had a benefit in our tax expense as it relates to valuation allowance I think we've talked about that previously.
Our expectation is that we continue our profitability on a go forward basis, which requires us to analyze our deferred tax assets on our expectation to consume them. So we expect the effective tax rate will continue to be stable I don't expect that we'll see it trending up or down significantly in the next 12 or 14 months.
Okay. Thank you actually I was not really my question, but I had to my next question to ask about taxes.
And then all of a customer contract.
And the magnitude and duration of those compared to past ones.
I think it's pretty consistent on yet in some of the new customer wins, we certainly see that Dom.
He is a little bit longer.
But but I think if you look at our historic average its not a huge difference for us that the.
The data point you can look at obviously is.
Our deferred revenue and within that particularly long term deferred revenue.
Rich, which obviously increased 15% plus.
Year over year in the quarter and so that's obviously, where you would see the financial impact off.
The contracts that are longer and therefore up yet in the long term deferred revenue lines. So you can see that that is growing pretty steadily for us which is good and in line with our goals.
And that's the connection point to see how much faster that is growing.
Okay, great. Thank you so much that was all for me.
Thank you.
Our next question comes from Hendi <unk> with Gabelli. Please go ahead.
Hydro power time, Brian.
Okay.
Good evening drew part you mentioned about Zero Trust network. Many companies mentioned that Zero Trust network gets a wide area can.
Can you remind us like what is unique in terms of APM offering and whether there's any like you use cases associated with zero Trust network that APM can capitalize.
Sure Yeah, So I think the.
The concept behind that architecture.
Historically cyber securities was viewed at.
Everything within that sort of embedded meter was considered safe.
Like if you are inside the castle then you are fine.
But what happens with things like co location then.
Sharing in cloud and everything else.
That could be under attack from somebody who is in the same gas allows you not.
Not necessarily someone from outside so the concept of zero Trust as you don't trust any device or any application.
You can right and so in that context, our product so it does not.
Not a single product.
That approach requires multiple things that we highlighted for example.
Our SSL insight solution, which allows customers to manage encrypted traffic in a much stronger way, which is important part of zero Trust.
The BARDA, our ability to withstand that mitigate complex ddos attacks at different levels of remediation automatically.
That is an important part of zero Trust.
And then the way our platform is built.
Further adds to the concept of where.
We can provide more end to end security in many cases for those applications. So.
And the last element of course zero Trust is training and awareness of users and customers on <unk>.
What are the types of attacks and how do they protect themselves starting from something as simple as not clicking on E mails that looks suspicious right. So.
So in that context, obviously, the provide that and be outright intelligence services, we provide to customers as well. So those are all different elements that go into it then.
It's not specifically a product right, it's more of a cyber security philosophy and approach and so we are working with our customers typically on multiple elements of doing that.
I think my interpretation that is zero Trust network will strengthen <unk> offering and differentiation.
I'm wondering whether in terms of dollar content.
That's sort of like whether or not it multiplies.
Dollar contents within the same scope of our project.
Yes, I think it's difficult to say that <unk> and the reason for that is typically when we work with <unk> than <unk>.
They are looking at 678 categories are things they could do to become more secure and so in some ways right down also prioritizing what to do for us what to do second and in some ways Zero trust and expand that opportunity, but also some ellen.
Men's it overlaps right so on a net basis certainly beating that.
More customers are adopting zero trust architecture is favorable to us, but it's too early probably for us to quantify what that means got it.
And then would you remind us in terms of product mix, which products have higher gross margins.
So because our products are all built upon the same hardware platforms.
Foundation that is not a significant difference on gross margin at that level across the products.
So for us really.
We really leverage very common platforms, but at the same box can be configured as one off five products, we sell based on software.
Persona and identity and load we can put on it. So so far us that's why we are able to maintain margins.
In a pretty stable way, even though we are selling much more of the security products.
I see.
And then last question for me so the new share repurchase authorization is large.
And then there is no new dividend initiation.
The new dividend initiation.
Does it imply that.
There is no potential sizable M&A in the short run.
No I think you are to look at it may be handing it in a balanced way right. So we are generating if you look at last quarter between 15 and $20 million cash flow from operations every quarter.
We think obviously the buyback is reflective of our confidence in the business and where we think it's going to grow in the future.
That dividend for US is just a balanced way of providing returns to shareholders. While we are still able to keep enough dry powder to fund growth or any other initiatives that we would consider yourself.
That's probably think of it as sort of a balanced way to achieve horrible.
Okay. Thank you Deepa. Thank you Brian.
Thanks, Andy Thank you. Thank you Andy.
This concludes our question and answer session I would like to turn the conference back up when it's your perch Betty for any closing remarks.
Thank you and thank you to all of our shareholders for joining us today and for your ongoing support and we look forward to talking to you again. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.