Q1 2022 A10 Networks Inc Earnings Call
Our model is working in spite of multiple macro headwinds.
Security led solutions continue to serve as a durable secular catalyst for our growth.
We have build security into every facet of our business, helping differentiate our technology solutions with focus on customer centric innovation that delivers business value for our clients.
We all continue to see high profile cyber security incidents, including recent ransomware situations impacting large technology organization here in the states as well as several state sponsored cyber attacks, taking place around the world, including Ukraine.
Headlines about cyber security intrusion seem to be a weekly if not a daily occurrence with attacks moving beyond isolated incidents involving small groups or individuals.
Two states wants to sophisticated and large scale targeting key infrastructure government agencies and utility companies alike.
As a result, CIO then it leaders are increasingly focused on security first.
Our ability to integrate security and encryption capabilities in.
All of our networking solutions sets us apart.
<unk> has differentiated itself as a leader in security led infrastructure solution, including the Zero Trust architecture with superior networking performance and best in class Cyber Security protection.
As a result, we are winning in our target markets and applications.
Our global customers also continue to expand their global IP networks.
In an effort to handle more traffic and data.
<unk> product suite allows our customers to increased traffic capacity and throughput without sacrificing security.
In fact, we built ddos recognition and mitigation capabilities as well as malware protection and privacy safeguards into nearly all our networking offerings, enabling our customers to improve their resiliency, while expanding their networks.
Let me highlight some key areas of progress within our business.
Security led product revenue increased 21% year over year in the quarter with North America being the leader leading driver of this growth.
From a geographical perspective revenue from the Americas grew 25, 5% year over year to $33 million, reflecting our investment on commercial initiatives in the America.
EMEA revenue increased year over year from $8 6 million to $11 9 million.
Asia, including Japan declined from 20 million to $17 8 million.
This is a consequence of continued depressed economic outlook in those countries and the lingering impact of COVID-19.
Within IPG, Japan went from $13 6 million to $11 5 million in Q1, 'twenty to 'twenty two inclusive of a significant foreign exchange headwind and in line with our expectations.
Our diversification.
Continues to provide a resilient foundation.
We continue to focus our investment in growth opportunities with balanced profitability and.
And a focus on achieving our stated rule of 40 goal.
A key part of the strategy is improving our ability to cross sell solutions to our customers, while continuing to reduce their overall capex and opex.
Over the past year, our product revenue growth rate with existing customers has consistently exceeded our target growth rate.
Demonstrating our ability to successfully leverage our strong installed base and bolsters, our confidence in delivering 10% to 12% consolidated growth.
We have proven our ability to grow.
Invest for future growth.
Return capital to shareholders and bolster our fortress balance sheet.
We will maintain a disciplined flexible and opportunistic capital allocation strategy.
Flooring, all options, while demonstrating vigor in evaluating potential uses of shareholder capital.
As Im sure you are all aware.
Supply chain issues continued throughout our industry.
<unk> has been able to successfully navigate these issues to date.
Our customers are looking for a supply assurance and we have been able to meet those requirements. So far.
<unk> is well positioned in a growing market.
And this is proven by our strong financial performance.
Cyber security remains the primary catalyst for our growth.
We are now well positioned to achieve the high end of our full year targets around topline growth of 10% to 12% and expanding EBITDA in the range of 26% to 28%.
With that I'd like to turn the call over to Brian for a detailed review of the quarter Brian .
Thank you <unk>.
As <unk> mentioned revenue in the first quarter was $62 7 million up 14, 3% year over year.
Product revenue, which is a lead indicator for future revenues was $37 million, representing 59, 1% of total revenue up 21, 3% year over year.
Services revenue, which includes maintenance and support revenue was $25 6 million or <unk>, 49% of total revenue.
Moving to our revenue from a geographic standpoint revenue from the Americas, including Latin America was $33 million, which was up 25, 5%.
Revenue from EMEA was $11 9 million compared to $8 six last year.
Revenue from Asia, including Japan was $17 8 million down 10, 8% compared to $20 million in the first quarter last year.
This is <unk>.
Inclusive of the strong headwind from foreign currency exchange rates mentioned by Jupiter earlier.
As you can see on our balance sheet, our deferred revenue was $121 3 million as of March 31 2022.
That's up seven 2% year over year.
Please note that this is in line with typical seasonality.
Recurring revenue defined as support subscription revenue grew eight 9% year over year to $27 9 million in the first quarter.
Which is within our target range of between 45% to 50% of revenue.
With the exception of revenue all of the metrics discussed on this call are 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 first quarter was 82% as <unk> mentioned, thus far we've been able to successfully mitigate the impact of industry wide global supply chain constraints and input cost increases.
non-GAAP operating expenses in Q1 were $38 6 million compared to $32 5 million in the first quarter last year, reflecting increasing investment in our growth priorities, including cyber security and commercial execution.
We reported $11 7 million and non-GAAP operating income compared to $10 8 million in the year ago quarter.
Adjusted EBITDA was $13 5 million for the quarter or 21, 4% of revenue.
non-GAAP income for the quarter was $10 million or <unk> 13 on a per share basis.
Diluted weighted shares used for computing non-GAAP EPS for the first quarter were approximately $79 3 million shares on.
On a GAAP basis net income for the quarter was $6 3 million or <unk> <unk> per share.
Paired with net income of $2 7 million for Threep per share.
In the first quarter last year.
For the quarter, we generated $15 9 million of cash from operating activities, we generated $12 8 million of 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.
As of March 31, 2022, we had $164 7 million and total cash and cash equivalents.
This compares to $161 million in the year ago quarter.
Growth of which includes $32 2 million of share repurchases and quarterly dividend during the quarter, we continue to carry no debt.
During the quarter, we repurchased $2 1 million shares at an average price of $13 35 per share totaling $28 3 million.
We have $64 $6 million remaining on our $100 million.
Share repurchase program.
Since January of 2020, we have repurchased eight 7 million shares at an average price of $9 six.
Totaling 79.
$1 million.
In addition, the board has approved a quarterly cash dividend of <unk> <unk> per share to be paid on June one to shareholders of record on may 16th.
In total we have returned more than $30 million to shareholders in the quarter between share repurchases and the dividend.
As Jeff had mentioned, we are now well positioned to achieve the high end of our full year revenue target of 10% to 12% growth in full year, adjusted EBITDA of 26% to 8%.
I will turn the call back over to <unk> for closing remarks.
Thank you Brian .
The first quarter represented a strong start to the year for <unk>.
Our position as a trusted partner with security led solutions is helping us to deliver consistent results and outpace the market.
We are well diversified in terms of product mix regional sales and customer mix.
Enabling a more durable.
<unk> business model in spite of macro headwinds.
I would also like to thank all employees customers and shareholders of <unk> for their continued support.
Operator, you can now open the call up for questions.
Thank you drew.
We'll now begin the Q&A session, if you'd like to ask a question. Please press star one and to remove that question and it start to.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Christian Schwab of Craig Hallum Capital Christian Your line is open.
Great. Thank you congratulations once again for.
Another solid report and consistent results here can you can you help.
Okay.
Almost every company is facing some challenges in the supply chain in one way or the other.
And you guys have just done a wonderful job.
Handling.
The supply chain issues can you help us better understand what you saw or what you've done.
Sure.
Be able to perform at such a consistent level and then continued to raise expectations.
Yes. Thank.
Thank you Christian.
No. Let me, let me talk to that a little bit of course.
If you look at the broader picture is our suppliers, especially on things like silicon at the same suppliers that you hear about right. So.
Some of the things that I think have helped us mitigate the.
I'll walk through some of those examples that hopefully helps so about two two and a half years ago, we started really putting in.
Much more senior longer term planning processes.
Around supply demand commercial initiatives and operational capabilities et cetera. So that we are driving a mix in line with customer needs, but one that we can deliver and so that was a good foundation for us to start from.
Second thing, we had to do as things got harder from an input cost and delivery.
Once we took initiatives around our footprint and simplifying it as well as the regionalized it where it made sense.
With our footprint right, obviously in Japan, UK, Taiwan and U S.
Third thing for us is as the <unk>.
<unk> very early signs beginning of 2020.
Anticipating what could be worst case scenario.
On sort of non silicon components side, we started developing at least more second sources for some of those components around the world.
And last I would say we have been much more deliberate aegon.
Focusing on what portfolio is most relevant to our customers simplifying some of our skus. If we have to but then putting ourselves in the best position to deliver right and.
So far it is not obviously impacted our ability to deliver and we.
We will continue to monitor it closely and try to find new levers as we need to.
Yes, congratulations on that thanks for that extra clarity.
I guess my last question is is in the current security environment, where you guys are.
Outperforming.
Can you just give us an update on.
In general who you're competing against most often.
And is it that is that different.
And different geographies in the Americas.
I will say versus Japan.
For example.
Yes.
Sure Yes, no. Good question, so I think the.
So I'll answer your question directly and then give you the subtlety as well so first.
Typically we are competing with people who have installed footprint in the ddos marketplace. So oftentimes it will be someone like Arbor networks, which is part of <unk> got now.
Other times, we would be competing with a broader solution we.
Which includes many different things as well so at our service provider customers it could be.
Working.
On a solution, where we are competing with someone like Juniper networks for example, as well.
It does not vary tremendously by geography.
It varies a little bit in the sense that in some of the developing nature.
Nations you will see local competitors, who are purely price driven but.
When we look at the customer set that we target.
Those customers are generally looking right for high reliability and high resilience and high level of expertise what is the lowest cost.
It may be true for kind of that.
Small mid enterprise segment, right, so by virtue of our product positioning and performance.
We are typically competing with high end performers.
And those are most often the companies that we would run into now.
Does change the landscape when we also savi, we are selling products for SSL encryption. We are also integrating all of those products with our other product platforms right. So.
When you compare it to that that's not an apples to apples, but I hope that gives you a flavor for the mix we compete with.
Yeah that is.
Great Congratulations on a solid quarter in this environment and raise guidance that's it. Thank you.
Thank you.
Yes.
Thank you Christian the next question is from on your sort of <unk> of Sidoti.
Your line is open.
Hey, Thank you for taking my question and congratulations on the continued great response.
So I'm just curious how that product's gross margin.
Dan.
Contracted a bit sequentially, what drove that and what can we expect from that going forward.
Yes, no I think I'll, let Brian commented more so nothing nothing unusual.
To note on that I think.
Of course, there is a little bit of aviation with product mix and it is not a lot it's very little that we see slightly quarter to quarter.
And as we look at obviously your year over year trends you will see some impact of volume. If you look at sequential Q4 to Q1, obviously right. So but if you look Q1 to Q1 you can see.
I see that trend line.
Within that margin obviously, we are also.
Absorbing on accommodating all the input cost inflation in the market right now right, whether it's from Fedex or our chip supplier site. So so.
So we think net inclusive of those impact as well as product mix is kind of where we end up Brian anything good numbers that's exactly it.
Our product gross margins are relatively consistent while all.
Waiting very slightly it's really just a matter of the mix of products and services that we're selling.
Okay, and then in terms of that.
Input cost inflation.
And I would also assume to some extent labor increasing labor costs.
How are you able to mitigate that.
Sure, Yes, so I think.
There are several things we.
Have been doing right. So those obviously are continue to be relevant to us. So in the last several quarters, we have continued to.
Simplify the business continued to.
Address things that are structural things, we could do.
To get better cost structure in place.
And.
We obviously had initiatives in place around PPV, and logistics and things like that that ultimately.
Have ended up being required just to offset the input cost right. So.
So those have been things we've put into place several quarters ago as a goal towards continuing to improve our portfolio and margin.
And lot of those have helped us offset kind of cost.
Inflation on labor and operations cost inflation obviously.
We faced the same phenomenon, but as I think we noted a little bit on the analyst day.
As a company.
So focus a lot on delivering productivity that helps us offset some of those inflationary costs right. So not 100%, but that has helped us offset.
Those are whether it's on materials operations our people on site.
And then that's helpful and then in terms of them.
It looks like.
America was very strong for you what are you seeing in Europe , given the geopolitical environment.
The increase sort of cyber warfare thats going on there.
Yes, So I think we talked about it right of our EMEA grew year over year I think we are seeing two things right. One is.
We don't have any direct impact from the bond flick, there so that's not relevant to us either plus or minus.
But what we are seeing is two things.
One as people become more launches.
Our cyber security.
Whether it's a budgeted topic or not that is increased importance in doing more to protect themselves and we are beginning to see that activity and typical sales cycle is six to nine months sites. So we do expect that.
To result in more people prioritizing cyber security.
In that budget.
We see a little bit of hesitation, because customers are uncertain right off the outlook on the economy and what can happen.
But I think what we see as more interest and importance of cyber security is.
Higher than the uncertainty that is causing them to be worried right now.
And how sensitive do you think you are.
And a strong economy and and and.
Inflation I mean, it's just like you have a pretty critical solution right now.
Yes, no thats right.
So I think that's exactly right, yes, so for us cyber security, we see it as leading with that and and by the way also all our product around network build out and throughput and data management.
Very strong secular trend right. So whether inflation is slightly up or slightly down people are still going to use the internet and wanted to be more secure and as they see more public incident site. It raises the awareness as well.
I think.
More on the mid enterprise side, you would see caution with interest rates and economy slowdown about.
Initiatives that were more about the things like digital transformation are.
Doing all of those ambitious project right, where cyber security is a more urgent and critical need. So we certainly see that as a more secular phenomenon right.
Okay. Thank you and I will talk for me.
Thank you.
Thank you Tanya.
The next question is from Ed <unk> of Dws I'm Ed Your line is open.
Hi.
First question was.
Given that so curious about six to nine month lead time, what is the conversation that starts now I mean, how are you doing the promotions.
Is it all security related.
Even to the service providers.
Yes, so I think.
Typically I mean, obviously, one other things and cyber security right.
For every <unk>.
Incident that is public there is a lot more things the companies see that are not public right. So they are themselves. Obviously also seeing.
Different ways, they are trying to be attacked and compromised on data so.
The conversation for us is more about having.
In a more secure integrated infrastructure that is more.
So for a mobile carrier it could be you have so many subscribers you want to now have so many more and you want to offer these new revenue services.
Here is how we can help you do that with the our infrastructure and make you more secure.
Or it could be as they are seeing more and more cyber attacks right, we work with them too.
Develop and deploy.
Something like the Zero Trust framework, which is not only our products that include things outside of what we do but as the trusted advisor work with them to say, here's what you should monitor and we publish a lot of threat intelligence, which talks about the kinds of threats, we see and how people can mitigate our immediate.
So it's a lot of it is around.
Being seen first as a trusted expert in security, but at the same time being able to deliver that with the network infrastructure build out.
That also gives them lower capex and Opex right as it relates to data management. So.
It's.
Without getting very specific comment obviously, we have specific commercial initiatives that focus on.
Is that is a new infrastructure bill how can those customers benefit from it is there are new types of cyber attacks, we're seeing how do we advise our customers than when they choose to spend money they might spend it with US right. So there's typically at any point in time would have.
<unk>.
Three most and occasionally refer to.
Very clear commercial initiatives around.
What is happening what is most relevant to our customers and how do we solve that problem. What is he has brought US we got right.
Okay.
And then given that.
There's no code restrictions in many markets.
Is this a proper sales and marketing expense for you going forward or are you looking at a ton more conferences and so forth, where you could spend more on sales and marketing.
Yes, I think.
If you look at it on a trended basis, Amit I think the way to look at it is.
Compared to last year, we certainly see a resumption of sales and marketing travel and activities.
It's not going to go back to 100% of what it was few years ago, but maybe 70, 75%.
And so you can see that reflected right in our sales and marketing now reflects.
Some amount per quarter as it relates to that discretionary spending that had stopped but hopefully towards lead generation right. So then it's okay.
The only other way I think sales and marketing to think about is on incremental revenue.
Obviously, we will.
<unk> variable sales expense as we grow that so.
While we get some obviously productivity as well we also expect.
With increasing revenue variable sales compensation goes up and on a year over year basis travel and entertainment and event spending goes.
It goes up on a year over year basis.
Roughly 2 million a year.
Okay.
Do you have any 10% customers this quarter.
We had one.
Alright, and then.
My last question was.
Are you winning large deals or are they.
Pretty much in the smaller range of Salesforce.
At both right I mean, so I think if you look at our average deal size it maybe 100.
Hey, maybe but there are deals that are 20.
<unk> thousand there are deals that are several million right. So.
A lot of these deals progress.
Typically we will get a first deal that's a one location one side and then they deployed they try it out and then they add so many more.
So it is a progression and even within an existing customer. So our first deal will not be the biggest deals, but they will typically continue delivering revenue every year.
Okay. Thank you.
Yeah.
Thank you.
Thank you Amit.
Next question from Hendi <unk> of Gabelli.
Your line is open.
Yes.
Good afternoon, Bob and Brian Congrats on strong Q1.
Thank you Andy.
Yes.
Some companies talk about.
Longer lead times, and then a stronger order visibility that gives higher conviction on the pipeline and then the.
Continued strength.
Throughout 2022, and you talk about overall visibility and your conviction on the pipeline.
Yeah.
Yeah sure. So I think for US I think we have continued to.
Refine our processes, we typically look at our sales forecast our outlook.
Revenue from.
Several different points of view, one of which would be our own 12 month funnel three months funnel nine months, etcetera, and understanding kind of the rates at which those translate.
Second is we obviously look at market.
Lead indicators not not necessarily what happened last quarter and how those lead indicators, whether it's got net spending on cyber security Capex telco etcetera etcetera. So that's the second thing we look at and there's a couple of other factors. So we look at multiple factors when we think of outlook and what.
We commit.
And you can see that hopefully we have demonstrated some consistency on that front.
I would say lead times are extending from other suppliers.
I think our customers are generally.
Of course concerned about that but our outlook. When we think of Q2, our full year is not based on any specific customer orders or things like that it's based on our engagements that deal visibility we have.
And we talk about obviously cycle time is roughly six to nine months right. So we should have.
Pretty good.
Active on that <unk> be surprised with one month to go and so.
So if you look at multitude of all those factors and so for US I would say.
Visibility is.
I think we talked about the headwinds and tailwind so things that are giving us a little bit better visibility is increased relevance and importance of cyber security second as we continue to see people.
Wanting to use and extend that assets more towards data and connectivity.
What is maybe three years ago, they were looking at radical transformation.
Headwinds for US obviously are we talked about right it could there could be.
Some customer uncertainty around the economy and interest rate and things like that which may cause them.
Two deferred spending by a quarter or something but generally we are tracking them.
On a project by project basis, not on a large macro one number basis right. So we would do.
Sorry to keep visibility on where the project is on budget is and approvals and all of that so.
So part of that I would say compared to compared to one year ago visibility not worse I would say it's slightly better.
And compared to two years ago, it's definitely better.
Thank you robot, that's very insightful and the drop that you stated that the main growth drivers. This year is security.
Can you help break down let's say the growth in security and service providers for enterprise and then I'm also wondering what the state of application delivery controller outlook I assume that you are still gaining market shares in application delivery controller and then if I look at like the top top.
Volume growth I'm wondering whether it's reasonable to think that that's a growth in security is somewhat close to 20% plus and minus and then during the remainder comes from application delivery controller.
Yes, I think so.
So I know at analyst day, we talked about three categories right Standalone ADC.
CGM CFW, our firewall and then Ddos SSL and I think Andy your observation is correct so for us.
Standalone ADC is not declining but it is less than the fleet average.
And by the way the reason it is not declining is because we are continuing to invest and innovate in it with more security embedded features right.
And then if you look at Ddos SSL ICF W. All the security oriented products.
Those are certainly growing north of the average and.
I would say we saw growth this quarter in both service provider and enterprise and insecurity and Nonsecurity. So it's not.
Big difference or a drag for us.
But remember that for us our enterprise focus as large enterprise.
Which tend to be customers, who are worried about critical data availability uptime and security. So they are.
Closer to.
Other companies that are delivering services as well.
Thank you Ruben Thank you Brian .
Thank you Andy Thank you and thank you.
There are no further questions waiting at this time, so I'd like to turn the call back over to <unk> for any closing remarks.
Thank you.
And thanks to all of our shareholders for joining us today and for your continued ongoing support of <unk>. Thank you.
That concludes the Aten networks Q1, 2022 earnings call. Thank you all for your participation you may now disconnect your lines.