Q2 2022 A10 Networks Inc Earnings Call
Taken as a recognized leader in one of the most important market catalysts in technology today network security.
<unk> faces the same market conditions.
Supply chain challenges and economic realities as our peers despite.
Despite COVID-19 recessionary conditions currency headwind and a global supply chain crisis, we have established a clear and durable track record of success.
Central to the success has been our focus on the network security needs of our customers and our diversification efforts.
We sell two main customer groups.
Enterprises and service providers.
And within these two groups our business is aligned with two secular tailwind infrastructure and cyber security.
In the first half of 2022, the economy had a disproportionate impact on this mix.
Cyber security continues to grow and the global geopolitical events have only serve as more of a catalyst for this growth.
Simultaneously infrastructure Buildout required capital expenditures, which can be impacted by interest rates and inflation unless it is linked to revenue generation.
Like our peers, our visibility with small and mid sized enterprises, especially related to infrastructure build out.
Is not as clear as it was exiting 2021.
However, cyber security solutions are being prioritized, even amidst economic challenges and especially by service providers, who are home network security and reliability is a business essentials.
The net result for <unk> is performance in the first half of the year that exceeded published expectations further strengthening our confidence in our full year outlook and ability to invest for future growth.
Driven by continued adoption of our proprietary security led solutions revenue increased 14, 9% year over year.
Our gross margin was better than 80% despite continued supply chain challenges and input cost pressures.
Driving higher levels of operating income EBITDA and net income.
During the second quarter, we achieved our rule of 40 goal with revenue growth of 14, 9% and adjusted EBITDA margins of 26, 4%.
Presenting a combined 41, 3%.
We ended the quarter with nearly $167 million in cash.
$2 13 per share.
Even after returning more than $7 million to shareholders in the form of share repurchases and cash dividend.
We have a fortress balance sheet positioning us to thrive.
If the economy slows.
And creating incremental opportunities as relative valuations reset.
We also have a proven business model with our bottom line growing faster than our top line.
Building upon our strong legacy we have built security solutions into every facet of our portfolio.
As discussed before.
Mix improvement is an important metric for aten.
Standalone ADC continued to decline as a percent of overall revenue even at.
Consolidated top line grew 14, 9%.
Demonstrating the progress we have made in transitioning to a security and infrastructure solutions company.
Today, eight and focuses on customer centric innovation and a solution based sales approach delivering tangible business value and industry, leading total cost of ownership.
Our clients regardless of whether the solutions are deployed on prem in private cloud or public cloud.
The cyber security threat only grow in magnitude frequency and sophistication.
The water in Ukraine, and the global diplomatic response has created new threats and exacerbated all ones.
Our advanced machine learning solutions continue to identify and mitigate new challenges such as the emerging LDP amplification threat.
Our current solutions identify and color a significantly broader spectrum of threats, including setting the standard for identifying and isolating ddos attacks.
<unk> technology strength and infrastructure allow us to do this efficiently while providing best in class fiber security integrated with network traffic flow.
<unk> are increasingly focused on security first and <unk> is capturing share because of our differentiated approach to solving our customers' problems.
Let me highlight some key areas of progress within our business.
Our revenue growth continues to be driven by our proprietary security led product revenue, which on a trailing 12 month basis is now up 26% backed by secular tailwind.
Overall product revenue, which is a leading indicator of future recurring service revenue increased 21% what does Q2 of 2021.
From a geographic perspective.
Revenue from the Americas grew 33, 7% year over year to $38 $6 million, reflecting our investment in commercial initiatives in the Americas and strong demand for our solutions.
EMEA revenue increased 10, 5% year over year.
Asia, including Japan was essentially flat on a constant currency basis exceeding our expectations.
Inclusive of the significant foreign currency impact.
<unk> revenue decreased seven 1% year over year.
Our diversification continues to provide a resilient foundation.
As different regions navigate macroeconomic and geopolitical headwinds.
We continue to focus our investment in growth opportunities, including expanded in new capabilities in cyber security.
We also continue to partner on hybrid solutions, enabling our customers to navigate their own technology roadmaps amidst the current economic climate.
A priority within these investments is improving our ability to cross sell solutions to our customers.
While enabling them to reduce overall capex and opex.
Our own Opex increased 11% year over year, demonstrating these investments.
Over the past year, our product revenue growth rate with existing customers.
Consistently exceeded our target growth rate, demonstrating our ability to successfully leverage our strong installed base.
And bolsters, our confidence in delivering 10%, 12% consolidated growth.
Back to the prior year.
We are committed to maintaining a disciplined flexible and opportunistic capital allocation strategy.
The recent economic conditions have impacted valuations across the board and while we will continue to demonstrate a rigor in evaluating potential uses of shareholder capital.
Current market conditions are only likely to provide increased opportunities.
Supply chain issues continued throughout our industry.
But to date <unk> has been able to navigate these conditions.
As evidenced by our gross margin improvement and our consistent ability to deliver products to customers.
Our year to date performance.
Reinforces our expectation that we can achieve our full year targets of revenue growth of 10% to 12% year over year and EBITDA in the range of 26% to 28% of revenue for 2022.
We have taken the current external environment into account and have identified levers in our business to achieve our targeted bottom line performance for the year.
With that I'd like to turn the call over to Brian for a detailed review of the quarter Brian .
Thank you <unk>.
Second quarter revenue was $68 million up 14, 9% year over year, the second highest quarter revenue in our history.
Product revenue, which is a leading indicator for future revenue was $41 5 million, representing 61% of total revenue up 27% year over year.
Services revenue, which include maintenance and support revenue was $26 5 million or 39% of total revenue.
Moving to our revenue from a geographic standpoint, as <unk> mentioned revenue from the Americas, including Latam was $38 6 million up 33, 7%.
Revenue from EMEA was $7 8 million compared to $7 $1 million last year up 10, 5%.
Revenue from Asia, including Japan was $21 6 million down seven 1% compared to $23 3 million in the second quarter last year, which is exclusively due to the depreciating yen to dollar currency exchange rates.
As you can see on our balance sheet, our deferred revenue was $127 9 million as of June 32022 up.
Up 10% year over year.
Recurring revenue defined as support subscription revenue grew 7% year over year to $29 2 million in the second quarter.
With the exception of revenue all the metrics discussed on this call are on a non-GAAP basis, unless otherwise stated a full reconciliation full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website.
Gross margin in the second quarter was 86%.
Also as <unk> mentioned, we continued to successfully mitigate the impact of industry wide global supply chain constraints and input cost increases.
non-GAAP operating expenses in Q2.
Were $38 7 million compared to $35 million in the second quarter last year, reflecting increasing investment in our growth priorities, including cyber security technology and commercial execution.
We reported $16 1 million in non-GAAP operating income compared to $11 1 million in the year ago quarter.
Adjusted EBITDA was $18 million for the quarter or 26, 4% of revenue.
non-GAAP net income for the quarter was $13 4 million or <unk> 17 on a per share basis.
Diluted weighted shares used for computing non-GAAP EPS for the second quarter were approximately 78 3 million shares compared to $79 3 million shares in the year ago quarter.
On a GAAP basis net income for the quarter was $10 4 million or <unk> 13 per share compared with net income of $6 6 million or <unk> <unk> per share in the second quarter last year.
Turning to the year to date results revenue for the first six months of 2022 was $130 6 million compared to $114 million in the same period last year up 14% year over year.
Product revenue was $78 $5 million year to date of 21% from $64 9 million.
Services revenue was $52 1 million up six 1% from $49 1 million.
Year to date gross margin was 84%, which was driven by favorable product and geographic mix.
non-GAAP operating income was $27 8 million year to date up 2026, 7% compared to $21 9 million last year.
Adjusted EBITDA year to date was $31 5 million or <unk> 24, 24, 1% of revenue.
non-GAAP net income was $23 4 million or <unk> 30 on a per share basis weighted.
Weighted shares used for computing non-GAAP EPS for the first six months period were approximately 78 million shares.
On a GAAP basis year to date net income was $16 8 million or 21 per share.
Turning to the balance sheet.
As of June 32022, we had $166 $8 million in total cash and cash equivalents effectively unchanged from the year ago period.
Year to date, we have repurchased two 4 million shares.
Or $31 $8 million worth and issued $7 $7 million in cash dividends, we continue to carry no debt.
In addition, the board has approved a quarterly cash dividend of <unk> <unk> per share to be paid on September one 2022 to shareholders of record on August 15th 2022.
In total we returned more than $39 million to shareholders in the first half of 2022 between share repurchases and dividend.
As drew had mentioned we are now well positioned to achieve our full year revenue target of 10% to 12% growth year over year.
In full year, adjusted EBITDA margin of 26% to 28% of revenue.
I'll now turn the call back over to Jupiter for closing comments.
Thank you Brian .
I am proud of <unk> ability to continue to perform better than the overall industry. Both in terms of growth and in terms of navigating external challenges.
Our proprietary security led solutions are enabling us to capture market share and expand our customer base.
We remain well diversified in terms of product mix regional mix and customer mix, enabling a more durable model in spite of macro headwinds.
Operator, you can now open the call up for questions.
Absolutely we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one of your telephone keypad.
And for any reason at all you would like to move that question. Please press star followed by two.
To ask a question press Star one as a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question. We will pause briefly ask questions are registered.
The first question comes from Herman <unk> with Dws financial your line is open.
Could you just talk about <unk>.
Competitive landscape, given the stronger dollar and how that could be impacting our benefitting you in some of your international markets.
Sure Yes, good good question so.
If you look at our global mix right support.
Our strongest growth region was North America. So.
In terms of currency that doesn't affect us.
When you think of our business.
In Japan, clearly as the yen exchange rate has gone from something like 105 to $1 36.
It created a headwind.
<unk>.
We were able to overcome that by performance in North America.
In Europe , our business is conducted mostly in USD denominated transactions.
So while it creates a little bit of headwind in terms of higher local currency rate. It was not a material impact for us.
So far.
Okay and is there any contributing standpoint from the Opex line given the stronger dollar.
Yeah.
Not not a significant impact from from that perspective, because obviously the local <unk>.
And marketing and other offices are at the Opex is in local currencies as well, so not not a meaningful impact for us positive or negative.
And then last question was.
Could you just talk about your sales funnel looking out how much clarity do you have and do you see any customers pushing out potential orders.
Yes, no. Good question. So I think we of course monitor multiple metrics to think of demand in our outlook on it.
We see a lynn phenomenon, where.
Because a lot of the lead times from several of our companies in the space are extended dramatically.
But as it relates directly to <unk>, we are not seeing customers deliberately pushing out.
Meaningfully right. So there is some push and pull of course with one in Europe and things like that the sales cycles are a little bit longer.
But we don't see a deliberate choice where somebody is saying we will put this off for six months or nine months and I think I would relate it back to.
Because our solutions are directly linked to customers' revenue generation are maintaining quality of performance of networks.
It just modernization I think we see those as being different categories than discretionary spending which may be more likely to be pushed out.
Okay. Thank you.
Thanks.
Thank you. The next question comes from Christian Schwab with Craig Hallum. Please proceed.
Hey, guys congratulations on another solid quarter in 10 quarters in a row.
And kudos on navigator.
A continued challenging supply chain environment.
Kind of a tremendous shift in currency and kind of unprecedented and again.
When we look at your exposure, there and you're talking to customers et cetera.
Who.
Where does the dollar yen conversion.
Should it moderate.
Back from kind of the.
We got 12% extreme movements in.
In the quarter.
Make your products.
Competitive or not.
<unk>, maybe possibly delayed.
Actually work.
Yeah. Good question, So I think I would say even as it relates to Japan, we did not see delays or push outs because of currency concern per se.
I think it's more.
Because the local transactions are in yen. So it's more that we were able to absorb that on a constant currency basis. If you will within our overall growth of <unk>.
<unk> 14, 9% right and.
So from a demand perspective, because the local demand is in yen and we're fulfilling it in yen.
We don't see that as being something where things are deferred or lock and in fact, our depending in terms of yen performance is on track to what we expected.
As things moderate out I think certainly it eases out that headwind for us.
But as I mentioned in the script, obviously, we are always navigating a lot of things and we.
Would also appreciate when that kind of tapers out but in the meantime, we'll look for ways to offset that to still get to where we need to.
Great. Thank you for that so.
And thank you for the clarity.
A set of slides.
<unk>.
Different patient.
I think an explanation of.
Making it more simpler for.
Some investors to understand and analysts who said to explain it to people I appreciate that.
With that being said, though can you.
Just give us an update on <unk>.
Competitive landscape and who.
So you guys are seeing the most often.
And who you believe your products.
Stack up best against.
Sure, Yes, so I think roughly.
Two thirds of our sales are to the service provider segment, which include cloud telcos Msos.
And so forth and one third is enterprise.
The service provider portion on the security products.
Yeah.
We would be competing with someone like Arbor networks.
As part of net scout.
And on the course out of service provider traffic and other features we will be competing with someone like juniper and that landscape really has not changed I would say materially from 90 days ago or even longer.
On the enterprise side, which is one third of our business.
It is predominantly large enterprises and that would be financial services and other institutions that handle a lot of data and are handling a lot of users and security.
On that segment, our competition would most often be someone like F. Five networks.
But the available product is architected.
We combine multiple kind of categories of products, which is a little bit unique light, which is true for every company, but so it's not a one for one comparison, but those would be the names we would see most often as competitors.
Excellent and then my last question I think when you guys were talking about your extremely strong.
Balance sheet and success.
Successful buyback program dividend et cetera.
<unk>.
Did you did you hit your suggests that you may use that.
To make acquisitions or to look at M&A with valuation multiples in the marketplace coming down too.
Actually.
Create more.
<unk> ability slash scale.
For your existing customer base through if I hear that wrong.
Yes, good question and I think the.
As we have said before and it's still true is our first priority is investing in organic growth and you can see obviously, we are increasing opex to fuel faster growth.
Because that's the most efficient and fulfilling way to grow as well.
Second is of course.
Return for investors. In addition to everyone else and so in that context talk about buyback and dividends I would say the last part for US is we have already.
Time of course, Opportunistically look that ideas that might help us bolster either a product capability or reach a different vertical our customer base and we will continue to do that but do it in a way that financially vigorous and and you are correct I think as things reset maybe.
There's more things to evaluate but our primary focus is really organic growth.
And our plan is based on how we can continue to fuel that growth.
Having said that with that balance sheet, we feel good that we can navigate turbulent times and if something makes sense and is financially disciplined way to do it we would continue to look at those options as well.
Okay great.
Great. Thank you for that and congrats on great execution.
Thank you.
Thank you. The next question comes from <unk> <unk> with Sidoti.
Please proceed.
Alright, Thank you for taking my questions and congratulations on another great quarter.
I'm just curious.
Sales and marketing it looks like that scaled back a little bit for this quarter and why is that.
Yes.
Not sure on yes, maybe that's on a GAAP basis, but in absolute terms sales and marketing is up 10% year over year and R&D is up about 11% year over year.
I think we can direct later, but we continue to invest more.
And sales and marketing is higher.
Actively one for the higher sale to cost of sales, while the higher revenue and second as we continue to invest in more solution selling in security oriented sales.
And R&D is up year over year, as we invest more and as I said, new types of cyber threats and continuing to expand our debt.
Okay, sorry, my mistake and then how are you, adding headcount to capture this stronger growth.
Enough meaningfully adding in head counts.
It's a mix so I think our growth in sales and marketing as a balanced approach. So we focus on.
<unk>.
<unk> solution selling expanding more categories with existing customers.
Selling based on security and ROIC value proposition.
And expecting obviously productivity improvement as well right. So.
The IV add head count, but our growth is based on all of those things and increasing head count is just one factor.
And obviously the ramp up and become more productive.
Positive as well, but it's not limited to growing by adding more salespeople, it's doing all those things together.
Okay. Thank you and then I'm just if you could just remind US again, how correlated are to this service provider capex cycles, and where you see the transition to <unk>, where we are in that at.
At this point.
Sure Yeah. So I think for US and then of course service provider category includes cloud companies as well as telcos and Msos.
And.
For US obviously, we are engaged in many <unk> design wins around the world.
And obviously that cycle is not as fast as.
Or is that a lot of people had expected but for US. The approach was always a balanced one where we.
We are engaged with those customers to modernize their current CIS.
Systems as well by doing things like virtualization offering more security and as they make the investments to move to <unk>, we are well positioned to take advantage of that.
As it relates to correlation with that Capex cycle.
There is some correlation but.
Things, specifically, our <unk> sequences.
As a spectrum sale then there is the radio buildout than there is.
Infrastructure, our optical backbone build out then it's deployment of services and so we are well positioned for that but in the meantime, all those service providers also continued to invest that current capex and opex for.
Either more security than they used to do or because they are adding new services are more subscribers they need to add more capacity to handle that traffic.
So we participate in those cycles, both existing and new.
Security spending is not highly related are correlated to that capex cycle, it's more secular phenomenon and infrastructure build out is more related to capex cycles, right and as we said obviously with interest rates and other features.
That is a little more depressed, but security is kind of secular from that.
Okay. Thank you that was all for me.
<unk>.
Thank you Tony.
Thank you. The next question comes from Hendi <unk> with Gabelli funds. Your line is open.
Good afternoon dropout Brian .
Okay.
Okay.
But I would like to inquire.
Our secure perspective on the growth between enterprise and service providers service providers. They do it for growth above 20% for the first half while enterprise growth is sort of like low to mid single digits.
Do you expect that growth profile to remain or.
Should there be any catalyst that may.
Let's see.
Results like higher growth in enterprise and maybe.
Lower growth in service providers.
Alright.
Yeah no. Good question. So I think as we have mentioned before we don't try to specifically achieve a certain mix there, but the phenomenon is this right in the first half of this year.
As I was saying before.
With providers continue to have to navigate adding subscribers, new services and facing new security threats.
And so we continue to make progress with those around the world, whether it's msos telcos are cloud companies.
As it relates to enterprise Si.
Of course that is the segment word.
Our exposure is mostly to large enterprise, but that is the segment, where economic conditions have had a stronger impact and if you look at lot of the peer group that we.
Get compared to obviously.
Right, they're signaling very low or negative growth in that segment. This year. So we think that that is a macro phenomenon that is impacted by.
Wanted euro interest rate inflation uncertainty all of that kind of issues. So we focus within that.
Verticals that we are more and more differentiated and I think.
As the economic environment improves.
That number could go up and service provider could be a little slower, but we look to achieve that and I'll probably bring it back to my original point right that by design, we have built a more durable source of revenue, where we are not dependent on one region or one vertical or one product.
To achieve our goals right. So this is helping us also be much more balanced.
Okay. Thank you and then Brian I would like to ask questions about gross margin.
The first question is like the non-GAAP service gross margin has been running at 85% to 86% in the first half significantly above historical levels.
Sustainable is it mid 80% and then the second part is.
During investor Analyst day.
You said the midterm 2022, 2023 gross margin target is 78% to 80%.
First half of 2022 gross margin is 80% at the high end.
Are there any scenario that may bring 2022 gross margin closer to the low end of 78% ore shoot with thing that.
Paypal is well positioned to be in the upper end of that 70% to 80%.
Midterm target.
Yeah, no you're exactly right, we had guided 78% to 80% for this year on a full year basis for gross margin. We still think that that's the right range. We're obviously tracking towards the higher end of it. So I would say that's probably the right way to look at it and then you set out years, we're targeting 80 to 82 so.
We're tracking pretty well managing through what we can given the environment.
And I think Andy just one thing to add to that right of course.
But we don't know as a headwind is.
Pressures, whether it's on shipping and logistics, our chip supply or whatever but what we do noise. We are also driving a lot of productivity measures that has helped us offset those right, which is what has helped us keep it at 80%.
Okay.
Thank you <unk>. Thank you Bryan and then congratulation on strong results.
Thanks, very much thanks Amy.
Yes.
Thank you there are no further questions in the queue. So I will now pass it back to <unk> for closing remarks.
Thank you.
First of all I wanted to thank all the global employee of <unk> for a great quarter and continuing to build a strong technical and commercial foundation for the future.
And thanks to all of our shareholders for joining us today and for your continued support thank you.
This concludes the second quarter 2022 earnings conference call. Thank you for your participation you may now disconnect your line.