Q3 2022 A10 Networks Inc Earnings Call
Good afternoon, and thank you for attending today's Aten in third quarter 2022 financial results Conference call.
My name is Austin, and I shall be your moderator for today.
All lines will be muted during the presentation portion of the call with an arbitrary team for questions and answers at the end.
You'd like to ask a question. Please press star one on your telephone keypad.
Now I'd like to pass the conference over to our host Rob Fink, Rob You May proceed.
Thank you operator, and thank you all for joining us today.
This call is being recorded and webcast live and may be accessed for at least 90 days via the Aten networks Investor Relations website at HSN networks Dot com.
Hosting the call today are <unk>, president and CEO and CFO , Brian Becker.
Before we begin I would like to remind you that shortly after the market closed today Aten networks issued a press release announcing its third quarter 2022 financial results.
<unk> 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 the course of today's call management will make forward looking statements, including statements regarding projections for future operating results, including revenue growth industry and customer trends.
Focus on and investment in the go to market strategy and infrastructure its capital allocation strategy M&A opportunities.
I chain, constraining and expectation positioning for the repurchase and dividend programs and its market share.
These statements are based on current expectations and beliefs as of today November one 2022.
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.
Business in operations that could cause actual results.
For materially.
Should not rely on them as predictions of future events.
<unk> does not intend to update the information contained in these forward looking statements whether as a result of new information future events or otherwise unless required by law.
For a more detailed description of these risks and uncertainties. Please refer to <unk>. 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.
non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results.
Third in accordance with GAAP and may be different from non-GAAP financial measures presented by other countries.
A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements that's posted on the company's website.
Now I'd like to turn the call over to drew Petrova Eddy throughout the call is yours.
Thank you Rob and thank you all for joining us today.
<unk> continues to deliver strong revenue growth and earnings power.
The third quarter was our 11th consecutive quarter of meeting revenue and EPS consensus expectation.
We are achieving this consistency despite a global pandemic economic volatility.
That interest rate and supply chain challenges.
This is a testament to the business we have built upon a great technical foundation and to a team that relentlessly delivers excellent.
We have proven that our business can be doable.
Leveraging differentiators to drive success.
Even amidst unprecedented challenges.
Today <unk> is a security focused organization.
Building cyber security into everything we do.
Building upon our deep networking expertise.
And global customer footprint.
This positioning is evident in our business model as our gross and operating margin reflect.
<unk> led solutions and strong customer demand.
Cyber security and infrastructure solutions.
By design, we are not reliant on any single geographic region and in fact, we are generating growth in nearly every region of Deloitte.
Foreign currency headwinds.
To the best of our ability we have been mitigated.
Mitigated business model largely insulated from volatility in any specific region product category.
Customer consumption model.
Lee fell to two main customer to.
Enterprises and service providers.
These two groups our business is aligned to secular tailwind.
Infrastructure and cyber security.
In the first half of 2022 economy impacted enterprise spending while service provider revenue continued to grow providing a balanced model.
In the third quarter revenue from enterprise customers represented our fastest growing customer segment.
Demonstrating that balance in our strategy.
Both enterprise and service provider segment grew in the third quarter and we continue to see demand from U S. Large enterprises aligned with the secular tailwind sort of a security led solutions.
I'd like to highlight to win that game from our enterprise segment, where <unk> is gaining market share by delivering a superior solution for the customer and exceeding performance criteria in head to head testing.
Critical customer needs.
One of the 10 largest transactions for Q T.
Kim we are one of the worlds top digital advertising platform companies.
Our customer had an urgent need to rapidly upgraded infrastructure in order to support added features and functionality, including security product and customers.
Hi.
Latency solution, which also support security encryption.
Across this customer network infrastructure and.
In short the customers' existing revenue stream, while expanding their ability to generate new revenue streams.
Another key customer win game from one of the largest government agencies in Europe .
This existing customer had a relatively small product footprint with aegon.
But had an urgent need.
Expanding deployment in support of a new online filing mandate on the country citizens and businesses with a very tight Douglas.
Aten was able to service these customers critical technological need for high volume and security.
And we've been able to deliver this solution within the required timeframe.
Similar to the first example, our solution helped this enterprise.
To ensure.
The ability to expand and capture new revenue stream, while actually improving network performance.
Today <unk> worked with nine of the top 10 wireless carriers four of the top six banks three of the top five that <unk> doesn't.
It doesn't our financials.
And educational institutions and several government agencies.
Our customer base is clearly diversified we.
We are not reliant on any single customer or small group of customers to achieve our results.
Our revenue growth continues to be driven by our proprietary security led product revenue, which on a trailing 12 month basis is now up 21% backed by secular tailwind.
And if you need.
<unk> innovations, which we're continually delivered by again.
Overall product revenue, which is a leading indicator of future recurring revenue increased 13% versus Q3 of 2021.
This.
It is due to our ability to combine networking expertise.
With the security needs of our customers.
The need for cyber security infrastructure continues to evolve and grow.
Global geopolitical events, so as a near term catalyst for this growth.
Cyber security solutions are being privatized, even though mix higher interest rates and ongoing economic challenges.
These trends are now viewed as an enterprise level risk.
Our product and technology roadmap deeply integrated infrastructure and security needs.
On a common platform deliver.
Delivering increasing efficacy and value to our customers.
Our quarterly revenues increased 10, 2% year over year in line with our target ranges and.
And non-GAAP operating gross margin was better than 80% driving record levels of operating income.
non-GAAP EBITDA of 29, 5%.
This is a result of our focus on customer centric innovation.
And delivering productivity across all functional areas.
We ended the quarter with nearly $128 million in cash even after repurchasing more than $47 5 million in stock in the quarter.
We continue to maintain a fortress balance sheet.
We have also demonstrated a proven business model with the bottom line growing faster than electric.
We continue to maintain a disciplined flexible and opportunistic capital allocation strategy.
The share purchased in this quarter was an example of this.
Our quarterly dividend is another example.
Today, we announced that our board approved a 20% increase in our quarterly dividend from <unk> <unk> per share to six cents per share.
Additionally, we announced a new $50 million share repurchase authorization.
At the same time, we continue to increase our investments for organic growth in R&D and sales and marketing.
Our year to date performance and customer traction.
Reinforces our expectation that we can achieve our full year target of revenue growth of 10% to 12%.
And EBITDA in the range of 26% to 28%.
This outlook fully incorporates foreign currency headwinds.
With that I'd like to turn the call over to Brian for a detailed review of the quarter Brian .
Thank you driven.
Third quarter revenue was a record $72 1 million up 10, 2% year over year.
Product revenue for the quarter was $45 1 million, representing 62, 6% of total revenue up 13, 3% year over year.
Services revenue, which include maintenance and support revenue was $27 million or <unk> 37, 4% of total revenue.
Moving to our revenue from a geographic standpoint.
Revenue from the Americas, including Latin America was $36 million up 11, 6%.
Revenue from EMEA was $11 2 million compared to $11 million last year up 2%.
Revenue from Asia Pacific, including Japan was $24 9 million or 12, 4% compared to $22 1 million in the third quarter last year.
On a constant currency basis revenue in Japan increased 15% year over year in Q3.
For reference on a constant currency basis <unk> consolidated revenue has grown approximately 16% year to date.
As you can see on our balance sheet, our deferred revenue was $126 million as of September 32022 up 8% year over year.
On a constant currency basis deferred revenue would have increased 10% year over year in line with overall revenue growth.
With the exception of revenue all 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 third quarter was 82%.
As drew had mentioned we continued to successfully mitigate the impact of industry wide global supply chain constraints that input cost increases.
non-GAAP operating expenses in Q3 were $38 3 million compared to $38 1 million in the third quarter last year, reflecting.
Strategic investments in our growth priorities, including cyber security technology and commercial execution.
We reported $19 5 million and non-GAAP operating income our highest quarterly result to date up 34, 2% compared with $14 5 million in the year ago quarter.
Adjusted EBITDA was $21 3 million for the quarter also a record reflecting 29, 5% of revenue.
non-GAAP net income for the quarter was $15 9 million or <unk> 20 on a per share basis up 18% from <unk> 17 per share in the third quarter of 2021.
Diluted weighted shares used for computing non-GAAP EPS for the third quarter were approximately 77 7 million shares compared to $79 9 million shares in the year ago quarter.
On a GAAP basis net income for the quarter was $12 1 million or <unk> 16 per share.
Compared with net income of $74 9 million or <unk> 94 per share in the third quarter last year.
As a reminder, in the year ago quarter, we recognized a nonrecurring income tax benefit of $65 4 million, which represented approximately 82 per share.
When adjusted for this income tax benefit our EPS increased from 12 per share to <unk> 16 per share this quarter.
Turning to the balance sheet as of September 32022, we had $127 8 million and total cash and cash equivalents compared to $166 8 million at the end of the previous quarter.
During the quarter, we repurchased $47 5 million in shares at an average price of $12 $12 77 and.
And paid $3 $8 million in cash dividends issued in the third quarter.
We continue to carry no debt.
As <unk> mentioned the board has approved a 20% increase in our quarterly cash dividend to <unk> <unk> per share to be paid on December one 2022 to shareholders of record on November 15 2022.
Board also approved a new $50 million share repurchase plan.
As <unk> mentioned, we are still well positioned to achieve our full year revenue target of 10% to 4% growth in full year, adjusted EBITDA margin of 26% to 8%.
I'll now turn the call back over to <unk> for closing comments.
Yeah.
Thank you Brian .
First I want to thank all the global employee, albeit then for continued performance in challenging.
And sometimes difficult situations.
I am proud of <unk> ability to continue to perform better than the overall industry.
This performance is due in large part due.
We are highly differentiated technical platform combined with our ability to achieve diversification in all aspects of our business.
Our security led solutions are in demand across all customer segments and each of our target geography.
We also maintain discipline in our <unk>.
Execution managing costs, while investing to bolster our differentiation.
Successfully navigating ongoing supply chain challenges.
Our solutions are well aligned with durable secular catalysts.
Which result in sustainable performance.
Operator, you can now open the call for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove that question. Please press star followed by two.
Again to ask a question it is star one if.
Youre using a speakerphone, please remember to pick up your handset before asking your question.
I'll pause here briefly ask questions registered.
Our first question is from Christian Schwab from Craig Hallum.
Christian Your line is open.
Yes.
Thank you congrats on another solid quarter.
We look to next calendar year you know.
Anticipate you know the security led solutions to drive you know a strong double digit.
Growth in the enterprise like we've been.
<unk> been experiencing.
Yeah, Thank you Christian and.
I think I would say, we don't necessarily view it that way, although we do see.
The large enterprise segment, continuing to be more balanced with our service provider outlook.
I think.
The bold product is obviously to deliver consistent performance regardless of the vertical.
I think in the large enterprise segment, we definitely see traction and momentum led by security.
And we expect to see that not just in North America.
Also globally so.
We are certainly optimistic about it and we feel good that on a combined basis.
We are well positioned to get to the 10% to 12% range.
In addition to overcoming FX headwinds.
Great is there any.
Any particular spending patterns or customer spending patterns in the service provider area yeah.
You know that that could be you know.
Positive for the complex you know as we look into the next calendar year.
Yeah no. Good question. So when you look at service provider spending patterns predominantly that is an infrastructure build out that is capex driven.
Our rambler.
The nature of our product, we continue to be relevant to them, even as they add more subscribers and handle more data.
And so forth right. So we see that as a balance off when interest rate might drive field of Capex right now, but it's not.
As challenging to maybe do an expansion enhancement of the network.
Beyond that I think we certainly see service providers in general.
The more and more concerned about cyber security as it directly impacts their network performance and therefore their ability right to monetize it and generate revenue.
So that's something that ECS has a more secular pattern. The capex, obviously follows a little bit cyclical trends, but to the degree we are relevant to them not just in the first day.
It is important to us and we continue to try to expand more things we can do it.
Great. Thank you and then you know congratulations on the strong capital allocation continually buying back your stock re upping on another buyback raising the dividend.
Are you guys beginning to look at her explore you know potential M&A as a as a way to complement the product portfolio or.
Expand growth potential for the company or it or are we still just a focus on continuing to do a great job blocking and tackling running their own business.
Yeah. So I think good question and I think certainly you saw we were.
They're not.
Not programmatic Mike.
Opportunistic as well as watching the market.
Such a volatile environment on the buyback right and therefore, having the buyback gives us that ability to.
To respond when when the timing is right.
As we look at our priorities I think.
If you look at our non-GAAP spending back on our R&D and sales and marketing is up about 78% year over year.
While we generate productivity in G&A and other functions to do that because our goal is for.
First priority is to invest in organic growth because that is the most efficient when we look at our customer base around the world up about 7000 customers in many different verticals.
That is a fair amount of room to continue expanding our product portfolio and customer penetration.
As we deliver more and more software I think what is not apparent is none of the new wins that are fueling our growth.
Came from innovations and releases that we've made in the last 12 18 months right. So we continue to invest and add to what we do.
At the same time of course, we are in.
Interested and open to looking at ways to accelerate our growth through inorganic means but the filters there would have to be it has to be aligned with strategy and second right. It has to have the right profile on what we can deliver from a financial perspective as well so.
Of course continue to look at deals and I have done those kind of those before so high degree of comfort in looking at them.
If we conclude organic growth is a good idea we will keep going.
Find something better.
Great.
Congrats again on a good solid results no other questions. Thank you.
Thank you.
Yes.
Our next.
Hi, Paul.
And then from Dws financial Herman Your line is open.
Hi, So first question was just given the gravity of how cyber security is really the primary spending spot are you seeing more competition are you seeing.
Pricing compression or customers, taking a long time because there is.
More new entrants in the same bid that weren't there before.
So thank you Amit good question, So I think.
So I think that's the phenomenon is if you look at cyber security as a general category that are several different segments of the drive that you have endpoint security identity management and we participate in networking security I think endpoint security is the one where you hear about.
Hundreds of companies from beating all the time with new buzzwords.
That is not the sweet spot for us our focus is.
Where we can take all our understanding of networking traffic.
Implied performance impact and bringing intelligence into what affects performance what can be detected and remediated quickly. So in that segment I would say.
Certainly we are not seeing any change in the competitive landscape.
I think we see more maybe slightly positive.
All of US as we continue to add more capability into that platform.
Our customers.
It does not.
The price compression is always to add in any competitive dynamic.
Our goal is to manage it in a way where we.
We are able to offset it with productivity.
Other measures that allow us to maintain the gross margin right. So you can see.
Gross margins.
Stable, so we don't see a risk where that's a concern.
And lastly, I think as you talked about the deal cycle.
We certainly saw some slowdown earlier in the year.
But I would say those cycles.
Really normalizing.
<unk>.
Impossible for me to predict what will happen after any announcement tomorrow from the fed but in in advance of that I would say, we certainly see our competitive positioning improving.
And we don't try to participate driving every every focus ADR vertical we are very targeted on where we generate value where we are highly differentiated. So we don't see anything negative so far if anything we feel we're positioned getting stronger.
Okay.
Sounds like you don't have a 10% customer anymore do they reduced their spending or have they've just been squeezed out with more of your other customers.
Knowing their spending with you.
Yeah, So I think.
<unk>.
<unk> had a 10% customer, but typically they have like endpoint something usually and it's not always the same one and I think Brian this quarter, we had one.
That kind of thing, but it's not the same one every quarter that's right.
And given that Youre, saying there is no concentration of the customers.
Do your top five customers make up 50% of your sales or is there more you know.
Diversified.
Yeah, I think roughly top 10 customers make up like 35%.
Yeah, and it varies between quarters, some time that come from a larger number of customers make up a large portion of revenue depending on the cycle, but if you average all in eight quarters. That's the kind of later this year.
Okay. That's helpful. Thank you.
Okay. Thank you.
Yes.
Our next question is from on your sort of strong from Sidoti Anya.
Tanya Your line is open.
Hello.
Alright since the firm view on for Ernesto to show them how are you.
Yeah.
Hi, welcome. Thank you.
I guess my first question is are you seeing an inflationary pressures.
Yeah of course, we are so we are not immune to the normal environment. So we see inflationary pressure in <unk>.
Shipping and logistic warehousing supply chain Labor engineering right.
Of course, we are not immune to the same inflationary pressures as everyone else I think.
Our goal as we continue to try to offset that with productivity.
And we have generally always generating new measures and ideas for how to.
So yeah, we definitely have the same pressures on materials and people cost.
Thank you. My next question is how do you think you will basically head into a recession.
Yeah. So I think you know.
I would say if you look at it over a broader portfolio typically the way our products our position is one.
Today, where we are successful is because we are helping customers add.
Capacity or security in the most efficient way without ripping everything and building a new network I think that's a pretty prudent approach that lot of CIO at Cfos will take if that concerned about.
Outlook on downtown because this is still critical to their ability to operate right or we are not.
Based on our value proposition all wouldn't it be nice to do X. We are in the value proposition of the need to do X sight and and I do think that.
When you look at the kind of.
Growth in volume and sophistication of cyber attacks and lot of the time.
Mandates are prescriptions around what people need to do to protect infrastructure as well as operations.
We believe that that will be one of the categories that will still be above the red line in case of a recession. So so we are very focused on how do we create value for our customers.
As they face that and that's how we plan to do it and then of course, our global footprint.
Helps further diversification, where we don't expect all regions in the world to have the same.
Same GDP trend line all the time.
Alright. Thank you so much for taking my questions.
Thank you.
Our next question is from Hendi <unk> from Gabelli funds.
Andy Your line is open.
Good evening drew part Brian .
Yeah.
My first question.
You mentioned.
Eight then.
Investment and growth opportunity.
What are the areas of your major investments in the past I eat them has mentioned security subscription offerings.
How would you be able to elaborate more on where you invest for organic growth opportunity.
Sure Yeah, So I think for us obviously.
As it relates to cybersecurity, where we are investing is in.
New capabilities, whether it relates to.
Managing.
Encryption algorithms like.
Like SSL <unk> product, our DNS product.
Offering east West Protection in addition to not solve it.
It's the wide range of things right that we continue to add capabilities, which by the way would typically be done by our standards startup otherwise so.
So these are.
The reasons why our customers look at us.
They continue to expand what they do and align on the road.
As it relates to combining security with network infrastructure our investments are in.
Vase to combine the.
The best way software with hardware to drive lowest latency and cutting edge performance and an example of that in.
It's a long investment program to deliver very very high performance products for high frequency trading products.
That needs a lot of engineering it needs a lot of innovation and research and so our technical teams continue to drive that so.
So those are some examples of where I.
Our investments are aligned with our differentiation, our differentiation is better ability to detect and remediate cyber attacks and to provide.
The highest throughput lowest latency infrastructure.
Got it and then Brian one question is about.
Currency.
How would you say you're 10 minutes the strong USD appreciation in Japan.
Do you split the currency appreciation between a tenant customers or like how how how essentially how do you how do you mitigate the strong USD appreciation.
Yes, no great question, it's been very difficult for us to navigate most of our customers in Japan.
We do deal in Japanese yen.
Given the nature of our service provider clientele in Japan, it's not surprising.
I think I mentioned that we lost revenue and deferred revenue accordingly to the magnitude of 2% in total on both deferred and overall top line.
So it was not an easy navigation that we've accomplished but I think to <unk> point about diversification across geographies and customer verticals that allowed us to overcome some of those headwinds, but it wasn't something that we were able to escape.
Well I mean, it's 100% absorbed by a penny and we still delivered the growth by growing faster than others.
I see.
And then Brian you might have mentioned this and I may have missed this well what is the recurring revenue by the end of the third quarter.
Yes no.
Recurring revenue as both a combination of support contracts and subscription contracts.
The subscription part is a small portion of it but it's.
On our income statements about.
Little less than half of our revenue is recurring revenue and it continues to be pretty stable a portion of our business.
Got it.
Okay.
And then drop it will be reasonable to assume that you are winning market shares considering the top line growth execution that you have been delivering and then if yes with you Paul.
I like where.
You believe eight then is gaining market shares.
Sure Yeah. So I think the way internally, we measure our performance and drive it as we look at our market indices that tell us what the market is growing at our lead indicators of that type.
Second of course, we look at our peer group and I think you guys all know.
Those peers that we are always being asked about so when we look at relative to the peer group revenue growth this year year over year as well as if you look at market indices like cotton on it spending capex elbows and things like that.
We believe that growing at 10% to 12% represent us.
Driving improving commercial execution and product.
Folio that helps us grow faster so.
Just mathematically right if our average peer group is growing low single digits, we feel pretty good about it.
And most importantly, when we are at customers as we continue to replace competitor does our win new business with.
With a customer that.
Didn't even exist before or we think that's another way for us to gain market share as well so.
I think in all honesty.
You guys know well on the typical players in this space. So we feel generally pretty well that in both enterprise and SP segment.
We continue to execute well and we are making good progress.
Thank you Bob Thank you Brian .
Thank you Andy.
That concludes our Q&A I would like to hand, the conference back to drew Penn for any closing remarks.
Thank you and thank you to all of our shareholders for joining us today and for your continued support.
Yeah.
That concludes today's call. Thank you for your participation you may now disconnect your lines.