A10 Networks Inc. Q1 2023 Earnings Call
All cyber attack.
During the first quarter before the augmented our already robust security infrastructure to enable us to better support our customers against these threats.
Cyber attacks are simply a business reality for even the most prepared organization and that deploying solutions to mitigate this risk and the associated disruption. They cause is a priority even during challenging times.
Like others, we are seeing longer sales cycles.
Particularly among larger north American customers due to concerns about the economy.
We do not believe we've lost any meaningful forecasted deals to competitors.
They are taking longer to close impacting our normal revenue cadence.
Indeed, North America declined 9% in the first quarter compared to last year.
And revenue in the rest of the world was down 7% year over year.
Effectively all of the revenue decline was due to tier one customers, who bought planned buying in the quarter with expectations of resumption in the second half of the year.
Our diversification both in terms of geography, and customers helped us mitigate the macro environment.
As we believe we are navigating the economy better than most but we were not immune from the conditions.
Proactively we have taken steps to align our cost structure we.
We deployed select austerity measures to reduce operating expenses by 10, 3% year over year in Q1 in light of these macro headwinds.
I want to note that we were mindful of our long term goals.
Particularly related to growth as we reviewed our near term spending.
Over the long term I don't believe this effort will materially impact our business trajectory, our ability to achieve multiyear targets as market conditions normalize.
In reality, our ability to maintain solid profitability and cash generation, even during a quarter with significant revenue challenges each.
Each to the durability of our business model and execution.
As a result, we maintained our gross margin in excess of 80%.
And significantly expanded our adjusted EBITDA margin.
To 26, 8%.
What is 21, 6% in last year's first quarter.
This is in line with our business model goals of achieving 26, or 28% EBITDA and 80% gross margin.
As we have previously communicated our ability to proactively manage investment and certain expenses enabled us to maintain robust profitability, even when revenues are under external pressure.
We have continued to methodically planned these actions, including supply chain sales and marketing investment and selected strategic investments in R&D.
In an effort to improve the security and resiliency of our hybrid cloud offering.
We recently announced a strategic partnership with Fastly and industry leader in next generation web application firewall all that.
By combining our leading ADC solution with their next generation lap. This first to market integrated solution can provide our large enterprise customers.
A single solution to enhance web defenses across software and hardware appliances within that hybrid cloud environment.
We believe this partnership strengthens our portfolio and unlock further diversification of our revenue streams.
Additionally, our collaboration should broaden our go to market strategy for this type of solution as we leverage the reach and capability of both aten and firstly teams.
Additionally, in Q1 and in line with these diversification efforts.
Large partner in Japan introduced <unk> cloud access controller into into the security Operation Center service package.
Aten networks cloud access proxy is a complete enterprise solution.
Designed specifically to help organizations optimize the performance.
And security of their SaaS applications and.
Enhanced user experience.
And provide comprehensive visibility into branch offices and the cloud.
With a partner, enabling this as a service. It is further proof that we continue to invest and comprehensive security solutions delivered through multiple form factors for our customers.
In the first quarter, our revenue was negatively impacted by the combination of macro economic headwinds and internal company priorities.
Strengthen our security posture.
But our business model and focus on execution enabled us to preserve our profitability.
We are confident that we will show improvement as we move through the year and we continue to expect full year EPS expansion.
We also continue to maintain a disciplined flexible and opportunistic capital allocation strategy.
Today, our board approved a quarterly dividend of <unk> <unk> per share.
With that I'd like to turn the call over to Brian for a detailed review of the quarter Brian .
Thank you trip it.
First quarter revenue was $57 7 million a decrease of seven 9% year over year, reflecting the headwinds Drupelet described earlier.
Product revenue for the quarter was $31 2 million, representing 54% of total revenue.
Services revenue, which includes maintenance and support revenue was $26 5 million or 46% of total revenue.
Moving to revenue from a geographic standpoint revenue from the Americas was $30 million down nine 1% as <unk> described this reflects slowing purchasing from larger customers primarily service providers due to the economic concerns.
As you can see on our balance sheet, our deferred revenue was $128 5 million as of March 31, 2023 up five 9% year over year on a constant currency basis deferred revenue would have increased eight 3% year over year.
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 for the first quarter was 83, 1%. This reflects strong execution overcoming input cost pressures and due to our product mix.
We expect our revenue mix to normalize in future quarters.
We reported $13 4 million in non-GAAP operating income up 14, 3% compared with a $11 7 million in the year ago quarter adjusted.
Adjusted EBITDA was $15 5 million for the quarter, reflecting 26, 8% of revenue.
We were able to achieve our targeted adjusted EBITDA margins, even as revenue declined by nearly 8%.
non-GAAP net income for the quarter was $9 9 million or <unk> 13 per share, which is relatively flat compared to 10 million or <unk> 13 per share in the year ago quarter.
Maintaining our non-GAAP net income on 8% lower revenue is a significant accomplishment demonstrating the earnings power, we have built into the business.
Diluted weighted shares used for computing non-GAAP EPS for the first quarter were approximately $75 5 million shares compared to $79 3 million shares in the year ago quarter.
On a GAAP basis net income for the quarter was $4 million or <unk> <unk> per share compared with net income of $6 3 million or eight cents per share in the year ago quarter.
Turning to the balance sheet as of March 31, 2023, we had $144 5 million in total cash and marketable securities compared to $150 9 million at the end of 2022.
During the quarter, we paid $4 4 million in cash dividend.
And we continue to carry no debt.
As Jeff had mentioned the board approved a quarterly cash dividend of <unk> <unk> per share to be paid on June one 2023 to shareholders of record on May 15 2023.
As stupid indicated we believe the first quarter represents the floor for our financial results and we anticipate sequential improvements throughout the year.
I'll now turn the call back over to Jupiter for closing comments.
Thank you Brian .
There is no doubt this was a challenging start to the year.
But our team responded effectively delivering strong execution and solid profitability despite revenue headwinds.
Our security led solutions are in demand across all customer segments and in each of our target geography.
<unk> solutions are aligned with durable secular catalyst.
Operator, you can now open the call up for questions.
Thank you as a reminder, if you'd like to.
I'll ask a question you can press star followed by one on your telephone keypad.
I'd like to withdraw your question you May press Star followed by two.
Please ensure you're on mute locally when asking your question.
Our first question for today comes from Christian Schwab, Craig Hallum Christian Your line is now open. Please go ahead.
Great. Thank you Hey, guys.
So as we think about sequential revenue growth you know from here from the rest of the year would you expect that to be kind of a linear a Bachelor how should we think about that.
Yeah I think.
I'll, let Brian add context to that right. So as we noted in the last call.
Our normal seasonality is being impacted certainly by the economy and so I think our results for this year from first half second half.
Are likely to be more backend loaded so we certainly see that and.
Reflecting some of the orders that.
Our now scheduled our plan at least by the second half right if not earlier and so I would say from that perspective, we certainly expect sequential improvement into Q3 and beyond and.
Who are maybe sequential improvements that are in line or slightly better than historic.
Seasonality.
I don't know Brian Yes.
I think we've talked about 2021, whereas the similar pattern, where we had the pandemic was challenging our revenue growth in the first half of the year last year I think we saw 48, 52% mix first half the second half in terms of how much revenue was recognized first half the second half and we believe this year will be a similar pattern. We saw in 'twenty, one with a little bit of a slow <unk>.
But as drip had mentioned and as I said in the script, we haven't seen any meaningful cancellations or.
Or a pullback so we think it'll be a sequential growth quarter.
Okay, Great and then come with some of the things that you mentioned and highlighted partnerships you know Fastly and large partnership you know in Japan. You know is is that.
Directionally helpful or is.
Is that material revenue that could come this year.
Yes.
Good question first and I would think of it in two different ways one is.
Obviously, we continue to maintain and invest in differentiating solutions for large service providers around the world.
But at the same time.
As we see maybe more.
Uncertainty are pausing their spending related to the economy.
We are also accelerating our efforts to be more relevant to larger enterprise customers right. So that's an example of where we are partnering so we have a compelling value proposition.
Typical sales cycle could be.
Six months kind of timeframe and an enterprise a large enterprise sales though.
We are certainly.
In the mode of building the pipeline and that certainly makes us optimistic.
Call that out as a meaningful partnership that.
That gives us also more durability and broadening of the revenue, but in line with our differentiation and.
The example related to Japan, a highlight that our progress in terms of supporting customers in hybrid environments, which could be.
On Prem cloud any other mode of consumption and.
And that we are able to deliver kind of cloud leading applications as well right. So that's.
Diversification, but in that sort of vertical sense of where we are gaining more.
Customers and partners and we expect again that to be.
More relevant and pipeline generation in the next in the near term, but certainly not irrelevant on revenue either for the year.
Okay, Great and then just one last question.
You know the the tight controls on operating expenses you know would you should we should we anticipate that operating expenses will grow with revenue on a sequential basis.
How should we be thinking about either the operating expenses you know to revenue growth on a sequential.
Basis, you know going up or do you have a level of Oh.
Operating expenses you're targeting here.
Yes, so I think that's too.
Two reasons right. So one is obviously with our shortfall in revenue.
Nashville reduction in commission expenses and partner costs and things like that right on sales and marketing side.
Second is we are able to adjust discretionary spending more to be in line with the revenue and pipeline potential.
Potential voices.
Kind of doing it linearly spreading it equally.
And I think the decisions, we are making as it relates to investment in product is more driven by ensuring that we are protecting our long term growth and securities portfolio and hybrid solution completely and maybe being.
A little bit more prudent on how much we spend and how on some of the older products side. So.
So we are doing it in a way that we think flex is and our business model philosophy really right is.
When revenue grows.
Percentage, our opex growth slower than that and Dino.
In the opposite direction. Unfortunately.
Revenue dropped 13%, our opex went lower than that too right. So I think we still are focused on delivering an 80% gross margin 26, or 28% EBITDA and flexing our cost structure with those kind of business model.
Great perfect no other questions. Thank you.
Thank you Chris.
Thank you.
Our next question comes from Gray Powell of BT I G. Graham. Your line is now open. Please go ahead.
Okay, great. Thank you. Thank you very much for taking the questions just a couple on my side.
So I think you hit on this already but can you maybe talk about the linearity you saw throughout Q1.
Did you see any material improvements.
And activity over the course of April or or any deals that slipped from March into April .
It's closed.
Yeah. Good question I think so.
In terms of linearity in Q1, what we saw was probably slower January than we expected right, which we had been worried about in Q4, and probably by March and being more in line right with what we would have expected so I would say.
As we exited the quarter certainly from a linearity order rate.
Perspective, etcetera things were better than beginning of the quarter.
Rich.
That everything is completely normal, but certainly we saw that trend where from.
From what we would've expected January start to linearity was a little worse and module is probably in line. So.
So that kind of entering into the quarter, we certainly as we have gone through the quarter so far.
We have been in line with what we are expecting and not seeing a worsening versus that expectation right. So anvil.
And we'll continue to monitor it obviously as the quarter goes on.
Okay really helpful and then just.
A high level.
I've heard it takes sort of a blended average across your primary target markets.
What do you think the growth is this year and then how should we think how should shake out once things normalize.
So I think gray.
So I am clear on the question you are thinking of that relative to our infrastructure market in cyber security markets are geographically yeah, yeah, yeah exactly.
Okay. Okay.
So I think certainly what we are seeing now a.
Our security driven portfolio continues to be the lead for conversations right now and that is where we are seeing probably some adjustment talk budget, but but much more resilient than the rest of the portfolio.
Where that discretionary is not sort of the approach that it's more of we need to do X and maybe we can push it a month or two right, but it's not being to the school significantly are canceled.
On the infrastructure side.
Projects that tie into customer revenue generation I think are moving alone.
Slightly slower and a little bit more scrutiny around them, but still moving along and I would say the most.
Effective category negatively.
Related to new projects to replace and prospector and wood.
Nice to have projects and so relative to those when I look at the growth rates in the near term and long term I think on the securities portfolio, we still expect that to be unchanged.
<unk> shifting from first half to second half, maybe but on the annual basis still supporting low single digits or better and on our infrastructure side I think the first half look challenging more so.
<unk> project, where we have line of sight to the second half of the year.
But certainly with inflation.
Signs of recession cost of capital all of that North America infrastructure is where we see the most impact right. So our projects in EMEA and Asia, that's impacted by that phenomenon. So that's an area, where we certainly expect it to resume too.
Mid single digit or better growth, but that's the one where we would say that's probably.
Second half phenomenon at this point.
And then gets us back to kind of a long term perspective on the blended market.
Okay.
On a color.
[laughter].
Yeah, and Chris Sorry, just one last thing to add obviously when you look at those as the market growth rate, but expect to do little better commercial execution, so slightly better than those.
Understood. Okay, a lot of great color there. Thank you.
Yep.
Thank you.
Keith.
Our next question comes from Amit <unk> from BW as financial your line is now open. Please go ahead.
Hi, could you just be a little bit more specific as to your the cost levers that you've pulled in the quarter and why is it that you waited until you know revenue was starting to slow to pull those levers instead of in a good environment.
Yeah sure.
Good question <unk> and obviously it I would say if you look at our trajectory for the last 12 quarters. We certainly have improved EBITDA continuously right. So it's not a.
It's not a matter of not I think the way to think about it really is a.
Responding to a changing market environment right. So one year ago, our spending profile was linked to a market environment that supported a certain growth rate and so we flexed our spending to grow slower than that but help us continue to support that growth rate when we are.
Faced with a change in external circumstance on market and customer spending.
I think you know it.
Responsible for us to respond to maintain our commitment on profitability and EBITDA. So.
The nature of reductions I think you know obviously if revenue is less it saved us on commissions and partner and rebates and all of that.
Discretionary events and marketing and other spending.
We basically.
<unk> two outer quarters when it is more in line with where we see growth and.
Actually customer receptivity to that translating into pipeline and spending.
And I think on the R&D side, it's more continuing to be more and more sharper on whatever.
Our focus is and I fully expect that as revenue improves.
Will.
Continue investing in those priorities, but now they will be even more aligned with long term.
Gold spas.
Okay and then.
Average sales or.
Requests for quote declined in the quarter.
I'm sorry.
Average no if anything its improved I mean, theyre going to do that in our margins, but it's it's not a meaningful improvement I think it does expect it but it's not that it's not a deterioration in the packet size, our sales price that we werent getting pressure and competitive situations. We we're just seeing delays.
And the size of the spend is not really declining either from our customers, they're still spending the same amount just taken longer.
Yep.
Okay.
And then as far as the your commentary about the sequential improvement.
What gives you the confidence that you could see that further into Q3 and Q4.
Given the hiccup that happened in January .
Yeah. So I mean, I think that's a good question and we I think if you connect back right. Our sales cycle is six to eight months typically in big deal on the longer side and that is the reason why when we were looking at Q4.
Pipeline and project debt like deals coming out and when and which customers in region that is when we had started seeing concern about Q1 and.
In the environment right, so right now when.
We look at our customer mix and pipeline as it is projected out into Q3 Q4, certainly Q3.
We have a higher confidence that that is based on a broad.
Set of customers and solutions and not.
Driven by one region or one product per se right. So I think as we have continued to diversify with more security led sales. We think that that continues to add to our confidence there with a lot of the wins could be in EMEA and Asia, Japan, right as well.
Okay, great. Thank you.
Thank you.
Thank you.
Question comes from and so just from from Sidoti.
Your line is now open. Please go ahead.
Alright. Good afternoon. This is from Dearborn for R&M sort of strong.
Oh, okay.
Very well Yep Hello.
Alright, thank you.
My first question is the hospital customer sensors image sensor, but over the past couple of bricks.
So yeah, let me see if I can answer the question with customer sentiment behavior over the last number of weeks. So entering into Q2 have you seen a change I'd say, what we have seen is a little bit more clarity or a budget cycle and I think as we walk through Q1, we were having a difficult time on <unk>.
Disability into customers' budgeting cycles, just because of delays in their own processes.
I think now we're seeing a lot more clarity and visibility also to <unk> point, you know whats different now versus last quarter. I think we have a little bit better visibility. We think the pipeline is shaping up pretty nicely to deliver on expect on our internal plans over the next few quarters, but that's really the biggest shift that we've seen this quarter is just a little bit more visibility and clarity coming.
Out of the budget cycles, our customers have gone through.
And I think Bryan good point and just to add typically we would have had that clarity in January or February , but with a lot of the customers themselves going through.
Size reduction than other.
And those got pushed out to where there was not that clarity of that in all the time right and we're seeing a little more of that now.
Thank you and can you speak about your capital allocation priorities.
Sure unchanged really largely we continue to look at our priorities, we want to fund organic growth first and foremost.
We're looking long term to ensure that we continue to hit the growth targets that we've outlined in our Investor day presentation back in February of 2022, obviously things are shaping up a little bit differently than this year, but again investing in organic growth is first priority second is to return value to shareholders and employees through repurchases and dividends.
Which continues to which continues as I mentioned the board approved another six that dividend for this quarter.
And then lastly, you know we're always being opportunistic about what we do with our cash on hand.
Thank you very much for picking my questions.
Of course, thank you.
Thank you at this time, we have no further questions. So I'll hand, it back to drew petrified to eat for any further remarks.
Right.
Thank you and thank you to all of our shareholders for joining us today and for your ongoing support.
Thank you for joining today's call you may now disconnect your lines.
For joining us today and for your ongoing support.