Q3 2024 A10 Networks Inc Earnings Call
Speaker Change: Hello everyone and welcome to the A10 Network's third quarter 2024 financial results call. My name is Lydia and I'll be your operator today. After the prepared remarks there will be an opportunity for you to ask questions. If you'd like to ask a question you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Tom Baumann to begin. Please go ahead.
Tom Baumann: Thank you all for joining us today. This call has been recorded in webcast slides and may be accessed for at least 90 days via the ATEN Networks website at atennetworks.com. Hosting the call today are Dhrupad Trivedi, ATEN's President and CEO, and CFO, Brian Becker.
Speaker Change: Before we begin, I would like to remind you that shortly after the market closed today, ATEM Networks issued a press release announcing its third quarter 2024 financial results.
Speaker Change: Additionally, ATEN published a presentation and supplemental trended financial statements. You may access the press release presentation and trended financial statements on the investor relations section of the company's website.
Speaker Change: During the course of today's call, management will make forward-looking statements, including statements regarding projections for future operating results.
Speaker Change: Demand, Industry and Customer Trends, Strategy, Potential New Products and Solutions, our Capital Allocation Strategy, Profitability, Expenses and Investments, Positioning, and our Repurchase and Dividend Programs.
Speaker Change: These statements are based on current expectations and beliefs as of today, November 7, 2024. These forward-looking statements involve a number of risks and uncertainties.
Speaker Change: Some of which are beyond our control, that could cause actual results to differ materially, and you should not rely on them as predictions of future events.
Speaker Change: A10 does not intend to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.
Speaker Change: For a more detailed description of these risks and uncertainties, please refer to our most recent 10-K and quarterly report on Form 10-Q.
Speaker Change: 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.
Speaker Change: The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies.
Speaker Change: A reconciliation between GAAP and non-GAAP measures can be found on the press release issued today and on the trended quarterly financial statements posted on the company's website. Now, I would like to turn the call over to Dhrupad Trivedi, President and CEO of ATIN Networks.
Dhrupad Trivedi: Thank you, Tom, and thank you all for joining us today.
Dhrupad Trivedi: This was a balanced quarter for ATTEND with improved performance from both enterprise and service provider sectors.
Dhrupad Trivedi: Enterprise revenue increased 5% year-to-date and is up 9% on a trailing 12-month basis, validating our new roadmap and increased focus on these customers.
Dhrupad Trivedi: Growth with enterprise customers is part of our ongoing strategic focus on driving predictable performance through diversification.
Dhrupad Trivedi: Indeed, diversification remains core to our overall strategy, enabling ATEN to navigate challenging conditions more consistently than peers, and over the long term, driving growth that outpaces the broader market segment.
Dhrupad Trivedi: Service provider revenue was up 2% year-to-date after being down in the first half of 2024.
Dhrupad Trivedi: While the North American segment of this business remains volatile, the overall trend is encouraging.
Dhrupad Trivedi: For the past several quarters, we have communicated that the short-term headwinds impacting our service provider customers
Dhrupad Trivedi: will likely pose less of a long-term challenge for A10 as our security-led solutions are less and less optional, even when macro uncertainties force customers to spend more cautiously.
Dhrupad Trivedi: We communicated in Q2 that opportunities in the pipeline were not lost, just delayed.
This quarter validated those expectations.
Dhrupad Trivedi: We do not yet have sufficient visibility to state that the North American service provider market has stabilized, but we are cautiously optimistic that the worst is behind us.
Dhrupad Trivedi: Our strong competitive position is due to our focus on security solutions.
Our security-led revenue increased 10% year-to-date.
Dhrupad Trivedi: Customer decisions to bolster security may be delayed, but they cannot be cancelled.
Dhrupad Trivedi: This is true both of enterprises who experience more and more cyber security threats every day.
Dhrupad Trivedi: and service providers who must safeguard critical networks to service existing customers and to add new ones.
Dhrupad Trivedi: We recently announced that we are expanding our security-led offering and laid out a longer-term blueprint for further expansion, including integration of AI capabilities throughout the portfolio.
These new solutions leverage our existing presence.
Dhrupad Trivedi: and our two-decade-long track record of enabling best-in-class throughput, low latency, and high levels of cybersecurity.
all while focusing on industry-leading, low total cost of ownership.
Dhrupad Trivedi: Over the next few months, ATAN will continue to introduce additional tools, solutions, and capabilities to better enable positive business outcomes for our customers.
Dhrupad Trivedi: Our goal is to create an integrated solution that reduces cybersecurity risk, improves the user experience, and simplifies the IT infrastructure of our customers, including AI build out.
Dhrupad Trivedi: Overall, we anticipate adding new AI-based capabilities, harnessing machine learning to better identify and mitigate threats.
Dhrupad Trivedi: We are also creating solutions specifically targeting threats and vulnerabilities that AI deployments can create, launching new approaches to address these threats.
Dhrupad Trivedi: Our infrastructure solutions help customers improve the performance and resiliency of their applications.
Dhrupad Trivedi: From an infrastructure standpoint, we will integrate AI to predict future network performance.
Dhrupad Trivedi: With 8N Control, we will enable centralized management for all 8N products, including partner products.
Dhrupad Trivedi: With Aid & Defend, we are developing solutions that will help our customers protect their mission-critical applications and infrastructure from an ever-growing number of cyber threats.
Dhrupad Trivedi: This includes protecting web applications, providing AI-enabled protection from bots and DDoS attacks, and threat intelligence to proactively identify potential threats.
Dhrupad Trivedi: Our priorities continue to be a mix of internal investments to support innovation.
Dhrupad Trivedi: Returning capital to shareholders and evaluating strategic opportunities to accelerate growth.
Dhrupad Trivedi: You are seeing the results of our internal investment reflected in this blueprint, and we continue to consistently return capital to shareholders.
Dhrupad Trivedi: Our strong third quarter performance demonstrate the upside that is built into our business model.
Dhrupad Trivedi: We maintained robust profitability in line and slightly ahead of our targets in the quarter.
Dhrupad Trivedi: During the third quarter, we expanded operating margins, EBITDA margins, and net margins as incremental revenue disproportionately fell to the bottom line.
Dhrupad Trivedi: At the same time, it is important to note that we have increased our R&D investment more than 15% year-over-year.
Dhrupad Trivedi: We generated more than $21 million in cash from operations, keeping us on track for full year targets.
Dhrupad Trivedi: Our EPS in the quarter benefited from non-recurring foreign currency factors.
Dhrupad Trivedi: But even excluding these benefits, our net margin and operating income expansion demonstrate the leverage and systemic profitability built into our operating model.
Dhrupad Trivedi: We have continued to buy back stock and our cash flow has more than funded our buyback and dividend programs.
Speaker Change: With that, I'd like to turn the call over to Brian for a detailed review of the quarter. Brian. Thank you, Dhrupad.
Brian Becker: Third quarter revenue was $66.7 million, an increase of 15.5% year-over-year. As Dhrupad described, quarter-to-quarter volatility in the North American service provider sector persists.
Brian Becker: But we delivered meaningful growth and sales to both service provider and enterprise customers.
Brian Becker: Product revenue for the quarter was $36.9 million, representing 55% of total revenue.
Services revenue was $29.9 million, or 45% of total revenue.
Brian Becker: Third quarter recurring revenue increased 6% compared to the third quarter last year.
Brian Becker: Deferred revenue increased 6%, demonstrating stronger product sales in the third quarter and continued demand for our cyber-led solutions.
Brian Becker: As you can see on our balance sheet, deferred revenue is 144.2 million as of September 30th, 2024. As I mentioned, 6% up year over year, as Dhrupad indicated in his opening remarks.
Brian Becker: 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.
Brian Becker: Growth margin in the third quarter was 81.3%, in line with our stated goal of 80-82%.
Brian Becker: Adjusted EBITDA was $17.8 million for the quarter, reflecting 26.7% of revenue, in line with our goal of 26 to 28%.
Brian Becker: Non-GAAP net income for the quarter was $15.9 million, or $0.21 per diluted share, compared to $12 million, or $0.16 per diluted share in the year-ago quarter.
Brian Becker: Diluted weighted shares used for computing non-GAAP EPS for the third quarter were approximately 74.8 million shares compared to 75.8 million shares in the year-ago quarter.
Brian Becker: On a gap basis, net income for the quarter was $12.6 million, or $0.17 per diluted share, compared to net income of $6.5 million, or $0.09 per diluted share in the year-ago quarter.
Speaker Change: As Dhrupad mentioned, several non-recurring and non-operational benefits resulted in higher than normal earnings per share. This was largely related to foreign currency exchange rates and interest income.
Speaker Change: Turning to the year-to-date results, revenue was $187.5 million, up 3.4% year-over-year.
Speaker Change: Year-to-date on-gap gross margin was 81.4% in line with our target range.
Speaker Change: We reported $39 million in non-GAAP operating income, down 3.6%, compared with $40.4 million in the first nine months of last year. Adjusted EBITDA was $47.2 million, reflecting 25.2% of revenue.
Speaker Change: Non-GAAP net income for the first nine months was $41.9 million, or $0.56 per diluted share, up from $36.5 million, or $0.48 per diluted share in the year-ago period.
Speaker Change: On a gap basis, net income for the first nine months was $31.8 million, or $0.42 per diluted share, compared with net income of $22 million, or $0.29 per diluted share.
Speaker Change: During the quarter, we generated $21 million in cash from operations, as Dhrupad mentioned earlier, and year-to-date cash generated by operations was $64.8 million, in line with our full-year targets.
Speaker Change: Turning to the balance sheet, as of September 30th, 2024, we had $182.1 million in total cash, cash equivalents and marketable securities, compared to $159.3 million at the end of 2023.
Speaker Change: During the quarter, we paid $4.4 million in cash dividends and repurchased $9.4 million worth of shares.
We also continue to carry no debt.
Speaker Change: The board has approved a quarterly cash dividend of six cents per share to be paid on December 2nd, 2024 to shareholders of record on November 18th, 2024.
Speaker Change: We have $25.4 million remaining in our $50 million share of purchase authorization as of September 30th.
Speaker Change: We continue to target gross margins of 80 to 82 percent and adjusted EBITDA margins of 26 to 28 percent on a full year basis.
Speaker Change: I'll now turn the call back over to Dhrupad for closing comments.
Thank you, Brian.
Dhrupad Trivedi: Increasingly, A10 is outperforming our peer set amidst ongoing market volatility.
Dhrupad Trivedi: The buying cadence from service providers is improving and our ability to execute in driving demand from enterprise is improving simultaneously.
Dhrupad Trivedi: Additionally, our investments in R&D are expected to result in additional solutions, leveraging our growing position in cybersecurity.
further enhancing our growth profile.
Dhrupad Trivedi: And, we have proven the ability to translate incremental revenue into significantly higher profitability levels.
Dhrupad Trivedi: I am confident we have the right strategy delivering the most important business outcomes for our customers and a durable business model.
Operator, you can now open the call up for questions.
Speaker Change: Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak.
Speaker Change: Our first question comes from Trevor Rambo with BTIG. Please go ahead, your line is open.
Trevor Rambo: Great, thanks for taking my question, guys. It's Trevor on for Gray Powell. And congrats on some nice results in the quarter.
Trevor Rambo: So to start, it was good to see SP spending come back and to see some strength in that segment. How should we expect demand there to continue throughout the rest of the year and maybe into next year? Just any more color on what you're seeing in that segment would be great.
Sure, yeah, so.
I would say that, you know, as we noted earlier,
We need
Trevor Rambo: expect to see some level of volatility in the space but overall trend is improving and stabilizing more given sort of
Trevor Rambo: outcomes on things like interest rate that can, you know, get modulated a little bit up or down, right? But overall, I would say that we certainly feel
from a customer demand perspective.
Trevor Rambo: We are seeing more positive signs where they are beginning to resume investments and plans.
Trevor Rambo: for that infrastructure growth, whether it's to support AI or just cloud and so forth. So so overall, I would say we feel that it's trending towards where it's in line with what we expect long term from that segment.
Speaker Change: Awesome, that's good color. Thank you for that. And maybe on the other segment, enterprise revenue.
Speaker Change: I know you guys said it was more in line with your expectations, but only up 3% about year-over-year, which was down from the previous year and last quarter. Just any puts and takes of what you're seeing in that segment or anything you want to call out that's one-time or just overall what you're seeing for demand there would be great. Thank you.
Speaker Change: Yeah, no, great, great question. So I think couple of points to note, right? So one is
Remember, for us, the focus in enterprise segment is
Speaker Change: , , , , , , , , , , , , , ,
Speaker Change: and not necessarily small and mid-enterprise, right? So what this is reflective of is...
Speaker Change: When we look at our funnel and opportunities in front of us, we see this line continuing to improve on a dollar basis, not just as percent of total revenue. And you are correct, I think we had a good quarter in enterprise last year. But if you look at
Speaker Change: from a year-to-date or trailing 12-month perspective. I would say those numbers compare favorably to what you might be seeing from industry overall and certainly, right, some of the larger enterprise companies. So that's
Speaker Change: That's the basis for us to say that our view is we continue to make progress in that segment.
And the sign off that is over.
Speaker Change: trailing 12-month or nine-month growth is above industry average and that we continue to grow on a dollar basis, right? That's probably how to think about it.
Speaker Change: Great, thanks for the call. And that's it for me. Congrats on a good quarter, guys.
Thanks.
Speaker Change: Our next question comes from Hamed Khorsand with BWS Financial. Your line is open.
Hamed Khorsand: Hi, so first question I had was, your accounts receivable went up quite a bit this quarter compared to Q2. What's the plan there to manage that and are you seeing any delays as far as getting paid?
Yeah, no, good question. And you're exactly right. We are
Hamed Khorsand: Not concerned with the trend. What we're seeing is, you know, the impact of some linearity.
Hamed Khorsand: during the period, but you know, it's still a good result. I think what you're seeing on the statement of cash flows, however, is period over period, we are seeing an improvement at this time of the year. But I think it's really reflective of.
Hamed Khorsand: Timing of the year, I think we usually see a little bit of a drag in terms of placing orders in Q2, but then as we got closer to Q3, we start to see things improve and hope to see linearity return to normal, but
Hamed Khorsand: As we have talked about before, looking at it as a percent of revenue, the reserve against income is extremely small, reflecting the health of the aging in general.
Yeah, exactly. And I think Ahmed, the.
Hamed Khorsand: Easiest way to think about it is the aging of our receivables is in line or better than we normally see. So there's no concern in that regard.
Speaker Change: Okay, and then could you just bridge your two comments here? One about the volatility in the service provider continuing, and then the other comment being that you're optimistic that the worst is behind. What's the...
Speaker Change: Just bridge it, if you could, for me, just to bring it together.
Speaker Change: Yeah, no problem. No, good, good observation. So what I meant by that, Hamid is, you know, if you remember in Q2, we had said after the call that because we still see a little bit
caution on spending by service providers.
We can see movement of, you know.
Speaker Change: few million dollars between quarters but that when you look at it from a longer trend perspective we not see that as a concern. So I would say the way to bridge it is
Speaker Change: Our service provider business outside of North America was already doing fine and is still doing fine. Our North America business is a little bit volatile as you can see that if you look at Q2 and Q3 there's a slight movement between them.
Speaker Change: But if we do a trendline of what we are seeing in the funnel...
Speaker Change: the opportunities and close rates and so forth, as well as customer conversations around their plans to use capital that is more favorable than say six months ago or 12 months ago, right? So that's the combination of factors to bridge that.
A10 Networks Inc.
Speaker Change: Okay and do you think that you would, you know, you could grow from here or it's just you don't have that clarity yet?
Speaker Change: I think that we think we grow from here, but it's hard to say exactly on a quarterly basis what that percent is, right? But the trend would be positive, that's correct.
Great. Thank you.
No problem, thank you Amin.
Speaker Change: Our next question comes from Christian Schwab with Craig Hallam Capital Group. Your line is open.
Christian Schwab: I'm sorry, I kind of missed it. I thought you said that your security-led business in the quarter grew 10%. Did I hear that correct?
Speaker Change: That is correct. Sturdy lead on a complete basis grew from
Speaker Change: 59% of total revenue to 69% of revenue? On a year-to-date basis, Christian, not in quarter. And on a year-to-date basis, 10%, yes.
Speaker Change: What is your future expectation for that portion of your business? Is 10% the new normal or do you think it can be higher than that?
Speaker Change: Yeah, I think in the near future we think 10 to 12 is appropriate, but yeah, that's baked into our plan and we think that that's a reasonable expectation.
Okay, great. And then my last question, just as regarding...
You know, M&A, is there anything due to report on...
Speaker Change: on opportunities for you to layer in other businesses, or is it really?
There's not much effort there right now.
Speaker Change: Yes, I would say that there is there is effort there right now I mean, you know, I would say in period and even year to date we have looked at assets that are
Speaker Change: scalable that would be more consolidation oriented ideas as well as assets that accelerate our security portfolio and we'll continue to do that. We are pretty active.
Speaker Change: defending the business model long term while also accelerating growth. So it is it is pretty active, right? We have partnerships, we have exploration and other discussions, but so it's not a secondary priority, but I would say we are.
Speaker Change: very mindful on how we choose to use capital when it comes to doing something.
Fantastic. No other questions. Thank you.
Thank you. Appreciate it.
Speaker Change: Thank you and our next question comes from Anja Soderstrom with Sudoti. Your line is open.
Anja Söderström: Hi and thank you for taking my questions and congratulations on the nice progress here. I'm curious with the new solutions you are about to, or capabilities you are about to release and increase in the R&D, will those capabilities be an option and how should we think about the marketing profile going forward?
Good.
Speaker Change: profile even if you are a SaaS company, right? So we think we continue to drive that through a mix of product mix as well as productivity and other initiatives we have in place. I would say
Speaker Change: With a lot of the new products and solutions, our goal is to expand the number of categories and products we can sell to existing or new customers. And from a margin perspective,
Speaker Change: in line with our customer target, right? We will obviously, and we already do support a mix of hardware, software, or other consumption models. So, but as we plan that out, we believe we can continue to deliver 80 to 82% gross margins.
Speaker Change: Okay, thank you. And in terms of your cash position with the nice increased share, could you become more aggressive on buybacks or how you think about the buybacks?
Speaker Change: Yeah, I mean, you know, we continue to be consistent about our priorities around
Speaker Change: In cash and capital, you know, our first priority is to reinvest in the business, drive growth. As Dhrupad mentioned, we see a good increase of over 15% from an R&D perspective on a non-GAAP basis.
Speaker Change: But yeah, you know, we continue to look at ways to return value to shareholders through the share repurchase program and the dividend. Obviously, the repurchase program is not an accelerated program that we filed a protection against, so it's an opportunistic
Speaker Change: endeavor, which requires us to be mindful of guardrails around volume and pricing. So we do what we can when we can. But yeah, those are our main priorities around cash deployment. Yeah. And we'll continue, I think, Ania, to do buybacks. And we think that's a great use of...
Speaker Change: our capital as well. But at the same time, we want to find the right balance between buyback versus organic investment versus strategic investment, right. So that's
Speaker Change: the balance. And as Brian said, sometimes that is determined by volume and capacity limits on what we can and cannot do in period. So, but it's something we think is an important part of our capital strategy.
Thank you.
Okay, thank you. That was all from me.
Thank you, Anis.
Speaker Change: Thank you. We have no further questions, so I'll pass you back to Dhrupad Trivedi for any closing comments.
Dhrupad Trivedi: Thank you. And thank you to all of our shareholders for joining us today. And thanks to all the A10 employees around the world for your continued support. And we look forward to a great quarter ahead. Thank you.
Speaker Change: This concludes our call. Thank you for joining. You may now disconnect your line.
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