3Q16 Financial Results

A10 Networks – Q3 2016 Earnings - Thursday, October 27, 2016 1 | P a g e


Thank you all for joining us today. I am pleased to welcome you to A10 Networks’ third quarter 2016 financial results conference call. This call is being recorded and webcast live and may be accessed for one year via the A10 Networks website, www.a10networks.com. Joining me today are A10’s Founder & CEO, Lee Chen; A10’s CFO, Greg Straughn; and our VP of Worldwide Sales, Ray Smets. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its third quarter 2016 financial results. Additionally, A10 published a presentation along with its prepared comments for this call and supplemental trended financial statements. You may access the press release, presentation with prepared comments, and trended financial statements on the investor relations section of the company’s website www.a10networks.com.

http://www.a10networks.com/

http://www.a10networks.com/


During the course of today’s call, management will make forward-looking statements, including statements regarding our projections for our fourth quarter operating results, our expectations for future revenue growth, profitability and operating margin, expectations of customer buying patterns, anticipated benefits from our acquisition of Appcito, expected product launches and the general growth of our business. These statements are based on current expectations and beliefs as of today, October 27, 2016. These forward-looking statements involve a number of risks and uncertainties, 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. A10 disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-Q filed on August 5th.


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. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company’s website. We will provide our current expectations for the fourth quarter of 2016 on a non-GAAP basis. However, we will not make available a reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis due to high variability and low visibility with respect to the charges, which are excluded from these non-GAAP measures. Now I would like to turn the call over to Lee for opening remarks.



I would like to thank you all for joining our third quarter 2016 financial results conference call. We reported revenue of 55.1 million dollars, up 8 percent year-over-year and below our guidance of 58 million dollars to 60 million dollars. Our continued focus on driving leverage through our operating structure led to a significant improvement in EPS. For the quarter, we reached non-GAAP breakeven, which was at the high end of our guidance. Although we achieved break-even, which we believe is an important milestone for the company, we are disappointed in our topline performance. While total bookings grew 24 percent year-over-year and were ahead of our forecast, our revenue results reflect lower than expected product bookings in North America - where we received a couple orders too late in the quarter to ship and some deals slipped into future quarters. These deals were in both our enterprise and service provider customer verticals and remain in our pipeline. We are closely engaged with these customers and we expect these transactions to close in either Q4 or Q1. We are also continuing to focus on refining our go-to-market strategy and execution to drive growth, and at the same time, find efficiencies in our investments to improve our bottom-line. In the last quarter, we added R&D and sales and marketing resources to support growth, as well as significantly increased our out-bound marketing campaigns to drive greater brand awareness and customer acquisition. We believe we have the right strategy in place to drive long-term growth.


Let me share with you some of our accomplishments in the third quarter that we believe demonstrates the momentum we are building with customers. We delivered very strong 83 percent year-over-year revenue growth in Japan driven by expanding our footprint with both service provider and enterprise customers. This included a large mobile carrier selecting our Thunder TPS solution to help protect their network from large-scale DDoS attacks. Two out of the top three mobile carriers in Japan are now using our TPS solution. Additionally, this customer is deploying our Thunder SSLi solution for their managed services to uncover malware hidden in encrypted traffic. We believe our ability to expand to new areas of the network within our marquee customers demonstrates the compelling value of A10’s ACOS Harmony Architecture. The A10 value proposition is also bringing new customers to A10 as they look for flexible and agile solutions to improve application performance and security, while at the same time reducing CapEx and total cost of ownership. Compared to this time last year, we have grown the total number of A10 customers by 17 percent. In the third quarter, this included:

o Adding a new U.S. Tier-1 mobile operator to the A10 family with our Thunder ADC. This customer plans to use software features in our Thunder ADC to help them monitor the health of the network and improve efficiencies. A key differentiator in winning this business was our industry-leading Open API built into ACOS. We now serve the top four Tier-1 mobile operators in the U.S.

o We also secured a significant win with an executive branch of the U.S Government that chose our Thunder ADC, Thunder SSLi and Thunder Baremetal solutions. The ability to manage all A10 products with a single management system, aGalaxy, at less than half the TCO of the competition were key differentiators for this new A10 customer.

o And lastly, with our ability to deliver ADC and Carrier-Grade NAT on a single appliance, we helped a communications provider in the U.S. cope with running out of IPv4 addresses and replace their aging ADC’s.


We continue to innovate and drive the application networking market forward with product enhancements that are all built on our ACOS Harmony Architecture. We recently introduced a new high-end Thunder 300G throughput modular chassis that is well-suited for high-performance networks such as service providers, cloud providers, e-commerce and online gaming. We have already sold this new appliance with TPS to a leading public cloud provider in the U.S., and with CGN to a large mobile operator in Southeast Asia. The 300G Thunder TPS solution offers industry-leading performance at a time when DDoS attacks are dramatically spiking in both magnitude and sophistication.

As we announced last quarter, we acquired Appicto at the end of June and the integration is going well. We are on schedule to launch our new native public cloud offering this quarter with additional offerings to follow early next year. While we expect to see only a modest amount of revenue from this product in 2017, we are excited about the opportunities Appcito is already bringing to A10 including driving new conversations with customers around the globe.

We believe our technology vision and holistic approach to solving the application networking and security challenges of today and tomorrow positions us well with the evolving trends we see in the market. As we look ahead, we are excited to extend the A10 Harmony value proposition to native cloud applications. We are committed to executing on our strategy and continuing to grow our business. And lastly, as we announced in our press release today, the board of directors has authorized a 20 million dollar share repurchase program, which reflects our confidence in our market opportunities and business, as well as our commitment to enhance shareholder value.

With that, I’d like to turn the call over to Greg to review the details of our third quarter financial performance and fourth quarter guidance.



Third quarter revenue grew 8 percent year-over-year to 55.1 million dollars, but fell below our guidance range of 58 million dollars to 60 million dollars. As Lee mentioned, the revenue shortfall was primarily in North America where product bookings came in lower than we had expected. Total bookings did come in above our forecast and grew 24 percent driven by strong demand in Japan for both product and services. The third quarter was our strongest renewals bookings quarter to date and this is reflected in a 25 percent year-over-year and 10 percent sequential increase in deferred revenue bringing the total to 83.2 million dollars.


Turning back to revenue, third quarter product revenue grew 1 percent year-over-year to reach 35.3 million dollars, representing 64 percent of total revenue. This compares with 35.0 million dollars, or 69 percent of total revenue in the prior year third quarter. Service revenue grew 25 percent year-over-year to reach 19.8 million dollars, or 36 percent of total revenue, compared with 15.8 million dollars, or 31 percent of total revenue, in the third quarter of 2015. From a geographic standpoint, third quarter revenue from the United States was 24.3 million dollars compared with 25.1 million dollars in the third quarter of last year, representing 44 percent of total revenue. Third quarter revenue from Japan grew 83 percent year-over-year to reach 16.0 million dollars and represented 29 percent of total revenue. Revenue from APAC excluding Japan was 7.4 million dollars or 13 percent of total revenue. While we did see some sequential improvement in the EMEA region, the overall environment remained soft, especially in the Middle East. Revenue from EMEA was 6.0 million dollars in the third quarter, compared with 7.3 million dollars in the same quarter last year and 5.9 million dollars last quarter. Enterprise revenue grew to 31.2 million dollars, up 2 percent from Q3 of last year. Service provider revenue came in at 23.9 million dollars, up 17 percent when compared with 20.4 million dollars in the third quarter of 2015. Our enterprise and service provider revenue split this quarter was 57 percent and 43 percent of total revenue, respectively. In the quarter, we had no customers accounting for more than 10 percent of our total revenue.


As we move beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless stated otherwise.

We delivered third quarter total gross margin of 77.1 percent, slightly above the high end of our expected range of 75 percent to 77 percent. This is an increase of 160 basis points from last quarter and a 130 basis points increase from Q3 of last year. Product gross margin was 75.2 percent in Q3 of 2016, increasing 40 basis points from last quarter and decreasing 60 basis points from Q3 of 2015. Our services gross margin came in at 80.5 percent, increasing 340 basis points from last quarter and 466 basis points from in Q3 of 2015.


We ended the quarter with staff of 885, up 19 when compared with 866 at the end of last quarter. Third quarter non-GAAP operating expenses were 42.2 million dollars or 76.6 percent of revenue, compared with 45.0 million dollars or 78.8 percent of revenue in the prior quarter, as we drove additional leverage through our model and closely managed our expenses in support of our stated plan to achieve non-GAAP profitability by the end of 2016. Additionally, our sales and marketing expense was lower than planned due to lower commission expense related to shifts in the regional mix of sales. In R&D please remember our third quarter operating expenses include the addition of a full quarter of 31 new employees joining us via the Appcito acquisition. We achieved third quarter non-GAAP operating income of 0.3 million dollars, a significant improvement from a loss of 1.9 million dollars in the second quarter of 2016. Our non-GAAP net income in the third quarter was 0.2 million dollars, or break-even on a fully diluted per share basis, landing at the top of our guided range of breakeven to a loss of two cents per share. Our net income performance this quarter represents a significant improvement from a net loss of 4.4 million dollars in Q3 of last year. For the nine-month period, our bottom line, on a per share basis, improved 73 percent. Basic and diluted weighted shares used for computing EPS for the third quarter were approximately 72.8 million shares.


Moving to the balance sheet - at September 30, 2016 we had 116.8 million dollars in total cash and marketable securities, a 3.1 million dollar increase from the end of June, and up 16.2 million dollars compared with September 30, 2015. Our cash balance reflects 2.5 million dollars in cash generated from operations during the quarter. This brings our year-to-date cash generated from operations total to 21.8 million dollars. Back to the balance sheet, average days sales outstanding were 74 days, up from 65 in the prior quarter, reflecting late billings in the third quarter. As Lee mentioned, the board of directors has authorized a share repurchase program of up to 20 million dollars over the next 12 months. Under the repurchase plan, shares may be repurchased on a discretionary basis through a variety of means including the open market. This repurchase authorization reflects our commitment to enhance shareholder value as well as expressing our confidence in our opportunities and long-term financial performance.







Investor Relations

3Q16 Financial Results