A10 Networks, Inc. (NYSE:ATEN) Q1 2024 Earnings Call Transcript

A10 Networks, Inc. (NYSE:ATEN) Q1 2024 Earnings Call Transcript April 30, 2024

A10 Networks, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $0.15. ATEN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to A10 Network’s First Quarter 2024 Financial Results. My name is Elliot and I’ll be coordinating your call today. [Operator instructions]. I would now like to hand over to Tom Bauman with FNK IR. The floor is yours. Please go ahead.

Tom Bauman: Thank you all for joining us today. This call is being recorded and webcast slides may be accessed for at least 90 days via the A10 Network’s website, atennetworks.com. Hosting the call today are Dhrupad Trivedi, A10’s President and CEO, and CFO, Brian Becker. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its first quarter 2020 tour financial results. Additionally, A10 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 timing, including our potential revenue growth, industry and customer trends, our capital allocation strategy, supply chain constraints and expectations, expenses and investments, our positioning, our repurchase and dividend programs, and our market share.

These statements are based on current expectations and beliefs as of today, April 30, 2024. 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 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. For a more detailed description of these risks and uncertainties, please refer to our 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.

The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. It may be different from non-GAAP financial metrics presented by other companies. 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. Now, I would like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks.

Dhrupad Trivedi: Thank you, Tom, and thank you all for joining us today. This was a solid quarter for A10 with strong profitability and revenue results that demonstrate continued demand for our solution. I am proud of the way our team has responded to a volatile economic environment, driving efficiency throughout our organization, and enabling us to do what we told investors we would do, even as sales cycles elongate and certain buying decisions are delayed. Once again, our differentiation is benefiting our business, enabling us to drive growth. Our customers need higher throughput in networks, especially in the age of AI. Our customers also need to enhance their security posture amidst a growing array of cyber challenges, including new challenges from AI tools.

Buying decisions may be delayed and agreements require additional approvals, but these investments are typically not optional because they directly address revenue generation or risk management for our customers. Of note, our revenue from service providers was up 16% year-over-year in the quarter. The slower service provider spending of the last few quarters is not reflective of competitive losses, nor does it suggest any longer-term trends relative to demand for A10 products. As investments are greenlit, we are benefiting. During Q1, we saw strong growth in our APJ region as an example of this pattern. On a trailing 12-month basis, enterprise revenue growth continues to outpace overall revenue growth. As we have said, A10 solutions are designed into customer workflows, and we are a key part of CapEx plans.

On a full-year basis, we expect enterprise revenue growth to outpace overall revenue growth. We have been investing both in terms of our enterprise-facing sales and marketing team and in terms of R&D to strengthen our capabilities to effectively target the enterprise segment. These investments are expanding our pipeline, and we are confident that enterprise sales in the second quarter will be better than the first quarter, and we believe the second half of the year will be a meaningful improvement compared to the first half. As we increasingly align our solution to consumption trends in this market, we expect to see growth in deferred revenue, building a stronger recurring base for revenue in the future. Turning to our R&D initiatives, these investments continue to be focused on two key areas, enhanced cybersecurity capabilities and more flexible and efficient consumption models for enterprise customers.

We are growing our use of AI, particularly in our security applications, in addition to bringing network insights. A10 has been using machine learning and AI for years, but as the technology continues to evolve and improve, we continue to remain at the leading edge of utilizing it to provide the best solutions. The machine learning component is already contributing to faster recognition of new threats and important capability as cyber attacks become increasingly sophisticated. We continue to work closely on aligning our product roadmaps with our strong customer base, who is leading the infrastructure transformation to enable new types of traffic and threats with adoption of AI in their networks. We are actively driving productivity to support our strategic objectives.

Our commitment to achieving stated goals of 80 to 82% gross margin and 26% to 28% EBITDA margin remains on plan. In the first quarter, our gross margin continued to exceed 80%, showcasing our sustained operations efficiency. Non-GAAP earnings per share were in-line with expectations adjusted for foreign currency. A10’s consistent ability to meet profitability targets amidst revenue challenges underscores the resilience of our business model. Looking ahead, we are confident in our ability to maintain profitability and deliver value to our shareholders through capital returns while we continue to invest in innovation. The results of the first quarter position us to achieve our full year business model objectives, including gross margins of 80% to 82%, adjusted EBITDA margins of 26% to 28%, and single digit growth in full year non-GAAP EPS.

We continue to buy back stock, and our cash flow more than funds our buyback and dividends. With that, I’d like to turn the call over to Brian for a detailed review of the quarter. Brian?

Brian Becker: Thank you, Dhrupad. Excuse me. First quarter revenue was $60.7 million, an increase of 5.2% year-over-year. As Dhrupad described, sales cycles have elongated, and the quarter-to-quarter volatility in both service provider and enterprise sectors continue to be high. Product revenue for the quarter was $30.1 million, representing 50% of total revenue. Services revenue was $30.6 million, or 50% of total revenue. First quarter recurring revenue increased 13% compared to the first quarter last year, and deferred revenue increased nearly 10%, demonstrating stronger product sales for the past two quarters and continued demand for enterprise solutions, validating our confidence that we are not losing opportunities to competitors.

As you can see on our balance sheet, our deferred revenue was $140.9 million as of March 31, 2024, up 9.7% year-over-year. With the exception of revenue, all the metrics discussed in 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 first quarter was 81.9%, in-line with our stated goals of 80% to 82%, and up slightly from the last three quarters. Adjusted EBITDA was 13.9 million for the quarter, representing 22.9% of revenue. On a trailing 12-month basis, adjusted EBITDA was 28% of revenue, in-line with our stated goal of 26% to 28% of revenue. Non-GAAP net income for the quarter was $12.7 million, or $0.17 per diluted share, compared to $9.9 million, or $0.13 per diluted share in the year-ago quarter.

Diluted weighted shares used for computing non-GAAP EPS for the first quarter were approximately $75.3 million shares, compared to $75.5 million shares in the year-ago quarter. On a GAAP basis, net income for the quarter was $9.7 million, or $0.13 per diluted share, more than doubling our net income of $4 million, or $0.5 per diluted share in the year-ago quarter. During the quarter, we generated $32.4 million in cash from operations. While Q1 had one-time benefit of better timing of receivables, we expect the full-year cash flow to be in excess of $60 million for 2024. Turning to the balance sheet, as of March 31, 2024, we had $182.1 million in total cash, cash equivalents, and marketable securities, compared to $159.3 million at the end of 2023.

During the quarter, we paid $4.5 million in cash dividends, and used $3 million in share repurchases. We also continue to carry no debt. The Board has approved a quarterly cash dividend of $0.6 per share to be paid on June 3, 2024, to shareholders of record on May 15, 2024. As discussed during our last call, the Board had approved a new $50 million share repurchase plan in November. Inclusive of share repurchases, we returned $7.5 million of capital to shareholders during the quarter. We expect 2024 revenue and EPS growth in the single digits, in-line with market expectations. 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. I’ll turn the call back over to Dhrupad for closing comments.

Dhrupad Trivedi: Thank you, Brian. ATEN maintains an enviable position, aligned with trends related to the need for cyber-security and the demands for increased throughput and lower latency. We are investing to strengthen our position with enterprise customers, and we are well aligned with service provider customer investment plans. Our business model enables consistent profitability and cash generation, and we are returning meaningful capital to shareholders while investing in innovation for future growth. Operator, you can now open the call up for questions.

Operator: Thank you. [Operator instructions]. First question comes from Anja Soderstrom with Sidoti. Your line is open. Please go ahead.

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Q&A Session

Alex Hantman: Thank you, and good afternoon. This is Alex Hantman on for Anja. Thanks for taking questions. My first question, you mentioned that sales cycles have elongated. I am curious, what inning you think you’re in terms of seeing results from changes in the sales team?

Dhrupad Trivedi: Yes, so I think, I would say certainly, as we made significant changes and investment in our go-to-market about two years ago and one year ago as well. And I would say, it’s a typical sales cycle is six to nine months in any time, at least close to six in an enterprise sale as well, and a little bit longer for service provider side. So as the new processes and people ramp-up fully and you factor in the sales cycle time, I would say, right, we are probably somewhere like in the third, second or third inning of that.

Alex Hantman: Great. Thank you for the context. And just curious, how are the conversations going? Do you feel like you still have, pricing power in this environment?

Dhrupad Trivedi: I think there’s two factors that go into it, right? So certainly it is well understood and accepted that there is broad inflationary cost pressure on input costs. I don’t think that’s necessarily a huge issue to the degree that, we work with our customers to understand that it’s typically, very collaborative conversation. And beyond that, I think, our focus is to not necessarily drive our margin through price, but more to drive it through efficiency and operational gains, right? So balancing, obviously, inflationary cost pressure, we look to find that balance where we are also not discouraging customer investment.

Alex Hantman: Got you. Thank you for the context. Last question for me, just around, capital allocation priorities. Could you talk a little bit more about how you’re thinking about that and maybe even, add some context, around future room for buybacks?

Dhrupad Trivedi: Sure. So, I mean, I think, the way we talk about it, right, is our first priority is continuing to invest in organic growth of the business. And you can see, for example, even in Q1, we increased our investment in R&D because we think that’s important for us to ensure that, right, we continue to provide the best solution. So first priority is funding organic growth, second priority is, we find a balance way between dividend and buyback on return to shareholders, right? And certainly we have active buyback programs that we exercise and utilize, but subject to, obviously, constraints on volume and trading and all of that. So we continue to look at that as a lever available to us and historically, right, in the last few years, we have utilized most of the buyback, but not in a monthly manner, but in a more, adjustable manner.

So that’s the second. And obviously the third is, given that we have no debt and continue to be healthy cash generation business in the current market and even before, we always look for inorganic opportunities that help us accelerate our strategy, but our business plan and customer engagements are not dependent on or predicated on us doing that, right? So that would be a means for us to accelerate strategy, but do it in a thoughtful way that also does not dilute our business model goals in the long term.

Operator: Thank you. We now turn to Gray Powell with BTIG. Your line is open. Please go ahead.

Gray Powell: Great. Thanks for taking the questions and congratulations on the good results. So, okay, so Yes, maybe I’m reading between the lines too much, but it seems like your tone is a lot better today than it was last quarter and maybe for much of 2023. Do you feel like your business has hit an inflection point here and just, can you maybe talk about how you feel about the quality of your pipeline and just your ability to call the business today versus, call it six, 12 months ago?

Dhrupad Trivedi: Yes, no, great, great question. So I think you are correct, Gray. I would say that compared to six to 12 months ago, certainly we are not seeing things deteriorating. I’m nervous to use a word like inflection point, but I would say from a trend perspective, we certainly see things not getting as bad as we saw in the last two, three, four quarters, if you will, right, and in terms of the volatility. So we definitely see that as a phenomenon where still there is activity that’s maybe sporadic, but we certainly see our customers more engaged on actual projects, right, in the pipeline and plans. Now, does that flex plus minus one or two quarters, maybe, but certainly I would say from a trend perspective, we are certainly not worse than Q4 or worse than Q3 last year.

Gray Powell: Understood. Okay, very helpful. And then you answered this to some extent in the prepared remarks. The combined results were better than what we are looking for. It’s definitely good to see the growth, return to positive territory. I was a little confused on the mix. So service provider was much stronger than expected, looks like that happened in APJ. Enterprise declined. Can you just sort of, I mean, you talked about the mix for the year. Can you just kind of talk about what happened in Q1 or just, Yes, can you help us explain the underlying trends there?

Dhrupad Trivedi: Yes, absolutely. No, good question. So I think first, maybe enterprise, right? So for us, if you look at our enterprise segment, what’s the service provider on a little bit longer period, like trailing 12 months, enterprise business is still in positive growth territory compared to many others. And service provider is obviously negative, right? So that’s one data point. Second data point I would say is that Q1 of last year had an unusually strong enterprise quarter. And I think that obviously made the Q1 to Q1 compare maybe a little bit more challenging, right? Because in the enterprise segment, typically Q4 is very strong, Q1 drops off. And so I think a little bit of that Q1 to Q1 is a function of last year’s jumping off point, right?