睿科網路 (ATEN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the A10 Networks Q1 2014 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, May 1st, 2014. I would now like to turn the conference over to Maria Riley with Investor Relations. Please go ahead.

Thank you all for joining us today. I am pleased to welcome you to A10 Networks First Quarter 2014 Financial Results Conference Call. This call is being recorded and webcast live, and may be accessed for 90 days via the A10 Networks website, www.a10networks.com. Joining me today are A10's Founder and CEO, Lee Chen; A10's CFO, Greg Straughn; and our VP of Global Sales, Greg 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 first quarter 2014 financial results. Additionally, A10 published a presentation with its prepared comments for this call, and supplemental trending financial statements. You may access the press release, presentation with prepared comments, and the trending financial statements on the Investor Relations section of the Company's website at www.a10networks.com.

During the course of today's call, management will make forward-looking statements, including statements regarding our projections for our second quarter operating results, our expectations for future revenue growth and the growth of our business in general. These statements are based on current expectations and beliefs as of today, May 1, 2014. A10 disclaims any obligation to update any information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. 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. For a more detailed discussion of these risks and uncertainties, please refer to our prospectus filed with the SEC on March21, 2014.

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 Trending Quarterly Financial Statement posted on the Company's website.

We will provide our current expectations reflecting quarters 2014 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.

Before I turn over the call to Lee, I would like to note that on May 6, A10 Networks will attend an RBC Tech Conference in Boston. On May 20, management will present at the JPMorgan TMT Conference, also in Boston. And on June 3, management will present at the BofA Merrill Lynch Conference in San Francisco. We look forward to seeing many of you there.

Now, I'd like to turn the call over to Lee for his opening remarks. Lee?

Thank you, Maria. I'm delighted to be here with you today, and I would like to thank you all for joining our first public financial results conference call. We are very pleased with our results, and we believe 2014 is off to a great start.

A few of our accomplishments so far this year included - in January, we officially launched our TPS product, which is our first standalone security solution for large scale DDoS protection. Also in January, we introduced our new aCloud Services Architecture, to support next-generation Infrastructure-as-a-Service cloud data center architectures.

In March, we completed our $193M initial public offering. In April we launched the industry's first 100 Gigabit Ethernet ADC for layer 4 to layer 7 services. Also in April, we expanded our Thunder Series of appliances filling our product portfolio with 4 new mid-range and high-end models. And last week, we established a new 3-tier channel partner program in North America designed to provide our channel with resources and programs to help foster A10 product sales.

Specifically, in the first quarter, the A10 team delivered tremendous growth, and we achieved our third consecutive quarter of record revenue. Revenue grew to $45.7 million, up 55% year-over-year, and 8% sequentially.

And we delivered this growth with very strong gross margin of 78.2%.

Highlighting our differentiated application networking platform, and the value we provide to a broad range of customers, we added 200 new customers in the first quarter.

Let me share with you a few new customer wins. First, a large cloud-marketing company chose our ADC solution to expand their network capacity, and provide consistent features and performance across both their physical and virtual network. This customer is deploying our ADC solution on a Thunder box in their large markets, and our virtual ADC solution in their emerging markets where they have a smaller but growing footprint and need to quickly scale and reliably spin up new ADC instances.

Next, a wireless solutions provider replaced their existing Cisco ACE equipment with our high-end Thunder ADC solution to future proof their network. For this customer, robust features, ease of integration, and all-inclusive pricing were the key factors in selecting A10.

Additionally, a service provider in the Middle East selected A10 for its CGN solution. This customer's primary concerns included security, performance and reliability, and their current equipment could not meet their needs. They chose A10 because our solution significantly outperformed the competition.

Over 3,100 customers now rely on A10 for their mission-critical networking needs. As we have noted previously, once a major customer purchases our products, we generally see both frequent and sizable repeat purchases.

A couple of notable customer expansion successes in the first quarter include -- one of our leading US broadband customers that uses our ADC solution in a few of its data centers, chose to deploy our Thunder series ADC solution in all of their regional data centers across the country, replacing the incumbent.

And, one of our marquee internet customers selected our ADC solution for their new data center. We are very proud of the fact that, although this customer had a dual-vendor environment in its existing data center, only A10's ADC solution is being deployed in their new data center because of the performance and flexibility of our platform, and our solid track record of customer support.

These are just a few examples of the many customers that continue to turn to A10 to meet their network performance and security challenges for today and tomorrow.

Given this is our first earnings conference call and we're likely to have new investors joining us, I would like to take a few minutes to discuss our differentiated technologies, and why customers are moving to our disruptive platform at this rapid pace.

Our next-generation application networking platform leverages the latest technology to deliver a new level of scalability and performance, scaling from megabit to terabit of throughput. We offer a portfolio of application networking appliance solutions that are all based on ACOS, our next generation software platform that we have built over the past 8 years.

ACOS includes our proprietary shared memory architecture that delivers 2 to 5 times the performance of our competitors, and aFlex is a powerful and flexible feature in ACOS that gives our customers the ability to customize and modify features to meet their needs.

We have leveraged the power of ACOS to launch 3 standalone solutions that address 3 different mission-critical application networking needs. We started with our ADC solution that optimizes network and data center performance.

In response to customer needs in 2010, we leveraged the ACOS platform to develop our standalone carrier-grade CGN solution. This standalone appliance gives our customers the ability to support an increasing number of mobile devices and subscribers, as IP address availability is becoming scarce.

More recently, we extended our ACOS platform again to introduce our standalone threat protection, TPS, that is deployed at the perimeter of the network. This standalone security solution provides real-time protection from large-scale DDoS attacks.

Our ACOS platform enables customers to deploy our solutions on a variety of form factors, including physical or virtual appliances. Whether the customer buys our ADC solution, our standalone CGN solution, or our standalone TPS solution, with A10's all- inclusive pricing model, they have access to the full feature set within each solution at the time of purchase. We believe our customer-friendly licensing model is a key differentiator for A10.

We plan on continuing to leverage our ACOS platform to develop new products in the new segments of the $12 billion application networking market. This is an essential component to our growth strategy. Additionally, we plan on investing in our go-to-market engine in the US and internationally. We believe these investments will help increase our number of sales opportunities. And given that we have a very high win rate, we are confident that this will translate to new customers, and long-term revenue growth.

In summary, we delivered a very strong first quarter, and achieved our third consecutive quarter of revenue growth. The superior price performance and flexibility of our application networking platform, our customer-friendly business model, and our outstanding customer support, are fueling our success. We believe we are in a very strong position to continue our growth, and we have never been more excited by the opportunities we see for A10.

With that, I'd like to turn the call over to Greg to review the details of our first quarter financial performance, and second quarter guidance. Greg?

Thank you, Lee, and thank all of you for joining us here today. Our continued execution of our growth strategy led to strong first quarter results delivering robust growth and a solid gross margin. First quarter revenue grew 55% year-over year and 8% sequentially to achieve record revenue of $45.7 million.

Our sequential growth this quarter is notable as the strong demand for our products in Q4 of '13 and Q1 of '14 offset the normal seasonal trends that we can often see in the first quarter of the year.

Product revenue was $36.4 million or 80% of first quarter revenue, up 57% from the prior year, and up 9% quarter-over-quarter.

Service revenue was $9.3 million or 20% of revenue, up 48% year-over-year and 7% from Q4 2013. Nearly all of our service revenue is from ongoing maintenance and support contracts, and grows as the installed base of our product grows.

Our deferred revenue, which primarily consists of maintenance to be recognized in future periods, grew 7% sequentially to a record $43.9 million.

From a geographic perspective, we generated robust year-over-year growth in all of our key regions, including the US, Japan, Asia-Pacific excluding Japan, and EMEA. Revenue from the United States grew 72% year-over-year and represented approximately 40% of first quarter revenue.

Japan represented 38% of total revenue, growing 40% year-over-year, and APAC represented 9% of revenue, up 69% year-over-year.

EMEA revenue more than doubled over Q1 of '13 and was 9% of total revenue.

Enterprise customers represented approximately 44% of revenue in the quarter with the remaining 56% of revenue from service provider. The vertical mix of our revenue this quarter reflects the strong service provider component of the Q4 backlog. We expect service provider revenue in Q2 to be closer to 50% of total revenue.

Moving beyond revenue, as we previously noted, all further metrics discussed are on a non-GAAP basis, unless expressly stated otherwise.

First quarter gross margin increased to 78.2%, in line with our historical trend, and up 450 basis points from the 73.7% reported in Q4 '13, and up 40 basis points over Q1 of '13.

Product gross margin was 79.6%, also in line with our historical trend of 77% to 80%, and services gross margin was 72.7%.

On the expense side, sales and marketing expense was $20.7 million, compared with $20.5 million in Q4, which included year-end commissions. On a percentage basis, sales and marketing expense was 45.2% of revenue, a 334 basis points decrease from Q4 of '13.

In Q1, R&D expense increased to $10.7 million, or 23.5% of revenue, which is in the middle of our historical range over the past 5 quarters.

G&A and litigation expense combined was approximately $6.9 million, or 15% of total revenue, compared with $5.7 million or 13.6% of revenue in Q4. The increase in G&A expenses is primarily attributed to costs associated with our IPO, and incremental costs associated with being a public company.

In total, non-GAAP operating expenses were $38.3 million or 83.7% of revenue.

First quarter non-GAAP operating loss was $2.5 million.

Our non-GAAP net loss in the first quarter was $3.3 million. GAAP net loss in the first quarter was $5.1 million.

Using a pro forma share count of 51.3 million shares, our non-GAAP net loss per share equates to $0.06 cents, and the GAAP net loss of $0.37 per share based on 13.9 million shares.

Before moving to the balance sheet, I would like to discuss our non-GAAP operating model. Our primary near-term focus is to significantly grow our top line in order to capitalize on the market opportunity at hand. To help foster this growth, we are investing aggressively in both our go-to-market engine and our product portfolio.

Some of the investments we have made in these areas are reflected in our growing team. Over the past 2 quarters we expanded our sales and marketing and engineering teams by nearly 100. And in the near-term, we plan to continue our aggressive expansion.

However, in the long term, we expect to work toward achieving non-GAAP operating margins in the 21% to 25% range. And under this non-GAAP target plan, we would expect gross margin in the 78% to 79% range, sales & marketing expenses in the 31% to 34% range, R&D expenses to be in the 15% to 18% range, and G&A and litigation expenses to be in the 7% to 9% range.

Now, moving to the balance sheet, at March 31, 2014 we had $122.1 million in total cash and equivalents, up from $20.8 million. This includes $124 million in proceeds, excluding commission and expenses from our initial public offering, offset by approximately $3.0 million cash used for operations, and a pay down of $20 million on our revolving credit facility. While we paid off the entire amount outstanding on our credit facility, it remains active and we have the ability to draw on it should we decide to so in the future.

We ended Q1 with $38.8 million of net accounts receivable, up from the Q4 '13 balance of $37.7 million.

Average days sales outstanding were 76 days, a decrease from 80 days in Q4.

Moving on to our outlook, we are entering the second quarter with solid momentum, driven by growth in our pipeline, and strong interest in our new products. We currently expect future revenue to be in the range of $46 million to $48 million. This represents 53% to 59% growth on a year-over-year basis.

We expect non-GAAP net loss to be between $0.07 and $0.09 per share, using 59.6 million shares on a basic [and diluted] basis.

In closing, we are executing well on our strategy and growth plan. We delivered a fantastic quarter, and we are optimistic about our future opportunities.

And with that, I'd like to open up the call for your questions. Operator?

Thank you.

(Operator Instructions)

And our first questions come from Tal Liani with Bank of America. Please go ahead.

Hi, congrats on the good quarter. I have 3 questions. First, do you provide the revenue breakdown between ADC, TPS, or security in the CGN? And second, what was the growth in service providers? You just said it was strong and it reached 56% of revenues versus kind of 50 normalized, but do you have the growth?

And the third is related to the second question. We've seen a few companies that had strong growth in service providers in the first quarter, which is atypical. This is supposed to be a weak quarter, and that most of them is because of AT&T, and I'm wondering if you had any concentration, on our side, if you had any concentration of customer within the service provider growth. Thanks.

Hi, Tal. This is Greg, thank you for joining us today. So on - going through your questions in order here. On the ADC, CGN, TPS, we are not breaking those out separately as revenue streams, just within the quarter we have seen strength both in sales and in pipeline across those products. We typically don't expect to be breaking it down in the future.

As far as service providers go, I think that in the first quarter we did see strength in service providers, both in fields that we book within the [transaction] quarter, as well as the amount of backlog that we carried out of Q4 into the quarter. So what we saw in the growth there was driven partly by the new transactions that our service provider customers had committed to late in Q4. So the growth rate on service providers was a little over 100% quarter-over-quarter, and 66% year-over-year, service providers.

We do typically see some strength in the service providers in Q1 because it is the Q4 in the Japanese market.

And there was any concentration? Was it?

Yes, I mean, in the service provider market we do see some large transactions. So if we looked at our 10% customers, you would find service providers within that environment, yes.

Got it. Last question is, your security, you announced a security product, but you did have revenues for security from a big customer already in 3Q last year. First, can you give us an update on this customer, if there was any strength this quarter, are there any repeat orders, or anything you can discuss? And second, how soon do you expect the security product to ramp into the new product that you discussed in your press release, to ramp into the next few quarters?

Okay, Tal, this is Lee. We announced the TPS product in Q1. We just released the product today. So the -- in terms of the customer, we have one large order in Q3 last year. With the customer we continue engaging with customer. But due to product just released today, so we did not see any revenue in this quarter from that customer, but we expect -- we are seeing a strong and growing interest, a very strong pipeline, and positive initial feedback on the TPS product.

So we do expect within 4 to 6 months, we should start to see a good -- these sales order coming in.

I misspoke on the quarter-to-quarter. It was 58% service provider quarter-to-quarter.

66% year-over-year still?

Yes, and 58% quarter-to-quarter. Yes.

Okay. Thank you.

Thank you. Our next question comes from Katy Huberty with Morgan Stanley. Please go ahead.

Thanks. Great quarter, guys. First question, mid-point of guidance assumes roughly 26% sequential growth in enterprise, which is pretty impressive given some of the guidance we've seen from other enterprise companies. Can you just talk about whether you think that's normal seasonality, or if you're seeing some acceleration in traction with new customers or new products? And then I have a follow up.

So, we are seeing a significant traction with both new and existing customers as we've brought the Thunder series product to market. And we're seeing great both interest and adoption of that product, and we're seeing very strong pipelines leading into Q2. So everything that we're seeing in the market is consistent with the guidance and the expectations we have for Q2.

And then, can you just walk through the major changes to the partner program announced last week, and talk about how much of an impact and timing of an impact that we should expect from that roll out?

Yes, let me pass it over to Ray Smets to address that question.

Yes, sure. We just announced the new partner program. It's a new 3-tier program that replaces our prior program, and it's what you would typically expect of a company of our size. Basically rewards partners that deliver a higher degree of revenue with greater margins and discounts.

What's really unique about this program is it adopts -- it moves our existing partner base to the new program, where we expect to see those existing partners deliver better revenues for us over time. We're going to deliver greater enablement, better certifications, and additional support that helps those partners get more productive.

The other half of this program is it's a -- it was really well-received by the partner community, and we anticipate recruiting new partners to the program as a result, and we would leverage our enablement and our support and the certifications process to make them productive as quickly as possible.

So this is part of our strategy to grow our business and get access to the market, and we're super-excited about this product launch, or this new, our partner launch.

And it's in effect right now, so we should see the impact in the June quarter?

Yes, well, it does take a little time for tractions to be made with a partner program like this. So the new partners will see, hopefully, an immediate benefit, and then as we begin to recruit other partners to the program, we should see a benefit to our business over time, probably over the next 6 months to 9 months.

Okay. Thank you.

Thank you. And our next question comes from Rod Hall with JPMorgan. Please go ahead.

Yes, hi guys. Thanks for taking my questions. Good quarter. Just wanted to start off with Japan. I guess, we've heard F5 talking about strength in Japan, and now you guys are talking about a pretty good quarter in Japan as well. I was wondering if you could just comment on the demand dynamics in Japan. What's going on there? And also the competitive dynamics a little bit, and then I have a follow up.

Yes, Rod, this is Lee. Let me answer that here. I think we saw the revenue grew 40% year-over-year, and also more than double from Q4. So we are seeing a very strong demand in Japan. I think the numbers speak for themselves. We definitely have a very strong position in Japan, very tight relationship with partners and customers in Japan.

As a matter of fact, I was in Japan last week -- I mean, 2 weeks ago, meeting with a customers and partners, and at our User Conference. Our User Conference actually had the largest turnout, and in general, very upbeat.

Okay. Great. Thanks, Lee. Also wanted to ask a little -- just maybe a question of Greg on the EBIT margin performance. I mean, that was better than we had anticipated, and I just wondered whether you think, Greg, you can hold the OpEx line quite as stable as revenues are growing a little bit faster, maybe. So I guess I'm curious on what you think the EBIT line looks like over the next year or so. I mean, do we end up with breakeven EBIT sooner than, maybe, you had originally anticipated a few months ago? Thanks.

Rod, not necessarily. We're really focused on growing the top line at this point, and I think there's a great market opportunity out there. So I think over the next year or so that you'll see a variation in the EBITDA line as well as -- and in the operating margins, just as we invest. We look at our hiring patterns. We tend to focus on Q4 and Q1 in our sales teams. So you'll see some additional expenses in those quarters.

So, we're not really going to guide towards any level of consistency in that number at this point.

Okay. Great. Thanks a lot, guys.

Thank you. Our next question comes from Mark Sue with RBC Capital. Please go ahead.

Thank you. I'm trying to get a sense of just the new products, and the range of new products. What components of your customers are actually just taking the regular in the series. Which are taking the carrier-grade set and the DDoS collectively? How is it that it's all combining for a collective set? Maybe you could give us a use case example. We're just trying to get a sense of the multiplier effect.

Mark, could you repeat that question. It broke up a little bit as you were asking it.

Sure. I'm just trying to get a sense of -- are you seeing an increased number of customers taking a collective set of you products, ADCs, carrier-grade, and DDoS, as opposed to certain customers very focused on specific end products? Are you seeing a multiplier effect?

Hi, Mark. This is Lee. Let me just take the DDoS product. I think the DDoS product just released today, so we just pick up these sales activities, even though the initial feedback has been very positive, we are seeing really a growing interest. But we do expect it will take 4 to 6 months to see the initial deals coming in. So on the CGN DDoS, we do have a customer taking our high-end Thunder series, taking our high-end Thunder series in North America for their CGN deployment, including some of the security functions.

I see. Would you say a lot of the initial interest is from existing customers or a new set of customers for some of these products?

Actually from both. We are absolutely seeing a lot of our current customers very interested in our DDoS solution. We also win this many new customers [here, can late] and contact A10. I was just recently even in Asia. We have some international partners actually approaching us because of the DDoS solutions we are going to offer.

I see. That's helpful. And then lastly, just on this legacy Cisco ACE replacement, any thoughts of quantifying that, and where we might be in terms of sun setting that opportunity?

Ray, can you take that question?

Yes, sure. Hi, Mark, this is Ray. Yes, we're -- I guess the good news is we have -- the opportunity for us is really getting to the table. When we get to the table, we tend to have a very high win rate in any deal. The good news is we are winning some very substantial ACE replacements, as well as winning back replacement strategies for other vendors that are in the incumbent position.

So although we're not breaking down the numbers specifically, our win rate tends to be about 70% when we're in the deal, and a number of those are ACE replacements.

I see. That's helpful. Thank you, and good luck, gentlemen.

Thank you. Our next question comes from Brent Bracelin with Pacific Crest. Please go ahead.

Thank you. A handful of questions here. I guess the first one we'll start with a little housekeeping, 10% plus customers, did you have any in the quarter, and if so, who was it and what percentage of revenue was it?

Hi, Brent. It's Greg. Yes, we did have 3 in there, and the percentage will be listed out in the Q when that's filed, but we have in round numbers we have one at 13%, one at 12%, and one at 11%. We're not disclosing the names quite yet.

Okay. I'll look forward to the filing there. And then to follow up on the Cisco ACE win, you mentioned that at a wireless customer. Was that a Tier 1 wireless customer, or was that kind of more Tier 2?

That was a Tier 2 wireless customer in that case.

Okay. And any color on geo or is that too specific.

That was a Tier 2 in North America, actually.

Tier 2 North America. Very helpful. And then, last question for me is really on the enterprise part of the business. Clearly, you had a nice backlog going into this quarter on service provider. Enterprise still is relatively healthy, albeit, easy compare up 70% year-over-year. Your guidance does imply, you're pretty optimistic about continued strength in the enterprise. The question here is, really, what's driving the momentum for you on the enterprise side?

Are you seeing a mix shift to 10 gig upgrades? Is this tied to an increasing desire by the enterprise to drive higher SSL traffic offloads? Any color on what's driving the strength on the enterprise side would be helpful.

I think there are multiple factors. Why is really from the ACOS platform? I think the platform offers a tremendous, I think, price performance, flexibility, and really rich feature set. So enterprise, as we know, every customer demands different features. And we are also very agile to, really, to do a really quick feature release for specific enterprise customers.

We are really investing in the sales engine. We have invested a lot in the sales and marketing over the last 6 months. So we are seeing some impact of our investment paying off.

Okay, so it sounds like, just improving sales productivity of those investments that you made 6, 9 months ago is really starting to pay off. Is that the number one reason? Is there any technology kind of driver that you see out there that's contributing to the acceleration and momentum in enterprise?

Yes, from the technology, it's really about the platform. The platform is really gaining traction with the enterprise. Our platform is very, very flexible, very reliable. And we also have a [good] reputation of the product itself. It's super reliable. That's what many enterprise are looking for. The other thing is really about performance. Also it is easy to manage.

Brent, the other thing to add to that is that from the product perspective, when we moved from ADC to CGN, we had a second product our there that our service provider products could buy. And we talked about our land and expand strategy, when they buy they move into a second product.

With DDoS we now have a product that will be coming out where our enterprise customers have a second product from the A10 portfolio that they can purchase. And so, we'll have a whole new product family that will be moving us into enterprise as well.

Okay. That's helpful. Thank you.

Thank you. Our next question comes from Ittai Kidron with Oppenheimer. Please go ahead.

Thanks. And that was Ittai. Congratulations, guys, on a great start as a public company. Greg, I wanted to dig a little bit into some of the numbers. When you talk about 200 enterprise -- or customers additions, I'm sorry, in the quarter, can you give us some context what it was in the fourth quarter, or the same quarter last year, just so we get a sense of the acceleration there?

Yes, let me [let's say] pull those numbers up while we talk. I will say that for the year last year, we added approximately 1,000 customers over the course of the year. As you know, Q1 and Q2 were light quarters for us last year. So that was fairly backend loaded. In just a second, we can have number. Do you have a second question? We can go to that and then come back.

Yes, so, do you -- how relevant, if we just look at the enterprise side, I understand the service provider is very lumpy. You can have $4 million, $5 million orders and then much smaller follow-on orders as you go. But when you look at the enterprise side, can you talk about some deal sizes, and what's been the trend over there, and how do you anticipate that to move forward, now again, that your portfolio and your ability to sell more into the same customer is developing?

Sure. Let me preface it, and then I'll turn it over to Ray. We end the -- when we got through and did the road show, and described our land and expand, as we showed how our top customers are buying -- they're buying in 80% of the quarters after initial purchase, and that they're buying more than 8 times initial product. And we see that pattern is repeatable in our enterprise as well as our service providers.

So, in some of the examples that Lee had described in the meeting -- or earlier in the call, you have seen how they would come back and expanding the footprint of A10 products across the enterprise as they go from one data center to multiple. So we do see that as a pretty consistent pattern. I'll turn it over to Ray. He can talk about some cases on that and other metrics.

Yes, so Ittai, this is a bit of a mixed bag, very hard to get into all the details here. But obviously what you're detecting here is our service provider customers seem to grow very nicely, and they add a significant amount of million dollar deals, and deal size, to our overall average.

But we are moving down into the enterprise market more effectively. We sell to large enterprise, but we also are going down market, and our channel program will actually address more of that market over time. Overall, the trend is going up in terms of deal size. So, and I think, I don't know if we actually provide that publicly, but we're actually seeing a very nice trend northwards in terms of average deal size on a quarterly basis.

And that would actually be reflected in what we see when we look at the customer numbers to go back to your first question. Last year, Q1, we added 202 customers, and in Q4 we added 245 new customers.

Got it. And then on the gross margin, Greg, as we move into the next quarter, given the change in mix that you're anticipating with regard to enterprise versus carrier, does that, generally speaking, have any impact directionally on margin?

Generally not. When we look out at our near-term margins, our expectations are still in the 77% to 78% range.

Very good. Alright, congratulations. Good luck, guys.

Yes.

Thank you. (Operator Instructions)

And our next question comes from the line of Ehud Gelblum with Citi. Please go ahead.

Thanks, it's Ehud Gelblum. Okay, so a couple of additional housekeeping questions, if I could. Greg, can you give us a breakdown of CGN revenues versus ADC on the product side? I'm assuming the DDoS was 0 this quarter. Is that the right assumption?

Well, so, I'll answer half your question with data. Yes, with the TPS DDoS product is just now available for shipping as of today. So it has not contributed revenue beyond that first large customer that we had. But beyond that we're not breaking down our revenues by the CGN, ADC, TPS at this point.

Okay. Can you give us a split between Thunder and the AX?

Again, we're not providing that breakout, but I will say that as we see new business coming on, there is a sizable move towards the Thunder platform due to the performance that it brings, and the price performance that comes along with it. So, we're seeing that being adopted pretty aggressively in the market, and I think as we had mentioned at least previously at one point, that part of the backlog that we carried out of Q4 was due to more demand than we had expected in similar high-end vendor products.

In general, these all high-end Thunder products are performing really well.

So would it be safe to assume that going forward, three-quarters of revenue is basically going to be Thunder, or more?

I don't think we have that level of detail to provide.

Okay. Do you -- I may have missed it, did you give a split between direct and channel in what your goals are between those two?

We have not, but I can give you some directional indicators there. We are primarily a channel business. As Ray talked about expanding the channel, that's about getting more productivity out of the channel. But currently greater than 90% of our transactions go through the channel. Not quite the same break on dollars. There are some major customers who prefer to work with us directly.

So when you think about how we will generate incremental leverage in the marketplace, a good portion of that is driven by our channel strategy that Ray described earlier.

I was asking more for the dollar number. Would that be closer to around two-thirds, and roughly staying there?

What was the question now?

I'm sorry, the split, the percent channel is on the dollar basis, not on the actual per unit customer basis.

Yes, we won't be breaking that out, but we will talk about it just in terms from a transactional perspective. That's one of the things that drive -- the thing that gets thrown off is that the channel business tends to be, as your numbers would illustrate there, tends to be how you go after more of the mass market transactions, and that's where we see the product moves to be more enterprise oriented. We see the channels becoming great for contributing to that piece of the revenue stream primarily.

Okay. Helpful. Question on the guidance. Assuming your guidance in the mid-point is up a couple million, basically, from what you just said in Q1, it sounds as though with the TPS product actually having some backlog, and now being ready to ship, that you'll sell a little bit of TPS. I'm not sure exactly you're anticipating for next quarter. But is the implication, therefore, that ADC is sort of flat to down next quarter on a sequential basis?

No, I think for the DDoS TPS product, we expect it will take 4 to 6 months that we do release a new product, even though the initial feedback has been very positive, it takes --

Okay.

Of 4 to 6 months. So should not --

Okay, I missed that part.

Q2.

So all the growth next quarter in Q2 is TPS -- is, I'm sorry, is CGN and ADC. Helpful.

Mostly growing pipeline in the TPS.

Okay. That's very helpful. Last question, big picture on the, now that you've been out in the public for a little while, have you seen any competitive response, either on pricing or in any other way from your main competitors, F5, Citrix, or Radware?

We have not noticed anything in the marketplace. No.

Okay. Helpful, I appreciate it. Thanks, guys.

Thank you. And we have a follow up question from Mark Sue with RBC Capital. Please go ahead.

Thank you. Gentlemen, just to put things in a historical perspective, a year ago some concern whether the ADC market was really growing. Today, you're going for revenues to re-accelerate to almost 60%, and you have new products coming also as well. If we look into the future, maybe a year or so, should we think of A10 more as a platform delivery system? Conceptually are there other things that customers are asking which you can actually layer on top? Just kind of that thought process of the things in the future.

I think the Mark -- this is Lee, I think we are -- ADCs have really established some very healthy markets. We -- but our growth rate in the ADC is definitely much higher than our competition. The our products I think in these really mission-critical area. So platform has always been a strong selling point with additional features we put in the ADCs, such as SSL intercept in that has helped really drive of some of the new business. So we definitely have seen the platform with the features, the performance, scalability, flexibility, all this contributes to our success in the ADC market.

I see. That's helpful. Thank you.

Thank you. And I'm showing we have no further questions at this time. I would now like to turn it back over to Lee Chen for any closing remarks.

Yes, thank you all for joining our first earnings call as a public company. We would like to take this opportunity to thank all of our customers, partners, and employees. You have all contributed to our success, and we thank you for your dedication and commitment. And we would also like to thank our shareholders for their support. We look forward to sharing our future success with you. Thank you.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation, and you may now disconnect.