睿科網路 (ATEN) 2014 Q2 法說會逐字稿

Good day and welcome to the A10 Networks' second-quarter 2014 financial results conference call.

(Operator Instructions)

Please note, today's conference is being recorded.

(Operator Instructions)

And now I would like to turn the conference over to Ms. Maria Riley. Please go ahead, ma'am.

Thank you all for joining us today.

I am pleased to welcome you to A10 Networks' second-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, 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 it's second-quarter 2014 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 and prepared comments with trended financial statements on the investor relations section of the Company's website, www.a10networks.com.

During the course of today's call, Management will make forward-looking statements, including statements regarding our projections for our third-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, July 30, 2014.

A10 disclaims any obligation to update 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 description of these risks and uncertainties, please refer to our 10-Q filed on May 13, 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 trended quarterly financial statements posted on the Company's website.

We will provide our current expectations for the third quarter of 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 the call over to Lee, I would like to note that Management will attend the Pacific Crest Global Tech Leadership forum on August 11 in Vail, Colorado; the Oppenheimer Technology Internet Communications Conference in Boston on August 13; the Jefferies 2014 Semiconductor Hardware and Communications Infrastructure Summit in Chicago on August 27; and the Citi Global Technology Conference in New York on September 4. We are looking forward to seeing many of you there.

Now I would like to turn the call over to Lee Chen for his opening remarks. Lee?

Thank you, Maria. I would like to thank you all for joining our second-quarter financial results conference call.

We delivered second-quarter revenue of $45.1 million, representing year-over-year growth of 50% and relatively in line with Q1 revenue. Also out of Japan, we delivered a strong quarter across all of our geographic regions, including the US, EMEA and China, demonstrating the progress we have made in diversifying our customer base and market footprint.

However, total revenue came in slightly below our guidance of $46 million to $48 million due to lower than expected revenue from service providers in Japan, where several large deals were pushed out. Enterprise sales in Japan grew nicely year over year and we believe our competitive position there remains very strong.

Our revenue in the US was robust and grew 154% year over year and 44% over Q1 to reach $26.2 million, with healthy demand across both our service provider and the enterprise customers.

We saw notable growth in the financial, federal government and Web 2.0 verticals. This brings our enterprise revenue growth from 64% for the six-month period over last year. We believe our impressive performance in the US is being driven in part by the rapid adoption of our recently launched high-end Thunder product with scalability and performance that we believe significantly outpaces our competition. We are seeing more and more customers turn to A10's high-end solutions as the amount of encrypted traffic increases driving the need for scalable SSL acceleration and intercept.

Additionally, we are seeing initial results from the investments we have made to expand our sales team and channel partner program. We have seen a healthy increase in the number of deals in our pipeline from both our sales team and those initiated by the channel. We are pleased with the progress we have made in such a short period of time. We are now starting to roll out our new channel program into our international regions.

We expanded our market footprint in the quarter and added 240 new customers, largely representing our enterprise expansion. New customer acquisition is an important aspect of our future success, given our land and expand model. As a reminder, our top 25 customers have made follow-on purchases in over 80% of the quarters following the initial sales.

Let me share with you a few of our key customer engagements in the quarter. A large US financial services firm and a retail financial institution in Europe both selected our Thunder ADC to replace their Cisco ACE equipment.

Both of these companies are new A10 customers. We won the business from the US firm in a competitive bake-off because of the ease of migration from ACE to A10, our simplified administration and management capabilities, our all-inclusive licensing models, and our superior customer reference and support.

We continue to expand our footprint within a large security technology company that is rearchitecting its data center in North America. We have significantly increased our market share with these customers because of the simplicity and ease of the deployment for our solution and all-inclusive licensing models. Specifically in the second quarter, they chose our recently introduced high-end Thunder model to load balancing their customer facing applications because of our superior SSL throughput.

A large US cable provider where we have been replacing the competition's equipment in the customers existing data centers, has selected our high-end Thunder ADC for two of its new data centers for load-balancing between its video service and in-home equipment. Our ability to continue to help simplify their data centers, improve return on investment and our SSL performance in a 1 RU appliance were key factors in expanding our relationship with this marquee customer.

A leading US based cloud storage company chose A10's high-end Thunder ADC solution to replace their homegrown open source solution. We won this new customer because of our ability to scale, our layer 4-7 throughput and our superior price performance. We are very excited by this win and believe it creates an opportunity for A10 to win future builds with young Web 2.0 customers that may be outgrowing their homegrown solutions.

We have also extended our Web 2.0 presence in Asia by leading gaming companies in China, Japan and Korea, and the very large cloud storage company in China. These companies are choosing our Thunder ADC solutions for its high reliability and high performance.

These are just a few of many customer success stories in the quarter that demonstrate the power of our differentiated application networking platform and all-inclusive licensing models. Our application networking platform built on our ACOS software delivers an increased level of scalability and performance. We have continued to leverage our flexible platform to deliver new product, functionality and features to our customers.

In April, we launched the industry's first 100 Gigabit Ethernet ADC for layer 4 to layer 7 services. And we expanded our Thunder series of appliance filing our product portfolio with four new mid-range and high-end models.

In May, we formally launched TPS, our first standalone security solution for large-scale DDoS protection. Our marquee customer for this product has already placed follow-on orders and we are very pleased with our traction and growing pipeline.

We also recently announced addition of integrated DDoS protection to our Thunder CGN product line. Given our ability to integrate this functionality quickly and deliver a higher performance solution, our CGN solution was selected by a leading US service provider with an urgent need to upgrade their CGN infrastructure due to a significant increase in DDoS attacks.

We also launched our new Thunder SPE, Security Policy Engine line of high-speed, high-capacity application networking appliances that leverage specialized hardware to perform security and policy enforcement at the ultra high speeds without impacting CPU usage.

Across our solution portfolio, we continue to gain industry recognition. In May, our Thunder TPS product line won two Best of TechEd 2014 awards, including Breakthrough Technology category. And in June at Interop Tokyo 2014, our Thunder CGN received the Best of Show Award in the Carrier and Service Provider Networking Category. And our A10 Thunder 6630, the industry's first 100 Gigabit Ethernet ADC received the Best of Show Award in the ShowNet Product Category.

In closing, we are very excited by our growth in North America and the expansion of our footprint globally. Our innovative and differentiated platform continues to perform very well in the market as scalability, performance, flexibility and security are growing concerns for networks around the globe.

Given the superior price performance and the flexibility of our application networking platform, our customer-friendly business model and our outstanding customer support, we believe our competitive position is very strong within all of our markets. With our growth initiatives and strategic plans on track, we are very excited by the momentum we see going into the back half of the year.

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

Thank you, Lee, and thank all of you for joining us today.

Second-quarter revenue grew 50% year over year to $45.1 million. Product revenue was $34.1 million, up 48% from the prior year and represented 76% of the second-quarter revenue. Service revenue was $11 million, up 56% year over year representing 24% of revenue. As a reminder, nearly all of our service revenue is from ongoing maintenance and support contracts and grows as the installed base of product grows.

Our professional services revenue, while currently a small part of the total, grew significantly in Q2. Deferred revenue, which primarily consists of maintenance to be recognized in future periods, grew 50% year over year and 4% sequentially to a record $45.8 million.

The increased investments we have made in building our US sales team and enhancing our channel enablement program are clearly paying off in our results this quarter. Revenue from the United States grew to $26.2 million, more than double the prior second quarter and up 44% sequentially. US revenue represented approximately 58% of second-quarter revenue.

Japan declined 27% year over year and represented 19% of total revenue, while APAC grew 24% year over year, representing 10% of revenue. EMEA revenue grew 20% year over year and represented approximately 9% of total revenue.

From a customer perspective, our revenue in the quarter has continued to diversify. Our top 10 customers represented 45% of total revenue and we only had one 10% customer, versus in the first quarter, 54% of our revenue was from our top 10 and we had three 10% or greater customers.

Our strong performance and expansion in enterprise is helping drive this diversification. Revenue from enterprise customers was $27.4 million, up 37% from Q1 and 85% from Q2 of 2013. Enterprise revenue represented approximately 61% of total second-quarter revenue in 2014, with the remaining 39% of revenue from service providers. While we expect our go to market investments to continue to drive growth in the enterprise vertical, we expect our vertical mix to continue to fluctuate from quarter to quarter.

Moving beyond revenue, all further metrics discussed on this call are on a non-GAAP basis unless expressly stated otherwise. Second-quarter total gross margin was 77.6%, within our expected range and in line with our historical trend. Comparatively, second-quarter total gross margin increased 41 basis points from Q2 of 2013 and decreased 64 basis points from Q1 of 2014. Product gross margin was 78.3%, also in line with our historical trend of 77% to 80%. Services gross margin was 75.2%.

On the operations side, we are executing on our plan to build a deep foundation for A10's growth. We are on track with our targeted investment plans and operating expenses were slightly below our expectations. We ended the quarter with staff of approximately 740. Over the past four quarters, we have expanded our sales and marketing team by 30% and we have seen improved sales productivity metrics across our sales team.

Sales and marketing expense was $22.5 million, compared with $20.7 million in Q1. On a percentage basis, sales and marketing expense was 49.9% of revenue, a 469 basis point increase over Q1 of 2014. In Q2, R&D expense increased to $10.9 million, or 24.2% of revenue, compared with $10.7 million and 23.5% in Q1.

Combined G&A and litigation expense was approximately $6.3 million, or 13.9% of total revenue, compared with $6.9 million, or 15% of revenue in Q1. In total, non-GAAP operating expenses were $39.7 million, or 88% of revenue.

Second quarter non-GAAP operating loss was $4.7 million. Our non-GAAP net loss in the second quarter was within our guidance range at $5.3 million or $0.09 per share, compared with a net loss of $3.3 million or $0.06 per share in Q1.

Basic and diluted weighted shares outstanding for the quarter were approximately 60 million shares. GAAP net loss for the second quarter was $1.3 million, or $0.02 per share, which includes a $7 million benefit to legal expense as a result of a negotiation that reduced a $12 million services fee to $5 million in exchange for a one-time cash payment.

Moving to the balance sheet. At June 30, 2014, we had $112.1 million in total cash and equivalents. During the quarter, cash used for operations was $6.7 million, which largely reflects the $5 million one-time payment I just mentioned. We expect cash used in operations to decrease in Q3.

We ended Q2 with $40.5 million of net accounts receivable, up from the Q1 2014 balance of $38.8 million. Average days sales outstanding were 80 days, up from 76 days in the prior quarter.

Moving onto our outlook. We entered the third quarter with a solid backlog, a growing pipeline and momentum driven by our expanded sales reach in North America. These factors, balanced with the market dynamics we have seen in Japan, lead us to expect third-quarter revenue to be in the range of $48 million to $50 million. In total, this represents 21% to 26% year-over-year growth and 6% to 11% sequential growth.

We expect to hold gross margin within our normal range of 77% to 78% and deliver a non-GAAP net loss between $0.07 and $0.09 per share using approximately 60 million shares on a basic and diluted basis.

With that, I would like to open the call up for your questions. Operator?

(Operator Instructions)

Mark Sue, RBC Capital.

Gentlemen, in Japan both of you our competitors had year-over-year declines but the drop that you saw, minus 27%, seems to imply a reversal of the market shares you -- change you've had in the past. Maybe a little bit more detail on the service providers, is it wireless, wireline, market share loss, competitor pricing changes, and how long do you think it would take to recover in Japan?

If I look at it from a fiscal year point of view, Japan was about $45 million in the trailing 12 months. So how should we think about Japan this year in terms of your business and the pace of recovery? Thank you.

Mark, we are clearly disappointed with our revenue performance in Japan this quarter. Late in the quarter we saw a slowdown in spending from our service provider customers that delayed and pushed out the planned purchases. Consistently with others in the sector have reported. We were expecting Q2 revenue from service providers in Japan to be [low] and be very high Q1 performers. But it was significantly lower than what we had expected. Ray, do you want to add anything other?

Yes, hey Mark, this is Ray. Our competitive position in Japan actually remains quite strong. We analyze our win rate in detail and in fact our win rate hasn't changed. So we have not lost any significant deals to any competitors during the quarter. And we think we're actually in a good spot once growth comes back online.

In terms of market share, we're still waiting to see what happens there. We rely on third-party industry analyst to publish that data. But our win rate remains quite high and it's above 70%.

I think we have a very high market share among service providers in Japan. So it is fair to expect that a slowdown has had a bigger impact on A10 than others.

Okay, so Lee would you say it's a couple of quarters of flattish trends from Japan before an improvement? Maybe how you're planning your assumptions for Japan.

And then the separate question is on DDoS, how you see that pipeline as it relates to broader projects and interest in some of your new security offerings.

I think we expect this other deal to close Q3 while others have been pushed out further. And we did a very thorough review of our pipelines and we are keeping our expectations very conservative at this moment. In DDoS I think we are seeing a significant increase and the really tremendous pipeline. We also receive a very positive feedback from the (inaudible)conversation and the POC with the potential customers.

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

James Faucette, Morgan Stanley.

This is Meta Marshall filling in for James. Quick question, if could you speak for a moment about general ADC trends and whether you were seeing similar interest in ADC versus security. And second, whether the Japan orders that were pushed out were CGNAT or ADC?

Yes, I think -- the general trend on ADC remains very [positive]. If you exclude Japan, in all geographic regions we are seeing tremendous -- we have tremendous growth in North America, in EMEA, in APAC. In North America our growth rate over last year is about 154% year over year. APAC grew 24% year over year. And EMEA grew 20%. In DDoS, maybe Ray you can provide initial pipeline and --

Yes, so Meta, to get back to your question regarding Japan related decline in either or different products. Our service provider market in Japan buys both our CD and ADC products. So the slowdown really has affected both products in that particular market. However, we just introduced our TPS product in the market, including in Japan. And it's a new product, it is getting traction and we certainly do expect this area of the business to grow.

Great, thanks, that's helpful.

Tal Liani, Bank of America.

A few things, but it's all the same topic here. Guidance for next quarter is even a tad higher than the consensus we had before, so you missed a quarter and that means you expect even a stronger sequential growth than we expected before given that the guidance is nice. Where is this growth coming from, that's number one?

Number two, if I remove Japan, Japan was down 50% or so, if I remove Japan the rest of your revenues are much higher than expected and the question is again, same question, where is this strength coming from and how sustainable it is and what can you tell us about this part? Thanks.

So Tal, this is Greg, I'll jump in first and then pass it over to Ray to add a little bit of color on some of the opportunities we're dealing with. I think the core question there is as we look at guidance, how are we looking at that and how do we have confidence in that number?

And I think that as we built up the guidance, we've applied the appropriate level of conservatism on Japan but also looked at each of our other individual markets. And as you've noted, we saw a great deal of strength in all those other markets, and it's driven by a lot of the dynamics that Lee had mentioned in the call on the continued adoption of our land and expand with our existing customer base as they move across products.

Our expectations of DDoS brings some revenue into Q3, not a great amount. But we expect to see wins there that will be contributory. And then within the other markets that we have here, the sales productivity gains that we've had plus the sales heads that we've added are contributing. And then our channel expansion is another major factor there. So we feel like there are several different areas that contribute to the growth, we're not dependant upon any particular one.

And then related to that as we look at guidance as well, the -- over the last year, the range of business that we're getting is much more diversified. A year ago, Japan was nearly 40% of our revenue stream. This quarter doing -- growing 50% year over year, they're down to 18%, 19%. So a much greater diversity both in the customers and the regions that are contributing to our growth numbers. Ray, do you want to add anything to that?

Sure, Tal, just add a little additional color. In terms of what's really driving the growth here, it's coming a couple of different areas, some which Greg already mentioned. But the amount of encrypted traffic that we're seeing is increasing which is driving the need for a scalable SSL acceleration and intercept solution. And we're in the right place at the right time to capitalize on that need with our high-end Thunder platform. So that has been part of it.

Yes, absolutely the Web 2.0 penetration continues to grow for us, we're very excited about that. As well as strengths in the financial industry sector. But Greg talks -- talked a little bit about land and expand strategy, our existing customers continue to buy more product from us both to the ADC space and also considering our TPS products at this point which is great.

But overall, our formula and recipe is working pretty well. The expansion of our sales team and the places where we're putting them and our higher productivity because of the way we're on-boarding our sales team is actually driving that growth and we continue to have very strong product in the market.

Got it. A follow up on competition, your competitor F5 is doing quite well for a few quarters now. And the question is, and Cisco is of course out of market, you mentioned a few wins, they mentioned a few wins of the Cisco base.

Overall, how do you see the competitive environment? How do you respond to F5 great efforts and successful efforts to grow in almost the same areas that you're targeting? And have you had to change any of your pricing strategy or go to market strategy against F5 given their focus and renewed momentum in their business? Thanks.

Well I guess I'll take the competitive question first. We actually do see F5 as our most frequent competitor, but our win rate actually remains quite high in North America exceeding 70% win rate which is great. We're also seeing them across other global markets in Europe and Asia as well. Our revenue grew nicely across Asia and EMEA as you noticed. And -- but we continue to win very strategic accounts against F5 in the marketplace.

So we're really -- our formula continues to work here. We're putting a very good product in front of our customers, we're leveraging that with a really solid sales team in all of the markets and we're seeing our competitive profile very, very strong.

From a pricing perspective, we haven't seen a big change in the marketplace regarding our competitive profile around their current pricing model. We have a very solid all-inclusive licensing model approach in the marketplace which really puts us in a very strong position to win customer hearts and minds.

I also do not believe we lost any significant deals to a competitor in Japan this quarter. I think the [lower than expected revenue] is due to our own service provider customer pushing out orders.

Got it. Excellent, thank you.

Brent Bracelin, Pacific Crest Securities.

Wanted to drill down, obviously in Japan a little bit more obviously outside of Japan things looked pretty healthy. Japan looks very, very weak here. If I look at the trend line over the last year, clearly Japan and your largest customer in Japan has been down materially over the last year looking at 2012 to 2013 and now looking hera over the last couple of quarters.

So I guess my question is, is how much of this is a timing issue? How much of this is tied a change in spending at your largest customer in Japan? Really trying to understand the trend line here that we saw over the last let's say 1.5 years, and then offsetting that with timing risk.

So Brent, this is Greg. From a -- when you talk about a period that goes back 18 months, you're capturing the latter part of their very large spend on rebuilding their network. And we were a great beneficiary of that in 2012 and that tailed into the very beginnings of 2013. And since that time they've started to go through that acquire, deploy, absorb, cycle on a lot of that product. And so in 2013, we saw an expected step down in their spending relative to that high standard that they sent.

As we've gone into these most recent quarters, the -- what we're seeing clearly is a lengthening of decision timelines, both from budgetary reasons and for things that are internal, we're seeing things stretch out. So from when we look forward, we're not -- we're certainly not seeing a return to those levels of 2012 from a spending perspective. We had, I think as we noted earlier, we had an expectation that this quarter was going to be a step down from the prior quarter and it just turned out to be a little bit more than that.

So what we've mostly seen is deal delay. And I think that that's something that has been experienced in the market. When they come back, it's a little harder the call.

I think Ray will have some comments on that in a second. But I think that the key thing for us is that as we track these customers, we're not seeing any change in their buying preferences or where the deals are going or the discounting that they're requiring. It looks to be a time issue, although we can't really put an end date as to when this timing turns around.

So Brent, if you look at our revenue from Japan in 2013, Q1, Q2 of last year were our highest quarters of the year. In fact, Q1 [Q2] last year is more than double of what we saw in Q3, Q4 last years. That's why when we do the quarter Q2 compared with last years' Q2, the decline seem to be bigger.

That's helpful color. And then I wanted to follow up that with your assumptions and what's baked into this 9% sequential guide in the September quarter. Are you baking in the assumption that Japan snaps back meaningfully to a similar level of spend you saw in Q1? Or is the assumption that you're baking into the guide that Japan is flattish with this quarter?

So Q1 was a very large quarter for Japan, so there's no scenario where it snaps back to that level. So as we look out into Japan for next year, our main goal there is to be conservative and to take into account what we're seeing in the market. So without being specific on the numbers there, we're being very cautious on when and at what rate that Japan returns.

So our Q3 revenue expectation for Japan is very conservative at this moment.

Okay, very helpful there. And then last question for me is really around the US business. Obviously this is the bright spot here more than doubling year over year.

Obviously your outlook, if the assumption is Japan is conservative that that momentum continues sequentially here into the September quarter to get to your midpoint of the guide. Were they large deals in the US that drove that strength? Could you talk a little bit more about the breadth of orders you saw that drove this 100% plus growth in the US market? And then talk a little bit about the pipeline and visibility into continued strength in the US market in the September quarter.

Okay, I'll -- let me start on the second and then I'll turn it right over to Ray. Is that yes, we are expecting to see continued strength in North America. It's -- there's a ton of potential in the market.

And to correct one thing is that from a guidance perspective, we do expect Japan to be modestly up quarter over quarter from Q2 to Q3. So we're not expecting further decline there, but we are being conservative even at that estimation. So Ray, you talk about the things you're seeing in North America?

Yes, I think we talked about it a little bit, but I'll go ahead and give you a broader perspective. We actually see very strong growth in North America, no doubt about it. You're seeing the results of that now.

We have a really strong growth plan in place to continue to further penetrate the ADC market, both on the service provider side and on the enterprise side. And we're seeing a very nice strong uptick in business in the Web 2.O and also in the financial sector. So North America is running on all cylinders.

And we're going to [fly] that engine with our new product, our TPS product which we've introduced just recently, and pipeline development continues to happen quite nicely. So it's a combination of having the right product, positioning the product very effectively and gaining some significant traction in various sectors in North America and we're seeing that growth from that execution strategy.

Helpful color, thank you.

(Operator Instructions)

Ehud Gelblum, Citi Investment Research.

Couple questions, we'll keep digging in a little bit. First of all let me hit the OpEx side. Your head count was up nearly 85 people, those are mainly in sales. And how long will it take for those people to kick in? I'm guessing they're practically all on the enterprise side, not the service provider side. And I'm guessing they're mostly North America, but if you can give us a sense as to when those additional 85 people kick in and what your thoughts are now as opposed to your hiring -- with regards to your hiring expectations the next couple quarters given what happened this quarter?

Ehud, so first of all to answer the last part of the question first, is we don't expect anything to happen this quarter to alter our hiring plans going forward. We look at this as very positive and it's fine that we continue to invest in these markets that have contributed great growth.

From a sales force expectation perspective, we look at a six-month window when a sales rep will start to pay for themselves. They're modest, they're getting traction in their market, particularly if they're in a new territory. And by a year out they should start contributing pretty significantly to the bottom line. And then they would continue their productivity growth out into two, three years out they're still adding productivity to the business.

And we see that both at the micro level when we look at individual reps and we see it at the macro level. Because I alluded to the increase that we've seen in sales productivity. And so as we look across our whole sales force, the tenure of that group has continued to mature over time as the new ads become a smaller percentage.

So we think those dynamics continue to argue for investing in salespeople, putting feet on the street and continuing to take market share, use that win rate that Ray alluded to earlier to our advantage, get more bats on a direct sales force. And in parallel, we continue to work on the channel side so we've got more channel partners who are increasing the feet on the street, they were out there for the benefit of A10 as well.

Okay. Given the success that you're seeing with these programs, do you have any different or have you thought about possibly having a different concept on your breakeven plan?

No, we've probably -- (multiple speakers) No, I think that our basic model is still investing for the top line. And breakeven, it's not that far away for us. But we're not giving any specific guidance on when it's going to happen. But it's on a horizon -- it's not three years out there, it's on a closer horizon than that obviously.

And you're not going to sell it at that, you're going to keep where ever it was, I know we don't know when it is, but in your own mind, you're sticking to your current plan?

Correct, correct.

Okay. Let's talk about Japan for one quick second. Is it your impression that your largest customer in Japan as well as some of the other business there, pushed out the projects they were working on with you, or is it your impression that the Japanese service providers are pausing or pushing out a lot of their business across a couple of different areas?

Yes, it's a good question. We didn't really see any one particular issue that we could put our fingers on other than the fact, as Greg already talked to you, is around the availability of budget, the timing of the budget and the rapidness of that change late in Q2. So it was internal issues probably associated with the broader market conditions associated with their own customer growth that drove it. But generally speaking, we saw as a timing issue.

I think the other thing to add that is that we don't believe it was unique to us because it was both in opportunities where we had existing relationships that were going forward as well as competitive transactions that were in the market where the decision dates got pushed out in the future periods. So we don't think it is the unique A10 scenario that was played out there but rather an industry one.

Okay. I realize that there's ways that different salespeople can help customers decide when they should book revenue, but assuming Japan had done roughly what you thought it was going to do, which was down a little bit, you would have -- could easily have been in a $52 million, $53 million quarter. It's unlikely to believe that you would have been that high.

So I'm trying to go back into the strength in America and was there anything that may have gone on in the Americas to drive that number possibly higher than it otherwise would have been that could possibly make the business a little bit more reliant on the US than it otherwise would have been?

If Japan had actually done roughly what it was supposed to do, I find it hard to believe that the US would have been as strong as it was. I'm trying to understand, did something mid quarter to make that happen, or it's coincidence that -- and you still posted a fairly good number at $45 million.

I'm sorry, so I'm trying to understand the puts and takes as to Japan falls off an awful lot one quarter and the US comes up an awful lot, practically offsetting it entirely. And I'm trying to get a sense to try and look forward as to what this could mean about US business going forward. Well wasn't it possible you shifted some more sales people over that sometimes that could do it as well?

Yes, it's not a matter of shifting salespeople. I think that we -- if Japan had done their expected amount we would have had a modest beat to the guidance numbers that were out there. Within North America, the miss happened late enough in the quarter that you just can't replace it dollar for dollar. But certainly as you have (inaudible) you talk to your salespeople and you try to see what deals we can encourage into the quarter and what deals are not movable. And so we certainly have that internal dialogue.

But I think the thing that's important is that customers are going to work on their own cadence and if they need to buy something in Q3, they will buy it in Q3. So there's a small bubble group of deals where you can perhaps influence how the customers view their timing. And some of those we're able to encourage into Q2. Some are in our backlog that they're booked but they're going to ship in the next quarter. An some of those will just exist in Q3.

So it's not the case that we can take our -- a sales force and point them at a bunch of customers and say grab all those things that we're going to sell in July and make them happen in June. Believe me, there were days when I was wishing that was the case within the last month or so, but that's not the way it works.

Okay. Two more questions. One is at what point in the quarter did you realize that Japan was going to be as weak as it was?

Yes, that was a -- that's a good question. Is was late in the quarter for us, so for us that's in month three. So as Greg mentioned, if we have an earlier heads up in such a shift in spending in a particular market, we can usually react in other ways. This particular shift occurred quite late in the quarter.

And I'm guessing linearity is roughly 20, 30, 50 as service provider. Was that the linearity in the quarter and your service provider linearity roughly the same, or is it a little bit more than that here?

Actually linearity in this quarter was very consistent with what we have seen in prior quarters, without communicating directly on those numbers you've described. But there was nothing odd about linearity this quarter.

Okay.

So basically it's very late in the quarter, there were deals we expect to close in the quarter, late in the quarter got pushed out. So we did not expect that.

Right, great. Last thing, security. I'm assuming you had practically zero negligible revenue this quarter on the new product. Is that true and what is in your guidance for next quarter?

I assume you mean the TPS DDoS product?

Right.

So DDoS we did get a follow-on order from one marquee customer with TPS. Other than that, there's little small deals. But it's not meaningfully significant in this quarter. But we do see tremendous interest and traction in pipeline in Q3 and Q4 for TPS.

Yes, I will add that we did receive a couple of eval unit orders in the quarter, which is usually indicative of very positive indication that a deal is imminent. But we are seeing very good development on the TPS pipeline. And this is global, not just in any particular market, but we are positioning it in all markets. And it is expected from that we will see some wins in Q3.

Yes, as normally our Q3 pipeline is very strong.

Okay, so it's your -- TPS is in your Q3 guidance. Helpful, thank you very much.

Rod Hall, JPMorgan.

I wanted to -- I hate to beat a dead horse, but I'm going to ask you a couple more questions about Japan and then I've got another question or two. So trying to quantify this, if you look at the 50% reduction quarter over quarter, you got $8 million to $9 million worth of deviation. From Q1 last year you were down like $1 million in Q2 over Q1. So it feels like maybe $7 million or $8 million of lost revenue, but I wonder if you guys could help us understand if that's in the ballpark of what pushed in Japan?

And then I also wanted to talk a little bit, get you to talk a little bit about the sustainability of that. I think one of your comments earlier was you thought maybe it's related to the service provider customer acquisition. If that's the case, is this more the macro issue that drives on and actually that revenue doesn't come back? Could you comment on what you think the probability of that is? Thanks.

So going at the first half of the question first. On the size of the miss. So we've indicated that if Japan did come in as suspected that we would have had a slight beat to the guidance range. And so -- and Lee had also indicated that Q2 last year was a very, very strong quarter for us. So the delta between Q2 last year and -- or last year and Q2 this year, would overstate the size of the miss there.

So we don't want to talk about our internal plans and expectations by market. But it's not as large as that math would take you to.

I think on the second half of the question, hand that over to Ray to talk about what we're seeing in market relative to trends and timing and --

Yes, I think your question is regarding the service provider segment and whether or not we're going to see that go away or come back online. We actually do believe that the ADC and CGN business that we're actively engaged in currently in the market will recover. We just don't know when that will occur.

We're going to track this carefully. We are watching what the others in the market are alluding to as well, and it sounds to us like we weren't the only ones being affected by this although our penetration rate in service provider tends to be high. We may have felt it a little bit more than others.

We're pretty confident at this point that the demand in our DDoS product will grow. And this problem is one that is becoming more urgent globally and we think that will happen actually with the service provider segment in Japan as well.

So if you know the DDoS space just a bit, its a problem that never really goes away but it just keeps getting bigger and bigger. And our DDoS mitigation solution with our TPS product is actually a product that's coming into the market at the right time. So we don't think that the ADC and CGM business will be down forever. And our hope is that the DDoS opportunity with our TPS product line will be immune to that change.

Okay, and then in terms of the -- Greg back to the qualification, is there a chunk of that revenue that went away that you have a pretty high confidence level is coming back in Q3? Or do you -- or is a lot of it questionable and you're waiting to see what the service providers tell you next?

I don't think it's questionable. I think the timelines for them are -- what we're really seeing is that the decision timelines are becoming longer and they're looking at new projects. They're considering them, they're taking them longer to decide to press the go, no go button.

So what I don't want to have us expect is that all the deals that were originally going to be in Q3 are now going to be added to the things that spilled out of Q2 so that we over expect. So as we've looked at this, some of the things we've added a level of analysis to deals that were going to be in Q3 and are open to the possibility that those may slip out of quarter as well. So we're trying to modulate this. And it's a very real-time activity with these customers.

I think that what we saw is that we were very close to customers through the quarter and their decision timelines changed at the end, their plans changed. So in staying close to them, we know which deals landed into Q3. We have a little higher certainty on those. On the deals that were in Q3 but haven't been evaluated and we haven't got close to the quarter which is all these decisions are made, we're open to the possibility that those might shift out as well and we've built that into the way we've defined our guidance.

Okay. (multiple speakers) Could you guys comment on the services margins as well, those margins were up a long ways and give us a little color on what happened there?

That's a matter of our services organization growing in, it's trying to see economies of scale as our service revenues grow. A lot of that's maintenance service. And so there's not a dollar for dollar add in the services, the maintenance and delivery product -- or the maintenance and support product, as there is with the hardware product. So we're able to leverage that a little bit more aggressively.

Okay, thanks.

And that is all the time we have for questions, and this will conclude today's question-and-answer session. At this time, I would like to turn the conference back to Mr. Lee Chen for any additional or closing remarks.

Thank you all of our shareholders for joining us today and for your support. We would also like to take this opportunity to thank all of our customers, partners and employees. We thank you for all your dedication, commitment and hard work that has helped A10 build A10 into the Company it is today. We are in a very strong position to continue our success and I have never been more excited about the opportunity ahead. Thank you and good day.

And this will conclude today's conference. We thank you for your participation.