睿科網路 (ATEN) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

Please note today's conference is being recorded.

(Operator Instructions)

And now I'd 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' third-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 A10's 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 its third-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 with prepared comments and the 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 our projections for our fourth-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, October 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. We disclaim any obligation to update these forward-looking statements as a result of future events or otherwise. For a more detailed description of these risks and uncertainties, please refer to our 10-Q filed on August 4.

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 statement posted on the Company's website.

We will provide our current expectations for the fourth 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. Now I would like to turn the call over to Lee for opening remarks. Lee?

Thank you, Maria. I would like to thank you all for joining our third-quarter financial results conference call. Let me start by saying we are very disappointed with our financial results this quarter. We delivered the full-quarter revenue of $43.4 million below our initial guidance of $48 million to $50 million. The lower top-line performance, coupled with a low gross margin profile, brought our non-GAAP net loss to $8.8 million or a loss of $0.15 per share, significantly off our original guidance of $0.07 to $0.09 per share.

Our current level of growth and execution is not at the level we intend to exhibit. We understand that the investment community expects more out of A10, as we do. And we are committed to improving our execution and rebuilding your trust in A10.

Let me take you into third-quarter dynamics that impacted our revenue. We ended the quarter with a very strong pipeline, and most our regions delivered revenue consistent with or above our expectations. However, bookings and therefore revenue in North America were below our expectations, primarily driven by lower North American service provider spending and longer than expected close cycles and sales cycles for select large deals in North America.

Looking to these factors in more detail, first, like many networking companies, we saw a slowdown in spending within our North American service provider customer segment. This particular set of customers tend to place large orders and is an important revenue segment for A10, given that 4 of our top 10 year-to-date customers are service providers in North America. Putting this in perspective, revenue from North American service providers decreased 55% in Q3 from Q2.

We expect service provider revenue in North America and other regions to continue to fluctuate from quarter to quarter in the near term. But we do believe our value proposition remains strong, as our ACOS platform addresses a critical part of their data center infrastructures and consolidation strategies. For longer-term opportunities, we are working with many of our large service provider customers to design products to meet the needs of their next generation networking deployment.

Second, the close cycle for several years was longer than we expected and extended beyond the end of the quarter. We define the close cycle as the time between when A10 is informed we were awarded the deal and the time the PO is received and the product is either shipped or received by the customers. There were about six awarded deals that did not close in Q3, and this amounted to approximately $4.4 million. To date in Q4, we have closed approximately $3.4 million of these deals.

And third, we saw a lengthening sales cycle for select large enterprise deals requiring features in development, some of which are new to the market. To help reduce our sales cycle times, for these deals, we are adding engineering resources to increase the velocity at which we deliver these deal-specific feature requests. Furthermore, to support large opportunities in our pipeline, we are also expanding the level of senior management engagement on deals above $1 million.

Diversifying our customer base and growing our enterprise revenue is a primary objective for A10, and where we have focused a lot of our 2014 investments. We have made a lot of progress in this initiative in Q3. We added over 260 new customers, most of which are enterprise customers. We also grew our enterprise revenue 29% over Q3 of 2013. And for the first nine months of 2014, it has grown 50% over the prior-year period.

However, we still have a ways to go. In order to help build consistency in our pipeline, we need to deepen our penetration in the enterprise, continue to build our enterprise pipeline, continue are new-generation initiatives, foster technology partnerships, and drive leverage out of our channels and new sales field resources.

We remain confident in our strategy, the power of our ACOS platform, the strength of our market and the ability to succeed within our three different markets -- ADC, CGN and TPS. We believe we are well-positioned in the market as we continue to see growing interest from our customers based on our superior performance, SSL insight and security features. As well as our ability to integrate with other leading-edge networking and security providers.

We believe this is best highlighted by the record number of new customers we added in the quarter, which increased four new TPS customers. In total, we now serve over 3,600 end-customers.

A few third-quarter customer engagements I would like to highlight include -- our Thunder ADC was selected by two government agencies, including a large US military department. We were chosen because our unique ability to process SSL-encrypted data packets. Our Thunder CGN solution was chosen by an international carrier that is in the process of deploying one of the largest LTE networks in the world.

Lastly, our Thunder TPS solution was selected by two leading gaming companies in North America to help protect their networks against the growing number and intensity of DDoS attacks. In both cases, we replaced an incumbent and beat several other security vendors in the bake-off. We also won initial TPS deals in Asia and Europe.

These are just a few of the many customer success stories in the quarter that demonstrate the power of our differentiated application networking platform, which we continue to innovate and enhance to meet our customers' needs. In August we added several new security features to our Thunder ADC solution, including URL bypass for SSL in an ADC, that provides an industry-leading performance and scalability of SSL insight.

We also integrated enhanced SSL upload capabilities, web application firewall enhancements. And we broadened our application, excess management features that centralize user authentication.

In conclusion, while we hit a speed bump and our revenue is not at the level we would like it, we continued to make progress on our initiatives by adding a record number of new customers, continuing to expand our enterprise revenue base, and bringing on four new TPS customers. Our differentiated high-performance product suite is gaining a lot of attention in the market. And we see significant increase by customers, channel partners, and technology companies in the Thunder portfolio.

It is important that we continue to deploy our go-to-market resources and partnerships in order to help drive future revenue and diversify our customer base. To that end, I'm pleased to announce that earlier this month, we launched the A10 Security Alliance, an ecosystem of leading security and networking companies that are working together to help mitigate threats and automate security operations.

Our ecosystem provides validated and integrated solutions that help customers architect secure data centers and improve efficiency. Inaugural members of the A10 Security Alliance include leading companies such as RSA, Arista, FireEye, Symantec, IBM Security, Webroot and several more.

Additionally, we recently brought on a new VP of Strategic Alliance. Gunter Reiss joins us from Ericsson. In his new role, he will oversee business development activities, including Strategic Alliance, technology partnerships, and the OEM relationships.

We are moving forward and charging ahead, and we will remain focused on improving our execution. With that, I would like to turn the call over to Greg to review the details of our third-quarter financial performance and the fourth-quarter guidance. Greg?

Thank you, Lee. And thank all of you for joining us here today. Third-quarter revenue grew 9% year over year to $43.4 million. Product revenue was $31.6 million, down 2% from the prior-year, and represented 73% of third-quarter revenue.

Service revenue was $11.8 million, up 56% year over year, representing 27% 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.

Deferred revenue grew 58% year over year, and 11% sequentially, reaching $50.9 million. As Lee mentioned, our Q3 revenue shortfall was primarily related to a reduction in North American revenue, due mostly to lower service provider spending and longer-than-expected close cycle times.

In total, revenue from the United States amounted to $20.4 million, representing approximately 40% of third-quarter revenue -- or, sorry, representing approximately 47% of third-quarter revenue. This compares with $26.2 million in the second quarter and $26.6 million in the third quarter of the prior year.

Outside of North America, revenue growth tracked ahead of our expectations. Japan revenue increased 41% year over year and 17% sequentially, representing 23% of total revenue. Revenue from APAC more than doubled year over year, representing 14% of revenue. And EMEA revenue nearly tripled year over year, and represented approximately 11% of total revenue.

Revenue from enterprise customers was $26.3 million, an approximate 4% decrease from Q2, and up approximately 29% from Q3 of 2013. Enterprise revenue represented approximately 61% of total third-quarter 2014 revenue, with the remaining 39% of revenue coming from service providers.

Moving beyond revenue, all further metrics discussed on this call are on a non-GAAP basis unless expressly stated otherwise. Third-quarter gross margin was 73.6%, a decrease of 399 basis points compared to Q2 of 2014.

Services gross margin increased to 77.3% in Q3 from 75.2% in Q2, while product gross margin decreased 615 basis points to 72.2% from 78.3% in the prior quarter. Product gross margin was impacted by increased inventory reserves and write-downs, mostly due to the product transition from the AX series to the Thunder series of products.

Inventory-related write-downs accounted for 320 basis points of the product gross margin reduction, relative to Q2. We've begun to make changes in our inventory management and planning to help minimize these costs in the future.

Additionally, product gross margin was impacted by changes in the geographic mix of our revenue, and decreased 122 basis points as a result of the weakening yen. In order to accommodate for a potential continued weakness of the yen, and fluctuation in the geographic mix, we are expanding the range of our expected Q4 gross margin. We therefore expect Q4 gross margin to be in the range of 76% to 78%.

We ended the quarter with that staff of approximately 756, up from 740 last quarter, with the majority of new hires in sales and marketing, and R&D. Sales and marketing expense was $23 million compared with $22.5 million in Q2. On a percentage basis, sales and marketing expense was 52.8% of revenue, a 295-basis point increase over Q2 of 2014. In Q3, R&D expense totaled $11.2 million or 25.8% of revenue, compared with $10.9 million and 24.2% in Q2.

Combined G&A and litigation expense was approximately $5.6 million or 13% of total revenue, compared with $6.3 million or 13.9% of revenue in Q2. As we announced in September, we resolved the IP claim by Radware, and as a result we expect our Q4 litigation expense to decrease by approximately $600,000 as compared to Q3.

In total, third-quarter non-GAAP operating expenses were $39.8 million or 91.6% of revenue. Third-quarter non-GAAP operating loss was $7.8 million. And our non-GAAP net loss in the third quarter was $8.8 million or $0.15 per share, compared with a net loss of $5.3 million or $0.09 per share in Q2. Basic and diluted weighted outstanding shares for the quarter were approximately 60 million shares. GAAP net loss in the third quarter was $12.3 million or $0.21 per share.

Moving on to the balance sheet, at September 30, 2014, we had $107.1 million in total cash and equivalents. During the quarter, cash used for operations was $3.8 million. We ended Q3 with $42.5 million of net accounts receivable, up from the Q2 2014 balance of $40.5 million. Average days sales outstanding were 86 days, up from 80 in the prior quarter.

Moving on to our outlook. In order to account for some of the deal dynamics we saw in the third quarter, we are adjusting our forecasting methodology. More specifically, we are expanding our revenue range, given the longer close cycle for select large enterprise deals. And we are requiring a higher level of conservatism to service provider opportunities in the pipeline, given the current spending environment.

We expect fourth-quarter revenue to be in the range of $41 million to $45 million. At the midpoint, this represents a 2% year-over-year increase in revenue, and brings our expected full-year growth in to between 24% and 27%. We expect to report a non-GAAP net loss between $0.14 and $0.20 per share, using approximately 61 million shares on a basic and diluted basis. With that, I would like to open up the call to your questions. Operator?

Thank you.

(Operator Instructions)

Mark Sue, Royal Bank of Canada Capital Markets.

Okay. Thank you, and sorry for the background noise. Gentlemen, if we could get a sense of how we should think about the long-term financial model, which I think we said that we saw recently. How we should think about revenue for the longer-term, how we should think about margins over the longer term -- and a focus on timing of profitability, that would be helpful.

Greg, can you take this?

Sure. So Mark, I think that the key thing here is that our visibility has been challenged over these last couple quarters, and so we've really focused our attention at this point on speaking towards Q4 and making sure that we get it right. Both in the core of the business, as well as how we guide participants of this call.

On a couple of the elements that we've talked about in Q4, I can give you a little color as to how we're thinking about them. But for the longer-term model, I think we're going to have to see that develop as we go through Q4.

Clearly -- to go to last piece first -- profitably does have a little bit of a push out on this, just because of the lower revenue rate that we're running at currently. But from a margin perspective, I think in the script, we describe what the effects of our margin, and most of those are things that were transitory within the quarter.

The yen, I think will continue for some time. We were making assumptions in why we expanded that range, that we will see some uncertainty in the yen, at least in the short-term. But the other elements of our margin really remain un-impacted. So I'd like to be able to guide you a little bit more on the long-term outlook, but I think at this point, our main focus is developing credibility around our ability to forecast in the short-term before we take you too far down the long-term road.

Okay, understood. And if I look at your competitors, your largest one actually had a very good results, even on the service provider side. I'm just trying to get a sense of what -- how do you see the competitive dynamics?

What do you see as the root cause of some of the delays at your carrier customers in North America? And whether or not you feel the market is -- still fourth quarter and your seeds are still growing in [IT]. Thank you.

Do you want to take this?

Sure, I'll go ahead and take it. Well, it's really -- from a service provider perspective, we should really focus on North America. I think that's probably going to get mostly to your question, where we saw lower North American spending than we typically would see. And we saw that some other companies have reported similar circumstances. But keeping in mind, 4 of our top 10 year-to-date customers are service providers in North America. And we expect the service provider revenue, as a result, to fluctuate from one quarter to the next.

So we feel certainly very strong that our value proposition for service providers is still quite strong. Our ACOS platform continues to address what those customers are looking for, in terms of addressing the critical part of their data center infrastructure and consolidation strategies.

What happened in North American service provider, it's an interesting situation to look at. We're not losing any particular deals, we're just seeing a slowdown in overall spending. And I'm not sure I can give you a whole lot more data than that.

I think based on our internal data, our win rate in this quarter is approximately the same as the prior quarter.

Do you have another question?

I think we're good. Thank you, gentlemen. Good luck.

Rod Hall, JPMorgan.

Yes, hi. Thanks for taking my question. This is [Astrin] on behalf of Rod. Greg, I was hoping you could give us more detail on both higher [inventories] and the write-offs that impacted gross margins. I know you mentioned about the transition from AX to Thunder, but looking at the deal pipeline heading into the quarter, it sounds like that is something that you could have already expected.

Can you help us understand why that would be a surprise? Also if you could provide any more color on the nature of these write-offs, that would be helpful too.

I think that's a -- there was an acceleration in our customers deploying the Thunder versus AX. And our customer [except this] we found their model faster than we expected. Greg probably can give you more details.

Yes. I think actually that does get to the core of it, is that the transition to Thunder has happened pretty rapidly. We just put that into market in the first quarter of this year, and it's now over -- it's up at 80% of our sales volume. So the transitioning happened more quickly than we expected, and in Q3 -- I'll just say, a lot more of the business went to Thunder than we had anticipated.

And so in the nature of trying to accommodate that move and allow it to continue, we ended up writing off boxes that were AX boxes. But also, there's a fair amount of componentry that sits behind that -- chips and cards that we have in our inventory versus in the manufacturer's inventory. And so that exacerbated the amount of the write-off, because it was good that we're kind of contingent -- not contingent, but consignment products other manufacturers locations.

What this is, is, it pretty much clears the deck of most of the AX product. There's a couple pieces that are still actively selling, but most of the AX now is either off the books or written down to fairly low levels.

Okay. So you -- [view a number at 3-point] percentage points here on gross margins due to write-downs, 1.2 percentage point is due to weakening yen. So is the rest of -- is the delta between your initial expectations and what you're reporting in terms of gross moral margins all related to this? [And into reserves?] Or are there other factors there?

I think the other factors that are called out here have to do with the -- so we've got the 320 basis points. You've got the 122, the geographic mix, with the [fort] shortfall in North America, which is typically a strong gross margin market for us -- that had an effect.

And then the other affect is that, just because of our level of gross margin -- our level of revenue in the quarter, there was just less total revenues to spread some of the fixed costs across both the staffing and the support organization, the warehousing staff. And so that had an impact on the gross margin as well. It was just the volume impact.

Okay. I just have one more question. I was hoping you could give us more perspective on the sales cycle entering -- was the sales cycle longer than your expectations? Because it was new customers you were dealing with, over [whom we now] regular [election] experience, is it now real slippage in the deals? Also, what is the number of service provider deals of the fixed deals that [got slipped]?

Well, Astrin, I'll go ahead and take this one. It may be worth expanding on this a little bit from the discussion that Mark had just a few moments ago. Obviously service provider in North America is a larger impact to us, because that's where we see a whole lot of larger deals get done. We didn't necessarily see sales cycles increase on service provider, we just saw an actual slowdown in overall service provider spending.

But moving beyond service providers -- which I think may get to your questions -- some the large enterprise deals slipped, due to longer-than-expected close cycles and sales cycles. And Lee commented on both of those in the earnings discussion.

But on a close cycle side, some of this is just being a new vendor, where the deals that we were awarded are just delayed, mostly due to more administrative-related issues. As Lee mentioned, we closed about 75% of those deals that were delayed since the end of last quarter. So that's a little bit on the close cycle.

On the sales cycle side, we also saw a lengthening of that cycle for some select large deals requiring special feature development, some of which were new to the market. But also some features that we may have to implement in order to close the deal in some new or different way. I can give you some examples of what those are like, to give you kind of an idea of what impacts the sales cycle.

So for example, one customer with a large CGN deployment was suffering from DDoS attacks in their DNS environment. They asked us to come to the table with a DDoS protection solution on their CGN deployment. And we developed it, and that caused them to refresh of their entire infrastructure. But the time it takes to close that deal actually was increased. To sell that deal actually increased.

Another area that we see is due to the Snowden Effect. We're seeing multiple requests from customers for new sets of special SSL ciphers to further protect their customer traffic over SSL, and we've developed that. But that development process takes some time.

In the enterprise space, which has been a bit of an impact for us in Q3, the large enterprises require very special features, such as to automate configuration and provisioning of the ADC services across multiple business groups within large enterprises. And we have to develop that, and we developed that. And also many large enterprises are asking for special load-balancing features, where enterprise customers just want to better manage load-balancing across their desktop, or virtual desktop infrastructure in our case.

So some of these things really aren't very new to us, honestly. A10 is built on this whole concept of customer-driven innovation, and as we continue to move deeper into the enterprise and penetrate that Fortune 1000, which we are aggressively pursuing, naturally the numbers get bigger. And as a result, we're going to have to bolster some resources in our engineering team to better support these kinds of requirements.

So it's those kinds of things that are actually impacting the sales cycles. And from a close cycle perspective, it's just being the new guy at the table.

Okay, understood. Thanks very much.

James Faucette, Morgan Stanley.

Thank you very much. I wanted to touch on a couple things related to the sales cycles, et cetera. First, can you talk a little bit about the timing of when you started to see some delays in sales cycles, as well as software carriers [pending that]?

The question from me arises because, even if it sounds like if you would've closed the delayed deals within the quarter, you still would've been towards the lower end of your guidance range. And that's even taking into account better-than-expected revenue (inaudible) like Japan. I'm just trying to understand when we started to see that, and the nature of the impact there, first.

And second, wanted to get your take on -- going back to Mark's question on competition in the market. I know that your win rates haven't changed, but are you seeing anybody more, or are pricing dynamics changing at all? But may also be contributing to people taking a little bit longer to go through their evaluation cycles? Thanks.

I'll take that one; Greg may have some comments. This is Ray Smets. When did we actually see the changes in the quarterly activity that would lead us to that? It's essentially -- from a linearity perspective, a good portion of our business -- as you would expect in a business of our type -- tend to close later in the quarter. And in Q3 in particular, we had a particularly later quarter than usual in month three.

So the signals were probably only a few weeks before the end of the quarter, because obviously you know what those end-of-quarter cycles look like, especially in the enterprise domain. We do keep track of that on a daily basis, we look at this data almost on a continual basis.

Your second question was regarding competitive pressure. From a competitive perspective, we do see all of the competitors in pretty much all of the deals. But we haven't seen anything additional or different, from a competitive pressure perspective, such as higher discounting or anything like that, in North America. So we continue to see the same competitors and the same kind of deals, but we are not seeing anything different.

Okay. And then I just had a question on inventory. You said you had written down most of the value of the inventory, et cetera. My question is, are those products still going to be available to customers? And as a result, if and when they do sell through, at least on a non-GAAP basis, should we expect them to be marginally accretive? Just trying to think through what's happening with those products and how they may come back into the [penal] at some point?

Yes. The products that we wrote down, several of them do still have application in the market. A lot of it for existing customers who have an install base of that unit and they want some additional units going forward. Some of them will get used as replacement units relative to end units that happen to fail in the field. And so those will come through in the service area.

And some of these boxes we're working on re-purposing in some different fashions. But they're not going to be the main-line products that we are aggressively promoting at this point.

Okay, great. Thanks.

Ehud Gelblum, Citi Research.

Hi. It's actually Stan Kovler calling in for Ehud. I just wanted to ask a question -- another clarification about the deals that amounted to the $4.4 million. It's related to the guidance. Obviously if you add back the deals to Q3 -- and let me think about Q4 -- then there's a decline, or you can spread them across both quarters as flat.

But you only added about 25 people to your organization this quarter, probably in an attempt to control costs. How do you think about the drivers of sales for the following quarter and for the following year from that quarter-carrying sales person perspective? Is it partnerships, is it sales? How we think about the past, to growing revenue from here? That's the first question.

And the second question is really just a clarification -- were there any 10% customers in the quarter? And how did you fare with one of your largest enterprise customers that was previously a 10% customer?

Okay. There's a lot of questions embedded in there, so I'm going to try to get to the ones that I can recall. And if we miss any, you just feel free to cycle back on them. Just the easiest one to answer factually is on the headcount one, on the staff growth. Just because the numbers you see for Q2 includes our summer intern program. And so there were roughly 16 individuals who were summer interns who were in that number, who just rotated off.

There's an additional 16 people who were hired during the period, related to that. And the people who were hired tended to be in our engineering team on balance, and in the sales and marketing teams.

The headcount growth was actually slightly greater than might be immediately visible from those numbers. But from an investment perspective, we are putting additional feet on the street from a sales deployment, as well as through our channel programs. And I'll let Ray talk about channels in a second, and how that goes through.

But from a growth perspective, we're still continuing to selectively determine where people go, and actually we're not attempting to cut costs this quarter. We were still charging ahead with the expectation, up until very late in the quarter, as Ray had indicated, that we were going to be well within our guidance range. So Ray, would you --

Yes. Let me talk a little bit about some of the things that we're going to do going forward to make sure that full productivity is there as we drive through Q4 and then 2015. And Lee highlighted this in his earning opening remarks. But one thing we are going to do is, we're going to continue to look for ways to deepen our penetration in enterprise, and build the enterprise pipeline.

And we're going to do this by investing and developing more channel lead opportunities with partners that can get us into the enterprise. We've already been doing this during the course of the year, but we're really just beginning to steamroll that. This is part of our A10 Affinity program, which we launched a couple of quarters ago, and that's where most of our effort is being placed to enable ADC sales in enterprise.

So far the program is delivering the kind of momentum we'd like to see in this kind of a program. And, in the early days, and we are prepared to take what we've learned in North America and roll that out globally. So that's one aspect.

But from that, we'll continue to develop lead generation initiatives where we create demand and we deliver those leads from that demand in various programs and to our inside sales organization. And we are actually hitting our internal goals in terms of leads generated in 2014, so we're pretty happy with that initiative.

We recently hired new leadership to drive inside sales activities in North America, and we're taking what we learned there to a more global approach as well. So that's the second part of it.

Lee talked a little bit about fostering technology partnerships, and that certainly is key as well. We have about 30 technical partners -- technology partners that we itemize on our website, and we're fostering new partnerships every quarter. And as we Lee mentioned, we hired Gunter Reiss to lead this initiative. He's a seasoned Alliance executive that will be focused on building and leveraging our technology partnerships.

But just to round that out, we're going to leverage our channel, but we're also going to development new sales and field resources. As I mentioned, our progress with the A10 Affinity channel program is moving forward nicely. The total number of partners in the program are up meaningfully quarter over quarter. We've seen a strong uptick in our channel enablement training activities that are online and available to all of our partners globally. The number of deals that we're seeing in the channel are up on a year-over-year basis, and we've seen a very strong increase in deal registrations.

So overall, we're pretty happy with the progress that we've made on the A10 Affinity program. And we are very bullish as we roll this program out globally, that it will help us expand access to the market. Now we just need to close the sale.

Thanks, that's helpful. And then just, any 10% customers in the quarter?

No. Not this quarter.

And if I could just ask a final question, on Japan. What drove the sequential increase in Japan? Was it the enterprise business, or the majority-still service providers that came back a little bit?

Well, I think the revenue from Japan is still primarily from the service provider customers. The revenue from the [enterprise] revenue from Japan this quarter is higher than what we expected, but still below our typical run rate, and not at the level where we would like to be. Ray, you want to add something to it?

No, I think you covered it. We do have -- we depend very heavily on service provider revenue in Japan. We're very much over-weighted on that. And as Lee mentioned, we did have a better-than-expected quarter there.

And just as an aside on that is, at the end of the prior quarter, we had talked about some service provider deals that have fallen out of the quarter. Some of what you see in Japan are those deals actually closing and coming to fruition.

Thank you.

(Operator Instructions)

Brent Bracelin, Pacific Crest Securities.

Thank you. I'll ask a couple questions, if I could here. Starting with Ray, I want to go back to service provider, given you had the unexpected weakness in Japan last quarter, you saw unexpected weakness in North America this quarter. I think Juniper last week talked about a slowdown in their service provider business, and really not expecting a rebound until the second half of next year. Could you just provide a little color around what you're seeing -- the appetite to invest, relative to service provider customers?

And would you be in the camp of Juniper, where you don't expect much of a rebound until the second half of next year? Or what's your best guess of when spending starts to improve?

Yes, that's a great question. Obviously we're part of a bigger market, so we're not alone on this one. And I'm not sure I can actually give you -- as much as I know the service provider market, I can't give you a real prediction as to when we are going to see investments come back. But as you know, service providers tend to move in a herd mentality, that's what I've seen in the many years I've been doing this.

And we saw the activities in Japan probably for other reasons than what we're seeing in North America. In Japan last quarter, we thought it was attributed to -- we heard many analysts talk about maybe it was attributed to the overall economic situation in Japan. In North America we've heard stories around whether there's a cash preservation activity regarding some new wireless licensing strategy or deployments that will happen next year. So it's very hard for us to put our finger on it.

The issue for us is that, where we exist within the service provider architecture is truly key. Where they derive most of their revenue, in terms of services and applications, touch the kind of solution that we deploy. So we feel like we're in a fairly protected area of their architecture, and we know that the technology will not be eradicated. If anything, it'll be consolidated and enhanced.

We think from a longer-term perspective, service provider spending will come back. But the reality is, the opportunities in the pipeline are lower than we would normally expect. And we're hearing that from other companies as well.

Okay. So it sounds like visibility, if anything, is declining in that certifier area, versus the last two quarters, which clearly have been tough. Greg, my follow-up question is really for you, around enterprise.

If we think about your outlook here and guidance for the December quarter, I know you're not breaking out guide on an enterprise and certifier basis. But if I look at the kind of spillover enterprise deals that you've already closed this quarter and then look at the guide, it does look like you also expect the implied enterprise business to be weak as well.

Could you talk a little bit about the pipeline that you see in the enterprise, in the December quarter? Given typically this is a quarter that you'd expect some seasonality and enterprise budget flush.

Actually there's two slightly conflicting trends here. One is that our enterprise pipeline is actually very strong. And we spoke of the deals under $500,000 where we see fairly consistent growth in that part of the business, and much more predictable part of the growth. But also in the select larger transactions that Ray had talked about earlier.

So I think what we're seeing is, we're seeing a growth in the pipeline. We are seeing good traction develop there. But because of the things that we described on these larger transactions, they become somewhat less predictable as to what their close dates are going to be. As we work with them to develop these customized features that are specific to them.

And so from a guidance perspective, from a forecasting perspective, there is a little more uncertainty around the timing of their close. So that's been the push-pull that we've got. It's not about interest in enterprise, it's not about getting traction. It's about our ability to forecast the close date that is causing us to put the guidance where we did, and to have that broader range on the guidance so that we can accommodate both the ins and the outs of these customers.

That's helpful color, Greg. Thank you.

Rohit Chopra, Buckingham.

Thanks very much. I wanted to ask a clarification question on the inventory. Did the Radware litigation have any impact? Or did that force any write-offs as part of any settlement or IP settlement? That was a clarification, and then I had a follow-up question.

No. There's actually no impact from the Radware settlement at all.

Okay. And then I wanted to come back to the sales cycles again and just talk about security. Did any new features or security capabilities with the new product, the new line, extend the sales cycles or maybe extend eval periods? And I know Lee only talked about four new TPS customers. As you talk about that, just talk about the momentum in security as well.

I think most of the enterprise feature requests were based really on automation. How do you make the enterprise manage their network easier, or cost [different department]? That's also [allowing us we sell] SSL insight. So many of our feature requests to expand our [marketing SS inside] capability. For example, I think Ray mentioned what [we read about cipher]. The different algorithm for the security, their encrypted data. So that's one area.

In terms of the other -- I think the other security features -- I think it's really not about the security features. But it's really since we are deepening our penetration enterprise, the number of customer requests just flowing more than what we anticipated. Because of success we've had by getting the enterprise talking to us and engage with us.

So the future it can be more than what we expected. So to address the issue, now we are adding more engineers this quarter to really fulfill the future requests so that we can shorten the sales cycle.

That's more a feature request from the customer, rather than the customer evaluating some of the new features on the Thunder series that may have extended the sales cycles. Is that --?

That's a feature request -- it's a feature request from a customer who was really interested in the product, really liked our performance, really liked our SSL, really liked our other security features, our ADC features. But most are really about the management, how do you [old maid], how do you do things like management your cost mobile devices.

Thanks Lee.

Thank you.

Catharine Trebnick, Dougherty & Company.

Thank you. Can you hear me?

Yes. Hi, Catherine.

Okay, I have a quick question. Can we just go back -- you had said on the win rate for the carriers -- can you talk about your win rate in the enterprise, and give us some color on that? Thanks.

Catherine, this is Greg. There may have been a missed [fix]. I don't think -- we don't describe the win rate by type of market. So the win rate that we refer to is across both the enterprise and service provider. And being consistent this quarter, it's still in the north of 70% range. But we don't differentiate between the two types of customers.

Okay, thanks. I thought perhaps you did. And then the other question is, on the enterprise, it seems that -- how long has this new sales program been in place to go after and increase your revenue and your number of leads? Because it seems to me -- is it -- do you think that's taking longer, or is that one of the reasons you ran into this challenging issue this quarter?

Yes, Catherine, this is Ray. We actually rolled the Affinity Channel program out just two quarters ago. We are still early days. So it is true, we're still in the early stages of this, and it does take some time to actually create that momentum.

But I believe that the objectives of that program are actually working out pretty well for us. As Greg mentioned, our typical kind of sub-500,000 business is actually moving ahead, which is where we see a lot of those deals come from. But at the same time, we actually see a few large deals come from there as well.

It's just the general slowdown in service provider spending that's impacting us, and then the sales cycle lengthening on the larger enterprise deals in the pipe. So it's not really affected by that program.

Okay, thank you.

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

Actually, this is Greg first. I want to clarify one statement. Earlier I said we had no 10% end-customers. We actually do have a 10% partner at 13% -- a reseller. So, just for completeness.

Lee, do want to close?

Yes. Thank you, all of our shareholders, for joining us today, and for your support. Thank you and good day.

This does conclude today's conference. We thank you for your participation.