睿科網路 (ATEN) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

Today's call is being recorded. At this time I would like to turn the call over to Maria Riley. Please go ahead, ma'am.

Thank you, Elizabeth. And thank you all for joining us today. I am pleased to welcome you to A10 Networks fourth-quarter and year 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 fourth quarter and year 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 trended 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 first quarter operating results, our expectations for future revenue growth and improved operating margin, and the growth of our business generally. These statements are based on current expectations and beliefs as of today, February 10, 2015.

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 most recent 10-Q filed on November 7.

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 first quarter of 2015 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'd like to announce that management will present at the Morgan Stanley Technology Media & Telecom Conference on March 3, in San Francisco. Now I'd like to turn the call over to Lee Chen for opening remarks. Lee?

Thank you, Maria. I would like to thank you all for joining our fourth-quarter financial results conference call. Overall the team executed well during the quarter.

We delivered revenue of $45.2 million, slightly above the high end of our guidance of $41 million to $45 million. Our deferred revenue grew 12% sequentially and 39% year over year. Our non-GAAP gross margin rebounded to 77.2% from 73.6% last quarter. We reported a non-GAAP net loss of approximately $12 million, or a loss of $0.20 per share, in line with our guidance of $0.14 to $0.20 per share.

Looking at our top-line results, service provider spending improved sequentially in North America. However, we are maintaining our near-term cautious view for the service provider vertical.

In the enterprise, we continued to make progress in expanding our presence by both landing new accounts and expanding within our existing customer base. Sequentially, enterprise revenue declined approximately 11%, reflecting a longer sales cycle for large deals while our enterprise pipeline continued to grow nicely. And overall, our win rate for the quarter increased. In total, we added over 280 new customers in the quarter and we now serve approximately 3,900 customers.

A few fourth quarter customer engagements I would like to highlight include a hosting service provider selected our standard Thunder TPS solution to protect their customers from the ever-increasing number of DDoS attacks. In this network, we are replacing a longstanding incumbent and beat several vendors in a bake-off. Our deep packet inspection capabilities and superior performance were key factors to expanding our footprint within this existing customer's network.

A large international financial institution that is building a new data center selected our Thunder ADC for server load balancing and DDoS protection. Following a security breach, a domestic government agency deployed our Thunder ADC for advanced SSL Insight, extending their security capabilities. And, an internet content provider based in Japan purchased our newest Thunder 100-gigabit solution for a critically important part of their network. This customer needed a very high performing ADC for layer four to layer seven SSL offload and CGN. All in all, the fourth quarter shaped up as we expected generally.

And although 2014 had its challenges, during the year we believe we made solid progress toward executing our strategic plan. A few of our notable accomplishments for the year include: growing our team by 20% and our customer base by 34%; adding nearly 1,000 new customers, growing our 2014 revenue by 27%, well above the growth of our market; growing our annual revenue in the US by 25%, in China by 43%, and in EMEA by 59%; growing our enterprise revenue by 30%; expanding our security solutions with the launch of TPS and several advanced ADC security features, such as SSL Insight, advanced cryptographics and enhancements to our application access management and WAF application firewall capabilities; enhancing our firewall and DDoS capabilities in our CGN solution; and increasing our channel engagement programs, resulting in a 33% increase in channel-led deals since the beginning of 2014.

These results were made possible by the hard work of the A10 team and by the power of our ACOS platform, which we continue to evolve and expand. In late Q4, we launched ACOS 4.0, our most significant release since ACOS was first introduced. Our newly released platform has open standards-based programmability, enhanced application support, and manageability that enables important advanced features such as: SSL Insight, WAF application firewall, and Application Access Management.

ACOS 4.0 also includes A10 Harmony, an architecture that enables rapid SDN and NFV integration for enterprise, cloud, and service provider networks. The ACOS platform is the foundation for A10 to expand our current product offerings, including new functions and modules for our Thunder ADC, as well as to move into new product areas.

Leveraging the advanced policy engine in ACOS 4.0, we released Thunder TPS 3.1, which includes a fully programmable policy engine, new advanced DDoS mitigation capabilities, and granular layer 4 to layer 7 control to enable best-in-class mitigation. The release of TPS 3.1 five months after our initial TPS product demonstrated our ability to leverage new programmability in ACOS across our solution platform to bring new modules and functions to market quickly.

We also recently announced the integration of our Thunder ADCs with the Cisco ACI fabric, enabling enterprises to automatically and quickly provision application delivery and security services in a shared infrastructure. The combined solution integrates more advanced A10 Thunder ADC and security functionality such as: service chaining, WAF application firewall, SSL Insight and GSLB with Cisco ACI.

Our high-performance Thunder product suite continues to gain momentum in the market, driven by our high performance, SSL and security features, as well as our ability to integrate with other leading-edge networking and security providers. A10 addresses some of today's most critical application and security challenges. As cyber attacks grow in size and sophistication, the manageability, scalability and flexibility of the network becomes even more important.

Our ACOS-based Thunder platform enables open programming interface with the ability to easily scale from megabit to terabit of throughput, and delivers two to five times the performance of our competitors. We remain optimistic about the opportunities we see ahead.

Looking into 2015, we will focus on leveraging the significant investments in our engineering team, technology platform, and go-to-market activities that we made last year. Our goal is to continue to build on this foundation in order to drive the top-line growth while improving our operating margin. We remain confident in our ability to grow our business, capitalizing on our competitive advantage, expanding our strategic partnerships, and continuing to strengthen our technology leadership.

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

Thank you, Lee. Thank all of you for joining us today. Fourth-quarter revenue grew 7% year over year and 4% quarter over quarter to $45.2 million. Our full-year revenue was $179.5 million up 27% from 2013.

Fourth quarter product revenue totaled $32.3 million, down 3% from the prior year and up 2% from Q3, representing 72% of fourth-quarter revenue. Service revenue was $12.9 million up 47% year over year and 9% from Q3, and accounted for 28% of revenue. Deferred revenue grew 39% year over year and 12% sequentially, reaching a record $57.2 million, driven primarily by the strong growth in our install base and our end customer count.

In total, fourth-quarter revenue from the United States was $20.5 million, representing approximately 45% of fourth-quarter revenue. This compares with $20.4 million in the third quarter and $20.6 million in the fourth quarter of 2013.

Fourth-quarter revenue from Japan represented 22% of total revenue and grew 19% year over year and 2% on a sequential basis, despite a 10% sequential and 14% year-over-year decrease in the Yen. Revenue from APAC, excluding Japan, declined 9% year over year and 13% from Q3, representing 12% of revenue. Sales generated from EMEA reached a record high of $6.2 million, an increase of 14% over Q4 of the prior year and 27% over Q3, and represented 14% of total revenue.

Our enterprise and service provider split this quarter was 52% and 48% of total revenue, respectively. Revenue from enterprise customers totaled $23.5 million, a decline of 11% from the prior quarter and 8% below Q4 of 13. Service provider revenue was $21.7 million, rising 27% from the prior quarter and 30% from the fourth quarter of 2013.

Moving beyond revenue, all further metrics discussed on this call are on a non-GAAP basis unless expressly stated otherwise. We delivered a fourth-quarter total gross margin of 77.2%, up 363 basis points from Q3. Services gross margin came in at 77.2%, a decline of 11 basis points compared with the prior quarter. And, as expected, our product gross margin rebounded to 77.2% compared with the 72.2% margin we reported last quarter.

We ended the quarter with staff of 759, relatively in line with Q3, and up from 630 at the end of Q4 last year, an increase of 20.5%. In Q4, sales and marketing expense was $24.9 million compared with $23 million in Q3. This increase was partially driven by the end-of-year sales commissions and bonuses as top-performing sales staff exceeded their quotas.

On a percentage basis, sales and marketing expense was 55% of revenue as we continue to grow our sales and marketing team to further build and expand our reach. In Q4, R&D expense totaled $13.1 million or 29% of revenue compared with $11.2 million and 25.8% in Q3.

Fourth-quarter combined G&A and litigation expense was approximately $6.8 million or 15% of total revenue, compared with $5.6 million or 13% of revenue in Q3. This increase was primarily related to additions to our bad debt reserve in some of our international regions.

In total, fourth-quarter non-GAAP operating expenses were $44.7 million. Fourth-quarter non-GAAP operating loss was $9.8 million compared with $7.8 million in the third quarter. Our non-GAAP net loss in the fourth quarter was $12 million or $0.20 per share compared with a net loss of $8.8 million or $0.15 per share in Q3.

The depreciation in the yen during Q4 negatively impact results by $1.6 million or approximately $0.02 per share. Basic and diluted weighted outstanding shares for the quarter were approximately 61 million shares. Our non-GAAP net loss for the year was $29.3 million or $0.51 per share compared with a non-GAAP net loss of $15.5 million in 2013 or $0.31 per share.

Moving to the balance sheet, at December 31, 2014, we had $91.9 million in total cash and equivalents. During the quarter, cash used for operations was $17 million, reflecting an $11.5 million increase in accounts receivable from the prior quarter. Combined cash plus AR was down $3.7 million compared to $3 million in Q3.

We ended Q4 with $54 million of net accounts receivable compared with the Q3 2014 balance of $42.5 million. Average day sales outstanding were 96 days, up from 86 days in the prior quarter. The majority of this increase was driven by a large amount of maintenance renewals in the month of December. These amounts are reflected in AR but revenue is recognized over 12 or more months.

Moving on to our outlook, to establish our Q1 guidance, we are balancing our strong Q4 bookings, backlog carried into Q1 and our growing pipeline with normal seasonality in North America and appropriate conservatism related to the service provider vertical. We therefore expect first-quarter revenue to be in the range of $41 million to $45 million.

On the income side, we expect operating expenses in Q1 to be roughly flat to Q4, and therefore expect to report a non-GAAP net loss of between $0.18 and $0.23 per share, using approximately 61 million shares on a basic and diluted basis. In [saying] this, we are assuming a yen exchange rate in the range of $1.18 to $1.20.

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

(Operator Instructions)

We'll go first to Itai Kidron with Oppenheimer.

Thanks. Greg, the last quarter when the enterprise slowed down, the large deals slowdown, I think that was understandable. Can you give us a little bit more color? Maybe you can jump in as well, Ray, what you see in the field as far as any changes to that. Do you have a much better color as to cause of the slowdown or the anticipation of recovery from the slowdown? And I assume that your guide assumes continued depressed sell cycles on the enterprise side?

Ray, why don't you go ahead and start with that and I'll clean up with the guidance piece after you've done that.

Yes, sure, okay. Hi, Itai, this is Ray. Just to give you a little bit of a broad brush on enterprise, obviously this area continues to be a very important part of our strategy going forward. And we continue to actually make very good progress in the enterprise, landing new accounts, as we just talked about, 280 new accounts in the quarter, most of which were enterprise, and also expanding in the customer base.

What we're seeing is deal volume actually is on the rise. We're seeing very nice and consistent flow of small or normal-sized deals, not the big ones but the average-sized deals, in the quarter. And they're closing. So, that's the good news.

The sales cycles have been lengthened on the larger deals in our pipeline, as we just talked about. So, even though the revenue decreased quarter over quarter the pipeline continued to grow a little bit.

Just to give you a little color on that -- we talked a good bit about it last quarter -- the large customers just typically take a little bit longer to close. As we move into the larger deal domain, POPS tend to take longer, feature focus tends to be a lot more diligent, both of which can increase the sales cycle. So, the way I look at it is it's a competitive process. And obviously in a competitive situation as this, it can take extra time for customers, especially new customers, to make decisions like this.

Another way to look at it is we're making more inroads into that large enterprise market and we're bringing customers more of a choice they didn't have before. We want access to those deals that we normally would not have access to because we want more at bat so we can apply our high win rate. But as the enterprise deals get larger we're seeing a lengthening in those sales cycles. But the good news is the enterprise pipeline actually looks pretty strong.

When you talk about lengthening, it doesn't sound like there's lengthening. It sounds like that's the reality, just by the fact that you are moving more into large deals that you're more exposed to that. But I'm just trying to understand if there's a change in the environment or just a change in the customer profile, thus the overall profile of the sale cycle for the Company is changing.

I think there's a little combination of we are new to some of the customers, also some of the deal we expect will close last quarter got pushed out into future quarters. So, it's a combination of both. Some deal being pushed out and some we are new to the customer so that may take a little bit longer in cycles.

Okay. And on the outlook on March, Greg, just trying to think about sequentially the move from December into March, you didn't really have much in the way of seasonality, certainly not on the enterprise side into December. So, why should you have the seasonality down into March?

And if I'm not mistaken, March, your Japan business historically is very strong in March, as evident in the March of 2014 and other first quarters of the year. Is there anything different this time around heading into this March quarter that makes you a little bit more cautious? I'm just trying to gauge how much of this is you being extra conservative versus there's something underlying here that we're not picking up on.

In terms of factors that you just alluded to, one of them is a key difference, is in coming into Q1 of 2014, we had a very sizeable backlog coming out of Japan. And, so, we saw strong revenue from them in Q1 but it was driven off of the backlog that came into the quarter. When we look at the guidance for this quarter, we are expecting to see seasonality in North America, as is typically the case, but Japan, because of its economy over the last couple quarters, we are not expecting them to overcome that seasonality.

So, as we build guidance we're looking at those two factors and adding the overlay to what Ray just described on enterprise. And then also we have the service provider issues that are well known out there. I think those elements taken together are how we get to the guidance number that we think is pretty appropriate for the Q1 environment.

Got it. Okay. Before I open the floor can you just remind us how do you think about your FX exposures and what do you do from a hedging standpoint?

For FX coming into Q1, our guidance is set under the assumption that the yen stays fairly flat at its current somewhat depressed level, which is the $1.18 to $1.20, so basically what we're seeing today, and not expecting it to weaken beyond that. And we do not have a hedge in place to cover that position currently.

And in Europe you're pricing dollars or local currency?

In Europe we price in dollars. The only place we price in local currency is in the yen in Japan.

Got you, very good. Good luck, guys.

Our next question will come from Mark Sue with RBC Capital Markets. Please go ahead.

Thank you, folks. This is [Amit Drupal] calling on behalf of Mark Sue. Maybe you could just start with the competitive dynamics. You highlighted a higher competitive win rate. Is that overall or core ADCs or are we including the TPS side? And maybe you could talk about whom you're winning against.

This is Greg. I'll start with the data side of that and then Ray can add color, as appropriate. When we talk about win rates, we're not disaggregating that for discussion, so it's across all products and across all markets.

Having said that, when we do disaggregate internally we don't see great deviations from one product or one market to the other. For us, it's basically looking at the number of opportunities that we are introduced to or get ourselves into, and of the ones that close how many did we win and how many did we lose. So, it's pretty straightforward math for us.

And the competitive dynamics are such that when we look across the competitive landscape we see one competitor more than the others. But it's a competitive environment out there. And I think that from a win rate perspective we've seen very consistent numbers from quarter to quarter, and then this last quarter was moving upwards.

This is Ray. I was just going to add, just as Greg mentioned, we're really not seeing a change in the competitive environment. We see competitors in all of our deals, but we haven't seen any additional competitive pressures that's causing any change in discounting or pricing pressure.

Okay. And maybe just talking on the TPS side, it has been a few quarters out. Could you maybe talk about how many total deals you've won? And wanted to also clarify how much TPS revenue was actually recognized, and whether the change in ownership at one of your larger competitors in the DDoS space, are you seeing any benefit from that side?

I think we continue to gain traction with our TPS product during the quarter. We added several new customers within the quarter but we do not disclose revenue by product. As I said earlier, we believe TPS will be a meaningful revenue contribution in 2015. We are seeing a good traction, also the pipeline looks good.

Okay. And maybe just on the sales cycle, you talked about six deals in the last quarter that had not been closed and that was extended. Could you confirm that those deals did close?

And just in terms of plans, there were plans for engineering investments, considering the long sales cycle. Now do you think that additional investments may be needed or do you expect the existing resources to just ramp up in the upcoming quarters?

And, finally, just on the sales cycle, are you factoring in a lower closure rate for Q1 considering the longer sales cycles on the enterprise side? Thank you.

That was a lot of questions in sequence. I'm going to try to remember them and if I miss one remind me. For the six deals we referred to in the prior quarter were occasions where the close cycle had been extended beyond the end of the quarter. So, that's different from a sales cycle process. And the majority of those have closed, as expected.

And as we came into the end of Q4 we did not see issues with deals coming up to the very end of the quarter and not closing as expected. So, that issue -- I won't say resolved itself but from some very heavy attention to it was much approved in Q4, and we expect it to remain that same.

From a sales cycle related to feature development, we did close a significant number of deals and dollar amount of deals that had feature requests as part of their sales cycle in Q4, and made great progress in closing the gap there. There should not need to be incremental investment in that area, other than the number of engineers we have just doing that work on an ongoing basis.

There is still feature work being done, there's certainly transactions in the current quarter where we are working on feature requests, but we feel we have a very firm handle on what their needs are, what the timing is and the work that needs to be done to be successful in that area.

And just maybe whether you're factoring lower closure rates for Q1 considering sales cycles?

I don't think we're factoring lower close rates. I think that, as Ray talked about, and Lee mentioned on the enterprise large deals, those have naturally longer sales cycles. And, so, we adjust the dates we think they're going to be done. So, that part is reflected in guidance, yes.

I think in Q4 we added a record number of new customers, 280 and most of them are enterprise customers. Additional deals are the more close deals. So every sized deal closed nicely in Q4. It's the large deal that got pushed out.

Okay, thank you, and good luck, folks.

We'll take the next question from James Faucette with Morgan Stanley.

Hi. You have Meta Marshall in for James. A couple of quick questions for you. Are you seeing, as you guys talk about lengthening in sales cycle due to larger customers, are you seeing the average deal size go up?

Second question related to the security business, are you seeing more interest from the enterprise side or the carrier side? And do you have a target attach rate that you're hoping to get to of security uptake with existing customers?

And then a third quick one just on, are you planning or do you envision having to make any adjustment to the dollar prices in Europe just due to the weakened currency in the coming quarters?

This is Greg here. Again, we've got three questions. The first one on -- remind me, what was first question again?

Average deal size.

That's right. On average deal size, on the large end we do see it pushing up as we bring larger products to market. But the counterbalancing effect of that is, as our channel strategy has begun to work, they're able to go out and sell to smaller customers that we would not necessarily be seeing ourselves.

And, so, when we look at our channel deals, they have an ASP, our channel-led deals, they have an ASP that is noticeably lower than our core ASP. So, when you look at those two in tandem in the course of the quarter, it keeps the ASP actually fairly flat, although the diversity of that ASP is becoming broader.

Got it.

And the next, Meta, I think your next question was on where we are seeing the interest.

Security, yes.

We are seeing security interest both in the enterprise and service provider. For example, some of the advanced [kurdi] features such as advanced cryptographics, which we introduced last two quarters, we are seeing a lot of interest from the government agencies, our enterprise customers and service providers.

SSL Insight is another example of we saw the interest from both the enterprise and service provider. The TPS DDoS mitigation, today we are focused more on few large service provider and web hosting company. On the other hand, there are interest from the enterprise, too. So we are seeing basically product interest from both the enterprise and service provider. The last question was--?

What was your last question?

That one was just about whether you were envisioning having to make any dollar adjustment to prices in EMEA just due to the weakened currency.

No. I think there are other tools we can use to control the price, other than the price adjustment.

Great, thank you.

Our next question today will come from Ehud Gelblum with Citi.

Thanks. This is actually Stan Kovler dialing in for Ehud. I just wanted to start off with a question on 10% customers. In the past, you've had several, just to name a few, like in Japan NTT DoCoMo, Microsoft in the US. What were the trends there?

And if you can just discuss, obviously if they were below 10%, whether business for those customers has been steady state or if there have been any changes under the 10% threshold. And then just to touch on the cloud side of the business and how you're doing with your virtual additions of your products, if we can get a handle on that, that would be great.

I'll start with the 10% piece and then Lee can talk about the virtual piece. That's a good question on the 10% because in Q4 we did not have any 10% customers. All of the business was built up, as we talked about, from the mid-tier enterprises and some slightly larger accounts but no one customer was above 10%.

As we talked in prior quarters about our desires and our efforts to have a more diversified customer base, we're seeing the fruit of that in Q4. As Lee talked about, we had a record number of customers, a large number of transactions, and no big purchases. But when we look at the buying behavior of our top customers, of our top 25 customers, 24 of the 25 bought within the quarter.

So, it's not that these customers left. You've got two things. One is that our quarterly revenue is staying sizeable, so you have to be a larger customer to be a 10%-er. But also we're just seeing more dispersion across a broader group of customers on a quarterly basis. We see that as actually ultimately a positive for creating both a predictable and therefore sustainable revenue stream.

And then I think your next question was on how we did on the cloud side and our virtual products.

Yes.

I think we have a fair amount engagement with cloud provider in both the appliance and also in software version of solutions. Today we have a all-virtual solution running our popular hypervisor. And customer can purchase our software with pay-as-you-go pricing model.

We also integrate our ADC software solution with leading vendors such as Cisco and ACI, the VM, and FX and also we have our solutions within the Amazon Marketplace. ACOS 4.0, which is very significant release, with open program interface, we can easily integrate with a cloud SDN orchestration system. The other thing about the ACOS 4.0, we can quickly move into a new emerging market such as the current related bus in the industry about commercial off the shelf server solutions. Unless something we can leverage ACOS 4.0 to quickly move into it. And I clearly like our position. I definitely think we will see uptick in our virtual revenue for 2015.

Thanks. And if I could just follow-up, it's more on the enterprise side. Was there a particular skew to the types of verticals that you were successful or less successful with? And specifically the trends in the government vertical. Thank you.

Ray, do you want to answer that?

I would say that Q4 looked a lot like the better part of 2014. We didn't see any particular skewing in any particular vertical but we did see very good participation by the government vertical that you mentioned, clearly, in the Web 2.0 space, which is very strong for us, and also in the financial industry sector.

Thanks.

We'll take the next question from Rod Hall with JPMorgan.

Yes, hi guys. Thanks for taking my question. I just wanted to see, Greg, could you comment on the proportion of revenue from Japan in your guidance? Is it similar to last year, 37%, 38%? Higher? Lower? Some kind of an idea on that. And then I've got a follow-up.

We won't break down guidance specifically by region. But the breakdown going forward would be more consistent with what we've seen over the last couple of quarters in terms of Japan's contribution versus what we were seeing a year ago.

Okay. So, you'd be saying more like mid 20%s contribution, something like that?

It would be more (inaudible) 35% to 40% that we had seen during a year ago, yes.

Yes, if you look at a year ago in Q1 2014, Japan carry a huge backlog into Q1. That's why it's an anomaly. 37%, 38% not going to happen.

Okay. The other question I have for you is, when you guys take -- so, you build up your order book in yen for Japanese revenues, then when you recognize the revenues you're always recognizing more or less as the spot rate. Is that correct? Or is there ever any historical hedging in that order book or is it always at spot?

The order gets taken at spot and there's an adjustment that comes about when the payment gets -- at the revenue level, it's done at spot. What you see on the income statement, down in other income, other expense, as the currency difference is what happens from that spot rate when you invoice the customer to the rate that's in place when they actually make the payment. And if there's a rate movement within that period, that gets reflected down in the income Statement.

So, there's two levels of impact that you can see on the yen. When I referred to the number of $1.6 million in Q4 as the currency impact, we saw about roughly $700,000 to $800,000 of that was revenue that was reduced versus our expectation going into the quarter by the spot rate being low -- well, the yen being lower at the spot rate than it was anticipated going into the quarter. And then the realized loss of about $900,000 on the income statement was the difference between the spot rate when we booked the deal and the spot rate when they actually paid.

Yes, okay, got it. That makes sense to me. The final question I've got for you guys is the big picture, which is revenue growth 9% in Q3, 7% in Q4. It feels like market growth in the last couple of quarters. I think F5 grew 11% in the December quarter, actually.

Is there any guidance you can give investors in terms of what to think about 2015 growth? Should we be thinking high single digits growth for this Company? Do you guys think the potential for growth in 2015 is actually quite a bit higher than that and these numbers we've seen the last couple quarters and in this guidance are misleading in that respect? Can you just give us some idea what we should be thinking there?

I think if you look at the 2014, our growth for 2014 is 27%. We are above our market. We also talk about the end price investment. We made a large investment in our engineering, in our platform, in our go-to-market activities. So we understand, the investment will take times. That's a lot of work to do. But on the other hand, they are a catalyst, I think, for the growth in 2015.

TPS, as I mentioned earlier, we expect TPS in 2015 will be a meaningful revenue. The ACOS 4.0 we said open programming interface in our policy engine, that will speed up the releases and bring a new function, new margin, maybe new product into the market. The ADC historically we had been able to grow above the market growth in ADC in international expansion.

If you look at our last year, we did really well in North America, we grew about 25%. In China, grew 43%. In India we grew 59%. I think our international expansion, we have still a lot of room to grow. So, that's another growth engine I think we have.

The other thing really leverage all the investments. We made significant investments in sales, marketing and engineering in 2014 and we plan to leverage that in 2015. So we do view A10 as a continue to be a growth company. We are excited about the opportunity we have.

Okay, thanks.

Our next question will come from Brent Bracelin with Pacific Crest Securities.

Thank you. Couple questions for you, Greg, here, and I'll go one at a time. First question is on DSOs. Clearly rose -- I think above 100 days in the quarter. Could you talk about linearity in the quarter and then backlog as you think about entering Q1?

Linearity in the quarter was fairly typical for most quarters in that a majority of the business is in the third month. We did see better linearity within December than we typically see.

But the thing that impacts the DSO most directly as it pertains to this quarter is that Q4, most particularly December, is very heavy maintenance renewal time, because historically most deals get booked in Q4 and in December their maintenance renewals come into that period, as well. So, you have this interesting effect of having a sizeable invoice in AR at the end of the quarter but the revenue itself is going to get recognized over the next 12, 18, 24 months, so it skews your DSO up pretty dramatically.

I think that six to seven days of the DSO movement was specifically related to the maintenance renewal cycles. So, I think that was the biggest news item on that particular line item.

Sure, perfect. And then shifting gears, second question is really around service provider. It did look like on a sequential basis and year-over-year basis you had a nice snapback in service provider orders. Was that all tied to just the timing of orders that slipped last quarter? Or what drove the rebound in service provider in Q4 specifically?

I think some of those were deals that were [pented] out last quarter. And I think there was probably one or two that you could identify as being Q4 type of activity at a service provider doing a little bit of budget flush. So, I think that causes us to still remain cautious as we put guidance out for Q1.

But we don't look at this and, as they say in Britain, one swallow does not a spring make. So, I think we look at it as a data point but not something that we just extend the line on.

Okay, perfect. That's helpful.

We did see a service provider customer both in North America and Japan, our revenue was higher than what we expecting in the quarter. But, still, you look at our product sales to service provider, it's really a very quick part of their networks. And after traffic did increase, at some point in time they will need to add capacity to their networks. So even though we have win on the come-back, at some point I think the business will bounce back. I just don't know when.

Certainly. Timing is a big question there for the whole industry. The third question I have is really on product mix. I know you guys don't necessarily break this out but as you think about TPS, CGN, ADC for the full year, any of those categories, specifically TPS or CGN, account for more than 10% of the mix of product revenue? And any additional color you can provide there.

I think we don't break out the product revenue but if you lock at CGN, I think we said before, CGN has been, since the introduction, has been a double digit in terms of revenue, double digit in terms of percentage of revenue. We have a fairly high expectation for TPS in terms of we don't do a product we believe is going to be a single digit million dollars revenue. We don't break out the (inaudible) product.

Okay. So, it sounds like CGN was the double-digit contribution this year, hopeful that TPS potentially could get there next year?

TPS is this year. I don't know the double digit but in terms of, we say we don't do a product with a believe it will only be a double-digit revenue.

Okay, fair enough. And then last question for you, Greg, is really on the outlook and trying to understand how much cushion you're giving yourself here in Q1. Japan very tough compare with the backlog that you had last year. It looked like $17 million. If I assume a typical mid 20% -- 22% -- mix of revenue that you've seen in Japan the last couple quarters, that puts it at about $10 million, which implies about a $7 million delta.

My question really is, ex Japan, it looks like revenue needs to be up 15% or more to hit the midpoint of the guide range. What's your line of sight to getting there, to driving 15% revenue growth ex Japan? Is that enterprise? Is that North America service Provider? Help us understand, as you look at your pipeline, where that type of growth is going to come from to offset that tough compare in Japan.

I'll describe to you the process by which we built the guidance and you can hopefully find the answer, or at least pieces of the answer, you're looking for within that. As we build up, we've got backlog coming into the quarter, so we've got line of sight on that piece of revenue. I don't think we described the number but will be in the K. There will be about $6 million of backlog coming into the quarter. Not all of that is product but we've got good line of sight on that. And that's both service provider and enterprise represented in there.

Maintenance and support for the quarter just finished was $12.8 million. Maintenance and support goes up for us every quarter so we've got line of sight on that piece. We've got the deals that we booked so far this quarter. They seem to be kind of in the normal mix of service provider and enterprise of the deal flow that we see from enterprise.

And then from there, you start to look into the art of this. We certainly have both service provider and bread-and-butter enterprise business within the quarter, as well as large enterprise. And I think that in Ray's comments and Lee's comments, up to this point, we've described how we're looking at each of those individually. Some level of conservatism one service providers because of an overall market dynamic that has affected their spending in general, counter balanced by the fact that we are in a different part of their network, a lot of these comps. So, we know that at some point they are going to have to buy so that affects how we look at that piece of it.

The bread-and-butter enterprise we continue to see grow quarter over quarter. That particular element probably has less seasonality built into it than some of the others. And then on the large enterprise side we've got a very good handle on the features that we need to build and when we need to build them, but they still have to go through their decision process at the other end of it. So that leads us to not want to step too far out on a limb as it pertains to that class of accounts, as well.

So, we feel like the building blocks when you look at them individually are very well understood. They are established. We've tried to aggressively learn from the past and lay those methods into this quarter. That's how we get there. I think it's up to each of you individually to determine if that's aggressive, conservative, or just spot on.

Okay, very helpful color. Thank you, guys.

We'll take the next question from Mark Kelleher with D.A. Davidson.

Great, thanks for taking the questions. Greg, just the bad debt reserve, I might have missed it in the numbers but can you give me that number?

After the quarter, was roughly $700,000.

Okay. As we head into Q1 we won't have that, hopefully, and we won't have the sales commission accelerators from Q4. So I'm looking for the headwinds that are going to make the costs flat from Q4 to Q1.

I don't think it's so much headwinds but as we move into the quarter, this is when we do a fair amount of our sales hiring, is at this point of the year. It's when we start to do programmatic compensation adjustments across the country. We're working on various projects internally,

There's really no specific call out that comes in. It's just the normal growth in investments that we're making in the business. Normally you would see the costs moving up from Q4 to Q1. We've just got to accelerate on that because of some of these items that we talked about -- the bad debt reserve and the currency piece, most explicitly.

In general, when do you think we can see some positive operating leverage? Are we going to have to continue some very high R&D investments and sales investments throughout this year? Or when do you think we can start growing that revenue faster than those costs?

I think that, as Lee alluded to earlier, is that the intent for this year is to do precisely that, is to grow our revenues faster than we're growing our cost. Does it happen in Q1? Not necessarily. But clearly the plan for the business is to do that over the course of the year. The pace and rate of that is fairly dependent upon the top line and starting to get movement through some of the things that we've already put in place as the contributors for how revenue grows.

But I think that when we look at the operating expenses for the quarter completed, we were within range. When we look at expectations for the year as a whole, our spend was very consistent with what the expectations were set early on.

And, so, the question becomes, and the thing that we do as part of our day jobs, is to find that balance point between our revenue growth expectations and how we manage costs through the year. And I think the reality is that balance point has slightly shifted going into real world 2015 than if we were to have said what that was six months ago.

If you look at our 2014, we increase our headcount in R&D by 24%, in sales and marketing by 23%. Definitely in 2015 the objective is really about how do we leverage the investment we made in 2014. The operating expense will be below our revenue growth, that's our objective. And we will continue to invest in R&D and sales and marketing but just not as much as we did in 2014.

Okay, thanks.

Our last question will be a follow-up from Itai Kidron with Oppenheimer.

Thanks. I just want to follow up again on the cost structure. Lee, you've talked about the fact that you can't really put your finger on the timing at which point all of the investments start working and revenue growth becomes much more -- there's a clearer path for revenue growth.

Greg, you guys burned a lot of cash in this fourth quarter and you're talking about flat OpEx and, to a large extent, somewhat of a flattish revenue outlook, as well. How do you think about that line in the sand in which you might want to consider cutting costs instead of not investing incrementally in costs? Or how do you think about it from either a time line or a cash reserve point? Can you give us a little bit some of your thoughts on the checks and balances you have in place, or the measuring sticks you have for yourself in place, in this upcoming year to figure out if you're on the right track here or not?

Greg, maybe let me start and then I'll let you. If you look at the operating expense in 2014, it's really in line with our business plan we set at the beginning of the year. So, we did not really overspend in terms of according to our plan.

Our investments are working. If you look at the number of customer in terms of number of deals closed actually in Q4, and also channel-led deals, these all increased nicely. So our investment is working. So what hit us really was about these service provider cutbacks, service provider headwind that's really hit us hard in 2014. Greg, you can add more?

Yes, I think the other piece, just to address the cash question, the cash use for the quarter, if you look at it from a cash flow perspective net of the AR, was less than $5 million, and not significantly higher than what we saw in Q3. And as we'd refer, we expect that AR to turn fairly quickly and be more of a fourth-quarter artifact.

I think this is one of those areas where the cash burn that you saw in this quarter is not something that we would expect to be reflected and repeated in Q1 at all. It's an aberrational thing having to do with those maintenance bookings that we talked about earlier on.

Okay. And then on the litigation expense, is that now you've settled most of this? I don't know if there's anything else outstanding. Should that be effectively a small minimal value at this point going forward?

In the immediate term, yes, we expect to see that number going down related to some of the IP stuff that was out there. There's some other litigation that was recently put out there and we've not really calibrated the cost of that yet beyond the first couple quarters.

Okay, very good. Good luck guys.

That's all the time we have today for questions. 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.

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

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.