睿科網路 (ATEN) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to today's A10 Networks Third Quarter Financial Results Conference Call. (Operator instructions) It is now my pleasure to turn the conference over to Ms. Maria Riley, you may begin.

Thank you all for joining us today. I am pleased to welcome you to A10 Networks Third Quarter 2015 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 its Third Quarter 2015 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.

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 our future revenue growth, profitability and operating margin, expectations of customer buying patterns, and the growth of our business generally. These statements are based on current expectations and beliefs as of today, October 29, 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 August 6. 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 fourth 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 attend the Cowen Networking and Cybersecurity Summit in New York in December, and we hope to see many of you there. 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 2015 Financial Results Conference Call. I am pleased to report another strong quarter that included achieving record revenue for the second consecutive quarter, as we continued to execute on our growth strategy and deliver results. We also continued to drive leverage through our operating structures, and improve our bottom line by 50% year-over-year. Additionally, we generated $4.2 million in cash from operations.

Looking at our top line performance in more details, total revenue grew 17% year-over-year, and 7% sequentially, to reach a record of $50.8 million. Product revenue grew 11% over last year, and 5% over Q2, to reach $35 million, and we achieved record enterprise revenue of $30.4 million, up 15% from last year.

Our growth this quarter was driven by sales of our high-end, security-focused Thunder products, including our ADC with advanced security features such as SSL Insight, and our Thunder TPS DDoS mitigation solution, in which product revenue grew 17% sequentially. The innovations we have made in security are opening new doors for A10, both within new and existing customers and partners.

I would like to highlight a few recent wins where our products are being deployed in security environments. A mobile cloud application provider in the US chose our Thunder TPS platform as the backbone for their DDoS-as-a-Service offering. A large US service provider customer selected our Thunder TPS platform to ward off volumetric DDoS attacks on their public cloud. While this carrier is already an A10 customer, this was our first win into their cloud infrastructures. To improve overall security, a Fortune 500 technology company selected our Thunder ADC with SSL to encrypt and decrypt data between their data centers. And, a branch of the US Government looking to improve performance and overall security for their web and e-mail environments turned to A10's Thunder ADC with SSL Insight.

Our advanced technology platform based on our highly-flexible and scalable ACOS software is at the core of our ability to add new customers, expand within existing customers, and quickly bring new products to the market. We have worked to expand our addressable market and diversify our customer base by introducing new security products and features. Based on the market trends we see today, we believe that security features will continue to converge onto an ADC-based platform. With our highly-scalable, flexible, and cloud-ready ACOS software platform, we see significant market expansion opportunities as the industry continues to converge. We plan to announce a new, standalone security solution on November 10. We look forward to sharing the details of our new product with you then.

In summary, we are pleased with our third quarter performance. We believe we are making substantial progress in executing our strategy to build a strong foundation for long-term growth, while at the same time improving our bottom line and driving closer toward profitability.

With that, I would like to turn the call over to Greg to review the details of our third quarter financial performance, and fourth quarter guidance. Greg?

Thank you, Lee, and thank all of you for joining us today. Third quarter revenue grew to $50.8 million, up 17% compared with $43.4 million in the prior year. Deferred revenue grew 30% year-over-year to reach a record high of $66.3 million. Third quarter product revenue grew 11% to $35 million, representing 69% of total revenue, compared with $31.6 million, or 73% of total revenue, in the prior-year third quarter. Service revenue grew 33% to $15.8 million, or 31% of total revenue, compared with $11.8 million, or 27%, in the third quarter of 2014.

From a geographic standpoint, third quarter revenue from the United States grew 23% year-over-year to reach $25.1 million, or 49% of total revenue. Third quarter revenue from Japan was $8.8 million, or 17% of total revenue, compared with $9.9 million, or 23% of total revenue in the third quarter of 2014. On a constant currency basis, Japan revenue would have been flat year-over-year.

Revenue from APAC, excluding Japan, grew 27% year-over year and 44% sequentially to reach $8 million, or 16% of total revenue. And in EMEA, we generated record revenue of $7.3 million, or 14% of total revenue, which represented a 48% year-over-year increase.

Our enterprise and service provider revenue split this quarter was 60% and 40% of total revenue, respectively. We achieved record enterprise revenue of $30.4 million, representing a 10% increase from the prior quarter and up 15% from Q3 of last year. Service provider revenue came in at $20.4 million, compared with $20 million in the prior quarter, and $17.1 million in the third quarter of 2014.

From a customer perspective, our revenue was well diversified with no 10%-or-greater customers in the quarter. Revenue outside of our top 10 customers grew 24% over Q3 of last year, and 24% sequentially, representing 69% of our total revenue.

Moving beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless expressly stated otherwise.

We delivered third quarter total gross margin of 75.8%, within our expected range of 75% to 77%. Product gross margin was 75.8% in Q3 of 2015, compared with 76.4% in the prior quarter and 72.2% in the third quarter of 2014. Product gross margin for the quarter was negatively impacted by 100 basis points, due to initial investments we made related to two new OEM opportunities. Our services gross margin came in at 75.9%, a decrease of 27 basis points versus Q2 of 2015, and 142 basis points from Q3 of 2014.

We ended the quarter with a staff of 816, up from 800 at the end of Q2, with the majority of headcount additions being in R&D and sales and marketing. Our Q3 sales and marketing expense was $23.7 million, compared with $23.1 million in the prior quarter. On a percentage basis, sales and marketing expense decreased to 46.6% of revenue, compared with 48.6% in the prior quarter. In Q3 R&D expense totaled $12.1 million, or 23.8% of revenue, compared with $12.4 million, or 26.1% of revenue, in the prior quarter.

Third quarter combined G&A and litigation expense was approximately $6.8 million, or 13.3% of revenue, compared with $5.5 million, or 11.6% of revenue in Q2, which included some favorable one-time items. In total, third quarter non-GAAP operating expenses were $42.5 million, compared with $41 million in the prior quarter. Third quarter non-GAAP operating loss was $4 million, compared with a loss of $4.7 million in the second quarter.

Our non-GAAP net loss in the third quarter was $4.4 million, or $0.07 per share, ahead of our guided range of $0.08 to $0.12 per share. Q3?s net loss represents an 18% sequential improvement, compared with a net loss of $5.3 million, or 9 cents per share, in Q2 and a 50% improvement when compared with a loss of $8.8 million, or $0.15 per share, in the third quarter of 2014. Basic and diluted weighted outstanding shares for the third quarter were approximately 62.8 million shares.

Moving to the balance sheet, at September 30, 2015 we had $100.5 million in total cash and equivalents, up from $96.2 million at the end of June. During the quarter, cash generated from operations was $4.2 million, reflecting strong billings and collections activities and expense management. This is our second sequential quarter of generating cash flow from operations, and we are pleased with the improvements in our working capital management. However, we would like to remind you that we expect to use up to a few million dollars in cash per quarter to fund operations until we reach operating profitability on a non-GAAP basis.

We ended Q3 with $41.5 million of net accounts receivable, compared with the Q2 2015 balance of [$46.2 million]. Average days sales outstanding declined to 80 days, compared with 95 days in the prior quarter.

Moving on to our outlook, we are entering Q4 with a solid backlog and are pleased with our strong start to the quarter. We currently expect fourth quarter revenue to be in the range of $53 million to $56 million. We expect gross margin to remain in the 75% to 77% range, and operating expenses to be between $45 million and $47 million. We expect to report a non-GAAP net loss of between $0.06 and $0.09 per share using approximately 63.7 million shares on a basic and diluted basis. In setting this, we are assuming the Yen exchange rate remains in the range of 119 to 121.

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

(Operator instructions) We'll take our first question from Tal Liani with Bank of America. Your line is now open.

Hi, guys, congrats on a great quarter. I have a question on the composition of revenues. Your North American revenues were down 8% sequentially, and the rest of the world, everything else created all the strength. Can you describe, or can you elaborate, on what's happening in North America? Why is it down sequentially? And, what's temporary and what's more long-term pressure, etc.? Thanks.

Let me start from just a financial perspective, and then we can turn to Ray for some color on the dynamics in North America. And the first thing I would remind, is that last quarter for North America was a record quarter for us. And so, when we look at the year-over-year, we're at 23% growth in North America. And so, when we look at the growth in that market, we're very pleased with where we've gone. We also, if you remember, had a very large service provider deal, and a 10% customer within North America within the quarter, so that would have been a very hard quarter to grow off of sequentially. I'm going to have Ray add a little bit of color to the dynamics in that market, though.

Yes, I think Greg pretty much covered it. Just remind you that had a pretty substantial customer win in Q2, but we're seeing very good movement in North America, especially in the security arena with our security products, and you probably have noticed that we continue our expansion in the enterprise domain, as well. We had record revenue in that area, as well. We were up 15% year-over-year in enterprise revenue. So, overall, the real color here is, it was a good quarter for us in North America, and we feel good about the momentum in North America going forward.

And let me cut the numbers on showing a different way. Your non-top-10 customers grew very sharply, grew 24% sequentially. It was up I think 24% year-over-year. I'm just looking at the numbers from it, on a different cut. Your top 10% customers declined sequentially, and also on a year-over-year basis. So, can you also describe in your answer, the dynamics between top 10% and then the other customers? And what drives the decline with the top 10% customers? Is there concentration there that is coming down? I'm sure that we understand what's driving the growth in the non-top-10. Thanks.

Yes, within the top 10 customers, that group has historically had a very high representation of service providers, and for the last several quarters, we've talked about the -- just the buying patterns, the service providers, with smaller deals and more spread out. And so, within that group, we're seeing a lot of the same customers represented, but their buying patterns are smaller. And so, what we've been pleased with, is that in the face of that, the things that we've been doing to develop our security products, to develop our channel, and to expand revenue diversity has given us a stronger base underlying those top 10 customers. And when service providers begin their spending again, typically what we've seen from them 18 months ago, I would feel we're well-positioned to see strong growth both in the top 10 and outside of the top 10.

Got it. Quick one, just one follow-up. What about Web 2.0, how is this vertical behaving this quarter?

Can you repeat that, Tal? I don't think we caught that.

I said, what about the Web 2.0 customers, can you discuss the trends in the vertical of the big cloud companies?

I'll go ahead and take that one. It's Ray Smets. The Web 2.0 customers continue to be a source of strength for us, and this is occurring for us in global markets. We announced a few activities in that area. You know, we've announced in the past some significant things with customers like Microsoft Azure, and we announced an additional win with a security solution with a public cloud company just this quarter. So, the Web 2.0 is absolutely a strength for us. We're known to be leaders in that area, and while we let the service providers kind of go through their situation over the recent couple quarters, the Web 2.0s are definitely floating us.

Perfect. Thank you.

Thank you, Tal.

Our next question comes from Mark Sue with RBC Capital Markets. Your line is open.

Thank you, gentlemen. Can you hear me?

Mark, are you there?

Hi, can you hear me now?

Yes.

Yes.

Not now, though.

Mark?

Operator, why don't we go to the next question, and Mark, maybe you can come back --

All right, sorry about that, can you hear me now?

Yes, we can hear you.

Thank you. Maybe just on how you see the longer-term trend as it relates to virtualization, and how customers are buying hardware and also the software element? And also, there are some -- as we think about AWS and their plans to kind of move further into this market, how you might see those dynamics impact A10, that would be helpful. Thank you.

Let me reply the first part, and then Greg, you can help me on the AWS. So, the -- we see the virtual and software as a nice growth vector, actually, for our [calling] in virtual product, and we participate the market in a couple of ways. Customer can buy a licensed virtual software-only product, or they can buy all-solution-access service. If you look at in the quarter, we actually secured multiple large wins with the cloud service providers. So, additional, we continuously expand our presence with the cloud provider market. As you know, the -- I think Ray mentioned about Microsoft Azure, it's a big customer for A10, and also we sold a TPS into another public cloud provider.

Furthermore, our TPS solution, as the backbone of the DDoS-as-a-service offering, they are selling to their customers as a cloud service. So, our high-performance, scalable, flexible platform, I think is very well suited to power the move to the cloud, and we feel good about it. Maybe Ray can talk about it?

Yes, Mark, what was your question on AWS specifically?

Does it impact --

Does it impact? So, from an AWS perspective, the way that we see it in the marketplace, is that we have a very good position selling into the cloud service providers currently. So, as Lee mentioned, I mentioned earlier, we have a very nice position there. We do tend to sell a higher-performance solution, so customers that come to A10 come to us because of our reputation in terms of scale and performance. And, we believe that the customers are going more towards the AWS route, are going for more of a lower-performance solution, so we don't really see AWS as a competitive solution.

However, we also participate in the AWS marketplace as an option for some of our customers who choose to do business there, too. So, we -- generally speaking, we see AWS as a market expansionary opportunity for us, not as a competitive situation.

Thank you, gentlemen, good luck.

Also, we are seeing a very strong growth, year-over-year growth, in our software and virtual revenue.

Our next question comes from Ittai Kidron with Oppenheimer, your line is now open.

Thanks. Good quarter, guys. I wanted to get your perspective on some of your peers in the market. I mean, clearly F5 did not have good numbers, Radware did not have good numbers. Both have pointed to US as the region that's been a little bit more challenging for them. Same goes for service providers. You know, you're correct that it had very good strong growth in the US, but on a sequential basis, it's -- you know, it clearly wasn't great, and your service provider business has been stuck there at that $18 million to $20 million for a good three or four quarters, now. So, is there anything that you're seeing out there with respect to those two areas, that you think is challenging?

I'll go ahead, and I'll jump on that and see if Greg will maybe back me up on that, but specifically in the service provider domain, we're no different. We've definitely seen what others have remarked about in terms of the slower spending in the service provider domain, but for us, over the last couple quarters, we really haven't seen a change in that behavior. The deals are still in the pipeline, so we're seeing the deal volume. We still have the relationship in place with the service providers that we have close relationships with. We're not seeing any churn to a competitor in that domain, but we are observing that the deals continue to be a little bit smaller, and we reported that in prior quarters, and that's affected our top 10 customers.

But, we're very happy with the Q3 revenue in the service provider space. You probably have noticed, like, higher than it was in Q2, despite the reported top 10 customer win in Q2. So, overall, we feel pretty good about that. We are going to experience some fluctuation there, because these deals are lumpy. They tend to be our largest deal sizes, and -- but you know, we maintain a great relationship in that domain and we're going to continue to benefit from that, and certainly as the market recovers, there.

And I've already talked about North America, you know, we've been really happy with North America. The other things I'll add there, is, from a Federal perspective, we actually had a good quarter. We pretty much delivered what we anticipated in the Fed domain. You saw that probably in other areas, as well. And, we continue to benefit from the deployment of our Affinity Channel Partner program, where we continue to see deals coming from the partner that generates more demand.

So, even though you saw a sequential decline in North America, probably affiliated with the top-10 customer that we reported in Q2, overall, North America did what we needed it to do, (inaudible - multiple speakers).

Okay. Very good, and Greg, you know, you delivered to the high end of your range, which is clearly a good thing, but I can't help but feel that you were kind of hoping to do above that. So, can you walk through the details, whether it be region- or product-specific, and kind of tell us, what did better relative to your plan, and what did not do as good relative to your plan? And my second question is regards to TPS, clearly you're seeing very good, strong traction there, but is there a way to -- if you separate TPS from your product revenue, is your ADC business growing, or not? How do I think about that?

That's -- a lot to unpack in that one. From a growth perspective, when we looked across our geographies, we saw pretty much what we were expecting across the geographies. We've invested and built for growth in our European environment. We saw them do strong, both quarter-to-quarter and year-to-year. North America, coming off of a quarter where they had grown 20% quarter-to-quarter from Q1 to Q2, we didn't need to see them to grow sequentially beyond that. We knew we had other parts of our business that were going to backfill, as we talked about on the last call. So, the question at that point was, how do you backfill behind a customer who was, I think it was 13%? And I think we saw that across our geographies.

And so, you know, I actually wouldn't stand here and say that we were disappointed with the deliveries in any of the regions. There's always ups and downs in deals that you think are going to come in that don't, and others that you don't expect that do, and we've always had that service provider volatility. And sometimes it's up, as we saw. We had sizeable service provider deals in the quarter we just closed, as well.

So, I think that when we look across the whole of our business, there's always going to be minor ups and downs, but there's no market we could look at and say, man, that one way over-performed, or way under-performed, our expectation.

And regards the splits of ADC and DDoS?

Let me just comment on Q3. We actually are happy with the growth we have in Q3. If you excluding Japan, in Q3, we grew 25% year-over-year, and [without] the 10% customers, and we continued to grow nicely due to diversification and the great performance we saw in security products. So, in [top two] years, I think that if you look at -- we don't break out the product revenue, but if you look at TPS and the other products, we already grew both TPS and other products, achieve the 17% revenue growth year-over-year, 7% [sequential]. In addition to that, product revenue grew nicely in the quarter. So, we definitely are very happy here with the Q3 performance, in terms of the product trends across all three standalone product lines. And, security definitely is a big driving factor for the ADC growth.

Very good. Good luck, guys.

Thank you.

Our next question comes from Rod Hall with JPMorgan, your line is now open.

Hi guys, thanks for the question. I guess I'll dive into the services revenue a little bit. The year-over-year growth there, 33.5%, and starting to lap some slower growth in the product revenue, you know, from a while back. So, I'm just wondering, that's up to 45% of product revenue, now. Do you think -- are we near a stability point there, where we've lapped all of the higher product growth from the past, or do you expect that to continue growing, and can you talk just a little bit about what else might be driving that growth? Thanks.

Sure, this is Greg. We had seen flat product growth over the last, up until the prior, last two quarters. So, Q2 and Q3, we hadn't seen reinvigorated product growth. And so, during the three or four quarters preceding that, we were seeing service growth grow more rapidly. Now that product growth is kind of re-ignited, we've seen it two consecutive quarters, growth in product, product side, the two of them will start to become more in sync with one another. And so, on the services side, we're seeing growth from both the maintenance renewals, which you know, our maintenance renewal cycle is greater than 95% of our customers renew. So, that keeps adding the install base. But also, we began to build our professional services organization.

So, while it's not a great contributor to gross margin yet, we've talked about that, it is beginning to add to the service line in terms of absolute dollars. So, over time, the two growth rates will begin to move back into -- to be somewhat more synchronized, but right now, the services piece will outstrip product for the next few quarters, I suspect.

Okay. Thanks, Greg. And then, I also wanted to follow up and ask you, Microsoft in their earnings said they're going to increase investment again in Azure, and I just wondered -- could you guys comment on, is there any reason you wouldn't participate in that increased investment? I know some of it may be overseas, and so on, so, could you just kind of comment on how you -- what your reaction to that increased investment is, and what you think the impact on the business might be?

Rod, this is Ray. Obviously, we're very happy about that. Microsoft continues to be a very important customer for us, and we supply them in multiple areas, not just in Azure, but in other areas of Microsoft including Xbox, and we sell multiple products in each of those areas. So, we actually see their investment as a positive for us, and we continue to bring in some very nice deals even on a quarterly basis from Microsoft. So overall, that's a positive sign for us, and we will be looking for ways to participate in that, and we expect we will.

Okay, great. Thank you guys.

(Operator instructions) We'll take our next question from Mark Kelleher with D.A. Davidson, your line is now open.

Great, thanks for taking the question. I wanted to look at gross margin a bit. You said that you were investing in the quarter to support some possible OEM relationships. Can you size how much that affected, how many basis points that might have affected, and whether that investment has to continue for the next quarter? And, when we might see those OEMs kick in, perhaps?

Yes, I can -- we can address that. So, first of all, the impact was 100 basis points on product gross margin, and about 70 basis points on total gross margin. We do not expect that that is something that will continue, but these investments were made because these are signed and completed OEM agreements that we have in place. So, this was getting kind of the initial product seeded into the organizations for them to begin to develop their programs against. So, we don't expect the costs to continue. Revenue, for us, the expectation, there'll be modest amounts, a small, small amount in Q4, but most of it will be as we grow into 2016, as they roll their programs out more aggressively. So, these are -- they're strategic, they're important, but I think experience says that OEM agreements often take longer than one originally anticipates, and it's not entirely in our control over how they get rolled out. But, we think these will be very interesting.

Right, and then just a clarification -- you said you were going to announce something on November 10. I didn't quite pick that up, can you just help me out with that?

We will have a new standalone security product to be announced on November 10. It's a new standalone security product.

Okay, great. Thanks.

And our final question comes from James Faucette, with Morgan Stanley. Your line is now open.

Hi, this is Eugene Anderson on for James. Just a little bit more on service provider, what is the latest you're seeing in Japan?

So, this is Ray. Just talking a little bit about Japan, you notice that we are flat year-over-year on constant currency, which we feel pretty good about. And, we actually feel pretty solid in terms of our position in Japan, where we think we've stabilized that marketplace in terms of our business in that marketplace. So, we participate very strongly in the service provider domain, we have a relationship with every service provider. We know what the major projects are, we participate in bidding for those major projects and expanding our position there.

What we've done in Japan, while the service providers are in that kind of headwind situation, is we've worked very hard to diversify in a couple of different ways. We've diversified more aggressively into enterprise over the last year, and we're very pleased with the progress there. But, we've also been back at the table with our service provider customers, and our enterprise customers, with our TPS solution, our SSLI solution, and basically selling the security features in our ADC. So, all of that really has kind of added to the stabilization of our Japanese business, so despite the economic slowdown that we see there and the currency issues that we see there in Japan, which are pretty severe, we've actually been able to maintain our own position there.

Hey great, that's really helpful, and just a little bit on the sales force and how you're feeling about efficiency, and sort of your hiring cadence at this point?

You know, we've had really good luck in terms of the global sales force. You know, we added some significant new leadership over the last year. We've had really strong retention and we've had really good success adding significant sales in various regions. Greg mentioned what the total head count is. So, we're pretty good about that.

In terms of total productivity, we definitely see an increase in productivity on a bookings basis across the sales organization, which is exactly what we would expect to see, so we are getting greater leverage there. And, we're achieving that greater leverage on a number of different fronts, through additional enablement and things of that sort. But, just go-to-market strategy, and rolling out our Affinity channel program, to really catalyze some additional activity in the marketplace.

Just as an FYI, in Q3 we did officially roll out the Affinity channel program across EMEA. That was a big deal for us, and in about two weeks over in Bali, Indonesia, we'll be rolling out the Asia-Pac version of Affinity as well. So, all this really catalyzes the deal volume, and we're very happy with the progress there.

Okay, thanks so much.

And I'll now turn the program back over to Lee Chen for any closing remarks.

Thank you all, all shareholder, for joining us today, and for your support. Thank you, and good day.

This does conclude today's teleconference. You may now disconnect. Thank you, and have a good evening.