睿科網路 (ATEN) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the A10 Networks Q3 2016 financial results conference call and webcast. All participants will be in a listen-only mode. (Operator instructions) Please note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. Maria Riley with Investor Relations. Ma'am, please good.

Thank you all for joining us today. I'm pleased to welcome you to A10 Networks third-quarter 2016 financial results conference call. This call is being recorded and webcast live and may be accessed for one year 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 Worldwide 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 2016 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, expectations for future revenue growth, profitability, and operating margin, expectations of customer buying patterns, anticipated benefits from our acquisition of Appcito, expected product launches, and the general growth of our business.

These statements are based on current expectations and beliefs as of today, October 27, 2016. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control but could cause actual results to differ materially, and you should not rely on them as predictions of future events.

A10 disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, our otherwise. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-Q, filed on August 5.

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 2016 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 2016 financial results conference call.

We reported revenue of $55.1 million, up 8% year over year, and below our guidance of $58 million to $60 million. Our continued focus on driving leverages through our operating structure led to a significant improvement in EPS.

For the quarter, we reached non-GAAP break-even, which was at the high end of our guidance. Although we achieved break-even, which we believe is an important milestone for the Company, we are disappointed in our topline performance.

While total bookings grew 24% year over year and were ahead of our forecast, our revenue result reflects lower-than-expected product bookings in North America, where we reserved a couple orders too late in the quarter to ship, and some deals slipped into future quarters.

These deals were both in our enterprise and service provider customer verticals and remain in our pipeline. We are closely engaged with these customers, and we expect this transaction to be closed in either Q4 or Q1.

We are also continuing to focus on refining our go-to-market strategy and execution to drive growth, and at the same time find efficiencies in our investments to improve our bottom line. In the last quarter, we added R&D and sales and marketing resources to support growth, as well as significantly increase our (inaudible) marketing campaigns to drive greater brand awareness and customer acquisition.

We believe we have the right strategy in place to drive long-term growth. Let me share with you some of our accomplishments in the third quarter that we believe demonstrate the momentum we are building with customers.

We delivered a very strong 83% year-over-year revenue growth in Japan, driven by expanding our footprint with both service provider and enterprise customers. This included a large mobile carrier who selected our Thunder TPS solution to help protect their network from large-scale DDoS attacks. Two out of the top-three mobile carriers in Japan are now using our TPS solution.

Additionally, this customer is deploying our Thunder SSLi solution for their managed services to uncover malware hidden in encrypted traffic. We believe our ability to expand to new area of the network within our [marquee] customers demonstrates the compounding value of A10's ACOS [family] architecture.

The A10 value proposition is also winning new customers to A10, as they look for flexible and agile solution to improve their application performance and security, while at the same time reducing CapEx and the total cost of ownership.

Compared to this time last year, we have grown the total number of A10 customers by 17% in the third quarter. This included adding a new US tier-one mobile operator to A10's family with our Thunder ADC.

This customer plans to use software features in our ADC to help them monitor the health of their network and improve efficiency. A key differentiator in winning this business was our industry-leading open API built into ACOS. We now serve the top four tier-one mobile operator in the US.

We also secured a significant win with the executive branch of the US government that chose our Thunder ADC, Thunder SSLi, and Thunder Bare Metal solutions. The ability to manage all A10 products with a single management system, aGalaxy, at less than half the TCO of the competition were chief differentiators for these new customers.

And lastly, with our ability to deliver ADC and carrier-grade [NAT] on a single appliance, we helped a [communication] provider in the US cope with running out of the IPv4 addresses and replace their aging ADCs.

We continue to innovate and drive the application networking market forward with product enhancements that are all built on our ACOS Harmony architectures. We recently introduced a new high-end Thunder 300-gig throughput modular chassis that is well suited for high-performance networks, such as service provider, [call] providers, e-commerce, and online gaming.

We have already sold this new appliance with TPS to a leading public cloud provider in the US and with [CGM] to a large mobile operator in southeast Asia. The 300-gig Thunder TPS solution offers industry-leading performance at a time when DDoS attacks are dramatically spiking in both magnitude and sophistication.

As we announced last quarter, we acquired Appcito at the end of June, and the integration is going well. We are on schedule to launch our new native public cloud offering this quarter, with additional offerings to follow early next year.

While we expect to see only a modest amount of revenue from this product in 2017, we are excited about the opportunity Appcito is already bringing to A10, including driving new conversations with customers around the globe.

We believe our technology vision and holistic approach to solving the application networking and security challenges of today and tomorrow positions us well within the evolving trends you see in the market.

As we look ahead, we are excited to extend the A10 Harmony value proposition to native cloud applications. We are committed to executing on our strategy and continuing to grow our business.

And lastly, as we announced in our press release today, the Board of Directors has authorized a $20-million share-repurchase program, which reflects our confidence in our market opportunities and business, as well as our commitment to enhance shareholder value.

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

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

Third-quarter revenue grew 8% year over year to $55.1 million, which fell below our guidance range of $58 million to $60 million. As Lee mentioned, the revenue shortfall was primarily North America, where product bookings came in lower than we had expected.

Total bookings did come in above our forecast and grew 24%, driven by strong demand in Japan for both products and services. The third quarter was our strongest renewals booking quarter to date, and this is reflected in a 25% year-over-year and 10% sequential increase in deferred revenue, bringing the total to $83.2 million.

Turning back to revenue. The third-quarter product revenue grew 1% year over year to reach $35.3 million, representing [64]% of total revenue. This compares with $35 million, or 69% of total revenue in the prior year third quarter.

Service revenue grew 25% year over year to reach $19.8 million, or 36% of total revenue, compared with $15.8 million, or 31% of total revenue, in the third quarter of 2015.

From a geographic standpoint, third-quarter revenue from the United States was $24.3 million, compared with $25.1 million in the third quarter of last year, representing 44% of total revenue. Third-quarter revenue from Japan grew 83% year over year to reach $16 million and represented 29% of total revenue. Revenue from APAC excluding Japan was $7.4 million, or 13% of total revenue.

While we did see some sequential improvement in the EMEA region, the overall environment remained soft, especially in the Middle East. Revenue from EMEA was $6 million in the third quarter, compared with $7.3 million in the same quarter last year, and $5.9 million last quarter.

Enterprise revenue grew to $31.2 million, up 2% from Q3 of last year. Service-provider revenue came in at $23.9 million, up 17% when compared with $20.4 million in the third quarter of 2015. Our enterprise and service-provider revenue split this quarter was 57% and 43% of total revenue, respectively. In this quarter, we had no customers accounting for more than 10% of our total revenue.

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

We delivered third-quarter total gross margin of 77.1%, slightly above the high end of our expected range of 75% to 77%. This is an increase of 160 basis points from last quarter and 130 basis-point increase from Q3 of last year. Product gross margin was 75.2% in Q3 of 2016, increasing 40 basis points from last quarter and decreasing 50 basis points from Q3 of 2015.

Our services gross margin came in at 80.5%, increasing 340 basis points from last quarter and 466 basis points from Q3 of 2015. We ended the quarter with a staff of 885, up 19 when compared with 866 at the end of last quarter.

Third-quarter non-GAAP operating expenses were $42.2 million, or 76.6% of revenue, compared with $45 million, or 78.8% of revenue in the prior quarter, as we grow additional leverage through our model and closely manage our expenses and support our stated plan to achieve non-GAAP profitability by the end of 2016. Additionally, our sales and marketing expense was lower than planned due to lower commission expense related to shifts in the regional mix of sales.

In R&D, please remember our third-quarter operating expenses included the addition of a full quarter of 31 new employees joining us via the Appcito acquisition.

We achieved third-quarter non-GAAP operating income of $0.3 million, a significant improvement from a loss of $1.9 million in the second quarter of 2016. Our non-GAAP net income in the third quarter was $0.2 million, or break-even on a fully diluted, per-share basis, landing at the top of our guided range of break-even to a loss of $0.02 per share.

Our net income performance this quarter represents a significant improvement from a net loss of $4.4 million in Q3 of last year. For the nine-month period, our bottom line on a per-share basis improved 73%. Basic and diluted weighted shares outstanding, used for computing EPS for the third quarter, were approximately 72.8 million shares.

Moving to the balance sheet. At September 30, 2016, we had $115.8 million in total cash and marketable securities, a $3.1-million increase from the end of June and up $16.2 million compared with September 30, 2015. Our cash balance reflects $2.5 million in cash generated from operations during the quarter. This brings our year-to-date cash generated from operations total to $21.8 million.

Back to the balance sheet. Average day sales outstanding were 74 days, up from 65 in the prior quarter, reflecting late billings in the third quarter.

As we mentioned, the Board has authorized a share-repurchase program of up to $20 million over the next 12 months. Under the repurchase plan, shares may be repurchased on a discretionary basis through a variety of means, including the open market.

This repurchase authorization reflects our commitment to enhance shareholder value, as well as expressing our confidence in our opportunities and long-term financial performance.

Moving on to our outlook. We currently expect fourth-quarter revenue to be in the range of $59 million to $63 million. At the midpoint, this represents 8% year-over-year revenue growth for the quarter and 16% growth for the full year.

We expect gross margin to remain in the 75% to 77% range and operating expenses to be between $44.5 million and $45.5 million. We expect our non-GAAP bottom-line results to be between break-even and earnings of $0.04 per share, using approximately 75.1 million shares on a basic and diluted basis.

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

(Operator instructions) Dariush Ruch-Kamgar, Bank of America.

The questions are on the deal push-outs. Wondering, are these customers (inaudible) purchase every quarter or two? What I'm trying to ask is, does this represent slower total growth for the next couple of quarters? And, are there any similarities between the customers that you're seeing or why they pushed out orders?

Hi, Darius. This is Greg. First of all, all of the deals that we saw that moved out of the quarter were with existing customers. And so they are customers where we have ongoing relationships. And I won't go so far as to say they buy every quarter, but they are usual suspects for us. And so we know pretty well what deals are going to close, but it's the timing that becomes the issue, and that's what we saw this quarter.

So I don't think this points to any kind of larger trend for us. It was an isolated group of customers, and I don't think there would be any common thread that we can point to, as to either why they pushed out or what they were buying or what they were -- I guess the process they were going through.

Okay. So safe to say that this wasn't something that was competitive?

No. In each of these cases, these were down to -- they were either in purchasing, going through testing. It was a logistics topic. We were not in active competition on these particular accounts.

Got it. Thanks, that's helpful. I wanted to switch to DDoS. There's obviously -- it's been making the headlines recently with the attacks in DNS servers. This has been a good growth driver for you guys in the past. I'm wondering if you've seen -- obviously -- can you talk about the DDoS market and what you're seeing in that market in terms of demand from customers, as well -- obviously, [Arbor Networks] I think [that Scott said they had] double-digit growth by Arbor Networks this past quarter, so qualitatively, anything you provide about that market would be helpful.

This is Lee. We definitely are seeing a great opportunity in the pipeline. As a matter of fact, we just announced a high-end 300-gig throughput TPS product, which in a very, very short time we landed a very large public cloud provider in the US.

We continue to see opportunity. We feel good about our position, especially with our product offering. We are the leading vendor in terms of the mitigation ability. With the recent attack -- you look [really] the spike and [really] the magnitude. We feel we are very well positioned.

Great, thanks. And then last question from me -- were there any 10% customers in the quarter?

There were not.

Okay. Thanks a lot, guys.

Catharine Trebnick, Dougherty.

Hi. Thanks for taking my questions. One of the things I had -- I missed one housekeeping item because I got on late on the call. What was the Americas growth? Thanks -- contribution.

The Americas -- the quarter-over-quarter growth?

Yes -- well, if you just give me the percent of the total, that will be fine. I missed that in Asia-Pac.

Okay, I can give you both of those numbers, here. So for -- APAC was 13% -- I'm sorry. APAC excluding Japan was 13%. Japan was 29%. North America was 44%.

Okay, thanks. Could you update us a little bit on the Cylance partnership that you announced last summer, late last summer, and where that is and what the opportunities for that are? Thanks.

I think the [project] is going well. We're still working on the integration. We have not announced a product based on their technology yet.

Okay. So are there opportunities for this partnership that possibly drove it then, Lee?

Again, the product is still in development, so we definitely are looking for, really, next year [then]. If any opportunity, it'll be next year. We do have a lot of customers who are very interested in the combined solution.

Okay, thanks. I'll circle round in the queue.

Alex Kurtz, Pacific Crest Securities.

A couple questions from me, guys. Can you just give us an update on the percentage of revenue coming from security versus the traditional ADC business?

It's fairly consistent with what we talked about over the last couple quarters. We're in the mid-teens range on that. And again (multiple speakers) at this point.

Okay, and that didn't change sequentially, it sounds like. Back to these two transactions in the US, I just want to clarify -- both of them were in the service provider, or one was in service provider and one was in enterprise?

When you say the two transactions, are you talking about the ones that we said were -- that did not ship?

Yes.

Yes. Those were both in -- those were actually -- there's one of each in that environment. And so just to clarify, these were deals that came in, and what we saw was that -- and the quarter had just ended -- we saw a backlog that was larger than we had anticipated in the quarter and larger than what we had seen coming out of Q3 last year. And interestingly with the addition of the backlog, if it had shipped and shippable, as it was expected, that would have put it into the lower end of our range for the quarter.

So are these two transactions still at the approval process and just waiting for POs to be written? Or is it a couple steps away from that?

So these are -- I should have been more -- these are actually orders. So we have received these orders. We have the POs in house, but they did not leave the loading dock by the end of Q3. So the orders are done. There's no procurement to go on there. That's as distinct from when we talked about a few deals that slipped out of the quarter. Those are the ones that were in a purchasing process or final phases of testing.

But you would have --?

We got a PO. It's the timing of the PO we received too late.

Understood. And did I hear that you grew bookings 24% year over year? Was that the number I heard at the outset?

Correct.

And what was that number last quarter, just to get a sequential growth in bookings?

We wanted to give some color on the bookings. We tend not to put that number out there. I think the main point that we want to reflect there was that we actually did see strong bookings within the quarter, but what we saw was the composition of those bookings were different than we expected. We saw more of those bookings coming from Japan, and we saw more of them represented by services than we would have expected going into the quarter.

Okay. Last question from me -- service margin, looked like it ticked up above 80%, here. Any reason that you can't hit that utilization rate going forward, or do you expect to come back down into the high 70s?

There's no reason why we can't, although I will say that there's a piece of our support business that if we open a new office, you may see a discontinuity in the cost structure because you can't open an office with just one person. So you may see little blips. But there's no reason that it wouldn't stay in the high 70s and up to 80s. So give us a couple points of variation there.

Okay, thank you.

Rod Haul, JP Morgan.

Hi, good afternoon. This is [Lockee] on behalf of Rod. Thanks for taking my questions. I wanted to go back to the question -- to the discussion on competitive dynamics. Could you comment on the win rates you saw in the quarter, if there was any significant change? And are you seeing and do you expect to see any impact from F5's product refresh?

I'm sorry -- the question was about -- any changes in the competitive dynamic and any response to -- if we're seeing anything from F5's refresh?

Yes, and your win rate.

And the win rate.

Yes. So this is Ray Smets. I just wanted to comment on that.

First of all, we tend to be in a pretty competitive environment. But we maintain and continue to maintain a very high win rate in [bake offs]. So when we go head-to-head competitively in scenarios that I think you're referring to, we win more often than we lose. So the competitive win rate is 70% or more. So we're actually maintaining that.

So we have -- I would say from a competitive perspective in the marketplace, we continue to hold our own very, very effectively. We have a very good competitive campaign offer in the marketplace and our channel currently. And we're executing very, very well, gaining traction in new accounts. I would say overall, our competitive position is quite strong. So the activities in Q3 really are not associated with some sort of competitive activity.

This is Lee. Basically we feel confident about our product offering and our relationship with our customers. We offer the highest (inaudible) performance on the market today.

Okay. And as a followup, could you comment on the trends you're seeing with the public cloud customers because we've heard -- the hardware [drives are putting] really good trends, but then we've heard the optical-component guys [are putting] not so good trends, and I'm just curious to hear what kind of things you're seeing.

This is Lee again. I continue to feel the public cloud is a tailwind for us. We -- as you know [as we tap more for] quarter, we have a lot of marquee customer that are cloud providers. And our solution, including a module form based on ACOS -- ACOS Harmony is a software [defined] platform for application and security services.

If you look at our ADC, CGN, TPS, and all products that can be deployed as a virtual machine, can be deployed as bare metal (inaudible) today. And we are also building a container in the future. So I feel the industry-leading API and [manual] solution positions A10 very well with the cloud provider.

Okay, thanks.

(Operator instructions) Ryan Flanagan, Buckingham Research Group.

Thanks guys. It's Ryan on for [Ro]. I had a question on the guidance. It looks like a little bit of a wider range than normal. Does that imply sort of variability on pipeline visibility or some uncertainty around closing these deals? Any color on the rationale behind that? Thanks.

This is Greg. I think that -- certainly, coming off of a quarter in Q3 where we had some deals at the end of the quarter that didn't cross the line as we expected leads you to think about how you do Q4, as well.

And so I think we just wanted to give ourselves a little bit of flexibility in dealing with that variability. Q4 has traditionally been a big quarter for us, and so we wanted to give ourselves room to [succeed] but also had to be realistic of what we saw in Q3 and factor that in.

Okay, that helps. And just a couple quick followups. I know you mentioned security momentum. It sounds like it's pretty good there, based on Lee's comments. You mentioned it's in mid [teens]. Can you give some directionality on sequential year-over-year?

Not at this point. I think we'll probably talk a little bit more about that when we have full-year results and get ourselves through Q4.

Got it, got it. And the last one I had was -- just wanted to talk about FX. I know you had a little bit of a benefit last year -- or last quarter from some yen conversion. Was there any notable currency impact this go around?

There was very little currency impact on the income statement, itself, as in the currency conversion of the other income. But revenue -- if you looked at revenue year over year, because the yen changed there was a couple million dollars of differential in Japan for the Q3 last year and the Q3 this year.

That's helpful. Thanks. Good luck, guys.

Catharine Trebnick, Dougherty.

Thank you. Can we talk a little bit about how you're doing with some of your partnerships -- FireEye perhaps, Cisco? And are you getting other of the Cisco security areas or not, and just kind of flesh that out for us so that we have a better feeling on opportunities ahead and catalysts that we can look forward to. Thank you.

Ray, do you want to address that?

Sure. Catharine, this is Ray. We don't talk too much about the OEM relationship that you just talked about, or asked that question about, but let me comment a little bit about Cisco.

We have that relationship in place now for the second quarter, and it continues to build momentum. The pipeline continues to develop. It's specifically focused around our SSL offering and SSLi, which we think is quite competitive.

We know this is a good catalyst for us. You know that the encryption levels continue to grow, and I think we've crafted a great relationship with Cisco that should deliver some significant opportunities for us over time.

It's really still early days. You know how this works for a big partner like Cisco. But we're very satisfied with the OEM relationships we have in place. We're satisfied with the relationship we have in place with Cisco, and it's really all about execution right now.

All right. And then are there other partners you're looking at -- I mean, competitively are running F5 and their newer SSLi product. Are you running into Blue Coat with their product, Metronome, etc? I mean, how does that look? Because this SSLi opportunity, when we do our field work, continues to be a star for you guys. I'm just wondering competitively how is it working out.

So I can comment on that a little bit, Catharine. So first of all, the SSL market is growing very, very nicely. So we see this as an opportunity. We have a strong position, as you mentioned, in the marketplace. We feel very good about the product.

It's pretty clear, I think, in the marketplace that the way we developed SSL decryption into our ADC solution and also delivering it as a standalone solution gives us a lot of technical differentiation, both in terms of performance and maturity level. We've been in the market with this product for quite some time. So customers are definitely turning to A10 Networks to find ways to decrypt what they can't see in their blind spot currently.

So we're going to drive the Cisco relationship. We're going to continue to drive activity within our channel partnerships, which I know that you check from time to time. We're very optimistic about the SSL growth factor for A10.

Catharine, this is Lee. Also, we feel good about the SSLi, the solution (inaudible) integrate into our product across ADC, CGM, CFW. Also, we have a standalone SSLi solution. We feel are in a very strong position (inaudible) SSLi solution.

We were first to the market, and we feel that the product has been really [went through multiple years]. As you can see -- we said during the call, we have several wins in the quarter of our SSLi.

All right. Thank you very much.

Rod Hall, JP Morgan.

Hi, guys. This is [Lockee] again. I just wanted to check with you -- could you give us any color on the magnitude of the two push-outs you saw this quarter? And also, to what extent if -- that they are reflected in your guidance for Q4?

So the question is, the magnitude of the push-outs and the extent they're factored into the guidance.

So on the magnitude -- I'll come at that from two different directions. One is that, from a deal size, they tended to be $0.5-million to $1.5-million deals. So not small deals but not mega deals that we sometimes run across. And there were a handful of them. So -- they were a very clearly identifiable group of accounts that we were focused on.

When we look at guidance for Q4, ultimately we go through the same process that we go through every quarter. And I've [talked a few times] about the layer cake that we build up, starting with the services that we know are coming in, looking at our backlog, looking at deals that book, and then going through our valuation process.

So these deals go through that same analysis. They likely have a higher probability because we are closer on them than on some of the others, but they kind of go under that same analysis that we look at. They don't get special treatment, necessarily.

So we would expect [the same] because we've said, some of them -- most of them close in Q4, maybe one or two goes to Q1. But they're factored in, we think, appropriately to Q4.

Okay, good. Thanks. Good luck, guys.

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to conclude today's question-and-answer session and turn the conference call back over to Lee Chen, CEO, for any closing remarks.

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

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.