q4 2016 earnings presentation pdf final final

A10 Networks – Q4 2016 Earnings - Wednesday, February 22, 2017 1 | P a g e


Thank you all for joining us today. I am pleased to welcome you to A10 Networks’ fourth quarter and year 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 & CEO, Lee Chen; A10’s CFO, Greg Straughn; and our Executive vice president 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 fourth quarter and year 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 www.a10networks.com.

http://www.a10networks.com/

http://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 2017 operating results, our expectations for future revenue growth or security product revenue, profitability and operating margin, expectations of customer buying patterns, expected product launches and the general growth of our business. These statements are based on current expectations and beliefs as of today, February 9, 2017. 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 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, or otherwise. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-Q filed on November 3rd.


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. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. 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 2017 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 Conference in San Francisco on March 1st and we hope to see many of you there. Now I would like to turn the call over to Lee for opening remarks.


The fourth quarter was a very strong close to the year. We are pleased with our results, improved execution and the momentum we continued to build in the market for our security and cloud solutions. Revenue grew 13 percent year-over-year to reach a record 64 million dollars, and exceeded the high end of our guidance. Our continued focus on driving leverage through our operating structure led to a significant improvement in our operating results and margin. On the bottom line, we delivered 3 cents in non-GAAP EPS, which was within our guidance range.


Let’s take a deeper look into our fourth quarter topline performance. Across the board, the A10 team executed and reached several new records including:

• Record product revenue of 43.5 million dollars, up 23 percent over Q3 and 10 percent over last year, • Record security revenue, • Record revenue in the U.S., which grew 38 percent over Q3 and 6 percent year-over-year, to reach 33.5

million dollars, • Record bookings, which led to the highest backlog in our history, and • Record deferred revenue of 92.9 million dollars, which grew 28 percent year-over-year.

Our record performance was driven by continued expansion within cloud provider, service provider and web-scale customers as well as strong demand for our security solutions, including our recently launched Thunder 14045 security appliance. Pound for pound, our Thunder 14045 is the highest-performing DDoS mitigation appliance on the market, providing 300G throughput within an extremely small footprint and modular chassis. Designed especially for high-performance networks, such as those used by service providers, cloud providers, e-commerce and online gaming companies, our Thunder 14045’s CapEx, OpEx and security performance advantages have resulted in strong traction with these customers. Measured by bookings in the first two quarters since its availability, the Thunder 14045 is the most successful product introduced in A10’s history, and our pipeline continues to grow. In addition to the early success of Thunder 14045, our record security revenue and bookings in the quarter was driven by strong demand across our lineup of standalone solutions including:

• Thunder TPS, which provides the industry’s best DDoS mitigation performance and scalability. ACOS Harmony OpenAPI enables TPS to easily integrate with third party management and detection solutions.

• Thunder Convergent Firewall, which delivers multiple security functions on a scalable ACOS Harmony platform that enables customers to achieve high performance and manageability, and

• Thunder SSLi, which provides visibility into encrypted traffic, helps eliminate blind spots in corporate defenses and maximizes customers’ firewall assets.


Together, our security solutions are providing more and more customers with a strategic portfolio-based approach to collectively address some of the nastiest threats and risks to their businesses, brands, and their own customers. The increase in security demand was led by our cloud customers, including a leading cloud provider that contributed 13 percent of total revenue in the fourth quarter, as they modernize their architecture with our latest solutions to increase capacity and fortify their defenses. We also saw continued demand from gaming, financial and mobile operator customers. Let me share with you several recent engagements that show how customers are using A10’s solutions to help secure and improve the performance of their networks and mission-critical applications.

• A tier-1 service provider in the U.S. selected our Thunder TPS and SSLi solutions to help protect customers on their dedicated internet service from DDoS attacks and gain visibility into encrypted traffic.

• A leading service provider in the U.S. chose our Thunder ADC with SSL Offload to help improve the performance of a Cloud Software solution running on their managed services platform.

• A leading mobile carrier in South Korea is deploying our Thunder CFW solution with our combined Gi Firewall and CGN functions to replace an incumbent security vendor’s product. In the performance tests conducted by this customer, A10’s solution demonstrated six-times lower latency and 20% better CPU utilization in half the footprint when compared with our largest competitor.

• A large international organization was looking to urgently increase visibility into the growing amount of encrypted outbound traffic on their network but without upgrading their firewall capacity. To meet their need, they deployed our Thunder SSLi alongside their existing firewall installation.

• And lastly, a leading mobile provider in Japan selected our TPS solution on our new Thunder 14045 high-capacity appliance to help protect their network from large-scale DDoS attacks. We are proud to say that the top three mobile carriers in Japan are now using our TPS solution.

Since our inception, A10’s strengths have always shined in high-performance networks. Because of our heritage, we continue to gain attention from cloud provider and web-scale customers. These customers have built their businesses on cloud infrastructures that require flexible and agile solutions for accelerating and protecting applications, while reducing CapEx, OpEx and total cost of ownership. Based on our ability to meet the needs of these and many other service provider and enterprise customers, we see cloud and security as powerful market opportunities for A10 Networks.


We are positioned very well across both traditional data center and cloud-based application environments. We see the opportunity to be the industry leader in secure application services – in other words, providing solutions for controlling and centrally managing secure application services across our customers’ spectrum of data centers and various cloud types – from private to public to hybrid clouds alike. While hardware remains our core business from a revenue perspective, we are unlike other competitors in that we can comfortably expand beyond our core business and address customer needs that require any combination of hardware, virtual, bare metal, and cloud-based solutions. We believe A10 has the most complete portfolio available on the market. As a reminder, during 2016 we acquired Appcito, which helped accelerate our vision and further differentiate A10 in the market. Staying focused on execution, we successfully integrated the Appcito team without disrupting our path to profitability. We launched A10 Lightning, the industry’s only advanced cloud-native, controller-based ADC-as-a-service offering, and we are on track to deliver additional Lightning cloud offerings this year.


In short, our strategy is working. For the full year, we grew revenue 16 percent to reach 230.0 million dollars. We exceeded our goal for security product revenue in the year and we expect our security product revenue to be over 20% of our total product revenue in 2017. We achieved these results while driving leverage through our model and significantly improving our bottom line. We reduced our non-GAAP net loss by 88 percent and met our goal to deliver a profit in the fourth quarter. With topline growth and continued focus on financial discipline, we expect to expand our profitability in 2017, and we remain committed to reach our target operating model by 2019. In summary, the A10 team’s diligent focus and execution led to a record fourth quarter and strong close to the year. We are excited about our performance, market opportunities and momentum we are building. We intend to continue to focus on growing our brand awareness and customer base and leveraging our strengths in high-performance environments. We believe the trends we see in the market today are in direct alignment with our product strategy and strengths as a company. We will continue to leverage our technology platform to bring new innovations to market that are designed to secure and protect some of the most demanding networking environments, including cloud networks. We believe we are well-positioned to continue our success, all while remaining focused on driving leverage in our model and growing our bottom line. Before I turn the call over to Greg, I want to personally comment on his resignation as CFO effective upon the filing of the Company’s 10-K. I know I speak for the entire A10 team, when I express my sincere gratitude for everything he has contributed to the company over the past six years. Greg was instrumental in taking the company public, has served as a trusted spokesperson to the investment community and implemented many of the programs needed to foster and support our growth. Along the way, he also built a great finance team and I’m pleased to announce that Shiva Natarajan, our Vice President and Controller has been appointed interim CFO effective upon the effectiveness of Greg’s resignation. Shiva has over 20 years of accounting experience and has played a key role in helping lead our finance department since he joined A10 in 2015 as vice president and controller. We are confident Shiva will do a great job leading the organization through this transition and to help facilitate this transition. Greg will remain with the company until April. And with that, I’d like to turn the call over to Greg to review the details of our fourth quarter financial performance and first quarter guidance.


Fourth quarter revenue grew 13 percent year-over-year to a record 64.0 million dollars, exceeding our guidance range of 59 million dollars to 63 million dollars. We also delivered deferred revenue growth of 28 percent year-over-year. For the full year revenue grew 16 percent, to reach 230 million dollars.


Fourth quarter product revenue grew 10 percent year-over-year and 23 percent sequentially to reach 43.5 million dollars, representing 68 percent of total revenue. Product revenue for the full year grew to 153.9 million dollars up 11 percent from 2015. Fourth quarter service revenue grew 20 percent year-over-year to reach 20.5 million dollars, or 32 percent of total revenue. Service revenue for the year grew to 76.1 million dollars, up 25 percent from 2015. From a geographic standpoint, fourth quarter revenue from the United States was 33.5 million dollars up 6 percent on a year-over-year basis. For the year, revenue from the United States grew 11 percent to 118.7 million dollars. Fourth quarter revenue from Japan was 15.1 million dollars up 32 percent on a year-over-year basis, and for the full year, revenue from Japan grew 49 percent to 53.0 million dollars. Fourth quarter revenue from APAC excluding Japan was 7.9 million dollars up 38 percent on a year-over-year basis, and for the full year, revenue in the region grew 25 percent to 29.8 million dollars. In EMEA we continued to see softness in select areas of the region and revenue in the EMEA region for the fourth quarter was 6.1 million dollars, a 10 percent year-over-year decrease, bringing the full year to 23.1 million dollars, reflecting a 15 percent decrease from 2015. Enterprise revenue grew to a record 39.5 million dollars, up 45 percent from Q4 of last year. As Lee mentioned, we had one cloud customer that contributed 13 percent of total fourth quarter revenue. Enterprise revenue for the full year grew to 134.9 million dollars, up 22 percent from 110.2 million dollars in 2015. Service provider revenue came in at 24.5 million dollars, down 16 percent when compared with 29.3 million dollars in the fourth quarter of 2015. Service provider revenue for the full year grew to 95.2 million dollars, up 7 percent from 88.7 million dollars in 2015. Our enterprise and service provider revenue split this quarter was 62 percent and 38 percent of total revenue, respectively.


As we move beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless stated otherwise. We delivered fourth quarter total gross margin of 77.6 percent, above the high-end of our expected range of 75 percent to 77 percent. This is an increase of 50 basis points from last quarter and 120 basis points from Q4 of last year. Total gross margin for the full year was 76.6 percent an increase of 30 basis points from 2015. Fourth quarter product gross margin was 76.2 percent, an increase of 100 basis points from last quarter and 40 basis points from Q4 of 2015. Fourth quarter services gross margin came in at 80.6 percent, increasing 10 basis points from last quarter and 280 basis points versus Q4 of 2015.


We ended the quarter with staff of 895 compared with 885 at the end of last quarter, and up 8 percent from the end of 2015. Fourth quarter non-GAAP operating expenses were inline with our guidance and came in at 44.9 million dollars or 70.2 percent of revenue, compared with 42.2 million dollars or 76.6 percent of revenue in the prior quarter. Sales and marketing expenses increased by 2.5 million dollars, primarily due to higher commissions related to our record bookings. We achieved fourth quarter non-GAAP operating income of 4.7 million dollars, or 7.3 percent of revenue, above the high-end of our guidance and a significant improvement from the operating loss of 3.2 million dollars in the fourth quarter of last year. We achieved Non-GAAP net income of 2.3 million dollars or 3 cents per diluted share, which was at the high end of our guided range of breakeven to 4 cents of earnings. In the fourth quarter, we incurred a 2.4 million dollar expense, or 3 cents on a per share basis, due to the unexpected, post-election movement in the Yen exchange rate. This expense is reflected in the other expense line in our income statement. Our net income performance this quarter represents a significant improvement from a net loss of 3.7 million dollars in Q4 of last year, bringing, our full year bottom line improvement to 88 percent on a per share basis. Diluted weighted shares used for computing EPS for the fourth quarter were approximately 73.1 million shares, while basic shares outstanding for computing the net loss for the 2016 year were 65.7 million shares.


Moving to the balance sheet- at December 31, 2016 we had 114.3 million dollars in total cash and marketable securities, compared with 116.8 million dollars at the end of September. Our cash balance reflects the use of approximately 2.4 million dollars in cash to fund operations during the quarter. Additionally, during the fourth quarter pursuant to our stock repurchase plan the board implemented in late October, we repurchased a total of 227 thousand shares of our common stock in the open market at an average cost of $7.92 per share for a total of approximately $1.8 million in consideration. For the full year, we generated 18.8 million dollars in cash from operations and increased our cash and marketable securities balance by 16.2 million dollars. Average days sales outstanding were 84 days, up from 74 in the prior quarter, reflecting our record billings in the quarter.


<OUTLOOK> And briefly, before we open the call to questions, I’d like to take this opportunity to thank the entire A10 team for their dedication, determination and can-do attitude, you have made A10 into a company that shows you can create an environment that is both team-oriented AND results driven. I would also like to thank Lee for his technological vision and leadership that has fueled A10’S growth. During my years with A10 I have been privileged to tell the A10 story to an outstanding group of investors, analysts and bankers, each of whom have added to the richness of my experience here – and I look forward to crossing paths again. As a team, we have accomplished many of our objectives since I joined six years ago. I feel that A10 is in a very good place and I am confident it will continue the growth and profitability trends we have established. Operator, you can now open the call up for questions.

q4 2016 earnings presentation pdf final final

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