A10 Networks, Inc. (NYSE:ATEN) Q4 2023 Earnings Call Transcript
A10 Networks, Inc. (NYSE:ATEN) Q4 2023 Earnings Call Transcript February 6, 2024
A10 Networks, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and thank you all for joining. I would like to welcome you all to the A10 Networks Fourth Quarter and Full Year 2023 Financial Results. My name is Frieka, and I will be your moderator coordinating today's call. After this speaker's remarks, we will conduct a question-and-answer session [Operator Instructions] I would now like to pass the conference over to your host, Tom Bauman at FNK IR to begin. So, Tom, please go ahead.
Tom Bauman: Thank you all for joining us today. This call is being recorded and webcast live, and may be accessed for at least 90 days via the A10 Networks website a10networks.com. Hosting the call today are Dhrupad Trivedi, A10’s President and CEO; and CFO Brian Becker. 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, 2023 financial results. Additionally, A10 published a presentation and supplemental trended financial statements. You may access the press release, presentation 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 projections for future operating results, including timing, our potential revenue growth, industry and customer trends, our capital allocation strategy, supply chain constraints and expectations, expenses and investments, our positioning, our repurchase and dividend programs, and our market share.
These statements are based on current expectations and beliefs as of today, February 6, 2024. These forward looking statements involving 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 for of future events. A10 does not intend to update financial information contained in these forward-looking statements, whether it is a result of new information, future events, or otherwise, unless required by law. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-K. Please note that with the exception of revenue, financial measures discussed today are on any 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 a substitute for results prepared in accordance with GAAP and they may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release that was issued today and on the trended quarterly financial statements posted on the company’s website. Now, I would now like to turn the call over to Dhrupad Trivedi, President and CEO at A10 Networks.
Dhrupad Trivedi: Thank you, Tom, and thank you all for joining us today. The fourth quarter demonstrates that we have taken the necessary steps to realign and efficiently allocate resources to find areas of growth and ensure solid profitability amidst revenue headwinds. The headwinds persist, but are largely related to a single region and a single customer type. Service providers, especially in North America, continue to delay CapEx investments as broadly announced by others in the industry. Simultaneously, enterprise customers are taking longer to make decisions and their internal approval process has incremental layers due to the same economic headwinds. As discussed during the third quarter call, orders slipped from our third quarter into our fourth and reduced in size as parts of the project were pushed out into 2024.
We are navigating these longer sales cycles and customer uncertainty, and I'm encouraged by the sequential improvement in both revenue and profitability from the third quarter into the fourth quarter. We agree that service provider customers in particular could remain choppy for some time related to the macro environment. In the interim, our focus on revenue diversification continues to benefit our business. Enterprise revenue was up 23% in the fourth quarter, partially mitigating the 24% decrease in service provider revenue, and validating our strategy to increase our focus on enterprise customers in addition to our service provider customers, which will return to strength in the future. Once again, A10 is poised to navigate this challenging cycle better than others in the industry.
We have reallocated resources, increasing our concentration on enterprise customers globally, and this focus has already begun generating positive results. On a full year basis, revenue from enterprise customers grew 9%, ahead of many of our peers and offsetting a 20% decline from service provider customers. This represents an opportunity for us to deliver growth that is increasingly independent of service provider CapEx cycles. Cyber security solutions continue to be prioritized. Economic headwinds may mean these investments are delayed, but they are unlikely to be canceled. The threats from hackers, malware, ransomware, and DDoS attacks are growing. These are existential business risks, interrupting service, damaging customer trust, costing affected business millions and increasingly causing regulatory issues.
In response to this growing opportunity, we continue to expand our capabilities as evidenced by some of our recent product and platform announcements. We maintained our profitability despite the revenue headwinds, matching our long-term stated goals of 80% to 82% gross margin and 26% to 28% EBITDA margins. This achievement is a testament to our business model and operational rigor as we reallocated resources focusing on near-term opportunities and ensuring that we are customer centric in our sales and support approach. On a constant currency basis, we delivered full year EPS of $0.74 flat year-over-year in spite of significant deterioration in the macro environment. We achieved this level of profitability due to a proactive decision to defer certain investments in light of deteriorating market conditions.
These deferrals will push those expenses into 2024 and align them with business condition improvements. We still expect to achieve our profitability targets on an ongoing basis. We continue to expect to deliver on our business model objectives, including gross margins of 80% to 82%, adjusted EBITDA margins of 26% to 28%, and single-digit growth in our full year non-GAAP EPS. We continue to buy back stock. We remain focused on preserving growth oriented investments, including R&D, related to new and enhanced security solutions. While being cognizant of our overall spending. In December, 2023, we released our A10 Defend detector, a new product which integrates our current capabilities and sets the stage to further expand our portfolio of security solutions for our customers.
In January this year, we completed our annual sales kickoff event. This intensive multi-day gathering is designed to align our sales team, discuss our strategy, and further strengthen commercial execution. Based on our experience and learnings from 2023, we have made further adjustments to capitalize on key strategic priorities that enable us to maintain strength with service provider customers while growing faster with security and enterprise solutions. The teams remain very excited about the new solutions that drive an even deeper customer centric approach, and one that aligns with their dynamic economic environment. With that, I'd like to turn the call over to Brian for a detailed review of the quarter and the year. Brian?
Brian Becker: Thank you. Dhrupad. Fourth quarter revenue was $70.4 million, a decrease of 9.3% year-over-year, reflecting the headwinds that Dhrupad described earlier. Sequentially, revenue increased 22% compared to the $57.8 million in the third quarter. This reflects some orders that were delayed right at the end of the third quarter and recognized during the fourth quarter, though we continue to see longer than normal sales cycles during the fourth quarter due to CapEx constraints, particularly with service provider customers. As a result, a number of orders we expected to close during the quarter slipped into 2024. Product revenue for the quarter was $40.6 million, representing 57.6% of total revenue. Services revenue, which includes maintenance and support revenue was $29.9 million, or 42.4% of total revenue.
Lower product revenue throughout the year continues to impact recurring revenue, but in the fourth quarter recurring revenue increased 8% year-over-year and also deferred revenue increased 11%, demonstrating the continued demand for our solutions and validating our confidence that we are not losing opportunities to competitors. As Dhrupad mentioned, for the full year, enterprise revenue was up 9% while service provider revenue was down 20%. Turning to our balance sheet, as you can see, deferred revenue was $141.3 million as of December 31, 2023, up 11.3% year-over-year. With the exception of revenue all of the metrics discussed on this call are on a non-GAAP basis, unless otherwise stated. A full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website.
Gross margin in the fourth quarter was 81.8% in line with our stated goals of 80% to 82% and especially unchanged from the third quarter of 2023. Adjusted EBITDA was $23.9 million for the quarter, reflecting 34% of total revenue. On a full year basis, our adjusted EBITDA margin was in line with our stated goals of 26% to 28% of revenue and since 2021 we have delivered adjusted EBITDA growth of 14%. Non-GAAP net income for the quarter was $18.5 million or $0.25 per diluted share compared to $18.4 million or $0.24 per diluted share in the year ago quarter. Maintaining our non-GAAP net income on lower revenue is a significant accomplishment demonstrating the earnings power we have built into A10. Diluted weighted shares used for computing non-GAAP EPS for the fourth quarter were approximately 74.9 million shares compared to 75.4 million shares in a year ago quarter.
On a GAAP basis, net income for the quarter was $17.9 million or $0.24 per diluted share compared with net income of $18 million or $0.24 per diluted share in the year ago quarter. Turning to full year results, revenue was $251.7 million, down 10.22% year-over-year. Product revenue was $141.1 million, representing approximately 56% of total revenue and service revenue was $110.6 million, representing about 44% of total revenue. Full year non-GAAP gross margin was 81.7%. Adjusted EBITDA was $71.2 million, reflecting 28.3% of total revenue in line with our stated goals. Non-GAAP net income for the year was $54.9 million or $0.73 per diluted share compared to $57.7 million or $0.74 per diluted share in the year ago period. On a constant currency basis our non-GAAP EPS was flat year-over-year.
On a GAAP basis net income for the year was $40 million or $0.53 per diluted share compared with net income of $46.9 million or $0.60 per diluted share in 2022. During the year, we generated $43.8 million in cash from operations. We expect 2024 cash flow from operations to return to historical levels as the market normalizes. Turning back to the balance sheet, as of December 31, 2023, we had $159.3 million in total cash, cash equivalent to marketable securities compared to $150.9 million at the end of 2022. During the quarter, we paid $4.4 million in cash dividends. We also continue to carry no debt. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on March 1, 2024 to shareholders of record on February 16, 2024.
As discussed during our last call, the Board had approved a new $50 million share repurchase plan in November. Turning to our 2024 outlook, based on current market conditions and in line with our broader peer group, we expect 2024 revenue and EPS growth in the single-digits. We continue to target gross margins of 80% to 82% and adjusted EBITDA margins of 26% to 28%. We expect to see revenue growth weighted to the second half of 2024 as the markets normalize. I'll now turn the call back over to Dhrupad for closing comments.
Dhrupad Trivedi: Thank you, Brian. A10 remains well-positioned, offering a business critical solution with a customer centric approach. Our solutions will be prioritized over other investments as they are key to our customers generating revenue and navigating challenging economic environment, and we continue to achieve our business model goals in terms of profitability despite the revenue headwinds. Operator, you can now open the call up for questions.
See also 20 Best Permanent Residency Countries in the World and 10 Best Cheap Car Insurance in California for 2024.
To continue reading the Q&A session, please click here.
