Q4 2023 A10 Networks Inc Earnings Call
Participants
Tom Baumann; IR; FNK IR
Dhrupad Trivedi; President & CEO; A10 Networks Inc
Brian Becker; CFO; A10 Networks Inc
Christian Schwab; Analyst; Craig Hallum
Anja Soderstorm; Analyst; Sidoti & Company
Hamed Khorsand; Analyst; BWS Financial
Hendi Susanto; Analyst; Gabelli Fund
Presentation
Operator
Thank you for your patience today. Today's conference call with A10 Networks will be starting in around three minutes time. Today's host, Tom Bowman from Sam K IR will beginning today's conference and hosting it. I would like to thank you for your patience and we will be beginning the call in two minutes' time.
Yes, 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 Precor, and I will be your moderator coordinating today's call. After the speakers' remarks, we will conduct a question-and-answer session and if you would like to ask a question during that time, you may do so at any point by pressing star followed by the number one on your telephone keypad. Should you change your mind and wish to remove your request to speak, please press star and tea. Thank you. I would now like to pass the conference over to your host, Tom BOWMAN S. and K. IR to begin photon. Please go ahead.
Tom Baumann
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 at a. 10 networks.com. Hosting the call today are JUPITER 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 of potential revenue, growth, industry and customer trends, our capital allocation strategy, supply chain constraints and expectations, expenses and investments are positioning our repurchase and dividend programs and our market share. These statements are based on current expectations and beliefs as of today, February sixth, 2020. For 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 does not intend to update financial information contained in these forward-looking statements, whether as 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 a non-GAAP basis and have been adjusted to exclude certain charges. Non-gaap financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may differ from non-GAAP financial measures presented by other companies. 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.
Now I'd like to turn the call over to Jupitermedia President and CEO of 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 that internal approval process has incremental layers due to the same economic headwinds.
As discussed during the Q3 call orders slipped from Q3 into our forte and reduced in size as part of the project for 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, intent 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.
Our service provider CapEx cycle. Cybersecurity solutions continue to be prioritized. Economic headwinds may mean These investments are delayed, but they are unlikely to be canceled that threat from hackers, malware, ransomware and deed of 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 improvement. 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. As 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 eight and defense detector, a new product, which integrates our current capabilities and sets the stage to further expand our portfolio, our 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 its 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 that dynamic, economic and lottery.
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, Jason. Fourth quarter revenue was $70.4 million, a decrease of 9.3% year over year, reflecting the headwinds that Drew described earlier. Sequentially, revenue increased 22% compared to $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 continued to impact recurring revenue. But in the fourth quarter recovery 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 David 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 30, 2023, up 11.3% year over year with the exception of revenue, all 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 essentially 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 filtered 8 million 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 the 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 10.2% year over year. Product revenue was $141.1 million, representing approximately 50 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 50 $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 $0.6 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 30, 2023, we had $159.3 million in total cash, cash equivalents and marketable securities compared to $150.9 million at the end of 2022. During the quarter, we paid $4.4 million in cash dividend. 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 first, 2024 to shareholders of record on February 16th, 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 David for closing comments.
Dhrupad Trivedi
Thank you, Brian eight and remain well positioned operating 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 environments, 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 four questions in queue.
Question and Answer Session
Operator
If you would like to ask a question during this time, please press star followed by one on your telephone keypad. Should you wish to remove your question, please press star and K. As a reminder, it's star one to ask a question and we will pause for a moment just to audit the queue.
Yes, first question we have comes from Christian Schwab of Craig-Hallum. You may proceed with your question.
Christian Schwab
Hey, guys. Just just a few quick questions on the service provider level.
Yes, I think in the prepared comments use in though I think you said future and then second half weighted, would you expect the service provider revenue to improve in the second half of the year? Or is the majority of the single digit growth going to be driven by enterprise?
Dhrupad Trivedi
Yes, Christian, good question. So I think I would say the popular belief and expectation in the market is that certainly service provider spending normalizes out in the second half of the year, and we expect seasonality to be returning to our normal seasonality of 47 54st half second half. But beyond that, I think our expectation of growth is not based on an assumption that SPE spending sharply picks up in the second half. I think we look at it as a more balanced way of saying up, we expect to continue progress in enterprise and security solutions. And as SP spending picks up maybe in the second half side, it should help us with that seasonality and beyond.
Christian Schwab
So that's maybe the best way to think of it as it's not purely based on hoping that sb spending comes back in the second is that as we look further out into 24, then which, you know, would you expect, you know, a snapback in service provider revenue after kind of a difficult long period? Or would you anticipate that business to return to like flattish plus or minus?
Dhrupad Trivedi
Yes. No, that's a good question. So I would say that it would normalize to that historical levels, which would mean that given how much it has been in a depressed cycle that in 2025, it could be in a positive cycle. The difficult thing for us obviously, and given sort of the movement we see in terms of interest rate actions and particularly then affected by the fact that there's some election year and political influences. And all of that, it's difficult for us to project up. But if you look at it as long-term, we expect that market to be at least growing in high single digits and security in a mid mid 10s, if you will. And so certainly from a depressed base, we should see a positive cycle on as the spending come back up and particularly because our products go into sort of the core of what they need to deliver new services and maintain customer experience, right, as opposed to a dramatic reinvention of the network so far. So we do expect that as it ramps up in 2024, we could see a more positive cycle in 2025.
Christian Schwab
Right. And Bill and Great, no, other questions. Thank you.
Dhrupad Trivedi
Thank you, Vishal.
Operator
Your next question comes from Andrea sort of strong from Seton side.
Anja Soderstorm
And I ask first of all? And is there anything you'd call out geographically in terms of of revenue?
Dhrupad Trivedi
Yes. Good question. And yes, so I think nothing nothing very unusual for us as expected. Certainly we saw weakness in North America service provider side. We certainly also saw positive momentum on enterprise growth in North America, right, where we have invested in resources and in some of the new products we released last year. So I would say from that perspective, North America enterprise positive service provider negative. When I look at our theaters in Japan and Europe, not a significant change versus what we were expecting for the year, a little bit of FX pressure in Japan. And I think we continue in Amea to find pockets of strength and continue to deliver on that. So I would say that's nothing unusual relative to what we have I mentioned before.
Anja Soderstorm
Okay, thank you. And can you just remind me in that in this year due to a tougher 2023, the product revenue was a little bit lumpy and second and fourth quarter was a lot stronger. I know some some of it was pulled in from Q3 to Q4. We had the same happening in the second quarter.
And how should we think about quarterly cadence for next year? Are they here?
Dhrupad Trivedi
Yes, so if you add, I would say that certainly we saw some movement from Q3 to Q4, and you can see it really in our sequential product revenue growth from that, particularly in service provider segment information that we publish our first quarter, I think for us was a little bit unusual because in addition to the macro environment, right, we also were focusing on strengthening our own cybersecurity posture and our own position on that going into 24 and beyond. I would say we expect to with return to our normal seasonality of 47, 53, first half second half.
Anja Soderstorm
Right. And that should add?
Dhrupad Trivedi
We don't expect obviously to the best of our ability one-time events to affect that that much.
Anja Soderstorm
Okay, thank you. And tested them for longer sales cycles and deciding what do you how have it trending now? They like becoming even longer already improving?
Dhrupad Trivedi
I don't think they're becoming longer. I think what we are seeing is even in enterprise segment, generally something that needed, you know, five steps, six step process and sales and signature and approval in 2023. These are typically customers adding one or two more steps in that process, right? Whether they were finance-related, our company CapEx or cash management related, and we don't see it getting worse. And I would say, no, it probably takes a couple of quarters before we see it getting better, but we don't see it getting any worse than it was in 2023 up but the focus really was on many of our customers, adding incremental layers of approvals to make sure that they are doing what they can to navigate an complex and uncertain macro environment just like we would have done ourselves.
Anja Soderstorm
Okay.
Dhrupad Trivedi
Thank you.
Anja Soderstorm
That's all for me.
Dhrupad Trivedi
Thank you, PENNSYLVANIA.
Operator
As a reminder, to ask any further questions, please press star followed by one on your telephone keypad.
We have the next question from Hamed Khorsand from BWS Financial permit. You may proceed with your question.
Hamed Khorsand
I have first question is if I look at just the revenue on a just simple basis, you were down something like $30 million year over year. Is that $30 million loss if you're saying that it gets pushed on 24, but it just seems like it's never BEING recruit.
Dhrupad Trivedi
Yes. So I would say Howmet that I would probably separate service provider and enterprise in that segment up as if you look at sort of historical cycles for service provider spending, that CapEx is cyclic and our enterprise revenue has grown every year, right? So that's not factor here. And on the service provider side, what we saw was pullbacks from a handful of large SP customers who had projected plans to add capacity or new services and have subsequently either recut those plans to be over longer periods of time or reduce them. And this is very consistent with all the 5G data. Our report, you will see from many of our peers, partners and customers that in general, their projected incremental investments are now slower for deferred over a longer period of time. So now when we say we don't think we lost the reality is what we are looking at is that was not a project where we were the chosen provider and the customer made a decision to go with someone else, which we would call as a competitive loss, right? So it's more that the customer was spending planning to spend X million dollars and ended up ultimately spending half of that back or saying we'll do half this year and a little bit next year, a little bit next year end. The difficult thing is it's hard for me to say 100% of that reappears in 2024. And I feel like I think I'll leave that to the economists and our analysts to figure that out. But I think to our ability what we can do is make sure we are aligned with those customers. We are not losing to competitors as they gain confidence to invest, and we feel that we are in a good position to get there.
Hamed Khorsand
Okay. And could you just talk about the sales timing within the quarter? Did all happen towards the very end of the quarter?
Dhrupad Trivedi
No, actually, no, it was better than what we saw in Q3 phenomenon.
Hamed Khorsand
And generally, obviously, we hope and the quarter is more balanced just because it reduces the risk and volatility for us on execution as well as well as cost. And so the fourth quarter, I would say definitely improved from second and third quarter in terms of what we were able to book and ship in month one month two and month three.
Dhrupad Trivedi
Yes.
Hamed Khorsand
Do you still have a large accounts receivable with one customer that more days diversified?
Brian Becker
It's fairly diversified, but I don't, Brian, you can add to that yes, yes, no, we did have two large customers and they are, but it's normal cycle. I think as Drew mentioned in the past, it does change quarter to quarter and the two that we had this quarter. I think it did not appear as the same customers in previous quarters.
Hamed Khorsand
Okay.
Dhrupad Trivedi
Thank you.
Operator
Again, thinking as a reminder to ask any further questions please ask, please please press star followed by one on your telephone keypad. We now have Hendi Susanto from Gabelli Fund. Your line is open and handy.
Hendi Susanto
Good afternoon, drupa and Brian My first question's for Drew. But if we see the self as to like service providers from one quarter to another, I saw some sequential improvement in Q4 from Q. three do you have any in sight weather, the service providers segment has seen its bottom or there or is there still any risk that it may continue to slight down sequentially?
Dhrupad Trivedi
So Hendi if you remember in the third quarter, what we had talked about was the fact that as we had entered even the 3rd month of the quarter, we had seen a few significant deals that were projected for Q3 move into Q4. And I think the Q4 result really showed that that materialized in Q4. In some cases, they were slightly smaller than what we originally thought in Q3, but in general you can see fairly significant step up, but it's related to that timing between the two quarters and up as far as you know, thinking about calling a bottom. Again, as I said, I would leave that to the economists and the federal board and analysts to figure that out from our perspective. Certainly we are very close aligned with our customers and us making sure we are designing in even more products that as their confidence in spending resumes, that we will be a key part of that strategy going forward, right? And it's hard for us to say. And as I said before, particularly in a year that could be influenced by political factors. It's even more difficult than just purely economic factors.
Hendi Susanto
And then and then since we have the full year revenue, can you share what percentage of the security solutions?
Brian Becker
Yes, I believe it was around 50% just below that. So in line with our goal of achieving 65%, which we announced the 2022 NTS.
Dhrupad Trivedi
Yes. So it's steadily growing and we're tracking to plan.
Hendi Susanto
Yes. And then last question for me of Brian. If I look at OpEx is $35 million to $36 million, a good baseline for quarterly run rate of the OpEx?
Brian Becker
Good question, Hendi. There's a few factors. Obviously, variable comp is lower than expected, not only because of the changes or at least the misses that we saw in Q3 and then overall, we were projecting a little little bit better result in Q4. But I'd say that there's variable comp that's missing from OpEx, both in Q4 as well as the full year results as we turn to 24, we'll be expecting to add back that variable comp. And yes, it may be like a third of that cost back as a result Thank you, Brian.
Dhrupad Trivedi
Thank you, Yvonne.
Brian Becker
Thank you.
Operator
Thinking to that to ask any further questions, please press star followed by one on your telephone keypad.
Now we currently have no further questions registered.
So I'd like to hand it back to you. Can you patch ready for any final one?
Dhrupad Trivedi
Thanks.
Thank you, and thank you all of our shareholders for joining us today and for your continued support. I also want to thank all our employees around the world for driving this performance in a very challenging market environment. Thank you.
Operator
Thank you for joining today's conference call with A10 Networks. Today's call has now concluded, and you may now disconnect your lines and please enjoy the rest of your day.
