A10 Networks (NYSE:ATEN) concluded its fourth quarter and full year 2023 with mixed financial results, as announced in their recent earnings call. President and CEO Dhrupad Trivedi acknowledged the impact of delayed capital expenditures by service providers and extended sales cycles for enterprise customers. Despite these challenges, the company reported a 23% increase in enterprise revenue for the fourth quarter. CFO Brian Becker noted a 9.3% year-over-year decrease in fourth-quarter revenue, totaling $70.4 million, but emphasized the growth in recurring and deferred revenue. A10 Networks achieved non-GAAP net income of $18.5 million for the quarter while maintaining their gross margin and adjusted EBITDA margin goals. For the year, the company reported GAAP net income of $40 million and generated $43.8 million in cash from operations. With $159.3 million in total cash and equivalents, the company paid $4.4 million in dividends and announced a new $50 million share repurchase plan. Looking ahead, A10 Networks expects single-digit growth in revenue and EPS for 2024, targeting an 80% to 82% gross margin and a 26% to 28% adjusted EBITDA margin.
Key Takeaways
- A10 Networks reports a 9.3% decrease in Q4 revenue year-over-year, with $70.4 million earned.
- Enterprise revenue grew by 23% in Q4, despite longer sales cycles.
- Recurring and deferred revenue show signs of continued demand for A10's solutions.
- Non-GAAP net income stood at $18.5 million for the quarter, and GAAP net income for the year was $40 million.
- The company remains debt-free, with a strong cash position of $159.3 million.
- A quarterly cash dividend of $0.06 per share is to be paid on March 1, 2024.
- A new $50 million share repurchase program has been approved.
- Revenue from security solutions accounts for about 50%, aiming for 65% by 2022.
- Single-digit revenue and EPS growth projected for 2024, with a focus on enterprise and security solutions.
Company Outlook
- A10 Networks anticipates single-digit growth in both revenue and EPS for 2024.
- The company targets gross margins of 80% to 82% and adjusted EBITDA margins of 26% to 28%.
- Revenue growth is expected to be weighted towards the second half of the year.
- Focus remains on expanding enterprise and security solutions.
Bearish Highlights
- Two large customers in accounts receivable were lost, which is seen as part of a normal cycle.
- Revenue headwinds are present, though the company continues to be profitable.
Bullish Highlights
- Recurring revenue increased, indicating sustained demand for A10's offerings.
- The company is debt-free and has a robust cash position, allowing for shareholder returns and share repurchases.
Misses
- Fourth-quarter revenue fell by 9.3% compared to the previous year.
- The company did not meet its goal of achieving 65% revenue from security solutions by 2022, currently at 50%.
Q&A Highlights
- The company discussed the loss of two large customers as a normal business cycle occurrence.
- Sales to service providers improved sequentially in Q4 compared to Q3, attributed to deal timings.
- The OpEx baseline is estimated to be between $35 million to $36 million, with future additions expected for variable compensation.
A10 Networks has managed to navigate through a challenging market environment, maintaining its profitability and cash position while also rewarding shareholders through dividends and a share repurchase plan. As they continue to adapt and focus on the growing demand for cybersecurity solutions, the company projects modest growth in the coming year.
InvestingPro Insights
A10 Networks (ATEN) has demonstrated resilience in its financial performance despite market challenges. The latest data from InvestingPro provides additional context to the company's fiscal health and future prospects.
InvestingPro Data:
- Market capitalization stands at $966.76 million, indicating the company's size and market value.
- A P/E ratio of 23.64 suggests investors are paying a higher price for earnings, which might reflect optimism about future growth.
- With a gross profit margin of 80.52% for the last twelve months as of Q3 2023, A10 Networks maintains a strong ability to generate profit from its sales.
InvestingPro Tips:
- A10 Networks has been increasing its shareholder value, raising its dividend for 3 consecutive years. This could be a sign of the company's commitment to returning profits to shareholders.
- The company's stock generally trades with low price volatility, which might appeal to investors looking for stability in their investments.
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Full transcript - A10 Network (ATEN) Q4 2023:
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.
Operator: [Operator Instructions] The first question we have comes from Christian Schwab of Craig-Hallum.
Christian Schwab: Just a few quick questions. On the service provider level of the prepared comments, 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. We expect seasonality to be returning to our normal seasonality of 47, 53 first half, second half. But beyond that, I think our expectation of growth is not based on an assumption that SP spending sharply picks up in the second half. I think we look at it as a more balanced way of saying, we expect to continue progress in enterprise and security solutions, and as SP spending picks up maybe in the second half right, it should help us with that seasonality and beyond. That's maybe the best way to think of it is it's not purely based on hoping that SP spending comes back in the second half.
Christian Schwab: And then as we look further route into ‘24, then would you expect a snap back 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 the 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 is given sort of the movements 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, 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 mid-teens if you will. And so certainly from a depressed base, we should see a positive cycle on SP spending come back. 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, we do expect that, as it ramps up in 2024, we could see a more positive cycle in 2025 right and beyond.
Operator: Your next question comes from Anja Soderstrom from Sidoti.
Anja Soderstrom: First of all, is there anything to call out geographically in terms of revenue?
Dhrupad Trivedi: So I think, 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. 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 EMEA to find pockets of strength and continue to deliver on that. So I would say that's nothing unusual relative to what we have mentioned before.
Anja Soderstrom: And could you just remind me in this year past year 2023, the product revenue was a little bit lumpy and second and fourth quarter was a lot stronger. I remember some of it was pulled in from the third quarter to the fourth quarter. We had the same happening in the second quarter. Now, should we think about the quarterly cadence for next year or this year?
Dhrupad Trivedi: So, if you know, I would say that certainly we saw some movement from third quarter to fourth quarter. And you can see it really in our sequential product revenue growth from that, particularly in service provider segment information that we published. First quarter I think for us was a little bit unusual because in addition to the macro environment, we also were focusing on strengthening our own cyber security posture and our own position on that. Going into ‘24 and beyond, I would say we expect to return to our normal seasonality of 47, 53, first half, second half, right? And that should -- we don't expect obviously to the best of our ability one-time events to affect that much.
Anja Soderstrom: And in terms of the longer sales cycles that you've been fighting, what are you -- how are they trending now? Are they like becoming even longer or are they improving?
Dhrupad Trivedi: I don't think they're becoming longer. I think what we have seen is, even in enterprise segment, generally something that needed five steps, six step process in sales and signature and approval in 2023 we saw typically customers adding one or two more steps in that process, right? Whether they were finance related or company CapEx or cash management related. And we don't see it getting worse. And I would say, 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. But the focus really was on many of our customers adding incremental layers of approvals to make sure right, that they are doing what they can to navigate and complex and uncertain macro environment, just like we would've done ourselves.
Operator: [Operator Instructions] We have the next question from Hamed Khorsand from BWS Financial.
Hamed Khorsand: Hi. First question is, if I look at just revenue on a just simple basis, you were down something like $30 million year-over-year, is that $30 million lost? You're saying it gets pushed down ‘24, but it just seems like it's never being recouped.
Dhrupad Trivedi: Yeah, so I would say Hamed that, I would probably separate service provider and enterprise in that segment. 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 a factor here. And on the service provider side, what we saw was pullbacks from handful of large SP customers who had projected plans to add capacity or new services and have subsequently, recut those plans to be over longer periods of time or reduce them. And this is very consistent with all the 5G data or reports you'll see from many of our peers, partners, and customers that, in general their projected incremental investments are now slower or 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 there 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, right? Or saying we'll do half this year and a little bit next year, a little bit next year. And the difficult thing is, it's hard for me to say a 100% of that reappears in 2024. And I think I'll leave that to the economists and our analyst 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 and as they gain confidence to invest we feel that we are in a good position to get that.
Hamed Khorsand: And could you just talk about the sales timing within the quarter? Did it all happen towards the very end of the quarter?
Dhrupad Trivedi: No, actually no, it was better than what we saw in Q3 phenomenon. And generally, obviously we hope 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.
Hamed Khorsand: Do you still have a large accounts receivable with one customer or is that more diversified?
Dhrupad Trivedi: It's fairly diversified, but I don't know, Brian, you can add to that.
Brian Becker: We did have two large customers in AR. But it's normal cycle. I think as Dhrupad has mentioned in the past, it does change a quarter-to-quarter. The two that we had this quarter, I think did not appear as the same customers in previous quarters.
Operator: [Operator Instructions] We now have Hendi Susanto from Gabelli Funds.
Hendi Susanto: My first questions, so Dhrupad, if we see the sales to like service providers from one quarter to another, I saw some sequential improvement in Q4 from Q3. Do you have any insight whether the service provider's segment has seen its button or there -- or is there still any risk that it may continue to slide 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 third month of that quarter, we had seen a few significant deals that were projected for Q3 move into Q4, and I think the Q4 results really show 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 as far as, 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 closely aligned with our customers and 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. 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 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 2022. It's steadily growing, and we're tracking to plan.
Hendi Susanto: And then last question for me. 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 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 will be expecting to add back that variable comp maybe like a third of that cost back as a result.
Operator: [Operator Instructions] We currently have no further questions registered. So I'd like to hand it back to Dhrupad Trivedi for any final remarks.
Dhrupad Trivedi: 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 all 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 rest of your day.
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