Good day, ladies and gentlemen, and thank you for standing by. Welcome to the A10 Networks Q1 2014 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, May 1, 2014. I would now like to turn the conference over to Maria Riley with Investor Relations. Please go ahead.

Thank you, all, for joining us today. I am pleased to welcome you to A10 Networks First Quarter 2014 Financial Results Conference Call. This call is being recorded and webcast live and may be accessed for 90 days via the A10 Networks' website, www.a10networks.com. Joining me today are A10 founder and CEO, Lee Chen; A10's CFO, Greg Straughn; and our VP of Global 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 first quarter 2014 financial results. Additionally, A10 published a presentation with its prepared comments for this call and supplemental trended financial statement. You may access the press release, presentation with prepared comments and the trended financial statement on the Investor Relations section of the company's website at www.a10networks.com. During the course of today's call, management will make forward-looking statements, including statements regarding our projections for our second quarter operating results, our expectations for future revenue growth and the growth of our business in general. These statements are based on current expectations and beliefs as of today, May 1, 2014. A10 disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise. 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. For a more detailed description of these risks and uncertainties, please refer to our prospectus filed with the SEC on March 21, 2014. 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 second quarter of 2014 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 these -- the charges, which are excluded from these non-GAAP measures. Before I turn over the call to Lee, I would like to note that on May 6, A10 Networks will attend RBC Tech Conference in Boston. On May 20, management will present at the JP Morgan TMT Conference, also in Boston, and on June 3, management will present at the BofA Merrill Lynch conference in San Francisco. We look forward to seeing many of you there. Now I would like to turn the call over to Lee for his opening remarks. Lee?

Thank you, Maria. I'm delighted to be here with you today, and I would like to thank you, all, for joining our first public financial results conference call. We are very pleased with our results, and we believe 2014 is off to a great start. A few of our accomplishments so far this year include: In January, we officially launched our TPS product, which is our first standalone security solution for large-scale DDoS protection. Also in January, we introduced our new aCloud Services Architecture to support next-generation Infrastructure-as-a-Service cloud data center architecture. In March, we completed our $193 million initial public offering. In April, we launched the industry's first 100 Gigabit Ethernet ADC for layer 4 to layer 7 services. Also in April, we expanded our Thunder Series of appliances, filling our product portfolio with 4 new midrange and high-end models. And lastly, we established a new three-tiered channel partner program in North America designed to provide our channel with resources and programs to help foster A10 product sales. Specifically, in the first quarter, the A10 team delivered tremendous growth, and we achieved our third consecutive quarter of record revenue. Revenue grew to $45.7 million, up 55% year-over-year and 8% sequentially. And we delivered this growth with very strong gross margin of 78.2%. Highlighting our differentiated application networking platform and the value we provide to a broad range of customers, we've added 200 new customers in the first quarter. Let me share with you a few new customer wins. First, a large cloud-marketing company chose our ADC solution to expand their network capacity and provide consistent feature and performance across both their physical and virtual networks. This customers deploying our ADC solution on a Thunder box in their large markets and our virtual ADC solution in their emerging markets where…

Thank you, Lee, and thanks all of you for joining us here today. Our continued execution of our growth strategy led to strong first quarter results, delivering robust growth and a solid gross margin. First quarter revenue grew 55% year-over-year and 8% sequentially to achieve record revenue of $45.7 million. Our sequential growth this quarter is notable as the strong demand for our products in Q4 of '13 and Q1 of '14 offset the normal seasonal trends that we can often see in the first quarter of the year. Product revenue was $36.4 million or 80% of first quarter revenue, up 57% in the prior year and up 9% quarter-over-quarter. Service revenue was $9.3 million or 20% of revenue, up 48% year-over-year and 7% from Q4 2013. Nearly all of our service revenue is from ongoing maintenance and support contracts and grows as the installed base of our product grows. Our deferred revenue, which primarily consists of maintenance to be recognized in future periods, grew 7% sequentially to a record $43.9 million. From a geographic perspective, we generated robust year-over-year growth in all of our key regions, including the U.S.; Japan; Asia Pacific, excluding Japan; and EMEA. Revenue from the United States grew 72% year-over-year and represented approximately 40% of first quarter revenue. Japan represented 38% of total revenue, growing 40% year-over-year. And APAC represented 9% of revenue, up 69% year-over-year. EMEA revenue more than doubled over Q1 of '13 and was 9% of total revenue. Enterprise customers represented approximately 44% of revenue in the quarter, with the remaining 56% of revenue from service providers. The vertical mix of our revenue this quarter reflects the strong service provider component of the Q4 backlog. We expect service provider revenue in Q2 to be closer to 50% of total revenue. Moving beyond…

[Operator Instructions] And our first question comes from the line of Tal Liani with Bank of America.

I have 3 questions. First, do you provide the revenue breakdown between ADC, TPS or security and CGN? And second, what was the growth in service providers? You just said it was strong and it reached 56% of revenues versus kind of 50% normalized, but do you have the growth? And the third is related to the second question. We've seen a few companies that had strong growth in service providers in the first quarter, which is atypical. This is supposed to be a weak quarter. And that most of them is because of AT&T. And I'm wondering if you had any concentration on your side, if you had any concentration of customer within the service provider growth.

Hi, Tal, this is Greg. Thank you for joining us today. So I'm going through your questions in order here. On the ADC, CGN, TPS, we are not breaking those out separately as revenue streams. Just within the quarter, we have seen strength in -- strength both in sales and in pipeline across those products, so we don't expect to be breaking this out in the future. As far as service providers go, I think that in the first quarter, we did see strength from the service providers, both in deals that we booked within the quarter, as well as the amount of backlog we carried out of Q4 into the quarter. So what we saw in the growth there was driven partly by the new transactions, but also by transactions that our service provider customers had committed to late in Q4. So the growth rate on service providers was a little over 100% quarter-over-quarter and 66% year-over-year service providers. We do typically see some strength in service providers in Q1 because it is the Q4 in the Japanese market.

And there was any concentration?

Yes, I mean, in the service provider market, we do see some large transactions. So if we looked at our 10% customers, you would find service providers within that environment, yes.

Last question is your security. You announced the security product, but you did have revenues for security from a big customer already in 3Q last year. First, can you give us an update on this customer, if there was any strength this quarter, are there any repeat orders or anything you can discuss? And second, how soon do you expect the security product to ramp into -- the new product that you discussed in your press release to ramp into the next few quarters?

Okay. Tal, this is Lee. We announced the TPS product in Q1, and we just released the product today. So the -- in terms of the customer, we have one large order in Q3 last year with a customer. We continue engage with the customer. But due to the product just released today so we did not have -- see any revenue in this quarter from that customer. But we expect the -- we are seeing a strong and growing interest, a very strong pipeline and positive initial feedback on the TPS product. So we do expect that within 4 to 6 months, we should start to see a good -- these deals already coming in.

And, Tal, I misspoke on the quarter-to-quarter. It was 58% service provider quarter-to-quarter.

66% year-over-year still?

Yes. And 58% quarter-to-quarter. Yes.

Our next question comes from the line of Katy Huberty with Morgan Stanley.

First question, midpoint of guidance assumes roughly 26% sequential growth in enterprise, which is pretty impressive given some of the guidance we've seen from other enterprise companies. Can you just talk about whether you think that's normal seasonality or if you're seeing some acceleration in traction with new customers or new products? Then I have a follow-up.

So we are seeing a significant traction with both new and existing customers as we brought the Thunder Series product to market, and we're seeing great both interest and adoption of that product. And we're seeing very strong pipelines leading into Q2. So everything that we're seeing in the market is consistent with the guidance and the expectations we have for Q2.

And then can you just walk through the major changes to the partner program announced last week and talk about how much of an impact and timing of an impact that we should expect from that rollout?

Yes, well, let me pass it over to Ray Smets to address that question.

Yes, sure. We just announced a new partner program. It's a new three-tier program that replaces our prior program, and it's what you would typically expect of a company of our size. Basically, rewards partners that deliver a higher degree of revenue with greater margins and discounts. What's really unique about this program is that it adopts -- it moves our existing partner base to the new program, where we expect to see those existing partners deliver better revenues for us over time. We're going to deliver greater enablement, better certifications and additional support that helps those partners get more productive. The other half of this program is it was really well received by the partner community, and we anticipate recruiting new partners to the program as a result. And we would leverage our enablement and our support and the certifications process to make them productive as quickly as possible. So this is part of our strategy to grow our business and get access to the market, and we're super excited about this product launch -- or this new partner launch.

And it's in effect right now so we should see the impact in the June quarter?

Yes, well, it does take a little time for traction to be made with a partner program like this. So the new partners will see an, hopefully, an immediate benefits. And then as we begin to recruit other partners in the program, we should see benefit to our business over time, probably over the next 6 months to 9 months.

And our next question comes from the line of Rod Hall with JPMorgan.

Just wanted to start off with Japan. I guess we've heard the F5 talking about strength in Japan. Now you guys are talking about a pretty good quarter in Japan as well. I wonder if you could just comment on the demand dynamics in Japan, what's going on there, and also the competitive dynamics a little bit, and then I have a follow-up.

Yes. Rod, this is Lee. Let me answer that. I think we saw the revenue grew 40% year-over-year and also more than doubled from Q4. So we are seeing a very strong demand in Japan. I think the numbers speak for themselves. We definitely have a very strong position in Japan, very tight relationship with partner and customer in Japan. As a matter of fact, I was in Japan last week -- I mean, 2 weeks ago, a meeting with a customer, a partner and with our User Conference. Our User Conference actually had the largest turnout and, in general, very upbeat.

Okay. Great. Also, I wanted to ask a little -- just maybe a question, Greg, on the EBIT margin performance. I mean, that was better than we had anticipated. And I just wondered whether you think, Greg, you can hold the OpEx line kind of stable as revenues are growing a little bit faster, maybe. So I guess I'm curious on what the -- what you think the EBIT line looks like over the next year or so, maybe we end up with breakeven EBIT sooner than maybe you had originally anticipated a few months ago.

Rod, not necessarily. We're really focused on growing the top line at this point and think there's a great market opportunity out there. So I think over the next year or so that you'll see variation in the EBITDA line as well as in kind of the operating margins just as we -- as we invest. We look at our hiring patterns, we tend to focus on Q4 and Q1 in our sales teams, and so you'll see some additional expenses in those quarters. So we're not really going to guide towards any level of consistency in that number at this point.

Of our next question comes from the line of Mark Sue with RBC capital.

I'm trying to get a sense of just the new products and the range of new products, and what percentage of your customers are actually just taking the regular [indiscernible], which are taking the carrier-grade and the DDoS collectively? How is it -- that is all combining for a collective set, maybe if you could give us any use-case examples. We're just trying to get a sense of the multiplier effect.

Mark, can you repeat that question? It broke up a little bit as you were asking it.

Sure. I'm just trying to get a sense are you seeing an increased number of customers taking a collective set of your products, ADCs, carrier-grade and DDoS as opposed to certain customers very focused on specific end products. Are you seeing a multiplier effect?

Mark, this is Lee. Let me just take the DDoS product. I think DDoS product just released today, so we just kicked off the sales activity. Even though the initial feedback has been very positive, we are seeing already a growing interest, we do expect it will take 4 to 6 months to see the initial deals coming in. So the 100 -- CGN DDoS, we do have a customer taking our high-end Thunder Series, taking our higher-end Thunder Series in North America for their CGN deployment, including some of the security function.

I see. Would you say a lot of the initial interest is from existing customers or a new set of customers for some of the new products?

Yes, actually, from both. We are absolutely seeing a lot of our current customers are very interesting in our DDoS solution. We also win with many new customers. They come to A10, contact A10. I was just recently in Asia. We had some international partner actually approaching us because of DDoS solutions we are going to offer.

I see. That's helpful. And then lastly, just on this legacy Cisco ACE replacement, any thoughts of quantifying that and where we might be in terms of sunsetting that opportunity?

Ray, can you take that question?

Yes, sure. Hey, Mark, this is Ray. I guess, the good news is we have -- to opportunity for us is really getting to the table. When we get to the table, we tend to have a very high win rate in any deal. The good news is we are winning some very substantial ACE replacements as well as winning back replacement strategies for other vendors that are in the incumbent position. So although we're not breaking down the numbers specifically, our win rate tends to be above 70% when we're in the deal, and a number of those are ACE replacements.

Our next question comes from the line of Brent Bracelin with Pacific Crest.

A handful of questions here. I guess the first one, we'll start with a little housekeeping. 10% plus customers, did you have any in the quarter? And if so, who was it and what percentage of revenue was it?

Hi, Brent, it's Greg. So yes, we did have 3 in there. The percentage will be listed out in the Q and S filed, but we have -- in round numbers, we have 1 at 13%, 1 at 12% and 1 at 11%. We're not disclosing the names quite yet.

Okay. Look forward to the filing there. And then follow-up on the Cisco ACE win. You mentioned at a wireless customer. Was that a Tier 1 wireless customer or was that kind of more Tier 2?

That was a Tier 2 wireless customer in that case.

Okay. And any color on Geo, or is that too specific?

Yes, that was a Tier 2 in North America actually.

Tier 2 in North America. Very helpful. And then last question for me is, really, on the enterprise part of the business, clearly, you had a nice backlog going into this quarter on service provider. Enterprise still is relatively healthy, albeit easy compare, up 78% year-over-year. Your guidance does imply you're pretty optimistic about continued strength in the enterprise. Question here is, really what's, driving the momentum for you on the enterprise side? Are you seeing a mix shift to 10 gig upgrades, is this tied to an increasing desire by the enterprise to drive higher SSL traffic offloads? Any color on what's driving the strength on the enterprise side would be helpful.

I think there are multiple factors. One is really from the ACOS platform. I think the platform offer a tremendous, I think, price performance, flexibility and really rich feature set. So enterprise, as we know, every customer, they demand different features. And we are also very agile to really -- to do really quick feature release for specific enterprise customers. You have to really invest in the sales engine. And we have been investing a lot in the sales and marketing over the last 6 months. So we are seeing some impact of our investment paying off.

Okay. So it sounds like the -- just improving sales productivity of those investments that you made 6, 9 months ago is really starting to pay off? Is that the #1 reason? Is there any technology kind of driver you that you see out there that's contributing to the acceleration and momentum in enterprise?

Yes, from the technology, it's really about the platform, right? The platform is really gaining traction within enterprise. Our platform is very, very flexible, very reliable, and we're able to build a reputation of the product itself is super reliable. That's what many enterprise are looking for. The other thing is really about performance. Both are easy to manage.

You know, Brent, I think, the other thing to add to that is that from a product perspective, when we moved from ADC to CGN, we had a second product out there that our service provider products could buy. And we've talked about our land-and-expand strategy, somebody. When somebody buys, they move into the second product. With DDoS, we now have a product that will be coming out where our enterprise customers have a second product from the A10 portfolio that they can purchase. So we have a whole new product family that will be moving us into enterprise as well.

Our next question comes from the line of Ittai Kidron with Oppenheimer.

Congratulations, guys, on a great start as a public company. Greg, I wanted to dig a little bit into some the numbers. When you talked about 200 enterprise -- or customers additions, I'm sorry, in the quarter, can you give us some context what it was in the fourth quarter or the same quarter last year, just so we get a sense of the acceleration there?

Let me, as I pull those numbers up, Ittai, I will say that for the year last year, we added approximately 1,000 customers over the course of the year. And as you know, Q1 and Q2 were like quarters for us last year, so that was fairly back-end loaded. So in just a second, we can have a number there. If you had a second question, we can do that and then come back.

Yes, so do you -- how relevant -- if we just look at the enterprise -- I understand that the service provider is very lumpy. You can have $4 million, $5 million orders and then on much smaller follow-on orders as you go. But when you look at the enterprise side, can you talk about some deal sizes and what's been the trend over there and how do you anticipate that to move forward now again that your portfolio and your ability to sell more into the same customer is developing?

Sure. Let me preface this, and then I'll turn it over to Ray. We and the -- when we got to doing the roadshow and described land and expand as we've showed how our top customers, if they buy it, and they're buying in 80% of the quarters after initial purchase and that they're buying more than 8x additional product. And we see that pattern is representable in our enterprise customers as well as our service providers. So in some of the examples that Lee has described in the meeting -- or earlier in the call, you have seen how they would transact in expanding the footprint of A10 product across the enterprise. So they go 1 data center to multiple. So we do see that as a pretty consistent pattern. I'll turn it over to Ray. He can talk a little bit some cases on that and some other metrics.

Yes, so Ittai, this is a -- it's a bit of a mixed bag, very hard to get into all the details here, but obviously, what you're detecting here is our service provider customers need to grow very nicely, and they add a significant amount of million-dollar deals and deal size to our overall average. But we are moving down into the enterprise market more effectively. We sell large enterprise, but we also are going down market and our channel program will actually address more of that market over time. Overall, the trend is going up in terms of deal size. So -- and I think -- I don't know if we actually provide that publicly, but we're actually seeing a very nice trend northward in terms of average deal size on a quarterly basis.

And that would actually be reflective of what we see when we look at the customer numbers. To go back to your first question, last year, Q1, we added 202 customers and in Q4, we added 245 new customers.

Got it. And then on the gross margin, Greg, as we move into the next quarter, given the change in mix that you're anticipating with regards to enterprise versus carrier, does that, generally speaking, have any impact directionally on margin?

Generally not. When we look at it, our near-term margins, our expectations are still in the 77% to 78% range.

[Operator Instructions] And our next question comes from the line of Ehud Gelblum with Citi.

Okay, so a couple of additional housekeeping questions, if I could. Greg, can you give us a breakdown of CGN revenues versus ADC in the product side? I'm assuming the DDoS was zero this quarter. Is that the right assumption?

Well, so I'll answer half of your question with data. Yes, with -- the TPS DDoS product is just now available for shipping as of today, so it does not contribute to revenue beyond that first large customer that we had. But beyond that, we're not breaking down the -- our revenues by the CGN, ADC, TPS at this point.

Okay. Can you give us a split between Thunder and AX?

Again, we're not providing that breakout, but I will say that as we see new business coming on, there's a sizable move towards the Thunder platform due to the performance that it brings and the price performance that comes along with it. So we're seeing that being adopted pretty aggressively in the market. I think as we had mentioned at least previously at one point that part of the backlog that we carried out of Q4 was due to more demand than we had expected in terms of some our high-end Thunder products.

In general, the high-end Thunder products are performing really well.

Yes, will it be safe to assume that going forward, 3/4 of revenues is basically going to be Thunder or more?

Yes, I don't think we have that level of detail to provide.

Okay. Did you -- I may have missed it, but did you give a split between direct and channel and what your goals are between those 2?

We have not, but I can give you some directional indicators there. We are primarily a channel business. Ray talked about expanding the channel. That's about getting more productivity out of the channel. But currently, greater than 90% of our transactions go through the channel, not quite the same break on dollars. There's some major customers who prefer to work with us directly. But when you think about how we will generate incremental leverage in the marketplace, a good portion of that is driven by our channel strategy that Ray described earlier.

Right. That was more for the dollar number. Would that be closer to around 2/3 and roughly staying there?

What is the question?

I'm sorry. The split, the percent channel, that is on the dollar basis not on the actual per unit customer basis?

Yes, we won't be breaking that out, but we will talk about it just in terms of -- from a transactional perspective. That's one of the things that drive -- the thing that gets thrown off is that the channel business tends to be, as your numbers would illustrate there, tends to be how you go after more of the mass-market transactions. And that's where we see, as the product moves to be more enterprise oriented, we see the channels becoming greater contributor to that piece of the revenue stream primarily.

Great. Okay, helpful. Question on the guidance. Assuming your guidance of the midpoint is up a couple of million basically from what you just did in Q1, it sounds as though with the TPS product actually having some backlog and now being ready to ship, that you'll sell a little bit of TPS. I'm not quite sure exactly how much you're anticipating for next quarter. But is the implication therefore that ADC is sort of flat to down next quarter on a sequential basis?

No, I think the -- for the DDoS TPS product, we expect it will take 4 to 6 months, due to this new product. Even though the initial feedback has been very positive, [indiscernible] of 4 to 6 months. So it should [indiscernible] Q2.

Okay, so all the growth next quarter in Q2 is TPS -- I'm sorry, is CGN and ADC. Helpful.

You will see a growing pipeline in TPS.

Okay. That's very helpful. Last question, big picture on the -- now that you've been out in public for a little while, have you seen any competitive response either on pricing or any other way from your main competitors, F5, Citrix, Radware?

We have not noticed anything in the marketplace, no.

And we have a follow-up question from the line of Mark Sue with RBC capital.

Gentlemen, if I put things in a historical perspective, a year ago, there was some concern whether or not the ADC market was really growing. Today, you're guiding for revenues to reaccelerate to almost 60%, then you have new products coming also as well. If we look into the future maybe a year or so, should we think of A10 more as a platform delivery system? Conceptually, are there other things that customers are asking for, which you can actually layer on top? Just kind of the thought process of the things in the future.

I think the -- yes, Mark, this is Lee. I think we are -- ADC is a really established but very healthy market. But our growth rate in ADC is definitely much higher than our competition. The -- our partners, I think the, really, mission-critical area, the platform has always been a strong selling point. With additional feature we put in the ADC such as SSL Intercept, I think that will drive channel the new business. So we're definitely seeing through platform, the feature, the performance, the scalability and flexibility, all this contribute to our success in the ADC market.

And I'm showing we have no further questions at this time. I would now like to turn it back over to Lee Chen for any closing remarks.

Yes. Thank you, all, for joining our first earnings call as a public company. We would like to take this opportunity to thank all our customers, partners and employees. You have all contributed to our success, and we thank you for your dedication and commitment. And we would also like to thank to our shareholders for their support. We look forward to sharing our future success with you. Thank you.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation, and you may now disconnect.