Hello. And welcome to the A10 Networks’ Third Quarter 2023 Earnings Conference Call. My name is Elliott, and I will be coordinating your call today. [Operator Instructions] I’d now like to hand over to Rob Fink with FNK IR. The floor is yours. Please go ahead.

Thank you, Operator, and 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 a10networks.com. Hosting the call today are Dhrupad Trivedi, A10’s President and CEO; and Brian Becker, CFO. Before we begin, I would like to remind you that shortly after the market close today A10 Networks issued a press release announcing its third quarter 2023 financial results. Additionally, A10 published a presentation and supplemental trended financial statements. You may access the press release presentation and trended financials 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 or future operating results, including their potential revenue share, revenue growth industry and customer trends and capital allocation strategy, supply chain constraint, and expectations, positioning, or repurchase and dividend programs and market share. These statements are based on current expectations and beliefs as of today, November 7, 2023. These forward-looking statements involve a number of risks and uncertainties. So much are beyond management’s control such as the potential impact that the COVID-19 pandemic and these could cause actual results to definitely materially and you should not rely on them as predictions for future events. A10 does not intend to update 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 the company’s 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. 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. With all that said, I’d now like to turn the call over to Dhrupad. Dhrupad, the call is yours.

Thank you, Rob, and thank you all for joining us today. The industry headwinds we discussed on our previous earnings calls impacted our results in the third quarter resulting in revenue of $57.8 million, which is in line with our preliminary results. Despite these headwinds, year-to-date we have achieved our stated EBITDA goals of 26% to 28% and we continue to generate cash. For the past three years, we have been speaking about the importance of our diversified business model and A10 structural profitability. This diversification has enabled us to outperform the market, transition to consistent profitability and support a buyback program and then a cash dividend. But the real value of our business model, both in terms of diversification and resource allocation relates to how we adapt to challenging macroeconomic circumstance. In February 2021, we had guided to a business model of 80% to 82% gross margin, 26% to 28% EBITDA and expanding EPS. In spite of a challenging topline environment, we are on track year-to-date to deliver on these as a result of our focus on execution and being customer-centric. To put it in perspective, our non-GAAP EPS for Q3, 2023 of $0.16 was higher than our full year non-GAAP EPS in 2018 and 2019. This demonstrates the progress we have made in establishing durable earnings power, building upon a strong technical foundation. We monitor growth opportunities and our sales cycles closely using multiple points of view. During the quarter and the first few weeks of the third quarter, we saw improving market conditions, but as the quarter progressed, decisions were delayed and our visibility decreased. Even so we expected higher revenue levels based on several late-stage opportunities that we expected to close in the last few weeks of the third quarter. As conditions worsen, these orders shifted…

Thank you. Dhrupad. The results we are announcing today are in line with preliminary results reported on October 3rd. Third quarter revenue was $57.8 million, a decrease of 20% year-over-year, reflecting the headwinds Dhrupad described earlier. Product revenue for the quarter was $30.3 million, representing 52.4% of total revenue. After modest improvements in the second quarter, market conditions deteriorated with several projects that we expected to close at the end of the quarter being pushed into future periods during the last month. Services revenue, which includes maintenance and support revenue, was $27.5 million or 47.6% of total revenue. Moving to our revenue from a geographic standpoint, revenue from the Americas, including Latin America was $25.8 million, down 28% year-over-year. This reflects slowing purchasing from large customers primarily Service Providers due to economic concerns. Revenue from the Americas was down 36% primarily related to reduced spending from Tier 1 Service Providers. As you can see on our balance sheet, our deferred revenue was $135.7 million as of September 30, 2023, up 8% year-over-year. With the exception of revenue, all the metrics discussed on this call 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 third quarter was 81.8%, in line with our expectations. Adjusted EBITDA was $14.4 million for the quarter, reflecting 24.9% of revenue. I’d like to note that we were able to maintain EBITDA margins in excess of 20% even as revenues declined by 20% in the quarter. Non-GAAP net income for the quarter was $12 million or $0.16 per diluted share, down from $15.9 million or $0.20 per diluted share in a year ago quarter. Maintaining our non-GAAP net income on lower revenue is a significant accomplishment demonstrating…

Thank you, Brian, A10 remains well positioned to generate improved results as market conditions improve and we expect our performance to benefit from our diversification and global presence. Our security-led solutions remain in high demand align with durable secular catalysts. Additionally, our investments in supporting hybrid solutions that work on-prem and in the cloud are well aligned with customer’s business outcomes. Operator, you can now open the call up for questions.

Thank you. [Operator Instructions] The first question today comes from Gray Powell with BTIG. Your line is open.

Okay. Great. Thanks for taking the question. So I had a couple here. So I am sort of -- some of the companies on the network security side of the world, some companies like Fortinet are talking about how a portion of growth the last couple of years was driven by temporary factors like COVID and supply chain and now we are in sort of this digestion phase. I know you all are a little bit different, but how long do you think this digestion phase last? And admittedly a tough question, but what do you think growth looks like, would we do come out it?

So, no, no, thank you, Gray. So maybe I will address those separately. So first, as it relates to supply chain, you are correct, right? I think if you look at some of the networking infrastructure, as well as security companies in the last 12 months to 18 months, a lot of them went through this kind of inventory correction cycle, if you will, where they could not supply for a while, had a lot of backlog, built up a lot of it and then are now kind of working through it and normalizing it. For A10, I think, because of our footprint and the way we manage some of these operational items, we were never in a situation of having excessive backlog either direction, right? So in some ways, for us, it’s more reflective of the actual market opportunity, because most of our business is book and turn and so it gets affected quickly. So we don’t expect or we are not -- the Q3 challenges for us had very little or nothing to do with supply chain or inventory levels, but certainly, that’s a phenomenon we are mindful of. And indirectly right, we, of course, always look at the equipment customers that purchase, what is the utilization and because our customer base is predominantly Service Provider or large Enterprise rather than say, small Enterprise, we are very well-integrated technically to track those things. So I do think that in itself is not a major factor. Certainly, where customers will be slower to use inventory they have already purchased in the past is harder to predict. But I think we see deferral of new CapEx projects like building new datacenters more so than kind of the cancellation of that, right? So that’s sort of the supply chain perspective and…

Understood. Okay. Great. And I guess just one follow-up question. I mean, you guys have -- you have always done a good job controlling costs. How much more room do you have to squeeze on the OpEx side and grow EBITDA and EPS in excess of revenue growth?

Yeah. I think a great question, Gray. And of course, EPS growth is always more fun with revenue growth. The -- so for us, I think, this year, because of the revenue impact versus last year, obviously, there are temporary cost changes that will resume when we are back in growth mode, such as right variable, selling costs, commission, channel, all of that. So we expect that obviously to float up again with revenue growth. On G&A side, I think, we continue to look for efficiencies. So nothing dramatically different, but it will always be better as a percent of revenue. And all OpEx will grow slower than revenue growth, right? The part that, I think, obviously comes back fastest would be variable comp on sales side with revenue growth. On R&D, I would say, the biggest focus for us is, reallocating resources to where we see the most growth opportunities, right? So a lot of our new announcements around capabilities and products will be not more engineers per se, but the ones who are there are working on the most important things, right? So that’s the way we balance it and when growth resumes, we grow OpEx, but not as fast.

Understood. All right. Thank you very much.

Yeah. Thank you, Gray.

We now turn to Hamed Khorsand with BWS Financial. Your line is open.

Hi. I was just want to understand the conversations you are having with your Service Provider customers. How does that relate to your guidance commentary about 2024, when it sounds like early in your comments that you still don’t have enough visibility even for Q4?

Yeah. No. Good question. So I think, we are, obviously, guiding -- we are not giving guidance for 2024, right? I think what I was explaining before is, so specific, Hamed, to the Service Provider customers. I would say, difference between North America and rest, so speaking about North America maybe the most, our conversations are around projects that are planned but are getting postponed, as opposed to them not needing the product anymore or scaling back their plans. Second element is, some of those customers specifically cite the cost of capital and concerns about their ability to get a rate of return when they are borrowing at those levels. And I think as those things not necessarily decline but normalize out, they will have to fulfill demand, right? So they can postpone it, but they are planning to add capacity to support new services and new data. So that’s the second element of it. And third, I think, obviously, in North America, some of the Service Providers have structural CapEx and capital complexity and challenges, so we are not assuming those go away, right? This is more around customers that were planning something in Q3. We know they are still planning it because we are working with them on testing and deployment, is more from that perspective than assuming that some large customers that completely shut out suddenly turns on.

Okay. And my other question was, you have always been a Service Provider-centric company. What are you doing to expand your presence and market share in Enterprise and how fast could that segment growth for you?

Yeah. So good question and I think if you look at our trended financials, right? And as I said before, Enterprise segment actually, even in this year, is growing 5% to 7% for us. Globally, obviously, right, it’s -- revenue-wise it’s still not as big or close to the SP segment. But I would say Q3, our Enterprise revenue was roughly $29 million out of that. So that’s a pretty good mix, if you will. Now we don’t want it to grow because SP is declining, right? But that is a pretty high mark for us so far in the last seven quarters, eight quarters, right? And the connection for us really there is a lot of the large Enterprise customers have concluded that it is more efficient and risk manage-wise -- management-wise better for them to operate on-prem and cloud, and our ability to provide that, right, is what is helping us regain growth in that market and be credible for those customers.

Okay. Great. Thank you.

Yeah, Thanks. Thank you, Hamed.

[Operator Instructions] We now turn to Christian Schwab with Craig-Hallum Capital. Your line is open.

Hey. Great. Thanks for taking my question. Just looking at your generic guidance then, you know, if we assume Enterprise remained stable at 5% and Service Provider not sure when it’s going to come back, but it should come back eventually. Just -- does that kind of mean that’s a flat year-over-year or it kind of sounds like it should be up modestly, maybe like 5%. Is that kind of given the visibility at hand, I know you are not giving guidance, but it kind of seems what you are implying? But did I hear that right or did I not hear that right at all?

Yeah. Good question, Christian. So, obviously, we have talked about Q4, so put that aside. One of the principles we talk about, right, is we plan to always over perform versus our peer group by a couple of hundred basis points with execution and strategy. And I think if you look at all the earnings that have already come out and you look at our peer group right now, you are correct, right, it would -- does call for that group next year year-over-year to be 3% to 4% and we obviously expect to do better. So we are not giving guidance, but we certainly are mindful of where the market is and working on things that help us do a little bit better than that.

Okay. And then how long would -- at these type of growth rates versus kind of our hope to be a double-digit growth company now that many quarters ago. How long would it take before you would maybe have to readjust the cost structure of the company permanently, if you would, if the business is reverting back to kind of, call it, a mid-to-high single-digit growth company?

Yeah. Good question. So I think, right now, obviously, we are taking actions where we can deliver results even without that high double-digit growth number. My expectation is, our new products and security-led offerings obviously can grow in that ZIP code. Our ability to drive Enterprise, although it’s a smaller number, is also in that ZIP code. Service Provider, we are continuing to derisk. That spending is not going to snap back, but we are trying to derisk by going more to also regional providers around the world. And I would say a lot of the other people in our sector have talked about it, that they expect Service Provider spending to resume in the first half, but be at a more normal clip by second half of 2024, right? So I think we -- obviously, we will continue to monitor it, but our goal is obviously to get back to the double-digit growth without necessarily calling a date, right, which I can’t do.

Yeah. That’s extremely fair. Great. I don’t have any other questions. Thank you.

Thanks. Thank you, Christian.

Our next question comes from Anja Soderstrom with Sidoti. Your line is open.

Hi. Thank you for taking my questions. Most of them have been addressed already. But are you starting to see any lost deals or is it just a matter of them being pushed out, you think?

So I think what we see, Anja, predominantly is push out and the reason I say that is, with the nature of customers we have, right, the design cycle is six months to nine months and we would have a pretty good idea if they were planning to switch, right? And we support those products for multiyears on a highly frequent basis. So we do see pushouts and it’s not in the category of like a modernization project that they canceled, right? It’s more to support some subscriber growth, they are planning to invest X dollars and now they are going to wait another quarter or two quarters to see where that is. So we do continue to see that. We obviously closely look for win-loss analysis, and of course, around the world there are deals we do lose once in a while. But majority of what impacts our results is not -- is in the deferment or CapEx slowdown category than anything.

Okay. Thank you. And then just maybe touch on capital allocation and returning cash to shareholders. Have you changed anything in your strategy on buybacks?

No. I think we talked about it, right? So the Board has approved another new buyback for $50 million and we continue to be active in the market. Of course, right, there are some constraints for us around volumes and kind of results and dates and all that. But we expect to be active in buyback, and as I noted earlier, right, we have invested a lot in buyback and dividend activity even in the last 12 months.

Okay. Okay. That was all for me.

Thanks, Anja.

We now turn to Hendi Susanto with Gabelli Funds. Your line is open.

Good evening and thank you for taking my question, Dhrupad and Brian. Dhrupad, I have a question. So in terms of when the telco Service Provider demand will recover, I have several questions. Like, the first one is, do you think they will recover at around the same time across different geography or one who may see softness first may recover earlier and then -- yeah. So let me ask that first.

Yeah. So I think good question, and I would say, from what we see around the world, right? We saw the most impact in North America Service Products, right? And that is where, obviously, that is the most kind of mix of things around CapEx, as well as inflation and interest rates and everything else. We did see some slowdown in parts of Europe, but in a couple of like large territories, right, with large providers. Beyond that, I think, we saw a sort of a general slowdown, but nothing dramatic. So I think outside of North America, we will see that being stable or in line with expectations. And in North America, I think, is where we continue to monitor sort of a bigger macro market environment impact on when that returns, right? And -- but certainly, I think, the deepest issue for us is North America and that’s where we have the least visibility. I think the other regions are not as far off on plan.

Okay. And then as far as the market recovery and telco Service Providers, what can trigger the resumption of the demand? I think, one, maybe the capacity you can only hold on like existing capacity until a certain point. But I am wondering like what else, I’d say, if interest rates remain high, the concern on inflation is growing, I am wondering what can trigger the demand resumption.

Yeah. So I think there’s two elements to that answer, right? So one is, as you said, which is a pure business case around the products that they used to buy from us. And I think one is obviously customer demand and network traffic growth, which requires them to invest more to support that traffic and that I think is harder to predict because it comes down to their priorities and even if their budget is cut, they still have to choose like what is not cut or funded. So that’s harder. The second part of it, right, that we have talked about before is, we are also with those existing customers continuously trying to expand the number of categories we sell to them, as well as the different parts of those businesses where we sell, right? So in that case, we are not dependent on a single business unit, who does certain things in a big company. But it’s more distributed around their mobile network, their wireline network, their security, infrastructure, all of those. So for us, from what we can control and execute, ability to sell them more categories even if there is depressed spending is an important driver and in terms of when they resume reinvestment, I think it’s a function of where the network traffic growth is to a point where they cannot sustain the service level to their customers.

I see. And then a question for Brian. Brian, product gross margin is outstanding despite of the revenue decline. I am wondering what contributed to the strong gross margin primarily. I am wondering whether that also reflect the, like, a more favorable mix of Enterprise versus Service Providers? And then I am wondering like how much discipline, cost cutting, supply chain improvement play into generating that strong gross margin?

Yeah. Thanks for the question, Hendi. Yeah. I think you are exactly right. First of all, the gross margin improvement is not a function of mix of Service Provider or Enterprise. It’s more of a function of our execution and demand planning. We have done a lot of work to build different avenues to gain product and to maintain our cost structure even despite the growing input costs that we see. But yeah, it’s -- again, it’s being able to execute on plan, it’s a mix of certain products and services, not services to subscription and really managing and monitoring our supply chain and executing on our plans.

And I think in a different way, Hendi, think of it as, right? We said we will have gross margins of 80% to 82% and that is in the category of things we can control, right? So, interest rates, we cannot control so much, but what we can control, we will do our best to do what we can.

Yeah. And then Brian, if I am not mistaken, I think you mentioned earnings growth remains impact for 2023, which means that full year earnings will be above $0.73 of last year. May I verify that?

That’s correct. Yeah. We continue to drive business. We have a --

That’s fully a non-GAAP EPS.

Full non-GAAP EPS. As I mentioned, we expect to do $70 million to $80 million in revenue in Q4 and we will continue to maintain our margins of 80% to 82%, which will fall through and expand EPS year-over-year for the full year.

Okay. Thank you

Thank you.

This concludes our Q&A. I will now hand back to Dhrupad Trivedi, President and CEO, for closing remarks.

Thank you. Thanks to all of you and to all of our shareholders for joining us today and your continued support of A10. Thanks.

Ladies and gentlemen, today’s call has now concluded. We would like to thank you for your participation. You may now disconnect your lines.