Thank you for joining. I would like to welcome you all to the A10 Network's Second Quarter 2024 Financial Results Conference Call. My name is Brika and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Tom Bauman with FNK IR. Thank you. You may proceed, Tom.

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, atennetworks.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 second quarter 2024 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, demand, industry and customer trends, our capital allocation strategy, profitability, 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, July 30, 2024. 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 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 and quarterly report on Form 10-Q. 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 as a substitute for prepared results in accordance with GAAP and may be different from non-GAAP financial metrics 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 would like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks.

Thank you, Tom, and thank you all for joining us today. The North American Service Provider market remains choppy, even as spending is trending positively overall. The market sentiment improved in the first quarter versus the second half of 2023, but we still saw projects moving across quarters. Year-to-date, our Service Provider revenue, excluding North America, is up 20%, demonstrating this is largely a North American market issue related to the timing of carrier CapEx. Encouragingly, much of these headwinds in the second quarter were offset by improving strength in the Enterprise segment. We have been devoting resources, both R&D investments and additional sales and marketing efforts to target Enterprise opportunities. These investments are bearing fruit. Enterprise-related revenue increased 25%, offsetting much of the 25% decline in the Service Provider segment. Additional investments are in process now, and we expect A10's position in the Enterprise market to continue strengthening. During the quarter, one of the world's largest digital communications technology companies, with nearly 100,000 employees worldwide, chose A10, displacing their previous vendor for their hybrid infrastructure solution. Our commitment to technical performance with a re-energized enterprise portfolio, global technical support, and alignment with customers' business goals led A10 to secure this win in the quarter and showcases our ability to compete and win in the Enterprise space with the most demanding infrastructures. As we look at our pipeline for the second half of the year, this segment is expected to grow faster than the Service Provider segment, providing the basis for continued growth in this vertical. Growing the Enterprise business is a part of our ongoing strategic focus on driving predictable performance. Diversification remains core to our overall strategy, enabling A10 to navigate challenging conditions better than peers and, over the long term, driving growth that outpaces the broader market segment. Clearly, 2024 has been a challenging year for North American service providers so far as they navigate market challenges for their own businesses. A10 is not alone in this exposure, but our business model and diversification have enabled us to maintain robust profitability in line with our targets despite these headwinds. For the first half of 2024, we delivered EPS expansion year-over-year in line with expectations and expect to accomplish this on a full-year basis. Longer term, we continue to build the capacity to grow at a low double-digit pace faster than the market, with our profitability and cash generation helping growth faster than the top line. Simultaneously, we are investing in our next wave of growth products, including initiatives to capitalize on growth tied to new AI solutions which continue to grow in scope and have some time before they are fully commercialized. As I have discussed in the past, A10 has long used AI in our Security Solutions, especially those that address DDoS attacks. We are increasing the use of AI-focused agile solutions to enable our customers to better identify, address, and remediate a growing wave of security threats. Bad actors are utilizing AI, and we are evolving our technology to address these new threats. These tools are increasingly must-haves for our customers, and we expect to add to our security and AI-backed arsenal of solutions in the coming quarters. Security Solutions as a percentage of sales continue to trend in line with our long-term growth goals. Our new engineering investments are related to developing AI-based solutions for customers to better manage and secure their networks. This includes better insights to predict network performance, as well as new capabilities to address threats in real time that have emerged with AI network traffic. In keeping with our historic strengths on understanding network traffic in real-time, we are also working with customers to evolve our hardware to support next-generation data centers needed to meet performance and latency needs for AI traffic in all kinds of new models. We are engaged with customers and channel partners to enable their roadmap as the market matures and moves into the commercialization phase in the future. While we invest in new solutions, technologies, and reallocate sales resources, A10 remains solidly profitable even as we navigate near-term revenue headwinds. Once again, I'm proud that we have achieved our non-GAAP EPS targets even with these investments and market challenges. Just a few years ago, these factors would have resulted in significant losses. Today, we are systematically profitable. Our gross margins in the second quarter were in line with our stated goal of 80% to 82% and our adjusted EBITDA margin was nearly 26%, in line with our profitability goals. As revenue conditions normalize, we expect our profitability to improve further. We remain committed to achieving our long-term stated goals while driving growth. A10's consistent ability to meet profitability targets even amidst revenue challenges underscores the resilience of our business model. The results year-to-date position us to achieve our full-year business model objectives, including targets for gross margin and adjusted EBITDA margin, as well as growth in our full-year non-GAAP EPS. We have continued to buy back stock, and our cash flow has more than funded our buyback and dividend programs. With that, I'd like to turn the call over to Brian for a detailed review of the quarter.

Thank you, Dhrupad. Second quarter revenue was $60.1 million, a decrease of 8.7% year-over-year. As Dhrupad described, quarter-to-quarter volatility in the North American service provider sector continues to be high, offset by improvements in the Enterprise segment. Product revenue for the quarter was $29.5 million, representing 49% of total revenue. Services revenue was $30.6 million or 51% of total revenue. Second quarter recurring revenue increased 11% compared to the second quarter last year, and deferred revenue increased 6%, demonstrating stronger product sales for the past several quarters and continued demand for our Enterprise solutions. These metrics, coupled with a strong pipeline of opportunities, further validate our confidence that we are not losing opportunities to competitors. As you can see on our balance sheet, our deferred revenue was $140 million as of June 30, 2024, up 6.3% 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 is provided in our press release and on our website. Gross margin in the second quarter was 80.9%, in line with our stated goals of 80% to 82%. Adjusted EBITDA was $15.5 million for the quarter, reflecting 25.8% of total revenue. Non-GAAP net income for the quarter was $13.2 million or $0.18 per diluted share compared to $14.5 million or $0.19 per diluted share in the year-ago quarter. Diluted weighted shares used for computing non-GAAP EPS for the second quarter were approximately 75.5 million shares compared to 75.4 million shares in the year-ago quarter. On a GAAP basis, net income for the quarter was $9.5 million or $0.13 per diluted share compared to net income of $11.6 million or $0.15 per diluted share in the year-ago quarter. Turning to the year-to-date results, revenue was $120.8 million, down 2.2% year-over-year. Product revenue was down 15%, representing approximately 49% of total revenue, and services revenue was up 15%, representing about 51% of total revenue. Year-to-date non-GAAP gross margin was 81.4% in line with our target range. We reported $23.9 million in non-GAAP operating income, down 16% compared with $28.5 million in the first six months last year. Adjusted EBITDA was $29.4 million, reflecting 24.3% of total revenue. Non-GAAP net income for the first six months was $25.9 million or $0.35 per diluted share, up from $24.5 million or $0.32 per diluted share in the year-ago quarter period. On a GAAP basis, net income for the first six months was $19.2 million or $0.26 per diluted share, compared with net income of $15.6 million or $0.20 per diluted share. During the quarter, we generated $11.3 million in cash from operations. Year-to-date, cash generated by operations was $43.8 million in line with our full-year targets. Turning to the balance sheet, as of June 30, 2024, we had $177 million in total cash, cash equivalents and marketable securities compared to $159.3 million at the end of 2023. During the quarter, we paid $4.5 million in cash dividends and repurchased $11.8 million worth of shares. We also continue to carry no debt. The Board has approved the quarterly cash dividend of $0.06 per share to be paid on September 3, 2024, to shareholders of record on August 15, 2024. We have $34.8 million remaining in our $50 million share repurchase authorization as of June 30, 2024. We expect 2024 full year EPS growth in single digits in line with expectations, and we continue to target gross margins of 80% to 82% and adjusted EBITDA margins of 26% to 28% on a full-year basis.

Thank you, Brian. A10 maintains a strong competitive position in the markets, supported by durable long-term growth catalysts. Short-term volatility in the North American Service Provider market does not alter our long-term strategy and we are making steady progress to enhance our position in the enterprise market. Our strategic diversification remains a key advantage, enabling consistent profitability even during periods of revenue headwinds. We also continue to create shareholder value through the return of meaningful capital to shareholders. Operator, you can now open the call up for questions.

Thank you, Dhrupad. You have the first question from Anja Soderstrom with Sidoti. You may proceed. Hi, good afternoon.

Hi, good afternoon. This is Stephan Guillaume on for Anja Soderstrom. Can you guys hear me?

Yes, we can hear you. Thank you.

Thank you. I guess my first question is, are you still seeing service providers come back in the second half, and how are your conversations with them?

Yes, good question. So, first, as I mentioned in the body of the call, our service provider conversations are very much North America specific because we have healthy growth outside of that. Within North America, I think there are two things we are seeing. One is they continue to manage the spending levels. Projects can get scoped differently and moved across periods and our assumption, of course, is a lot of their decisions around making significant capital investments are related to a cost of capital, market uncertainty, including an election period right now. So our conversations with them generally show that they continue to spend a little bit because a lot of the things we do are in the path of either revenue generation or becoming more secure. However, the newer projects tend to be pushed out in time a little bit. When we think of our second half, our assumptions really around delivering results are that we continue to make steady progress on Enterprise footprint. Second, we continue to see execution that we saw in the first half from service providers outside of North America. Then within North America, I think we continue to find ways between the balance of our customers to deliver that growth at the point at which they get confident and start reinvesting CapEx. Of course, we will benefit from that as well. But our plan for the second half is not predicated on a sharp snap-back in spending from them.

Thank you for the color there. Can you also talk about the competitive environment? In the past, you've said that you're taking share; are you still doing that?

Yes. So I would say there are two ways to look at that, right? So first, if you look at the broader market and you look at a lot of the growth rates that you are seeing from companies in our sector or industry, they are all kind of plus or minus 2% kind of range. Right? So that's one. Second is the way we think about gaining share is when we can trace and point to an actual displacement of a competitive solution. I would say that certainly in the Enterprise market, we feel that we are able to replace some of the solutions and I would say that's the most basic way we think about gaining share. And if you look at our Enterprise segment growth on a year-to-date basis, half to half, we grew about 7%, which I would say is at least slightly above market average.

All right, thank you. And so what kind of pricing power do you have in this environment?

I would say pricing is a balanced thing. We have input cost inflation, which we try to find ways to offset, and we offset that with maybe price increases selectively to customers and then the rest with productivity. I think we are very selective because we want to do it in a very methodical way versus adjusting prices frequently. I think for us it's a mix of overcoming input costs through productivity and selective price increases where we don't have a choice but to pass it on.

Thank you. And the last one from me is, where are you in the innings of seeing results from the changing of your sales team?

I would say if you think of our business, two thirds is Service Provider, one third Enterprise. Enterprise is a little bit bigger now. On the Service Provider side, we have a very mature, experienced sales team where the focus is on improving our capability to cross-sell more products to existing customers. On that dimension, I think we are making good progress. Some regions obviously are farther ahead than others, so there is still room for us to continue growing through that. On the Enterprise side, we have brought in new sales talent and we have also restructured how we go-to-market regarding our portfolio and products as well. I would characterize that as we are probably somewhere between the third and fourth inning on that journey.

Thank you so much for taking my questions.

No problem. Thank you.

Your next question comes from Gray Powell with BTIG. You may proceed.

Okay, great, thanks. So, yes, a few questions from my side. Maybe just to start off at a high level, can you talk about what you saw in terms of the overall spending environment and macro headwinds? I know you've talked about it some in the prepared remarks. It sounds like North American service provider may have caught you by surprise, but outside of that, would you say that things were stable? Did anything change positively or negatively? Just any more color you could provide there.

Yes, no, good question, Gray. I would say absolutely that if I think of my three regions, I would say APJ is stable on both Enterprise and Service Provider sides. EMEA is stable on both enterprise and service provider sides. And for North America, I would say we are making good progress on enterprise, which offsets some market weakness, and then within North America Service Provider, I think we were not necessarily surprised, but I think what evolved was some of the re-scoping of projects versus cancellations or complete push-outs. So that was the only thing. That's why we feel good about the full year. If you remember Q1, we did slightly better than we thought, and Q2 is slightly worse, but it's still plus or minus $2 million or $3 million. So that's the sort of volatility or movement we see. Our goal is obviously to use the remaining pieces to offset that so that when North America starts to spend again, it only helps us from there.

Got it, okay. And then within the context of the full year, should we still be expecting low single-digit growth in revenue or closer to flat now?

I think we would probably say low single-digit still feels right, although it's more back-end loaded, so it's always risky. But our plan is, obviously, if it's slightly below that to figure out how to bridge back to getting to our non-GAAP EPS results, either way.

Okay, great. And then last question. Free cash flow in the first half of the year was actually really strong. What drove that? Any directional pointers you can give us or maybe talk about free cash flow margins relative to EBITDA margins?

Yes, good question. Yes, go ahead, Brian.

Yes, free cash flow – a number of factors led into that. I mean, last year we had pretty poor linearity. I think we're seeing the benefits of some of that return to cash spending and releasing cash into the market, which benefits our free cash flow. As you pointed out, we've talked about free cash flow being really strong last quarter at nearly $30 million. We generated another approximately $10 million of free cash flow this quarter. Our full-year cash flow target from a free cash flow perspective should be in the sixties if everything continues to go as planned.

And Brian, our EBITDA is a good proxy for free cash flow precisely because there's not too much CapEx variability here.

Understood. Okay, thank you very much.

Thanks, Gray.

Thank you, Gray. We now have Hamed Khorsand with BWS Financials. You may proceed.

Hi. Talking about this North America Service Provider, this has been a topic for about a year now. Given the growth you saw in Q2, it obviously points to actual revenue decline on that part. Are you losing share or how are these service providers just cutting back so much spending without you losing share?

Yes, so I think, good question, Hamed. Maybe just level set on a couple of data points. If you look at North American Service Provider, in the last two or three days, AT&T and Verizon have published their CapEx, and you can see that in 2024, they are projecting CapEx declines of between 6% to 8% year-over-year and it's all of them. The cable companies are projecting slightly less than that. That data point says it's not that the market is plus 10 and we are negative. Second, the way our products are designed at these customers ensures we are in their operational workflow to run the network and publish results on SLA achievement. While they may look at competitors, we have a good understanding of what is deployed. We track all the devices, and our support team knows every active device and the traffic going through it. That gives us confidence that it's more linked to their CapEx spending cycle than to competitive factors. The last point is that when they do approve a data center, we do get the purchase order. We have a reasonably good correlation of when the project is approved, and we are in the mix for that purchase order. These CapEx plans are public, and you can see them.

Okay. If I heard you correctly, you're investing more on the Enterprise sales side. Should we expect to see an acceleration in Enterprise revenue eventually, maybe two or three quarters down the line?

Yes, you should, and I think the thing I would point to Hamed is that even now, which is very early, on a year-over-year basis, half-to-half, the Enterprise business grew 7%, which you can compare to our peers. As the teams mature and we achieve a better value proposition and market fit, we expect that to continue to grow. If we don't want to rely solely on Service Provider sales, we want to build the Enterprise segment as a way to reduce the impact of that volatility.

Okay, my last question is, when you were talking about the digital tech company, how much of an impact does that have on revenue, if any in Q2? How significant is it for revenue going forward?

I think I would say it was not a 10% customer, but it has the potential to be somewhere between 5% and 10% over time.

Okay, great. Thank you.

Thank you, Hamed. I appreciate it.

Thank you, Hamed. We have had no further questions registered, so I'd like to hand back to President and CEO at A10 Networks, Dhrupad Trivedi for some final remarks.

Thank you. And thank you to all of our shareholders for joining us today and for your continued support, and thanks also to all the A10 employees around the world. Thank you.

Thank you all for joining today's call. You may now disconnect, and please enjoy the rest of your day.