Hello everyone and welcome to A10 Network's fourth quarter and full year 2024 financial results call. My name is Lydia and I'll be your operator today. After the prepared remarks, there will be an opportunity to ask questions. If you'd like to participate in the Q&A, you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Tom Baumann at FNKIR to begin. Please go ahead.

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 Drupal 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 and full year 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, demand, industry and customer trends strategy potential new products and solutions or capital allocation strategy profitability expenses and investments positioning and our dividend program these statements are based on current expectations and beliefs as of today february 4th 2025. 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. A-10 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 results prepared in accordance with GAAP and 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 issued today and on the Trended Quarterly Financial Statements posted on the company's website. Now I'd like to turn the call over to Drupal Trivedi, President and CEO of A10 Network.

Thank you, Tom, and thank you all for joining us today. A10 ended the 2024 year delivering 5% growth for the quarter and 4% growth for the year as our service provider marketplace continues to normalize and we are making the expected progress to expand our presence with enterprise customers. We enter 2025 expecting the current trends around service providers to continue and deliver continued growth with enterprise customers. Our optimism is bolstered by an improving competitive position with both customer segments and the recognition that security and AI-related investments are increasingly serving as a catalyst for spending. We believe that ATEN's offering is exceedingly well aligned with both of these secular trends. For service providers, the need to expand AI data centers continues. Data centers are incredibly hungry for power, and the availability and cost of reliable electricity are considerations for locations and logistics. As a result, we are seeing accelerating interest in ATEN solutions as part of AI data center development. Our products provide industry-leading efficiency in terms of throughput and low latency and also include integrated security capabilities. The result is that service provider customers need fewer ATEN products compared to competitive offerings, materially reducing the power consumption without sacrificing performance. This is serving not only as a catalyst for our business, but also as a meaningful competitive advantage. Combined with the expected backfill of spending following the pauses we experienced last year, we are seeing an improving pipeline from North American service provider customers. We expect this to continue while short-term quarter-to-quarter volatility in spending patterns may persist. I am encouraged that service provider revenue was up 2.5% for the year, considering that it was down nearly 8% through the first six months of the year. The turnaround in the second half, while expected, is a positive indicator heading into 2025. On the enterprise customer side, we responded to the slowdown in spending from service providers by accelerating investments to drive demand from enterprise. This initiative was successful as we grew revenue from enterprise customers faster at 6% for the year, then we did consolidated revenue at 4%. We have a compelling offering to enterprise customers, and we are investing heavily to further expand and bolster our suite of solutions, particularly to align with AI trends. Most of these investments are the culmination of several years of innovation and engineering, and we are just now beginning to see the benefits. We are developing additional solutions for bot protection, DDoS mitigation, and technologies that are designed specifically for GPU-based AI infrastructure. We will integrate AI to predict performance with our solutions, and with ATEN Control, we will enable centralized management for all ATEN products. Within AT&Defend, our cybersecurity suite, we continue to develop solutions that will help our customers protect their mission-critical applications and infrastructure from an ever-growing number of cyber threats. We anticipate an improving pipeline related to these investments in 2025. AI has become an important near-term catalyst for our business, and we are strong and getting stronger in this area. This, combined with our focus on cybersecurity solutions, continues to play a role in our growth. Security-led revenue increased 6% for the quarter and 9% for the year. Our focus on security continues to make our solutions less optional, mitigating the impact of short-term fluctuations in spending priority and enabling ATEN to outperform our peer group. We had previously stated our long-term goal was to derive 65% of our revenue from security-led solutions. And for the full year, security represented 63% of revenue. I think it's also worth noting that in Q4, we deliver growth in all key regions. North America, Asia-Pacific, Japan, and EMEA. For the past year, we had been stating that demand was consistent in EMEA and Japan, but soft in North America. That trend has begun to correct in line with the improving market conditions for North American service providers, as previously mentioned, and validating the strength of our technical solutions in all markets. Our priorities continue to be a mix of internal investments to support revenue generation, returning capital to shareholders, and evaluating strategic opportunities to accelerate growth. I spoke in detail about the internal investment related to our long-term cybersecurity blueprint in the last earnings call. Simultaneously, we continue to consistently return significant capital to shareholders. In spite of a challenging macro environment, our strong second-half performance continues to demonstrate the earnings power of our business model. We maintain robust profitability in line and slightly ahead of our targets in the quarter. Our strong results also enabled us to support our R&D investments while simultaneously accelerating our cash generation ending the year with nearly 200 million in cash and marketable securities even as we return significant capital to shareholders. 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 and the year. Brian.

Thank you, Drupad. Fourth quarter revenue was $74.2 million, an increase of 5.4% year over year. The growth was broad-based, with enterprise revenue increasing 8%, faster than consolidated revenue, and service provider revenue increasing 4%. The results reflect the continued normalization of service provider spending patterns and the investments we made in the enterprise segment. Quarter-to-date volatility in North America's service provider sector persists, but the overall trends are increasingly positive. Product revenue for the quarter was $43.3 million, representing 58% of total revenue. Services revenue was $30.9 million, or 42% of total revenue. Deferred revenue increased 5% to $148.3 million, demonstrating stronger product sales in the fourth quarter and continued demand for our security-led solutions. with the exception of revenue all the metrics discussed on this call are on a non-gap basis unless otherwise stated a full reconciliation of gaps and non-gap results are provided in our press release and on our website gross margin in the fourth quarter was 80.7 percent in line with our stated goals of 80 to 82 percent adjusted ebitda was 27.4 million for the quarter reflecting 36.8 percent of revenue non-gap net income for the quarter was 23 million or 31 cents per diluted share, compared to $18.5 million, or $0.25 per diluted share, in the year-ago quarter. Diluted-weighted shares used for computing non-GAAP EPS for the fourth quarter were approximately 75 million shares, effectively unchanged year-over-year. On a GAAP basis, net income for the quarter was $18.3 million, or $0.24 per diluted share, compared to net income of $17.9 million or $0.24 per diluted share in the year-ago quarter. We recorded a one-time gain in OI&E of $3 million in the fourth quarter. Adjusted for this one-time event, our non-GAAP EPS for the quarter would have been $0.27 per diluted share. According to the full-year results, revenue is $261.7 million of 4% year-over-year. Year-to-date non-GAAP gross margin was $81.2 million in line with our target range, and adjusted EBITDA was 74.5 million, reflecting 28.5% of revenue. Non-GAAP net income for the year was 64.8 million, or 86 cents per diluted share, up from 54.9 million, or 73 cents per diluted share last year. Adjusted for the non-recurring game in OI&E discussed earlier, our non-GAAP EPS for the year would have been approximately 82 cents per diluted share and i got not on a gap basis net income for the year was 50.1 million or 67 cents per diluted share compared with net income of 40 million or 53 cents per diluted share during the year we generated 90.5 million in cash from operations ahead of our full year targets cash generation benefit from the timing of opex and working capital mix and we anticipate future cash generation to be more in line with historical patterns. Turning to the balance sheet, as of December 31st, 2024, we had $195.6 million of total cash, cash equivalents, and marketable securities, compared to $159.3 million at the end of 2023. During the quarter, we paid $4.4 million in cash dividends and repurchased $5.8 million worth of shares. We also continue to carry no debt. The board has approved a quarterly cash dividend of six cents per share to be paid on march 3rd 2025 to shareholders of record on february 14th 2025. we have 44.2 million remaining of our 50 million dollar share repurchase authorization as of december 31st we continue to target gross margins of 80 to 82 percent and adjusted ebitda margins of 26 to 28 percent on a full year basis i'll now turn the call back over to drupit for closing comments Thank you, Brian.

This was a solid year for ATEN with strong performance in the second half of the year, reflecting the ongoing normalization of service provider spending and consistent enterprise growth as a result of the strategic investments we made in this portion of our business. We are navigating market volatility successfully due to our focus on security solutions, our tight alignment with AI trends, and our strategic diversification. Our investments in R&D are expected to result in additional solutions, leveraging our growing position in the cybersecurity sector, further enhancing our growth profile. We have consistently proven the ability to convert incremental revenue into significantly higher profitability levels, and we expect that to continue as we enter 2025. Operator, you can now open the call up for questions.

Please press star followed by the number one if you'd like to ask a question and ensure your devices are muted locally when it's your turn to speak. Our first question comes from Gray Powell with BTIG. Please go ahead. Your line is open.

Okay, great. Thanks for taking the question and congratulations on the very solid-looking results.

Thank you, Greg. So, yeah.

Yeah, absolutely. So, yeah, maybe just to get into it, you know, just looking at the Q4 numbers, I'd be curious, like how did seasonality in Q4 compare to the last couple years? Did you see a normal budget flash? And just, you know, any dynamics there that you could talk about would be helpful.

Yeah, I'll start off and Brian can add to it. So I think I would say the seasonality that we saw in Q4, it's probably consistent with previous years, but we saw less of a budget flush phenomenon this time around. And I would say this was probably just an extension of the idea that through the year, right, we were seeing increased kind of signatures and scrutiny around spending and CapEx as well as OpEx. And so we did not see maybe as much of that year-end activity, but when you look at our seasonal pattern, it was pretty consistent with previous years as well.

Yeah, as Drupad mentioned.

I'm sorry, go ahead. I didn't mean to cut you off.

Apologies. I just wanted to add that it's in line with our typical seasonality pattern of 52% on back half, 48% on front half.

Yeah, 48, 52.

Okay. Understood. And then, all right, so then you called out some new products coming up this year. Can you just repeat, like, just the products again? I think it was bot detection, something around DDoS, and products to protect GPU-based AI infrastructure. I guess I'm just trying to, the question is, how should we think about the timing of those products coming to market? And then just like, what's the excitement level around them? Like, could it drive upside to revenue this year?

Yeah, no, good questions. And maybe, you know what, I'll answer that, Grace. I would segment them between sort of our security products and then products that are influenced by AI spending, right, a little separate. So on the security side, I would say, you know, what we are focused on is really expanding the categories we can provide to customers with still a common way to manage and run them, right? And so within that category, we are improving our DDoS detection and mitigation products, adding things like bot management, which may be adjacent to those categories. And this is a kind of ongoing expansion that you should see play out in second, third, fourth quarter of this year that basically does two things, improves our competitive position, but at the same time gives us a natural way to scale our security platform where we have done the work on the kind of foundation and the management layer already. So those, I would say, are in the next six to 12-month window, we should start seeing those as enhancing our security story incrementally as well. As it relates to some of the AI oriented products, I would say on the first layer where people are building new data centers to support AI traffic, we will probably see that impact as a positive thing in 2025, probably, you know, again, towards the second half of the year. But the excitement around that is really that when they are building these data centers, things like throughput, latency, connectivity are more important. So our advantages as it relates to those attributes are a direct advantage. And the data point for us is customers are engaged with us in reviewing those kind of build-out plans. That is current products as well as kind of roadmap. Second layer of it is, you know, using AI to develop capabilities like predictive analytics is, I would say, customer excitement is good, but the deployment cycle is probably a little bit farther out. And the reason for that is, you know, as we have said before, there is a wave of, there is a massive build out of AI, but then the real business is when enterprises are doing their local deployment of it, local learning centers and inference models. And our engagement is with customers, right, who are using AI, not necessarily just building them today. So that's a positive fraction, but that is aligned more with the wave of mass adoption of AI versus just the massive initial build-out, if that makes sense.

Yeah, that's very helpful. Okay, thank you very much. Yeah, thanks.

Our next question comes from Christian Schwab with Craig Hallam. Please go ahead.

Hey, guys, this is Tyler. On behalf of Christian, thanks for letting us ask a few questions.

Maybe first, just following up on that last question, could you break out what's your AI revenue, both to the customers, building their own AI data centers and then selling your AI-enabled products, kind of what that is at a baseline now and how you see that growing, maybe what it could be at the end of the year, out a couple years? yeah i think you know so i i think thank you tyler that that's a good question it's uh something we'll have to figure out how to uh depict that view and the reason for that is our current products are actually being used for those applications as well so it's not necessarily linked to releasing new products that go into those build outs as it relates to products that are designed around inspecting and mitigating AI oriented threats as well as analytics.

I think that's early in the cycle and I think we will have to come back maybe in the next quarter with a view of how we want to communicate that in terms of you know number of customers or funnel growth and things like that right because it's not going to convert to revenue in the next two periods so okay yeah fair enough um so then you know maybe if you think about you know the full year 25 here you know with with service providers normalizing you know continued traction with the enterprise customers you know these ai opportunities layering in as well you know kind of a backfill like you mentioned or maybe a catch-up in some of these you know could it be possible that you're able to drive growth in 25 you know ahead of that 10 to 12

percent you know longer term growth number that you're targeting yeah so i think for 2025 right i would say this year we were able to get back to four percent with that normalization of market we are continuing to understand the impact of things that are outside of our control like you know what can happen with interest rate tariffs everything else but what we do know is we are on a positive trajectory in terms of what's his last year to this year to next year. And as we go through 2025, right, we expect in the middle of the year to maybe have a better view if it can be better.

But right now, I think we feel confident with where people are expecting us to be and still navigating some of these macro things that are outside our control. okay that sounds great and then last one you know maybe for brian on on op x you know it fluctuated a little bit quarter quarter through this last year but you know with it being down almost four million sequentially i guess from q3 to q4 like 35 and a half million non-gap q4 number you know could you help maybe level set us on on op x what what kind of run rate we should be thinking about heading into 25?

Yeah, of course. I mean, to your point, 149 million of OPEX for 24 on a non-GAAP basis. Looking forward, I mean, we're talking about AI. We're talking about products that we are innovating and developing for introduction in 2025. So, you know, I think the obvious point is that, you know, we're not going to continue the same run rate as a percent of revenue you could expect it to tick up um you know not materially but to some level uh just to because that's going to reflect the investments we're making in cyber security and infrastructure products not only with our existing portfolio but then also with ai opportunities that are in the market yeah and maybe to add to that tyler right our long-term goals of saying gross margin of 80 to 82 percent and ebitda 26 to 28 are still valid right but we are investing within that envelope for growth as well.

Perfect.

All right. That's all for us. Thanks, guys. Thanks, Al.

Thank you. Our next question comes from Mohamed Koulsan with BWS. Please go ahead.

Hi. So first question was, the orders that you were seeing from the North American service providers, was that merely just an upgrade or tack-ons to orders that you were receiving maybe a year or two years ago and these are just purely because of constraints in their system or are these brand new sales as far as 810's role goals yeah no good question ahmed so i would say uh i would say it was a mix i think there were definitely orders that were related to new kind of build outs and new data centers or network and then with some of those customers as they continue to operate network

So based on capacity, they buy a little bit up or down. But we were certainly seeing more of the new build-out orders in Q4 than we did any other quarter this year, or sorry, previous year.

All right, and then as far as enterprise is concerned, are the customers coming to you and asking you for these AI solutions, or is that more of a competitive threat that you feel like you need to be ahead of the…

Oh, so I would say that the way we are approaching that is that AI is integrated into pretty much all of our product roadmap. So when they are buying a security product, their natural extensions are then inclusive in the future of AI traffic detection, unique threats, managing all of that. So for us, AI is just a new capability we are enabling them with. And you are correct. The conversations with customers today are more about them partnering with us on the roadmap and their long-term goals, more so than sort of a competitive bid against some other business.

And then, Brian, your accounts receivable is up in this.

Yeah, good question. I mean, as you can see, we had pretty significant success in driving cash flow during the quarter as well as building working capital. But yeah, you're exactly right. I mean, kind of like what Gray mentioned earlier, you know, we saw a pretty significant increase in the amount of revenue balance in the back half, and that's reflective in the AR balance, you know, going up about the same rate that you see revenue. But yeah, absolutely, it's linearity. It's normal, of course, of business for us.

We always expect to have a pretty significant accounts receivable balance walking out of Q4 when compared to the prior quarters. okay thank you thank you thank you thank you and our next question comes from anya sodastrown with sudoti and co your line's open hi and thank you for taking my questions and congrats on the nice progress here and i'm wondering for the product revenue we saw a good growth there how long is the lag before that starts to benefit services revenue yeah um i mean i nothing has really

change in our business model our average contract term is about two years so um you know simple rough math when we do product sales growth uh you expect that that's a lead indicator for services growth and i think you can see that in the services line as well as deferred revenue deferred revenue was up at almost the same rate as total revenue which we would expect but yeah i think to your to your question you know it's two year run out on average so you know as you see product revenue grow today, then you'll expect in the following year the same growth rate in the services revenue line.

Okay, thank you. And the margin, the growth margin for the products were a bit softer. What's going on there?

Yeah, this is, you know, as we get through the end of the year, we get a lot of long-term projects that we've been working through. And, you know, it depends on the region. It depends on the customer mix, whether they're buying software hardware uh there's all kinds of factors but in this case i mean the the change in gross margin is simply reflected of geographic and product mix yeah i think it's okay and you know that's why yeah that's right yeah sorry and that's why when we say 80 to 82 percent that's reflective of accommodating that regional and product mix so okay thank you and are you at all affected by tariffs in terms of the products? We will be. I mean, once that's locked in and we can expect what the impact will be, we're absolutely not impervious to the impact of tariff hikes in different regions from a procurement perspective. And then I'm sure that'll put pressure on sales price in other regions.

But to be determined, I think as we always talk about over the last five years is these are headwinds that we anticipate and expect in our operating plan and we always deploy countermeasures to overcome those to deliver the results you see and and maybe would you have particular yeah so yeah i'm just going to add one thing and brian can talk to it but remember right now we are talking about three major regions right and uh if you recall we had made the decision and we don't have any exposure in china market right so that's not something that we have deliberately made that decision. Obviously, we have business in Canada and Mexico, but it's not as large as most other countries. So we will continue to monitor what the percent takes are on those. But as Brian said, obviously, we don't know what we don't know yet.

And I think to your follow-on question in terms of passing through those costs, I mean, it's case-by-case basis. I mean, we're not wholesale-raised places to overcome challenges. we typically deploy countermeasures internally to find cost savings that we can pass on to our customers but yeah this won't be a an indicator of a price increase globally okay thank you and then within me i guess that was uh doing uh well for you but can you just um talk about europe specifically what you see there yeah so i think when we talk about europe right i think we typically internally look at it in three uh three pieces so there is core europe uh emerging right

europe and then middle east and i think when we see the business there we saw our business in europe continued to be pretty stable business in the middle east uh as it is mixed across countries so some countries are fine some are not but if you look at the core europe and what you normally think of as northern parts of europe uh we continue to build our business uh pretty constantly over there so we see that as good market for both service provider and enterprise growth okay thank you and then just one last one in terms of strategic opportunities how active are you looking for that and have you seen any changes there in some of the activities yeah so of course i think you know as the market has changed and companies have gotten kind of re-rated on multiples and things like that. We see, you know, a lot of inbound ideas as well as companies looking for strategic fit. And so we are pretty actively looking at those. And as we said before, our focus is on things that accelerate our strategic goals around enterprise security and things like that. And we'll continue to look at them, but we are pretty actively involved with looking at product gap fills, as well as technology, as well as market expansion.

Okay. Thank you. Now, what's up for me?

Thank you, Aya.

Thank you. We have no further questions, so I'd like to turn the call back over to Drupal for any closing comments.

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

This concludes our call today. Thank you very much for joining. You may now disconnect your line.