A10 Networks, Inc. Q2 FY2025 Earnings Call

Good day, everyone, and welcome to the A10 Networks Second Quarter 2025 Financial Results. It is now my pleasure to turn the floor over to your host, Tom Baumann of FNK IR. Sir, the floor is yours.

Thank you. 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, a10networks.com. Hosting the call today are Dhrupad Trivedi, A10's President and CEO; and CFO, Brian Becker. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its second quarter 2025 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, macroeconomic factors, strategy, potential new products and solutions, our capital allocation strategy, profitability, expenses and investments, positioning and our dividend program. These statements are based on current expectations and beliefs as of today, August 5, 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. 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 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 at www.a10networks.com. Now I'd 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. A10 continued to deliver growth and profitability in the second quarter. This performance demonstrates the continued validation of our strategy. We have strategically aligned our technology roadmap and go-to-market focus with the evolving cybersecurity landscape where our customers are facing increasingly complex challenges. Our solutions emphasize high performance and advanced security, two areas that are increasingly central to both the Service Provider and Enterprise customers. The strategic focus and delivery of innovation is resonating in the market. This concentration was further validated by our recent selection by a global cloud leader to help build their future AI infrastructure, indicating that A10's offering is well positioned at the intersection of today's most urgent priorities for the world's most demanding customers. Increasingly, that alignment with the key drivers of technology investment is the most important point I want to share with investors today. A10 is exceedingly well aligned with these two primary catalysts influencing IT and infrastructure spending: artificial intelligence and cybersecurity. We believe we have the right technology, the right product roadmap and increasingly, the right go-to-market execution to fully capitalize on these trends. Our intentional diversification enhances our resilience. In the second quarter, we saw an improvement in parts of Global Service Provider spending, driven by the factors I mentioned earlier. Our balanced exposure across verticals and geographies is a core strength of our business model, and it allows us to maintain momentum while we capitalize on secular tailwinds in AI and cybersecurity. Looking at performance on a trailing 12-month basis provides a view of our underlying momentum. Total revenue grew 11% year-over-year with Enterprise up 8% and Service Provider revenue increasing 14%. Even after adjusting for the favorable year-over-year comparison, we believe this reflects a sustainable growth trend aligned with our strategy and we remain comfortable in our ability to deliver annual revenue growth in the high single-digit range. Our first half results are consistent with these expectations. We will continue to navigate choppy market conditions while focusing on execution and aligning investments with long-term growth expectations and business model goals. Our Service Provider revenue during the period benefited from improved demand from data center expansions and AI infrastructure investments. As I mentioned in the past, AI applications are power hungry, making our solutions, which provide industry-leading efficiency in terms of throughput, low latency and best-in-class security, more attractive, as customers can achieve better ROI on those investments. We are actively leveraging this competitive advantage, along with our networking expertise, in opportunities for large data center projects around the world. Our EBITDA as a percent of revenue grew year-over-year even as we aggressively invest in new areas. As an indicator, we had two AI products win the top awards at the prestigious Interop Event in Japan, competing against much larger players as well as startups. Our comprehensive A10 Defend portfolio of solutions provides hybrid DDoS protection, threat intelligence, web application and bot protection and now adds a fully featured WAP solution, all integrated into a single solution with end-to-end delivery and stronger security for mission-critical applications. Stepping back, I am increasingly confident in our strategic positioning. Our deliberate focus on aligning A10's growth and investment strategy with structural tailwinds of AI and cybersecurity continues to pay dividends. Our focus on systematically growing Enterprise market adds another growth vector. We believe A10 is well positioned to serve both Enterprise and Service Provider customers, employing an intentional diversification strategy that delivers resiliency in our results. We are also well diversified across regions. The business continues to effectively navigate short-term market volatility, delivering consistent profitability and returning capital to shareholders. As markets evolve, we are well positioned to outpace the market in terms of revenue growth while increasing our profitability in line with our business model. With that, I'd like to turn the call over to Brian for a detailed review of the quarter. Brian?

Thank you, Dhrupad. Second quarter revenue was $69.4 million, an increase of 15% year-over-year. The results benefited from a more normalized Service Provider quarter compared to last year and the strategic investments we've made in Enterprise and AI infrastructure. The overall trends are positive, and we continue to maintain our focus on global diversification. Product revenue for the quarter was $39.2 million, representing 56% of total revenue. Services revenue was $30.2 million or 44% of total revenue. Total deferred revenue increased to $144.4 million. As expected, we see strong uptake of our cutting-edge portfolio, evidenced by continued product revenue growth and renewal rates on eligible contracts remain above 90%. The high renewal rates are an indicator that we are not losing any customers or market share. With the exception of revenue, all of the metrics discussed on this call are on a non-GAAP basis, unless otherwise stated. A full reconciliation of GAAP to non-GAAP results is provided in our press release and on our website. Gross margin in the second quarter was 80%, in line with our stated goals of 80% to 82%. Adjusted EBITDA was $19.7 million for the quarter, reflecting 28.3% of revenue, in line with our stated long-term goals. Non-GAAP net income for the quarter was $15.5 million or $0.21 per diluted share compared to $13.2 million or $0.18 per diluted share in the year-ago quarter. Diluted weighted shares used for computing non-GAAP EPS for the second quarter were approximately 73.1 million shares, down 2.4 million shares year-over-year due to our continued share buyback. On a GAAP basis, net income for the quarter was $10.5 million or $0.14 per diluted share compared to net income of $9.5 million or $0.13 per diluted share in the year-ago quarter. During the quarter, we generated $22.2 million in cash from operations. Turning to the year-to-date results. Revenue for the first six months of 2025 was $135.5 million compared to $120.8 million, an increase of 12%. Non-GAAP gross margin was 80.4% year-to-date. We continue to navigate macro uncertainties and are aggressively supporting our key AI customers. Adjusted EBITDA was $39.2 million year-to-date, reflecting 28.9% of revenue. Non-GAAP net income on a year-to-date basis was $30.5 million or $0.41 per diluted share compared to $26 million or $0.35 per diluted share last year. On a GAAP basis, net income for the first six months was $20.1 million or $0.27 per diluted share compared to net income of $19.2 million or $0.26 per diluted share in the first six months of last year. Turning to the balance sheet. As of June 30, 2025, we had $367.4 million in cash, cash equivalents and marketable securities compared to $195.6 million at the end of 2024. We ended the quarter with convertible debt of $218.1 million as a result of our convertible debt offering completed in Q1. During the quarter, we paid $4.3 million in cash dividends and repurchased $3.9 million worth of shares. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on September 2, 2025 for shareholders of record on August 15, 2025. The company has $71.1 million remaining of its $75 million share repurchase authorization.

Thank you, Brian. We are encouraged by the continued business execution and remain confident that A10 is strategically well positioned in the market. Technology spending is heavily influenced by increased demand for cybersecurity solutions and the accelerating adoption of AI-related spending. A10 is positioned squarely in front of these two durable secular catalysts. We are investing to enhance our position in the Enterprise space and remain aligned with key leaders in the Service Provider sector around the world. We believe our business model enables us to dynamically allocate resources to address changing market conditions while preserving profitability and shareholder returns. Operator, you can now open the call for questions.

Your first question is from Gray Powell from BTIG.

Congratulations on the good results.

Thank you, Gray.

Yes, absolutely. So yes, you posted the best product revenue growth in Q2 that we've seen in over five years. I realize that comps get tougher next quarter, but just how should we think about the potential to sustain your recent momentum and just the sustainability of the Service Provider segment, do you think you'd like to hit a turning point there?

Yes. No, great question. So I'll probably address them both separately. So you're right. I think, Gray, so obviously, we are pleased with the progress and results on the product side because ultimately, that builds a foundation for us with the customer base and results in more sustained growth long term. So that's one. The part of the driver for that, I would say, two things. One is on the Enterprise side, as we are able to penetrate larger Enterprise customers, that's part of how we are able to grow that revenue profile and ultimately resulting in a stronger customer base. Second is related to your second point; I would say when we look at our Service Provider performance, outside of North America, we continue to make good progress on Service Providers' sustainability. Within North America, I think we saw a little bit mix where some of the customers are beginning to have a more normal spending pattern relative to last year. So that's a positive sign. And not all of them are there yet. We still see some of them sort of holding off on CapEx and decisions, so it could get better. But fundamentally, the product revenue growth should be seen as an indicator of customers choosing us to either refresh existing installations or selecting us over competitors to go to new ones. And it's a lead indicator of growth now as well as in the future.

Really helpful. And then just some of the other vendors we covered, they've highlighted like a more back-end loaded June quarter as well as strength in July. Can you provide any commentary on how linearity played out this quarter? Or just any insights on what you saw like so far in July? Just any color at all?

Sure. Yes. So I think I would say, we did not see linearity very different in Q2 than we would like to see and we drive towards. So we did not see sort of an unexpected burst of activity in month three relative to month one and month two. I would say entering the third quarter, we see sort of phenomenon of customers on track versus what we expect to happen in Q3 and not a lot of noise between quarters around orders being pulled in or pushed out, right? So we don't see that as a major thing, but we certainly don't see any signs in July that make us think any better or worse on the outlook.

Your next question is coming from Simon Leopold from Raymond James.

This is Victor Chiu in for Simon Leopold. Can you tell us how we should think about the potential materiality and contribution from the potential Microsoft award that you announced recently?

Yes, that's a good question, Victor. We don’t disclose revenue by customer, but I want to emphasize that this is a significant customer for A10, with whom we have a long-standing and deep relationship. Our focus is on highlighting our long-term partnership and our role in their considerations regarding their current cloud infrastructure, as well as their future plans related to AI and connectivity. We value this ongoing partnership. It shows that our solution is quite relevant to a global leader in cloud networking, who has very high expectations for their network. Additionally, we have other customers purchasing our products for their AI infrastructure. It's worth noting that about six to nine months ago, our discussions with customers revolved around building data centers that support AI. Now, more customers, both in the U.S. and internationally, are prioritizing the establishment of AI data centers over merely ensuring their current operations align with AI needs. This is why we made that announcement, and we appreciate the long-term partnership.

Great. That's very helpful. And then just one follow-up. Telcos have kind of talked about raising CapEx somewhat following the Big Beautiful Bill passage and kind of the improved cash flow that they'll see from there. Does A10 kind of see this trend trickling down to them and kind of seeing tailwinds from this over the longer term?

Yes, that's a good question. You're right. There are two main factors to consider. First, I would distinguish between telecommunications companies in North America and those elsewhere in the world. The global market is relatively stable, while North America is influenced by two significant factors. One is that investments often depend on interest rates, return on investment, and positive consumer sentiment. If we see some movement in interest rates, it may prompt them to invest more heavily, which would provide us with a favorable environment for them to justify their business cases. The second factor involves the spending patterns of telecommunications companies. Strategically, we recognize that they have essential maintenance capital expenditures for building and sustaining networks. We benefit when they increase their spending in that area. At the same time, we are focused on collaborating with them to enhance other areas of their business, such as security solutions, which are somewhat distinct from the capital expenditures for new network development. As they allocate more budget for CapEx to build or upgrade networks, that’s beneficial for us. Our strategy also involves increasing our share of their budget by offering more security solutions.

Your next question is coming from Hamed Khorsand from BWS Financial.

Could you elaborate on the comment that was in your press release about the AI global leaders? Are these mainly North American companies, international? I mean, you're using plural tense, so it sounds like you have multiple customers there?

Yes, that's right. Good question, Hamed. I would say there are two parts to it. Some of these players are indeed based in North America. They come from various types of companies, but many are at the forefront of building new AI infrastructure. This is certainly a diverse group. The second part is that we have seen success in both EMEA and Japan with large global players who are looking to adapt their strategies to leverage AI. Not all of them want to rely solely on three American companies for their AI needs. We have established long-term partnerships with these customers in both Asia and Europe.

Okay. And then how much of a benefit did you see from foreign exchange this quarter?

I think you know this, Hamed, but for us, the only foreign exchange exposure is with the Japanese yen. Everything else is conducted in U.S. dollars. In fact, this quarter, foreign exchange had a small benefit, much less than 100 basis points, significantly less.

Your next question is coming from Christian Schwab from Craig-Hallum.

Great quarter, by the way, but could you help us just, again, what percentage of revenue is AI driven? And I'm kind of thinking maybe some of your firewall products to secure AI and large language model inference environments. Given the growth that we're seeing there, how long before that kind of drives double-digit plus type of year-over-year growth for you?

Thank you for your question, Christian. There are a couple of points to consider. The growth we are experiencing as a result of AI is primarily due to our customers investing in new data centers designed to handle AI traffic. Currently, our involvement with customers on AI firewall and predictive analytics is at an early stage as they begin to understand how to leverage AI for their needs. We anticipate that this will translate into revenue in 2026 and later, but it’s crucial to remain engaged with them on their plans today. Your question is fair, and we’ll work on finding a way to address it more clearly in the future. It’s somewhat nuanced; for instance, if a customer initially planned to build four data centers, they may still proceed with that plan but will adjust them to support more AI-related traffic and security. This makes it challenging for us to determine the difference between conventional data centers and those tailored for AI. Nonetheless, I acknowledge your question regarding how much of our growth is influenced by AI, and we will strive to provide a quantitative answer.

Your next question is coming from Michael Romanelli from Mizuho.

Congrats on the strong results. Maybe just to start here. I believe on last quarter's earnings call, you guys had mentioned that A10 has sort of multiple customers that helped drive the good Enterprise revenue growth in Q1. So just looking within the Enterprise cohort, can you maybe double-click on what you saw this quarter, whether that be from a customer vertical and/or geo perspective?

Sure, if you analyze our results by geography, you'll notice our Enterprise growth on a trailing twelve-month basis is 8%, which we believe is stronger compared to our peers. Growth in Enterprise in North America was significantly above 8%. Our investments have been strategically aligned with expanding in the large Enterprise segment, particularly in North America rather than small and medium enterprises. This is reflected in our results, where even though the global average is 8%, the numbers for North America, especially the U.S., are much higher. Regarding the types of customers, for a company of our size, we need to focus more narrowly rather than pursue every Enterprise customer. Our aim has been on large Enterprise clients who manage complex networks and have a strong emphasis on security. This includes sectors like financial services, gaming, and technology, where there are numerous users, high security and data breach risks, and critical elements such as network latency are vital, whether for enhancing gaming experiences or facilitating trade processing on Wall Street. This is the area we are focused on, where we have invested in our product offerings and commercial strategies, and we aspire to execute effectively to establish a solid foundation.

Got it. Super helpful. I wanted to ask about ThreatX. I know it's still early days, but how are conversations going with both existing and prospective customers? How has it been integrated? Do you believe it could potentially drive increased new business for your cybersecurity portfolio, especially in larger enterprises? Any information you can share would be appreciated.

Yes. No, Michael, thank you. Good question. So I think you're absolutely right. So I think for us, obviously, with ThreatX, we were able to integrate into our portfolio a very, very strong product, which is particularly recognized in the industry as something that's very easy to download, set up and run. And in cybersecurity, that's a big premium because typically, people are just confused by 20 acronyms thrown at them. So I think the fact that they are easy to set up and run is a differentiator and one of the reasons we really like their solution. The second part is, as you said correctly, as we think of the evolution of network architecture and cybersecurity, what is important is when the world moves to more of a networking and AI and learning centers, all distributed, it becomes more of an API and WAP security story. And with ThreatX now, we are able to integrate our strength in DDoS, bot, all those components already alongside with a contemporary API and WAP solution that helps us not just be aligned today on a product side, but actually we aligned from a roadmap perspective long term. So in terms of scale, it's hard to say how important ThreatX is, but in terms of importance to our customers, it is a very, very important part of us being seen as the relevant solution for them who provides the right mix of networking expertise and security expertise while being contemporary with their roadmap on AI as well. Sorry, Michael, the second part you asked was, so you are correct, it's pretty early days to know one way or the other. But our goal is, of course, eventually, as we continue to learn more about the customers, the buyer behavior and the market trend that we are able to start taking it to more and more of our customers. And it's a process we have started already, and we think it's promising relative to what we were expecting. But obviously, those cycles typically take six to nine months. So it's hard to declare victory or not. But certainly, our early indicators are it has clearly helped us access different types of buyers and expand kind of the aperture of what we discuss with customers.

Thank you. That concludes our Q&A session. I will now hand the conference back to Dhrupad Trivedi for closing remarks. Please go ahead.

Thank you. Thank you to all of our shareholders for joining us today and for your continued support. We greatly appreciate the deep customer relationships along with our dedicated employee base around the world for working to deliver consistent results. Thank you.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.