Earnings Call Transcript - ATEN Q3 2025

Operator, Operator

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

Tom Baumann, Unknown Executive

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 CFO, Michelle Caron. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its third 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, November 4, 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 that with the exception of revenue, financial measures discussed today are on a non-GAAP basis, unless otherwise noted 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 a10networks.com. Now I would like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks.

Dhrupad Trivedi, CEO

Thank you, Tom and thank you all for joining us today. A10's strategic position, aligning our solutions and technology roadmap with the persistent needs of our customers around trusted infrastructure, cybersecurity and AI capabilities continues to enable growth that outpaces our market peers. Our solutions emphasize high throughput, low latency, and integrated security, which our customers and the broader market increasingly view as essential. A10 is well positioned alongside the durable catalysts that are driving spending across our markets. In the third quarter, revenue grew nearly 12% year-over-year. On a trailing 12-month basis, growth from enterprise customers in North America continues to outpace our overall company-wide growth. Revenue from the Americas has increased 25% on a trailing 12-month basis, driven primarily by investment in AI infrastructure. This performance helped offset macro-related headwinds in other regions. Our global diversification continues to enable consistent performance despite macro variability. AI-related deployments were a key driver for growth, where security and performance at scale are critical. These applications are power-hungry and our solutions deliver efficient throughput and low latency with integrated best-in-class security capabilities. This allows customers to achieve target performance with fewer devices, improving total cost of ownership, while maintaining the highest levels of network performance. We continue to leverage this advantage in large data center opportunities globally. Our operating model continues to focus on discipline and leverage, converting growth into profitability and cash, while reinvesting in strategic priorities. EBITDA margins expanded year-over-year from 26.7% to 29.3%, while non-GAAP operating margin expanded from 22.6% to 24.7%. This demonstrates the inherent leverage in our model even as we continue to invest more in R&D. A10 is well positioned to serve both enterprise and service customers alike, while we navigate macro uncertainty. In the world of AI, these will be harder to demarket as customers redefine their architectures. Our increasingly strong alignment with AI infrastructure build-out and adoption gives us confidence in our strategic positioning as we align investment with structural tailwinds of AI and cybersecurity. As our investments in innovation and product enhancements have taken shape, we have established ourselves as a stronger, more differentiated technology solution provider. On a trailing 12-month basis, growth stands at just over 10%. Based on momentum in key strategic initiatives, we expect full-year growth rate of 10%. With that, I'd like to formally welcome Michelle Caron, our new Chief Financial Officer, to the call. I also want to take a moment to thank Brian Becker. Brian had been an important part of the leadership team during A10's progress and had instituted strong processes that will continue to serve us well into the future. Michelle brings deep operational and financial expertise from complex global organizations and a proven ability to align financial strategy with growth opportunities. Her background complements A10's disciplined culture and long-term transformation agenda. We expect continued disciplined execution and an increased focus on capital deployment to play a role in our overall growth. Michelle's experience positions us well to help drive that next phase of the company.

Michelle Caron, CFO

Thank you, Dhrupad. I'm excited to join A10 at this important inflection point. What drew me here is the combination of a strong foundation, coupled with an even stronger opportunity ahead. With a proven business model, solutions that are ideally aligned with global spending trends and a Tier 1 customer base, A10 is positioned for consistent success. I share Dhrupad's belief that we can continue to grow both organically and inorganically, and I look forward to contributing to both sides of that growth equation. My near-term focus involves building on our solid base and driving greater consistency, predictability and profitability as we grow. I'll be concentrating on a few key areas. First, maintaining financial discipline and transparency, better aligning our performance and market expectations. Second, driving profitable growth, balancing top-line expansion with healthy margins and cash flow; and third, maintaining disciplined capital allocation. Investing where we can create the most value while continuing to return capital to our shareholders. Supporting our pipeline of M&A activities and effectively putting our cash to work will be part of this initiative. Now let me turn to the results. As Dhrupad noted, we delivered a strong Q3, growing revenue almost 12% to $74.7 million, reflecting a mix of 58% product revenue and 42% service revenue. Global service revenue of $31.6 million grew 6% while product revenue of $43.1 million grew 17% year-over-year. Product revenue, which has been strong for the last 2 quarters, represents a leading indicator of future revenue. Our third quarter performance gives us confidence we're on the right track to deliver on our strategic priorities, while continuing to drive rigor building on our culture of excellence. Within our product revenue category, the third quarter reflected a greater contribution of security-led revenue, exceeding our long-term target of generating 65% of our total revenue from security-led solutions. This performance reflects customer demand and our alignment with customer needs, particularly within North America for both service providers and enterprises. Now looking at our major verticals, enterprise customers represented 36% of Q3 revenues. As previously stated, America is our priority region, and we continue to see growth in excess of overall revenue on a trailing 12-month basis. Service provider revenue, which was 64% of total revenue, was weighted towards cloud providers, further indication of our success in strategically aligning our offerings with AI infrastructure build-out. From a geo perspective, our Americas region represented 65% of global revenue, reflecting the benefits of A10's investments in our enterprise segment and strength of AI infrastructure build-out. As Dhrupad mentioned, macro-related headwinds in the Rest of World were made up for in the Americas region. Now 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. Our continued operating discipline contributed to our strong Q3 results. Non-GAAP gross margin was 80.7%, in line with our stated goals of 80% to 82%. Operating expenses were $41.8 million, reflecting an operating margin of 24.7%, an improvement of about 215 basis points year-over-year. GAAP net income for the quarter was $12.2 million or $0.17 per diluted share. Non-GAAP net income for the quarter was $16.7 million or $0.23 per diluted share, reflecting a 7.4% EPS growth from the year-ago period. Diluted weighted shares used for computing non-GAAP EPS for the third quarter were approximately 73 million shares, down 1.7 million shares year-over-year, driven by our continued share buyback. Adjusted EBITDA was $21.9 million, 29.3% of revenue, which is aligned with our long-term strategic goals. Turning to the year-to-date results. Revenue for the first 9 months of 2025 was $210.2 million compared to $187.5 million, an increase of 12.1%. Non-GAAP gross margin was 80.5% year-to-date. Adjusted EBITDA was $61.1 million year-to-date, reflecting 29% of revenue. Non-GAAP net income on a year-to-date basis was $47.2 million or $0.64 per diluted share compared to $41.9 million or $0.56 per diluted share last year. On a GAAP basis, net income for the first 9 months was $32.3 million or $0.44 per diluted share compared to net income of $31.8 million or $0.42 per diluted share in the first 9 months last year. I'll now turn to the cash flow and balance sheet, both of which are very strong. We generated $22.8 million in cash flow from operations in Q3. CapEx was $4.7 million with cash and investments totaling $371 million at the end of the quarter. Deferred revenue was $143.5 million. During the quarter, we paid $4.3 million in cash dividends and repurchased $11 million worth of shares. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on December 1, 2025, to shareholders of record on November 17, 2025. The company still has over $60 million remaining of its $75 million share repurchase authorization. I look forward to speaking with many of you in the coming weeks, gathering your feedback on our strategy and operations. I'll now turn the call back to Dhrupad for closing comments.

Dhrupad Trivedi, CEO

Thank you, Michelle. We are encouraged by continued business execution and remain confident that A10 is strategically well-positioned in the market, especially as we see acceleration in AI infrastructure build-out. A10 is positioned squarely in front of multiple durable secular catalysts. In fact, our strength in high-performance hardware and software is more relevant than ever before. 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 up for questions.

Operator, Operator

Your first question is from Gray Powell from BTIG.

Gray Powell, Analyst

It's actually Gray up again for Gary. Gary is traveling today. But just want to say congratulations on the good results. I just had a couple of questions. Yes, absolutely. I think last year, security-led revenue was around 63% of the business, growing 9%. You called out 65% in the prepared remarks in the slide deck. Just how is it tracking this year? And where do you think it can go longer term?

Dhrupad Trivedi, CEO

Yes. Good question. We previously mentioned that our long-term goal is 65% because we believe the integration of security and infrastructure is a strength for us. It’s important for these components to work together effectively. In Q3, we actually exceeded 65%. We are confident in maintaining that goal of around 65%. If we perform even better, that's a bonus. However, we do not intend to sacrifice infrastructure revenue for the sake of reaching this goal. I'm pleased that we have improved our mix from below 30% to 65%. Our aim is to lead with this approach as it positions us in higher growth markets and applications.

Gray Powell, Analyst

Understood. That's really helpful. On a separate note, F5 experienced a significant data breach a few weeks ago. I know it might be early to discuss this from your perspective, but do you think it could influence your conversations with enterprise customers? Has this topic come up in your discussions yet? Is there any commentary you could share regarding that?

Dhrupad Trivedi, CEO

Sure. Yes. No, I think good question. And I think, first of all, I would say that all of us in the cybersecurity industry face the same kinds of attacks and challenges that we are all resolving. So obviously, we cannot specifically comment on anything, but I would say as we navigate that market environment and you look at some of the key players in that space, right, including F5, of course. I think we have seen certainly an increased level of interest from customers, not necessarily wanting to change, but wanting to understand what else is in the market and what alternatives there might be towards making sure that their own infrastructure is more resilient in the future. So of course, I think we'll continue to work with our customers as we'll continue to work with the industry overall to find better ways to manage and handle cybersecurity challenges.

Operator, Operator

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

Victor Chiu, Analyst

This is Victor Chiu for Simon. You noted strength in North American AI infrastructure investments in your prepared remarks. But can you elaborate on some of the specific factors contributing to the upside this quarter? Were there a handful of specific customers or deals? Or was the strength more broad-based?

Dhrupad Trivedi, CEO

Sure, Victor. As you know, the AI market is currently dominated by a few large players. In the longer term, we are working with many companies that will be significantly more independent in the next 2 to 3 years. Right now, we are in the initial stages of a major build-out, which will lead to more realistic business objectives and localized models. During this phase, we have benefited from a few large customers who are heavily investing in AI infrastructure. However, we are also collaborating with enterprise customers globally, who will benefit in the long run as they develop their own solutions and find ways to leverage AI.

Victor Chiu, Analyst

That's very helpful. Just a quick follow-up to elaborate on the previous question. Have you noticed any negative impact from the high-profile security breach involving one of your key competitors that customers have expressed specific concerns or hesitations about regarding their planned deployments?

Dhrupad Trivedi, CEO

No, we are certainly not experiencing any negative impact from that. People have become accustomed to dealing with both public and private incidents in that space for a long time. So, it is definitely not a negative for us at all. I would say it has increased the conversations we are having with customers. However, it’s difficult to classify it as positive. But there is certainly no hesitation from customers regarding their spending on A10's products or in delaying their decisions in any way.

Operator, Operator

Your next question is coming from Julio Romero from Sidoti & Company.

Julio Romero, Analyst

This is Julio on for Anja. So my first question would be just it seems like the efforts you've done on the enterprise sales push have been working. Are there any more initiatives you can do there? And then secondly, where are you in the innings of expanding within this market?

Dhrupad Trivedi, CEO

Yes. Good question. And I think we have been talking about that for a few periods now, right? So I think our initial thesis was around building up our capability on the product solution side as well as on the commercial execution side to get more stability with enterprise customers than growing our share. I think in the last 2 to 3 years, we have continued to see that kind of maturation process, if you will. And we believe, certainly with our sales leadership currently in place, there is a lot of focus around that while we continue to support our service provider customers as well. So I would say, if I had to characterize it in that sense, I would say probably we are in the third or fourth innings as we continue to build kind of our own maturation of the team, but also engagement with customers.

Julio Romero, Analyst

Excellent. Very helpful. And then just any preliminary thoughts you could share on how you would view 2026 shaping up for you from a top line and bottom line perspective just at a high level at this point?

Dhrupad Trivedi, CEO

Yes. No, good question. And I think I would say you can see, obviously, last year was a little bit unusual year in terms of seasonality. And this year, as we talked about, we expect on a full-year basis to get back to 10% growth and obviously, the EBITDA results as well. As we look into the future, I would say the challenge like everybody else is we are dealing with uncertainties that we cannot control, such as interest rates and tariffs and everything else. But given the momentum in the business, particularly around secular tailwinds that we are aligning more and more to, we feel that going into next year, we should be able to sustain the growth level that we are seeing now. And we obviously will continue to provide more clarity as we see it as well. But our goal is obviously to be in that high single-digit range. And if the market aligns to do better than that, but at the same time focused on our business model goals on 26% to 28% EBITDA as well as EPS growth faster than top line.

Operator, Operator

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

Hamed Khorsand, Analyst

I was just wanted to see what kind of progress you've been making as far as expanding your service provider customer base?

Dhrupad Trivedi, CEO

Yes, that's a good question. I would differentiate our approach in two ways. Firstly, with our existing large Tier 1 service provider, as seen in most companies, we are experiencing significant pressure on capital expenditures. Therefore, our focus has been on increasing our share of wallet and cross-selling in markets such as the U.S., Europe, and Asia. Secondly, we are noticing more activity and rollout with Tier 2 service providers, which isn't primarily linked to aspects like BEAD funding. Our progress is focused on acquiring new customers within that independent or Tier 2 segment. For Tier 1, alongside the wait for capital expenditures, we aim to broaden our presence by selling to various business units and offering multiple products.

Hamed Khorsand, Analyst

Okay. And then just looking out to the clarity you're seeing as far as your service prices are concerned, do you have that clarity at all? Is it better?

Dhrupad Trivedi, CEO

Yes, that's a good question, Hamed. I would say the situation varies among our service provider customers. For those involved in building cloud infrastructure, we have decent clarity and a typical cycle of 6 to 9 months, which gives us a reasonably good understanding. Regarding the Tier 1 telcos in Europe, we have a fair level of clarity; it's progressing a bit slower than usual, but it's still moving forward. In Japan, things are quite slow due to their challenging economic conditions, which aligns with our expectations. For U.S. Tier 1 service providers involved in cloud and infrastructure, the situation looks good. However, on the traditional telco side, things remain a bit unpredictable. While they may maintain overall annual spending, making quarterly projections is currently more challenging than it used to be.

Hamed Khorsand, Analyst

Okay. And could you just talk about what drove that big outperformance this quarter in the EMEA region for you?

Dhrupad Trivedi, CEO

Sorry, Hamed. I think you broke up for 1 second. Can you please repeat that?

Hamed Khorsand, Analyst

In the EMEA region, it seems like on your presentation slides, that was a big revenue portion. What drove that?

Dhrupad Trivedi, CEO

In Q3, the EMEA segment saw a significant increase due to a major project that was completed during the period. It's reasonable to consider that quarter as an average to better reflect the situation, and this level of performance is not expected to continue as a new baseline.

Operator, Operator

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

Christian Schwab, Analyst

Great quarter. Can you give us an idea yet of the percentage of product revenue that's tied to AI-related security products?

Dhrupad Trivedi, CEO

Yes, that's a good question, Christian. I believe you brought this up in our last discussion as well. We are working internally to develop a clearer view on this matter. The challenge for us is that many of our customers are planning to build 10 data centers. While they are still building 10, 6 of these will be focused on AI and 4 will be traditional setups. We are trying to gain better insights from our customers to represent this more accurately and specifically. This makes it a more complex issue. In terms of the growth improvement from our service providers, I would say that a significant part of it is linked to their AI build-outs. However, it's difficult for me to determine exactly how many of the 10 data centers are classified as AI versus traditional, as they don't market it that way either. Nonetheless, this is something we are prioritizing, and we are working on ways to present a proxy for this in our Q1 comments.

Christian Schwab, Analyst

Great. When you mentioned that the business momentum would continue into 2026, we initially saw a 10% increase, followed by a return to high single digits. Should we assume that the business momentum will lead to a top-line growth target of 8% to 10% next year? Did I understand that correctly?

Dhrupad Trivedi, CEO

Yes, I think that's a fair way to look at it. So I think that's sort of the line of sight we have, right, is in that range for next year as well? And as we navigate things up and down, right, it's hard to kind of nail it down by quarter at this point. But on a full-year basis, certainly, we feel good with that range.

Christian Schwab, Analyst

Great. And then my last question. Seeing the increased customer interest as an alternative given F5's recent issues, when would be a logical time for those indications of interest to potentially turn to orders? Is that 3 months, 9 months, how should we be thinking about that opportunity?

Dhrupad Trivedi, CEO

Good question. So I think, yes, as I said before, certainly, we are having customer conversations, and certainly, right, we wish all those customers and F5 to resolve those problems swiftly for themselves because a good thing for the industry. The typical sales cycle for us in that kind of an enterprise market is 6 to 9 months. And we are engaged or talking to customers, but roughly speaking, that's the window in which you would see it translate into incremental bookings if that were going to be the case.

Operator, Operator

Your next question is coming from Michael Romanelli from Mizuho Securities.

Michael Romanelli, Analyst

Yes. To begin with, could you share your thoughts on the linearity of the quarter and how activity has been throughout October?

Dhrupad Trivedi, CEO

Yes. No. Good question. And I think, Michael, that it varies a little bit by regions as well. So I would say that linearity for us outside of Americas has been not atypical or in line with what we expect to get to. Within Americas, I think there is a little bit of jitter around kind of political things and tariffs and interest rates. But overall, we don't see a dramatic change in linearity relative to what we were expecting.

Michael Romanelli, Analyst

Got it. Okay. That's helpful. And then as my follow-up, it's nice to see the services revenue return to growth following consecutive quarters of decline. As part of revenue algo. How should we be thinking about your services revenue growth going forward?

Dhrupad Trivedi, CEO

Yes. Good question. So you are right. I think there's a little bit of timing element to the service revenue because it's related to 1-year, 2-year, 3-year kind of support contracts and so forth. The way you should think about it is if our product is growing at a certain rate, typically, that is sold with a 1-year service or support contract. So 1 year from that date, we would have a larger eligible pool of renewals and support contract and revenue. So in that sense, product revenue growing faster means that a year from now, it should naturally lead itself to service revenue growing faster as well.

Operator, Operator

Your next question is coming from Hendi Susanto from Gabelli Funds.

Hendi Susanto, Analyst

Dhrupad, could you discuss the opportunities in AI? We are somewhat familiar with A10 as a core application, but perhaps you can elaborate on the use cases for AI among service providers, data centers, and Tier 1 service providers. Where do you see A10 making an impact? Specifically, what are the growth drivers in AI, such as traffic or security, and are there new use cases arising for A10?

Dhrupad Trivedi, CEO

Sure. That's a great question. I’ll address that briefly. We connect everything back to our differentiation, as we have done for several years. At the foundational level, we provide hardware platforms and software that support higher throughput, lower latency, and GPU-based architecture, which aid in building data centers across various sectors like enterprise, service providers, telco, and cloud. The second level involves our cybersecurity products, which have expanded their coverage to detect and address threats arising from AI traffic, such as prompt injection and loss of personally identifiable information. This represents an extension of our networking expertise to tackle new types of threats. Thirdly, we are collaborating with customers over the long term to analyze traffic data in complex networks using AI tools for predictive analytics. This ultimately enhances their capabilities in network planning and resource management, impacting the costs associated with building and operating a network. Our approach is informed by 20 years of experience in networking and cybersecurity bolstered by a team that includes many young graduates specializing in AI. We are leveraging our established knowledge in networking and security to develop AI solutions that create value for our customers.

Hendi Susanto, Analyst

Got it. And then Dhrupad, I think when you talk about U.S. service providers, you refer to Tier 1. What does the opportunity in Tier 2 service providers look like at A10 now?

Dhrupad Trivedi, CEO

So I think broadly. So this is not AI, right? But broadly speaking, I think in the Tier 2 service provider side, a few years ago, right, there was a lot of discussion of government spending, rural broadband, things like that. Obviously, that has changed quite a bit, particularly with the government actually in shutdown now. So it's not that, but it's more that for those kind of carriers, our solution does not require them to fully rip and replace everything they do and then figure out how to monetize it or pay for it, right? Our solutions are more aligned on getting more out of those networks, doing more virtualization, things like CGNAT, which allows them to reuse addresses cheaper and so progress there is more on an economic value proposition based on our technology. It is not a substitute for a Tier 1 who might spend 5x as much, right? But it is something where we continue to see good resonance with our technology and solutions.

Operator, Operator

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

Dhrupad Trivedi, CEO

Thank you and thank you to all of our employees, customers, and shareholders for joining us today and for your continued support. I am increasingly confident in our strategy and about our future. Thank you for your time and attention.

Operator, Operator

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