ATEN - NYSE

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

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.

Thank you, Tom and thank you all for joining us today. A10's strategic position, aligning our solutions and technology road map 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 catalyst 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?

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 shared 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 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.

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 catalyst. 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 Instructions] Your first question is coming from Gary Powell (sic) [ Gray Powell ] from BTIG.

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?

Yes. Good question. I think -- so we had said long term, our goal was 65% because -- we see the connection between security and infrastructure as something that actually is a strength for us in the sense, we want those things to work together and make it even better. So if you look at where we actually ended up in Q3, the number was higher than 65%. And so we feel pretty good continuing to maintain that goal of about 65%. And if we do better, that's great. But at the same time, we are not looking to lose infrastructure revenue in its place, right? So, I feel pretty good that we have been able to improve that mix to -- from somewhere less than 30% to 65%. And obviously, our goal is to lead with that because that tends to expose us to higher growth markets and applications.

Understood. Okay. That's really helpful. And then just a separate topic and this 1 might be a little bit early. But F5 had a pretty bad data breach a few weeks ago. Again, like, I'm sure it's a little bit early from your side, but is that something that can potentially help your customer discussions on the enterprise side of the business? Is that something that's come up at all in conversations yet? Or is there any -- I don't know, is there any directional commentary you could make about that?

Sure. Yes. No, I think good question. And I think, first of all, I would say that all of us in the cybersecurity industry, right, face the same kinds of attacks and challenges that we are all resolving, right? 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, right? So of course, I think we'll continue to work with our customers just as we'll continue to work with the industry overall to find better ways to manage and handle cybersecurity challenges.

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

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 it more -- was the strength more broad-based?

Sure, Victor. I think -- so as, of course, you know well too, the market today in AI is pretty concentrated with several large players. And then in the longer term, we are also engaged with multitude of players who, in 2 to 3 years' time will be doing a lot more things on their own, right? So right now, it's in the phase of initial big build-out and then it becomes more realistic in terms of business goals, local models and so forth. So in this phase of the evolution, certainly right, the benefit to us was from a few large customers, who are investing aggressively into building the AI infrastructure. But we are equally engaged with customers around the world on the enterprise side as well, who will be the beneficiaries long term as they build out their own solutions and decide how to take advantage of AI.

Great. That's very helpful. And just a quick follow-up, just to elaborate on the previous question. Have you observed any -- on the flip side, have you observed any negative collateral impact from the high profile security breach from 1 of your key competitors that customers express specific concerns or hesitations moving forward with planned deployments?

No, we are certainly not seeing any negative impact from that. I think people are used to kind of having to deal with public as well as private incidents in that space for many, many years to come. So, it is certainly not a negative thing for us at all. And it's -- I would say, it has certainly increased conversations we are having with customers. But at the same time, it's hard to say it's positive. But certainly, there's no hesitation on customer side in terms of spending on A10's products, right, and holding off on that in any way.

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

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?

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.

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?

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 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.

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

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

Yes. No, good question. So I think, Hamed, I would probably differentiate it in 2 ways. So 1 is we -- during this year, with our existing large Tier 1 service provider, I think that has been, like most companies have seen a lot of pressure on CapEx. And so our efforts there have been more around improving share of wallet and cross-selling, whether it's in U.S. or Europe or Asia, right? Where we are seeing a little bit more traction is on the Tier 2 service provider side, where it's not necessarily related to things like BEAD funding, but we are certainly seeing a little more activity and rollout. So our progress there is, I would say, gaining new customers that are in that category of independent or Tier 2 type service providers. With Tier 1 in addition to waiting for CapEx, really trying to expand our footprint to sell into different business units or selling them multiple products.

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?

Yes. So good question, Hamed. So I would say on the service provider customer side, it probably varies, so on the ones that are exposed to more building out things like cloud infrastructure, the clarity is decent, I would say. And we have a 6- to 9-month kind of cycle. So we generally have a reasonably good idea. On the Tier 1 telcos in Europe, I think we have reasonably good clarity, a little slower than normal, but moving along. Japan is pretty slow, but their economy is still in a difficult spot, right? So that we -- it's in line with what we expect. In the U.S. Tier 1 service provider, I would say, where they are exposed to cloud and infrastructure like that is good. But on the pure classic telco side, it's still a little bit choppy in the sense -- they may still spend the same amount for the full year, but projecting it by quarter is still harder than it normally used to be.

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

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

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

I think so the -- in Q3, the EMEA portion, the step-up that you saw was 1 big project that culminated in the period. So it's probably fair to look at that 3 quarter and average it to be more indicative of it. And it's not like a new step level that you should expect to continue seeing there.

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

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

Yes. No, good question, Christian. And I think you have mentioned that last time as well. So we are working internally on how to create a view that does that. And the complication for us is -- for many of our customers, they were, let's say, going to build 10 data centers. Now they are still building 10, but 6 are designed for AI and 4 were what they used to do before. And I think we are trying to get a better handle on that through our customers so that we are more specific and clear in how we represent that. So that's the tougher part of it. Now when you look at our service provider growth improvement, I would say majority of it is related to because they are doing AI build-out. But it's hard for me to say from the 10 data centers they build 4 were AI and 6 were not AI, right? Because they don't market that way either. So -- but that's something that's on our docket Christian and that we are working towards in our Q1 comments to start figuring out a way to show some kind of a proxy for that.

Great. And then when you talked about the momentum in the business sustaining itself in '26, we kind of did 10%, then you went back to high single digits. So should we just kind of assume sustaining the momentum in the business, next year's top-line growth objective would be 8% to 10%. Is that -- did I hear that right?

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

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?

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. 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.

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

Yes. Maybe to start off, I was wondering -- I was wondering if you can comment on linearity in the quarter and how activity has been through the month of October?

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 tariff and interest rate. But overall, we don't see a dramatic change in linearity relative to what we were expecting.

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?

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 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.

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

Dhrupad and Michelle. Dhrupad, would you talk about opportunity in AI, like we are somewhat familiar with A10 like core application, but perhaps you can go deeper into use cases for AI for service providers, data centers, Tier 1 service providers, like where you foresee A10 in influencing. For example, whether it is -- like what are the growth drivers in AI, whether it is traffic or security and whether there are things that are somewhat presenting new use cases for A10?

Sure. Yes, Hendi. Good question. So I think I'll do that briefly here. But for us, really, the like we have done in the last several years, right? We connect everything back to our differentiation. So on the foundation level, we have hardware platforms and software that now also support higher throughput, lower latency and GPU-based architecture. So those feed into people building out data centers, whether it's enterprise or service provider or telco or cloud, right? So that's the first foundation level. Second level is in our cybersecurity product, we have expanded coverage to where our products are able to detect and remediate threats that occur now because of AI traffic, and that will be things like prompt injection and loss of PII data and so forth, right? So that's an expansion of our networking know-how to now handle new kinds of threats that happen because of AI. Third is, obviously, we are working with our customers on a longer-term basis to understand how we can look at traffic data from a long period of time in complex networks and use AI tools to drive predictive analytics, which ultimately, for them, helps do better things around network planning, resource management and which is ultimately their cost of running -- like building and running a network, right? So that's the range of things we do. So we don't come into it thinking we are a new AI startup. What we do is we know 20 years of networking, we know cybersecurity, we have a large team of people, a lot of young graduates as well who are AI engineers. And what we are doing is we are taking our know-how in networking and security. And using that as a foundation to create AI solutions that are value creating for our customers.

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

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.

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 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.