Form 8-K A10 Networks, Inc. For: Oct 30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 8-K
____________________________________________________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
October 30, 2018
____________________________________________________________________________
A10 NETWORKS, INC.
(Exact name of registrant as specified in its charter)
____________________________________________________________________________
Delaware | 001-36343 | 20-1446869 | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Commission File Number) | (I.R.S. Employer Identification Number) | ||
3 West Plumeria Drive
San Jose, CA 95134
(Address of principal executive offices, including zip code)
(408) 325-8668
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company | x | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | x | ||||
Item 2.02. Results of Operations and Financial Condition.
On October 30, 2018, A10 Networks, Inc. (the “Company”) issued a press release regarding financial results for the quarter ended September 30, 2018. The Company also posted on its website (www.a10networks.com) slides with accompanying prepared remarks regarding such financial results. Copies of the press release and slides with accompanying prepared remarks by the Company are attached as Exhibits 99.1 and 99.2, respectively, and the information in Exhibits 99.1 and 99.2 are incorporated herein by reference.
The information in Item 2.02 and Item 9.01 in this Current Report on Form 8-K and the exhibits attached hereto shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits
Exhibit | Description |
99.1 | |
99.2 | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: October 30, 2018
A10 NETWORKS, INC. | |
By: /s/ Tom Constantino | |
Tom Constantino | |
Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) | |
EXHIBIT 99.1
A10 Networks Reports Third Quarter 2018 Financial Results
SAN JOSE, Calif., Oct. 30, 2018 -- A10 Networks (NYSE: ATEN), a provider of intelligent and automated cybersecurity solutions, today announced financial results for its third quarter ended Sept. 30, 2018.
Third Quarter 2018 Financial Summary
• | Revenue of $60.5 million, compared with $62.0 million in third quarter 2017 |
• | GAAP gross margin of 78.5 percent, non-GAAP gross margin of 78.8 percent |
• | GAAP operating margin loss of 2.6 percent, non-GAAP operating margin of 4.2 percent |
• | GAAP net loss of $1.8 million, or $0.02 per share, non-GAAP net income of $2.3 million, or $0.03 per share |
A reconciliation between GAAP and non-GAAP information is contained in the financial statements below.
“We delivered a solid third quarter achieving revenue of $60.5 million, which exceeded the high-end of our guidance range. In the quarter, we continued to execute on our initiatives to transform our sales team, sharpen our focus on execution and expand our advanced suite of 5G, security and cloud solutions, and we are pleased with the initial results of our efforts,” said Lee Chen, president and chief executive officer of A10 Networks. “We are building momentum in the market with our highly scalable and intelligent automation driven security solutions. During the quarter, strong growth in sales for Thunder TPS and record Thunder CFW sales drove security product revenue to exceed 40 percent of total product revenue. We have a clear strategy and are hyper-focused on maximizing our opportunities in the fast-growing areas of our market. We believe we are on the right path and remain confident in our strategy to grow our business.”
Prepared Materials and Conference Call Information
A10 Networks has made available a presentation with management’s prepared remarks on its third quarter 2018 financial results. These materials are accessible from the “Investor Relations” section of the A10 Networks website at investors.a10networks.com.
A10 Networks will host a conference call today at 4:30 p.m. Eastern time / 1:30 p.m. Pacific time for analysts and investors to discuss its third quarter 2018 results and outlook for its fourth quarter of 2018. Open to the public, investors may access the call by dialing +1-844-792-3728 or +1-412-317-5105. A live audio webcast of the conference call will be accessible from the “Investor Relations” section of the A10 Networks website at investors.a10networks.com. The webcast will be archived for a period of one year. A telephonic replay of the conference call will be available two hours after the call, will run for five business days, and may be accessed by dialing +1-877-344-7529 or +1-412-317-0088 and entering the passcode 10124388. The press release and supplemental financials will be accessible from the “Investor Relations” section of the A10 Networks website prior to the commencement of the conference call.
Forward-Looking Statements
This press release contains “forward-looking statements,” including statements regarding our initiatives to transform our sales team, improve our execution and expand our solutions, our ability to maximize our opportunities, the pace of growth in our market, our belief that we are on the right path, and our confidence in our strategies. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on assumptions that may prove to be incorrect, which could cause actual results to differ materially from those expected or implied by the forward-looking statements. Factors that may cause actual results to differ include execution risks related to closing key deals and improving our execution, the continued market adoption of our products, our ability to successfully anticipate market needs and opportunities, our timely development of new products and features, our ability to achieve or maintain profitability, any loss or delay of expected purchases by our largest end-customers, our ability to attract and retain new end-customers, our ability to maintain and enhance our brand and reputation, continued growth in markets relating to network security, the success of any future acquisitions or investments in complementary companies, products, services or technologies, the ability of our sales team to execute well, our ability to shorten our close cycles, the ability of our channel partners to sell our products, variations in product mix or geographic locations of our sales and risks associated with our presence in international markets.
Non-GAAP Financial Measures
In addition to disclosing financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), this press release and the accompanying table contain certain non-GAAP financial measures, including non-GAAP net income (loss), non-GAAP gross profit and non-GAAP operating income (loss). Non-GAAP financial measures do not have any standardized meaning and are therefore unlikely to be comparable to similarly titled measures presented by other companies.
A10 Networks considers these non-GAAP financial measures to be important because they provide useful measures of the operating performance of the company, exclusive of unusual events or factors that do not directly affect what we consider to be our core operating performance, and are used by the company's management for that purpose. We define non-GAAP net income (loss) as our GAAP net loss excluding: (i) stock-based compensation, (ii) amortization expense related to acquisition and (iii) non-recurring expenses associated with the litigation and internal investigation. We define non-GAAP gross profit as our GAAP gross profit excluding stock-based compensation. We define non-GAAP operating income (loss) as our GAAP loss from operations excluding (i) stock-based compensation, (ii) amortization expense related to acquisition and (iii) non-recurring expenses associated with the litigation and internal investigation.
We have included our non-GAAP net income (loss), non-GAAP gross profit and non-GAAP operating income (loss) in this press release. Non-GAAP financial measures are presented for supplemental informational purposes only for understanding the company's operating results. The non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from non-GAAP financial measures presented by other companies. Please see the reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure attached to this release.
About A10 Networks
A10 Networks (NYSE: ATEN) is a provider of intelligent and automated cybersecurity solutions, providing a portfolio of high-performance secure application solutions that enable intelligent automation with machine learning to ensure business-critical applications are secure and always available. Founded in 2004, A10 Networks is based in San Jose, Calif., and serves customers in more than 80 countries with offices worldwide. For more information, visit: www.a10networks.com and @A10Networks.
The A10 logo, A10 Networks, A10 Thunder and A10 5G-GiLAN are trademarks or registered trademarks of A10 Networks, Inc. in the United States and other countries. All other trademarks are the property of their respective owners.
Investor Contact:
Maria Riley & Chelsea Lish
The Blueshirt Group
415-217-7722
Source: A10 Networks, Inc.
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue: | |||||||||||||||
Products | $ | 38,265 | $ | 40,404 | $ | 105,638 | $ | 116,930 | |||||||
Services | 22,237 | 21,601 | 64,760 | 62,982 | |||||||||||
Total revenue | 60,502 | 62,005 | 170,398 | 179,912 | |||||||||||
Cost of revenue: | |||||||||||||||
Products | 8,790 | 9,357 | 24,979 | 28,124 | |||||||||||
Services | 4,224 | 4,510 | 13,106 | 13,286 | |||||||||||
Total cost of revenue | 13,014 | 13,867 | 38,085 | 41,410 | |||||||||||
Gross profit | 47,488 | 48,138 | 132,313 | 138,502 | |||||||||||
Operating expenses: | |||||||||||||||
Sales and marketing | 24,539 | 26,930 | 77,231 | 78,754 | |||||||||||
Research and development | 15,505 | 15,997 | 49,874 | 49,529 | |||||||||||
General and administrative | 9,012 | 6,945 | 30,464 | 21,444 | |||||||||||
Total operating expenses | 49,056 | 49,872 | 157,569 | 149,727 | |||||||||||
Loss from operations | (1,568 | ) | (1,734 | ) | (25,256 | ) | (11,225 | ) | |||||||
Non-operating income (expense): | |||||||||||||||
Interest expense | (34 | ) | (20 | ) | (99 | ) | (128 | ) | |||||||
Interest and other income (expense), net | (131 | ) | (37 | ) | 6 | 779 | |||||||||
Total non-operating income (expense), net | (165 | ) | (57 | ) | (93 | ) | 651 | ||||||||
Loss before income taxes | (1,733 | ) | (1,791 | ) | (25,349 | ) | (10,574 | ) | |||||||
Provision for income taxes | 74 | 454 | 660 | 963 | |||||||||||
Net loss | $ | (1,807 | ) | $ | (2,245 | ) | $ | (26,009 | ) | $ | (11,537 | ) | |||
Net loss per share: | |||||||||||||||
Basic and diluted | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.36 | ) | $ | (0.17 | ) | |||
Weighted-average shares used in computing net loss per share: | |||||||||||||||
Basic and diluted | 72,707 | 70,705 | 72,550 | 69,688 | |||||||||||
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(unaudited, in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
GAAP net loss | $ | (1,807 | ) | $ | (2,245 | ) | $ | (26,009 | ) | $ | (11,537 | ) | |||
Stock-based compensation | 2,333 | 4,545 | 13,055 | 13,824 | |||||||||||
Amortization expense related to acquisition | 253 | 253 | 758 | 758 | |||||||||||
Litigation and investigation expense | 1,531 | — | 9,031 | — | |||||||||||
Non-GAAP net income (loss) | $ | 2,310 | $ | 2,553 | $ | (3,165 | ) | $ | 3,045 | ||||||
Non-GAAP net income (loss) per share: | |||||||||||||||
Basic | $ | 0.03 | $ | 0.04 | $ | (0.04 | ) | $ | 0.04 | ||||||
Diluted | $ | 0.03 | $ | 0.03 | $ | (0.04 | ) | $ | 0.04 | ||||||
Weighted average shares used in computing non-GAAP net income (loss) per share: | |||||||||||||||
Basic | 72,707 | 70,705 | 72,550 | 69,688 | |||||||||||
Diluted | 74,940 | 73,572 | 72,550 | 74,086 | |||||||||||
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
September 30, 2018 | December 31, 2017 | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 36,162 | $ | 46,567 | |||
Marketable securities | 87,391 | 84,567 | |||||
Accounts receivable, net of allowances | 51,084 | 48,266 | |||||
Inventory | 15,102 | 17,577 | |||||
Prepaid expenses and other current assets | 13,266 | 6,825 | |||||
Total current assets | 203,005 | 203,802 | |||||
Property and equipment, net | 7,994 | 9,913 | |||||
Goodwill | 1,307 | 1,307 | |||||
Intangible assets | 4,108 | 5,190 | |||||
Other non-current assets | 8,380 | 4,646 | |||||
Total Assets | $ | 224,794 | $ | 224,858 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 9,630 | $ | 9,033 | |||
Accrued liabilities | 20,602 | 21,835 | |||||
Deferred revenue | 60,653 | 61,858 | |||||
Total current liabilities | 90,885 | 92,726 | |||||
Deferred revenue, non-current | 34,202 | 32,779 | |||||
Other non-current liabilities | 642 | 967 | |||||
Total Liabilities | 125,729 | 126,472 | |||||
Stockholders’ Equity: | |||||||
Common stock and additional paid-in-capital | 369,859 | 355,534 | |||||
Accumulated other comprehensive loss | (157 | ) | (123 | ) | |||
Accumulated deficit (1) | (270,637 | ) | (257,025 | ) | |||
Total Stockholders' Equity | 99,065 | 98,386 | |||||
Total Liabilities and Stockholders' Equity | $ | 224,794 | $ | 224,858 | |||
(1) | The adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) in the first quarter of 2018 resulted in a reduction to the accumulated deficit balance of $12.4 million as of January 1, 2018. |
A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (26,009 | ) | $ | (11,537 | ) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||
Depreciation and amortization | 6,020 | 6,222 | |||||
Stock-based compensation | 13,055 | 13,824 | |||||
Other non-cash items | 152 | 930 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (3,144 | ) | 11,288 | ||||
Inventory | 1,550 | (2,513 | ) | ||||
Prepaid expenses and other assets | (868 | ) | (2,785 | ) | |||
Accounts payable | 806 | (1,243 | ) | ||||
Accrued and other liabilities | (1,482 | ) | (3,023 | ) | |||
Deferred revenue | 4,219 | (1,245 | ) | ||||
Other | 183 | 102 | |||||
Net cash (used in) provided by operating activities | (5,518 | ) | 10,020 | ||||
Cash flows from investing activities: | |||||||
Proceeds from sales of marketable securities | 23,194 | 18,747 | |||||
Proceeds from maturities of marketable securities | 41,732 | 52,119 | |||||
Purchases of marketable securities | (67,754 | ) | (69,580 | ) | |||
Purchase of investment | (1,000 | ) | — | ||||
Purchases of property and equipment | (2,252 | ) | (4,223 | ) | |||
Net cash used in investing activities | (6,080 | ) | (2,937 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of common stock under employee equity incentive plans | 1,269 | 7,665 | |||||
Repurchases and retirement of common stock | — | (3,071 | ) | ||||
Payment of contingent consideration | — | (650 | ) | ||||
Other | (76 | ) | (83 | ) | |||
Net cash provided by financing activities | 1,193 | 3,861 | |||||
Net (decrease) increase in cash and cash equivalents | (10,405 | ) | 10,944 | ||||
Cash and cash equivalents - beginning of period | $ | 46,567 | $ | 28,975 | |||
Cash and cash equivalents - end of period | $ | 36,162 | $ | 39,919 | |||
A10 NETWORKS, INC.
RECONCILIATION OF GAAP GROSS PROFIT TO NON-GAAP GROSS PROFIT
(unaudited, in thousands, except percentages)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
GAAP gross profit | $ | 47,488 | $ | 48,138 | $ | 132,313 | $ | 138,502 | |||||||
GAAP gross margin | 78.5 | % | 77.6 | % | 77.6 | % | 77.0 | % | |||||||
Non-GAAP adjustments: | |||||||||||||||
Stock-based compensation | 187 | 403 | 1,277 | 1,068 | |||||||||||
Non-GAAP gross profit | $ | 47,675 | $ | 48,541 | $ | 133,590 | $ | 139,570 | |||||||
Non-GAAP gross margin | 78.8 | % | 78.3 | % | 78.4 | % | 77.6 | % | |||||||
RECONCILIATION OF GAAP OPERATING LOSS TO NON-GAAP OPERATING INCOME (LOSS)
(unaudited, in thousands, except percentages)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
GAAP loss from operations | $ | (1,568 | ) | $ | (1,734 | ) | $ | (25,256 | ) | $ | (11,225 | ) | |||
GAAP operating margin | (2.6 | )% | (2.8 | )% | (14.8 | )% | (6.2 | )% | |||||||
Non-GAAP adjustments: | |||||||||||||||
Stock-based compensation | 2,333 | 4,545 | 13,055 | 13,824 | |||||||||||
Amortization expense related to acquisition | 253 | 253 | 758 | 758 | |||||||||||
Litigation and investigation expense | 1,531 | — | 9,031 | — | |||||||||||
Non-GAAP operating income (loss) | $ | 2,549 | $ | 3,064 | $ | (2,412 | ) | $ | 3,357 | ||||||
Non-GAAP operating margin | 4.2 | % | 4.9 | % | (1.4 | )% | 1.9 | % | |||||||
ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 1 | Page
Thank you all for joining us today. This call is being recorded and webcast live and may be accessed for one year via the A10 Networks website, www.a10networks.com. Members of A10's management team joining me today are, Lee Chen, Founder & CEO; Tom Constantino, CFO; and Chris White, EVP of worldwide sales. 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 2018 financial results. Additionally, A10 published a presentation along with its prepared comments for this call and supplemental trended financial statements. You may access the press release, presentation with prepared comments, and trended financial statements on the investor relations section of the company’s website www.a10networks.com. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 2 | Page
During the course of today’s call, management will make forward-looking statements, including statements regarding our projections for our future operating results, our ability to transform our sales team, our expectations regarding future opportunities and our ability to execute on those opportunities, our expectations for future revenue and market growth, the development and performance of our products, our current and future strategies, our beliefs relating to our competitive advantages, our expectations with respect to the 5G market, our ability to penetrate certain markets, anticipated customer benefits from use of our products, expected product launches and the general growth of our business. These statements are based on current expectations and beliefs as of today, October 30, 2018. 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 disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-Q and 10-K. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 3 | Page
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. We will provide our current expectations for the fourth quarter of 2018 on a non-GAAP basis. However, we are unable to make available a reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis due to high variability and low visibility with respect to the charges, which are excluded from these non-GAAP measures. Before I turn the call over to Lee, I’d like to announce that on November 16th at 8 AM pacific time, management will host a Tech Talk and Q&A session for investors and analysts to discuss 5G and the Need to Auto Scale, Auto Protect and Automate the Network. Now I would like to turn the call over to Lee Chen, Founder and CEO of A10 Networks. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 4 | Page
ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 5 | Page
Thank you, Maria and thank you all for joining us today. The A10 team delivered solid results in the third quarter. Building on the highest second quarter in our history, we delivered revenue of 60.5 million dollars in the third quarter, exceeding the high-end of our guidance range. We also delivered a total non-GAAP gross margin of 78.8 percent and on the bottom- line generated non-GAAP EPS of 3 cents. Our performance in the quarter was led by our security portfolio, strong growth with our large cloud customer combined with our sharpened focus on execution. CFW and TPS were strong during the quarter. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 6 | Page
In the quarter, we continued to execute on our initiatives to transform our sales team and improve our execution. Earlier this year, we made a number of important changes to reorganize and energize our global sales team. While it is still early in our sales transformation, we are pleased with the initial results of our efforts. In EMEA, which is a region where we have historically not had strong performance and recently changed leadership, we were especially pleased to see product revenue more than double sequentially. We are also seeing good progress in APAC, where product revenue grew nearly 50 percent year-over-year. We are building a culture to win in our selected markets and have an enhanced focus on new business. Our sales team did a terrific job driving sales into a number of new accounts and we are building a strong funnel of opportunities for our 5G, Security, and Cloud solutions. In total, we added over 200 new customers in the quarter. We have more work ahead to continue transforming our go-to-market engine, but believe we are on the right path and remain confident in our strategy to grow our business. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 7 | Page
5G, Security and Cloud opportunities are large and growing for A10. We are focused on expanding our advanced suite of 5G, security and cloud solutions to address evolving trends in the market, including the growing cyber threat landscape and cloud-based applications. Our vision is to simplify application security by providing visibility and automated operations while reducing costs for our customers. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 8 | Page
We are building momentum in the market with our highly scalable and intelligent automation driven security solutions, and we are winning with our customers as we take a holistic approach. We achieved record product revenue for our Thunder CFW solution and sequentially nearly tripled our product revenue for our Thunder TPS solution. Security product revenue was over 40 percent of total product revenue in Q3, and we are seeing the momentum continue as we are experiencing healthy bookings growth in CFW and TPS. We are pleased with the strong traction we are building globally with our security solutions and we are well on the path to meet our goal for security product revenue to exceed 30 percent of our product revenue mix in 2018. Our security solutions continue to gain industry recognition. Our Thunder TPS was recently awarded the DDoS defense effectiveness certification by NimbusDDOS. Thunder TPS is the only DDoS solution in the market to receive this award. We believe this award along with the many others we have earned this year, demonstrate the power of our advanced innovations. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 9 | Page
A10’s Harmony Controller plays a strategic role in driving our vision in automated operations through prescriptive data analysis and machine learning. We continue to innovate and expand the analytic capabilities of our security offerings across our Harmony Controller platform. We recently released an upgrade that expands Harmony Controller’s connected intelligence capabilities through a new Harmony Controller App that supports A10’s enterprise SSL inspection solution. With this offering we provide a complete solution with new levels of control and simplified analytics to help businesses keep up with the rapid growth in encrypted traffic and ever evolving cyber threats. The Harmony Controller simplifies multi-site deployment and management, with detailed visibility and insights into application traffic. We believe A10 stands out competitively with these solutions due to their diverse range of security features designed to provide customers with greater performance, scalability and reliability in managing the delivery and security of their applications. Harmony Controller is one of our growing number of products offered on a subscription basis and it is helping us to build a strong pipeline of opportunities to drive more software subscription revenue. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 10 | Page
5G is the evolving market that I am most excited about. 5G will be large, global, and significant. We have been hard at work making advances across our entire product portfolio to win in 5G. The planned scale of 5G networks around the world represents a new era of high-speed connectivity and a dramatic transformation in mobile services. Beyond faster speeds, 5G will drive new applications in IoT, autonomous vehicles, telemedicine, robotics, and smart factories and cities. To enable the true vision of 5G, the industry will require massive scale, real-time data transmission and automation, which means we have to increase the reliability, reduce the latency in the 5G network and provide centralized management with machine learning. With existing 4G networks, the Carrier Grade NAT, firewall, ADC, DDoS, deep packet inspection and other elements have been traditionally provided by a variety of vendors. This heterogenous approach creates complexity and latency, all the things you do not want in emerging 5G Networks. A10’s 5G-GiLAN solution consolidates all these network security and application capabilities into one single platform. We deliver lower latency, operational efficiency, better security and lower total cost of ownership. On top of this, our Harmony Controller adds deep analytics and machine learning which provides service providers the ability to manage and troubleshoot all these functions from a single pane of glass. A10's 5G-GiLAN solution is the only converged solution currently on the market that provides carrier-grade scale and comprehensive application and network visibility through Harmony Controller. This synergistic approach drove our major expansion win during the quarter with a Japanese mobile operator, one of the most progressive carriers leading the charge in 5G. Our strong 4G installed base of service providers provides us with an advantage as we bring our 5G ready products to market with Harmony Controller. While it is still early, we are having very good discussions with carriers in Asia and Europe regarding their 5G plans; stay tuned for more to come. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 11 | Page
Before I pass it to Tom, I want to highlight a few recent customer engagements that show how A10’s solutions are helping secure and improve the performance of networks and mission-critical applications: • A next generation Managed Security Service Provider based in Europe that ensures high availability of its customers' assets by protecting them against high scale DDoS and cyber threats, was looking for a highly scalable and reliable DDoS defense solution and chose A10's Thunder TPS. A10 provided the best performance with the smallest footprint, which was a key selling point for this customer. Moreover, A10's open API allowed this customer to build their own fully customized Service Dashboard on top of our technology. • Following a competitive bake-off, a leading automotive component supplier based in Japan selected A10's Thunder CFW with SSLi to augment their existing Cloud proxy solution to improve the user experience and secure their Office 365 environment. A10’s solution was selected because the customer saw immense value in the ability to manage and troubleshoot these functions from a single pane of glass, and found our Harmony controller platform extremely reliable and easy-to-use. • A financial agency of the U.S. Government chose A10's Thunder CFW with SSLi to provide a security blanket in front of its next-generation application firewall by decrypting, inspecting and re-encrypting incoming traffic. Our solution's speed and ability to quickly scale up will help strengthen this customer's security posture against cyberthreats hidden in encrypted data and meet their compliance requirements. In summary, we are pleased with our improved execution and the initial results we are seeing from our sales transformation. Our product portfolio is strong and we have more enhancements coming. We are excited about the momentum we are building in the market and the many technology advancements that materially matter to our customers. We have a clear strategy and are hyper-focused on maximizing our opportunities in the fast-growing areas of security, 5G and cloud. With that, I’d like to turn the call over to Tom to review the details of our third quarter financial performance and fourth quarter guidance. Tom? ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 12 | Page
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Thank you Lee. Third quarter revenue was 60.5 million dollars, compared with 62.0 million dollars in the same period last year. We grew deferred revenue 5 percent year-over-year, to reach 94.9 million dollars. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 14 | Page
Third quarter product revenue was 38.3 million dollars, representing 63 percent of total revenue, and service revenue was 22.2 million dollars, or 37 percent of total revenue. This compares with product revenue of 40.4 million dollars or 65 percent of revenue and service revenue of 21.6 million dollars or 35 percent of total revenue in Q3 of 2017. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 15 | Page
From a geographic standpoint, third quarter revenue from United States was 27.0 million dollars, compared with 29.0 million dollars in Q3 of last year. Third quarter revenue from Japan was 14.0 million dollars, compared with a record 16.6 million dollars in Q3 of last year. Third quarter revenue from APAC, excluding Japan, was 9.3 million dollars, up 30 percent year-over-year. Third quarter revenue from EMEA was 8.1 million dollars, representing a 33 percent year-over-year increase. Revenue from LATAM was 2.0 million dollars, compared with 3.1 million dollars in in the same period last year. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 16 | Page
Enterprise revenue grew 21 percent year-over-year to reach 35.8 million dollars, or 59 percent of revenue. We had one cloud customer that contributed 15 percent of total third quarter revenue. Service provider revenue was approximately 24.8 million dollars, or 41 percent of revenue. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 17 | Page
As we move beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless stated otherwise. We delivered third quarter total gross margin of 78.8 percent, an increase of 20 basis points from last quarter and up 50 basis points from Q3 of last year. Third quarter product gross margin was 77.1 percent, an increase of 20 basis points from last quarter and up 10 basis points from Q3 of 2017. Our improvement in gross margin was driven by geo mix, which always plays a factor, as well as a higher mix of software and security revenue. Services gross margin came in at 81.8 percent, flat compared to last quarter and up 100 basis points compared to Q3 of 2017. We ended the quarter with headcount of 875 compared with 855 at the end of last quarter. Non-GAAP operating expenses came in at 45.1 million dollars, compared with 45.3 million dollars in the prior quarter. Non-GAAP operating income was 2.5 million dollars, compared with 2.4 million dollars in the prior quarter. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 18 | Page
Non-GAAP net income for the quarter was 2.3 million dollars, or 3 cents per diluted share, compared with 2.6 million dollars, or 3 cents on a fully diluted per share basis in Q3 of last year. Diluted and basic weighted shares used for computing non-GAAP EPS for the third quarter were approximately 74.9 million shares. Moving to the balance sheet, average days sales outstanding were 78 days, up from 75 in the prior quarter. At September 30, 2018 we had 123.6 million dollars in total cash and marketable securities, compared with 127.4 million dollars at the end of June. ATEN – Q3 2018 Financial Results Conference Call – Tuesday, Oct. 30, 2018 19 | Page
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