A10 Networks, Inc. (ATEN) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the A10 Networks Second Quarter 2026 Financial Results. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Tom Baumann of FNK Investor Relations. Tom, the floor is yours.

Thank you, and thank you all for joining us today. This call is being recorded and webcast live and may be accessed for at least 90 days via the A10 Networks website 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 second quarter 2026 financial results. Additionally, A10 published a presentation, supplemental trended financial statements. You may access the press release, presentation and trended financial statements on the Investor Relations section of the company's website. During the course of today's call, management will make forward-looking statements, including statements regarding projections for future operating results, demand, industry and customer trends, macroeconomic factors, strategy, potential new products and solutions, our capital allocation strategy, profitability, expenses and investments, positioning and our dividend program. These statements are based on current expectations and beliefs as of today, August 5, 2026. 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 may have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's website at www.at10networks.com. Now I'd like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks.

Thank you, Tom, and thank you all for joining us today. A10 continues to deliver top and bottom line growth driven by the increasing relevance of our platform to the demands of next-generation networking. From our foundation in advanced traffic management solutions to our more recent focus on integrating security in all our offerings, we have built exactly the platform that today's customers need to address the host of challenges impacting their operations. AI is creating new challenges for customers across the industry, greater traffic volume, expanding security threats and the need for lower latency. Our focus on next-generation networking, which combines advanced application management with integrated security represents the future of A10 and increasingly, the standard our industry is being held to. Subsequent to the quarter, we announced a significant expansion of our relationship with Microsoft. This agreement reflects a shared commitment to a long-term partnership with mutual performance commitments on both sides. As a result, we are more firmly aligned with the long-term road map of this industry leader. It also serves as a powerful validation of A10's relevance to the customer and market and speaks to the depth of the relationship we have built over multiple years. We also continue to advance our product road map. In June, we acquired TrojAI, an AI security company that helps organizations secure, test and govern AI applications and agentic workflows. This acquisition adds 2 layers to our platform, Red Teaming, which uses AI to probe models and agents for vulnerabilities that build time as well as real-time protection at run time. We generated 15.5% revenue growth in the second quarter on a year-over-year basis and 14.5% growth year-to-date. This marked our fourth quarter of double-digit growth in the last 5. And as a result, we have increased our full year outlook to 12% to 14% for the full year versus previous guidance of 10% to 12%, reflecting continued confidence in the demand environment ahead. AI continues to erase the distinction between how enterprises and service providers build their networks. Today, enterprises and service providers face the same workloads, performance demands and security requirements. We have built our platform for exactly this world, one architecture, one operating model, one security framework across both segments. Through this period of improving demand, our operating discipline has remained constant. We balanced targeted investment with EPS expansion, and we delivered on both goals in the second quarter. Our goal is to convert growth into profitability and cash while continuing to invest in the technical capabilities this demand environment requires with earnings per share growth exceeding revenue growth, and we remain on track to do just that. With that, I'd like to turn the call over to Michelle Caron, our Chief Financial Officer, to review the numbers in more detail.

Thank you, Dhrupad. As a reminder, 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 are provided in our press release and on our website. Let me now turn to the results. As Dhrupad noted, Q2 results were aligned with our business model goals. We delivered revenue growth of 15.5% to $80.1 million. Year-to-date, our revenue was $155.1 million, an increase of 14.5%. Turning to mix. Product revenue in the second quarter was $49 million or 61% of total revenue, while service revenue was $31.1 million or 39% of total revenue. From a product mix perspective, security-led revenue continues to drive product revenue growth and meet our long-term goals as a percentage of total revenue. From a vertical perspective, enterprise customers represented 60% of Q2 revenues. On a trailing 12-month basis, enterprise represents approximately half of total revenue, in line with our previously stated corporate goals of driving balanced growth. Service provider spend in the Americas has begun to normalize. EMEA service provider demand was impacted by the geopolitical environment, while Japan within our APJ region continues to experience macroeconomic pressures that are impacting spending cycles. We remain confident that our service provider relationships around the world remain a strong foundation for continued growth within international markets. Both verticals align with our strategy and reflect the strength of our offerings supporting AI infrastructure build-outs. From a geographic perspective, our Americas region represented 68% of global revenue. This reflects our deliberate focus on the Americas as a growth region, driven by AI infrastructure build-outs and strength in the enterprise market. Non-GAAP gross margin was 80.3%, in line with our stated goals. Operating expenses were $43.9 million as we continue to prioritize investments in AI-facing innovation, next-gen networking and security. Operating margin was 25.5%, resulting in net income of $18.7 million or $0.26 per basic and $0.25 per diluted share compared to $0.21 in the year ago period. Q2 diluted weighted share count was 75.7 million shares. We generated $26.9 million in free cash flow in the quarter as the Q1 items -- as the Q1 timing items we noted recovered as expected. On a year-to-date basis, free cash flow was $26.2 million. We continue to expect full year free cash flow to grow year-over-year from approximately $65 million in 2025. Adjusted EBITDA was $25.4 million, 30.5% of revenue, consistent with our business model goals. Turning to the balance sheet. Cash and marketable securities were $357.3 million as of June 30, and deferred revenue was $154.8 million. We continue to return meaningful capital to shareholders. During the quarter, we paid $4.3 million in cash dividends and repurchased $2.4 million worth of shares, returning a total of $6.7 million to shareholders. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on September 1, 2026, to shareholders of record on August 15, 2026. The company has $53 million remaining on its $75 million share repurchase authorization. Consistent with the industry, we continue to navigate cost and delivery challenges related to the supply chain. Customer satisfaction and on-time delivery remain our top priorities and the strength of our business model gives us the confidence to raise our EPS outlook even as we navigate near-term cost dynamics. I'll now turn the call back to Dhrupad for an update on our 2026 outlook and closing comments.

Thank you, Michelle. A10 continues to strengthen its position as a partner of choice for next-generation networks, and we are positioned to benefit from multiple durable secular catalysts. We continue to invest to enhance our position across our portfolio while preserving profitability and shareholder returns. Based on the results through 6 months and our visibility ahead, we are increasing our full year 2026 outlook. We now expect 2026 full year revenue to increase by 12% to 14% on a year-over-year basis, up from 10% to 12% and EPS growth of 14% to 16%, up from 12% to 14% previously. Operator, you can now open the call up for questions.

[Operator Instructions] Our first question is coming from Gray Powell of BTIG.

Congratulations on the really strong set of results.

Thank you.

Okay. So on product revenue growth, it's consistently been strong. It's the last 18 months, 25% growth in Q2 versus a tough comp last year. I thought that was particularly impressive. Can you maybe talk about how the drivers of growth on the product side have been changing this year versus last year? And then just how should we think about the duration of the spending cycle that you're currently benefiting from?

Yes. No, great question. And I think as we have said before, when we get new customer or new business, product revenue is the lead indicator. And relative to your question, Gray, 2 things, right? So A, over the last several quarters, we have spoken about things that we are strengthening on the commercial side and the product side to be able to better address and win opportunities, including in the enterprise segment, right? So that's one aspect of where as we get new business, the product growth is the lead driver and grows faster than service at that point. Second, I would say, is as we have continued to engage customers with longer-term road map and solutions related to what they can do with AI when they actually deploy it in the next 2, 3 years, that has also naturally led to broader conversations with other products that they could be engaging with us today while they do that. So, I think those 2 dimensions have helped us kind of drive that product growth a little bit more substantially. And our goal is obviously to continue to maintain that as much as we can.

Okay. That's really helpful. And then just, I guess, it's a related question. The last quarter, you called out some pull-forward dynamics with your largest customer. So, I guess I was a little bit surprised to see product growth accelerate in Q2. Can you maybe just talk about what surprised you the most in the quarter? And was there any similar pull-forward dynamics in Q2 to what you saw last quarter?

Yes. No, fair point. And I think maybe a minor subtlety there, right? So the pull-forward dynamic was not sort of a relocation of demand. It had more to do with supporting a significant project that had a time line that needed to be completed. So when I look at Q2, similarly, I would say, right, we continue to balance the customer needs and deployment needs. But there's no concern that this is demand from outer quarters that's coming into the period, if that's helpful.

And our next question is coming from Christian Schwab of Craig-Hallum Group.

Great quarter and outlook. Can you just give a better description and discussion on the growth drivers, which appear to be a large degree of increased traffic that is going through the network, in particular, through enterprises as AI adoption is accelerating. And is that also part of the expansion of the Microsoft relationship? And in addition to that, as more and more traffic becomes localized on the enterprise and as enterprise deploy specific AI applications that they run dedicated on their networks versus going to the cloud? Should we think of that as a meaningful growth driver for you over time?

Yes. No, great question, Christian. So I think I'll maybe talk about that in 3 parts, right? So first, as you mentioned, right, our approach is around the notion of helping whatever type of company uses the product that when there is more traffic, more complicated traffic and people are worried about latency, that's a good fit for our solutions independent of what exact application may be. So certainly, the growth in traffic driven in some part due to AI, which is much more burst traffic, high-volume traffic and different than what we used to see. It results in 2 parts. One is just managing that traffic efficiently and with low latency. And second is dealing with the new kinds of threats that arise because of the use of AI by not even enterprise, but by everybody on the network. So that is certainly one of the drivers. And I would say we see that as kind of a sustainable thing for several years because it's related ultimately not to who's building how many data centers, it's linked to our people using AI, right? And I think we all can answer that for ourselves. So that's clearly one of the drivers. Second, I think you talked about Microsoft. And obviously, we have been partnered with them, and it's been a great customer for us for a long period of time. The expansion is that over the next couple of years' time frame, again, we are more and more aligned on the road map that as they build out their own architecture and infrastructure that we are continuing to be embedded with them in broader areas than we used to before, right? So, it's continuing to expand that. At the same time, obviously, we are very focused on ensuring we do our part to help them continue to be successful. So that's simply kind of a reflection and joint commitment from both sides that we want to make it work for an extended period of time, and this is just a reflection of that. And ultimately, it has to be that we have to deliver the right technology they need, and we are obviously focused on that from a technical point of view. The last point you mentioned actually is an interesting one. So I would say this is not a big demand driver immediately, but certainly, in the next 2 to 3 years, as you see in the news, a large enterprise, particularly chooses to do sometimes their own models or because of sovereign AI reasons outside of U.S. as well, they choose to do actually more things on-prem than even in the cloud. Our solution can go across all of that. So as we see uptake in the next 2, 3 years with enterprise doing more AI, like inference AI and generally, the large ones preferring to do their own, we see that obviously as a strength for us, again, based on the nature of our solution and the ability that we have maintained how we deliver these capabilities in any kind of form factor.

Great. I just have 1 more question. Regarding your first sustainable growth driver as more complicated traffic and latency is security threats are a huge issue. Your success there, can you just remind us who your first or second biggest competitor for those products are?

I think -- so I think there's 2 class of people that we would compete with, right? So one is traditional companies that deliver infrastructure products, obviously, are also trying to add similar capabilities. So that would be 1 category of that, right? And I would say, though, the way we are approaching it, we try to do it based on our differentiation. So we believe we can be competitive. The second part of that is, which is an evolving market is because of the nature of funding, there is a lot of small and start-up companies that is trying to compete in those slots. But ultimately, I think the -- one of the factors that plays into it is, would you trust -- if you're a large bank, "Would you trust your data to an AI with a 6-person team, right?" So I think -- and if you do, then the technology has to be really, really good. So I think the balance for us is we overlap with both. The direct competition, I would say, though, would be with companies that do networking and infrastructure, trying to add on AI products and capabilities.

And our next question is coming from Hamed Khorsand of BWS Financial.

So first off, were there any prebuy requirements on the part of Microsoft for the expanded relationship? And how are you going to manage the business given that Microsoft is so large of a percentage of revenue at this point?

Yes. So I think the agreement that we have is linked to more their demand and us working jointly with them in a much more longer time frame. So there's no prebuys or anything like that. It's very much aligned with their business needs, rollout forecast and us being much more operationally intertwined than before as well as the product side. The second part of your question, Hamed, I would say is if you put aside that and maybe where 1 or 2 countries where there's macro issues, our overall business, excluding those factors is also growing close to double digits, right? So, it's not that this is the only place that is growing. So, our objective continues to be to increase our relevance more and more in enterprise, obviously, including cloud and AI as well as maintain durability where we should also benefit when service provider CapEx rebounds and does better, right? So, we are not loosing those slots. We are maintaining those positions. But obviously, we are taking advantage of the current spending profile of customers by quarter.