A10 Networks, Inc. (ATEN) Q4 2014 Earnings Report, Transcript and Summary

Please standby, we are about to begin. Good day, everyone. And welcome to the A10 Networks' Fourth Quarter 2014 Financial Results Conference Call. Questions will be taken at the end of the presentation. [Operator Instructions] Today’s call is being recorded. At this time, I would like to turn the call over to Maria Riley. Please go ahead, ma'am.

Thank you, Elizabeth, and thank you all for joining us today. I am pleased to welcome you to A10 Networks fourth quarter and year 2014 financial results conference call. This call is being recorded and webcast live and may be accessed for 90 days via the A10 Networks website, www.a10networks.com. Joining me today are A10’s Founder and CEO, Lee Chen; A10’s CFO, Greg Straughn; and A10’s VP of Global Sales, Ray Smets. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its fourth quarter and year 2014 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 Investor Relations section of the company’s website www.a10networks.com. During the course of today’s call, management will make forward-looking statements, including statements regarding our projections for our first quarter operating results, our expectations for future revenue growth and improved operating margins and the growth of our business generally. These statements are based on current expectations and beliefs as of today, February 10, 2015. A10 disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. 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. We disclaim any obligation to update these forward-looking statements as a result of future events or otherwise. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-Q filed on November 7th. 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. 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 first quarter of 2015 on a non-GAAP basis. However, we will not 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 management will present at the Morgan Stanley Technology, Media & Telecom Conference on March 3rd in San Francisco. Now I’d like to turn the call over to Lee Chen for opening remarks. Lee?

Thank you, Maria. I would like to thank you all for joining our fourth quarter financial results conference call. Overall, the team executed well during the quarter. We delivered revenue of $45.2 million, slightly above the high end of our guidance of $41 million to $45 million. Our deferred revenue grew 12% sequentially and 39% year-over-year. Our non-GAAP gross margin rebounded to 77.2% from 73.6% last quarter. We reported a non-GAAP net loss of approximately $12 million or a loss of $0.20 per share, in line with our guidance of $0.14 to $0.20 per share. Looking at our topline results, service provider spending improved sequentially in North America. However, we are maintaining our near-term cautious view for the service provider vertical. In the enterprise, we continued to make progress in expanding our presence by both landing new accounts and expanding within our existing customer base. Sequentially, enterprise revenue declined approximately 11%, reflecting a longer sales cycle for large deals, while our enterprise pipeline continued to grow nicely, and overall, our win rate for the quarter increased. In total, we added over 280 new customers in the quarter and we now serve approximately 3,900 customers. A few fourth quarter customer engagements, I would like to highlight include, a hosting services provider selected our Thunder TPS solution to protect their customers from the ever-increasing number of DDoS attacks. In this network, we are replacing a longstanding incumbent and beat several vendors in a bake-off. Our deep packet inspection capabilities and superior performance were key factors to expanding our footprint within this existing customer’s network. A large international financial institution that is building a new data center selected our Thunder ADC for server load balancing and DDoS protection. Following a security breach, a domestic government agency deployed our Thunder ADC for advanced SSL Insight, extending their security capabilities. And an internet content provider based in Japan purchased our newest Thunder 100-gigabit solution for a critically important part of their network. This customer needed a very high performing ADC for layer 4 to layer 7, SSL offload and CGN. All in all, the fourth quarter shaped up as we expected generally and although, 2014 had its challenges. During the year we believe we made solid progress toward executing our strategic plan. A few of our notable accomplishments for the year include, growing our team by 20% and our customer base by 34%, adding nearly a 1,000 new customers; growing our 2014 revenue by 27%, well above the growth of our market; growing our annual revenue in U.S. by 25%, in China by 43%, and in EMEA by 59%; growing our enterprise revenue by 30%; expanding our security solutions with the launch of TPS and several advanced ADC security features such as SSL Insight, advanced cryptographics and enhancements to our application access management and Web Application Firewall capabilities; enhancing our firewall and DDoS capabilities in our CGN solution; and increasing our channel engagement programs resulting in a 33% increase in channel led deals since the beginning of 2014. These results were made possible by the hard work of the A10 team and by the power of our ACOS platform, which we continue to evolve and expand. In late Q4, we launched ACOS 4.0, our most significant release since ACOS was first introduced. Our newly released platform has open standards-based programmability, enhanced application support and manageability that enables important advanced features such as SSL Insight, Web Application Firewall and Application Access Management. ACOS 4.0 also includes A10 Harmony, an architecture that enables rapid SDN and NFV integration for enterprise, cloud, and service provider networks. The ACOS platform is the foundation for A10 to expand our current product offerings including new functions and modules for our Thunder ADC as well as to move into new product areas. Leveraging the advanced policy engine in ACOS 4.0, we released Thunder TPS 3.1, which includes a fully programmable policy engine, new advanced DDoS mitigation capabilities and granular Layer 4-7 control to enable best-in-class mitigation. The release of TPS 3.1 five months after our initial TPS product demonstrated our ability to leverage new programmability in ACOS across our solution platform to bring new modules and functions to market quickly. We also recently announced the integration of our Thunder ADCs with the Cisco ACI fabric, enabling enterprises to automatically and quickly provision application delivery and security services in a shared infrastructure. The combined solution integrates more advanced A10 Thunder ADC and security functionality such as service chaining, Web Application Firewall, SSL Insight and GSLB with Cisco ACI. Our high performance Thunder product suite continues to gain momentum in the market driven by our high performance, SSL and security features as well as our ability to integrate with other leading-edge networking and security providers. A10 addresses some of today’s most critical application and security challenges. As cyber attacks grow in size and sophistication, the manageability, scalability and flexibility of the network becomes even more important. Our ACOS based Thunder platform enables open, programming interface with the ability to easily scale from megabit to terabit of throughput and delivers two to five times the performance of our competitors. We remain optimistic about the opportunities we see ahead. Looking into 2015, we will focus on leveraging the significant investments in our engineering team, technology platform, and go-to market activities that we made last year. Our goal is to continue to build on this foundation in order to drive the topline growth while improving our operating margin. We remain confident in our ability to grow our business, capitalizing on our competitive advantages, expanding our strategic partnerships, and continuing to strengthen our technology leadership. With that, I’d like to turn the call over to Greg to review the details of our fourth quarter financial performance and the first quarter guidance. Greg?

Thank you, Lee. I thank all of you for joining us today. Fourth quarter revenue grew 7% year-over-year and 4% quarter-over-quarter to $45.2 million. Our full year revenue was $179.5 million, up 27% from 2013. Fourth quarter product revenue totaled $32.3 million, down 3% from the prior year and up 2% from Q3, representing 72% of fourth quarter revenue. Service revenue was $12.9 million, up 47% year-over-year and 9% from Q3, and accounted for 28% of revenue. Deferred revenue grew 39% year-over-year and 12% sequentially, reaching a record $57.2 million, driven primarily by the strong growth in our installed base and our end customer count. In total, fourth quarter revenue from the United States was $20.5 million, representing approximately 45% of fourth quarter revenue. This compares with $20.4 million in the third quarter and $20.6 million in the fourth quarter of 2013. Fourth quarter revenue from Japan represented 22% of total revenue and grew 19% year-over-year and 2% on a sequential basis, despite a 10% sequential and 14% year-over-year decrease in the yen. Revenue from APAC, excluding Japan declined 9% year-over-year and 13% from Q3, representing 12% of revenue. Sales generated from EMEA reached a record high of $6.2 million, an increase of 14% over Q4 of the prior year and 27% over Q3 and represented 14% of total revenue. Our enterprise and service provider revenue split this quarter was 52% and 48% of total revenue respectively. Revenue from enterprise customers totaled $23.5 million, a decline of 11% from the prior quarter and 8% below Q4 2013. Service provider revenue was $21.7 million, rising 27% from the prior quarter and 30% from the fourth quarter of 2013. Moving beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless expressly stated otherwise. We delivered a fourth quarter total gross margin of 77.2%, up 363 basis points from Q3. Services gross margin came in at 77.2%, a decline of 11 basis points compared with the prior quarter. And as expected, our product gross margin rebounded to 77.2%, compared with the 72.2% margin we reported last quarter. We ended the quarter with staff of 759, relatively in line with Q3 and up from 630 at the end of Q4 last year, an increase of 20.5%. In Q4, sales and marketing expense was $24.9 million, compared with $23 million in Q3. This increase was partially driven by the end of year sales commissions and bonuses, as top performing sales staff exceeded their quotas. On a percentage basis, sales and marketing expense was 55% of revenue, as we continue to grow our sales and marketing team to further build and expand our reach. In Q4, R&D expense totaled $13.1 million or 29% of revenue, compared with $11.2 million and 25.8% in Q3. Fourth quarter combined G&A and litigation expense was approximately $6.8 million or 15% of total revenue, compared with $5.6 million or 13% of revenue in Q3. This increase was primarily related to additions to our bad debt reserve, in some of our international regions. In total, fourth quarter non-GAAP operating expenses were $44.7 million. Fourth quarter non-GAAP operating loss was $9.8 million, compared with $7.8 million in the third quarter. Our non-GAAP net loss in the fourth quarter was $12 million or $0.20 per share, compared with a net loss of $8.8 million or $0.15 per share in Q3. The depreciation in the yen during Q4 negatively impact results by $1.6 million or approximately $0.02 per share. Basic and diluted weighted outstanding shares for the quarter were approximately 61 million shares. Our non-GAAP net loss for the year was $29.3 million or $0.51 per share, compared with a non-GAAP net loss of $15.5 million in 2013 or $0.31 per share. Moving to the balance sheet, at December 31, 2014, we had $91.9 million in total cash and equivalents. During the quarter, cash used for operations was $17 million, reflecting an $11.5 million increase in accounts receivables from the prior quarter. Combined Cash plus AR was down $3.7 million, compared to $3 million in Q3. We ended Q4 with $54 million of net accounts receivable, compared with the Q3 ’14 balance of $42.5 million. Average days sales outstanding were 96 days, up from 86 days in the prior quarter. The majority of this increase was driven by a large amount of maintenance renewals in the month of December. These amounts are reflected in AR, but revenue is recognized over 12 or more months. Moving on to our outlook, to establish our Q1 guidance, we are balancing our strong Q4 bookings, backlog carried into Q1 and our growing pipeline with normal seasonality in North America and appropriate conservatism related to the service provider vertical. We therefore, expect first quarter revenue to be in the range of $41 million to $45 million. On the income side, we expect operating expenses in Q1 to be roughly flat to Q4 and therefore, expect to report a non-GAAP net loss of between $0.18 and $0.23 per share using approximately 61 million shares on a basic and diluted basis. In studying this, we are assuming a yen exchange rate in the range of $1.18 to $1.20. With that, I’d like to open the call up to your questions. Operator?

Thank you. [Operator Instructions] We’ll go first to Ittai Kidron with Oppenheimer. Please go ahead.

Thanks. Greg, the last quarter when the enterprise slowed down, the large deals slowdown, I think that was understandable. Can you give us a little bit more color? Maybe you can jump in as well, Ray. What you see in the field as far as any changes to that. Do you have a much better color as to cause of the slowdown or the anticipation of recovery from the slowdown? And I assume that your guide assumes continued depressed sales cycles on the enterprise side?

Ray, why don’t you go ahead and start and I will clean up with the guidance piece after you’ve done that.

Yeah. Sure. Okay. Hey, Ittai. This is Ray. Well, just to give you a little bit of a broad brush on enterprise, obviously this area continues to be a very important part of our strategy going forward and we continue to actually make very good progress in the enterprise, landing new accounts as we just talked about, 280 new accounts in the quarter. Most of which were enterprise and also expanding in the customer base. What we are seeing is the deal volume actually is on the rise. We are seeing very nice and consistent flow of small or normal sized deals, not the big ones but the average sized deals in the quarter and they are closing. So that’s the good news. The sales cycles had been linked in on the larger deals in our pipeline as we just talked about. So even though the revenue decreased quarter-over-quarter, the pipeline continued to grow a little bit. Just to give you a little color on that, we talked a good bit about it last quarter. The large customers just typically take a little bit longer to close. As we move into the larger deal domain, POPS tend to take longer, feature focus tends to be a lot more diligent, both of which can increase the sales cycle. So the kind of -- the way I look at it is it’s just a competitive process. And obviously in a competitive situation as this, they can’t take extra time for customers, especially new customers to make decisions like this. Another way to look at it is, we are making more in-roads into that large enterprise market and we are bringing customers more of a choice they didn’t have before. So, we want access to those deals that we normally would not have access to because we want more add backs, so we can apply a high win rate. But as the enterprise deals get larger, we are seeing a lengthening in those sales cycles. But the good news is the enterprise platform actually looks pretty strong.

I guess one -- yeah, go ahead, Greg.

Go ahead, Ittai.

I guess when you talk about lengthening, it doesn’t sound like there is lengthening. It sounds like that’s the reality. It’s just by the whereby -- the fact that you are moving more into large deals that you are more exposed to them. But I’m just trying to understand if there is a change in the environment, or is there just a change in the customer profile, thus the overall profile of the sales cycle for the company is changing?

I think there is a little bit combination of the -- we are new to sell the customers. Also, they are some due to the deal we expect will close last quarter that push out into future quarters. So it’s the combination of both. The deal being push out and some, we are new to the customer. So that may take a little bit longer in the cycle.

Okay. And on the outlook on March, Greg, I’m just trying to think about sequentially the move from December into March. You didn’t really have much in the way of seasonality, certainly not on the enterprise side into December, so why should you have a seasonality down into March? And if I’m not mistaken, March, your Japan business historically is very strong in the March, as evident in the March of 14th and other first quarters of the year? Is there anything different this time around heading into this March quarter that makes you a little bit more cautious? I’m just trying to gage much of this is you being extra conservative versus there is something underlying here that we are not picking upon?

So in terms of factors that you just alluded to -- one of them is a key difference is coming into Q1 of ’14, we had a very sizeable backlog coming out of Japan. And so we saw strong revenue from them in Q1 but it was driven off of the backlog that came into the quarter. And so when we look at the guidance for this quarter, we are expecting to see seasonality in North America as typically being the case. But Japan because of its economy over the last couple of quarters, we are not expecting them to overcome that seasonality. So as we build guidance, we are looking at those two factors and adding the overlay to what Ray has just described on enterprise and then also we have the service provider issues that are kind of well-known out there. So, I think those elements taken together are how we get to the guidance number that we think is pretty appropriate for the Q1 environment.

Got it. Okay. Well, before you open the floor, can you just remind us what, how do you think about your FX exposures and what do you do from a hedging standpoint?

So for FX coming into Q1, our guidance is set under the assumption that the yen stays fairly flat at its current, somewhat depressed level, which is the $1.18 to $1.20. So basically what we are seeing today and not expecting it to weaken beyond that and we do not have a hedge in place to cover that position currently.

And in Europe, you are pricing dollars or local currency?

In Europe, we are pricing dollars. The only place we price in local currency is in Japan.

Got you. Very good. Good luck, guys.

Thank you.

Our next question will come from Mark Sue with RBC Capital Markets. Please go ahead.

Yes. Thank you, folks. This is Ameet Prabhu calling on behalf of Mark Sue. Maybe you could just start with the competitive dynamics. You highlighted higher competitive win rate. Is that overall or core ADCs or are we including the TPS side and sort of maybe you could talk about whom you are winning against?

This is Greg. I will start with the data side of that and then Ray can add color as appropriate. When we talk about win rate, we are not just aggregating that for discussion. So it’s across all products and across all markets. Having said that, when we do disaggregate internally, we don’t see great deviations from one products or one market to the other. But for us, it’s basically looking at the number of opportunities that we are introduced to or get ourselves into and of the ones that closed, how many did we win and how many did we lose. And so it’s pretty straightforward math for us. And the competitive dynamics are such that when we look across the competitive landscape, we see one competitive more than the others. But let’s say it’s a competitive environment out there. And I think that from a win rate perspective, we are seeing very consistent numbers from quarter to quarter and then this last quarter was moving upwards.

So in -- go ahead, Mark.

I am sorry. No, this is Ray. I was just going to add -- just as Greg mentioned, we are really not seeing a change in the competitive environment. We see competitors in all of our deals, but we haven’t seen any additional competitive pressures, that’s causing any change in discounting or pricing pressure.

Okay. And maybe just talking on the TPS side, it has been a few quarters out. Could you maybe talk about how many total deals you have won? And just wanted to also clarify how much TPS revenue was actually recognized and whether the changing ownership at one of your larger competitors in the DDoS space, are you seeing any benefit from that side?

I think it would be -- we continue to gain traction without TPS product during the quarter. We added several new customers within the quarter, but we do not disclose revenue by product. As I said earlier, we believe TPS will be a meaningful revenue contribution in 2015. We are seeing a good traction. Also the pipeline looks good.

Okay. And maybe just on the sales cycle, you talked about six deals in the last quarter that had not been closed and that was extended. Could you confirm that those deals did close? And just in terms of plans, there were plans for engineering investments, considering the long sales cycle. Now do you think that additional investments may be needed or do you expect sort of the existing resources to just ramp up in the upcoming quarters? And finally, just on the sales cycle, are you factoring in a lower closure rate for Q1, considering the sort of longer sales cycles on the enterprise side? Thank you.

That’s a lot of questions in sequence. I am going to try to remember them and if I miss one, remind me. The six deals that we referred to in the prior quarter were occasions where the closed cycle had been extended beyond the end of the quarter. So that’s different from a sales cycle process and the majority of those have closed as expected. And as we came into the end of Q4, we did not see issues with deals coming at the very end of the quarter and not closing as expected. So that issue, I won’t say resolved itself, but from some very heavy attention to it was much improved in Q4 and we expect it to remain -- we expect it to remain that same. From a sales cycle related to future development, we did close a significant number of deals and dollar amount of deals that had feature requests as part of their close or sales cycle in Q4 and made great progress in closing the gap there. There should not need to be incremental investment in that area other than the number of engineers that we have just doing that work on an ongoing basis. So there is still future work being done. There are certainly transactions in the current quarter where we are working on feature requests, but we feel we have a very firm handle on what their needs are, what the timing is, and the work that needs to be done to be successful in that area.

And just maybe on the -- whether you are factoring lower closure rates for 1Q considering the sales cycles?

I don’t think we are factoring lower close rates. I think that as Ray talked about and Lee mentioned on the enterprise large deals, those have just naturally longer sales cycles. And so we adjust the dates we think they are going to be done, so that part is reflected in guidance, yes.

Okay. Thank you.

Yeah. I think in Q4 we added a record number of new customers, 280, most of them are enterprise customers. Additional deals are the more closed deals. So every size deal closed nicely in Q4. It’s a large deal that got pushed out.

Okay. Thank you. And good luck, folks.

Thanks.

We will take the next question from James Faucette with Morgan Stanley.

Hi. You have Nida Marshall in for James. A couple of quick questions for you. Are you seeing the -- as you guys talk about lengthening in sales cycle kind of due to larger customers, are you seeing the average deal size go up? Second question related to the security business, are you seeing more interest kind of from the enterprise side or the carrier side? And do you kind of have a target kind of attach rate that you're hoping to get to of security uptake with kind of existing customers? And then a third quick one just on, are you planning or do you envision having to make any adjustment to the dollar prices in Europe just due to the weakened currency in the coming quarters?

This is Greg here. So again, we’ve got the three questions. The first on -- remind me, what was the first quarter?

Average deal size?

That’s right. So on average deal size, on the large end we do see it pushing up as we bring larger products to market. But the counterbalancing effect of that is as our challenge strategy has begun to work, they are able to go out and sell to smaller customers we would not necessarily be seeing ourselves. And so when we look at our channel deals, they have an ASP, our channel led deals. They have an ASP that is noticeably lower than our core ASP. And so when you look at those two in tandem in the course of the quarter, it keeps ASP actually fairly flat, although the diversity of that ASP is becoming broader.

Got it.

And the next, Nida I think your next question was on where we are seeing the interest on the security?

And security, yeah.

We are seeing security into both in the enterprise and service provider. For example, some of the advanced feature such as advanced cryptographics which we introduced last two quarters, we are seeing a lot interest from the government agencies, from enterprise customers and service provider. SSL Insight is another example of we saw the interest on both the enterprise and service provider. For the TPS, DDoS mitigation, today we are focused more on few large service provider and web hosting company. On the other hand, there are interests from the enterprise too. So we are seeing basically product interest from both the enterprise and service provider. The last question is…

And what was your last question, Nida?

So that one was just about whether you were envisioning having to make any dollar adjustment to prices in EMEA just due to the weakened currency?

No, I think the other tool can use to control the price, other than the price adjustment.

Great. Thank you.

Our next question today will come from Ehud Gelblum with Citi. Please go ahead.

Thanks. This is actually Stan Kovler dialing in for Ehud. I just wanted to start off with a question on 10% customers. In the past, you have had several, just to name a few, like in Japan NTT DoCoMo, Microsoft in the U.S., what were the trends there? And if you can just discuss, obviously if they were below 10%, whether business for those customers has been steady state or if there have been any changes under the 10% threshold. And then just to touch on the cloud side of the business and how you are doing with your virtual additions of your products, if we can get a handle on that, that would be great.

Yeah. I will start with the 10% piece and Lee can talk about the virtual piece. That’s a good question on the 10%, because in Q4 we did not have any 10% customers. All of the business was built up as we talked about from these the mid-tier enterprises and some slightly larger accounts, but no one customer was about 10%. And so as we talked in prior quarters about our desires and our efforts to have a more diversified customer base, we are seeing the fruit of that in Q4. As Lee talked really about, we had more a record number of customers, a large number of transactions and no big purchases. But when we look at the buying behavior of our top customers, of our top 25 customers, 24 of the 25 bought within the quarter. So it’s not that these customers left, it’s you’ve got two things, one is that our revenue, our quarter revenue is staying sizeable. So you have to be a larger customer to be a 10%, but also we are just seeing more dispersion across a broader group of customers on a quarterly basis. So we see that as actually ultimately a positive for creating both a predictable and therefore sustainable revenue stream.

I think your next question was on how we did on the cloud side and our virtual products?

Yes.

I think we have a fair amount of engagement with cloud provider in both the appliance and also in software version of the solutions. So today we have a all virtual solution running our popular hypervisor and customer can purchase our software with pay as you go pricing model. We also integrated our ADC solution, software solution with leading vendor such as Cisco and ACI, the VM and FX and also we have our solutions within the Amazon Marketplace. The ACOS 4.0, which is very significant release, with open program interface, we can easily integrate with a cloud SDN and NFV orchestration system. The other thing about the ACOS 4.0, we can quickly move into a new emerging market such as the current related bus in the industry about commercial off-the-shelf server solutions unless something we can leverage ACOS 4.0 to quickly move into it. And I clearly like our position, I definitely think we will see uptick in our virtual revenue for 2015.

Thanks. And if I could just follow up, it's more on the enterprise side. Was there a particular skew to the types of verticals that you were successful, more or less successful with, and specifically, the trends in the government vertical? Thank you.

Ray, do you want to answer that?

Yeah. I would say that Q4 looked a lot like the better part of 2014. We didn't see any particular skewing in any particular vertical, but we did see very good participation by the government vertical that you mentioned clearly in the Web 2.0 space, which is very strong for us and also in the financial industry sector.

Thanks.

We’ll take the next question from Rod Hall with JPMorgan. Please go ahead.

Yeah. Hi, guys. Thanks for taking my question. I just wanted to see, Greg, could you comment on the proportion of revenue from Japan in your guidance? Is it similar to last year, 37%, 38%, higher, lower, some kind of an idea on that? And then I've got a follow-up.

Okay. So we won’t break down guidance specifically by region. But the breakdown going forward would be more consistent with what we've seen over the last couple of quarters in terms of Japan's contribution versus what we were seeing a year ago.

Okay. So you'd be saying more like mid 20%s kind of contribution, something like that?

It would be more -- have been in the 35%, 40% that we had seen during a year ago, yeah.

Okay.

Yeah. If you look at a year ago in Q1 2014, Japan carry a huge backlog into Q1. That’s why the….

Right.

… on this, is anomaly like 37%, 38% ...

Right. Okay. Yeah.

… just not going to happen.

Okay. So I guess, the other question I have for you is, when you guys take -- so you build up your order book in yen for Japanese revenues, then I guess when you recognize the revenues you're always recognizing more or less as the spot rate. Is that correct? Or do you -- I mean, is there ever any sort of historical hedging in that order book or is it always at spot?

The order gets taken at spot. And there is an adjustment that comes about if when the payment gets -- so at the revenue level, its done at spot. What you see on the income statement and other income, other expense as the currency difference is what happens from that spot rate when you invoice the customer to the rate that’s in place when they actually make the payment. And if there is a rate movement within that period, that gets reflected down on the income statement. So there is kind of two levels of impact that you can see on the yen. So when I refer to the number of $1.6 million in Q4 as the currency impact, we saw about roughly $700,000 to $800,000 of that was revenue that was reduced versus our expectation going in the quarter but the spot rate been low -- yen been lower at the spot rate than it was anticipated during the quarter and then the realized loss of about $900,000 on the income statement was the difference between the spot rate when we booked the deal and the spot rate when they actually paid.

Yes. Okay. Got it. That makes sense to me. I guess, the final question I've got for you guys is the big picture, which is revenue growth 9% in Q3, 7% in Q4. It feels kind of like market sort of growth in the last couple of quarters. I think that if grew 11% in the December quarter, actually. So what should we be -- is there any guidance you give investors in terms of what they think about 2015 growth? I mean, are we -- should we be thinking high-single digits growth for this company? Do you guys think the potential for growth in 2015 is actually quite a bit higher than that and these numbers we've seen the last couple of quarters and in this guidance are sort of misleading in that respect? Can you just give us some idea what we should be thinking there?

I think if you look at the -- our 2014, our growth for 2014 is 27%, well above our market. We also talk about the end price investment. We made a lot of investment in our engineering, in our platform, in our go-to market activities. So we understand the sound investment will take time. There’s a lot of work to do. On the other hand, there are notable catalyst I think for the growth in 2015. TPS as I mentioned earlier. We expect TPS in 2015 will be a meaningful revenue. The ACOS 4.0 we said open programming interface in our policy engine. They will speed up the releases in terms of the bringing new function, new module, maybe new product into market. The ADC historically had been able to grow above the market growth in ADC. International expansion, if you look at our last year, the three regions we did really well is North America, we grew about 25%. In China, we grew 43%. In India, we grew 59%. I think on the international expansion, I think we have still have a lot of room to grow. So that’s another growth engine I think we have. The other thing, really leverage all the investments. We made significant investments in sales, marketing and engineering in 2014 and we plan to leverage that in 2015. So we do view A-10, I’d say continue to be a growth company. We are excited about the opportunity we have.

Okay. Thanks.

Our next question will come from Brent Bracelin with Pacific Crest Securities.

Thank you. Couple of questions for you Greg here and I’ll go one at a time.

Thank you.

First question is on DSOs. Clearly rose, I think above 100 days in the quarter. Could you talk about linearity in the quarter and then kind of backlog as you think about entering Q1?

So, linearity in the quarter was fairly difficult from most quarters. And the majority of the business is in the third month. We did see a better linearity within December than we typically see. But the thing that impacts the DSO most directly as it pertains to this quarter is that Q4, most particularly December is very heavy maintenance renewal time because historically, most deals get booked in Q4 and in December, their maintenance renewals coming to that period as well. And so you have this interesting affect of having a sizable invoice in AR into the quarter, but the revenue itself is going to get recognized over the next, 12, 18, 24 months and so its skews your DSO up a pretty dramatically. And I think that six to seven days of the DSO movement was specifically related to the maintenance renewal cycles. And so I think that was kind of the biggest news item on that particular line item.

Sure. Perfect. And then shifting gears, second question is really around service provider. It did look like on a sequential basis and year-over-year basis, you had a nice snapback in service provider orders. Was that all tied to just the timing of orders that slipped last quarter, or what drove the rebound in service provider in Q4 specifically?

I think some of those were deals that were pended out last quarter. And I think there was one or two that you could identify as being Q4 type of activity at a service provider during a little bit of budget flush. So, I think where that causes to be still remain cautious as we put guidance out for Q1, that we don't look at this and as they say in Britain, one swallow does not a spring make. And so, I think we look at it as a data point but not something that we just extend the line on.

Okay. Perfect. That’s helpful.

We do see a service provider customer both in North America and Japan. Our revenue was higher than what we expecting the quarters. But still you look at all product sale to a service provider, it's really a very quick part of their networks. And also traffic computing increase, at some point time, they were need to add capacity to their networks. So even though we have win on the come-back, at some point, I think, the business will bounce back, I just don’t know when.

Certainly. Timing is a big question there for the whole industry. Third question I have is really on product mix? I know you guys don't necessarily break this out, but as you think about TPS, CGN, ADC for the full year? Any of those categories, specifically TPS or CGN account for more than 10% of the mix of product revenue and any additional color you can provide there?

I think we don’t breakout the product revenue, but if you look at CGN, I think we said before, CGN has been a -- since the introduction has being a double-digit in terms of million dollar revenues, double-digit in terms of percentage of revenue. And we had a very high expectation for TPS in terms of the -- we don’t do product we believe is going to be a single-digit million dollars revenue. We don’t breakout as a standalone product.

Okay. So, it sounds like CGN was the double-digit kind of contribution this year, hopeful that TPS potentially could get there next year?

TPS in this year.

Okay.

I don’t know the double-digit, but in terms of the, we said, we don’t do product with a believe it will only be a double-digit revenue. So we don’t do it.

Okay. Fair enough. And then last question for you, Greg, is really on the outlook and trying to understand how much cushion you're giving yourself here in Q1. Japan, very tough compare with the backlog that you had last year, it looked like $17 million? If I assume kind of a typical mid 20% -- 22% kind of mix of revenue that you've seen in Japan the last couple quarters that puts it at about $10 million, which implies about a $7 million delta. So my question really is, ex-Japan, it looks like revenue needs to be up 15% or more to hit the midpoint of the guide range? What's your line of sight to getting there, to driving that 15% revenue growth ex-Japan? Is that enterprise? Is that North America service Provider? Help us kind of understand as you look at your pipeline, where that type of growth is going to come from to offset that tough compare in Japan.

So, well, I’ll describe to you the process by which we’ve built the guidance and you can hopefully find the answer to or at least pieces of the answer you are looking for within that. So, as we build up, we have got backlog coming into the quarter. So we have got line of sight on that piece of revenue. And I think, I don’t think we describe number will be in the K. So there will be about $6 million of backlog coming into the quarter. Now all of that’s product but we’ve got good line of sight on that and that’s both service provide and enterprise represented in there. Maintenance and support for the quarter just finished was $12.8 million. Maintenance and support goes up for us every quarter. So we have got line of sight on that piece. We have got the deals that we book so far this quarter. They seem to be kind of in the normal mix of service provider and enterprise of the deal flow that we see from enterprise. And then from there you start to look into the art of this. We certainly have both service provider and bread and butter enterprise business within the quarter as well as large enterprise. And I think that -- in Ray’s comments and Lee’s comments up to this point, we have kind of describe how we are looking at each of those individually, right. Some level of conservatism on service providers because of overall market dynamic that has affected their spending in general, counter balanced by the fact we are in a different of their network since a lot of these comps and so we know that at some point they are going to have to buy. So that effects how we look at that piece of it. The bread and butter enterprise, we continue to see grow quarter-over-quarter. That particularly element part has less seasonality built into it and some of the others. And then the large enterprise side, we’ve just -- we have got a very good handle on the features that we need to build and when we need to build them. But they still have to go to their decision process at the other end of it. And so that leaves us to not want to step too far out on a limb as pertains to that class of accounts as well. So we feel like the building blocks when you at them individually are very well understood. They are established. We have tried to aggressively learn from the past and lay those methods into this quarter. So that the kind of how we get there. I think it’s kind of up to each of you individually to determine if that’s aggressive, conservative or just spot on.

Okay. Very helpful color. Thank you, guys.

We will take the next question from Mark Kelleher with D.A. Davidson. Please go ahead.

Great. Thanks for taking the questions. Greg, just the bad debt reserve, I might have missed the numbers, but can you give me that number?

The after the quarter was roughly $700,000.

Okay. As we head into Q1, we won’t have that, hopefully, and we won’t have the sales commission accelerators from Q4? So I am kind of looking for the headwinds that are going to go -- that are going to make the cost flat from Q4 to Q1?

I don’t think it’s so much headwinds, but as we move into the quarter, this is when we do a fair amount of our sales hiring at this point of the year. It’s when we do -- we start to do programmatic sales comp or not sales comp, but compensation adjustment across the country. We are working on various projects internally. So there is no specific call out that comes in. It’s just a normal growth and investment that we are making in the business. So normally you would see the cost moving up from Q4 to Q1. We just got the accelerate on that because some of these items that we talked about, the bad debt reserve and the currency piece most exclusively.

In general, when you think we can see some positive operating leverage? I mean, we are going to have to continue some very high R&D investments and sales investments throughout this year or when do you think we can start growing that revenue faster than costs?

I think that the, our -- I think as Lee alluded to you in earlier that, the intent for this year is to do precise for that, is to grow our revenues faster than we are growing our costs. Does it happen in Q1, not necessarily, but clearly, the plan for the business is to do that over the course of the year. And the pace and rate of that is fairly dependent upon the topline and starting to get movement through some of things we have already put in place as we -- as the contributors for how revenues grows. But I think that, when we look at the operating expenses for the quarter completed. We were within range. When we look at kind of expectation for the year as a whole, our spent was very consistent with what the expectations we said early on and so the question becomes and with the thing that we kind of deal is part of our day job is to find that balance point between our revenue growth expectations and how we managed cost through the year. I think the reality is that balance point has slightly shifted into going into real world 2015 than if we would have said what that was six months ago.

Yeah. So if you look at our 2014, we increased our headcount in R&D by 24%, in sales and marketing by 23%. Definitely, in 2015, the objectives will be about how to deleverage the investment we made in 2014. The operating expense were not -- would be below our revenue growth. That’s our objective. And we will continue to invest in R&D and sales and marketing but just not as much as we did in 2014.

Okay. Thanks.

Thank you.

Our last question will be a follow-up from Ittai Kidron with Oppenheimer. Please go ahead.

Yeah. Thanks. I just want to follow up again on cost structure. So Lee, you’ve talked about the fact that you don’t have a -- you can’t really put your finger on the timing at which point all the investment start working and then revenue growth becomes much more. There is a clear path for revenue growth? Greg, you guys burnt a lot of cash in this fourth quarter and you’re talking about flat OpEx and to a large extent, somewhat of a flattish revenue outlook as well. How do you think about that line in sand at which you might want to consider cutting cost instead of not investing incrementally in cost or how do you think about it from either a timeline or a cash reserve point. Can you give us little bit some of your thoughts on the kind of checks and balances you have in place or the measuring sticks you have for yourself, placed in this upcoming year to figure out if you’re on the right track here or not?

Greg, maybe let me start and then I’ll let you answer. So if you look at the operating expense in 2014, it’s really in line with our business plan we said at the beginning of the year. So we did not really overspend in terms -- according to our plan. Our investments are working. If you look at the number of customer into a number of deal flow, number of deal close actually in Q4 and also a channel that deals, this all increased nicely. So our investment is working. So what keeps us really about these Service Provider cutbacks, Service Provider headwind that’s really hit us hard in 2014. Greg, you can add some more.

I think the other piece, just to address the cash question is that the cash use for the quarter, if you look at from a cash flow perspective, net of the AR was less than $5 million and not significantly higher than what we saw in Q3. And as we prefer, we expect that AR to turn fairly quickly and to be more of a fourth quarter artifact. So I think this is one of the areas where the cash burn that you saw in this quarter is not something that we would expect to be reflected and repeated in Q1 at all. It’s an aberrational thing having to do with that, those maintenance bookings that we talked about earlier on.

Okay. And then on the litigation expenses, as that -- now you’ve said most of this, I don’t know if there is anything else outstanding, should that be effectively small minimal value at this point going forward?

In the immediate term, yes we expect to see that number going down related to some of the IP step that was out there. There are some other litigations that was recently put out there and we’ve not really calibrated the cost of that yet beyond the first couple of quarters.

Okay. Very good. Good luck guys.

And that’s all the time, we have today for questions. And this will conclude today’s question-and-answer session. At this time, I would like to turn the conference back to Mr. Lee Chen for any additional or closing remarks.

Yeah. Thank you all of our shareholders for joining us today and for your support. Thank you and good day.

And ladies and gentlemen that does conclude today’s conference. We thank you for your participation.