A10 Networks, Inc. (ATEN) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the A10 Networks' Fourth Quarter and Year 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Maria Riley, Investor Relations for A10 Networks. Ms. Riley, you may begin.

Thank you all for joining us today. I am pleased to welcome you to A10 Networks’ fourth quarter and year 2016 financial results conference call. This call is being recorded and webcast live and may be accessed for one year via the A10 Networks Web site, www.a10networks.com. Joining me today are A10’s Founder and CEO, Lee Chen; A10’s CFO, Greg Straughn; and our Executive Vice President of Worldwide Sales, Ray Smets. Before we begin, I'd like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its fourth quarter and year 2016 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 Web site 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 2017 operating results, our expectations for future revenue growth or security product revenue, profitability and operating margin, expectations of customer buying patterns, expected product launches and the general growth of our business. These statements are based on current expectations and beliefs as of today, February 9, 2017. 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 filed on November 3rd. 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. 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 Web site. We will provide our current expectations for the first quarter of 2017 on a non-GAAP basis. However, we will not make forward -- 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 Conference in San Francisco on March 1st and we hope to see many of you there. Now, I'd like to turn the call over to Lee for opening remarks. Lee?

Thank you, Maria, and thank you all for joining us today. The fourth quarter was a very strong close to the year. We are pleased with our results, improved execution and the momentum we continued to build in the market for our security and cloud solutions. Revenue grew 13% year-over-year to reach a record $64 million, and exceeded the high-end of our guidance. Our continued focus on driving leverage through our operating structure led to a significant improvement in our operating results and margin. On the bottom line, we delivered $0.03 in non-GAAP EPS, which was within our guidance range. Let’s take a deeper look into our fourth quarter topline performance. Across the board, the A10 team executed and reached several new records including: record product revenue of $43.5 million, up 23% over Q3 and 10% over last year. Record security revenue, record revenue in the U.S., which grew 38% over Q3 and 6% year-over-year, to reach $33.5 million. Record bookings, which led to the highest backlog in our history, and record deferred revenue of $92.9 million, which grew 28% year-over-year. Our record performance was driven by continued expansion within cloud provider, service provider and web-scale customers, as well as strong demand for our security solutions, including our recently launched Thunder 14045 security appliance. Pound for pound, our Thunder 14045 is the highest-performing DDoS mitigation appliance on the market, providing 300G throughput within a extremely small footprint and modular chassis. Designed especially for high-performance networks, such as those used by service provider, cloud provider, e-commerce and online gaming companies, our Thunder 14045’s CapEx, OpEx and security performance advantages has resulted in strong traction within these customers. Measured by bookings in the first two quarters since its availability, the Thunder 14045 is the most successful product introduced in A10’s history, and our pipeline continues to grow. In addition to the early success of Thunder 14045, our record security revenue and bookings in the quarter was driven by strong demand across our lineup of standalone solutions including: Thunder TPS, which provides the industry’s best DDoS mitigation performance and scalability. ACOS Harmony OpenAPI enables TPS to easily integrate with third-party management and detection solutions. Thunder Convergent Firewall, which delivers multiple security functions on a scalable ACOS Harmony platform that enables customers to achieve high performance and manageability, and Thunder SSLi, which provides visibility into encrypted traffic, helps eliminate blind spots in corporate defenses and maximizes customers’ firewall assets. Together, our security solutions are providing more and more customers with a strategic portfolio-based approach to collectively address some of the nastiest threats and risks to their businesses, brands, and their own customers. The increase in security demand was led by our cloud customers, including a leading cloud provider that contributed 13% of total revenue in the fourth quarter, as they modernize their architectures with our latest solutions to increase capacity and fortify their defenses. We also saw continued demand from gaming, financial and mobile operator customers. Let me share with you several recent engagements that show how customers are using A10’s solutions to help secure and improve the performance of their networks and mission-critical applications. A tier-1 service provider in the U.S. selected our Thunder TPS and SSLi solutions to help protect customers on their dedicated internet service from DDoS attacks and gain visibility into encrypted traffic. A leading service provider in the U.S. chose our Thunder ADC with SSL Offload to help improve the performance of a Cloud Software solution running on their managed services platform. A leading mobile carrier in South Korea is deploying our Thunder CFW solution with our combined Gi Firewall and CGN functions to replace an incumbent security vendor’s product. In the performance tests conducted by this customer, A10’s solution demonstrated six-times lower latency and 20% better CPU utilization in half the footprint when compared with our largest competitor. A large international organization was looking urgently to increase visibility into the growing amount of encrypted outbound traffic on their network but without upgrading their firewall capacity. To meet their need, they deployed our Thunder SSLi alongside their existing firewall installation. And lastly, a leading mobile provider in Japan selected our TPS solution on our new Thunder 14045 high-capacity appliance to help protect their network from large-scale DDoS attacks. We are proud to say that the top three mobile carriers in Japan are now using our TPS solution. Since our inception, A10’s strengths has always shined in high-performance networks, because of our heritage, we continue to gain attention from cloud provider and web-scale customers. These customers have built their business on cloud infrastructures that require flexible and agile solutions for accelerating and protecting applications, while reducing CapEx, OpEx and the total cost of ownership. Based on our ability to meet the needs of these and many other service provider and enterprise customers, we see cloud and security as powerful market opportunities for A10 Networks. We are positioned very well across both traditional data center and cloud-based application environments. We see the opportunity to be the industry leader in secure application services. In other words, providing solutions for controlling and centrally managed secure application services across our customers’ spectrum of data centers and various cloud types, from private to public to hybrid clouds alike. While hardware remains our core business from a revenue perspective, we are unlike other competitors in that we can comfortably expand beyond our core business and address customer needs that require many -- that require any combination of hardware, virtual, bare metal, and cloud-based solutions. We believe A10 has the most complete portfolio available on the market. As a reminder, during 2016 we acquired Appcito, which helped accelerate our vision and further differentiate A10 in the market. Staying focused on execution, we successfully integrated the Appcito team without disrupting our path to profitability. We launched A10 Lightning, the industry’s only advanced cloud-native, controller-based ADC-as-a-service offering, and we’re on track to deliver additional Lightning cloud offerings this year. In short, our strategy is working. For the full-year, we grew revenue 16% to reach $230 million. We exceeded our goal for security product revenue in this year and we expect our security product revenue to be over 20% of our total product revenue in 2017. We achieved these results while driving leverage through our model and significantly improving our bottom line. We reduced our non-GAAP net loss by 88% and met our goal to deliver a profit in the fourth quarter. With topline growth and continued focus on financial discipline, we expect to expand our profitability in 2017, and we remain committed to reach our target operating model by 2019. In summary, the A10 team’s diligent focus and execution led to a record fourth quarter and strong close to the year. We are excited about our performance, market opportunities and momentum we are building. We intend to continue to focus on growing our brand awareness and customer base and leveraging our strengths in high-performance environments. We believe the trends we see in the market today are in direct alignment with our product strategy and strengths as a Company. We will continue to leverage our technology platform to bring new innovations to market that are designed to secure and protect some of the most demanding networking environments, including cloud networks. We believe we are well-positioned to continue our success, all while remaining focused on driving leverage in our model and growing our bottom line. Before I turn the call over to Greg, I want to personally comment on his resignation as CFO effective upon the filing of the Company’s 10-K. I know I speak for the entire A10 team, when I express my sincere gratitude for everything he has contributed to the Company over the past six years. Greg was instrumental in taking the Company public, has served as a trusted spokesperson to the investment community and implemented many of the programs needed to foster and support our growth. Along the way, he also built a great finance team and I’m pleased to announce that Shiva Natarajan, our Vice President and Controller has been appointed interim CFO effective upon the effectiveness of Greg’s resignation. Shiva has over 20 years of accounting experience and has played a key role in helping lead our finance department since he joined A10 in 2015 as Vice President and Controller. We are confident Shiva will do a great job leading the organization through this transition and to help facilitate this transition. Greg will remain with the Company until April. And with that, I’d like to turn the call over to Greg to review the details of our fourth quarter financial performance and first quarter guidance. Greg?

Thank you for those kind words Lee and thanks to all of you for joining us today. Fourth quarter revenue grew 13% year-over-year to a record $64 million, exceeding our guidance range of $59 million to $63 million. We also delivered deferred revenue growth of 28% year-over-year. For the full-year, revenue grew 16%, to reach $230 million. Fourth quarter product revenue grew 10% year-over-year and 23% sequentially to reach $43.5 million, representing 68% of total revenue. Product revenue for the full-year grew to $153.9 million, up 11% from 2015. Fourth quarter service revenue grew 20% year-over-year to reach $20.5 million, or 32% of total revenue. Service revenue for the year grew to S76.1 million, up 25% from 2015. From a geographic standpoint, fourth quarter revenue from the United States was $33.5 million, up 6% on a year-over-year basis. For the year, revenue from the United States grew 11% to $118.7 million. Fourth quarter revenue from Japan was $15.1 million, up 32% on a year-over-year basis, and for the full-year, revenue from Japan grew 49% to $53 million. Fourth quarter revenue from APAC excluding Japan was $7.9 million, up 38% on a year-over-year basis, and for the full-year, revenue in the region grew 25% to $29.8 million. In EMEA we continued to see softness in select areas of the region and revenue in the EMEA region for the fourth quarter was $6.1 million, a 10% year-over-year decrease, bringing the full-year to $23.1 million, reflecting a 15% decrease from 2015. Enterprise revenue grew to a record $39.5 million, up 45% from Q4 of last year. As Lee mentioned, we had one cloud customer that contributed 13% of total fourth quarter revenue. Enterprise revenue for the full-year, grew to $134.9 million, up 22% from $110.2 million in 2015. Service provider revenue came in at $24.5 million, down 16% when compared with $29.3 million in the fourth quarter of 2015. Service provider revenue for the full-year grew to $95.2 million, up 7% from $88.7 million in 2015. Our enterprise and service provider revenue split this quarter was 62% and 38% of total revenue, respectively. As we move beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless stated otherwise. We delivered fourth quarter total gross margin of 77.6%, above the high-end of our expected range of 75% to 77%. This is an increase of 50 basis points from last quarter and 120 basis points from Q4 of last year. Total gross margin for the full-year was 76.6%, an increase of 30 basis points from 2015. Fourth quarter product gross margin was 76.2%, an increase of 100 basis points from last quarter and 40 basis points from Q4 of 2015. Fourth quarter services gross margin came in at 80.6%, increasing 10 basis points from last quarter and 280 basis points versus Q4 of 2015. We ended the quarter with staff of 895 compared with 885 at the end of last quarter, and up 8% from the end of 2015. Fourth quarter non-GAAP operating expenses were in line with our guidance and came in at $44.9 million or 70.2% of revenue, compared with $42.2 million or 76.6% of revenue in the prior quarter. Sales and marketing expenses increased by $2.5 million, primarily due to higher commissions related to our record bookings. We achieved fourth quarter non-GAAP operating income of $4.7 million dollars, or 7.3% of revenue, above the high-end of our guidance and a significant improvement from the operating loss of $3.2 million in the fourth quarter of last year. We achieved Non-GAAP net income of $2.3 million or $0.03 per diluted share, which was at the high-end of our guided range of breakeven to $0.04 of earnings. In the fourth quarter, we incurred a $2.2 million expense, or $0.03 per share, due to the unexpected, post-election movement in the yen to dollar exchange rate. This expense is reflected in the other expense line in our income statement. Our net income performance this quarter represents a significant improvement from a net loss of $3.7 million in Q4 of last year, bringing, our full-year bottom line improvement to 88% on a per share basis. Diluted weighted shares used for computing EPS for the fourth quarter were approximately 73.1 million shares, while basic shares outstanding for computing the net loss for the 2016 year were 65.7 million shares. Moving to the balance sheet. At December 31, we had $114.3 million in total cash and marketable securities, compared with $116.8 million at the end of September. Our cash balance reflects the use of approximately $2.4 million dollars to fund operations during the quarter. Additionally, during the fourth quarter pursuant to our stock repurchase plan, the Board implemented in late October, we repurchased a total of 227,000 shares of our common stock in the open market at an average cost of $7.92 per share for a total of approximately $1.8 million in consideration. For the full-year, we generated $18.8 million in cash from operations and increased our cash and marketable securities balance by $16.2 million. Average days sales outstanding were 84 days, up from 74 in the prior quarter, reflecting our record billings in the quarter. Moving on to our outlook. As Lee mentioned, we ended the fourth quarter with our highest backlog in history, which totaled $19 million. Balancing this strong start with the normal first quarter seasonality in parts of our market, we currently expect first quarter revenue to be in the range of $59 million to $61 million. At the midpoint this represents a 12% year-over-year revenue growth for the quarter. We expect gross margin to remain in the 75% to 77% and operating expenses to be between $46 and $47 million. We expect our non-GAAP bottom line results to be a loss -- to be between a loss of $0.01 and a profit of $0.01 per share using approximately 76 million shares on a basic and diluted basis. And Briefly, before we open the call to questions, I’d like to take this opportunity to thank the entire AT&T for the dedication, determination and can-do attitude, you have made A10 into a Company that shows you can create an environment that is both team-oriented and results driven. I would also like to thank Lee for his technological vision and leadership that has fueled A10’S growth. During my years with A10 I have been privileged to tell the A10 story to an outstanding group of investors, analysts and bankers, each of whom have added to the richness of my experience here, and I look forward to crossing paths again. As a team, we have accomplished many of our objectives since I joined six years ago. I feel that A10 is in a very good place and I am confident it will continue the growth and profitability trends we have established. Operator, you can now open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rod Hall with JPMorgan. Please go ahead.

Yes, hi, guys. Thanks for taking the question. I guess, couple of one -- questions. I just wanted to see Greg, if you could give us a little bit more color on what’s driven you to resign. I assume it's kind of been in the planning for a while, but I would like to get your thoughts or your words on that. And then secondly, just a little bit more you guys continue to do really well in this DDoS area and we continue to hear that is a critical area of security for a lot of people. I just wonder, how big you think that market is, and do you have any feeling for what your share in the market is? So those are my two starting questions. I might have a follow-up. Thanks.

All right, Rod. I will start. Rod, you’re right. These decisions don’t come quickly or easily. But, it's kind of at a point now where we’ve got a great team, we put some great results for 2016, for Q4, a very strong finish to the year and so it creates a great time and opportunity to find the mix Company where I can contribute, very meaningful way, whether it's going to do an IPO or two growth face. So it really comes down to having achieved the goals we set out to hear and looking to do that one more time. So is that the high degree of confidence in the team that remains here and I will be an A10 shareholder. So …

Okay, great. And then what about the DDoS product and kind of what your -- do you guys have any feelings what your model position is there in terms of share?

Sure. Probably not in a position to give you a market size of the share we have, but I think we are still in the early days and we see lot of opportunity to grow within strategy --- strength of the DDoS. We are very happy with the momentum, especially with cloud provider, mobile carrier, gaming and banking industry. We said the goal to be over a 20% of product revenue from that -- for this year.

Okay. And just following up on Greg, Lee is that your intention to initiate a search for a replacement or is the idea for the interim CFO to potentially work into a full permanent job?

So the -- Rod, we initiate a search and we’ve a ongoing search.

Okay. All right, great. Thank you, guys. Nice job.

Thanks, Rod.

The next question comes from Ittai Kidron with Oppenheimer. Please go ahead.

Hi, guys. Congrats and good numbers and Greg sorry to see you leave. Maybe you could talk a little bit about the outperformance, how much of that in the quarter was really the deals that got delayed, that closed -- your master capture what kind of slip through last quarter versus the upside driven by new business transactions, if you can give us some color, that will be great.

Sure. Of the deals that we had talked about at the end of Q3, some of those did close in Q4, some of those are in the pipeline and we would expect the close in Q1. But I think the key thing to note is that we had massively strong bookings within the quarter, that we talked about a $90 million backlog which is well beyond anything we've seen before. And so the traction within the quarter was where the quarter was made. So, those deals are -- some of those deals are in revenue, but the real story for our business traction is the record bookings and have that contributed to backlog.

When you look at that backlog, is it -- are there large deals in there that made a jump like or is it pretty widely distributed?

There is a combination. I mean there it's not all small deals. There are some good-sized transactions in there and that backlog will likely come into revenue, not all Q1, at least some -- there will be some spread to it, but we're really very, very pleased with the quantity and quality of that backlog.

Got it. And then -- go ahead.

The backlog from many customers.

Got it. And Lee, lastly on DDoS, it's good to see you make a good progress. Maybe you can give us some color from your perspective on who ordered that the profile of the customers. And what I mean by that is I am trying to understand how much of the DDoS opportunity is going to be with end enterprises versus with providers that will take your solutions and then offer DDoS as a service. If you could give me a little bit more color as what do you think is going to be the more important driver to the business that would be gratefully appreciated.

I think it’s a read about probably both. If you look at we, we’ve a lot of success on all the momentum in cloud provider and mobile carrier. These are all success in gaming, banking, so many of these service provider they use our solution to offer a DDoS as a service. So we see the opportunity are pretty big. And the top three mobile operators in Japan, they’re using our DDoS of solutions. And in Japan, a lot of mobile carriers they’re the call provider, they’re the service provider, so they also offer services to enterprise customers.

Got it. Are you worried with Japan clearly had a big rebound year, I think the last time it was this big as when you’re just about when you went public, if I remember correctly, and after a little while they had some challenges over there. Is that a market where the revenue is concentrated with a small number of customers? And if yes, how do you get comfort or visibility into what they might do with you in 2017?

You know you never get really comfort, you always have like these, right, the market dynamic, but we feel very good about our position with the customer. If you look at COMPARE today versus when we went IPO, the -- position are much stronger compared to IPO. During IPO we were primarily ADC company. Today we really sell our -- these secure application services. So application, delivery, and security solutions to many of our existing customers and the new customers. I look at our security success, most are driven by the -- demand is by the growing cyber security needs new requirement and the growth of our customers. In 2020, Japan has Olympics, so I’m looking forward to that.

Very good. All right. Good luck, guys and good luck to you also Greg in your next step.

Thank you, Ittai.

Thanks.

The next question comes from Mark Keller with D.A. Davidson. Please go ahead.

Great. Thanks for taking the question. I was wondering if you might provide some more detail on the 13% of revenue customer, the cloud provider. What was the profile about some of the products you sold in there? And what’s the use case with that cloud provider is implementing?

Greg, you want to answer that question or you want me to …

I’m happy to comment on that. So the 13% customer purchased a couple of different product, they even purchase one particular product. They did buy some from our security portfolio as well, so -- and the use case there was basically building out their cloud infrastructure, so that they get protect their cloud infrastructure from various attacks. We usually don't go into too much detail about those types of sales, however.

Okay.

So the customer is a customer, we’ve been doing business for several years.

Okay. And how about on the geographic spread? It looks like very different geographic results from EMEA and from APAC. What’s the dynamic going on there, is that macro over -- in Europe or is there some execution issues that could be improved there?

Yes, I think speaking specifically about the macroeconomic issues, all of the computers [ph] are reflecting whatever is happening in their respective areas, obviously, you’re seeing definitely what other people are seeing in the EMEA theaters, especially over in the U.K and Middle East, but there is always opportunities to improve the actual execution as well. Over in Japan, you’re seeing a nice surge of our land and expand strategy as we move from the ADC into the security marketplace. But also along with strong execution and building pipeline, we're also diversifying that market portfolio or addressing markets little differently. In North America, it's pretty much as we would have expected. We pretty much call that one very, very close to the pin. The catalyst there is security, especially within the service providers and also on the cloud service provider side.

Okay, great. Thanks.

Thanks, Mark.

The next question comes from Alex Kurtz with Pacific Crest Securities. Please go ahead.

Thanks, guys, and Greg sorry to see you go. Nice quarter to exit on though. Definitely a little bit easier tonight. So, maybe you could talk a little bit about the backlog and the mix between security and traditional ADC and the backlog that you guys had at exiting the quarter?

Yes, I don’t have too much specifics, but I will say that backlog is -- its really is diverse and it has -- it's not that different from our overall product revenue. It's fairly representative both in customer type, customer products, their purchase and it might be a little skewed towards the U.S., but that's really probably the only SKU that’s in there.

Okay. And maybe just a little bit more about the competitive landscape at Arbor Networks. I was wondering if you could go into if there is any competitive bake offs in the quarter that result in some of the backlog generation or just generally where that stands today?

I’m happy to comment on that. From a competitive perspective, obviously we see Arbor and other competitors in the DDoS space and we go into bake offs like you would expect in any part of our business and the good news is we come out on top in various ways, specifically around performance and mitigation capacity and our ability to bring together a complete solution. So, there is many facets of this industry. We have a nice spot in that opportunity and we continue to gain share. It's the catalyst for us in terms of growth there. You’ve heard Lee talked about it is in the cloud area, the mobile providers, gaming and banking, and the good news is customers are really happy with our solution and keep buying more. This industry never really get smaller, it just keeps getting bigger. The attacks get more diverse, a little bit more challenging to address and we have a great solution for those customers.

So, fair to say there were some one-on-one bake offs with Arbor this quarter?

Yes, as you would expect one-on-one, one-on-two, all the various sundry types you can imagine.

Yes.

All right, guys. Thanks.

Thanks, Alex.

[Operator Instructions] The next question comes from James Fawcett with Morgan Stanley. Please go ahead.

Thanks a lot. I think you indicated that North America was pretty close to what you had expected, maybe a little bit weaker in Europe. Can you talk about what the products and confirm the geographies where you did a little better than you thought in the quarter? And then also can you talk a little bit about linearity during the quarter? Just wondering how customers reacted to the elections and then into the end of year and the beginning of 2017? Then I have a follow-up question.

Okay. So I will start with the linearity question first. James, the -- we go back and we look at performance year-over-year and what we expect in Q4 linearity was pretty much right exactly as we had expected. So there is no real news on linearity, it was just good linearity throughout the entire quarter and we finished very strong. And the first part of the question …?

I was just wondering, Lee, like where are your sources of outperformance were both geographically and from a product perspective?

It's -- that’s actually -- there is a lot of different ways we can look at that. From a geographic performance, we saw obviously very good performance across Asia and Japan and we're benefiting in multiple ways in terms of why there is a growth catalyst there. It's very strong attention to pipeline generation. We got some good leadership plays, we’re expanding into new markets etcetera, and we’ve added a couple of new significant customers in Asia, in the service provider domain. So that was actually really strong execution for us, but in North America the catalyst was security and we're really pleased with the outcome from what we were able to convert that into pipeline there.

Yes, I think the -- let me -- its Lee. So, our win rate we remain high. So the security and cloud really are two driving factors for you. The revenue to be exceeding our guidance.

Got it. And then just last question from me is that when you look at your security strength in the U.S., is that having any impact on sales of the rest of the product portfolio or would you expect there to be impact on sales for the rest of the portfolio. I guess, I’m just wondering if there is an opportunity for pull-through for the more traditional mainline part of A10's business? Thank you.

It’s a good question. A lot of the sales we are making in the security space tend to be to larger types of customers, like cloud providers, mobile service providers, gaming customers and things of that sort. And they have a use case that goes beyond the security portfolio that we sell them, so on the larger customer side clearly a land and expand strategy is in play here, and definitely those customers are buying other products as well. And we see the reverse occur as well. Being well-positioned in ADC market actually gives us access to security opportunities with large customers as well. So, we sell sometime single solutions to smaller customers, but generally the larger customers buy more than one product from us.

You know we have one customer in Korea, they were using our CGA solution due to the fact we have Gi Firewall in our CFW Convergent Firewall. So they combine those function and purchase our CFW Security Solutions.

That’s very helpful. Thanks.

Thanks, James.

The next question comes from Dariush Ruch-Kamgar with Bank of America Merrill Lynch. Please go ahead.

Hi, guys. Thanks for taking my questions and congrats on the quarter. Greg, also sorry to see you go, but congrats on getting to your long-term goal of positive operating margins.

Thank you.

So, looking at gross margin, they have been trending higher for a couple of quarters now on both the product and services line. Can you provide some color behind what’s driving it? And with some of the product margin improvement, due to an uptick in your software only bare metal solutions?

Sure. Talking about the product side, first, on the product side there is several factors that are part of the lift there. One is that as we move and have a higher proportion of our sales coming from security products, they tend to have a higher gross margin pretty much across the board. Additionally, as we’ve continued to work with our manufactures on product, we’ve been able to put enhancements in our design and in the manufacture of our products that even for a specific product we’re getting better margins through cost efficiencies and design efficiencies in the hardware itself. As software and virtual products become a larger piece of our business, still small, but as they move in that direction those are added to gross margin as well. And then the other piece is that as we see regional shifts as we see Japan and North America become a larger proportion to sales traction, they tend to be higher gross margin market. So, those are the things that are on the push up side. The effect that we see there has potential to go the other way and we’ve seen a little better recently is that currency impacts can have a slight negative effect coming out of Japan primarily. And then as we bring through and cycle some new product in and we occasionally have write-downs of all product, and so most of that’s worked this way through system, so our expectation is as we move through '17, that the general trend will be upward, which is not the same as saying that each quarter will be upwards. So still be some volatility around it, but the general trend on gross margin should be improving on the product side. On the service side, as we continue to have a larger and larger install base, we begin to see incremental economies of scale come in on the maintenance and support piece of that as our professional services organization grows, we start to see some economy of scale in that piece of the market. So, in the services side, it comes down to efficiency and how our people are mobilized to service customers both in a support and in a field perspective.

Thanks for the color. It's really helpful. Could you provide any additional color into what security revenues look like as a percent of total revenues this quarter?

We exceed our security revenue for the year. We set a goal for 20% of our total product revenue for '17. We probably will not break out the -- presently our security revenue for the year.

Thanks. And if I take out T-Mobile, which is a 20% customer in Q4 last year and I take out the 13% cloud provider in this quarter, service provider sales declined pretty significantly but your commentary seems to be pretty bullish on service provider. So, can you provide some additional color into what’s driving this?

Yes, I will take a shot at that, Dariush. Well, obviously the one thing that you do know about our business is good service provider revenue, bookings and revenue is lumpy. So we do see some trends moving from one quarter to the next and they do tend to buy in large quantities. But the good news is we feel very good about our positioning there, we’re going to benefit is workloads move into the cloud and workloads move and are managed in the service provider domain, so that's a long-term positive growth driver for us in the service provider business as well. And you heard the commentary, we had a very strong quarter in Q4 also in service provider and we articulated a couple of key wins for us that were very significant both the ADC, but primarily in the security space.

We put cloud customers in the enterprise. We have many other companies actually put cloud customers in service provider. So if we put a cloud provider into the service provider, also the high revenues then will be very strong.

Okay. Yes, I know. Thanks for the clarity there. I will hop back into the queue. Thanks, guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Lee Chen for any closing remarks.

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