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A10 Networks (NYSE: ATEN) is a medium-growth cybersecurity-driven software company which, I expect, will generate long-term revenue growth from its software and ADC products. These products enjoy strong demand in the marketplace due to their technologically advanced architecture, which helps the company’s customers address challenges related to cybersecurity and cloud. Since the company’s bottom-line is expected to grow in a significant way as well, the company’s shares have strong potential to perform well in the stock market. Long-term investors can buy the company’s shares around the current price to maximize their gain.
The company is a leading provider of networking solutions focusing on scalability and cybersecurity. The company’s product portfolio supports its cloud-based customers, both operating in on-premise and in hybrid environments. With cyber-attacks increasing to threaten enterprises worldwide, the company offers its customers security as a key attribute in virtually all of its solutions.
Growth Drivers
Software Solutions
A10’s primary growth driver is its security-led software solutions which are available to be delivered in a variety of form factors. These form factors include software embedded in optimized hardware appliances as bare metal software, containerized software, virtual appliances and cloud-native software. While the company primarily derives its revenue from delivery of its proprietary software on a perpetual license basis, this business model is changing in various ways, including among others, term licenses, subscriptions, and software-only models. The company’s comprehensive and flexible software solutions portfolio, as mentioned above, combined with its Harmony Controller product (which is an intelligent management and automation tool built on microservices and container technologies), helps it address the growing need for shifting workloads to a mix of private clouds and public clouds. This is the reason the company’s software solutions perform well in the competitive environment. I expect the company’s software solutions will help it generate significant revenue growth in the long term.
ADC Products
The company’s another growth driver is its family of Application Delivery Controller (ADC) products. The company’s Thunder ADC products and Lightning ADC delivery controller products offer clients many server-related capabilities, including advanced server load balancing, aFleX scripting, web application firewall (“WAF”), and domain name server (“DNS”) application firewall (” DAF”). The ADC products offer clients increasing operational efficiency at reducing costs, and improved security anomaly detection capabilities. As a result, these products perform well in a competitive environment. I believe these products can boost the company’s revenue growth to a considerable extent.
Competition
A10 faces stiff competition in the area they conduct their business. Its competitors include F5 (FFIV), Juniper Networks (JNPR), Cisco Systems (CSCO), Fortinet (FTNT), and Ciena Corporation (CIEN). A10 competes with these companies on the basis of its ability to innovate highly advanced cybersecurity products, strong after-sales service, and price.
A10’s primary competitive advantage is that it develops products that address the challenges today’s cloud-based companies face. Traditional applications remain central to businesses around the world, with a new genre of cloud-based applications emerging. These new applications present new challenges that require organizations to reassess the performance and security of their applications. A10’s endeavor to help the companies with its products regarding their challenges helps the company generate long-term revenue growth.
The company develops cybersecurity products that are capable of preventing DDoS (Distributed Denial of Service) attacks, which is its another competitive advantage. Such attacks are intensifying day by day, in terms of frequency and complexity. A10 addresses the challenges the companies are facing in mitigating the attacks, which helps the company generate long-term revenue growth.
Third Quarter 2022 Results
The company’s third quarter 2022 revenue came in at $72.1 million, up 10.2% year-over-year. Non-GAAP net income came in at $15.9 million, or $0.20 per diluted share, compared to $13.7 million, or $0.17 per diluted share (up 17.65% year-over-year) in the year-ago period.
The company delivered impressive financial results for the third quarter of 2022. Top-line increased meaningfully driven by growth in Enterprise and Service Provider customers. Bottom-line increased driven by better product mix and successful navigation of input cost pressures. The company demonstrated strong demand for its proprietary security-led solutions with a focus on revenue diversification. As a result, the company continued to perform well under competitive pressure. Because of this, I believe, the company’s revenue and profitability growth will sustain in the long term.
A10’s security-focused business model with a focus on building a portfolio of security-led software solutions helped the company diversify its revenue source in such a way which addresses the challenges today’s cloud-based companies face. Today’s growing enterprises are continuously evolving, and they need security in their endeavor to develop advanced solutions in almost every aspect of modern business. As a result, the company’s security solutions enjoy strong demand in the marketplace. This helps the company generate strong revenue growth in the long term.
Valuation
A10’s competitors include F5, Juniper Networks, Cisco Systems, Fortinet, and Ciena Corporation.
ATHENS
FFIV
JNPR
CSCO
FTNT
CIEN
P/E Non-GAAP (FY1)
22.71
12.87
16.49
13.55
43.51
19.55
Price/Sales (TTM)
4.39
3.29
2.01
3.81
9.78
2.13
Price/Cash Flow (TTM)
24.18
20.06
110.90
14.35
24.94
15.25
Click to enlarge
(Data Source: Seeking Alpha)
The company is relatively expensive compared to its peer group companies. The company has an okay balance sheet comprising of cash and equivalents of $32.1 million, and total debt of $22.6 million. The company is expensively valued because its security-related software and ADC products help its customers grow market share by providing them with adequate security measures. I expect the company’s revenue will grow at a CAGR of 5% in the next five years driven by its unique business model which focuses on providing security to its enterprise-grade customers. Since the company offers a wide range of solutions to its customers related to security and cloud, it enjoys premium valuation compared to its competitors in the stock market. In my opinion, the company’s shares can be bought around the current price as a long-term investment.
Assuming the company’s revenue will grow at a CAGR of 5% in the next five years, I will find out the company’s long-term (five-year) share price. The company’s trailing 12-month revenue is $273.4 million, and at a CAGR of 5% its beginning-2028 revenue will be $350.00 million, or $4.77 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 1.5x and 6.0x, and I expect in the next five years the company’s shares will touch a price to sales multiple of around 7.0x at the higher side driven by its highly innovative cybersecurity solutions which I expect will enjoy long-term demand (beyond five years) in the marketplace. Applying a price to sales multiple of 7.0x on the company’s beginning-2028 expected revenue per share, I get the company’s beginning-2028 share price as $33.39.
Risks
The company’s long-term success depends on its timely development of new products, which addresses new challenges regarding cybersecurity. However, continuing to develop such products, particularly regarding security problems which change its characteristics frequently, is a difficult task. If the company fails to develop such products on a sustainable basis, its revenue growth and profitability could be negatively affected.
The company’s family of ADC products addresses the requirements of the markets which are rapidly evolving. The security landscape where the company serves is changing day by day. As a result, the company’s ADC products may face downward pressure in terms of demand, which could result in lower revenue growth for the company. If this happens, the company’s share price may get negatively impacted in the long term.
Conclusion
A10 is a cybersecurity company which has a diverse revenue source in the realm of cybersecurity and cloud. Since the company offers its solutions to a wide range of customers, its revenue diversification goal gets strengthened. As a result, the company’s shares have solid potential to perform well in the stock market. The company’s shares can be bought around the current price as a long-term investment.
