Radware Ltd (RDWR) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware first quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions to be given at that time. If anyone should require assistance during the conference please depress zero then star. As a reminder this conference is being recorded. I would now like to turn the conference over to our host, President and CEO, Mr. Roy Zisapel. Please go ahead.

Good morning, everyone. Welcome to the Radware first quarter 2003 conference call. Joining me today is Meir Moshe, our Chief Financial Officer. We are very pleased to announce another strong quarter for Radware overcoming a tough spending environment, Radware has exhibited continued growth across all business metrics for the sixth sequential quarter liberating our business model to increase profitability while continually improving our financial results. Before I discuss the highlights of this quarter, Meir will review the financial results. After my comments will open the discussions for Q&A. Meir?

Thank you, Roy. And welcome, everyone, to our first quarter conference call. First I would like to read you the Safe Harbor language. During the course of this conference call we make projections of forward-looking statements regarding future events of the future financial performance of the company. We wish to caution you that such statements are just predictions and the actual events always estimates [Inaudible]. The failure to document the company files from time to time with the Securities and Exchange Commission, specifically the company's last filed form 28 filed in April 2003.

Now, ladies and gentlemen, for the financials. In this quarter, our revenues and earnings exceeded their projections and continued to improve all of our business parameters including sales, [Inaudible], EPS, inventory levels and cash. The first quarter is the sixth consecutive quarter of gross in sales. Revenues for the first quarter were $12.6 million. $12 million in the first quarter, a 25% increase over the $10.1 million in the first quarter of 2002. The net profit for this quarter was $801,000 which represents an earnings of diluted share of 5 cents, 1 cent better than guidance. We continue to maintain a high gross margin. Our gross margin for the first quarter remains at 82%. The same as the second half of 2002 and about half a percent above the gross margin we had in the first half of 2002.

Our operating expenses for the first quarter of 2003 were approximately $10.5 million, the same as in the last six quarters and according to our guidance to the market regarding keeping our expenses throughout the year. The DSOs for the first quarter decreased 60 days from 67 days in the first quarter and from 76 days in third quarter of 2002. By that we have completed an improvement of 53 days in DSOs in six quarters. 60 days this quarter converts to 113 days in the third quarter of 2001.

This quarter is marked by a marketable improvement in our positive cash flow. Our positive operating cash flow for this quarter was $1.9 million. This quarter we generated cash of $1.6 million. By that increased our cash position including long-term deposits of $127 million and we have no debt. Inventory levels have continued to decrease this quarter. The inventory decreased by $538,000 this quarter completing a decreasing inventory level of $2.3 million in five quarters. Inventory this quarter was $2.45 million compared to $4.25 million a year ago in the first quarter of 2001. The head count for this quarter was 273 employees. Shareholders equity increased to $128.1 million.

Guidance, with respect to the second quarter of 2003, we anticipated sales would increase to a range of $12.8 to $13 million and the annual diluted share will increase to 6 cents. As you see, ladies and gentlemen, the first quarter revenues increased, inventories and DSOs are down, cash position is up, operating results improved. We keep on maintaining focusability and we are optimistic about the second quarter results. And now I would like to return you to Roy.

Thank you, Meir. In the first quarter of 2003 we have continued our growth building on our results of the last six quarters. We are pleased to report growth in revenues, market share and profitability while at the same time we were able to reduce our inventories and DSOs. Radware solutions are deployed across carrier and enterprise networks to guarantee the full availability and optimize performance of all mission critical applications. By delivering immediate ROI and providing tangible operation of benefits, our product line has received continuous and growing demand.

As a result of the increase in our product adoption and our strengthened world wide presence, we are confident in our ability to sustain growth in the coming quarters building on the positive business trend which showed a constant upward growth over the last six quarters. In particular, during this past quarter we guided new revenues from several strategic accounts including, Credit Suisse First Boston, Mathda, [Inaudible], BeijingTelecom and HSBC. We generated repeat business from customers across the broad industrial spectrum, including, Chick Filet, France Telecom, Rueters, Lumberg [Inaudible]. This business indicates high customer satisfaction and the ability of our product line to scale across enterprise operations to deliver end to end solutions for network productivity and cost effective resource utilization.

I would like to focus on the Chick Filet account in more detail as it describes the scope and benefit of our offering for enterprise accounts in providing end to end availability performance and security of mission critical applications. Operators across more than 870 remote Chick Filet restaurants in the U.S. processed their weekly payroll across the network accessing centralized application service at Chick Filet headquarters in Atlanta. Given the importance of timely payroll fulfilment, the Chick Filet network must be available 24 by 7 while ensuring consistent response time. For Chick Filet for the especially challenging given the traffic flow very widely, increasing enormously on Thursdays and Fridays which are typically the payroll processing days. To meet its challenges, Chick Filet has deployed the WSD product line FireProof and LinkProof to ensure availability of web and application servers, firewalls, CPNs and internet access links. In order to accelerate secure transactions, Chick Filet deployed 5100 of our SSL accelerators and to further protect network performance for internal network users, Chick Filet deployed cash servers managed by [Inaudible] which maximizes cash resources and optimizes cash performance. Implementing end to end solutions, Chick Filet was able to guarantee complete network availability and performance for both external and internal network users. This is an excellent example of the level of repeat business each and every one of our customers represents. On the marketing front, we announced a joint solution with NetScreen partnering with them to provide high availability among marketable internet access [Inaudible] and service providers. The solution combines NetScreens, integrated network security appliances and LinkProof product line, each element tested and certified to ensure availability. Our strong cooperation with NetScreen follows from Radware's commitment to address enterprise security and collectivity needs and we have already gone with several joint projects with them this quarter. On the technology front, we released our industry leading Application Switch III this quarter introducing multi-gigabit switching for the highest IT performance in the market. We are extremely proud of the introduction of this powerful platform enabling us to continually drive the performance of Layer 4-7 operations. Application Switch III 3-tier architecture starts with hypodensity and switching ASICs at the port level. This provides capacity and wire speed switching with 44 gigabit non-blocking back plane. By far the highest in the market. Application Switch III is also the first Layer 4-7 switch in the market with 10 gigabit port providing users with the ability to accommodate any connectivity requirements. The second tier of the Application Switch III architecture consists of an area of network processors, that delivers comprehensive traffic forwarding, quality of service control, real-time intrusion prevention and DoS mitigation at multi-gigabit speeds. The network processing technology incorporated into the Application Switch III architecture dramatically increases the performance of Layer 4-7 switching while enhances network control and security. Last but not least, each Application Switch III platform has top of the line Power PC Risc Processor for management and optimization [Inaudible]. The processing power, the full density and most importantly the performance of Application Switch III set a new standard in our industry. We saw great customer feedback and we will start recognizing revenues from Application Switch III in the current quarter, the second quarter. We also want additional recognition for our products and innovative technology including comment Best of Show in February, Product of the Year by Network Computing in January, [Inaudible] of previous awards in industry recognition for our technologies throughout 2002 including Internet World New York Best of Show in October, Interop Best of Show in November, Well- Connected Award for [Inaudible], Editors Choice by Network Computing Internet World a Best of Show and on and on.

To summarize, we continue first quarter of 2003 to demonstrate consistent growth across all operations and parameters. We believe that in the remainder of 2003 we will see further advances in our technological leadership, diversification of our product offering, broadening of our customer base and geographic spread enabling us to sequentially grow our revenues and market share throughout the year. With that I would like to open the discussion for Q & A.

Ladies and gentlemen, if you wish to ask a question, press 1 on the touch tone phone. You'll hear a tone indicating you've been placed on queue and may remove yourself at any time depressing the pound key. If you pressed 1 prior to this announcement please do so again at this time. If you are using a speaker phone please pick up your handset before pressing any numbers. Again, ladies and gentlemen, if you do have a question, please press 1 at this time. We do have a question from the line of Alex Henderson with Smith Barney. Please go ahead.

Thank you. I was wondering if we could talk about the linearity in the quarter. I didn't hear a book to bill number as well. Were there divots around the war? Any change in purchasing patterns subsequent to the war's conclusion? Have you seen a pickup in April? Can you give us a sense of trajectory over that window?

Okay. In terms of linearity, I think it was in line with the previous quarter. Generally we're quite satisfied with the linearity of our quarters. We didn't see any effect from the start of the war nor from the end of it in terms of the way people are purchasing or committed to the projects involved in our product. So all in all from our point of view, we continue to see growth and demand, we continue to see, regardless of the tough spending environment, we see people committing to investing in the mission critical applications and we see growth in many geographical areas world wide.

Book to bill number?

Basically we don't carry that from quarter to quarter. That's one of our business strategies. In order for our distributors not to carry substantial stock, we are committed to supply roughly less than a week all of our products. This is why relatively we have higher inventory on our books. Generally we don't carry backlog.

Generally it's always around 1.0 then.

Yeah.

Can you give us thoughts on the gross margin. You've had guidance of declining gross margins for a long time. Gross margins have been persistently stable. Pricing seems like it's holding maybe even a little bit of improvement in ASTs due to the new products and sounds like you're seeing component cost declines. Should we anticipate stable gross margins with a gradual bias to decline?

Currently we would like to maintain our guidance. I think the reason why we see continued stability there is that we see customer purchasing the higher end modules of our product line as well as additional softer modules that increase, of course the gross margins. On the other end, the cost of our components and platform is going up especially if you're talking about the higher end platforms like Application Switch III which is [Inaudible] a network processing technology embedded in it. The guidance continues to be gross margins should continue to track down. We are very happy with the fact that they are stable so far.

Thank you.

We do have a question from the line of Steve Kamman from CIBC. Please go ahead.

How are you doing? Another good quarter, thanks very much for that. Makes life easy. Questions recurring or repeat orders as a percent of revenues. I know you have given that out in the past. Any sense on that?

This is the same as we had in '02. It's about 45% and just to remind everybody, it's up from 35-40% in '01.

Good stuff. Inventories up four times versus about two times a year ago. Just want to get your sense, do you think you bottomed out in terms of inventory carriage or is there going to be more improvement on that line?

I believe that we are in the very low end of level of inventory that can enable us to run the company efficiently. I don't believe that we will see any change specifically not down hopefully not up on the inventory level. We keep it around $2.5 million. This is what we feel comfortable.

I did see a relatively negative review of the LinkProof product in InfoWorld, I don't know if you guys have a comment on that.

We saw it. Obviously we wanted to see a stronger review, but you know LinkProof is one of our top products. Go to our website you'll see rave reviews from Yankee Group from business communication on the same product. It won many awards. In this specific one we had some execution problem on the technical support. We are the leader in market share on this product. We have over 100 ,000 installations. It's the best on the market. I don't think it changes anything.

You shouldn't send that tech to Hawaii. Is that the idea? More specific on the AS 3, in terms of performance capability, how did this put you versus some of the other players in the market, Nortel and Cisco products as well as Foundry, just a sense of where you stand in terms of throughput indensity.

Let's take throughput as an example, F-5 by their own numbers are maxing out at 1.4-1.5 gigabytes. The lowest end of performance in Application Switch III is 3 gigabits. Over twice in the F-5 performance. In terms of Cisco, the differences are much bigger. Depends on the platform it's between five-ten times depending on the actual performance metric you test. In terms of full density, if you compare let's say the [Inaudible] the newest product line, the Chita, they have 24 fast ethernet boards and 4 gigabit boards in their platform. Application Switch III -- F-5, by the way, is similar old configuration in their top line. 4 gigabytes and 24 fast in 2 U factor. The Application Switch III in 1 U factor has 110 gigabit ports, 7 gigabit ports and 16 fast ethernet ports. Again, by far higher than anybody else. Last but not least none of our competitors have a 10 gigabit port. If we have a large carrier, large enterprise, a university, and so on that they need connectivity to 10 gigabit ports for the Layer 4-7 switches, we are the only vendor that ships products currently.

This is true even of Foundry's latest announcement of the newest 10 gig platform?

Yes, in mucho grande Layer 2 to Layer 3 switch. It does not support 4-7. If you look on the Foundry technology, they have three product lines, the net Iron, the server Iron, you need to look on the server Iron product line. This is the product line that addresses Layer 4-7. Foundry announced a very impressive Layer 2 to Layer 3 but not competing in our model.

Thanks very much. Appreciate it.

We do have a question from the line of Dan Harvard with HSBC. Please go ahead.

Hi. The F-5 announced recently expanded into a mobile market. Is that an area where where you will see potential?

We see some potential but the Layer 4-7 generally speaking, doesn't care what is the underlying access technology that the traffic is going through. We have many installations in mobile carriers including T-Mobile, Digitel and so on and I'm not sure the application is so different in the regular wireline applications whether it's a satellite, cable, DSL, a T1, a cellular carrier, Layer 4-7 capabilities are roughly the same because this, again, is on the higher levels of the OSI module, the application level. The importance of the access technology is somewhat limited.

Okay. Can you comment in terms of visibility and how your pipeline is compared to previous quarters?

You can assume we are comfortable giving the current environment in upward guidance. Where all our fears and generally speaking, the network equipment vendors are saying flat to down guidance so probably our pipeline is stronger we have better confidence in our business, visibility is improving. Again, as I said in my remarks, this quarter and we believe that the next quarter will not be different than what we've seen in the last six quarters. So business is improving.

So does this mean you already have some visibility in terms of pipeline?

We have some. The sales cycle in our market are not that long. We feel more and more confident on Q2 and on the rest.

Okay. And one final question in terms of SARS, are you seeing any impact in the Asian markets at all?

We are tracking that. Of course, I don't think it's unique to us. From what we hear in greater China and Singapore, the climate, the business climate is a bit weak right now. We need to track and see. In any case we don't feel it will have an impact on our results.

Okay. Thank you very much.

Thank you.

We do have a question from the line of Mark Su with [Inaudible]. Please go ahead.

Thank you. Looking at your guidance of $12.8 to $13 million for the June quarter, are you looking for any improvements in North America in network expending or would most of that growth come from the international markets?

Currently I don't want to give the exact split. We see several opportunities of growth in both markets. Since also my employees are listening to this call, if I would say it's only world wide maybe the U.S. team will rest, so all of them should grow and grow nicely this quarter.

Got it. Can you give us thoughts on your channel partnerships. Are you increasing your distribution pace particularly in Europe and Asia and how should we see the trend develop over the next several months?

We are increasing our distribution channels. The key focus is really on making the current ones more successful and more efficient. In several markets, we are taking some large distributors from competitors. It's not our focus. Our focus today is to drive more revenues, more business to our current infrastructures.

Got it. And, Roy, separately, if you look at the opportunity, is this a market that you're targeting in the near term or something that should develop over the longer term and whether or not you participate, give us your thoughts.

We are tracking the market. We don't see a strong demand from customers both enterprise and carrier customers to it. We feel we have enough on our plate to focus on and enough growth, growth opportunities in our main stream market before we go after servers and so on.

Thank you, Roy. Thank you.

We do have a question from the line of Troy Jenson. Please go ahead.

Two quick questions, one on the operational leverage. Can you give us a sense on how much additional revenue you can add on before the operating expense structure changes?

At this level I don't want to give the full guidance for the year. We definitely can see material growth above 30% in revenue without really, what we believe a major upgrade for the operational expenses.

Can you remind us, do you recognize revenue on sales in our sales out?

As I mentioned in the beginning of the call, we are recognizing revenues basically on sales in to our partners. But we don't allow or we don't stock equipment in their warehouses and this is why we have a relatively large inventory on our books. So basically today whenever they are getting an order placed for a specific project, they place the order with us, we supply the equipment to them and they are supplying it to the end user. This allows us quite a good visibility in terms of projects, order flows and so on and we would like to keep it this way.

Congrats and good luck.

We have a question from Jonathan Hats with UBS.

Thank you. Congratulations on the execution. Just a follow-up on the previous question. Maybe you can elaborate a little bit on how you achieved the growth. I mean, from Q1 '02 basically revenues in the neighborhood of 25% with keeping operating expenses flat. You indicated you can do another 30%. Give us insight how that is achieved?

I think what we have done is build a strong infrastructure so we have today presence in many markets, we have maintained our sales and marketing expenses quite high. Basically this sales and marketing infrastructure can support much more revenues on it. What we have done during the years, we invested ahead of revenues and now we can grow revenues on the same infrastructure. If you look at the marketing expenses on our world wide presence, on our domestic presence in the United States, it is quite obvious we can grow revenues with the same amount of people and budgets.

So fair to assume your average salaries have gone down given the fact your head counts have gone up by 20 people over the last twelve months?

Maybe on the overall salary, this assessment is correct. We also reduced some additional budgets. Not all of our expenses are salary oriented. The combination of the marketing budgets we don't think are appropriate for the new, new economy like trade show participation allowed us to increase head count without increasing total expenses.

As far as your breakdown between international sales and U.S. domestic sales, can you give us a breakdown. I believe last quarter you commented that half your international sales were split between Europe and Asia if you can give that to us today as well.

The U.S. in this quarter contributed 48% total revenues and rest of world accounted for 52% split half and half between Europe and Asia.

Okay. And finally this quarter, it doesn't appear you will have to buy back shares. If you can give us what's your strategy, what's your plan in terms of completing your buy back?

Actually, yeah. This quarter we didn't buy back shares and we actually will do it according to the structure based on some parameters taking into consideration the market price and so on and so on. Right now the guidance we got on the board not to do so.

Thank you and good luck.

We do have a question from the line of Toby Fishbin from Lehman brothers.

Thank you. What portion of prior shipments do you expect to contain solutions around the end of this year?

We're not aligned with the shipments themselves, basically large projects in the large enterprise network. What people are demanding is not only to install a VPN network but ensure this service because it serves them mission critical applications of the enterprises, this will be always available and availability in the sense of the VPN themselves as well as ISB links. What the joint solution allows for our mutual customers who get the VPN products from NetScreen, the availability and performance switches into an integrated solution that will support full availability, performance and connectivity across the VPN network. I would rather say it's not aligned with the amount of appliances but in the large enterprises all of the wins basically being mutual ones for both companies.

Would this mean that Radware will be relying on NetScreen marketing and maybe other distribution in terms to benefit from that?

We have several joint channels with NetScreen like [Inaudible], the largest channel in Japan is a common channel for us. Several channels across Europe that we're working together as well as in the U.S. markets. I don't think it will be a right statement to say we will rely on the [Inaudible] it's a very good partner of us, but we have other partners in the security market as well that we are marketing joint solutions for our mutual customers. We see nice fractions together with NetScreen in many enterprises.

Thanks. Maybe a question for Meir, do you expect to turn profitable from operations in the second quarter?

Yeah, specifically to reach the high end of our guidance which is $7 million, but 12.8 under the assumption that we continue to maintain the gross margin and operating expenses will be at $10.5 million, we can break even.

Thank you. Meir, can you please repeat your answer to the answer to the previous question on the share buyback problem. I'm not sure I got it right.

Okay. For the first quarter we didn't buy shares. The bulk of the [Inaudible] the company based on market condition other factors were to do every quarter. For this coming quarter, the guidance we got from the vote not to buy back shares.

Right. So actually you are roughly at the beginnings of this plan, right?

Yes.

All right. Thank you.

We do have a question from the line of Martin Mosar from CAIB. Please go ahead.

Good afternoon, gentleman and congratulations on a very good quarter. I have a couple of questions. I think you didn't give the carry revenues and enterprises. Last quarter was 46. Did it change?

This is the same we had before enterprise 60 and carriers 40.

So it's the same. Unchanged. And I was wondering did you have any currency, any currency impacting your revenues? The euro is so strong?

No, actually, we fell in dollars all over the world.

Okay. Then my last question is with regard to your tax situation, did you ever capitalize any different tax assets, is there something on your balance sheet under other assets or how will this look going forward 2003-2004? What do you expect here?

As technology company we benefit from certain tax incentive, one of them is improved enterprise, so far our tax rate expected to be in the next two years at least at zero. I believe that world wide taking into consideration from maybe '04, to take a tax rate in single digit. This is a good assumption.

Thank you very much and good luck going forward.

Thank you.

Again, ladies and gentlemen. If you do have a question press 1 at this time. We do have a question from the line of Matthew Maurice with IItalia Partners. Please go ahead. Your line is open. Please go ahead. If your line is muted, could you please unmute your line? I do apologize. There are no further questions. Please continue.

Okay. I would like to thank everybody for joining us today and have a great day. Thank you.

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