Radware Ltd (RDWR) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions and comments, instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to turn the conference over to our host, President and CEO of Radware, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning everyone, and welcome to the Radware third-quarter of 2003 conference call. Joining me today is Meir Moshe, our Chief Financial Officer. We are very pleased to announce another record quarter for Radware. We are proud to have achieved record revenues of $40 million and a net profit of $1.9 million in what is typically considered a seasonally weak quarter. We have shown a growth in revenues for the eighth quarter in a row while keeping our expenses flat, resulting in continuous improved profitability. Before I discuss the highlights of the quarter Meir will review the financial results, and after my comments we will open the discussion for Q&A. Meir.

Thank you Roy, and welcome everyone to our third quarter conference call. First of all, I would like to read you the Safe Harbor language. During the course of this conference call we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to documents the company files from time to time with the Securities and Exchange Commission, specifically the company's last files for 20-F filed in Israel 2003. And now, ladies and gentlemen, for the financials.

This quarter has been marked by the achievement of record sales totaling $40 million, and an increase in our operating profit. Our revenues and earnings exhibit projections and we continue to improve in the range of business product sales including sales, operating results, EPS and cash. The third quarter of 2003 is the eighth consecutive quarter of growth in sales. Revenues for the sales quarter were $14 million, up from $7.2 million in the second quarter and a 27 percent increase over the sales of $11 million in the third quarter of 2002. Our operating profit for the quarter was approximately $1 million, up from $300,000 in the second quarter and compared to an operating loss of $1.5 million in the third quarter of 2002.

The net income for this quarter was approximately $1.5 million, which represents earnings per diluted share of 10 cents, better than the guidance of 7 to 8 cents that the company had set for the quarter. We have continued to maintain the high gross margin. Our gross margin in this quarter remains at 82 percent, the same as in the last four quarters and approximately 1/2 percent above the gross margins in the first half of 2002. Our operating expenses for the third quarter of 2003 were approximately $10.5 million, the same as in the last eight quarters and in line with our guidance to the market with respect to maintaining our expenses flat throughout the year.

The DSOs for the third quarter remained at 59 days, the same as in the second quarter and a decrease compared to 71 days in the third quarter of 2002. The company continues to maintain a positive cash flow. During this quarter we generated cash in the amount of approximately $3.7 million fueled by increasing our cash position including long-term deposits and marketable securities, to more than $133 million and we have no debt.

The headcount for the quarter was 280 employees and the shareholders equity increased to about $133 million. Guidance. With respect to the fourth quarter of 2003, we anticipate sales to increase to a range of $14.5 to $14.8 million and earnings per diluted share of 12 cents. As you can see ladies and gentlemen, in the third quarter, revenues continued to increase to record sales of $40 million, the cash position is up with improved our operating results by increasing our operating profit we continue to maintain profitability and we are optimistic about the fourth quarter results. Now, I would like to return you to Roy.

Thank you, Meir. The third quarter of 2003 continued our momentum and positive results of the past eight quarters. We are very pleased to report growth in revenues, market share and profitability. During the past quarter, we achieved several important milestones attesting to the progress we are making on all fronts. At the end of August, we announced the distribution agreement with Tech Data providing gradual heightened exposures to U.S. system integrators and resellers. We believe this agreement will provide us with incremental revenues on top of our existing channel network.

During October, we held our annual worldwide partner conferences. Over 400 participants from leading distributors, VARS and resellers attended our global events representing a threefold increase in attendance from a year ago. The events marked a growth in channel commitment to Radware and we intend to continue to strengthen our channel metric and increase efficiency and productivity. Concerning customers, our solutions are deployed across carrier and enterprise networks to guarantee the full security, performance and availability of the mission critical applications. We are seeing continuous and growing demand for our solutions driven by the increased deployment of mission critical applications.

During the past quarter, we generated revenues from customers such as ADP, C-SPAN, eBay, Tellus the Canadian carrier, the Food and Drug Administration, Moody's, Shanghai Telecom, Telefonica, Thrifty Rent-a-Car and Bain Capital. I would like to discuss ADP in more details.

ADP dealer services as partners with Radware to provide their dealers with an end-to-end connectivity solution for their Internet security program Get Wired. Dealers have come to rely on the Internet as a vital communication tool for running their business requiring full connectivity across all retail alternative branch and central headquarters. Radware enables ADP to extend a highly available secure Internet connection to its customers across all remote locations ensuring continuous connectivity while cutting service costs.

On the marketing front, we announced a partnership with Citrix. Together the Citrix and other partnership drive the delivery of Server-based applications, and ensure continuous secure and effortless access to these applications from any location, device or network connection. We announced together with Citrix a major joint customer, DTCC, which is the largest financial service trading infrastructure organization in the world. They are using Radware application switches across multiple server forms to ensure reliable and optimized remote access of employees and partners to the depository trust server funds.

On the product front, the third quarter was a very busy quarter for us. On the application security front, in terms of volume and damage caused by application level effects including worms, viruses and denial of service attacks the past quarter was the worst ever. To give you a sense of scale, the damage of the sobig virus alone was estimated at $30 billion. Attacks such as MSBlast, sobig and Cisco's (ph) vulnerability proved that application level security is critical for ensuring availability and performance of enterprise application.

Our award-winning SynApps architecture is the only solution in the market that provides application security and denial of service protection in gigabit speeds. This unique security (inaudible) capabilities were highlighted in the latest (indiscernible) for enterprise firewall that was released last quarter. Radware was recognized together with Cisco, Checkpoint and NetScreen as the only challengers to lead the application security market because of our ability to detect and protect against application violations in real-time from the network level up to the applications. We were first in the market to deliver application security to multiple gigabit speeds and first to combine application security with application switching.

In addition, we announced this quarter the LinkProof Branch for remote office connectivity. With the introduction of LinkProof Branch Radware addresses all connectivity needs of organizations working with distributed IP applications. Delivering end-to-end internet link availability, connectivity cost savings, optimized performance and complete link security. LinkProof Branch is the first and only layer 4 to 7 solution to provide distributed networks with VPN and multi-homing capabilities for secure and highly available connectivity. As a result, headquarters and branches can connect over the public Internet or private network. Whether connecting over friendly (indiscernible) MPLS or the public Internet, organizations can enjoy end-to-end load balancing performance optimization and full tolerance for the distributed applications.

Last but not least, this past quarter we announced a new version for our flagship WSD productline; version 8.0 which further extends our competitive advantages in application switching. With this new version, Radware is the first vendor to provide a combined solution of global redirection and multi-homing capabilities guaranteeing accelerated response time to end-user requests by serving them through the fastest connection available. This version also provides SSL backend encryption with layer seven switching letting financial and government institutions to improve content (indiscernible) while adhering to no clear text transmission policies, all the way from the client to the server. The multivariable layer seven switching enables our customers to configure switching decisions based on any application header and content including URL, browser and access device, language, file types or other content, and providing them with the most flexible and configurable way to deliver content to their users.

To summarize, we continued in the third quarter of 2003 to demonstrate consistent growth across all business and operational parameters as we have done in the last eight quarters. New product announcements, distribution agreement with Tech Data, a positive shift with Citrix and exceptionally successful partner conference are some of our achievements. Our business fundamentals continue to improve and we are seeing traction across the world for our application switching solutions from both existing and new customers. We are confident that this positive trend together with our continued product innovations and focus on the application switching market, will enable us to continue to grow revenues sequentially. With that, I would like to open the discussion for Q&A.

(OPERATOR INSTRUCTIONS) Troy Jensen of ThinkEquity.

Roy, quick question for you. Could you comment on the SSL VPN market and let us know if you think that is a direction Radware may be heading?

The way we see the SSL VPN market is that it’s an extension of the VPN market. What SSL VPN allows you to do is basically enable your remote employees or mobile users to connect to the enterprise applications (technical difficulty) without the need for client sized software. So, we believe it is just an extension of the regular IP sect VPN and I think the latest acquisitions by a net screen of military Siemen-type of software and (indiscernible) proved that. From our point of view, our focus on the SSL market is on transaction acceleration and word compression. So, while the main SSL may confuse, SSL is just the name of a protocol and we are focusing on the server (indiscernible) side accelerating (indiscernible) transactions, website content delivery, web-enabled application delivery while SSL VPN is installed in the other side of the network allowing you for easier remote access to the enterprise. So, we don't intend to enter this market, and we are cooperating with leading SSL VPN vendors such as Safe Web, now Siemens Tech, (indiscernible) etc. to provide best of bridge solutions to our customers.

And a quick follow-up for Meir. Could you give us maybe expectations for what operating margin goal is for Radware?

The operating margins for Radware in the future, if we are talking first of all about our gross margin, the gross margin is 82 percent. We have maintained this in the last four years, but we continued to guide the market that we plan for our gross margin to decline. Even so, we have maintained in the past. About the next quarter, we made the comment the operating expenses will continue to be flat throughout all '03, so by that this is very clear we have not guided the market for '04 yet.

Congrats, guys. Very nice numbers.

Mark Sue representing CE Unterberg.

This is Brian Marconi (ph) for Mark. Could you talk about your 10 gig products and how business is doing? Where do you see demand coming from? And also can you just talk about your inventories, seem to have gone up again this quarter?

First of all concerning our application switch three, the (indiscernible)switch three accounted for 7 percent, 7 to 8 percent of our total revenues. We see strong traction in the high end of the enterprise market, and especially in the (indiscernible) and ISP market. You look at all of the growth in carriers worldwide with the fast adoption of DSL services, the speeds of their networks is going up dramatically and they need a solution that can support those multi-gigabit speeds for layer 4 through 7 applications and today we are the only vendor in the market shipping the 10 gig interface for layer 4 to 7. So we are definitely seeing their strong acceptance and I think it is in line with what we have discussed in the last quarter.

Concerning inventories, as we have announced, we have added basically two new platforms, two new houser platforms to our mix. One is the LinkProof Branch for the branch offices and the other one is Application Switch 3 and therefore, we have seen some slight increase in our inventories of $300,000 because we have more platforms and more hardware to our stock.

Thank you.

Alex Henderson with Smith Barney.

Couple of questions. First of all headcount?

Headcount for this quarter was 280 employees.

Have you given any guidance with what you think your tax rate is going to be in '04?

At this point, we are not giving guidance to '04.

I am not looking for revenue, just tax rate? We can't forecast your tax rate in any way form or fashion.

The tax rate would be in any case in single digit. We believe that in '04 it will be in the low range of the single digit, and '05 and later it will be like 9 maybe 10 percent, but again it depends on further parameters that we have yet to see in the future.

Like 5 this year, 5 in '04, 10 in '05 kind of thing?

Yes.

Ballpark is fine. Can you talk a little bit about what you are seeing in terms of system pricing ASP's, as well as apples-to-apples prices and what you are seeing on component costs?

Generally the pricing environment is stable both from our costs as well as selling prices. Every average selling price again did not change if we compare apples-to-apples of course, our power Application Switch 3 is the higher selling price in the list and the LinkProof Branch platform is a lower one. But if I am looking on same platform, selling prices this is stable.

Can you talk a little bit about whether you are seeing any acceleration in activity rates, any shortening of self cycle links, or any change in deal sizes?

Currently, we don't see any significant increase in deal sizes. We are seeing more a lot more activity in North America. We believe books (ph)in Q3 was seasonally weak and will come back in Q4, so we expect increased level of activities there but Q3 that obviously was not the case, and in the Far East we continued to see very, very strong traction an infrastructure buildout.

Thanks.

Orin Hershman (ph) with (indiscernible) Investments.

Congratulations on the progress. Could you just repeat once again the breakdown between enterprise and telecom and can you tell us a little bit more, you started to talk to one of the other answers. Does the new products really beginning to hit the sweet spot was the telecom? Can you kind of just give a little bit more color on that?

First of all, about the breakdown enterprise and carrier, enterprise 60 percent and carrier about 40 percent, this is the same as we had in first and second quarter this year. Concerning the material market, we are seeing that service providers anteriors that deployed for example three years ago, (indiscernible) solutions that were able to support several hundreds of megabits, let's say 500 megabits. With the DSL adoption let's say a user is getting one meg of traffic, 500 meg means 500 simultaneous users only. So obviously, there is DSL traffic goes up (indiscernible) need to adopt the network speeds and infrastructure to this rise and therefore we are seeing the cycle of replacement of all the infrastructure in carriers that specialize in DSL or broadband connectivity to the new end of our application switches. And over there, we are seeing very strong demand and from one end there is the need from the other end there is no product in the market other than Radware can support that need and we are seeing the very strong traction.

Have you actually seen any telecoms begin to deploy that product already?

Yes we did. We mentioned the 7 to 8 percent meaning roughly just over 1 million dollars of revenue this quarter of Application Switch 3 coming from customers not from demo holders or stocking of the product in general, we don't do that.

This was the first quarter of meaningful revenue, correct?

Yes.

Finally you have mentioned about the Asian business being very good to you on the telecom side, is that just existing customers or there were new customers as well on the telecom side in Asia?

We have done both. A lot of it big business as well as extension to new customers.

Thanks so much.

Alex Henderson with Smith Barney.

I was wondering if you could talk more about where you think your distribution strategy is going. It is nice adding Tech Data, but are you planning on any major pushes to pick up new VAD VARs (ph) in North America or Europe or are you doing any strategic alignments with large systems houses, ala the IBMs of the world. What is your plans on that front as we go out? The second question is can you talk about what you think '04 looks like in terms of -- think about your new product introduction rates over the last several years -- is '04 an average year, above-average year, below-average year. How would you characterize it?

First of all, concerning the channel networks, worldwide we are working with two-tier distribution. So, Tech Data is a strong addition for us in the U.S. to be able to serve more channels. As the market matures especially in the low-end, we believe China's end distribution network will play a key role in that. So, on one end, we are adding value added distribution in order to support China to provide Tech support to enable us and help us in recruiting in those channels. On the other end, we're approaching the high end of the system integration companies and integrators worldwide in order for them to support our product. So I can go market by market, but we have done very good progress in the Far East, especially in Japan and China on that front. We have done good progress in the U.S. on that front, and in Europe we continued to dominate the high-end of the system integrators and especially the European ones like Dimension Data (indiscernible) so we constantly invest and we are doing this not only this year but for four or five years using our channel system. From the beginning our sales model was indirect sales and we are constantly increasing and strengthening it.

Concerning your question about the pipeline of products for 2004, first of all, 2003 is not over yet in terms of new product announcements for us. We believe that in Q4 we will announce another new product. Second, we are intensively as you can see investing in R&D. We believe 2004 will not be anything different than that, and we expect the same rate of new product introduction, new capabilities, new versions and new platforms.

Thanks.

Homer Jacob (ph) with UBS.

Do you still believe you can grow revenues by about 25 percent without the need to increase operating expenses?

We answered that I think in the first quarter conference call when our sales were just above 12 million dollars per quarter, we were asked this question and we said that we believe that we can on top of the same infrastructure increase our sales by roughly 30 percent. The situation we still believe the same numbers.

So still believe. So, when do you think you will need to increase expenses in terms of revenues levels?

Basically, in order to plan for the next stage in growth, once we reach if you add 30 percent to 12 to 12.5 million, once we reach 15.5 to $16 million range in revenues, we will need to invest more in order to make sure that we continue to grow.

Thank you. Can you please -- I do not know if you told it during the conference call, but what was the repeat business in terms of percentage of revenues?

The repeat business was 45 percent for this quarter. Again this is the same we had in first and second quarter this year.

Thank you.

Dan Harvard (ph) with HSBC.

(inaudible) on the numbers. Just in terms of (indiscernible) the operating expenses, can you explain how your revenues have increased by over 20 percent. We do not see any increase in sales and marketing expenses? I am just trying to understand the commission to some of your distributors and resellers?

Commissions are not I would say the biggest part of sales and marketing expenses. A lot of the marketing expenses such as shows, advertising campaigns are much more influential than change in commissions. In addition to that, you would assume that our sales plan for this year took into account growth sequential growth between quarter-to-quarter. So, even if sales are growing but percentage of achievement versus quota is the same, there is no change at all in commission payments.

Okay. Looking to just in terms of the business environment, I know you asked it earlier, but just as a more direct answer in terms of whether you are seeing improvement in general?

Can you repeat the question?

Just in terms of the overall business environment in terms of IT spending plans, et cetera, how would you describe the environment compared to let's say six months ago?

There are definitely signs of a strong improvement in North America. I think Far East continues to be extremely strong. In Europe we are seeing seasonality in the business. So, we believe Q4 should be strong because of end of year budgets, but I think that the best time to really discuss Europe and the trends will be Q1 when we can factor out the end of year issues.

Just finally for me, can you give an indication of the number of new customers that you have in the quarter?

In any given quarter we have between 50 to 100 new clients and this is the same we had in this quarter.

Thank you very much.

(OPERATOR INSTRUCTIONS) Mr. Zisapel there are no participants queuing up.

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

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