Radware Ltd (RDWR) 2003 Q4 法說會逐字稿

Welcome to the Radware fourth-quarter earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. We will now turn the conference call over to your host, President and CEO of Radware, Mr. Roy Zisapel.

Good morning, everyone, and welcome to the Radware's fourth-quarter of 2003 conference call. Joining me today is Meir Moshe, our Chief Financial Officer. We are very pleased to announce an unbelievable quarter and record results for Radware. Q4 revenues of $50 million and total 2003 annual revenues of $55 million represent a 25 percent growth over the 2002 respective numbers. Our continued growth in the Intelligent Application Switching market enabled us to increase our market share and customer base across all geographies. Before I discuss the highlights of this quarter Meir will review the financial results. After my comments we will open discussions for Q&A.

Thank you, Roy, and welcome, everyone, to our fourth-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 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 filed Form 20-F filed in April, 2003.

And now, ladies and gentlemen, for the financials. We are very proud of our achievement in the fourth quarter and in 2003 as a whole. All four quarters of the year 2003 were marked by exceptional performance with respect to all our business parameters. Our revenues and earnings exceeded projections. Alongside continued improvement in all our business barometers, (indiscernible) EPS and cash. We focused on increasing sales by giving attention to efficiency, improved collection and expenses monitoring, all of which are important for our enhancement of the business and financial results.

We are pleased to show continued and stable growth in sales for 9 consecutive quarter; in each of the quarters of 2003, we achieved growth in sales of 25 to 27 percent compared to the corresponding quarter in 2002. Revenues for the fourth quarter were $50 million, up from $40 million in the third quarter, and 25 percent increase over the sales of $12 million in the fourth quarter of 2002. The fourth-quarter revenues brought us to a total of $54.8 million for the year 2003, which reflects an increase of 25 percent from annual revenues of $43.7 million for 2002.

In addition we continued to show growth in deferred revenues. Our deferred revenues for the end of 2003 increased $7.1 million, compared to $5.3 million in 2002, an increase of (indiscernible) percent. Our operating profit for the quarter increased by 61 percent to $1.6 million, up from $970,000 in the third quarter and compared to operating loss of $700,000 in the fourth quarter of 2002. Our total operating profits for the year 2003 was $2.7 million compared to an operating loss of $6.3 million in the previous year.

The net income for this quarter increased by 35 percent from $1.85 million in the third quarter to $2.5 million, which represents earnings per diluted share of 13 cents, one cent better than the guidance. In annual analysis, that brought us to a total net income for 2003 of $6.4 million, which represents earnings per diluted share of 74 (ph) cents. We have continued to maintain the same high gross margin. Our gross margin for the quarter remained at 82 percent.

Our operating expenses for the fourth quarter of 2003 were approximately $10.7 million, a slight increase compared to $10.5 million in the third quarter. This increase is primarily attributed to the launch of our new DefensePro product during this quarter. The DSO's for the third (ph) quarter remained at 59 days, the same as in the third quarter and the decrease compared to 65 days in the fourth quarter of 2002.

The Company continued to maintain a positive cash flow for the ninth consecutive quarter. During this quarter we generated cash in the amount of approximately $6 million, hereby increasing our cash position including long-term deposits and marketable securities to more than $139 (ph) million. Total cash generated for 2003 amounted to $14 million, and we have no debt.

The headcount for this quarter was 289 employees and shareholders equity increased to $140 million. Guidance. With respect to the first quarter of 2004, we anticipate that sales will increase to $15.5 (ph) million and the earnings per diluted share will be 14 cents. The operating expenses will increase to a range of 11 to $11.2 million as a result of our investment in the application security market. We anticipate this investment will begin contributing to revenues in the second quarter of 2004. We also anticipate that the sequential increase in sales and in deferred revenues will continue throughout 2004.

As you can see, ladies and gentlemen, in the fourth quarter revenues continued to increase to record sales of $50 (ph) million. The cash position is up by approximately $6 million. We have improved our operating results by increasing our operating profit and we have continued to increase profitability. To sum up the year 2003 for Radware, we can probably say that it has been an exceptional year. Not only have we continued to grow significantly with 25 percent growth, we have also brought Radware stability and conservative management by maintaining low expenses and improving all business aspects. We expect that our innovative technology coupled with efficient management of resources will lead us to an even more successful and profitable 2004. And now I would like to return you to Roy.

Thank you, Meir. I would like now to discuss some of the main highlights in the quarter. First of all our solutions continued to gain customer tractions as they are deployed across carrier and enterprise networks for the availability performance and security of mission critical applications. During the fourth quarter we generated revenues from a strong global customer base including Fujitsu, China Telecom, and George Bank, ADP, Swift, Maxim, Reuters, HSBC among others. In this past quarter Radware garnered two product technology awards. Radware CertainT 100 won the recommended Buy (ph) Award in ST (ph) magazine tests in a head-to-head SSL accelerator comparison with eight other vendors. CertainT 100 offloads and accelerates SSL transaction processing while accelerating the response time of delivering web-enabled applications to end-users so optimized transactions and unlimited SSL service scaling. The ST (ph) magazine group test collected the CT 100 as the best product for a self-contained unit with high-performance and clustering capability.

In addition Radware improved from the Editor's choice award by Network Computing Magazine for multi-homing and (indiscernible) balancing with top scores, in categories including features, performance, reporting, and management. LinkProof enables enterprise customers to connect their networks to multiple service providers and carriers for guaranteed availability, improved performance, and reduced cost of connectivity. Both awards underscores the technology leadership of Radware progress in the application switching market.

In addition during the past quarter we were awarded a U.S. patent for our LinkProof multi-homing core technology. Our U.S. patent covers Radware's optimized Internet connection management. Radware LinkProof was launched in 1999 as the first to market multi-homing solution. Since it launched the LinkProof family has expanded to cover all connection speeds, delivering the only End-to-End Connectivity Solution in the market, further increasing our technological leadership. With over 1500 customers, the LinkProof is the de facto standard in the market and the LinkProof patent further solidifies our leadership in the market from all aspects, technology, innovation, and market share.

I believe the major highlight of the quarter was our new product announcement of DefensePro, the industry's first security switching solution for multi-gigabit in proven prevention and loss protection. DefensePro couples unmatched security performance up to 1000 times faster than a Pentium-based appliance, with advanced security intelligence to immediately protect applications against worms, viruses, intrusions, and denial of service attacks. DefensePro addresses the need to both connect and protect applications against a growing number and escalating cost of attacks. Followed by eight parallel ASICS (ph) dedicated for content scanning, DefensePro performed up to 256,000 data matches per second for complete database detection of over 1300 attacks, cleaning enterprise and carrier networks for internal and external attacks regardless of complexity or volume and up to three gigabit speeds.

DefensePro represents the evolution of over three years of Radware award winning finance architecture for application award services. DefensePro is today the only integrated solution in the market capable of isolating, blocking and preventing intrusions and denial of service attacks at multi-gigabit speed, while ensuring high throughput of all secure traffic for the complete continuity of mission critical applications. Radware security update service that was launched in conjunction with DefensePro release, provides our subscribers with automated security updates. The value of security update service features emergency updates, weekly updates and custom fielders to continually secure customers against emerging threats.

Only last week Radware security update subscribers were protected against the My Doom virus, within six hours of the attack appearance, blocking and preventing the virus spread. During the quarter we announced that OSCE (indiscernible) was one of the first DefensePro installations. The OSCE Organization for Security and Cooperation in Europe is the largest regional security organization in the world and is dealing with a broad spectrum of security issues, such as arms control, preventive diplomacy, human rights, election monitoring, and economic and environmental security. DefensePro was selected to protect the (indiscernible) conference against hacking attacks. During the conference DefensePro blocked several thousand security attacks, clearly demonstrating the huge security benefits of this product.

To summarize, in the fourth quarter we continued to demonstrate consistent growth across all business and operational metrics for the ninth sequential quarter. We were able to grow at 25 percent rate and continued to gain market share in all geographies. We are confident that the continued growth of our application switching products, together with the exciting growth opportunity in the application security market positions Radware very strongly to another record year in 2004. As a result we believe the current positive trend of sequential revenue and earning growth will continue throughout 2004. With that, I would like to open the discussion for Q&A.

(OPERATOR INSTRUCTIONS) Troy Jensen of ThinkEquity.

Just a couple questions here, Roy, I was wondering if you could go into more detail about the market share gains you are speaking of, both F5 and Nortel had very positive things to say about this space. I am just curious to know who you are taking share against.

Okay, basically the statistics that we have from Gartner and IDC are speaking on flat markets throughout the year of zero to 3 percent up. From all the companies I know in the market we are the only ones that grew in that group in overall yield and double-digit numbers. And not only that we grow double-digit numbers, we grew 25 percent. From the market researches that I have Nortel is losing market share, as well as Cisco and I think F5 is roughly stable. But nobody can speak on 25 percent growth.

Got it. In the fourth quarter did you recognize any DefensePro revenues and what is your expectation for Q1 contribution?

We did not recognize in Q4 any DefensePro revenues. We believe that although we are going to sell DefensePro units in Q1, the level of where revenue recognition will be very minimal.

Congrats guys.

Stephen Kamman of CIBC World Markets.

A couple questions. Housekeeping, could you give deferred revenues for third-quarter? Just so we could see the sequential change? We can get back to you on that but just a question on that.

Okay, for the third quarter it was roughly $6.5 million.

Thanks very much. A little more on the DefensePro. So no recognition on betas, which is good. How are the beta tests going and what is your advanced traction? How much of that deferred revenue line now is DefensePro? And then, I think you commented on this before. What percent of your revenues do you think could come from that product in the next four or five quarters?

Okay, we had around 20 betas. Roughly we closed 10 already as of today. We are since it's better our revenue from those beta sites are very minimal because those customers are helping us basically in being first references, as well as helping us to improve the product. So out of the deferred revenue line you should assume very minimal contribution is coming from DefensePro until now. Concerning the future, the traction we are seeing in the market and the customer's reaction is very, very strong. And also we have detailed expectations, of course, to how much it can contribute to us in 2004. I think it is premature to share it with you. So now I don't want to put the cart before the horse. I think the best time to speak about it will be after Q1 results.

The expenses, a slight increase, is that mostly sales and marketing?

The sales and marketing and a little bit in R&D.

Last question, you mentioned the patent. Any update on the patent issues between you and F5s and any thoughts on where that's headed?

Currently we continue in the process of litigation. There's no further update.

Thanks very much. Thanks for the quarter.

Alex Henderson of Smith Barney.

So just to recap, you are saying that most of the increase in the 11 to 11.2 quarter-to-quarter is in the sales and marketing line. Is that mainly marketing expansion, distribution expansion?

I think the increase in expenses that I think started at the 10.5 level all the way to 11 to 11.2, you split to several departments in the company. First of all there is some sales marketing and technical support ramp up we are doing in order to support the new security product. We are adding people to R&D in various departments, some of them dedicated to the security update service as well as to general R&D that we believe is the time to invest in. And those I would say -- and on top of that of course, some sales expansion in strategic areas for us. So I would say the investment is split between R&D, technical support, and sales.

And with respect to the betas that you closed, you said you closed 10. Did you get reorders from those beta sites?

Not yet. We just launched the product officially, I think December 2. There is no reorder yet, but the level and the -- we have several success stories, for example, we went to visit a carrier in Europe on other accounts he was attacked by My Doom, and the same morning just before the meeting and immediately a DefensePro unit went in the day after. So there is here an opportunity with the right timing to get very, very short and I won't save very, very short sales cycles, but they seem to us before.

I see. On the distribution front, can you just outline what you're planning to do this year in terms of expanding your distribution to broaden the reach of the company? A little bit broader discussion of how you are attacking the channel expansion?

Okay, basically we are going to continue with our current strategy, meaning we believe that in the most -- in the majority of the international markets and to some extent in U.S. regions we have quite well channel and distribution network and what we need to do is really to focus on training and drive efficiency through that channel network. So I believe the regular channel, the traditional channels we need really to invest in training, making them more efficient and so on. We have the right partners in place. In some regions, especially in North America, which is roughly 60 percent of our revenues, we are seeing very strong opportunities to augment our existing distributors and resellers with some kind of vertical OEM partners. And we're going to invest in that this year.

One last question. It wouldn't be fair to have the same person ask all of them so I give a financial question. On the tax rate, will we be paying taxes in '04? If so, what rate might that be?

In '04 we plan on paying taxes around 2 to 3 percent. This is on average for the year. I don't expect in first quarter paying taxes.

So nothing in the first quarter and 2 to 3 percent for the year?

Yes.

Dan Harverd from HSBC.

Just follow-up from the last question, first of all tax has gone to 2005, would it be similar kind of level?

Tax in 2005 will be in the single digits but more close to like 7 to 9 percent.

In terms of your operating expenses, from the Q1 level would you expect that to be fairly consistent through the rest of the year or moving up?

During the year we will plan on average of $11.5 million operating expenses on a quarterly basis, but of course, we have to take into consideration the progress that will be done in our revenues in the future (indiscernible) to augment this number. But right now in the (indiscernible) first quarter this is 11 to 11.2. Our average for the year is around 11.5.

Just on the DefensePro, Roy, you mentioned that you have had some back to sides (ph) with carriers and also with enterprise. Where are you seeing the most potential in terms of end-users?

I think like our regular application switching product line there is very big opportunities in both, both in carrier environments to protect for example their mission critical systems, whether those are billing, email platform, provisioning, and so on, as well as enterprise customers, protecting both external threats and internal worms that are spreading in the organization. So I believe the beauty of the DefensePro product line end market is that it is targeting the same customers, or same prospects that we are targeting with our core application switching product line. It is being built by the same channels because our channels to a big extent are dealing also with security initiatives and products in that market. So from many points of view it is very, very synergistic with our existing operation.

So in the enterprise market, as I understand, you will be positioning DefensePro not just for perimeter security but also for internal security?

When we speak about application, application threats, those are spreading both from the outside as well as the inside. For example the MSBlaster worm was mainly spread through employees connecting with their home desktops to an enterprise network and then spreading the attack, not so much from their gateway connectivity. So the power of DefensePro, our ability to protect up to three gigabit speed enabled us not only to protect the external threats coming into the network at the gateway level, but also to provide internal protection against those application security threats. And today, I believe we are the only product in the market that is capable of delivering that in three gigabit speeds. And this is a major advantage that we are going to stress with our customers.

Then just finally, can you give some indication of how many security update subscribers you currently have?

We have 20 beta customers. That's what we have.

Okay, so the security updates are just on the DefensePro, not on --.

At this stage, yes.

Thank you very much.

A follow-up from Stephen Kamman of CIBC World Markets.

Just a couple other quick housekeeping questions or stuff you have given in the past. ASIII for the quarter?

ASIII for this quarter is $55,000. It is up from $50,000 actually that we had in the first three quarters of the year.

Any particular reason for the increase?

It is mainly because of product mix. We are seeing nice growth in the Application Switch III, in the high-end, and that is the cause.

It is not the special golden platinum plated ASIII limited edition?

Not yet.

Sorry. It was a late night for all of us. Percentage sales from the ASIII, that was the other question. You gave that last quarter, I think it was 8 percent?

Fourteen percent this quarter.

Fourteen, excellent. Not bad for a box that's too fast for the market. And I think that's it. I had another question. I don't think you usually give this out, but book-to-bill?

We don't have a book-to-bill as we ship all products that we are getting orders for. And we discussed that in the past, it’s in order to minimize channel inventory into a better visibility for our business, so basically book-to-bill is always one.

Makes sense, and the last question is -- gone completely out of my head. It could not have been that important. Thanks very much.

(OPERATOR INSTRUCTIONS) We have no further questions in queue. Please continue, gentlemen.

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

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