Radware Ltd (RDWR) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. 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 given at that time. [Operator Instructions] And, as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, CEO of Radware, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone, and welcome to Radware's first quarter 2004 conference call. Joining me today is Meir Moshe, the Chief Financial Officer.

We will pleased to announce another record quarter for Radware. Q1 revenues of $15.5 million represent a 23 percent revenue growth for our first quarter of 2003 revenues and a quarterly net profit at $2.8 million is more than three times our profit in Q1, '03.

Before I discuss the highlights of this quarter Meir will review the financial results. After my comments, we will open the discussion for Q&A. Meir.

Thank you Roy and welcome, everywhere, to our first quarter conference call.

First I would like to review the Safe Harbor language. During the course of this conference call, we may 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 actual events or results may differ materially. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission specifically the Company's last filed form 20 F. filed March of '04.

And now, ladies and gentlemen, for the financials.

In the first quarter of '04, Radware continued its strength over the past ten quarters with improved performance in all business parameters. Our revenues and earnings are in line with projections, alongside continuous improvement in our operating results, EPS, and cash. These improvements were achieved while we invested great effort in introducing our new product -- the DefensePro.

We're pleased to show continued and steady growth in (indiscernible) for the 10th consecutive quarter. This quarter has been marked by the achievement of record total sales of $15.5 million, up from $15 million in the fourth quarter of '03 and a 23 percent increase over the first quarter of $12.6 million in the first quarter of 2003.

At the same time, we increased our other (ph) sales revenues. Our operating income for that quarter continues to increase to an amount of $1.7 million, up from $1.6 million in the fourth quarter of 2003 and compared to an operating loss of $180,000 in the first quarter of '03.

The net income for this quarter was $2.8 million, which represents diluted earnings per share of 14 cents in line with guidance and one cent about the diluted earnings per share reported for the fourth quarter '03.

We have continued to maintain a high gross margin and have even increased it slightly to 82.2 (ph) percent. Our operating expenses for the first quarter of 2004 were approximately $11.1 million, an increase compared to $10.7 million in the fourth quarter of '03 which resulted from our investment in security segment, including our defense quota development and marketing and our security public service.

The DSOs for the first quarter were 60 days, the same as in the first quarter of 2003. The DSOs in the last five quarters have remained at 59 to 60 days which is below our original target.

The Company continues to maintain positive operating cash flow for the 10th consecutive quarter. During this quarter, we generated cash in the amount of $4.5 million, thereby increasing our cash position including long-term deposits in marketable securities to $143.5 million. This represents more than $8 per outstanding share and we have no debt.

The head count for the end of the quarter was 307 employees. Shareholders' equity increased to $145 million.

Guidance. With respect to the second quarter of 2004, we anticipate that sales will increase to $16 million and the earnings per diluted share will be 15 cents. The operating expenses will increase to a range of $11.3 to $11.4 million as a result of our investment in the application security market.

We anticipate this investment will begin contributing to our works (ph) in second quarter.

As you can see, ladies and gentlemen, in the first quarter, revenues continue to increase to a record sales of $15.5 million. Gross margin increased to 82.2 percent and cash position is up. We've improved our operating results and increasing our operating income to 11 percent and the net income to 18 percent and we're optimistic about the second quarter results. And now I would like to return you to Roy.

Thank you, Meir. Radware solutions continue to gain customer traction as they are deployed across carrier and enterprise networks for the availability, performance, and security of mission critical applications. During this past quarter, we generated revenues from a strong global customer base including China Telecom, Finegra (ph) Foods (ph), France Telecom, Anheuser-Busch, Gateway Computers and Reuters, among others.

During the first quarter we announced an agreement with Alternative Technology, a premier (indiscernible) technology distributor to drive the distribution of Radware's entire suite of intelligent application switching products throughout North America.

Alternative Technology will provide Radware with better coverage of the North American VAR and SI market and by focusing on service sites computing and security channels Alternative Technology will provide us with distributions that complement and grow our existing channel structure in the U.S.

We also announced a global reseller partnership with System International, Europe's second largest system solution provider. The agreement extends Radware Intelligent Application switching solutions as a value added offering across this System's customer base. These systems are a subsidiary of Deutsche Telecom. They have 42,000 employees in over 20 countries, providing us with access to the leading enterprise network accounts across Europe with an especially strong presence in Germany.

Other continual growth in market share was recognized this quarter by leading analysts including Gartner and IDC. Radware was positioned in the leading quadrant of Gartner web enabled application delivery emerging quadrant for the first half of 2004 recognizing our achievements in enabling the availability performance and security of network applications.

IDC 2003 report with market share by (indiscernible) shipments published in March, placed Radware in the second place with 17.1 percent market share. Last but not least, based on the (indiscernible) numbers for 2003 Radware holds 24 percent of the market for fixed layered proto seven (ph) up from 20 percent in 2002.

To further consolidate our application switching IP leadership Radware was awarded a U.S. patent for global load balancing in April. U.S. patent No. 671-8359 details the method for determining network proximity and the use of it as part of load balancing decisions.

This patent joins the LinkProof patterns we received less quarter and provide a strong indication for our technology innovation.

On the product front, we continue to progress with DefensePro 3 gigabit applications security release.

At the RSA show, we presented a live demo of DefensePro and matched security performance blocking attacks at 2.5 gigabits per second with over 700 different attacks activated. 300 times faster than competing products running on Intel based processes and architectures. We expect to start recognizing revenues from DefensePro in the current quarter. Before concluding I would like to shortly discuss our guidance.

In the last quarter Radware experienced very strong international growth in both Europe and the Far East coupled with flat performance in the U.S.

Revenues from international markets reached 60 percent of total revenues, growing 22 percent sequentially and 42 percent year-over-year. North American revenues were down 15 percent sequentially, representing a flat year-over-year.

We provided a guidance of $16 million revenues for the quarter. This guidance can prove to be conservative if our revenues in the U.S. will return to our regular levels. In addition, our guidance was modeled based on of a very small contribution of the DefensePro revenues in Q2.

In summarizing, in Q1 2004, we continued to demonstrate growth across business and operational metrics for the 10th sequential quarter. We believe we're well positioned to continue to grow our revenues and profitability and achieve another record year for Radware. With that, I would like to open the discussion for Q&A.

+++ q-and-a.

(OPERATOR INSTRUCTIONS)

Alex Henderson with Smith Barney.

I was wondering if you could give us some sense on this distribution expansion that you just announced, whether there's some increase costs associated with the initial ramp of that and how rapidly do you expect that distribution channel to open up in terms of producing revenue streams for you and adding to your growth rate?

We believe Alternative Technology will be fully ramped up in -- during Q2 so we will end up this quarter already with Alternative Technology producing. We've done all the training already, all the announcements, the product managers on site and so on so we don't expect any any additional expenses for this alliance. Concerning T Systems, T Systems is a reseller so advice from one of our distributors in Europe, we are working with them already on several projects. And while training will take place over the year in different systems branches in countries again we don't expect dedicated expense ramp up because of these alliances as well.

And the scale of the ramp of revenues, I assume there's some delay in the timing of the benefits from bringing in the (inaudible) given the natural three- to six-month sales cycle that technical equipment normally carries.

Here you are correct.

So what kind of ramp are we looking at? Do we expect it to be a sizable contribution in the third quarter, fourth quarter, first half of next year? When? When does it begin?

I think Alternative Technology towards the end of this year can be over 10 to 15 percent of our U.S. business, definitely. And beyond that I want to see the ramp in the early cycle revenues from them. Concerning T Systems we believe T Systems will be by the end of the year our largest partner in Germany.

You expressed some concern about the U.S. operations this quarter coming in below expectations. Can you give us some sense of what you think might have caused that?

I think as always there are several parameters. First of all Q1 is a seasonal quarter generally in the U.S. and also we expected to continue to grow our U.S. business sources during this quarter. I think the seasonality has hurt us to some extent. Second, we believe that our institution in the U.S. should be improved. There's no reason why our international business will grow 42 percent year-over-year and the U.S. will not match that. So we are working strongly in order to make sure that the U.S. business is ramping up as quickly as possible.

Tory (ph) Jensen with Equity Partners.

Couple questions here. Could you give us a better sense of how much contribution you expect to get from DefensePro this quarter?

As I mentioned in my notes in the model we expect very little. Very little contribution from DefensePro. This is one of the points that can be an upside for the revenues in this quarter.

How about then on the core apps switching business? If you kind of backed out a contribution from DefensePro looks like you're modeling just 1 or 2 percent sequential growth in kind of the apps switch space? Is that correct?

You should assume that the majority of the 500 K. increasing revenues or roughly 3 percent is modeled from the core apps switch business. As I mentioned DefensePro model is very low. For this quarter for conservative reasons we believe we will book revenues.

How about on another note, can you give us what contribution the apps switch 3 sales were for the quarter?

For the past quarter, as we'd mentioned in the last conference call we will not give a break out of application switch 3. What I can tell you is that the wins the major wins of we have in the carrier market and some of the names I've mentioned in my notes were coming from application switch 3. So the trends we're seeing, our carrier business is shifting from application switch 2 to application switch 3. For the enterprise business application switch 3 is just too powerful. And they don't need the capacity yet.

And as a final question and I'll pass it on then, (indiscernible)'s got the I control architecture which seems to be doing quite well, I think it was about 40 percent of their revenues. Do you guys have any technology or any thoughts of developing these type of interfaces?

Our platform support has the same options for external configuration like other platforms so you basically can configure from our remote application our switches to any combination of FMNP (ph) version 2 version 3 SSH Delnet (ph) and so on. From the application partners' point of view we we have today an alliance with Oratel with (indiscernible) with Citrix, with Mercury Interactive, with BMC software and so on. So we enjoy good relationship with us up with those applications and ours as well. We don't break those revenues (inaudible).

Warren Hirschman with OH Investment Group.

Can you break out the carrier vs. enterprise I'm not sure you did it and I missed it. And also on just trends, whether you are seeing any positive development in terms of trying to get other large carriers the size the ones you already have, particularly in the United States, if there's any progress on the carriers side towards a larger carrier deal?

The breakdown between enterprise and carrier this quarter was enterprise 65 percent and carriers 35 percent.

Concerning carriers, I believe in the next conference call we will announce a major win in the US carrier.

Okay and how in general, I assume the answer is well, could you give us any more color on how the betas went on the Sun (ph) DefensePro?

We believe the progress is very good and the feedback is very good. So as I said I think the product will ramp up successfully, I think we're on target with this product and there's a lot of good feedback and enthusiasm in the field. In some of the additional hardware components for DefensePro we are working on increasing the orders because we are short on supply and as I mentioned we will have real data end of this quarter to share with you.

You think a lot of the beta sites will become customers?

I believe so.

On DefensePro who are they comparing you to most, as a competitive product, if anything?

Generally in the -- the DefensePro is a high-speed intrusion prevention and denial of service protection product. So if you look on the whole market, in some cases they compare us to IDS intrusion detection vendors that don't provide the protection or the active filtering of the network but can also alert on attacks. In that sense sometimes it's ISS but generally we compete on a much higher end networks over 1 gig where the regular ISS process products are not targeting.

In the IDS market, the intrusion prevention market itself from time to time we meet a net screen and network associates. Network associates with the requisition of intruders and (indiscernible) with their IDP product line. But as a general rule, today we -- because of our hardware architecture and our application switching we are providing a much faster speed than anybody else for this application layer attack. So the higher the requirement is for a application layer security for example, carrier infrastructure (ph), for example high-speed data centers the better we are competitively.

One last question, if I may? I don't know if there's really an answer to this today but just in terms of the general switch market actually moving over to the point where people are looking for your type of switch or on that screen type of switch, immediately, as opposed to adding it on as a second thought is there such a movement at all yet in the marketplace?

I think the layer (ph) proto 7 market is still in its early days meaning we are still seeing very large companies that did not even choose the technology yet or just experienced with the technology on a limited scale. So it's really a market that we still need to go educate and penetrate. And the larger counselors big potential for increased revenues. By no means a market that is saturated or people are even well educated on the technology and expenses.

But that obviously will take you into a much bigger larger addressable market, correct?

Yes. We believe so.

Alex Henderson with Smith Barney.

Yes so I guess I'm a little curious about what's causing you to be so timid on your Q2 guidance. Normal seasonal patterns in this industry and most data network companies would suggest significantly more than a 3 percent sequential growth rate there. With a new product kicking in for first-time revenues, with a distribution channel kicking in for first-time revenues why so timid? Why are we being so overly cautious here? Is there something that we're missing in terms of concerns that we should be more worried about? Or are you just being silly, overcautious, timid? How can you explain that to us? Your guidance is below what the streets numbers are on First Call.

Okay. First of all it's the thing that is bothering us is the change in mix that we've experienced in Q1. To look on our results over the past two years we were having quite a steady mix between our North American operation and our international operation. And if you look on what's missing for us in Q1 in terms of the different place, you'll end up with over $1 million of revenues that we regularly would expect to have. So going forward I'm not quite confident how quickly we will bring back the U.S. to its regular levels. We're optimistic about it but at this point we don't want to comment it will happen already in Q2.

As a result we are more cautious on our guidance. As I mentioned in my notes we believe the guidance can be conservative, based on the two factors. How much revenues will book from DefensePro and how quickly the U. S. is going back to its regular levels.

Okay so on the DefensePro just so I understand, virtually no revenues in the first quarter of availability seems surprising. Most people have been anticipating this was going to be an important product for you. Sounds like you're not expecting much revenues from it. Why?

I would differentiate between our guidance and our expectations.

Well how about giving us a little bit more clarity on it, since your guidance is well below the street estimates?

Okay, so in this quarter we are modeling in the very low hundreds of thousands of dollars in terms of revenues. Going forward as we've stated, we believe it can be an over 10 by the into the year an over 10 percent of our total revenue but let's first of all get the orders let's book them and based on that we will continue.

William Abeckline (ph) with Oppenheimer.

I'd like to explore that geographic strength a little bit. Sounds like you're counting on Europe and Asia to continue to be strong into the second quarter. However last week, a large reseller or a large distributor Ingram Micro basically spooked a bunch of people by indicating they thought European business was going to be weak. And that got translated also into expectations of a weak Europe on the part of Tech Data, another big distributor.

So are you seeing any signs of weakening business in Europe? And if not, what's different about your business and what the people at Ingram Micro were looking at?

Okay. First of all our expectation going forward is for our international business which Europe is half of it to continue to be strong and to strengthen during the year. I think the main thing that's different is we're operating in a very niche market. Rather than Ingram Micro looking about all networking and computing their product portfolio. So while there may be some weakness as Ingram indicated in the overall market which I don't know -- I don't have the visibility and I'm not (inaudible) I believe in our specific technology and in our market, it really depends on our execution. It's really how many customers we visit, how well are we carrying our message? And how well are we positioning the ROI on our solutions? Once we're doing that, our chances to get the revenues are very high. And I think that's the driving factor behind the growth that we are seeing internationally.

As I mentioned international business is 42 percent growth (indiscernible) well above any market growth in networking.

Okay, thank you. And just a follow-up on what's going on in the U.S. One of the reasons you pointed out for the U.S. was seasonality. And of course it's expected that the second quarter is seasonally strong and, again, I'm surprised that your expectations for the U.S. are as conservative as they are. I would think that you would benefit from a seasonal recovery in the U.S.

I agree there will be a seasonal improvement in Q2 as there should always be but as I mentioned our expectations for Q1 were higher than for Q4 as the patterns were in the last two years. And as I mentioned in my previous answer, we are not contributing all of the flagged (ph) U.S. performance to a seasonality only. We believe that with proper and better sales execution we can considerably ramp up the revenues and that is the real issue. Whether we can do it and how quickly can we do it.

And Alternative Technology is one of the key mechanisms to do that I presume?

It's one of them. It's also -- going after the carrier business, that is serving our large enterprise customers, alternative will help in developing new partners in new niches of the market. But that will take more time than the immediate impact that we would like to see in the U.S. business.

Stephen Kamman with CIBC World Markets.

I was getting worried I was never going to get my question in. Just for housekeeping, because I don't think we got this data yet last quarter, could you just give us the geographic and service/enterprise split for fourth quarter and for one quarter just so we've all got it?

Okay. The geographic split for the fourth quarter was U.S. 49 percent and international 51. And this quarter it was 40 as we mentioned for the U.S. and 60 international.

And then service provider enterprise?

Fourth quarter it was 60/40 60 the enterprise and 40 the carriers and this quarter 65 percent enterprise and 35 percent carriers.

All right and then a lot of that, the drop-off in the carrier -- anything in particular there? Any geographic reasons for that?

We didn't have any geographic impact here. I think it's just more of the trends of material buying Q4 vs. Q1. I don't think it's more than that.

Okay, no worries then. Deferred revenue last quarter you broke out deferred vs. what do you call it, accrued? What -- other accrued? What were deferred revenues strength, at the last quarter I think it was in the $7 million range?

Okay, on a quarterly basis we don't want to break it for the market but the general segment that we made in the contents that this quarter deferred revenues is up. It's up from Q4.

Okay and that's true deferred revenues, not the other accruals in there?

Yes.

Okay, good to know. And then, another question, two questions on this. The Riverhead acquisition by Cisco. Seeing any impact there, positive or negative?

We didn't see any impact and I am not sure we, on our business, there will be an impact except for the maybe the good impact that Cisco will start to promote more security solutions to carriers as part of their backbone and their networks and I believe this will help layer (indiscernible) technology because it goes after availability performances security. So it will definitely help, I think, in the carrier market to drive the understanding that security is part of the services that carrier should provide to a customer as well.

The U.S. weakness. Was that specific to a distributor I mean, in Westcon (ph) or have there been any changes in your U.S. sales team or was it just not a good month, not a good enough -- somebody didn't have a good month?

We are analyzing it. It's, again, I think it was a mix of having maybe a bad quarter but also sometimes several sales execution issues and knowledge problems that we need to address.

Okay, that makes some sense and then, China, any update there in terms of traction?

As we've mentioned, our international business is growing very strongly. China is one of the leading driving factors behind it, very strong business from both the carrier side and the enterprise side. I mentioned China Telecom as a customer but on the carriers side also China Mobile, China Netcom and China Unicom or CNC -- a strong customer of ours so we are very optimistic on our business in China.

Are any of those companies customers a year ago? Or a year and a half ago?

Some of them started a year and a half ago. But we're constantly expanding our carrier business in China as well as, by the way, our enterprise business. Our business is growing very nicely.

That's good and then my last question just the FI patent litigation I guessed the trial is going to hit the end of this year, December. Any comment on that in terms of how that's flowing through? And what your expectations are? I realize it's a little early.

We don't have any update. Currently, we continue with the litigation process.

Mark Sue with RBC Capital Market.

Could you just comment on the linearity for the March quarter and what the typical linearity should be for the June quarter? And just as a clarification did you recognize any DefensePro revenues yet during the first part of this current quarter?

Okay, (indiscernible) linearity. This quarter the first quarter linearity was 20 percent in the first month of the quarter and 30 percent in the second month and 50 percent the third month of the quarter. We expect for the June quarter to have regular linearity, typical linearity which is 25 percent first month of the quarter in April, 30 percent May, and 45 percent June.

Got it. And then, if you could just give us a general commentary from your customers, regarding demand overall and any thoughts on deal sizes and then if you separate that with business from new customers and business with existing customers?

The average deal continues to be around $55,000 per deal as we had in the Q4 last year. It's about $58,000 that we had in the first three quarters of '03 and then what was the other part of the question, please?

Just business from new customers and maybe existing customers?

The new customers this quarter was 50 percent and repeat 50 percent. Again, if we compare it to Q4 and year was 55 and at least 45 percent.

Got it. And, historically, you would give revenue guidance in a range, and now you're giving an absolute number. Is that extra conservatism? Is that because of the change in sales? The expected sales in the U.S. out to be resolved over the next couple of weeks? Just give us the finality on that? Thank you.

If you recall from the last five quarters we will set our times as we give our guidance only one number without a range. There's no specific reason for giving the range right now as Roy discussed before this is conservative and if we will be able to book more revenues than expected on the DefensePro and to have better business in the U.S. Of course, there's upside to this number.

Alex Henderson with Smith Barney.

Yes. Just wanted to see if you could give us guidance on the tax rate, please?

The tax rate as we discussed last quarter will be this year in the range of 2 percent. And next year it will be in the range of -- next year and on -- will be in the range of 8 or 9 percent.

Okay. And just wanted to make sure that I understood your share count trajectory. Any guidance on that one?

Actually this is, what we had this quarter is almost 20.1 and so the rest of the year we expect to have it in the range of 20.1, 20.2.

(OPERATOR INSTRUCTIONS)

Mr. Zisapel, we have no other questioners queuing up so please continue, Sir.

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

Ladies and gentlemen, this conference will be available for replay after 12:15 Eastern time Eastern USA time today and running through Monday, May 10th at midnight. You may access the AT&T Executive Playback service at any time by dialing 1 800-475-6701 and entering the access code 726072. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 and an access code of 726072. That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. And you may now disconnect.