Radware Ltd (RDWR) 2004 Q2 法說會逐字稿

Welcome to the Radware second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and 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, Roy Zisapel, President and CEO. Please go ahead.

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

We're very pleased to announce another record quarter for Radware. We are proud to have achieved record revenues of $16.3 million and net profit of $3 million. We have continued to sequentially grow our revenues for the 11th quarter in a row, resulting in continuous improved profitability.

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?

Welcome, everyone, to our second-quarter conference call.

First, 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 event or results may differ materially. We refer you to the documents the Company piles from time to time with the Securities and Exchange Commission, specifically the Company's last filed Form 20-F filed in May, 2004.

Now, ladies and gentlemen, for the financials. In the second quarter of 2004, Radware continued its strength of the last 11 quarters with improved both top and bottom lines. Revenues and earnings are above our guidance. This quarter has been marked by the achievement of record sales totaling $16.3 million, up from $15.5 million in the first quarter and a 24 percent increase over the first of $13.2 million in the second quarter of 2003.

U.S. sales improved this quarter and contributed approximately 42 percent to our total sales, compared to 40 percent in the first quarter of this year. The defense -- (technical difficulty) -- contributed $400,000 to our sales this quarter, above our initial forecast of $200,000.

At the same time, we increased our deferred revenues. We have continued to maintain a high gross margin of 82.2 percent as (indiscernible) last quarter. Our operating expenses for the second quarter were approximately $11.3 million, at the lower end of the guidance range.

Our operating income for the quarter continued to increase to an amount of $2.1 (ph) million, up from $1.7 million in the first quarter and $300,000 in the second quarter of 2003. Since achieving our first operating profits in the second quarter of 2003, we have continued to improve the operating margin, reaching a total operating profit of 7 percent this quarter. The net income for this quarter was $3 million, or 19 cents, which represents diluted earnings per share of 16 cents, 2 percent above the diluted earnings per share reported for the first quarter of 2004.

The DSOs for the first quarter of 2004 were 66 days, a slight increase as a result of back-end sales in the month of May which were collected in July. The Company continues to maintain a positive operating cash flow for the 11th consecutive quarter.

During this quarter, we generated cash in the amount of $1.7 million, fueled by increasing our cash position, including long-term deposits and marketable securities, to $144.2 million, and we have no debt.

The headcount for the end of the quarter was 321 employees and the shareholders equity, $140 million.

Guidance -- with respect to the third quarter of 2004, we anticipate that sales will increase to $17 million and the earnings per diluted share will be 17 cents. The operating expenses will increase to $11.6 million as a result of our investment in the application security market.

As you can see, ladies and gentlemen, in the second quarter, revenues continued to increase to a record sales of $16.3 million, the cash position is up, we have improved our operating results by increasing our operating profit to 13 percent of sales and the net profit to 19 cents -- excuse me, 19 percent. We continue to maintain profitability and continued to guide upwards for the third quarter.

Now, I would like to hand you to Roy.

Thank you, Meir. The second quarter of 2004 continued our momentum and results in the last 11 quarters.

I would like to highlight several significant and strategic developments from this first quarter that serve as the foundation for Radware's continual growth. Radware's solutions are deployed across carrier and enterprise networks to guarantee the full availability, optimize performance and enhance security of the mission critical applications. Our seamless architecture is the only integrated architecture to provide customers with the full set of application-aware (ph) services. These services include health-monitoring, traffic redirection and load balancing, (indiscernible) management, application security and Denial of Service protection. Radware continues to leverage our unique architectural advantage to meet the application needs of new major accounts and growing implementations across our existing customer base.

During this past quarter, we generated revenues from customers such as Anheuser-Busch, Reuters, Cingular Wireless, Federal Home Loan Bank, CHIP Xonio and Ace Hardware. Ace Hardware deployed Radware's application infrastructure solutions, including (indiscernible) CertainT 100 to control and secure traffic and transactions across over 4,800 global Ace stores. Ensuring the full availability of Ace server (indiscernible) while accelerating all online transactions, Radware ensures Ace business continuity as it grows its global application network.

We had also a major win with Cingular Wireless. Cingular deployed Radware's FireProof and WC (ph) product lines to centrally manage and scale those (indiscernible) architecture and security layers. With Radware, Cingular Wireless can ensure service continuity for its applications while optimizing and scaling its security infrastructure. We believe we will be seeing repeat business from Cingular in the coming quarters.

With the continued growth in application level security attacks in the past quarter, including malicious worms and viruses, Radware's defense (indiscernible) and security (indiscernible) service delivers immediate 24X7 security against attacks and preventing attack spreads for our customers.

Radware's security applic (ph) service provide weekly updates for subscribers along with emergency filters whenever a high-risk attack is spreading. This quarter, SUS protected our customers' mission critical applications, network end-users against Bagle, (indiscernible) e-mail worm and AgoBot worm, a malicious back-door program with self-propagating capabilities.

More and more customers are turning to Radware to deploy our integrated application security and -- (technical difficulty) -- protection capabilities within our application switches. The Sasser worm is a good example of Radware's real-time protection. Sasser is a worm that spreads via the Internet to computers using the Microsoft Windows operating system. As a result of our research and protection against vulnerabilities, Radware products were already protecting against the Sasser worm before it even started, delivering zero-day attack protection to our customer base.

We were very satisfied with the performance of Defense Pro traction and revenue this quarter. Defense Pro is a high-end, high-performance intrusion prevention product delivering unmatched 3 gigabit performance for wireless (indiscernible) application security, protecting against over 1,500 threats and attacks. Revenues for the quarter, as Meir mentioned, were 400 (indiscernible) dollars and we are expecting Defense Pro revenues to double in the third quarter.

On the product front, we announced a new version for our application accelerator CertainT 100. Introducing Web compression and web session (indiscernible) features, CT 100 is the first product in the industry to address end-to-end application response time. The Web compression capabilities improve user response time for any Web application. Their download time improved significantly and bandwidth consumption reduced. (indiscernible) reduces the service (indiscernible) utilization, freeing the expensive cycle to serve more content for customers while providing an additional boost to response time.

To summarize, we've continued in the second quarter of 2004 to demonstrate consistent growth across (indiscernible) parameters, as we've done in the last 11 quarters. Record revenues and profits continued and sustained sequential and yearly growth and very nice ramp up of Defense Pro revenues are some of our achievements. Our business fundamentals continue to improve and we're seeing traction across the world for our application switching solution from both existing and new customers. We are confident that this positive trend, together with our continued product innovation 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 from ThinkEquity.

Congrats on the nice quarter, guys. A couple of questions on my side -- could you touch base on the linearity in the quarter? DSOs jumped a little bit and I'm just curious what you think DSOs will be, going forward.

About the DSOs, as we said before, our goal is 65 days. (indiscernible) will reach the 60 days, and we plan to take the DSOs back to the low 60s. It will probably be in the next quarter.

As I said in the call, the increase in the DSOs is due to the month of May, which was back-end loaded, but those collections have been collected in July already. So this is a more technical issue of accounting the DSOs and not something which is practically about 60 days.

About the linearity, this quarter, actually the international -- excuse me, the first two quarters, the first two months were 52 percent (indiscernible) total revenues and the last month contributed 48 percent to revenues.

Perfect. On the North American piece, 42 percent this quarter -- do you still expect that to hit 50 percent within the next few?

Basically, what we're looking is for continued improvement in the U.S., which will allow us to grow the U.S. business over time even faster than the current international growth. At this point, we would like to set the bar at 50 percent but we're looking for continued improvement.

Our last question and I'll pass it on -- could you touch base, Roy, on the patent litigation?

Yes. Basically, we have today two patent litigations with F5, which are separate. On the F5 case, there is no special update; the litigation is still ongoing and we still feel very confident about our position there.

Concerning the new case, we have a patent that was issued to us in April, 2004 for load-balancing based on proximity information. That mainly speaks about how you redirect traffic in a global load-balancing scenario. We have what we believe is a very strong patent and we believe F5 infringes that patent. We believe this case is a material case in global load-balancing networks, and we're going to protect our IP.

Congrats on the Defense Pro business -- much better than expected.

William Becklean with Oppenheimer.

A couple of questions -- you had some execution problems in the U.S. last quarter, and I guess also some mix issues. Could you talk about what was done in the U.S. to resolve that? Are those problems all fixed?

Okay, we've done multiple things to -- (technical difficulty) -- we stated also on the call, it was a short-term issue. First of all, we've replaced the top management in the U.S. and as we've announced, Dave Hubbard is now the President of Americas.

Second, we enhanced the amount of training dramatically for the sales force as well as the support, and we've done that through the quarter and we're much more pleased now with the level of knowledge.

Third, we've increased the amount of technical resources in the U.S. to provide our existing customers with better support as well as to do better pre-sales to new customers.

We have additional items that we're doing in order not only to bring the U.S. growth to in line with the international, although, as you've seen last quarter, it was better than the international growth, but also to dramatically increase our U.S. business. We believe there is a very big potential there. We have a very nice customer base, very nice (indiscernible) like I've stated with (indiscernible) and Cingular and we are quite confident in our ability to take advantage of this.

Just to follow up on that, was the recovery in the U.S. a seasonal recovery or was it a result of these corrections that you've put in place?

We believe the recovery is a result that you are seeing is beyond seasonality.

One last question on seasonality -- half of your business is in Europe. Typically, the third quarter in Europe is soft, seasonally. Do you expect a seasonal softness in Europe? Do you expect that to be offset by strength in other markets?

Obviously, if you look in our guidance, we've guided for roughly 5 percent sequential growth. As you've mentioned, a seasonally weak quarter, so while Europe should be soft, as you've mentioned, because of the vacation, we are very confident on the strength of our business in the other regions that will more than compensate the weakness in Europe.

Stephen Kamman with CIBC World Markets.

Just a question on that -- just to correct maybe, as best as I understand, Europe is more like 30 percent of your business; Asia is another 30 percent, something along those lines. Just if that's still correct from the last question. More importantly, rest of world only up about 1 percent sequentially, I'm just wonder where, if anywhere there was a bit of a setback there, Asia versus Europe?

Basically, Europe and Asia is 58 percent of our total revenues, and we've rounded the numbers for the U.S. Basically, the U.S. did between 41.5 to 42. International grew roughly 3 percent, but again we feel very confident on our business. I mentioned last time that, in Q1, which is a low quarter internationally, sequential growth still was 22 percent, so we feel very strong about the international business in growth.

Just to mention, it was a record quarter internationally in terms of revenues as well so business is going well there.

Asia versus Europe, any color there?

It's (indiscernible) roughly the half and half split.

You traditionally give enterprise versus service-provider mix.

It's still 35/65. The carriers are the 35 percent this quarter and the enterprise, 65 percent.

Then the share count is down about 2.4 sequentially. Is that just a function of the stock price or anything else going on?

That's correct. This is, as you say, as a result of the reduction in this share price.

ASP trends? Anything going on with ASPs we should know about, or are things staying pretty stable?

Stable.

Okay, and then the other thing you've given in the past -- I don't know if you still are -- is kind of a rough split between sales to existing customers versus sales to new customers, and just kind of any color on how things are going there.

Actually, we see the same trend in the first quarter, about 50-50 -- 50 this is new and 50 repeat business.

I promise I'll shut up after this one -- it was a good quarter, by the way. But Cingular, just any color on where they're using that? Is that in their data center? Is it in any place in their network? Just kind of any sense on that and also the LinkProof -- the branch office solution, any additional color on what's going on there?

In Cingular, we're already supporting multiple different applications, and we're doing security activations with the security layer. We are serving several mission-critical applications with our service-switching solutions. So we have already spread to some locations inside the Cingular networks and with multiple (indiscernible) of products, both the FireProof and the WC (ph).

Concerning LinkProof Branch, we are seeing growth in that business. I believe that we will be able to share some of the success in the coming quarters, but basically we're starting to see not only data center implementations but also full-branch and headquarter implementations. We've won several projects along those lines with between 50 to 100 LinkProof branches in each win.

All right, thanks very much and good quarter.

Zib Gill (ph) with MCS (ph).

Hello? Hello? Operator?

(OPERATOR INSTRUCTIONS). Alex Henderson with Smith Barbie (ph).

Smith Barbie? All right! That's pretty good. I didn't know we changed our name. I've got a couple of questions for you. The first one is could you answer the question that was asked on Cingular? I think what he was asking is, is the product that you're selling going into the service-provider portion of the network or into the corporate operational data center of the parent?

To date, internal applications of Cingular. It's not for reselling or service in the provision increase.

So it's in the corporate ops?

Yes.

Second, can you talk a little bit about what you're seeing in terms of component pricing?

We first seeing stability. You can see it from our gross margin and the fact that our ASPs are stable.

How about leadtimes?

There is some lengthening in leadtimes but in very specific components. I would not look at that as an issue.

Have you seen any reduction in leadtimes anywhere?

It's quite stable.

At the end of the quarter, a lot of software companies ran into some softness at the end of the quarter. Did you see anything like that? If you didn't, why do you think that there's such a -- what do you think the distinction is?

We didn't feel that and I'm not sure that our business is directly related to the software business but more to the implementations themselves on the server side, which obviously there is a gap there. But on top of that, if you look on the conductivity that we've had with LinkProof and LinkProof Branch, if you look on the carrier business that we've discussed with Cingular and others, if you look on the security market, basically a lot of our business is completely not related to the application business. Only the server side, only the server-switching side is related and over there, I think we're tracking with more with implementations than the actual software licensing.

On Defense Pro, if you could give us a little bit more detail on how you see that product ramping now that you've got the launch behind you? Obviously, you had a little bit of incremental sales this quarter, but certainly your expectations are substantially greater than the level that you've achieved. Can you give us some idea of what your expectations are for that product say a year out or how you see it ramping or something along those lines?

Basically, I think if you combine the last two calls, in this call, we've said that, looking in Q3, we are seeing Defense Pro revenues doubling, and in the last call, we said that we're seeing in Q4 Defense Pro being 10 percent of our business. I think those two statements are showing that we are quite confident, not only in the potential but in the actual revenues that Defense Pro will contribute to us.

How about new product development beyond Defense Pro? What does the new product launch roadmap look like?

As a policy, we always announce products when we're shipping them to (indiscernible), not before that.

That's all right. I was just asking whether you have product introductions, not necessarily product detail.

Of course we have. We have a large engineering department. We're working on the new generation, both on the platform side, on the SynApps architecture as well as new development of products.

Should we expect any new products announced between now and year-end?

It may very well be.

Okay, I will cede the floor.

Andy Shopek (ph) with Nutmeg Securities.

Thank you and good morning. I've two questions I'd like to ask, one on the financial side first. In terms of the gross margins, where do you currently expense field service and maintenance? Basically, what I'm getting at is whether or not there's any possibility of any reclassification of expenses down the road that might change the gross margin and the shift in the operating expense.

It's inside the cost of goods.

It is in the cost of goods?

Yes.

So there's nothing here that is subject to any kind of a reclass?

No.

Secondly, I'd like to ask about the growth in the VAR reseller channel or network. Can you characterize what the change or growth in that channel has been over the course of the last, say, six months?

You mean in the -- (multiple speakers)?

In terms of numbers of VARs and resellers that you are using.

We are using roughly the same number. We're working mainly on efficiency and productivity of those channel members. In specific markets, we are adding large system integrators strategic for us like T-Systems (ph) that we've added in Europe, of course many in Germany and the alternative technologies that we've added in the U.S. But as a whole, the number is roughly the same.

How many systems integrators have you actually added this year?

Meir Moshe; I think, you know, our total number today is roughly 140, 145, so I would say we've added, 10, 15 percent in terms of numbers, but I think the impact is much better as we are raising our profile within the VAR system.

(OPERATOR INSTRUCTIONS). Mosheeb Masgib (ph) from Apex Investments.

Congratulations on a good quarter. Do you see any chance for a strategic OEM in the near future?

Obviously, we are seeing a chance. When we have something to share with the market, we will share it.

Okay, thanks.

Troy Jensen from ThinkEquity.

Two follow-ups -- could you give us an update on maybe 10 percent distributors, if any, and then health tech data and (indiscernible) are tracking?

We didn't have any 10 percent customers. Currently, we are very satisfied with the addition of Alternative Tech. We are seeing a nice ramp up (indiscernible) as percentage of revenues is roughly static.

Last question, use of cash -- you guys have got a significant amount of cash and are generating profits. Any sense of maybe buybacks, special dividends to put that cash to work?

We are mainly looking first of all as a first priority for strategic use of our cash, being acquisitions for example. We are searching for businesses that will bring us additional customers and technology leverage. So that's our prime concern -- to use the cash for strategic deals.

I got it. Good luck, guys.

William Becklean from Oppenheimer.

Last quarter, you suggested that, in the second quarter, you were going to get an order from a service provider. Would that be the Cingular order that you mentioned?

That's correct.

Stephen Kamman from CIBC World Markets.

CIBC -- that's almost as good as Smith Barbie! Anyway, one last question on tax rate, a small bump up on taxes on a percentage basis and I realize that may just be rounding in the model, but any guidance for this year and next year?

No, this is exactly as I said before; this is 3 percent for this quarter and the rest of the year and next year, it would be in the high single digits -- 8, 9 percent.

okay, good enough. Thanks very much.

We have no other questions from the phone lines. Please continue.

Okay, thank you very much for joining us today, and have a great day.

Ladies and gentlemen, this conference will be made available for replay after 1215 PM Eastern time today running through Monday, August 2, 2004 at midnight. You can access the AT&T executive playback service at any time by dialing 1-800-475-6701 -- international participants, 320-365-3844 using the access code 736320. (Operator repeats numbers.) That does conclude our conference for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.