Radware Ltd (RDWR) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radware third-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; 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 your host, President and CEO, Mr. Roy Zisapel.

Good morning, everyone, and welcome to the Radware third-quarter of 2004 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 $17.6 million and a net profit of $3.6 million. We have continued to sequentially grow our revenues for the 12th quarter in a row resulting in continuously improved profitability. Before I discuss the highlights of this quarter Meir will review the financial results. After my comments we'll open the discussion for Q&A.

Welcome, everyone, to the third-quarter conference call. First, I would like to review 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 do documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed form, 20F (ph), filed in March '04.

And now, ladies and gentlemen, for the financials. In the third quarter of '04 Radware continued its trend of the last 12 quarters with improved top and bottom lines. As we announced, our revenues and earnings for the third quarter '04 exceeded our original projections. Phone (ph) company revenues reached a record of $17.6 million and earnings per diluted share of 19 cents. (indiscernible) of $17.6 million, up from $16.3 million in the second quarter, reflects sequential growth of 8 percent, the highest sequential growth we've had in the last 2 years.

We have seen an increase in all our productlines and specifically the defense process which had reached $1.1 million this quarter, up from sales of $400,000 in the second quarter and above our initial focus of $800,000 for the third quarter '04. At the same time we increased our deferred revenue. We have continued to maintain high gross margin of 82.2 percent as in the last two quarters. Our operating expenses for the third quarter of '04 were approximately $11.8 million.

Our operating income for the quarter continued to increase to an amount of $2.6 million, an increase of 168 percent compared with less than $1 million in the third quarter of '03 and a sequential increase of 25 percent versus operating income of $2.1 million in the second quarter of '04. Since achieving operating profit in the second quarter of '03 we have continued to improve the operating margins reaching total operating margins of 15 percent this quarter.

The net income for this quarter was $3.6 million which represents diluted earnings per share of 19 cents, 3 cents above the diluted earnings per share reported for the second quarter of '04. The DSOs for this quarter decreased to 61 days from 66 days for the second quarter of '04.

The Company continues to maintain a positive cash flow for our 12th consecutive quarter. During this quarter we generated cash in the amount of $4 million, thereby increasing our cash position including long-term deposits and marketable securities to $149.2 million and we have no debt. The headcount for the end of the quarter was 339 employees and the shareholder's equity increased to $152.5 million.

Guidance, with respect to the fourth quarter of '04 we anticipate that sales will increase to a range of $18.8 to $19 million and the earnings per diluted share will be 21 cents. As you can see, ladies and gentlemen, in this third quarter revenues continued to increase to record sales of $17.6 million; the cash flow position is up by $4 million; we have improved our operating results and increased our operating margins to 15 percent. We continued to increase both bottom-line profitability and EPS and we expect acceleration of our revenue growth in the fourth quarter. Now I would like to return you to Roy.

Before I discuss the highlights of the quarter I would like to walk you through our positioning and unique differentiators in the market. Other solutions are deployed across carrier and enterprise networks with a full availability, optimized performance and enhanced security of mission critical applications. When our customers deploy network applications such as EOB (ph), CRM and so on, they face several challenges.

First, network applications must continuously operate 24x7 without failure. Second, these applications require end-to-end performance for optimal user and transaction response time. And third, application security must be insured and intrusion prevention in this case is of key importance. With the growth in distributed applications our customers are deploying these applications across the enterprise from the headquarters all the way to the branch offices. They require the same level of availability, performance and security across all their infrastructure.

For network applications availability, performance and security are inseparable. For example, while a (indiscernible) is a security problem, if it causes down time it immediately becomes an availability problem or if it's (indiscernible) so to speak or the service offloads it is becoming a performance issue. Recognizing this dependency (indiscernible) solutions address all aspects of application availability, performance and security.

Our SynApps architecture is the only integrated architecture that provides customers with a full set of application (indiscernible) services enabling availability, performance and security. Our architecture includes health monitoring, disaster recovery, traffic redirection, load balancing, (indiscernible) management, web compression, (indiscernible) acceleration, intrusion prevention and denial of service protection.

Our SynApps architectures run on our full range of switching platforms ranging from our entry-level branch platform for 5 Mb connections and up to our industry-leading maximum performance 3 gigabit application switch 3 for the most demanding environment. Combine our comprehensive SynApps with other switching platforms, the other product (indiscernible) is deployed at every critical point across the network -- including Internet links in the connectivity layer with our LinkProof product, the security layer with the FireProof and the DefensePro productlines, and the (indiscernible) funds with our WD and CT 100 products, ensuring applications and transactions for all headquarter and branch office environments.

To summarize, Radware is the only vendor in the market to offer a unified, integrated and scalable architecture for meeting application availability performance and security. In addition, we are the only vendor that provides these application services end-to-end, meaning from the branch level all the way to the headquarters.

Radware's SynApps architecture is the driving force behind our continued growth and market share gains over the past 3 years. This can be exhibited through the growing percentages of units deployed across our customers with full SynApps capabilities per quarter. This figure currently stands on 25 percent -- meaning 25 percent of the units we shipped in Q3 (indiscernible) full SynApps capabilities versus 23 percent of the units last quarter in Q2 and an average of 20 percent last year.

With the continued growth in application security attacks in the past quarter including malicious worms and viruses, Radware DefensePro and security update service delivered immediate 24x7 security for our customers. This quarter our SAS service protected our customer mission critical applications, network end-users against My Doom S (indiscernible), My Doom N, and the Microsoft Jpeg vulnerability to name a few.

DefensePro continued to make excellent progress in the IPS market. It's the highest performance IPS in the market delivering unmatched 3 gigabit performance for wireless (indiscernible) application security. Coupled with the highest full density in the industry which allows our customers to protect more network segments with the same device, we believe we have an extremely powerful IPS solution.

Revenue for the quarter, as Meir mentioned, was $1.1 million versus $400K in the previous quarter and we are expecting DefensePro revenues to reach 10 percent of sales in the fourth quarter.

In summary, in the third quarter of 2004 we continued to demonstrate consistent growth across all business parameters as we've done in the last 12 quarters. Record revenues and profits accelerated sequential and annual growth and a very nice ramp up of DefensePro revenues 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 these positive trends together with our continued process innovation and focus on the application switching market will enable us to continue to grow revenue sequentially. With that I would like to open the discussion for Q&A.

(OPERATOR INSTRUCTIONS) Stephen Kamman (ph), CIBC World Markets.

Good to see some positive numbers here this quarter. So much for the rest of the sector. Just a couple of housekeeping questions. Tech Data, any trends there? Was that up, down; it was flat last quarter?

It was flat last quarter.

And this quarter?

You mean Q4?

Yes.

I think it's too early. We don't know until the end of the quarter.

It was flat the current quarter, though?

Yes.

And then, any trends in pricing?

I think the pricing environment is very stable. You can see it also from our gross margin.

Two other, just U.S. versus international revenue mix?

To date U.S. -- this is 43 (ph) percent of our total revenues and, of course, the international is 57.

And I still think there might be some room to recover in the U.S., how are things going there?

Things are improving well. As a percentage of revenues they grew and the Company itself grew 8 percent sequentially. We would consider it a sequential quarter. So, we think we are progressing well.

Okay. And then enterprise versus service provider mix?

It was the same as in the last quarter, 35 percent carriers and 65 percent enterprise.

And then, any guidance for OpEx? Have you guys made any decisions about 2005?

We will update you in the next conference call of Q4.

Okay. And then final question, tax rate, any expectation of changes there?

For this year the tax rate is 3 percent. As we mentioned before, for next year on the tax rate it will be in the high single digits. That means in the range of 8 to 9 percent.

Okay. I'll ask my last question -- sorry, I just wanted to get through the housekeeping there. Any further information on OEM relationships and/or negotiations there?

At the minute we have nothing to share on the call.

Thanks very much, appreciate it.

Alex Henderson, Smith Barney.

I was wondering if you could talk a little bit about what you're seeing in terms of activity in the field, whether you're seeing any acceleration in business conditions or erosion in business conditions? Obviously given your guidance you’re expecting good results, but what’s the backdrop feel to you? Is this a function of you guys really outperforming in a toughening environment or do you see improvement in the environment and your products continuing along? How do you read the background?

I'm not sure if we can pinpoint the issue, but we definitely see a strengthening environment for us. I think pipelines across the whole company whether it’s the Americas, the Far East or Europe are growing very nicely. Obviously the entrance to also the IPS market or ability with SynApps architecture to cover both layer 47 and the security market is helping us considerably there. So, I'm not sure if we know whether it's above and beyond the industry or just above the industry, but we're very happy with what we're seeing.

So is your sense that the economy is still improving and that the demand conditions are still improving then, excluding your company? In other words, try to look through the strength out of your products, what's your read of the economy? Are you assuming the economy is improving, flattish sequentially or eroding sequentially?

We think it's still strong; it's definitely not declining. So I would say flat to growing.

And can you talk a little bit about the U.S. ops, the trajectory there? When you look at the 43 percent, obviously that's been over 50 percent. How long do you think it would take to get it back to 50 percent and can we think about a couple of percentage points a quarter improvement there?

It depends. We are also enjoying very strong growth internationally over the past couple of years and also projections (indiscernible). So it really depends on the ratio of growth. But definitely we are seeing much better execution in the U.S. and as a result better obsolete numbers. Whether it will affect the overall split, I wish the international will grow even faster. So I'm undecided on this.

And just a line item. So on the share count it's down a couple quarters in a row now, could you talk a little bit about what's causing that? Are you buying the stock back? And secondly, do you expect it to decline again next quarter?

Actually the share count is based also on the share price. And we would like to believe that share price will be up so the share count will be up. In our projections and for the guidance we gave for Q4 we take into consideration 20 million shares -- the headcount.

Thank you.

Mark Sue, RBC Capital Markets.

This is Brian Marconi for Mark. Can you elaborate a little bit more on geographic mix, what you might have seen in each of your geographies? And also, I think you spoke on Cingular last quarter. How did they do this quarter?

First of all in terms of the mix, as we've mentioned, the U.S. is up, and Asia-Pac as a percentage of revenues is the same, and Europe is slightly down basically the 1 to 1.5 percentage points of the U.S. is up, that's what (indiscernible) is down as a seasonal quarter. Actually I think it's very good performance of the (indiscernible). In terms of Cingular, we continue to receive from them orders this quarter as well for expansion, so we believe our business with them is progressing very nicely.

Did you have any 10 percent customers this quarter?

The only 10 percent customer, this is Westcom which has accounted to 11 percent approximately.

Thank you.

William Becklean, Oppenheimer.

Your operating margins got to 14.8, 15 percent this quarter. On a longer term basis where do you expect to see those going?

As we mentioned before, we have a 1 year target, not the long-term target that nobody can check if we are talking about '07 or '08. And for 1 year targets we believe we can reach this 20 percent of operating margin.

And can I do a follow-up question? Just in terms a what is going on in the competitive environment, when you're in bidding situations out there against other alternative solutions, who do you principally run up against now?

The vendor we mainly see is Cisco as they are a post (ph) incumbent in the vast majority of the enterprise accounts.

And what do you think is your advantage against Cisco?

As I mentioned in my remarks, there are several main advantages. First of all, as I've mentioned, our SynApps architecture is covering way beyond what traditional load balancing is doing, recovering all the aspects of availability, performance and security for the applications in an integrated manner on the same switch. So that's the first big advantage. These customers want not only to load balance their servers, but also to protect them at the same time from viruses because load balancing the virus on the servers will bring all of them down, we definitely have a strong differentiator there.

If the customer wants to protect his application against the amount of service (indiscernible) switching, again we are going to strongly point (indiscernible) there. So the SynApps architecture with the integrated services is a key differentiator for us.

The second differentiator is our ability to support the application infrastructure end to end. From the branch office through the headquarter connectivity, through the security layer and activation all of the current security tools like firewalls, IDS (ph) and so on, and all the way to the server layer.

The Cisco solution is focused on the server layer and, therefore, as customers deploy applications and push them to their branches in a distributed manner, again, our architecture is a key benefit. Last but not least on the stand-alone products, our Application Switch III with 3 Gigabit performance is by far the highest performing product in the market. I think most of our competitors are up to 2 gig performance so we have over 50 percent advantage there. And that, again, for the most demanding or high-performing ISPs, there's enterprise customers are now the differentiators. So our SynApps architecture, our end-to-end deployment and the high-performance of our switches are the key differentiators.

Do you try and do all of that on one box or do you deploy multiple boxes to provide all that functionality?

All the functionality I mentioned on the SynApps, meaning bandwidth management, load balancing, security and so on, all of that is integrated on a single box. But in order to support all the customer deployment from the branch office all the way to the headquarter, of course, we need to deploy one box at the branch to take care of the security, availability and performance there. And several boxes at the headquarter depends on the layer that the customer wants to optimize; one for the connectivity layer, maybe another one for the security layer and another one for the server layer which generally fits internally in a very safe and well kept data center.

So our end-to-end infrastructure and deployment is basically based on multiple units across the enterprise infrastructure that are covering all those needs.

Thanks, Roy.

Troy Jensen, ThinkEquity.

Nice quarter, gentlemen. I've got a couple of questions. Roy, the comment about 25 percent SynApps in Q3, that was units deployed using the SynApps software?

Yes.

And then do you have any internal goals where that could be in 2005?

We don't have specific goals, but basically the way we do the architecture in the problem is that long-term there's no reason for a customer to split those services into multiple units and our consolidated and integrated architecture is the way to go. So we definitely are pushing for more and more revenues as well as the percentage of SynApps units going forward.

Okay, perfect. How about maybe an update on application switch 4 -- when do you think that comes available?

We would like to announce -- like we always do when we are starting to ship the product. But obviously (indiscernible) applications with switch 1, 2 and 3 the next one will be 4 and we'll update you when the time is right.

Okay. I've got a final question for Meir. You commented that deferred revenues were up, but on the balance sheet you reported a blended number with some other items in there. Could you tell us what deferred was in and of itself in maybe what the change was quarter-over-quarter?

Actually we don't break it for the market, but the trend -- this is constantly out -- as we had in the last two quarters also this quarter because our revenues are up. We'll release the phone number at the year-end.

And is there any product related revenues or is that strictly like service and maintenance?

This is service and maintenance.

Thank you.

Ehud Eisenstein, Oscar Gruss.

Nice job on the DefensePro. Could you share with us in which industry verticals do you see more demand for the DefensePro?

I think we're seeing the same split like we're seeing in our traditional (indiscernible). We're seeing a lot of demand in ISPs to protect their backbones, especially against denial of service attacks. And in the large enterprises we're seeing a lot of demand for the intrusion prevention capabilities of defense, mainly to protect against all the new worms and so on. So I would say both segments are very good. Inside the enterprise financial services, education, government are the leading segments.

Okay. So can we say that the speed (ph) between carriers and enterprise are the same for the DefensePro?

Currently I would say it's more 50-50 versus the 65-35 in our overall business. But going forward I believe we will see the regular split of the Company.

Very good. And just a housekeeping. A new customers versus existing one?

New customers we have just above 100 new customers this quarter.

Just above? I didn't hear, sorry.

The split -- Meir mentioned a number of new customers, but the split was 45 percent for new, 55 percent for repeat.

Vera good, thank you very much. Good luck.

Orin Hurschtman (ph), OH Investments.

Congratulations on the progress. Can you just repeat once again for this quarter versus last quarter the breakdown between carrier versus enterprise? And can you also indicate whether you're seeing the enterprise begin to increase not just DefensePro but the whole strategy that you laid out?

First of all the breakdown between enterprise and carriers -- it's almost stable in the last three quarters, 65 percent enterprise and carriers is at 35 percent. As I said, this quarter as we had in the second (indiscernible) quarter.

And concerning your second question, obviously by the growth of the units you can see that we're seeing more and more adoption of our SynApps architecture. It was 20 percent of all units last year, 25 percent the previous quarter, and given all the growth of the Company so far which was another 25 percent, you can see that the SynApps segment is growing very nicely and more and more customers are deploying it.

Are you seeing the enterprise begin to take interest in the -- actually deploying this type of advanced switch as opposed to more (indiscernible) on the carrier side?

I'm sorry, you were cut off. Can you repeat the question?

I'm sorry. Are you beginning to see the enterprise more embrace the whole need for security switches as opposed to just going with a regular switch and worrying about (technical difficulty) later?

Definitely, definitely. Mainly, again, from the intrusion prevention point of view, protection against worms and the application layer attacks; not as much for the denial of service, but definitely on the intrusion prevention side.

And how much do they care yet, again at the enterprise level, about layer 4 through 7? Do they care, are they beginning to care?

We continue to see, regardless of the industry conditions, that layer 47 is growing. For us in the past 2 years we grew 25 percent year-over-year with some strengthening economy, some weakening economy. We definitely see layer 47 taking a major role in the enterprise network as they deploy more applications. It's critical to their systems, that's why they invest.

Okay, thank you so much.

(OPERATOR INSTRUCTIONS) Ryan Hutchinson, WR Hambrecht.

Good quarter. Not just left here to ask, but just in terms of a couple housekeeping -- the employee headcount at the end of the quarter. And then could you talk about the VAR channel and the strategy there and any adds to the VAR? I think last quarter you gave a number that was approximately 140.

The headcount for the end of the quarter was 339 employees; we mentioned it in the call also.

And then on VAR.

In terms of the VAR strategy, it was discussed also in the beginning of the year. Our aim is not to add so many as to increase their efficiency and that's what we did also this quarter. The number of total VARs didn't change. We did some modifications in several countries, additions and terminations, but we are focused on driving more efficiency, being more strategic to those VARs so they will push us more to their top customers.

Great, thank you.

There are no further questions, please continue.

Okay. With that I would like to conclude the call. Thank you, everybody, for joining us today and have a great day.

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