Radware Ltd (RDWR) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware fourth quarter and year-end results conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to our host, Mr. Roy Zisapel, President and CEO of Radware. Please go ahead.

Good morning, everyone, and welcome to the Radware fourth quarter of 2004 conference call. Joining me today is Meir Moshe, Chief Financial Officer. We're very pleased to announce another record quarter for Radware talking a record year. We are proud to have achieved revenues of $19 million and a net profit of $4.3 million. Our results represent a sequential growth in (indiscernible) revenues for the 13th quarter in a row and continuously improve profitability.

Before I discuss the highlights of this quarte,r Meir will review the financial results and after my comments, we will open the discussion for Q&A.

Thank you and welcome everyone to our fourth 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 of the future financial performance of the Company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the 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 2004.

And now, ladies and gentlemen, for the financials. We're very proud of our achievement in 2004. All four quarters were marked by exceptional performance and increased improvement with the (indiscernible) all business parameters. This strategy for increasing growth, top and bottom lines will execute successfully each quarter throughout the year. We intend to maintain this proven strategy for 2004 with resales (ph) and profitability. (technical difficulty) increase in revenues and earnings in 2004 we continued to maintain a high gross margin of 82.2 percent and to improve our operating results, EPS, and cash.

We are pleased to show continued and stable growth in sales for the past 13 consecutive quarters. Revenues for the fourth quarter 2004 were $19 million, up from $17.6 million in the second quarter, 11 percent increase over the sales of $15 million in the first quarter of 2003. As we anticipated, revenues will derive from all product lines with DefensePro sales including over 10 percent of revenues for this quarter. The fourth quarter revenues (indiscernible) for a total of $68.4 million total the result which (indiscernible) them an increase of 25 percent over the annual revenues of $54.8 million for 2003.

In addition, resale revenues increased by an even higher percentage (indiscernible) percent in 2004. Rising from $7.1 million as of December 31st, 2003, to $9.9 million at the end of 2004. (technical difficulty) the quarter increased by 20 percent sequentially to $3.4 (ph) million. This brings our operating margin for the quarter to 16.4 percent. For operating income for the year 2004 totaled $9.5 million compared to $2.7 million in the previous year, an increase of over 250 (ph) percent. The net income for this quarter increased by 20 percent from $3.6 million in the third quarter to $4.3 million this quarter, which represents earnings per diluted share of 22 cents. 1 cent better than guidance.

In the annual analysis (indiscernible) total net income for 2004 of $17.8 million which represents earnings per diluted share of 70 cents. The DSOs for the fourth quarter were 64 days. The Company continued to maintain a positive operating cash flow for the 7th consecutive quarter. Due in this quarter we generated in the amount of $7.8 million thereby increasing our cash position including long-term deposits and marketable securities to $157 (ph) million, representing $8.5 (ph) (indiscernible) per-share. Total cash generated for 2004 amounted to $80 (ph) million and we have no debt.

The headcount for this quarter was 361 employees. Gross equity increased to $161 million.

Guidance. With respect to the year 2005, we anticipate sequential growth in each quarter. In order to take advantage of the opportunities in 2005, (indiscernible) the Company and product lines particularly in security, total in expenses will increase throughout (ph) 2005. However, we will still expect to anticipate visibility (ph) each quarter.

With respect to the first quarter of 2005, we anticipate that sales will increase to $20 million, expenses will be (indiscernible) $.5 (ph) million and the EPS will be 22 cents.

One more piece of good news. We have finalized our tax returns for the year -- 99 to 2002. And as a result and due to our large (indiscernible) enterprise partners we will enjoy a tax holiday in 2005.

Our tax rate for the year 2005 will (indiscernible) below than previously anticipated and we expect it to be 4 to 5 percent. We expect that our long-term tax rate, starting 2006, will be in the high single digits.

As you can see, ladies and gentlemen, in the fourth quarter, revenues continued to increase to record sales of $19 million. The cash position is up by $7.8 million and we have improved our operating results and EPS. To sum up, we're very happy with the 2004 results. We delivered a 25 percent growth in sales without compromising our stable and conservative management of operations and expenses, leading to a sharp increase in our operating results.

(technical difficulty) are ramping up, alongside the continued strength of all product lines and we see plenty of opportunities for 2005.

And now, I would like to hand it to Roy.

Thank you. The fourth quarter of 2004 continued our momentum and results for the last 13 quarters, closing a strong year of profitability (ph), performance, and security solutions. Other solutions (indiscernible) and enterprise network to enable the full availability, optimized performance and security of mission-critical applications. For these applications, availability, performance and security are things (indiscernible). For example, (indiscernible) originated a security problem if it causes downtime it inevitably (indiscernible) into an availability problem. If it clearly causes service overload it results in a performance challenge. SynApps architecture is the only offering to address this (indiscernible) interdependence problems affecting network applications.

The SynApps architecture provides customers with the full-service application (indiscernible) capabilities including customer (indiscernible) disaster recovery, (indiscernible) for application availability, then balancing (technical difficulty) management, connection tooling, web compression and (technical difficulty) for application performance, a (indiscernible) intrusion prevention and denial of service protection for application security.

For the SynApps architecture lands in the full range of Application Switching platforms ranging from our entry-level bench (ph) platform for 5 megabit collection and up to our industry-leading (indiscernible) switches with a 3 gigabit performance environment. Our SynApps architecture has been the driving force behind our continuous strategic growth and market share gain and (technical difficulty) percentage growth of units with complete seamless capability deployed across our existing and new customer base.

This quarter, 27 percent of our units were SynApps and (indiscernible) up from 25 percent last quarter and 20 percent a year ago.

In sum, it is the only vendor in the market to offer a unified integrated and scalable architecture for meeting application availability, performance, and security. Specifically speaking on application security (indiscernible) update service delivered immediate (ph) security for our customers. (indiscernible) SUS protected our customer's mission-critical applications, networks end-users, against new volumes of (indiscernible) and FED worms both preventing attacks while ensuring continual operation of the mission-critical applications. DefensePro continued to make excellent progress in the IDS market. We announced new customer attraction, including Korea Telecom, the largest carrier in Korea, Changua (ph) Telecom, the largest carrier in Taiwan, and Fina (ph) Gaming (ph) in China. For the quarter DefensePro revenues were $2 million, up from $1.1 million in the third quarter.

Additional strategic customer wins in Q4 include eBay, Experian, St. George Bank, Dollar Thrifty, ING, Deutsche Telecom, Shanghai Telecom, Bloomberg News (indiscernible), among others, representing a strong and growing client base of cross-global e-commerce finance media and communication sectors.

I would like to focus on St. George Bank, Australia's fifth largest bank. St. George deployed a large project including our WB layer 4 7 switches with (indiscernible) architecture and 5100 application accelerators. With Radware, St. George Bank is able to ensure complete and securitized actions and the high availability of all the critical online banking and database applications. This project is a good example of Radware's strength, with the best global traffic management solution and the only architecture in the market to integrate security, (indiscernible) management, and layer 4 7 switching, we were able to demonstrate to the bank how Radware effectively ensures the continuity of the financial applications.

Our ability to both block malicious traffic while continuing to drive the availability and performance of the banking application was a key winning factor for us. Another impressive project was the Dollar Thrifty Automotive Group, installed the entry-level solution including W-D switches, 5100 application accelerators, fireproof, and (indiscernible) to ensure the availability of performance and security of the (technical difficulty) application.

New promotions and vocations (technical difficulty)-- increased traffic to the Dollar Thrifty website. Dollar Thrifty was able to continue to handle customer traffic while delivering the best user experience. This project was one based on our Application Switch 3, fastest 4 7 switch in the market and based on our ability to provide in (indiscernible) solution for Dollar Thrifty network application needs. Both in (indiscernible) , application layers, security layers, and connectivity layers.

On the product front, (indiscernible) City 100 application accelerator won the Recommended Buy Award by the Computer Secure Computing Magazine test for the second consecutive year. As I've mentioned the second year we won this award, this time the (technical difficulty) competitor of the receiving price (indiscernible) for Web application and transaction acceleration.

This award during the (technical difficulty)-- award for (indiscernible) applications for all major applications (technical difficulty)-- including Windows IP (technical difficulty)-- network computing PC magazine and Network Fortune interview.

To summarize, in Q4 2004, we continued to demonstrate conservative growth as we have done in the past 13 quarters. Record revenues and profits contributed sequential and online (ph) growth with a very nice ramp up of DefensePro revenues with some of our achievements. Our business fundamentals continue to improve and we're seeing traction across the world for our Application Switching solutions from both existing and new customers.

Now I'm confident this conservative trend -- together with our continued product innovation and focus on the Application Switching market -- will enable us to continue to grow revenues sequentially. We will open the discussion for Q&A.

(OPERATOR INSTRUCTIONS)

William Becklean. Oppenheimer.

Nice quarter. Could you give us the breakdown -- geographic breakdown -- as well as the customer breakdown between enterprise and service providers?

Okay. The breakdown between enterprise and service providers was the same as last quarter, about one-third carriers and 65 (indiscernible) enterprise, the breakdown between territory -- it was 42 percent the U.S. and the rest 58 (indiscernible) international.

Okay, thanks very much.

Mark Su (ph), RBC Capital Markets.

Thank you. I'm assuming no change in the gross margin outlook. What about your operating margin target? You're now at 18 percent. Should that stay at this level, considering your comments about your operating expenses or, Meir, do you think we could get that to maybe 20 plus percent pretty quickly?

Actually we are in 16.4 percent of operating margins this quarter. 16.4 percent and, as I said in the call, we plan on increasing the expenses throughout the year; but we are still planning on running the sales faster than expenses and targeting 20 percent of operating margin at the end of this year into Q4 '05.

Q4 '05. Got it. And Roy? Are you seeing interest for the DefensePro from non Application Switch customers? Or are you still selling this figure to your installed base of customers? And has the competition changed any for the DefensePro?

Definitely, we are seeing a lot of new customers for example (indiscernible) the customers that we issued a press release here in this quarter is a customer only for DefensePro for (indiscernible). So we are leveraging the (technical difficulty) of our existing customer base also to (technical difficulty) to customers to later go back to seven. It's a mix now between existing and new customers. In terms of the competitive landscape, we did not see any change in the competitive landscape. The only significant change is that we cannot position (technical difficulty)-- any new products, any new (indiscernible) etc.

Alex Henderson. Smith Barney Citigroup.

I don't seem to have a very good connection today. So I may have missed your comments on the tax rate. I was not sure what you'd said.

Okay I will repeat. On the tax rate we finalized our tax return for the year at 1999 to 2002, and as Roy has said we will enjoy in 2005 a tax holiday and, therefore, our tax rate will be lower than we previously expected. That means we will be (indiscernible) 5 percent in 2005.

4 to 5, instead of 8 to 9 that you had been talking about before?

Yes and I also said in the call that in 2006 (technical difficulty) anticipated our long-term tax rate to be in the high single digits. That means the 8 to 9 (ph) percent.

Thank you and what was the employee level at the end of the quarter?

361 (ph) employees.

351. And could you tell me what percentage of revenues came front SynApps customers and whether you saw any change in and what the deal size of SynApps customers was compared to other non SynApps customers?

Okay Alex, first of all it was 361. For Q3 quarter. And second on the (technical difficulty)--

Thank you.

Second, concerning the SynApps 27 percent of units this quarter up from 25 to 24 (multiple speakers) (technical difficulty)--

I'm sorry. I could not hear that. What was that?

27 percent.

27 percent. Thank you. Up from?

25 last quarter (multiple speakers) and 20 last year, 30 percent last year.

And what about deal sizes? Can you measure deal size for your SynApps space versus the rest of your customer base?

We don't measure it, but basically, if you look on the sales price it is 30 roughly 30 to 40 percent higher than without SynApps.

And could you tell me what the book to bill was in the quarter?

We're shipping basically -- we don't carry (technical difficulty)--

Thank you. Okay that is it.

Stephen Kamman. CIBC World Markets.

Hello Roy and Meir. You guys may be on a broken speakerphone or something. It is extremely hard to hear you. I don't know if there's a line you can pick up. But, anyway, so we will try and work our way through this. A couple of questions on new products. I know most first quarters, you guys announce a new product -- APSwitch One, ApSwitch Two, ApSwitch Three. Any thoughts on that as we go into 2005?

(technical difficulty)-- platform but at this point we don't want to provide any specifics. Obviously we announced the Application Switch Three in February 2003 and since then we are working on a new generation of the platform, which we will announce during 2005.

I figured we could count to Four. Meir, a little bit of an increase in interest income. Just trying to figure out if that is anything that has changed on the handling there. Whether we should be modeling at a higher number going forward or was that just my model throwing out a different number?

It is more based on (indiscernible) a lot of the Company decisions. And of course in the future, as the interest rates are higher, we expect to get higher revenues coming from interest and so the next quarter for example, it is expected to be in the range of $1.4 to $1.5 million.

Okay. And then any thoughts on price pressure? You know foundries come back in? Are using anything on the ASP line or have those stayed fairly reasonable?

Currently, we don't see any price pressure.

Okay I did not think you did but I thought I would ask. I have one last question which I'm now -- oh yes you have also in the past given sales to existing customers versus new customers. Any change in the trend there?

Okay. There is no big change there. This is (technical difficulty) 50 percent of the revenue. It is almost 55 (ph) percent; and then just 45 percent running it very closed to (indiscernible) we had in the last quarter.

Jonathan Hasp (ph) from UBS.

Congratulations on a good quarter and I, too, can hardly understand what you're saying. Meir, could you first repeat the question regarding the repeat business? What was the percentage of repeat sales this quarter?

The repeat sales for this quarter was about 55 percent.

5 5?

55, 5 5.

Okay. Great. In the past usually you would give a range for your next quarter guidance. This quarter, you're giving a precise number. Does that make you feel better about your ability to forecast or is it just a technicality?

It is a technicality. The quarters were in the past we gave (technical difficulty)-- a single number in (indiscernible) range. There's no special meaning to that.

What should we expect in terms of the mix between DefensePro?

Basically, Q1 will be the last quarter that we will announce DefensePro sales, specifically, as we don't break out the other products. But we believe DefensePro will continue to ramp faster than the Company as well as * (technical difficulty) in this quarter as well. So you can expect that, maybe, half of the growth in Q1 is expected from DefensePro and have from the traditional (indiscernible).

Okay that is helpful. And Meir, I think you gave a total cash generated. What was the operating cash flow or was that the number you provided in the press release?

No, actually we have not provided it in the press release. But it was 4.8 -- the operating cash flow for this quarter.

4.8?

4.8 out of the (multiple speakers)

And last you are increasing your operating expenses. Can you just kind of give us a sense of, specifically, what (indiscernible) items it will be?

It is two fronts. One on the sales in the field support engineer, we increase sales, to increase customer service to get into more opportunities, and the other one is continued investment in R&D.

Does that equally split the increase?

I would say it is more 70 percent to the field to the sales and (indiscernible) 30 percent to R&D.

Troy Jensen. ThinkEquity.

Nice quarter guys. A couple of quick questions there. If you stripped out the DefensePro business and just looked at the application traffic management, can you talk about the trend you see in there? I think you're up about 4 to 5 percent sequentially in that business.

We think we are doing quite well. Some of our Application Switching capabilities, especially as it relates to SynApps, we have seen them integrating into DefensePro so customers -- instead of buying SynApps on existing, for example -- (indiscernible) will still improve, what they do they go and buy a full unit DefensePro for high-speed protection. So we believe that in both, so to speak, venues we are progressing well. Even more so, as I mentioned in my remarks we have seen availability performance and security as inseparable. We don't agree that the customer (indiscernible) Web application without worrying about Web-based attracts (ph) or denial of service attracts so going forward we believe those markets will consolidate, will merge to one market which will be the Application Switching or application delivery markets.

Basically what we have done with the DefensePro launch is that we are creating toward ourselves the means of the security market as well on top of the performance and the availability markets that we already play in in order to secure our future position in the merged market. So while we are breaking our DefensePro for the last couple of quarters to share with you the ramp and the success we are enjoying there, over the long-term, we are treating that as one single market for application delivery.

Okay, Roy. Just a follow-up on product development. I know you guys do some acceleration, but any thoughts on other types of compression or acceleration technologies coming soon?

We are (indiscernible) the 5100. You know, our (indiscernible) acceleration product for almost two years. Web compression, connection pulling EPS-type of file compression, and many other additional acceleration techniques. So, although some of our competitors are just launching compression capabilities, we have a long list of customers already did deploying life with Web compression and collection polling (ph) technologies.

Okay two quick ones for Meir. Could you comment maybe on the shared outgrowth you expect, and then any impacts on potential option expensing?

For the next quarter, we expect the share count to be 20.3 (ph) percent.

Got it. And the option expensing?

Okay we're still learning the new (indiscernible) on the option expenses. It will be implemented in the sales quarter this year. (indiscernible) right now I can mention to you again that (indiscernible) the impact in 2003 it was (indiscernible) $20 million.

Okay, good luck in 2005, guys.

Dan Harbard (ph) of Deutsche Bank.

Good afternoon and good morning. Nice results. In terms of the increase in your sales and marketing team, how is that going to be divided geographically if there is any area where you are specifically beefing up?

We will do it across the world. We see opportunities everywhere basically.

Okay so, then, specifically in terms of the U.S. which, obviously, was a little bit problematic earlier in the year. Do you feel that situation has now stabilized or is there still room for improvement?

First of all, we think we are improving our results in the U.S. You can see it in the last several quarters with the sequential growth there. Second, there's obviously a lot of room for improvement. The potential in all markets for the Company is much higher then what we regard today as revenue and we want to enjoy this potential. We think we have a very strong differentiator on the technology, on the products and on the architecture and we want to (indiscernible) in certain marketings to show you that growth in our numbers.

Okay. It seems from the press releases that DefensePro is seeing strong growth in Asia. Is that representative of where the demand is coming in for the product as a whole?

Not necessarily. Simply with Asian customers, the press release approval processes faster. But I believe in the coming quarters you're going to see U.S. customers, European customers, as well. Releases, press releases without (indiscernible).

Okay just one final question from me. Your thoughts on market share given some of the numbers that have come out from your competitors.

(indiscernible) first obviously SI is growing faster than us. That is obvious. Second, I think if you look at all they growth in the market research that was published lately, and the whole market is growing in the highest single digits and I think that is also what concerns us from all of the vendors. So based on that, definitely, we're gaining market share. Not as fast as we want. But we're gaining market share. We grew 25 percent for the second year in a row and market grew, I think 3 to 4 percent in 2003. (technical difficulty) probably losing market share and those are Cisco (indiscernible). And so we are gaining market share, we should accelerate our rate our market share gains and accelerate our growth.

(OPERATOR INSTRUCTIONS) Orin Hurschtman of OIGH Investments.

Congratulations on the results. You said a little bit about some of the wins from the DefensePro as how you won not just with DefensePro and the application but because of all the other applications you could put around DefensePro. You also mentioned (indiscernible) acquisition of Tipping Point. Obviously Tipping Point has had an incredible growth rate in the last four or five quarters. Can we hope that you may be able to do the same with DefensePro? Is that who you're bumping heads with most? What are they doing right if anything that we could do more of?

First of all, you know we believe that the IDS market has a tremendous potential for growth. I don't like to discuss specific companies because, mainly, we're heading in the competitive evaluations against McAftee (ph) and ISS. And that to some extent in dipping point in the U.S. and now we receive with the (indiscernible) acquisition how this will play out. But definitely the IDS market is * (indiscernible) from customers and this quarter we have almost doubled sequentially the revenues. So there is a lot of room for improvement there.

Are you seeing you mentioned the growth and the selling there were a lot of customers that wanted to go to other applications in other platforms which only you offer. Obviously you're looking at Tipping Point. Do most of the customers like that or do most of the customers just want a very very good IDS box (ph)?

It is (indiscernible) defense and there are customers liking the * market in the integrated bandwidth management business is a key advantage for them because of the same box they can control (indiscernible) traffic and protect against (indiscernible). There are customers that are splitting the claim layer (indiscernible) seven IDS. And they are just going after the best IDS folks, so there's really no one good answer. It truly depends on the segment and on the customer. But I would say all customers appreciate several key differentiators that we have in the DefensePro. The first one is the performance since we're speaking now on general security, you need to be able to deal with the performance of the network or Application Switch Three with 3 gigabits is definitely an advantage here.

Second, we're the highest pro density in the market which allows our customers at the same spoke to stand more segments more build on more network segments. (indiscernible) reduce the CapEx and the OpEx for foreign intrusion prevention solution.

Third other applications like you mentioned are integrated on the same design, specifically, bandwidth management; and in some markets it's key and allows them to really control better than they provide better security. And last but not lease our denial of service protection, not only intrusion prevention but in the same boat, we provides denial of service protection in which is extremely strong. And again for e-commerce sites or carrier customers this is a key differentiator.

Obviously you're beginning to see some subscription revenue. I don't know if you can break that out yet. I know it is not very much, but can you envision that becoming a nice piece of your revenue a year or so out?

Could you please repeat the question?

Together I believe the DefensePro also has a subscription aspect to it. Can you talk a little bit about that?

Yes I mentioned in the call we call it the security of the service. Or the SOS. We believe that will give us better visibility for future years and future quarters. But it's basically a subscription service. You will see -- probably will see that impacting the deferred revenues, calling from us going forward. We believe it is a very good point. For future revenues.

(OPERATOR INSTRUCTIONS). William Becklean. Oppenheimer.

Roy, a question on integrating all the multiple functions that are required by a particular enterprise. Your strategy has been, historically, I believe to do it on individual boxes under a single management system. Are you looking more at putting more and more functions on a single platform?

Actually, our strategy was different. Our (indiscernible) each point of the network our SynApps architecture provides (indiscernible) consolidated services. So at a single switch we provide layer 4 7, low content, low traffic management. We provide bandwidth management and proven prevention and denial of service protection so at each point in the network, we are already integrated five to six services at that point. What we do is that we deploy our solutions across the network because these layer 4 7 on these Application Switching solutions are needed in several points. For example at the gateway to your network probably you want to protect against denial of service attacks and to manage your connectivity links to AT&T and WorldCom.

Next to the servers, you probably want to manage your service problems and to provide a much more fine-grained security mainly to detect the IAS Web explodes (ph) and so on. The same thing of architecture is getting different forms and different benefits for the customers where it is being deployed next to the servers, or in the security layer or in the connectivity layer. But over four years now we are delivering 5 to 6 services consolidated on the same switch. If you're speaking about our end to end offering, at the branch level is our new proof (ph) branch, at a single point we provide neutral balancing, bandwidth management, VPN, access, intrusion prevention and branch protection though, actually, if you look at it, we can replace several boxes that exist today in the branch whether it is a bandwidth manager, a VPN gateway, intrusion prevention if the customer wants to deploy and so on.

So across our product line we set (indiscernible) consolidating function.

Gentlemen, there are no further questions. Please continue.

Okay, thank you very much. We apologize for the quality of the line; and at this point, I would like to thank everybody for joining us today and have a great day. Thank you.

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