Radware Ltd (RDWR) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware second-quarter earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to the Chief Executive Officer of Radware, Mr. Roy Zisapel. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to Radware's second-quarter earnings conference call. With me today is Meir Moshe, our CFO. Meir will open the call with the financial information; I will follow with several business notes and then we will open the discussion for Q&A. Meir?

Thank you, Roy, and 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 may make projections or other forward-looking statements regarding the future events or 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, including but not limited to general business conditions and our ability to address changes in our industry, changes in the amount (indiscernible) the timing, the amount or consolation of orders, and other risks detailed from time to time in our U.S. filings, the various (ph) documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed Form 20-F filed in February of 2005.

Now, ladies and gentlemen, for the financials. As we have announced in our primary (indiscernible) results, revenues for the second quarter were $17.5 million compared to revenues of $20 million in the first quarter of this year, an increase of 7% compared to revenues of $16.3 million in the second quarter of '04.

The net profit for this quarter was $1 million, which represents an earning per diluted share of $0.05, in line with the revised guidance provided on July 1.

Our gross margin for second quarter decreased to 80% compared to 82.2% in the previous quarter. I would like to note that we have guided the market all along that the gross margin of 82.2% may decline. The gross margin of 80% is still the highest gross margin in the industry.

Our operating expenses for the second quarter of 2005 were approximately $14.3 million compared to $13.2 million in the first quarter of '05. The DSOs for the second quarter increased to 69 days in the second quarter, compared to 59 days in the first quarter of '05 and 66 days in the second quarter of '04.

We continue to have positive operating cash flow. In the second quarter, the Company generated cash in the amount of $5 million, by that increased our cash position, including long-term deposits, to $166.5 million, and we have no debt.

The inventory remains at the same level as in the first quarter of '05, $12.5 million.

The headcount for this quarter was 395 employees, and shareholders' equity is about $171.3 million.

Guidance -- we anticipate up (ph) quarter. Revenues will go up compared to the second quarter. However, since we haven't completed the dip (ph) analysis on the second-quarter delayed order, we prefer not to provide an accurate number for the third-quarter revenues. Gross margin expected to be at the same rate of 80%. As a result of our plan to increase investment in marketing activities, the operating expenses for the third quarter are expected to range between 14.8 to $15 (ph) million.

Regarding buyback, our Board did not approve to reactivate the buyback program. With the reduction in share price, which limits the Company's ability to use shares for M&A activities, the Board (indiscernible) allowed more flexibility for the Company by maintaining its cash positioning with the belief it will bring more value to our shareholders.

To summarize, of course, we're disappointed by the decrease in revenues and earnings compared to the first quarter this year. We believe we can drive the Company back to gross and increased profitability starting this September quarter.

Now, I would like to return you to Roy.

Thank you, Meir.

As we discussed on our July 1 conference call, we experienced continuous large delays in closing orders during the quarter. The revenue miss was across the board in all geographies. We attribute it primarily to the large amount of acquisitions and announcements in our space over the last -- (technical difficulty) -- that made it extremely difficult for us to close orders and projects. In the last two weeks, we've seen the better business environment as far as we are concerned, and we believe some of our customers' prospects and value-added distributors are assuming their activities and engagements with us. While we believe this is a gradual process, we starting to see positive signs concerning the fair share of the projects that we were tracking in late Q2.

I would like to dedicate a large portion of this call to focus on the core competitive advantages we have in our market. First, we are the only vendor to offer an integrated application (indiscernible) architecture with our SynApps operating system. SynApps integrates (indiscernible) direction load balancing bandwidth management application security and DOS (ph) protection in one suite. We are far ahead, compared to any other vendor in the market, in delivering a full application switching solution. While other companies are trying to integrate several security features with their load balancing products, we are delivering an integrated application, security application delivery and application availability solution today.

Second, we provide the broadest line of application switches in the market, from our branch platform all the way to the fastest application switch in the market, which is currently the application switch 3 with a very high broad connectivity and 10 gig interfaces. Our switches on our PC-based solutions is state-of-the-art ASIC and (indiscernible) processing technology and provide a more scalable application switching solution in the market. We believe its broader networks and 3G networks are being deployed. The performance required from application switching will naturally increase and companies will need to move to a stronger and more scalable (indiscernible) architecture like the one we have invested in over the years.

Third, our DefensePro is one of the strongest intrusion-prevention products in the market, while providing unmatched throughput and flow density. We are the only vendor with integrated solutions for the amount of service protection and intrusion prevention. Furthermore, with our integrated bandwidth management, we can offer carrier and enterprise customers a scalable, comprehensive solution for their application SLA (ph).

Fourth, in layer 4-7, we have the broadest solution addressing all customer needs, starting from the connectivity layer with our LinkProof family, the security layer with our FireProof, and all the way to the data center with our W CMCT (ph) 100 product lines. All of those products are running our integrated seamless operating system, as discussed before. No other company can provide a full solution for our Layer 4-7 needs like Radware can.

We're going to continue to invest on all the four major differentiators we have and in the second half of 2005, we plan to release additional components of our next generation solution. Specifically, we will be releasing key products in each of the four areas I've mentioned. One of our key focus areas is obviously the SynApps architecture. We just released the Voice-over-IP support for SynApps. It's the first solution in the market to address Voice-over-IP availability, scalability and security issues. Our switches can block the amount of service attachments (ph) (indiscernible) proxies while redirecting codes to multiple proxies for better performance and scalability of this mission-critical application. Over the next two quarters, you're going to see new application services that are being added into the SynApps architecture.

On the platform side, we're going in the second half of 2005 to dramatically increase the performance (indiscernible) for applications switching. We believe this will have a strong impact on our large enterprise and carrier prospects.

To summarize, we believe the opportunity and application delivery continues to grow. The Sirius (ph) acquisitions in our space is just another validation voice for the strategic value of our market. We are certain that our large competitive advantage, with the integrated SynApps OS, our state-of-the-art switching platform, and our end-to-end offering, provide us with a strong foundation for future growth. In order to take advantage of what we believe will be the new opportunities in the applications switching market from both carrier and enterprise customers and in order to overcome the short-term interruption in (indiscernible) as a result of the acquisitions, we decided, as we discussed in the last call, to increase our marketing investment in 1 to $1.5 million per quarter. This will enable us to participate, to a larger extent, in the upside potential and new opportunities that we will open in our market in the next several years.

To summarize, although the results in the second quarter were disappointing, we are extremely confident on our competitive advantages and on our ability to extend our lead over the next two quarters. We believe the recent moves of vendors, such as Cisco, Juniper and Citrix, in the application switching market validate the importance of our market and will cause many more end-users to integrate application switching solution as a critical component in their architecture.

On the short-term, we believe our business fundamentals will improve and we believe we will be able to grow our revenues sequentially for the remainder of 2005. On the long-term, as a focused player in this market, with 4000 customers worldwide, a substantial amount of financial resources for strategic investments, a proven track record of innovation and execution in the field and a leading technology architecture and product offering, we are uniquely positioned to enjoy the huge potential of the application switching market and grow our business and profitability.

With that, I would like to open the discussion for Q&A.

Thank you very much. (OPERATOR INSTRUCTIONS). Alex Henderson with Citigroup.

This is Mike Genovese for Alex Henderson. Guys, I was wondering. Can you tell us more about new products coming down the line for the remainder of this year, maybe the application switch 4, when we could expect to see that shipping? Maybe conceptually, how the new product can help further differentiate you guys against the competitors entering the market.

Okay, as I've mentioned, there are four areas that we're looking at, and we plan to announce major announcements in the remainder of the year. The first is additional services to our SynApps architecture. We believe that's the core of the intelligence of our solutions and that's a major differentiator for us because, unlike other vendors that are providing only load balancing, we already integrated many application of our services into our platform. Security is the key differentiator there because, for example, we can block worms before they hit the server phones rather than like the regular load balancer, distribute them across all servers and make all servers being infected.

Bandwidth management is another strong differentiator, because when we are connected to a gateway in an enterprise, not only that we can ensure connectivity is up and running, we can prioritize all of their business applications and guarantee the right response time for those. So, we're going to enhance the SynApps architecture to include more application services and with that grow the competitive edge that we have over all competitors, including the new entrants. So you should expect additional modules being integrated there, providing our customers with much more business and benefits than ever before.

Second, I discuss this last point -- today, we enjoy already application Switch 3, which is the fastest and was the first switch in the market with a 10 gig interface. Obviously, after applications switch 1, 2 and 3, the next one will be application switch 4. As I mentioned, we're planning to release it in the second half of 2005 and we believe it will dramatically increase the performance bar in our market. We believe there will be a very strong impact on our large enterprise customers that are already running 10 gig (indiscernible) backbone as well as many of the carrier customers that are looking for performance upgrade on their networking in order to serve, reach the new 3G networks as well as the new demand of the broadband users.

I've mentioned also additional two areas. One of them was the DefensePro. Also in the second half, we believe we will announce a new product with this family. Last but not least, on the breadth of our offering, we will introduce a new Layer 4-7 solution to the market in the second half of 2005, a new solution that we will need to see and explore what will be the impact on our revenue.

But just to summarize, I've mentioned four key differentiators for Radware in the second half. We are going to strengthen each and every one of them with new product announcements.

Just to follow-up, on the application switch for the DefensePro II or this new platform that you're talking about, are any of these products currently in beta testing, or you know, what -- the second half of the year is a big window there. I mean when do you expect to see actually some of these products move from initial testing to actually shipped?

Two of our products are already in beta, but our policy is to announce the products only when we start shipping them, on a G-A (ph) basis. So currently, we are already in beta in two out of the four initiatives I've mentioned.

Steve Kamman with CIBC World Markets.

A couple of questions. Well, just to clarify a little bit, if you go back to the shortfall, how much of that would you attribute to confusion at the customer level versus confusion at the channel level? I'm just trying to figure out whether it was the actual end customers who were kind of trying to figure out where to go, or whether it was more issues of getting the channel to engage.

We cannot specify, I think, percentage-wise but in the last several weeks, as I've mentioned, we are seeing definitely some of the channels and to some extent, the end-users, coming back and some of the deals we were tracking are closing or we have now a good estimate where and when they should close. So I think business is gradually coming back to where it was and assuming -- and I think that is a fair assumption -- we will not see another surprise acquisition in our field. We think, over the next quarter, we hope it will be back to regular terms. So we're seeing already some good signs of improvement in there, definitely in the channel, and to some extent already in end-users.

But it sounds like it was more of a channel problem in terms of the slow down itself. I'm just trying to make I know sort of why revenues slowed.

I wouldn't say that. We were seeing many customers that were taking the time to re-evaluate.

Another thing -- I noticed your revenues went down 12% but your deferreds went up 3%, so I guess I just want to make sure that that's a pretty good indication. I know there are some other things in there, other payables, but all things being equal, most of that improvement was in actual revenues. Is that fair?

Yes, the (indiscernible) revenues were up this quarter, although we haven't said exactly the number and the percentage for deferred revenues this quarter. We always give the numbers on the (indiscernible) -- on our annual report.

Then to follow on from that, though, the not giving a specific guidance number from Q2 and I understand there is still a lot of sort of trying to sort out deals out there, but has your visibility shortened all or not? I mean, one of the things you guys have always had is about a six-month visibility. I'm a little bit concerned to see that lack of guidance.

Basically, what happened to us -- and I tried also to explain it on the previous call, is since deals were delayed, we would keep working the same deals. I think we had some issues with building the pipeline to the level we wanted to be. Obviously now we are accelerating this process, but as a result -- and you can -- and it's evidenced from that lack of guidance -- our visibility is not as it used to be. We want to basically see this quarter and to go back to normal business, and then resume the visibility and with the confidence and accuracy that we provided over the last five years.

That's fair. Buyback, it sounds like that's not going to happen; it does sound like you are implying more M&A. What might that look like? Is this the goal here of acquiring technology? It seems like you've actually got a pretty good portfolio -- or distribution, or just any thoughts on just what you are thinking strategically?

Generally, we're looking for a company that is in an adjusting (ph) market, because we think we have a very strong and leading technology in our market. But a key point is really an enterprise customer base that we can leverage, a company with revenues and traction in the market. We think there's a good window of opportunity for doing that and that basically was our Board decision.

Thanks very much and we will look forward to next quarter.

Troy Jensen with Piper Jaffray.

Just a couple of questions -- Roy, I think you said, in the previous call, that DefensePro was less impacted here in the quarter. I'm just curious why -- I understand why the 4-7 would be impacted with the acquisitions, but why do you think DefensePro actually declined on a sequential basis?

It's basically just the time the (indiscernible) sales force and (indiscernible) force and where do they spend it -- to try and to close the same deals you're, not opening new opportunities. Some of the DefensePro deals were closing but some simply I think for lack of focus and the inability to dedicate the resources and to free yourself from the previous deals, we were not able to grow that.

On the other hand there, I did mentioned some of the strategic wins we had in that area, but we are very confident with the DefensePro and it starts with competitive advantage, traction, and also some of our beta versions that are already in the field.

That's helpful. Then a question for Meir -- on the marketing side, you guys talked about 1 million to 1.5 million increase in the marketing, but looking at the OpEx guidance, you're definitely not predicting that or planning on spending that this quarter. Should we kind of model out, continue to bump up the sales and marketing, or when do you think the full 1.5 -- or 1 to 1.5 million actually hits the model?

We said about the range of 1 to 1.5 in each of the next two quarters, this quarter and the quarter after that. Of course, this quarter will be a little bit less, just because marketing activities we have to plan ahead of time, so I would say that the number that we put right now, it's based on our marketing activities planned for this quarter. And the next quarter, you can expect $1.5 million (indiscernible) based on activities. This is our best assumption, so now on the operating expenses this quarter and the next quarter as well.

How about -- can you guys give us the percentage of deals that had SynApps attached to it?

It was like last quarter at 28%.

Last question, and then I will pass it on -- can you talk, Meir, what was the linearity like in the quarter with the DSOs jump (ph)?

This quarter, it was back-end loaded. You can see also from the DSOs, also what we discussed in the call at the beginning of this quarter. Last month, the June quarter, the month of June was about 60% of the sales.

Guys, good luck in Q3.

Thank you.

Dan Harverd from Deutsche Bank.

Now that you've had some time to do some planning, where do you expect the additional marketing dollar to be allocated?

Okay, there are several places that we need to do. One of them is on the demand-generation aside is in order to make sure we are reaching to our end-users and clarifying the message and clarifying the positioning. Another portion will go into channel marketing, because over there, there's a lot of confusion and they need to make some choices which way they go. For the long-term, based on the acquisitions that had happened. So I think we're going, between demand generation and channel marketing, we will invest the vast majority of those budgets.

So it's not necessarily a case of taking on more headcount but allocating more resources to existing staff. Would that be a fair comment?

Yes, yes. I think the majority of the budgets will go to marketing, marketing percent, not necessarily to sales (indiscernible).

Okay. Then secondly, given that your business has been -- or the linearity of the business has been getting more back-end loaded in the last few quarters, is there anything that you can do to change the model from what -- so that you can build up backlog and not have this issue going forward?

I don't think, you know, the linearity was different, you know, like it was making -- becoming worse over the last several quarters. It was just last quarter that it happened to us. Until then, we had roughly 50% of the business booked in the last month, and we roughly had the low 20s, then the high 20s for the first month and the second month. But we've seen -- although this quarter and second quarter, the first month behaved normally, the second month was -- we started to feel the impact of the acquisitions. We believe in the second month, it was only 20% of the total and since we are driving to the third quarter, some of them closing, some of them did not. So we believe, as business will go back to normal, the linearity will improve and will go back to where it was.

On top of that, obviously we're looking on ways to improve linearity, but in many cases, that's the nature of the business and it's no different than what other companies in our space are reporting.

Then just one final question -- can you give the breakdown between new customers and repeat business in the quarter?

New customers, this quarter, it was 40% (indiscernible) 60%. Actually it's a little bit changed from last quarter that we had the new 45% and repeat 55%.

Okay, so you also saw a slowdown in the quarter from existing customers? (multiple speakers).

No, from existing customers, it was up; instead of 55%, 60%. That means that what we said about the confusion in their market impacted more new clients rather than existing clients.

Right but just in absolute terms, I mean there was still some sort of a decrease in order flow from your existing customer base.

That's roughly the same. I don't know. It was roughly flat I would say.

Troy Jensen from Piper Jaffray.

Just a follow-up -- could you guys give the geographic breakdown?

Yes. The geographic breakdown for this quarter was the U.S. 38%, and (indiscernible) 62%.

Could you distinguish between the two different international dealers?

Yes. Asia-Pac 28%, EMEA, 34%.

Then do you also give the enterprise versus service provider breakdown?

Yes, it was very similar to last quarter, 65 enterprise and 35% the carriers.

Mark Sue from RBC Capital Markets.

This is Jennifer Tannenbaum for Mark Sue. Could you tell us when you think that gross margins will recover to the historical level?

As we mentioned before, the gross margin is expected to remain the same 80% in this coming quarter, but we guided the market sales -- we went public, it was about six years ago, that gross margin may decline. So, it was the first quarter that we experienced decline in the gross margin, so the next quarter, it means this coming quarter, we expect similar gross margin of 82%, but for the long-term or so, we don't see any reason right now, so any erosion of the gross margin. We continue to guide the market on the drive for the gross margin.

William Becklean from Oppenheimer.

This is Pria (ph) (indiscernible) for Bill. I was just wondering if you can give us an update on the carrier side of the business and if that was (indiscernible) affected and what the split was last quarter between carrier and supplies (ph).

The split basically between enterprise and carriers was the same, so we were affected in I would say to the same extent at both, although carrier business tends to be more lumpy than the enterprise business. But as a percentage of revenues, it was the same impact.

Okay and just a quick follow-up -- were some of the orders lost from last quarter? Are you expecting that back or has it all been just pushed out to this quarter and the next?

So, I tried to speak about it in my comments. Basically, we are definitely seeing some of the orders closing or progressing, or back on track, as you say, but you didn't finish the full analysis. So we're not sure everything will come; we need to find out the situation in each and every place. But overall, we're seeing some positive signs in that aspect as well as in terms of our pipeline that is building for this quarter and next.

Okay, thank you.

Mark Donahue (ph) from Ferris Baker Watts.

I was wondering if you had a breakdown of percent of sales by your (indiscernible) market or product line.

We don't share this information. Obviously, we have that internally but we don't split by product line. I want also to explain that we are selling basically application switches with the seamless architecture. It's less important where exactly the customer position us, as we're looking for the end-to-end solution from connectivity to the security, all the way to the data center. We share the same technology and the same architecture across all those points. Although we can track it by manufacturing by the exact model and so on that the customer is ordering, we are really looking on the end-to-end solution here.

Okay, okay. I don't mean to belabor the point on the channel partners, but have you seen any significant relationship changes with these acquisitions that have happened in the front end of the year?

We didn't see any sales activity yet as a result of those, if that's what you are speaking about. We definitely -- a lot of the Juniper channels, Citrix channels and so on are exposed to this activity, and they are looking for what are the opportunities in each product line, what are the differentiators, what is the right positioning and so on.

Okay, thank you.

Alex Henderson from Citigroup.

I'm sorry to re-ask the question that has already been asked twice, but I missed the answer; I heard it two different ways. Did you say next quarter 80% or 82% -- (multiple speakers) -- the gross margin?

My mistake. Next quarter 80, 8-0. I'm sorry for this. Next quarter, 80%, as we had in the second quarter.

At this time, there are no other questions in queue. Please go ahead.

Thank you very much for attending this call and have a great day. We will see you next quarter. Thanks a lot.

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