Radware Ltd (RDWR) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware conference call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions and comments; 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, President and CEO, Mr. Roy Zisapel.

Thank you. Good morning, everyone, and welcome to the Radware's fourth-quarter 2005 conference call. Joining me today is Meir Moshe, our Chief Financial Officer.

Today, we are reporting quarterly revenues of $21 million and net profit of $2.4 million. These results represent approximately 11% growth over Q3 revenues.

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

Thank you, Roy. Welcome, everyone, to our 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 the future financial performance of the Company. We wish to caution you that such statements are just predictions, and actual events or results may differ materially including but are not limited to general business conditions and our ability to address changes in our industry, changes in demand of [SA] products, the timing and amount of orders, and other risks detailed from time to time in Radware's filings. We refer you to 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 April 2005.

Now, ladies and gentlemen, for the financials. We ended the year with a terrific momentum. Sales increased sequentially by 11%. Gross margin is up to about 81%. Operating profit increased to $1.1 million. EPS is up to $0.12. Cash generation for the quarter is almost $5 million before a $9 million investment in the V-Secure asset acquisition.

Our fourth-quarter sales of $21 million are consistent with our expectation that we would be able to grow revenues sequentially by 11%. The net profit for this quarter was $2.4 million -- higher than forecasted -- therefore, also, EPS was better, $0.12 versus forecast of $0.11.

Our gross margin for the first quarter increased to 80.7%, mainly as a result of the higher level of sales. This gross margin is the highest gross margin in the industry.

Q4 was a quarter of focusing resources on effective marketing. And as we focused it, our operating expenses were $15.8 million. The increase of sales enable us to increase the profit of the operating profit. The operating profit for the fourth quarter was $1.1 million compared to operating profit of $300,000 in the previous quarter.

Our balance sheet remains strong. The DSOs for the fourth quarter decreased to 64 days from 70 days in the third quarter of 2005. We continued to have a positive operating cash flow. We ended the year with cash position, including long-term deposits, totaled approximately $165 million, with no debt. We ended the year with shareholders' equity of $177 million and headcount of 433 employees.

We believe this quarter is out demonstrating improvement in our business fundamentals and the results of more effective marketing. Based on that, we anticipate that we will be able to deliver sequential growth in each of the quarters of 2006.

At the end of December, we closed the V-Secure asset-quick acquisition. As previously announced, this transaction will be accretive only from the third quarter of 2006, and it dilutes the EPS by $0.02 in each of the first 2 quarters of 2006.

The following guidance does include the dilution of the V-Secure transaction. We anticipate first-quarter sales will grow by 5 to 7% to a range of 22.2 to $22.6 million. We are targeting a gross margin in the 81% range. Operating expenses, excluding stock-based compensation, will increase to $16.4 million. After 10% tax rate, the EPS excluding stock-based compensation is expected to be $0.13. The impact of stock-based compensation as a result of implementing FAS 123R for the first quarter of 2006 is about $1.6 million.

As you can see, ladies and gentlemen, in the fourth quarter, revenues increased; our high gross margin is up; we continued the focused marketing activities; increased operating profit, maintaining positive cash flow; increased the EPS. And we're optimistic about the results for 2006.

With that, I will turn the call over to Roy.

Thank you, Meir. During our last conference call, I outlined how our new integrated APSolute products family provides Radware a strong skill to leverage the growing interest and demand for complete Application Delivery solutions. APSolute is our platform for driving future revenue growth, increased market penetration and brand recognition. We launched our APSolute Application Delivery solution in October, and our fourth-quarter results reflect building market momentum for APSolute.

Briefly, our new integrated APSolute architecture strengthens our technology leadership and sharpens our competitive advantages. APSolute enables our customers to extract the greatest value from their investment in IT infrastructure by making networks applications smart and optimizing network performance end to end. Because we design our architecture from the ground up to intelligently integrate availability, performance and security functionality, APSolute provides best-in-class feature set to ensure fast, reliable and secure delivery of applications over IP networks.

None of our competitors have an architecture that enables usability across the entire network or can use such granular intelligence to make decisions at every critical point along the network to ensure fast and reliable business transactions.

In Q4, we made a lot of progress in regards to executing the execution of our APSolute product family strategy. We are now shipping AppDirector and AppXcel, our next-generation applications content product. APSolute versions of LinkProof will be available this quarter. In addition, both AppDirector and DefensePro are available on our new high-end Application Switch 4, 3020 Application Switching Platform. The AS4 was designed to satisfy the demanding performance, availability and connectivity needs of large enterprises and carriers. It provides 88 gig wire speed switching, a dedicated parallel-processing engine for high-speed processing of granular, layer 4 to 7 classification and security processing, an array of network processors, ASICs and state-of-the-art risk processing. These are key elements needed for fully leveraging the power of APSolute OS for application smart networking.

In Q4, we also added SecureFlow to our APSolute Application Security product offering. Enterprises typically deploy a combination of firewalls, VPN, IDSs, content inspection and antivirus solutions to satisfy their security needs. SecureFlow innovative security switch architecture uses the integrated availability, performance and security services of our APSolute OS to optimize the performance and simplify the management of best-of-breed enterprise security tools. By enabling complete control of a bandwidth-management allocations and policies that guarantee security performance, SecureFlow aligns business priorities with bandwidth usage to eliminate the security performance trade-off. SecureFlow also ensures 24-by-7 security policy enforcement; high availability; fast response time and transparent, cost-effective scaling for the security devices.

So, to recap, in Q4, we progressed very well on our product roadmap. AppDirector end AppXcel were released as planned; our new high-end other platform, the AS4, was released; and we announced a new product, SecureFlow. Our product pipeline continues to be strong, and we have plans to continue to enhance our APSolute architecture throughout 2006 each and every quarter.

This quarter, we hosted over 400 of our worldwide channel partners in two events, where we introduced APSolute. The product family in our single APSolute message was uniformly well-received. Our partners see APSolute as a unified Application Delivery solution that addresses the full range of current and future requirements for optimizing Web-enabled and networks applications. Our integrated APSolute hardware and software architectures allows our partners to provide customers with a scalable solution that can easily be custom-fit to meet diverse customer business needs.

During the quarter, we sell revenue growth from all of our geographies -- America, EMEA and APAC. In terms of product lines, we saw similar sequential growth from both our application switching core business and our security offering. We saw strong customer activity during the quarter with key wins coming from the New York Stock Exchange, Bloomberg, Fortis Bank, Bank of China, Corrections Canada, L3, Time Warner, Samsung, MetLife -- to name a few. We were particularly satisfied with the level of interest and activity around our newly-released AS4 platform. We believe it will translate into actual revenues in first half of '06.

On the business development side, we announced partnership and alliance with Computer Associates and Finjan to accelerate their content security offerings with our SecureFlow product. We believe the combination of SecureFlow with security tools, such as anti-viruses, anti-spam, firewall and IDSs provide unprecedented traffic acceleration and scalability.

In the past quarter, we also did our first acquisition, V-Secure. As discussed, we plan to integrate V-Secure Technologies for behavioral daily-based self learning networks into our APSolute OS. As part of our core engine for application smart networking, the combined technology provides more intelligent ways to analyze and quickly adapt to changing application traffic patterns. It enables us to take Application Delivery and security to the next level.

Specifically for security and intrusion prevention, this technology extends our arsenal of intrusion-prevention mechanisms to include proactive, 0 day protection for new, emerging threats. The combination of our content-based technology with V-Secure adoptive rate-based technology and behavior-based protection enable us to offer our customers a superior, real-time IPS and denial-of-service security solution. The integration process is progressing very well, and we believe we will be able to start shipping integrated products ahead of the July timeframe we previously targeted. The first product to ship with integrated behavioral intrusion prevention and denial-of-service will be the DefensePro. We will then integrate this functionality into our APSolute OS and make it available on our entire APSolute product line.

This month, we appointed Larry Marino as President of Radware Americas. Larry is an AT&T veteran and has a proven track record of scaling high-growth networking businesses. Larry's appointment is a strategic one, as we enter 2006 with a key focus on demonstrating strong market traction in the U.S. and growing overall market share for our integrated Application Delivery solutions. While the Americas were growing in 2005 and we definitely progressed in terms of our organization, we are looking for stronger growth as a company. Larry will play a key role in achieving significant revenue growth with effective execution of our business strategy.

To summarize, we believe our Q4 2005 results reflect growing market momentum for our APSolute Application Delivery product family. We began executing aggressive brand awareness and demand-generation marketing activities this quarter and plan to continue these activities in 2006. We have significantly increased our investment in marketing for 2006 and have plans to implement a variety of marketing programs focused on lead generation, sales enabling and channel marketing.

In addition to focusing on organic growth in Q4, we made our first acquisition. With the APSolute product family launching, the strong positive feedback we are getting from the market for it, our increased investment in marketing and strong [near] focus on revenue growth, we are very optimistic on our ability to grow our business at the stronger base.

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

(OPERATOR INSTRUCTIONS). [Stanley Cobbler], Merrill Lynch.

I just wanted to see if you can update us on your progress maybe with service providers and give us a mix of enterprise versus service provider customers if that's changed. Also, talk about perhaps the competitive landscape if that has changing in any way for you.

Okay, the split between enterprise and carriers is about the same for this quarter -- 35% carrier, 65% enterprise. We continue to enjoy very good business in the carrier market. Cingular Wireless, Bell Canada, France Telecom, China Telecom, KDDI in Japan all contributed to this quarter results.

We believe going forward, there's even a bigger opportunity in the carrier market as a result of some of the competition being weakened as new carrier infrastructure are put in place to support next-generation network needs. So obviously, that's a market that we are seeing growing going forward.

Did I answer your question about the carrier and enterprise?

Yes. And I was also wondering if you can update us about the competitive landscape if it's changing new players or how you are faring against your competition.

We didn't see any change this quarter. Actually, you know we were waiting to see Citrix or Juniper starting to push more their new offerings following the Q2 acquisitions, and we didn't see that much in the market. So overall, nothing special happened; everything is the same. We are meeting the same competitors, and we don't think anything has changed. We believe our position is becoming stronger, as we are revealing and introducing more components of the APSolute product family.

Alex Henderson, Citigroup.

I was wondering if you could give us a little bit more of a sense of where your business model is heading over time. Obviously, there was a reset last year, which was pretty disappointing. Your margins got hit pretty hard as you accelerated spending, particularly on the marketing side.

You seem to have straightened that ship out, but I guess the question is, what's your objective here? Are you trying to get back to the 20%-plus operating margins? And if so, can you give us some sense of what your internal timeline might be for achieving those types of margin targets?

Basically, we're looking to grow back to the 20-plus% in operating profit, and the key point in our business model is the high gross margin. So what we're doing now, we are investing in marketing to create a demand generation and fuel the revenue growth, knowing that that acceleration of revenue growth will provide us more than enough leverage in the business model to support 20, 20-plus operating profit like we were doing last year.

In addition, the way we built our internal plan -- although we are sharing only guidance for Q1 -- is for our operating margins obviously to increase over the year quarter by quarter together with the increasing sales.

Is it reasonable to think that trying to get back towards the 25% type of sustained topline growth rate would get you back towards 20%-plus margins by the end of '06 or during '07 timeframe?

(multiple speakers) Although we don't want to comment specifically, I believe you are right in your assessment.

Mark Sue, RBC Capital Markets.

Can you elaborate on your thoughts of sequential revenue growth in every quarter for 2006? Typically, March is a more back-end-loaded quarter. Are you still highlighting 5 to 7% sequential growth? Does that mean we should see accelerating rates of sequential growth for the balance of the year?

Basically, our guidance for Q1 is obviously showing the confidence we have in our business. Generally to look in the past years, we were guiding more conservatively as Q1 is a seasonal quarter. So generally, we were guiding anywhere between 3, 4, maybe up to 5%. So definitely for Q1, we're seeing stronger growth rates. Also, you know beyond that, we believe we will be able to sequentially grow our business, but we don't want to give specific guidance at this point in the call.

Can you just help us understand the trends and deal sizes and also maybe business from new customers? And then separately, just your thoughts on what Larry might do differently in terms of his operations in the Americas?

Okay, about the deal size, the deal size this quarter was up to $70,000; it's up from $65,000 in the third quarter. Just if you recall in the first 2 quarters of this year, it was only 60,000. So [throughout] to summarize, it was $60,000 in the first half of the year, went up to $65,000 in the third quarter, went up again to $70,000 in the fourth quarter.

And the (indiscernible) ratio, this has remained approximately the same. It's 40% in new, 60% repeat. A quarter ago, it was a little bit different, 42 and 48, but it's not a major change.

Concerning the U.S. as I have mentioned, you can see it also this quarter, we were able to grow nicely in the U.S. but we believe the potential is much bigger. We believe we need to put in place much more focused organization on revenue growth, increased market share, much more aggressive execution. And I'm sure Larry will execute on that. For specific plans, I think it's too early to share it on the call, and we will do it when the time comes.

Ryan Hutchison.

Just a couple quick follow-ups here. On the international breakout, did you just provide that? If I missed it, I apologize.

Okay, about the U.S. profit accounted for 40% of total revenues. In the international, it was 60%.

Okay, and then what is the AS3 contributing in terms of as a percentage of revenue? You've given that in the past. Typically, it's around 28%. Is that still where we are today?

You are asking about the AS3, or--?

Yes, and then expectations for AS4 going into 2006.

Okay, we didn't break -- we are breaking platforms only in the first quarter or two for shipments. AS4 was starting to contribute really in the end of the quarter meaningful revenues we will start to see I believe in Q1 and Q2. And on the next call, I will share that with the audience.

Okay, and then did you catch it right here that the LinkProof portion will be shipping towards the end of this quarter, or is it towards the middle?

The LinkProof is a shipping product. What we're going to do in the coming version that we just released and is available in Q1 is that it's going to enjoy all the APSolute OS components. So we integrate all the APSolute OS components, including the classification, the flow management, the security pieces to the LinkProof product as well. Now, we've integrated across the whole value of products family. So that was the last component to ship with full APSolute capabilities, and it's already starting its way in the market.

Okay, and then in terms of how should we think about the gross margins moving forward? Do you think we can get back towards that 82% level towards the back half of 2006?

Okay, about the gross margin, as I said for this quarter, it was mainly due to a higher level of sales. So, I don't want now to put a high about 81%. But we expect as sales will go up, we can benefit from that. Also, you know the gross margin depends on some other factors, like prices in the market, mix of products, etc. So the trend is positive. This quarter, it was 80.7. We are targeting 81% for this quarter. But as for the future as I told you, higher sales is a positive factor for that one but it's not the only one.

Then one final one here just in terms of the competitive landscape. Clearly, a lot of the competitors are looking at more of a -- call it a sort of an end-to-end solution here as they enter into the WAN optimization or WAN optimization controller market. What are your plans as we look forward in terms of entering that market?

First of all, we think WAN optimization is a nice opportunity, but we believe that the branch office, Cisco, is dominating the brand [Trousel] -- as a result is a very strong position to the branch side of WAN acceleration. When we are thinking about the end-to-end acceleration of applications, we see that as our core business. But going forward, as more applications are becoming more Web-enabled, .NET, XML, etc., you can accelerate all those from the data center, providing our customers with a much stronger ROI, much better performance, much smaller footprint on their full network. We believe that's the way to go.

So we're focusing on application acceleration, application optimization end-to-end, not only to branch offices like the WAN optimization controllers but also to mobile and traveling users. We believe that can be achieved with a strong technology and focus on the data center, and that's where we are targeting with APSolute.

As far as APSolute, I have mentioned the AppXcel product. The AppXcel is doing exactly that. It is optimizing application delivery end-to-end through a combination of multiple optimization techniques, from TCP optimization, Web compression, SSL acceleration, caching, wireless content modification, image manipulation, and on and on and on. So we believe that our solution for end-to-end acceleration from the data center is a very strong one. I believe that in Q1 or Q2, we will be able to share a very strong success story with a carrier player that is using our technology to accelerate the experience of applications for end users.

William Becklean, Oppenheimer.

Do you feel any pressure to get into the SSL VPN business?

We have very strong alliances there with Aventail and to some extent regionally in Europe with Whale. So we believe we are participating in the opportunities through our partners. We don't see a need for us to integrate SSL VPN specifically in our devices currently.

Could you just review for me briefly what the U.S. organization looks like from the top down, who the main players are in that organization now that you've added your new sales guy?

Yes. We have Larry Marino, who is the President. This is the new recruitment that we've shown. We have Michele Blank, which is the Chief Marketing officer. We have under Larry, we have VP of Sales for the Americas, Bob Simpson, Regional Director of Sales, as well as the full FE system engineering organization. We have operations and so on. I can send you the org chart after the call, but it's over 100 people there.

Yes, I would appreciate it if you would do that. Thanks.

Matt Robison, Ferris, Baker, Watts.

Can you talk about what you're doing to achieve more third-party support for your products? Also, if you're going to support the Snort with your version and [integration] of V-Secure?

Okay, concerning the third-party support, I have mentioned also in my remarks. We are working with other parties -- for example, with SecureFlow, we've announced a relationship with Computer Associates and with Finjan for a joint go-to-market strategy, where they use our products to accelerate the performance of their antivirus and content security gateway. So obviously, we're seeing that as a very strong tool to promote our solutions.

Concerning Snort, Snort is an open source, intrusion-detection code that has a signature database that one can use. But that database has many, many force positives and so on. I don't think at that format it's commercially usable for large enterprises and carriers, which is our target market.

What we have in our intrusion prevention and Denial of Service protection capabilities is -- first of all, in APSolute OS, full application security capabilities, including a signature-based database that we create, we maintain, we develop -- it's fully owned by us -- as well as protocol anomaly, traffic anomaly, anti-scanning capabilities. In addition to that, internally with our DoS Shield module of APSolute OS, we are protecting against Denial of Service attacks, both known and unknown attacks, in very high speeds.

V-Secure is adding to us what is called behavioral intrusion prevention, meaning without knowing the attack, without having a filter like Snort-based solutions or signature-based solutions -- for the product to automatically understand and detect an attack and create a filter to block it. This is extremely important for our large customers because they can be the target of what is called a 0-day attack, meaning they are going to be attacked first before the attack is launched to another customer. So they don't have the time to get a filter or to update their systems. They are the first target. And for that, they need 0-day protection, while the behavioral Denial of Service and IPS capabilities of V-Secure are unique in the market. That is the asset we acquired. We believe it's extremely strong and useful to all the large carriers to protect their infrastructure, like billing, OSS, systems, services to customers, as well as to enterprise customers to protect their portals to dotcoms to protect their business and so on. All those high-visible customers are prone to Denial of Service attacks and especially for those that are 0 day. And that's where the technology is really shining.

So we believe our security capabilities. All of them already integrated in APSolute OS are unique, are covering the multiple functions and aspects that you need from an intrusion-prevention and Denial of Service and together provide a very strong solution to our customers.

So you expect to build a scale operating margins, while carrying basically the burden of this intrusion-prevention expertise with relatively minimal third-party support to help you along the way?

The Snort is a free community; it's not really a third-party support. But yes, we already modeled as Meir mentioned, the V-Secure impact on the business model, and we're seeing operating margins going up together with that. We believe it will also enable us to grow topline revenues because it's extremely unique and powerful technology.

Dan Harverd, Deutsche Bank.

To through ‘06, what are the key things you'd like to achieve during the course of the year more on the operational side than the financial side?

Until the closing of 2006, you mean?

Yes, you know, as you look forward to the year ahead?

Okay, basically, we are looking and very focused on growing the Company revenues. We are looking on increased market share, both in the carrier and the enterprise and the large enterprise markets through our APSolute. We are looking to executing on our -- we have a very aggressive product roadmap for the year, and we're looking very strongly for execution there in a timely manner. We're looking on building the infrastructure to support next year's growth. I think we're now in a transition stage, and we have most of the components in place. But we need to put also the infrastructure across the Company to support growing from the current level of revenues that we are to a much higher number.

So, we have many things to do. But in the end of the day, I think a lot of the pieces are in place. We have the new family and all the next-generation product family already launching. We have the organization and the infrastructure in terms of scale and support already in place, and now we need to execute on those bases.

Are you seeing any evidence yet that the increased marketing spending is having an impact?

We started to see in Q4 much larger coverage of the Company; much more leads are being generated. But again, we believe we should start seeing much larger fruits in 2006. We have just started; we think we are executing well there. The first signs are very good, but we believe it can dramatically change the pipeline and our exposure in the market.

Then just a final question from me. Your new president in the U.S. will be -- if I recall correctly -- the third president that you've had in the last 2.5, 3 years. What are some of the lessons you've learned from that turnover, and why do you think it will be different this time?

First of all, I think you need to understand that this time, we replaced in strength, meaning the organization is growing; you can see that in Q4. We delivered 11% sequential growth. The U.S. is growing the organization progress in the last 2 years. So overall, I think many companies were not doing anything. We are aiming higher; we're aiming to accelerate the revenue growth. We believe now is the time to focus not only on the organization part but more into the sales and business execution and really taking it to the next level. And that's why we've done this time the change. So I think it's very different than what happened in the first time that we just nominated a guy to hold it or the second time that we had to replace on weakness.

This time, we are replacing in strength. U.S. is growing. Q4 was the record quarter, but we're still aiming higher. And we're looking for them to overachieve their business plan.

Matt Robison, Ferris, Baker, Watts.

The OpEx guidance, does that include the amortizations for V-Secure? I've got a couple more housekeeping.

Yes, that's correct. It includes all the expenses related to V-Secure, also the amortization.

Can you give us a sense for the magnitude there?

The amortization, this is about $150,000.

Okay, and then the 1.6 million of stock comp, is that before or after tax?

This is before tax.

Can you repeat what you said for headcount and your plans to add heads and what departments you're going to add them?

What's said, we ended the year with a headcount of 433 employees. We haven't mentioned the number of heads that we're going to add, but we are adding heads mainly for R&D and sales and [such] engineers.

Stephen Kamman, CIBC World Markets.

I've been pressing star one for a while here -- happy to get on. I have a couple questions. New product development, obviously, you are working with the APSolutes. But anything in terms of maybe an App Switch 5, I guess, and/or any other areas you might be focused on?

Okay, definitely, we've released App Switch 4 last quarter, so the next is App Switch 5. I believe we will have a lot to tell about it. I think it's going to change the rules of the game in our industry, but we will need to wait another call for that.

Also, just any progress on the channel partner front either in the U.S. or internationally? I know that's been a focus over the last year, and I know there's been some changes on the marketing front but just any thoughts?

Yes, I think we've done a very good progress there. I have mentioned in my remarks, we had our yearly partner conferences. And this year, we got 400 partners participating way ahead, especially in the U.S. We got excellent participation, roughly 100 participants, up dramatically from the years before. We believe we've done very strong steps in training and making our partners in the Americas and overall much more productive. But we're very happy with the progress on that front.

Then on the marketing, can you give us any kind indication of what you're really expecting to spend this year on marketing? You know, it does sound like you're going to ramp there. I'm assuming R&D probably doesn't have much room upside but just any thoughts.

I think we will continue to spend like you've seen in Q4 and Q3 because of the success we're seeing in our marketing activities. You can expect the same rate, even a bit higher but roughly the same rate. In R&D, we're going to continue to invest. Basically, our long-term business model calls for 15% of our revenues to be back reinvested into R&D as we see that as something we must keep our technology advantage.

Then, Roy, the last question and it's getting at this APSolute thing, which I do think has got a lot of interesting potential in it. But I want to try and maybe back it in the other direction is -- let's say 1.5, 2 years from now, the APSolute product line is fully flushed out and is a phenomenal success. What does it look like? How does it change with the product Company's go-to-market is? You can kind of take it from the reverse of -- once we get to where we are, what changes has this led in the Company? Just because I think we're getting lost on the leads in the technology, and I'd like to kind of step back up and make sure that we understand what it looks like in totality?

I think what APSolute is aiming is to create an application delivery network for our customers. What we are seeing is basically that as customers deploy the next-generation applications and as they rely more on their applications for the day-to-day business to maintain their competitive edge in their environment and their business, they need to shift away from a specific point layer 4/7 load-balancing solution to a specific application to a full architecture view of how am I going to run an application on business-critical application over my IP network?

I think the first layer of the networking, the layer 2/layer 3, the types, etc., that's already sold in the market -- can buy from Cisco, from 3Com, Foundry, Extreme. That is, people understand how to run networks globally in an efficient manner and in a manageable manner. But once you're trying to take a next-generation application and deploy it globally over the IP protocol and over your current layer 2/layer 3 network, many challenges arise, starting from availability issues or failures across your global network, going through performance issues for latent fees, for the behavior and chattiness of the protocols and last but not least security issues. As you now need to open up to partners and employees that are traveling, to suppliers, you're more prone to attacks from the outside as well as from the inside on your mission critical applications.

So it's not good enough anymore to put a load balancer, as advanced as it may be, in a single point in the network and take care of that, deploy another appliance at the other end to take care of the intrusions and so on. Organizations need to think strategically of how they're going to run these applications. And for that, they need a new layer, what we call the application smart network.

APSolute is, I think as far as we know, the first architecture for that piece. It's not marketing; it's not [slight]. It's an actual unified integrated architecture to enable end-to-end Application Delivery over IP networks with combined all the availability, performance and security components together with end-to-end management and visibility to really enable our customers to go to the next level as they require. That will obviously mean a lot for the Company. We're moving from a more tactical scale in an organization to become much more strategic and fundamental to the business, and we believe that is a huge potential for growth forever.

If I were to -- my understanding, your real advantages of you bringing to the market there is -- one, obviously speed, which has always been kind of the core of your product; two, my understanding is you guys will accelerate on any application rather than being tuned for specific applications. So by working at a lower level, you're not just tied to accelerating a couple popular applications. You can run pretty much anything on anyone's network. And then three, as you say, the end-to-end nature, so you've got a branch solution all the way up to the datacenter. Is that fair?

It's fair. But I think there are a couple of points that I would like to stress in addition to that. In APSolute, the core component of classification allows us to automatically learn a new application and to automatically adjust the network behavior to your business needs, which means, let's say you are deploying now a new CRM application. Through our classification engine, we can automatically learn how this application looks and automatically teach the entire network from Tokyo to New York, from Tel Aviv to London, what to do with this application, how to accelerate it, how to secure it, how to ensure its end-to-end availability. That's unique in the market. No one can have this granular intelligence on the application and automatically enable all those services for that application. That's number one.

Number two, through the flow manager in APSolute, we are able to take -- according to that application -- end-to-end decisions. From Tokyo for the CRM, I want to give more bandwidth. In my datacenter in Illinois, I want to make sure that the Web front end for that application are secured. And on my hub in New York, I want to make sure that I accelerate the Web access to the CRM application. All of those policies and decisions are made once and are being propagated to all the switches to take end-to-end action.

The third point I would like to stress, which is unique to our architecture, is the full integration of security performance and availability. We're not only talking about layer 4/7 or layer 4/7 with some Web firewall capabilities next week. We're speaking about integrated security and intrusion prevention for all applications end-to-end and Denial of Service protection. So those are the components that I would add to the benefits or the differentiators that you've mentioned.

Troy Jensen, Piper Jaffray.

A couple questions, first for Roy. Roy, can you remind us what your market share in the career side of the 4 through 7 space?

I don't think there is a -- I didn't see any market share research on that. But you know from our customers, we believe we are holding a significant market share. We are looking across all -- you know, carriers is a small community. So you can go country by country and name them and see where you stand. We believe we have a very nice market share in that segment.

Historically, has it been just Nortel foundry the biggest competitors, or did you see others there too?

I think it was mainly Nortel and to some extent Cisco. (multiple speakers) foundry was more the layer 2/layer 3, less from the 4/7.

Any concerns, I think F5 just announced the availability of their 10 gig product this morning. Just kind of curious to know what your thoughts are competitively on the carrier side.

I don't think it matters for us in the carrier side. Just to remind the audience, we have 10 gigabit connectivity in our Application Switch 3, which started to ship 3 years ago. I believe we have a very strong holding in the carrier market because of the architecture of our platform, which is fully switch-based with network processors and ASICs and not PC-based or Intel-based with the applications we are providing, the specific support for the carrier-based applications, not only enterprise, and most importantly with the integration of availability and security, which is a key concern for carriers, as they are seeing the Denial of Service attacks slowing through their networks.

Roy, I have one more for you, and then I want one from Meir. I know you are not going to quantify, but could you just talk qualitatively about maybe DefensePro versus application traffic management? Which one was stronger in the quarter and the thoughts on guidance?

Okay, as I've mentioned in my remarks, both of them grew at roughly the same pace, both the Application Delivery and the DefensePro or the dedicated IPS and Denial of Service business. We believe also going forward, the opportunity is very large in both markets. So in the guidance in Q1, we expect both of them to continue to perform well.

Meir, could you talk quickly about linearity? DSOs dropped pretty nicely in the quarter; I was just curious what the revenue recognition looked like on a monthly basis?

Okay, the legality for this quarter was 28% in the first month of the quarter, 25% in the second month, and roughly 55% in December.

Ryan Hutchison, W.R. Hambrecht.

A follow-up, guys. Just in terms of a tax rate, what are the expectations for '06 and as you look out into '07, has that changed?

As we said a long while ago that the tax rate is expected to be 10%. Just to remind everybody that when Israeli-based technology company will benefit from tax incentives, so our tax rate is in single digits. But as a conservative measure, we prefer to step up the [bow] at 10% tax rate.

There are no other questions at this time.

Okay, thank you, everyone, for joining us and have a great day. Thank you.

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