Radware Ltd (RDWR) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Radware conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Roy Zisapel, President and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to the Radware First Quarter 2006 Conference Call. Joining me today is Meir Moshe, our Chief Financial Officer; Larry Marino, our President of Radware Americas; and Michelle Blank, our Chief Marketing Officer. Before I discuss the highlights of this quarter, Meir will review the financial results. After my comments, we'll open the discussion for Q&A. Meir?

Thank you, Roy. Welcome, everyone, to our conference call. First, I would like to review the Safe Harbor language. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are just predictions. 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 for product, 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 February 2005.

And now, ladies and gentlemen, for the financial. As we have announced in our preliminary results, revenues for the first quarter were $20 million. The deferred revenues increased over $1 million, and diluted EPS excluding the effect of stock-based compensation expenses were $0.07. The net profit for the quarter, excluding the effects of stock-based compensation expenses, was $1.4 million. Our gross margin remained at the 81% range and operating expenses, excluding the effects of stock-based compensation expenses, topped out to $16.3 million. The DSOs for the quarter are 71 days. We continue to have a positive operating cash flow. In the first quarter, the Company generated cash in the amount of $5.6 million. By that increased our cash position, including long-term deposits and marketable securities to $117 million and we have no debt. The head count for this quarter was 464 employees. Shareholders' equity is about $183 million.

Guidance. At this point, we prefer not to provide specific guidance for the second quarter of 2006. However, we anticipate that revenues will go up compared to the first quarter. Gross margin is expected to be at a range of 81%. The operating expenses for the second quarter, excluding the effects of stock-based compensation expenses, are expected to increase to $17.5 million. Regarding the buy back. Our board approved to reactivate a buy back program in an amount of up to $25 million. And now I would like to return you to Roy.

Thank you, Meir. As per our preannouncement, Q1 revenues were below expectations due to weak sales in North America. We believe that the weak seasonal Q1 in the U.S., together with our own execution issues, resulted in the underperformance. At the same time, we experienced continued sequential growth in our international business and our deferred revenue grew by over $1 million. Improving sales performance is a primary goal of our 2006 business plan. We are investing and aligning resources to help achieve this objective. We are confident the steps we are taking and changes we are making will enable us to drive revenue growth. In terms of our product offering, we have a leading technology and product [inaudible] to deliver on the promise of application smart networking.

APsolute unique application delivery architecture combines our purpose-built application smart [inaudible] platforms with our APSolute OS system software to make network adaptive and responsive to diverse application requirements and different processes. The layered design of our purpose-built platforms enable us to quickly integrate the most advanced technology for handling the different types of processing that's needed for Layer 2 and 3 switching, Layer 4-7 functions and more complex application smart operations. The power and scalability of our purpose-built Application Switches is further enhanced by the decoupling core application delivery controller functionality from other critical add-on acceleration and security services. The end result is a complete application delivery solution that provides superior price performance and reduced other cost of ownership. We introduced APsolute in. October, and we continue to build on this architecture and release additional solution components. In Q1, we started to shape our Application Switch 4 platform that was designed to satisfy the performance, availability and connectivity needs of large enterprises and carriers.

This week we further extended the performance of our product offering with the announcement of our new high-end Application Switch 5. The Application Switch 5 provides the power needed to support the most demanding application requirements of web services, XML applications, rich media content services and interactive services such as voice over IP, video conferencing, information sharing, and collaboration. With these two new plat forms added to our application switching line, we have today the fastest and broadest product line in the industry, providing our customers full investment protection and integration [inaudible] with Radware for their application delivery needs. Application Switch 5 offers the industry's fastest Layer 4-7 switching speed, doubling the through put of the Application Switch 4 platform from 3 gigabit to 6 gigabit on all functionality. Application Switch 5 also offers the industry's highest port density with 210 gigabit ports and 17 gigabit ports. AppDirector 6000 and DefensePro 6000 will be the first products that will be available on the Application Switch 5 platform. AppDirector 6000 is our high-end Layer 4-7 switch for optimizing large server farms, and DefensePro 6000 is our high-speed intrusion prevention and denial of service protection switch for cleaning peering points and high-speed backbones from malicious traffic and attacks.

During the last quarter, we also introduced a new model to our APSolute OS for behavioral-based intrusion prevention. Radware is the first vendor in the market to combine content-based, behavioral-based and rate-based protection in a single scalable solution, bolstering application security, improving productivity and reducing deploying costs. The unique value to our customers is that our integrated APsolute security capabilities ensure application availability and fast response time for legit traffic and users, no matter what kind of attack is happening. In Q1, we appointed Larry Marino as President of Radware Americas. I would like to turn now the call to Larry for an introduction note.

Thank you, Roy. First of all, let me say that I'm delighted to be part of the Radware team and to have the opportunity to leverage a strong product portfolio as we implement plans to increase traction in the U.S. market. I firmly believe that our product portfolio provides a robust set of capabilities that addresses the market's needs for application delivery solution. In January, I joined Radware after a 25-year career in the telecom industry. And during my long tenure at AT&T, I successfully led a number of AT&T strategic initiatives and have a proven track record of delivering business results and, more importantly, scaling operations to take advantage of market opportunities. It's my plan to replicate that success here at Radware.

Turning now to the question that I'm sure is on everybody's minds. What happened with Q1 U.S. revenue production? The bottom line is that we experienced a seasonably weak quarter with lower than acceptable revenues from new strategic accounts. This performance was attributed to a reduced number of qualified strategic opportunities in the first quarter sales funnel, and net-net we didn't participate in enough deals to maintain our historical production levels. It is important to note, however, that when we are at the table, our competitive win rate is quite strong. So for the next question. What am I doing to improve our performance in the U.S.? I'm implementing a comprehensive plan to achieve sustainable quarterly revenue growth. I expect to see moderate improvements over each of the next three quarters with a stronger trajectory as we move into 2007.

One of the main elements of the plan is to focus our field resources on strategic accounts while we leverage our inside sales resources and new channel initiatives to maximize transactional revenue production. On the strategic account level, we plan to focus our resources on extensively farming our signature, or existing, customer base and by increasing our penetration of targeted accounts that we believe will significantly benefit from our integrated solutions approach. Our EMEA and Asia Pac regions have experienced a great deal of success in positioning our overall message within strategic accounts to capture revenue opportunities, and we fully intend to achieve the same success in the United States. Across the board, we are investing in the resources required to accelerate timeframes for revenue production. Now I hope that these high-level insights on our improvement plans gives you a sense that we understand what it takes to achieve sustained revenue growth in the U.S., that we have a plan to address it, and that we're dedicated to executing the plan to deliver the results. I look forward to sharing our progress with you over the coming quarters, and I thank you for your time and attention. And now I'd like to turn it back to Roy.

Thank you, Larry. In Q1, we also strengthened our relationship with key vendors in the application market. We joined the Microsoft Security Alliance. As part of the select community of vendors, we now have the ability to have more enterprises truly understand the critical role of security in the core business enabler. We also announced a joint solution with BEA WebLogic. The solution enables enterprise customers to eliminate down time across all BEA server farms for fault tolerance and application continuity in a single or across multiple data centers. On the customer front, we announced a success story with VitalStream. VitalStream is using the Radware technology for application delivery of its streaming service for Windows Media.

APsolute products family is the only solution in the market to offer global traffic management with application redirection, enabling true global application delivery solution. As more and more next generation applications are being deployed, we feel very strongly on our global solution unique advantages. Another success story we announced this quarter was BetandWin . BetandWin is Europe's premier provider of online gaming. Radware products allow BetandWin to effectively support over 20 million advertisement impressions per day, and over 500,000 transactions over the web, wireless, and interactive TV daily. Through the scalability of our absolute architecture, BetandWin can continue to grow its business based on the same solution by adding on-demand application acceleration resources. With the integrated APSolute OS, BetandWin simplified and consolidated multiple distinct products from multiple vendors to a unified, integrated application delivery architecture, providing local and global balancing, bandwidth management and traffic shaping, and very importantly in the case of BetandWin, best [inaudible] denial service protection. A very important milestone for our government business was our Common Criteria Certification.

During Q1, APSolute OS has passed three tests to achieve certification with the Common Criteria Evaluation and Validation Scheme. APSolute OS has achieved Evaluation Assurance Level 3 Certification from the National Information Assurance Partnership , who is administrating the program within the United States for the National Institute of Standards and Technology and the National Security Agency (NSA). The Common Criteria is accepted by a number of organizations internationally as a definitive standard for proving that the integrity and the security architecture of our technology have been tested against known criteria by a third party source. We are the only Layer 4-7 switch to achieve this certification.

To summarize, we believe that in Q1 '06 we continued to make progress on multiple fronts. We improved our competitive position in the market with a series of new product introductions as part of our APSolute architecture. We successfully finalized the integration of our first acquisition, and introduced it as an integral part of our APSolute OS. We continue to strength then our relationship with key application vendors, and continue to enhance our customer base globally. We are addressing the sales execution issues in the U.S., with new management already on board. With leading technology, a unique architecture, a strong customer base, and improved execution, we remain confident in the business prospects and growth potential for Radware. We expect to see improved results moving forward as we continue making changes and focus on implementing our business plan. With that, I would like to open the discussion for Q&A.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Stanley Kovler with Merrill Lynch. Please go ahead.

Hi, everyone. Thanks for taking my question. I just want to see if you can talk about -- In light of the distribution strategy in the U.S., looking at the expenses it seems like you expect a significant ramp in the sales and marketing expenses. I'm wondering if that's related to adding sales head count. So first if we can start if we can start off, maybe you can tell us what the net change in sales head count was this quarter, particularly in the U.S., and how you see that trending going forward. Thanks.

The increase in expenses consists of several factors. The first one is that the salary raises were done in first of April. The first one is that the salary raises were done first of April, the yearly salary raises across the Company. That's one of the factors. The second is our continued investment across the whole company in R&D, in sales and marketing and in infrastructure for growth. So it's a combination of those two factors.

Can you talk about if you expect to add sales head count in the U.S. to improve your footprint as part of that spending?

We do.

Can you give us some numbers around that? What percentage of increase in the sales force you anticipate or are planning in terms of people or percentage?

We are not sharing this information on the call. But as I said, across the Company we're adding resources, in field as well as in corporate.

Got it. And if I may, I just want to get clarity on the -- If you can talk about what the run rate has been and the share issuance, just so we can get some help on forecasting the shares outstanding in light of the buy back.

The share count for this quarter was about 20.2 million shares. I would say that for the rest of the year we might say 20.5 million shares. This is what is going to be the share count.

And can you help us with a little bit more details on the geographic break down of revenue?

Yes. In graphical revenue, the U.S. was about 35% of the total revenues while the international was at 65%. Almost split half and half between Asia and EMEA . EMEA was 33% and Asia 32%.

Great. Thank you.

Your next question is from Troy Jensen with Piper Jaffray. Please go ahead.

Quick question for Roy. DefensePro is a product you guys were pretty excited about several quarters ago. I just wondered if you could give us an update on DefensePro.

We think it continues to progress very well, both on the customer side as well as on the product releases. As we've announced in Q1, we released a new version, version 3.0 for DefensePro. That version dramatically strengthened the product capabilities in protecting high speed denial of service attacks. It's integrating, basically the V-Secure technology for a behavioral IPS that we have acquired with additional multiple features, including wide blacklisting and so on. I will not go into too many details. In addition to the version 3, we've also announced new platforms, including the application switch for the DefensePro 3020 with 20 gigabit ports, internal bypass and carrier grade redundancy. That platform was received very well by customers in Q1, and we continue to see very strong interest in it. This quarter, as I've mentioned, with Application Switch 5, we are going to start to ship DefensePro 6000. That's the highest capacity IPS and denial of service device in the market. It's the only device with built-in 10 gig interfaces that allows it to sit on carrier backbones and large enterprises, and really protect and connect to the next generation backbone of 10 gig that customers are deploying. So from multiple points of view, from the platform capacity, speed, functionality, unique security capabilities, we're very happy with the progress we're doing as well as on the customer fronts. We are very strategic wins with large carriers and dot-coms and enterprises across the world. So I think that part of our business is progressing very well.

One more for Roy, and I've got a follow-up for Meir. Competition. We had the F5 introduced, the big IP 80400. We've got Cisco out with their other ACE blade. Have you seen any change at all in the competitive landscape, Roy?

We didn't see a competitive change. The ACE is still in beta. And I'm not sure that the Cisco solution is right on target with the Layer 4-7 market. They still don't have the feature set of the CSM fully integrated based on their announcement. Concerning the big IP 8400, we strongly believe that Application Switch 5 is far ahead with Layer 7 performance and the fastest point in the industry. With the integrated functionality of APSolute OS, we are very confident about the speed and functionality of our platform.

This is Michelle Blank. If I can just say a couple of other things regarding the positioning of our AS5 platform relative to the higher-end platforms coming from our competition. There's a fundamental difference between our architectural approach and the approach of our competitors, and it really lies in the fact that we have a purpose-built, layered architecture that basically allows us to integrate a lot of functionality into our single box without having to confront a lot of the processing contention issues that are apparent in sort of all-in-one kind of architectures.

The fact that we have this layered architecture that allows us to have different tiers that are dedicated to do optimal processing, for example, at the Layer 2 switching fabric, to offload our CPU from, for example, core Layer 4-7 capabilities so that we have maximum CPU capability available to do the higher-end application smart networking capabilities allows to us basically provide our customers with high performance and, most importantly, with predictable and consistent performance which is really, really key for network planning and capacity planning, especially when you're looking at large enterprises and carriers. And that's something that architecturally -- It's not just about throwing bits and bytes. Just like people think if you throw bandwidth at a network you're going to be able to solve some issues. There's fundamental, underlying architectural benefits to our tiered approach, and we're going to be implementing marketing programs to sort of crystallize and hone these unique value propositions that I think, to date, we have not yet been able to articulate to the marketplace.

Got it. Then the follow-up for Meir . Correct me if I'm wrong, but didn't you guys have a buy back plan in place several quarters ago and didn't execute on it? I'm just kind of curious to know. Is this buy back going to be something you are a little bit more serious?

Actually, the buy back plan that we had in place, it was several years ago. But since then the Board discussed this issue several times and decided not to go, and not to activate the plan. In the last Board meeting, based on the accounting circumstances, Board approved to start activating the buy back plan, as I mentioned to $25 million. Just to make clear to everybody, based on the Israeli law, buy back plan we should get an approval from the Court. We have approval from the Court for $25 million. Therefore the Board decided to start immediately activating the plan for $25 million. This is what I can share with you.

Got it. Good luck going forward, everyone.

We will now go to the line of William Becklean with Oppenheimer. Go ahead, please.

I'd like to talk. or have maybe Larry Marino talk, a little more about the specifics of what you can do to improve the pipeline in the U.S. Are you kind of -- identify vertical markets? Are you going to try and do more with the service providers? Could you give us a little more meat on what's going on there?

Yes. When you start attacking the strategic accounts, there's a lot of opportunity to position our product. As you heard from Michelle, we have a very strong value prop in the high-end customer base, and she also mentioned in the carrier base. So obviously I don't want to share the details of my plan on a general call, but as you can imagine, I'm going to be looking to make penetration into a number of vertical markets that we believe will see the benefit of our differentiated product to their solution. So as you might expect, there will be a number of key vertical markets that we'll be hitting. And at this point, I'd rather not go into anymore specifics, because right now we're actually aligning the resources, doing the assessments and figuring out where we want to continue to put those investments to increase the funnel on the strategic account opportunities.

This is kind of marketing 101. Are you saying that this really wasn't getting done before?

One of the things I will share with you is that one of the models that we had in place really did not have the appropriate discipline and structure around separating the resources between transaction and strategic revenue. I think it was a pretty good model to achieve the success that we've achieved in Radware historically, but I think we have to now hone the resource and the investment approach of the sales resources into a more segmented approach. That's something that I'm implementing as we speak.

Do you think -- What about that will make the business more predictable? Because you've had a problem in the past with guidance.

At this point, we don't want to share too much on what we're doing exactly, et cetera. We wanted to give the overall framework of the direction. Over the next quarters we will be able to show more and maybe provide more details, but we wanted to give an insight to the overall direction we're going, to the focused approach on strategic customers, vertical versus transactional and to leave it with that.

Okay. Thanks, Roy.

We will now go to Mark Sue with RBC Capital Markets.

Hi. This is Jennifer [Tenna] in for Mark Sue. Just a couple of questions. Were EMEA and Asia on plan? Or were one of those regions not on plan?

Overall, our international business was on plan.

When do you expect the run rate in United States to go back to historical levels? Is it going to take one quarter? Two quarters? Longer?

At this point, as Larry mentioned, we are looking for moderate growth quarter by quarter in the U.S. during the year.

And then just -- Also in the U.S., was it a phenomenon with the sales force maybe going after some larger accounts? Was it the transition with the management? Just kind of more clarity on what exactly happened.

As we've mentioned, we think it's a combination. First of all, Q1 is seasonally weak, and we think -- you know -- We think, to some extent, we've experienced this seasonality in the U.S. That's number 1. Number 2, as Larry mentioned, we were not enough into the regular amount of deals that we're seeing on the strategic level, and that we need to improve.

Okay. Thank you.

Your next question is from Ehud Eisenstein with Oscar Gruss Go ahead, please.

Yes. Hi, guys. Roy, just going back to your previous comment. When you say moderate growth in the United States, should we expect a double digit revenue in the U.S. by the end of the year?

We don't want to give now specific numbers, et cetera, but obviously we think the U.S. a very large potential market. We know the size of the market. We know our market share from the international markets and our success rate to be very high, and we are looking to build that market share in the U.S. as well. That would definitely translate into meaningful revenue growth.

Okay. And can you give us an update on the V-Secure integration?

Actually the V-Secure integration was the cornerstone of our introducing our behavioral-based technology, so it's been fully integrated now both into APSolute OS as an integral element of that. It began shipping this quarter. And it's also the center of the functionality that we now offer in DefensePro 3.0.

Thanks, Michelle. Meir, can you just give us the breakdown between carriers and enterprise, and then existing customers versus new ones?

Existing clients, this is about 60% of the total revenues, and new clients 40%. About enterprise carriers, this is about 65% enterprise and carriers 30%, 35%.

That's fair enough. And in terms of OpEx, you expect to increase the sales force. Where do we expect to see OpEx by the end of the year?

We give guidance only for one quarter. And actually what we say -- This is for the second quarter on all the [inaudible]. So we cannot give further information.

Okay. Thank you, guys. Good luck.

Next we have Matt Robison with Ferris, Baker Watts. Please go ahead.

This is actually Mark Donahue for Matt Robison. You mentioned that you had a good pulse on what the size of the U.S. market that you're after would -- Do you mind sharing what you think that might be?

I think the overall market in the U.S. per quarter that relates to our technology can be in the neighborhood of $100 million. Meaning, if you take what we're seeing in the segments of the Layer 4-7 and, to some extent, on the security side the opportunity is definitely in that range. Obviously we're not participating and we're not seeing enough of those deals to date.

Okay. And just one other question. More of a housekeeping. What was your operating cash flow and CapEx for the quarter?

The CapEx for this quarter was around $800,000 and operating cash flow around $2.5 to $2.6 million.

Great. My other questions were answered. Thank you.

Thank you.

Then with that, Mr. Zisapel, I'll send the conference back to you for any closing remarks.

Okay. Thank you very much for attending the call, and have a great day.

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