Radware Ltd (RDWR) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radware second-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions 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, CEO Mr. Roy Zisapel. Please go ahead.

Good morning, everyone, and welcome to the Radware second-quarter 2006 conference call. Joining me today is Meir Moshe, our Chief Financial Officer 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 will open the discussion for Q&A.

Thank you, Roy, and welcome everyone to our conference call. First I would like to review the Safe Harbor language. During the course of this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are just prediction and that actual events or results may differ materially including but are not limited to general business conditions and other ability to address changes in our industry, changes in demand for products, the timing and amount of orders and other risks, results from time to time in Radware's filings. (indiscernible) documents the Company files from to time with the Securities and Exchange Commission specifically the Company's last filed form 20-S. And now, ladies and gentlemen for the financials.

Revenues for the second quarter were $20.1 million and diluted EPS excluding the effect of stock-based compensation expenses were $0.02. The net profit for this quarter excluding the effect of stock-based compensation expenses was $349,000. Our gross margin remains at the 81% range, and operating expenses excluding the effect of stock-based compensation expenses, totaled $17.6 million.

The DSO's for the quarter are 78 days. The interest in DSO's reflects a back ended quarter and collection of other $1 million received in the first week of July instead of the last week of June. Our cash position including long-term deposits and marketable securities and after buying back shares in the amount of $5 million, was increased by $400,000 to $170.4 million, and we have no debt.

The headcount for this quarter was 486 employees. Shareholders equity is about $185 million. Regarding buyback, in the second quarter we bought 359,000 shares at an average price of 13.69 per share. We will continue to buy back shares as it was approved by the Board.

Guidance. Revenues, we expect an up quarter, and gross margin excluding the effect of stock-based compensation expenses is expected to remain around 81%. The operating expenses excluding the effect of stock-based compensation expenses for the third quarter are expected to remain the same as in the second quarter at $17.6 million. And now I would like to return you to Roy.

Thank you Meir. Our Q2 results were relatively flat with Q1 results that represent a 15% increase over Q2 of last year. As forecasted we saw modest increase in revenues in the Americas and some seasonality impact on our APAC business in Japan. During the quarter our deferred revenues continue to grow following a $1 million increase in Q1. Improving sales performance continues to be our primary goal of our 2006 business plan. During Q2 we have continued to invest and align resources to achieve these objectives. We believe we are starting to see the first results of these efforts, and we are confident the steps we are taking and changes we are making will enable us to drive revenue growth.

We believe that our current level of operating expenses is more than enough to support our growth, and in the next two quarters we're going to maintain this level of expenses while looking to post higher revenue numbers. This quarter we've also implemented additional global marketing capabilities to drive market demand our application smart networking solutions. This will enable us to more effectively capitalize on these evolving application (indiscernible) needs of customers that are seeking to maximize their strategic IT infrastructure investments by making networks adaptive and responsive to diverse application requirements and business processes.

As top priority for our global marketing initiative, is a continued sharpening of our APSolute message and product positioning strategy. The goal being to more clearly articulate the unique business value propositions of our approach to making networks applications (inaudible). Simply stated for large enterprises and carriers APSolute is the only application delivery architecture that can first, cost effectively scaled to support the integrated availability, performance and security functionality that is needed for the new generation of Web enabled and XML Web services application.

Second, our purpose builds multi-tiered switch platforms provide the optimal design to support the integrated functionality of our APSolute OS. Our solution provides consistent and predictable performance as customers expand the capacity and functionality of their network with additional services. This is critical to network planning, effectively managing infrastructure costs and most importantly, ensuring end-users service level agreements.

Other solutions that are built around owning one architecture has performance issues due to processing contention that will first, win more and more integrated functionality is required. Third, because our architecture separates core application delivery functions from add-on services, our switching platforms can extract and process massive amounts of granular information about applications, users and content. This is a key requirement for tuning metal behavior and optimizing applications according to application smart policy.

Finally, our APSolute OS supports leading technology capabilities for interactive converged IP services, such as Voice over IP, videoconferencing, information sharing and collaboration. This quarter we have made significant progress in developing and executing integrated marketing initiatives that are aimed at promoting our APSolute application delivery solution within the context of broader IP trends and customer [paid for]. These programs are effective vehicles for highlighting our unique differentiator. We have implemented our security of the core business enabler program as a platform to drive demand for our supplies, real-time, IPS and denial of service security solution.

Philadelphia stock exchange and shopping.com are good examples for customers that have deployed our DefensePro solution for protecting against known and emerging worms, viruses and denial of service attacks. In Q2 we also implemented our business continuity disaster recovery; the Internet is key program, to promote the value of our access and patented globally direction application front end solution.

Patagonia, A. G. Edwards and R. J. Reynolds are some of our customer wins with selected Radware (inaudible) application delivery vendor. We will continue to invest in integrated imagination program to strengthen market awareness and brand recognition for our APSolute product family, and of course to increase our sales pipeline and transaction (indiscernible) strategic prospects.

In Q2 we continued our focus on strengthening relationships with key vendors in the application market. Following last quarter announcements with BA and Microsoft this quarter we were certified by Oracle for their 10g environment. This allows Oracle customers to deploy Oracle application service 10g with Radware applications front end solutions. Deploying our solution with Oracle ensures the elimination of application and (indiscernible) across networks, thus enabling transaction continuity and full tolerance for Oracle environment.

In terms of our product offering we started to ship our high-end application switch 5 platform this quarter to select customers worldwide. The application switch 5 extends the high-end of our APSolute architecture. The initial feedback is very positive and we believe it will help us grow our revenues in [deterior] and ISP environment where best of breed performance and integrated functionality is a key requirement. With the application switch 5 in our shipping we currently offer the fastest and broadest productline in the industry, providing our customer solutions to in current or future need for application delivery with seamless integration (inaudible). Application switch 5 offers the industry's fastest layer server switching speeds, covering the throughput of the application switch forward to 6 gigabit. AS5 also offers the industry highest port density with two ports of 10 gigabit and 17 ports of gigabit.

To summarize, we believe that in Q2 '06 we continue to make progress on multiple fronts. We put in place additional global marketing resources, began implementing new marketing initiatives to improve our product positioning and increase pipeline. We continue to strength our relationship with key application vendors, began shipping our new high-end platform and expanded our customer base globally. We believe we're going to present sequential growth in revenues and improve profitability throughout the rest of the year.

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

(OPERATOR INSTRUCTIONS) Alex Henderson, Citigroup.

Can you give us a little bit of clarity on what you see as the end market conditions? Have you seen deterioration in the overall end market demand as a result of economic activity? Is this the weaker than expected revenues relative to what most people were forecasting a function of sluggishness in the economy, or is this a gradual execution deployment issue, more of a timing of the ramp than an end market (technical difficulty).

We overall think the market conditions are good, meaning there were better days but it is definitely not because of the market. We think we still have work to do in accelerating our revenues. We think we've achieved a lot during Q1 and Q2, and we hope it will start to show up in meaningful sequential growth going forward. But I would say (indiscernible).

And so (technical difficulty) issues are primarily in North America, as far as I can tell, the programs that are being implemented there, do you have a better sense of (technical difficulty) to actually kick in with helping to deliver that accelerated growth?

Actually in the U.S., as Larry guided in the last call, we were looking for modestly growth each and every quarter, and this quarter was, we've achieved that. So sales in the U.S. went up, and still not in the level we want, but I believe they are tracking in the right direction. We also forecast in Q3 for again a sequential growth in the U.S. So we believe while we have still a lot of work to do, August is a huge market growth potential for us in the U.S. and if you compare our international market share to our domestic one, we believe our current pipeline and business is trending in the right direction.

Can you talk a little bit about what the linearity was in the quarter, and then I will see the floor?

The linearity in this quarter, as I said when I comment on the DSO's, it was back ended quarter, and 67% of the revenues recorded in the last month of the quarter in June.

That's a little unusual, right?

Yes, we had relatively slow I would say second month.

Okay. Thank you.

Mark Sue, RBC Capital Markets.

Thank you. Can we understand the specifics as it relates to the meaningful sequential growth during the later part of the year, the fourth quarter? Is it just a combination of seasonality and the application switch 5, or is there something else that is more meaningful if you can help us understand that?

First of all we believe our overall execution is improving, so from multiple data forms we believe our revenues will grow not only in the Q4 which is obviously seasonally strong quarter, but also in Q3 which is a very challenging quarter from seasonality point to view, both in the U.S. and especially in EMEA. So first of all we believe our business metrics are improving. Second, we believe that some of the introductions of our application switch 5, some key versions that we've announced in the DefensePro productline, in the [operated] productline those are fueling better competitive wins in the field. In some cases competitive replacements and as a result we believe our business fundamentals are improving.

And Roy, can you maybe just touch on competition, Cisco's new product and maybe also Citrix. Do you think that may have caused some delays in (technical difficulty) decisions this time around?

So far we don't see a big difference in the competitive landscape. From a Cisco point of view I am not sure the new product is a very strong one relative to what is going on in the industry. We are mainly seeing Cisco in the enterprise accounts and F5 and in the carrier our accounts it is Cisco and Nortel. And so we didn't see a lot of change in the, in our competitive landscape. I believe Citrix is selling well through their channels to their customers but that is not the target market for us. It is more a medium enterprises and large enterprise in the Citrix environment; that is not our market segment so far.

Lastly, just some thoughts on the combination of LAN optimization and Layer 4-7, if you can share with us some of your thoughts from your customers that this needs to be combined.

We do feel a strong push to combining that, and also so far from vendor point of view those are distinct productlines, so if you look even on companies that have both in their solution such as Juniper, those are very distinct productlines with generally different management platforms and so on. From a point in the network generally the application delivery controllers are sitting next to the servers. In the server file the one optimization devices are sitting at the edge of the network next to the one router. So physically they are not located at the same place. Obviously there are customers that would look into end-to-end application delivery but this requires different technology, a different market and probably different or [societal] implementation. So while we are -- I think one optimization is a very nice market and can show very nice growth, we would focus on the application delivery market. There's plenty of business to do there and that would be our focus (inaudible).

Thank you. Good luck, gentlemen.

Yair Reiner, CIBC.

Just a couple questions from me. First, we saw a pretty healthy increase this quarter in R&D expenses. Can you give us a little bit of insight into what drove that?

We increased both the headcount, and also we had our yearly salary review that impacted the numbers. It's a combination of those two.

Is there any onetime items in that or should we think about the $4 million as a good number going forward?

There is no onetime in our numbers.

My other question is can you provide us some more color on the reorganization of the U.S. sales and marketing efforts? And I guess some more insight about what you're doing and how you see the progress happening?

Concerning the marketing initiatives I will let Michelle answer in a minute. On the sales I think Larry presented the -- Larry the President of the Americas -- presented in the last call the plan, we are progressing according to that plan, including the transactional business and the strategic business and the initiatives with the sales force. I think that is progressing exactly according to the plan we presented and we continue to track the progress and finding ways on how to accelerate it as I've mentioned. We are looking for the U.S. again in Q3 to grow sequentially the revenues and obviously every time we get this type of a positive data point it tells us that we are in the right direction. Now concerning marketing, Michelle would you take that?

One of the key changes that I've instituted over the past year is to augment our marketing communications organization and product marketing organization with a marketing program organization. And a lot of the initiatives that Roy mentioned today are initiatives that are coming out of that marketing programs organization that has a priority focus on lead generation, channel marketing and sales enablement. And those are the kinds of programs and initiatives that you're seeing that will help us sort of transition from a technology oriented cell to a more business relevant cell.

Got it. Thank you very much and good luck for going forward.

Stanley Kovler, Merrill Lynch.

I just wanted to see if you could update us on any progress with initiatives such as partnering, not with the software companies that you've been partnering with but maybe some larger hardware vendors. Then I have a few follow-ups.

Obviously we are partnering, is an excellent way for us to penetrate into some of the markets we are active in. We continue to make progress. At this time we have nothing to report publicly but we believe that we are progressing well in that front as well.

Thank you, and in light of what's going on in Israel at present day, just wondering if you can update us on if your facilities in Karmiel are intact and if you have obviously contingency plans if there is an escalation of the conflict in the region.

First of all, Radware doesn't have facilities in Karmiel, so in Israel we are, our headquarters are in Tel Aviv, and we have a small R&D center in Jerusalem. And in general our operation is not affected at all. We are a global company today with technical support -- marketing, sales and manufacturing resources across the world. And out of our 480 employees 70% of them are out of Israel. We have manufacturing capability both in Israel that continues to work without a problem as well as in the U.S., and we didn't feel any impact so far from the situation. Obviously while the current situation is unfortunate we don't anticipate any impact to our customers or operations worldwide.

Excellent. And lastly on the buyback program estimate there is almost $5 million in buybacks during the quarter. Do you plan to get more aggressive? You have a program ongoing but can we see you get more aggressive in the buyback program to have more of a meaningful impact possibly on the EPS?

Of course when the share price is low we can be more aggressive on making buyback but we have to follow the Board's direction, and we do it with accordance to Board directions. Of course we cannot publish it and put it public domain, what we are doing before we submit any orders in the markets. As Meir says in the call, we plan to continue to make a buyback and it's based on the guidance we get from our Board.

Matt Robison with Ferris, Baker Watts.

Meir on that topic did you say $5 million, you spent $5 million in the quarter on the buyback?

Yes.

What was the amortization for V-Secure?

This is only $150,000.

Okay, and headcount?

Headcount 486 employees.

486?

486, yes.

What was the mix, enterprise to service provider and U.S. versus international?

This is 65% 35%, 65% is the enterprise and the carrier is 35%.

The U.S. was 36% of revenue, 64 was international.

And aside from -- was Japan the only market that was down sequentially?

On a country level, no, obviously there are many countries in APAC --

Oh, major countries I should say.

Out of the major countries I would say (indiscernible).

And percentage of revenue from new customers?

This is [40 60] and new customers, this is 40%.

So same as past quarters?

Yes.

Did you book a significant amount of revenue from AS5?

No. As I mentioned in my note, we started to ship it to select customers. We believe we will start to recognize revenues in the Q3 and Q4. The majority obviously in Q4. And on the other end I think from our Application Switch 4 platform that we've announced in December we are seeing very nice momentum of revenue and of shipments already in Q2. So we're definitely seeing traction with the high-end productline. People need that level of performance and that is unique in the industry for us.

Where are you guys in terms of developing an API for your products?

Generally we're not sharing information about future developments until we do that, but I would say the second half of the year is very busy with product launches from Radware, and let's talk in the next conference call and maybe we can discuss those item as well.

Okay. Thanks for the update.

[K. Wells], [unidentified]

Thanks for taking the call. You guys have talked about the channel initiative in the U.S. in sort of very vague terms. I just wonder if you could take us through some of the specific -- some of the details of exactly what you are going to do to improve that, you guys have been working on that for some time now. And secondly I would just reiterate that we would really like to see you guys out their buying more shares back especially with about nine dollars in net cash right now. So thanks.

So let me address the channel program, etc. First of all we have a strong channel program that we've invested -- started to invest in over a year ago -- which includes all the really best of breed channel program including deal (indiscernible) registration, training, scheduling engineers, certification and so on. We have over 70. The focus there is really on quality and the productivity of the channels and not necessarily on quantity. We have over 70 channels that are fully certified across our productline. They have dedicated staff for it and trained for our product across the U.S.

Recently we've added additional channel marketing programs, maybe Michelle will brief you specifically on one of the, one of those that we did last quarter but definitely we are now planning to use this channel more effectively to upgrade our knowledge and to continuously push them to be more independent. And generate for us additive revenues in the U.S. while we're focusing on our strategic goals. Michele, do you want to speak about it?

Absolutely. So a couple of dimensions to our channel marketing initiatives are trying to facilitate turnkey selling on the part of the channel. And to do that what we are doing is sort of creating these turnkey selling kits that basically provide our channel with all of the elements that they need in order to qualify, identify and ultimately sell. We are also sort of as a companion to those selling kits, is doing these lead generation programs and instituting new programs and processes for sharing and registering those leads. As well as putting together -- we will be launching a whole series of programs in a box that will allow our channels with us or independently to do end-user outreach to speak to the specific value propositions in customer paying points that each one of our solutions has addressed.

Thanks a lot. That's helpful.

Alex Henderson, Citigroup.

So obviously losing operating or having a negative operating income or loss is not a satisfactory solution. So can you give us some sense to how rapidly you think you can drive back to a breakeven or a profit at that level? And it seems clear you're not going to achieve that in the third quarter. Is it possible in the fourth or we looking into the first half of next year?

We didn't give specific guidance but I said and Meir mentioned that also in his remarks that basically we're going to maintain the operational expenses flat. So if you look in our gross margin roughly with additional of $2 million we're making in breakeven and then I think you can look versus a possible ramp in our business where we will get this number. So as I've mentioned we're planning to keep operational expenses flat for the next two quarters at least. We think it's enough to find solid growth investment that we have, we are very high business leveraged with the 80% gross margin, 80-plus percent gross margin and therefore the revenue target is not that far off to bring the business back to profitability.

But as we are managing expenses flat sequentially we obviously take the bulk of your step up in the June quarter each year. We should be modeling in similar step up I would assume in the June quarter of '07, in terms of costs plus your normal annual cost increases?

(multiple speakers) a little bit unusual the end result (indiscernible) that we have to make in the June quarter because all the high market, the high (indiscernible) worldwide is very hard. So it was a little bit above, also what we did in the last five years.

So still plausible that it is not going to change that much between now and next year, though, right?

It depends on the markets, but we think this year the increase was a bit towards the high end. But you should model every year an increase around the June timeframe. That's correct.

Thank you.

Thank you; we have no further questions.

I would like to at this point to thank everybody for joining the call and have a great day. Thank you.

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