Radware Ltd (RDWR) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radware conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Radware third quarter 2006 conference call. Joining me today is Meir Moshe, our Chief Financial 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. Meir?

Thank you, Roy. And welcome, everyone, to our third quarter conference call. First, I would like to review the Safe Harbor language. During the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are just predictions, that 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 products, the timing and the amount of orders, and other risks detailed from time to time in Radware's filings. We'll refer you to the document the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed form 20F. And now, ladies and gentlemen, for the financials.

Revenues for the third quarter were $20.2 million and diluted EPS, excluding the effect of stock-based compensation expenses, was $0.03. The net profit for this quarter, excluding the effect of stock-based compensation expenses, was $557,000. Gross margin remained at the 81% range and operating expenses, excluding the effect of stock-based compensation expenses, totaled to $17.6 million, the same as in the previous quarter. The DSOs for the quarter are 72 days, down from 78 days in the second quarter. Our cash position including long-term deposits and marketable securities and after buying back shares in the amount of $6.2 million this quarter is an approximately $164 million at the end of the quarter and we have no debt. The headcount for this quarter was 419 employees. Shareholders equity is about $179 million.

Regarding buyback, in the third quarter we bought 488,000 shares at an average price of $12.62 per share. The total shares we bought back in the last two quarters amounted to 847,000 shares at an average price of $13.07 per share. We obtained the Israeli court approval for the continued buyback and we will buyback shares in accordance with our board's approval.

Guidance for the fourth quarter. Revenues: We expected revenues to range between $21.5 million to $22.5 million. Gross margins, excluding the effect of stock-based compensation expenses, is expected to remain the same as in the second quarter, 80.7%. Also the operating expenses, excluding the effect of stock-based compensation expenses for the fourth quarter, are expected to remain the same as in the third quarter at $17.6 million. Financial income are focused at $21.7 million, the tax rate 10% and non-GAAP EPS of $0.07 to $0.10. And now I would like to return you to Roy.

Thank you, Meir. Our Q3 results were relatively flat with Q2 results and represent a 6% increase over Q3 of last year. We were expecting a stronger quarter but some of the deals with pushed to Q4 and we believe we will contribute to this quarter's results. As forcasted, we saw modest increase in revenues in the Americas and some seasonality impact in our EMEA business. During the quarter our deferred revenues continued to grow. As mentioned in the previous call, we believe that our current level of operating expenses is more than enough to support our growth. In the next quarter we are going to maintain this level of expenses while looking to post higher revenue numbers. Improving sales performance continues to be a top priority. In the Americas this quarter we appointed Charles Robertello to the position of Vice President of Sales. Charlie brings more than 20 years of technology industry experience to Radware. Most recently, he successfully built aggressive and highly effective sales organizations for F5 Networks and Expand Networks. Charlie is a key hire for us, as we continue to focus on driving revenue growth and increasing market share, and we are very confident in his ability to hit the ground running and help us to take the business to the next level.

As we have discussed in April, we were looking to marginally grow revenues in the Americas quarter over quarter for the remainder of the year. Now after doing so for the last two quarters and our view that this target will be achieved again in Q4, we are taking the next step in accelerating our growth in the Americas. This quarter we restructured the U.S. sales organization to establish the foundation to support long-term revenue growth. Our restructuring plan includes [territory alignment to penetrate key markets, securing talent to adequately address the strategic account opportunities, mapping resources to current [INAUDIBLE] opportunities and increasing revenue generation per investment, and building a new federal team to capitalize on federal buying cycles associated with third quarter, year-end results.

During Q3 we had a strong growth in the sales of our high-end Application Switch 4 and Application Switch 5 platforms. We believe that the unique value proposition we offer large enterprise and carriers in the performance and scalability of our platforms will continue to differentiate us and we expect continued revenue growth from our high-end platforms. During the quarter we had a good mix of new and existing customers purchasing our APSolute applications delivery product to optimize their mission critical applications. These include Foster Beer, the Food and Drug Administration, Fortus Group, the New York Stock Exchange, Bloomberg, Samsung Electronics, People’s Bank of China and OSRAM.

OSRAM is a good example of how large enterprises deploy our application delivery solutions. OSRAM is one of the two largest lighting manufacturers in the world with more than 36,000 employees and a sales presence in more than 150 countries. The company needed a solution to ensure that its global Extranet product catalog, MYOSRAM.com, was accessible to its extensive network of OEMs, retailers and customers at all times. OSRAM also looked to ensure availability of its complete SAP application suite to employees spread across global locations. OSRAM chose to deploy other application front-end and application access solutions across its large global network, which includes locations in China, Malaysia, Indonesia and Taiwan. AppDirector, our application delivery controller, and AppXcel, our application accelerator, optimized OSRAM 50 servers providing global fail over and redundancy over two data centers, SSL offloading, acceleration of SAP response time and protection against denial of service attacks to ensure the continual availability of OSRAM portals.

As part of Radware's Application Access Suite, LinkProof and LinkProof Branch were deployed across the world to provide multi-homing capabilities with WAN and VPN acceleration , which enable OSRAM to ensure reliable and cost effective employee internet connectivity to distributed application across all of the remote subsidiaries. In Q3 we continued our focus on strengthening relationships with key vendors in the application market. Following last quarter announcement with Oracle, this quarter we extended our relationships with IBM. We have a worldwide non-development solution engagement agreement, NDSEA, and statement of work with IBM global procurement, making Radware a qualified supplier for IBM. Additionally we have a teaming agreement with IBM banking to become an IBM advance partner as well as gain the IBM optimize for banking status. Our partnership with IBM allow Radware to approach strategic accounts, via IBM, and strengthen considerably our position in these customers. We are now working with IBM on multiple fronts to strengthen this partnership and we expect over the next year a strong increase in joint business thanks to these agreements.

On the product side we continue to invest in advanced technology development for evolving our application delivery architecture. Today we absolutely provide our customers with solution for Application-Smart Networking that provides the scalability and flexibility needed to support changing requirements of the datacenter. As companies strive to implement business oriented IT strategies, the primary objective of IT organizations is shifting from keeping their infrastructure up and running to advancing and contributing to the business. IT organizations are finding themselves under increasing pressure to meet service level agreements and enable fast development and deployment of new services for business agility, all at lower cost for improved ROI. Service oriented architecture, or SOA, make it possible for organization to more quickly innovate and deliver new services, as well as make these changes easier.

This month we announced expanded absolute functionality aimed at ensuring the fast and secure delivery of XML-based web services running on service oriented architecture. This new functionality will be offered as a new service model that integrates XML acceleration with security features from Forum Systems with Radware's AppXcel Application Acceleration upline. The new capabilities will be available as optional add-on software for our devices and will extend Radware current APSolute Application Acceleration and Application Security functionality. Our new XML optimization services will provide fast XML processing, policy based, XML message handling and protection against a host of message based exploits, such as content attachment and execution attacks carried inside XML messages.

This service module will allow enterprise to deliver a greater end-user experience and higher level of [excellence] when deploying web services. We believe we will be the first application delivery vendor to offer large enterprises and carriers the ability to accelerate secure SOA-based applications through a fully integrated optimized framework. Moving forward, we're going to announce additional capabilities and modules that are being integrated into our APSolute Application Delivery service architecture as part of our Application-Smart Networking capabilities. We believe that many of our over 5,000 customers will need to expand their application delivery architecture with new enhanced capabilities to support the evolving requirement associated with deploying business oriented IT strategies that align network with business processes.

To summarize, we believe that we continue to make progress on multiple fronts. We are keenly focused on improving sales execution and are taking steps to address this issue. We are progressing nicely incorporating and integrating our offer with leading vendors worldwide that will help us leverage our superior technology as an integrated part with their application. We are executing on our vision for application deliver and are introducing new innovative capabilities to address evolving application delivery requirements that we believe have the potential to change the current market landscape. And most importantly, we believe that we are strengthening the Company with the fundamentals to increase our growth rates and improve profitability. With that I would like to open the discussion for Q&A.

[OPERATOR INSTRUCTIONS] We have a question from the line of Mark Sue from RBC Capital Markets. Please go ahead.

Thank you. Roy, if I look at your revenues it has been kind of stuck in the $20 million range for the last three quarters and you are providing guidance for potentially double-digit sequential growth. Aside from the seasonality and a better market environment, are there specific things you can point to that give you this confidence, for example contributions from the new products, the Application Switch 5, the trends in the Defense Pro and also the carrier trends around the world?

Okay. So I think first of all you have counted several of the key factors behind our guidance for double-digit growth. I would add to that that some of the deals that we were expecting to close in Q3 were pushed to Q4. So all in all we are entering a strong quarter. We are entering it with a strong forecast. We believe some of our new products and platforms, especially Application Switch 4 and 5, are starting to contribute meaningfully to the revenues and we see favorable trends in the high-end of the market, both the large enterprises and the carriers.

And there's also some speculation that you've seen a lot of turnover in the sales force in the U.S. Maybe you could help us understand that. Or is that related to the realignment that you guys have been working on?

Yes, as I've mentioned in our prepared remarks, we have done a restructuring that resulted in some, obviously, turnaround in the U.S. organization. Following that, obviously there are some other people that decided to resign, but overall we are [after] that. It was according to our plans and it's part of our plan, really, to grow faster in the U.S. beyond the current revenue growth that we have [to].

Got it. And lastly any early thoughts on how the revenue pipeline may development with your new partner IBM.

We believe this partnership is now just starting. We will have a better feel for that I would say in two quarters or in a quarter, but overall it gives us an excellent access to strategic customers through the IBM sales force working together on large application delivery opportunities. I believe now we are approaching country by country our IBM contacts and starting to see what are the common opportunities we can work together on.

Okay.

Definitely we see IBM with their dominant role in data centers and in the move to service oriented architecture as an excellent partner for application delivery solutions.

That's helpful. Thank you and good luck gentlemen.

Thank you.

We have a question from the line of Stanley Kovler from Merrill Lynch. Please go ahead.

Thank you. Good morning. I just wanted to see if you could go over the trends that led to the pushouts, if it was related to any particular, specific products or just in general that there were some deals that were pushed out? Or perhaps you can talk about verticals, [where] you are seeing a little bit longer sales cycles?

We-- I don't think it was something of a very large magnitude. We saw several deals slipping. I don't think there was commonality necessarily in terms of geography, vector or product line. We think those deals will close in Q4 and will help us in any case in a strong Q4 that we are expecting.

Got it. And could you tell us what the headcount was in the quarter? And how -- I don't know if you have a breakdown of that by addition to or salespeople that were perhaps let go.

Yes. The total headcount for the quarter was 490, 4 9 0.

Thank you.

Thank you. We have a question from the line of Ehud Eisenstein from Oscar Gruss, please go ahead.

Maybe just a follow-up on the headcount. Would you break the headcount in the U.S.?

Actually we didn't do it in that, but we have in the U.S. about 110 employees. This is including some corporate functions, so the total should be -- remain the same by the end of the quarter by the new hiring that we are expected.

Okay. And if you can just comment on the linearity in the quarter and if you can break out the deferred revenue.

First of all about the linearity, the September quarter is always back-end loaded and we experienced 65% of the revenues derived in the last months of the quarter. About deferred revenues, we break it down only on the yearly basis, but as Roy comments in his remarks, the deferred revenues went up this quarter as they did in the last two quarters.

Thank you. And lastly, how did Japan territory perform this quarter?

It was okay. It's one of our strongest territories. It performed well.

Thanks a lot, guys, good luck.

Thank you.

We have a question from the line of Matt Robison from Ferris Baker Watts, please go ahead .

Hi, good morning. Can you just comment, Roy, on what territories were up sequentially and what territories were down? And also if we could get an amortization number and some backdrop for why -- it looks like your CapEx went up, property, plant and equipment were up more than we have seen for a while. What went on in that investment?

I'll take the sales question and Meir will answer the rest. Concerning the territories, US went up marginally, EMEA, it's a seasonal quarter, went down marginally, and APAC was about the same. So no big differences or nothing surprising there, and Meir?

Yes, about the depreciation for this quarter, it was about $609,000. The CapEx went up, this is mainly due to new ERP system that we are deploying in the Company. This is the reason for the CapEx went up.

The amortization -- could you provide the amortization of -- is the V-Secure amortization still about 150K a quarter?

Yes.

That ERP system, since you put it into CapEx does that mean you have completed the installation and it's up and running? Or did you just reserve for it?

No, this is expected to be up and running by January next year, but all the expenses that we carried up until now, of course we carried at the CapEx [bar] on quarterly basis.

And is this a worldwide --

Yes.

-- upgrade?

Yes, sure.

And anything -- should we be looking for any potential disruption as a result of that, or do you view it as relatively minor?

No, we plan that up and running and generally will be smooth and no disruption in any issue of the Company neither the sales, or the R&D, et cetera.

Okay. Thanks.

Thank you. I have a question from the line of Dan Harverd from Deutsche Bank. Please go ahead.

Looking out to Q1, just based on your pipeline, would you expect that to be a quarter that is seasonally weak, or should we look at the Q4 guidance as sort of a starting point for 2007.

We currently give guidance only one quarter ahead, so we will probably discuss that end of Q4. The industry trend is that Q1 is a seasonally a weak quarter. On the other end we were expecting our revenues to grow on the year-over-year basis and also on quarterly basis. So we will need to relate to that question in the Q4 earning call.

Okay. Fair enough, and just looking at your comments on the sales and marketing infrastructure being enough to support current sales levels, at what level of revenue do you feel that you would need to expand that infrastructure?

I think of still, as I have mentioned, a long way to go. The current infrastructure that we have, we can increase the sales per head and the productivity dramatically. So I think it's not in the near-term that we will need to build more sales people or [INAUDIBLE] to support these levels of sales.

Okay. And then just on the -- with regards to IBM, was that a -- the strategic relationship there, was that displacement of a competitor? And what was the process that drove IBM to form this relationship with the Company.

I can not relate to IBM, to IBM’s thoughts and strategy direction. I think there was a clear value for us and for IBM to partner together. It was demonstrated in very large installations across the globe over the last year and one half and that, I think, helped both parties to decide to take the partnership to the next level. We believe it can open up much more opportunities for us to work with IBM. And we are now starting to execute on this opportunity.

Okay. Thank you and good luck.

Thank you.

[OPERATOR INSTRUCTIONS] We have a question from the line of Ehud Eisenstein, please go ahead, from Oscar Gruss.

I'm sorry if I missed it earlier, but can you just give the geographical breakdown again.

Sales in the U.S. was 36% and the international 64% split equally between the EMEA and APAC.

And on the carrier side?

This is no change from last quarter, about 35% of revenues are coming from carriers.

30? Say it again, please.

3 5, 35.

Thank you. And Roy, just on the IBM comment that you had. If I understand correct now, you have BA, you have Microsoft, you have Oracle and you mentioned IBM today. Can you just elaborate on the go-to-market strategy that you have with all of these names.

Okay. With Microsoft and BA it's the [SOA] and the certification integration type of relationship. So there's no actual commercial agreement between the parties beyond the fact that we are certified, we are supported for BA or Microsoft implementation. And when there is a project and they are being asked who are their supported vendors, who are the recommended vendors for them, as a Layer 4-7 or application acceleration device, they are [appointing] us. Those agreements are not exclusive and they can also point to other vendors in the industry. What it gives our customers, our combined customers, is first of all the confidence that those solutions were tested, they are working together, and that the companies are also aligned in the way they are designing their future solutions, and that the support will be there, the application optimization will be at best, et cetera.

With IBM, beyond the regular integration and certification that we have with the WebSphere group, similar to what we have with BA, we find now with the global services the agreements that I discussed where IBM global services is working with Radware in order to integrate best of breed application delivery solutions to their customers. This allows us to locally engage with the IBM sales force to work together on opportunities. And as I've mentioned we are an official supplier to IBM with all of the legal, the commercial, financial issues that are tied to that. So IBM, the IBM global services can be now a very strong vehicle or a channel for Radware towards the large enterprises and obviously especially the banking and carrier environments.

And that's exclusive?

It's not exclusive.

Okay.

But this type of agreement with IBM requires a lot of work, many field engagements and achievements. It's not something that's -- it's a strong barrier.

Absolutely. And with regards to Oracle?

With regards to Oracle, we have certification for both the 9 to 10 and coming soon the 11. In the Oracle 11 business suite we are a certified partner. We are one of the products that is mentioned in the Oracle catalog for application delivery for balancing and scalability and we are enjoying good success with Oracle integrators that are integrating the hardware solution into a complete Oracle installation in order to optimize and ensure availability of Oracle environments. We have just finished, for example, last week an installation in M Systems across the an Oracle system. And we are doing that across the world constantly.

Very good. Thank you.

Thank you.

Thank you, our next question comes from the line of Matt Robison from Ferris, Baker Watts. Please go ahead.

What should we expect in terms of product pipeline over the next few months? And was there any major changes in product mix in the September quarter?

Okay. So first of all we continue to believe like we discussed in the last quarter that our product pipeline is very strong for the next six months and we believe there are new introductions of platforms, new services, and I have mentioned in my prepared remarks the XML. The XML Service Suite, we believe there are other application services and capabilities that are going to be launched in the coming six months. Concerning the product mix, as -- we don't relate it to specific products, but as I've mentioned, we are seeing strong growth in the high-end of our business, specifically with Application Switch 4 in the Q3, and we believe that in Q4 both applications Switch 4 and Application Switch 5 will continue to grow as percentage of our overall revenues.

How has Intrusion Prevention been a factor in your revenue?

It continues to be an over 10% product line.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] And there are no further questions, please continue.

Okay. Thank you very much for joining the call and have a great day, looking forward to speak to you in the next quarter release. Thank you.

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