Radware Ltd (RDWR) 2006 Q4 法說會逐字稿

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

Thank you. Good morning, everyone and welcome to Radware's fourth-quarter 2006 conference call. Joining me today is Meir Moshe, 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 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 and 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 our product, the timing and amount of orders and other risks detailed from time to time in Radware's filings. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed, Form 20-F.

And now ladies and gentlemen, for the financials. We ended the year with record sales of $81.4 million. Revenues for the fourth quarter of 2006 were up 4%, $21.1 million compared to the revenues of $20.2 million in the third quarter this year.

Net income, excluding the effect of stock-based compensation expenses for the fourth quarter of 2006, was $0.9 million or $0.05 per diluted share compared to net income of $0.6 million or $0.03 per diluted share in the third quarter of 2006.

Our gross margin for this quarter was 80.4%, the highest gross margin in the industry. Q4 was a quarter of focusing resources on the realignment of our sales force in the U.S. by continuing to invest in our international market. The DSOs for the fourth quarter were 76 days. In the fourth quarter, we continued to have a positive operating cash flow. This quarter, the Company generated cash in an amount of $0.2 million after paying the final payment of $3 million for the acquisition of V-Secure assets. The cash position, including short and long-term deposits and marketable securities, totaled $164.1 million with no debt.

The headcount at the end of the year was 475 employees. Shareholders' equity is about $182 million. Guidance. We anticipate that the first quarter [first] will range between $21 million and $22 million and earnings per diluted share, excluding the effect of stock-based compensation expenses, will be approximately breakeven.

To summarize, in the fourth quarter, revenues increased. Our gross margins remain the highest in the industry. We are finalizing our U.S. salesforce restructuring process while maintaining positive cash flow and strongly believe in our ability to drive our business to the next level in 2007. And now I would like to return you to Roy.

Thank you, Meir. As Meir mentioned, our Q4 results reflect the 4% sequential revenue growth over Q3, while total revenues for 2006 were $81.4 million, an increase of 5% compared with revenues of $77.6 million in 2005.

Our international business continued to grow very well this quarter, resulting in record results in both the EMEA and APAC regions. Following the U.S. salesforce reorganization that started early October, we experienced weakness in our Q4 results in the Americas.

During the quarter, our deferred revenues continued to grow. We continue to believe that we are heading in the right direction to post high revenue figures throughout 2007 as reflected in the guidance we provided.

Improving sales performance continues to be a top priority. As discussed in our last call when were in the midst of the effort, we restructured our U.S. sales organization. As mentioned, our restructuring plan included territory realignment to penetrate key markets, securing talent to adequately address strategic account opportunities, recruiting new resources to significantly improve our channel program and achieve much higher production rates and building a new federal team to capitalize on federal buying cycles.

I'm happy to report that the restructuring is all but over with a few new hires that are expected to join during February. While the new sales force will need a ramp-up, we strongly believe we have now a strong organization in place to drive our Americas business forward.

The growth during Q4 came from our [co-]Layer 4-7 products, while our security products were flat. During Q4, we continued to experience a strong growth in the sales of our high-end Application Switch 4 and Application Switch platforms. We believe that the unique value proposition we offer large enterprises 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 application delivery products to optimize their mission-critical applications. Those customers include Petrobras, Fiat, Bell Canada, Coles Myers, Mohawk Industries, Papa John's, Cerner and APC.

Mohawk is a very good example of the value we bring large enterprise customers that are faced with new challenges running their applications and network to support the web-based applications and on-line users.

Faced with increased pressure to consolidate data center expenditures and increase the bottom-line contribution of its information technology, Mohawk turned to Radware to solve issues related to unpredictable network outages. Mohawk relies on its e-commerce and Web applications to connect the company with the growing numbers of dealers and [REITs]. Providing their dealers and retailers with 24X7 availability to these mission-critical applications is key to Mohawk's ability to guarantee high customer service levels and increase revenue generation.

Mohawk deployed Radware AppDirector, our integrated application smart networking switch, which delivers load balancing, bandwidth management and security, making their IT infrastructure adaptive to the dynamic requirements of the company's business critical applications.

Mohawk also deployed SecureFlow to manage and optimize all of the company's best of breed security tools. With the Radware solution deployed, any failure in firewalls, routers, application servers, Web servers and so on is immediately detected and customers are redirected automatically for the best resource available to finish their transaction.

Following a lot of work we have done in the past several quarters with Oracle, BEA and IBM, we have continued this quarter to make progress with the application vendors. Together with IBM, we have certified our AppDirector product for the latest version of WebSphere 6.1, demonstrating the value that AppDirector can bring to WebSphere environments in scaling, optimizing and guaranteeing best transaction processes.

On the product side, we announced this quarter a new product family for DefensePro. The expanded family provides the industry's only pay-as-you-grow scalable throughput without additional hardware investment. The product family now boasts the new DefensePro x02 series and an expanded x20 series. Those products set a new bar for price performance and investment protection in the industry.

The new DefensePro model supports software license control scalable throughput from 100 meg to 500 meg in the x02 series and 600 meg to a maximum of three gig in the x20 series. Radware's expanded DefensePro product family is targeted at the enterprises and managed security service provider markets for securing the enterprise core, perimeter, departments and remote sites using Radware's breakthrough self-learning technology, DefensePro's enterprises with best zero day attack protection against a whole set of threats, including anti-scanning worms and denial of service attacks, using a combination of signature and behavioral-based protection, DefensePro bolsters application security, while reducing business risks and costs.

For a single segment monitoring, the new DefensePro x02 line includes the DefensePro-102, the DefensePro-202 and 502. In addition, the DP x20 family was expanded with the DP-620, DP-1020 to complement the existing DP-3020 line. The DefensePro x20 series offers the industry's highest port density, providing cost effective, multi-segment monitoring of core and perimeter environments.

To summarize, we believe that we have and will continue to make progress on multiple fronts. We are continuing to increase our quarter international business, while concurrently approaching finalization of our U.S. salesforce restructuring. We are steadily deepening our value-added partnerships with leading vendors worldwide that will help us leverage our superior technology as an integrated part of their application.

As always, we are committed to innovating and strengthening our product offering by adding competitive advantages that can address evolving application delivery requirements. Requirements which we believe have the potential to change the current market landscape. And equally as important, we have maintained in lockstep with all of these efforts our focus on strengthening relevant Company business fundamentals to increase our growth rates and improve profitability. With that, I would like to open the discussion for Q&A.

(OPERATOR INSTRUCTIONS). Mark Sue, RBC Capital Markets.

Maybe, Roy, if you could just give us some more on strategy for the U.S. market and whether or not you are doing things differently enough to enable improvements down the road. Are you looking at just better segmentation, different channels? Is it a tailored product or do you think it is just changing the sales people? Maybe if you give us some thoughts there, that would be helpful.

Okay. We are doing several things in the U.S., some of them we have highlighted in the last several calls and what we have done in the last couple of quarters is that basically we have changed some of the original sales team that we had and added in other locations. That, together with the core numbers that we had before.

So tactically in the U.S. market, definitely we believe that the new sales force, which we believe is a stronger sales force now, will provide us with better growth potentials in execution. In parallel to that, we have shared with the audience in the last two calls what we are doing on channel, on verticals, etc. and we will continue to do so.

Do you get the sense that from the feedback that you're getting from your sales folks that things have really turned a corner and that the improvements are imminent or it's still a work in progress?

I think it is still a work in progress in several areas. As I have mentioned, while we've hired almost all of the open positions based on our plan, obviously this is still a new sales force that will need time to ramp. Yet, we are very encouraged by the first signs and the engagements of the new sales force. We definitely believe that we will start to play much more seriously in the Americas market, similar to what we have done in the international market.

Got it. And any last thoughts on IBM, how that is tracking?

It continues to go well. We are now in the phase that we are engaging in local countries on a per country basis. We are starting to fill the pipeline. I believe in Q1, a very sizable transaction with IBM might close already. So we are very encouraged with working with them. There's still a lot to do. It is a very big organization obviously and we are investing in this relationship. As I have noted in my prepared remarks, we continue to certify additional environments, additional products and to try to leverage the existing relationships with IBM.

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

Stanley Kovler, Merrill Lynch.

My question is on guidance. For the fourth quarter, I was wondering if you can talk about the performance relative to the guidance of $21.5 million to $22.5 million. Was that solely that range and the slight underperformance, was that solely related to the Americas or were there other things that perhaps didn't come through?

And then for the March quarter in terms of the guidance, it seems like you are keeping a range between $21 million to $22 million and just wondering if you could walk us through a little bit what the drivers are, how you get to the bottom of the range and how you get to the high end of the range. What are you expecting there? Thanks.

First of all, in Q4 our international business was ahead of plan. Meaning it delivered better results than expected in the initial guidance. In addition, we had a very strong booking figure on deferred revenues for Q4. So actually we -- while the recognized revenues are lower than the guidance, we feel very good on the progress that we have done in Q4 and the signs for entering 2007.

So as a result, we provided this guidance that are basically representing the sequential growth in Q1, which is a seasonally weak quarter. Those are the key metrics. We believe our international business continues to improve and to gain marketshare and we are starting and we are looking to start to see some improvement in the U.S. as the new sales force is hitting the ground and engaging with our prospects.

Just to follow up on expenses, we see that the expenses keep creeping up and this quarter, you had fewer employees and you expect to add a few going forward. And if you do just the back of the envelope on the breakeven guidance, we have expenses going up another quarter. So I was just wondering if you can walk us through where you think the base is or how you think the expense is tracking. Particularly, I see the R&D spiked this quarter. So I'm wondering what you are doing there. That's all for me.

Basically the figure that you see in the end of the quarter of the total headcount is not representing what we had during the quarter as we have changed some of the U.S. headcount. So while that is the figure for the end of the year, if you will recall from our end of last quarter, we had 490 in total headcount. So it is a bit -- it is just a sample in time, which does not reflect the overall expenses.

We continue to invest in R&D as we have outlined before and we will continue to do so this year. We are working on several products and applications and that, together with some currency exchange rates that were not favorable to us on a weak dollar versus the currency that we are working in the R&D expenses resulted in this spike.

Overall, I think our guidance is providing the level of expenses that we foresee with the new U.S. sales force -- in the full U.S. sales force in the plan.

Mr. Kovler, does that answer your question?

That's all for me.

Ittai Kidron, CIBC.

Meir, just to follow up on the last points here. For the guidance for the first quarter, you have guided for breakeven. And assuming your expenses keep on moving up through the year, where do you see your expense line peaking or where do you think, by the end of the year, would be a breakeven revenue run rate for you?

Actually, we mentioned it. Right now, it is $21 million to $22 million. This is the guidance. For this quarter, the gross margin -- excuse me -- the EPS is approximately breakeven.

Yes, but your expenses are expected to continue to rise. So in the following quarter, you guide $1 million, $2 million higher, but again you are going to be breakeven. At what point the revenue growth starts outstripping your expense growth?

Yes. You can make the calculation by your own since we have more than 80% of gross margin. So you can understand that any increase of $1 million in expenses can be offset by roughly $1.25 million in sales. So if, for example, the expenses will be higher in the next quarter another million, we need about $1.2 million higher sales in order to offset that and to stay breakeven.

Basically, we are not guiding beyond one quarter.

I understand. I'm just trying to get a sense on your R&D plans. For example, where do you think you have the right amount of people in place to pursue your plans?

We believe that by the end of Q2 that would be the right level.

And with regards to the impact of the exchange rate, I guess it impacted your R&D. For whatever reason, it didn't impact your G&A that much and it looks like your interest income was very nice during the quarter. How can you -- give more color about that and how should we think about interest income and also your tax rate through '07?

Okay. Let's start with the tax rate. The tax rate is expected to be 10%. This is since we benefited from the tax benefit, tax incentives of an Israeli-based technology company. About the exchange rate, actually what you see on one hand you see higher on the operating expenses.

On the other hand, you see the offset that we have (indiscernible) financial income. Since this exchange rate difference goes into different lines in the P&L, you have two record expenses based on the rate and if you have from one (technical difficulty) that is recorded not in dollars and you have some positive effect on the exchanges rate, it is reflected in your financials income.

I would say that the total is balanced. We have a natural hedge, but it doesn't go into the stem lines and we cannot control what is going on in the future in those lines, but roughly talking, since we have the natural hedge, the impact of the bottom should be balanced, zero.

Fair enough. Good luck, guys.

Ehud Eisenstein, Oscar Gruss.

I guess I missed the geographical breakdown. What was the U.S. this quarter please?

Well, we haven't stated that until now. Actually the international was 70% and the U.S. 30%.

I see. So you had roughly 25% decline in the U.S. revenue year-by-year. Is that correct?

Approximately, yes.

And then in terms of buyback in the quarter?

We haven't bought any shares this quarter.

Any shares this quarter?

Yes.

I see. Thank you very much.

Matt Robison, Ferris, Baker Watts.

You mentioned international growth, which you just articulated I guess in your last answer. Can you give us a little bit -- give us a flavor of the sequential comparison as well and then describe what is working for you overseas in the non-U.S. market?

Okay. So basically overseas, I think we have -- we are executing well on the sales and marketing side. So we are competing nicely and we believe and as we have discussed in prior calls, we have significant technology advantages in the large enterprise market, as well as in the carriers from performance, global solution, support of multiple protocols and so on.

Why are you executing well? We've heard all that, but give us some specifics of what is the recipe that is working internationally that you are not able to get across in the U.S.?

It is -- first of all, I think the -- if I had all the answers a year ago to that, probably we would have done that completely. So we're working on it and we believe that we are now working in the U.S. as close as possible to the successful model that we know from internationally in the profile of the sales force and the [SEs] that we are hiring in the way that we are running our territories and so on.

Generally speaking internationally, we're working very well with our channel partners and they help us in the overall customer relationship penetration and so on. In the U.S., our channel is less productive in bringing us into opportunities and I think that is one of the major differences.

Wasn't there an effort in the U.S. to also have sales -- your salesmen more focused on specific named accounts to penetrate larger accounts?

There is and that goes well, but I don't think there is only one thing that we need to improve in the U.S. So it is a mix of things and the key one is to be more engaged and more active in the market like we are doing internationally.

So the combination going forward, we can expect a little bit more direct focus in the U.S. and then where you have a mind share in the channel is really overseas and the hope is to offset the absence of mind share with more direct emphasis in the U.S.

I would say it is more direct touch in the U.S., not necessarily direct business. Meaning we -- direct touch means that we are [visiting] our ourselves the end users, but we're working with the channels to close and leveraging the channel relationships. So we will try to do similar things to what we are doing internationally also in the U.S.

Okay. Meir, can you give us the sequential comparison for U.S. versus international?

About the U.S., the U.S., I said this is 30% this quarter versus 76% the quarter before that and the international, as we state, 70% this quarter versus 64% a quarter ago.

Rohit Chopra, Wedbush Morgan.

This is Chris Rolland for Rohit Chopra. Can you speak a little bit about pricing and the competitive environment, United States versus the rest of the world? Also I don't know if you could tell us this or not, but average deal size, up or down and the number of deals this quarter versus last. Thank you.

Overall, I think in the U.S., the pricing environment is more favorable than internationally simply because of the structure of the channels. So overall selling prices in the U.S. are higher than what we are seeing internationally.

In terms of the average sale price of our units and average deal price, it is quite stable. In the last several quarters, around $70,000 average deal size and the average price per unit is in $11.5K per unit.

Irit Jakoby, Susquehanna.

Just to ask again about this quarter versus guidance. In this quarter, the guidance was for a range of $21.5 million to $22.5 million. So actual results were about $1 million below the midpoint. And I remember that last quarter in Q3, you had mentioned that you had several deals that were pushed out and that were expected to close in Q4. Was the miss this quarter because those deals didn't close or what is the status of that?

So for the most part, we did close those deals. I think from our global split, it is quite evident that our international business did above what we would have expected in terms of sequential growth and our U.S. business did not. So it is simply based on the split between the geographies. Having said that, as I have mentioned, we exited the quarter we believe in a very good manner.

Was the miss mostly related to several large deals or was it more than that?

I think it is the overall business in the U.S. I would not tie it to a specific deal.

Thank you. That is it for me.

Jeff Meyers, Intrepid Capital.

So let me just understand the guidance for EPS for Q1, is breakeven. Is that GAAP? Is that pro forma?

This is the pro forma. This is excluding the effect of stock-based -- stock compensation.

Got you. And why -- I guess you guys did $0.05 this quarter on $21.1 million. So I guess on a bigger revenue number, is it -- what expense areas I guess are going up and at what point does that sort of flatten out and you start to see some good operating leverage?

In Q1, the expense that is relatively high is obviously in the U.S. sales forces. There is guaranteed commission for the first period. Also it reflects the currency exchanges currently plus the salary increases end of the year for the field. In Q2 generally, we are doing the salary increases for the Israeli corporate R&D offices.

So our view is that by the end of Q2, the expenses are relatively [heating] their high end and since then, it is flat in Q3 and Q4. So you would expect the revenue leverage or the business leverage to be very meaningful in that timeframe.

Got you. Now on the deferred revenue, how does that work? What goes into deferred and is there -- how would you characterize I guess your book-to-bill this quarter? Was it above one because deferred was up?

It was above one definitely. Very comfortably above one.

You can see from the financial statements if you go to the balance sheet that in the year, it was about $3.3 million of the deferred revenues, but about half of that is related to the last quarter. This is the Q4. Usually in the last quarter of the year, we book very nice revenues from new assets and services. We have recognized them on a yearly basis, on a timely basis and we can't recognize it once it is booked. So book to sales here was higher than one.

Got you. Thanks.

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