Radware Ltd (RDWR) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radware Q1 '07 earnings 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. If you should require assistance any time during the call, (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Roy Zisapel, President and CEO. Please go ahead.

Good morning, everyone, and welcome to Radware's first quarter 2007 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 discussions 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 of our products, the timing and amount of orders, and other risks detailed from time to time in Radware's filings. We refer you to documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed Form 20-F.

And now, ladies and gentlemen, for the financials. Revenues for the first quarter were $19.7 million, and the net loss excluding the effect of stock based compensation expenses and a one-time inventory write off was $1.4 million, or a diluted loss per share of $0.07. Our gross margin excluding the effect of the inventory write-off remained at the 80.4% range. And operating expenses excluding the effect of stock-based compensation expenses, topped out to $19.1 million. During the first quarter, we performed a one-time inventory write-off in the amount of $1.2 million in connection with the anticipated release of our new generation platforms. This write-off results in a negative effect of $0.06 on GAAP-based EPS. The DSOs for the quarter decreased from 76 days in Q4 '06 to 71 days.

We continued to have a positive operating cash flow. In the first quarter, the Company generated cash in the amount of $700,000, by that, increasing our cash position, including long-term deposits and marketable securities, to $165 million, and we have no debt. The head count for this quarter was 506 employees. Shareholders equity is about $180 million.

Guidance. We anticipate the second quarter revenues will go up compared to the first quarter. The operating expenses for the second quarter will go up as well, as we invest in our new strategy in the Covelight acquisition and integration. As announced two days ago, we just completed the acquisition of Covelight Systems. The needed cost for hardware is $7.5 million, and the rest of the consideration is performance-based. We expect this transaction will dilute our EPS in 2007. And now, I would like to return you to Roy.

Thank you, Meir. The core topic for my remarks today concerns the launch our business-smart network strategy and vision. Over the last 12 months, we have observed a shift in the expectations placed on the IT department of our customers. In the past, IT departments were tasked with deploying applications and making sure they were up and running at all times with acceptable performance and security. This is no longer sufficient as the role of IT has become more and more critical to the success of the business. Our customers' IT organizations are now tasked with making a meaningful contribution to the business, both in generating a new competitive advantage for the business, through first to market delivery, of new applications and services, and at the same time, addressing the requirement to improve the bottom line by cutting OpEx and CapEx expenses.

This new set of requirements is fueling several key trends in the market, including data center consolidation and virtualization for cost savings, as well as service oriented architecture projects to reduce software development cost by re-use of previous services developed, while at the same time shortening development cycles and improving time to market to gain business agility and increase firm competitiveness. In order to achieve these goals, a real-time data center, and by that, we mean a data center that in real-time enables the enterprise to respond and take action as business events unfold, is a must. As a result, we formed our strategy and vision for the business-smart network. A business-smart network understands business events occurring within user transaction, communicates and feeds these events to the enterprise business applications, and has the ability to enforce real-time instructions from business applications. Armed with real-time access to critical data, companies can optimize their business processes, offer new products and services on the fly to customers, and halt identity theft or fraud within unwanted delay.

Radware's market launch of business-smart networking solutions signifies a strategic move beyond the traditional industry approach to application switching or Layer 4-7 switching, to one that provides customers with the ability to make their network business aware. We have been steadily transitioning our application delivery offering in this direction for several months and will now marry our award-winning application smart APSolute architecture with Covelight's real-time transaction capture, transform, and feed functionality to enable first-time visibility into the business events embedded in user transactions. The unique approach will allow data centers to tie their infrastructures to business needs by making this information immediately actionable without time-consuming batch processing.

Let me provide you with an example of the difference between Layer 4-7 switching or application smart networking, and business-smart networking. Application smart networking is about optimizing the delivery of a web application. Let's say an E-banking application. Thus, products like ours and our competitors will allow traffic based on the user web page request to a specific server, will compress the content to accelerated its delivery, and so on. Yet, application over networks have no understanding that for example, Roy Zisapel just logged into his bank account, that he is currently transferring money from one account to the other, or that he is searching for a mortgage. This business information if delivered in real-time, is of critical importance in order to have the ability to sell additional services to the customer, to improve the service he or she receives, or to stop hackers in loss of critical private consumer data.

To accelerate our progress on achieving this vision, we've decided to acquire Covelight Systems. Covelight Systems, founded in 2003 in Research Triangle Park in North Carolina, developed a platform for capturing, transforming and feeding real-time business event data called Inflight. Inflight is the only online network-based pervasive monitoring solution that delivers real-time business level events to any back-end analytic systems. Inflight sits out of path in the data center between the servers and critical business applications and captures all transactions from the web channel to dynamically feed relevant systems with key transaction data.

The launch of the business-smart network and the acquisition positions Radware at the forefront of an important industry trend. Our mission has always been to make our customer networks more intelligent so they can extract greater business value from their data transactions, and therefore, their IT infrastructure investments. The addition of the Inflight platform, which dovetails several recent enhancements to our existing portfolio, accelerates this strategy and significantly differentiates us among other vendors in the application delivery market.

We've already received positive and enthusiastic feedback from leading industry IT analysts regarding our business-smart network strategy. For example, Mark Fabbi, the lead application delivery market analyst for Gartner said, "I believe Radware's move will raise the stakes in the application delivery controller market. It will get people thinking about the whole application delivery value proposition." Analysts across the board view this as a very innovative and strategic move and see Radware as the first Company to lead this new market direction. In order to execute well on the future revolution of the market and of our Company, we are going to dedicate approximately $1.5 million per quarter in R&D sales, marketing and business development to ensure our progress and leadership in business-smart networking. We believe this is a very important investment that we're making in the future of the Company, and in Radware's opportunity to be a worldwide leader in what we believe will be a multi-billion dollar market.

We also made progress on other fronts of the business this quarter with respect to our APSolute product portfolio, sales of our high-end platforms and third party validation. Specifically, we released a very important software version for our DefensePro product line. The new version protects against all the full range of attacks at the initial point of entry. The application layer with absolutely no need for human intervention, allowing the network to automatically respond to attacks targeted at mission-critical applications. With new capabilities such as the ability to block worm propagation far in advance of the actual outbreak, the ability to block zero day attacks based on our market-leading behavioral IPS technology, we've increased our competitive edge in the market.

During Q1, we continued to experience 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 enterprises and carriers in the performance and the scale ability of our platforms will continue to differentiate us, and we expect continued revenue growth from our high-end platforms. We continue to gain traction with leading customers worldwide. (Inaudible) and Singular wireless in the carrier market, Bloomberg and Forbes in the financial segment, the Food and Drug Administration and companies such as Rolex, Spanda, and the New York Stock Exchange all contributed to our revenues during the quarter.

During the quarter we also received strong third party validation for our strong superior product offering in the market. TechWorld Magazine conducted a multi-vendor load balancing and application switching test. In a head-to-head test with F5 BIG-IP and Coyote Point, our AppDirector product was highlighted as the best product. According to TechWorld, "Best in test is Radware AppDirector 1000, primarily for the excellent interface. The solution is sound and solid and performs excellently in our tests. It is also a truly stable solution for load balancing."

In addition, Miercom tested our LinkProof product. Based on rigorous testing of LinkProof and a review of its configuration, deployment, and operation, Miercom found that in Voice-over-IP traffic tests of 100 concurrent calls, LinkProof maintained 100% of the Voice-over-IP connections when a simulated WAN outage automatically switched calls to a secondary WAN link. LinkProof features a very large assortment of settable and tailored QoS Policies, and last but not lease, LinkProof includes Intrusion Prevention System capabilities for DoS attacks, worms, et cetera. These are very unique qualities unmatched by any other Radware competitor. To summarize, we believe that we have and will continue to make progress on multiple fronts. We have announced our next generation strategy, the business-smart network that allows customers to extract the greatest value from their networks and improve their business processes. For our legacy business, we continue to differentiate our offering in the market, while concurrently releasing innovative capabilities. And we truly believe our business matrix will include going forward. With that, I would like to open the discussion for Q&A.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Mark Sue from RBC Capital Markets. Please go ahead.

Thank you. Roy, I'm trying to quantify the financial impact from changes to your new strategy. Are we supposed to add 1.5 million per quarter in R&D for the rest of the year? And how does that look in addition to the base number from total OpEx last year? And separately, with the changes that you're implementing, should we see flattish revenues this year versus last year before a big ramp in 2008?

Okay. So basically, we're going to add $1.5 million per quarter, and that covers the additional head count from Covelight people, as well as the investment that we're doing in the strategy of business-smart networking across R&D sales and marketing, business development, and obviously marketing in the regions. You should add it for the remainder of 2007 on a per-quarter basis. Concerning the sales, we believe the business-smart network is the next wave for networks, or network intelligence should go. So while we don't expect any short-term revenues from this strategy, we believe that as we launch it and we are releasing more products to the market, and specifically in 2008, there will be meaningful revenues from business-smart network implementations at customer sites.

The point was, Roy, do we see some disruption in the near term, which means the revenues for '07 might be a little flat before we hit the inflection with the business-smart in '08? Or do you think you can kind of manage the transition with your customers in 2007?

We think the business-smart network is another layer of intelligence. It is not necessarily our replacement of existing customers deployment. But actually brings more intelligence, more services to their network. So we believe what we call the legacy business, or the classical business will continue, and should continue to improve through the remainder of '07, while we are investing and executing on the business-smart networking strategy.

Got it. That's helpful. And Meir, just on gross margin, the big delta there sequentially, any thoughts?

Actually, what we have, this is the same gross margins as we had before, and just what you see right now, the GAAP, this is because of the write-off of the inventory. As we say, this is one time.

Got it. Okay. Thank you. And good luck, gentlemen.

Thank you. Our next question comes from the line of Stanley Kovler of Merrill Lynch. Please go ahead.

Thank you. I just wanted to ask if you could maybe give us some update on the relationships with some of your partners like IBM and others that you've highlighted in the past. I apologize if I missed that, if that was on the earlier part of the call. And perhaps give us a perspective on the geographies. I think I missed that as well. Thank you.

Okay. Concerning the partners, we continue to expand our partnerships and alliances, and I believe this quarter, we will also continue to release press releases demonstrating our progress in that aspect. We're very happy with what we're doing there, and we're seeing additional opportunities with the partners that we've mentioned. And we've also extended the partnerships circle to other leading vendors, and those I believe will be announced during the quarter.

Okay. As far as the split between the region, the U.S. is about 30% of our total service, and the international, 70%.

Great. And were there any changes to the enterprise and service provider mix this quarter?

No, actually this has remained the same, about two-thirds enterprise and one-third service carrier.

And maybe the last one I have is if you could maybe give us a prospective on how the transition in the U.S. sales force is going, if that is in line with your plans, slower or better than expected? That's all for me, thank you.

So far it's in line, it progresses well. Obviously, we are looking through the remainder of the year for progress in our U.S. revenues. But so far, it is exactly on plan.

Thank you. Our next question is from the line of Ittai Kidron from CIBC. Please go ahead.

Hi, guys. Just to follow up, Meir and Roy, on the -- I have questions in regards with Covelight and your new business direction. Does that imply that you're not going to be profitable this year in any quarter? Is that the right way to look at it?

Okay, first of all we haven't guided the market for the rest of the year. Only for this quarter. In about the top line, we give you the direction, and also give some direction about the operating expenses. It is too early for us to see the impact of the implementation of the new strategy with Covelight, and also the outcome of the new people that we have just hired in the U.S. and to see the outcome of those activities. So it is very early to say right now, but you have to take into consideration our leverage with the high gross margins, which is over 80%. So if we will be able to generate a few million dollars themselves, just as we expect, of course, to do so, so the impact on our bottom line will be a positive one. So we are all expecting through the second half of the year to see the results.

Roy, before making the decision on acquiring Covelight, when you look at it, and you look at the business plan and the outlook, what kind of benchmarks are you setting for yourself to evaluate return on investment here? Is this something that -- what is the timeframe by which you expect business like this to be break-even on an operating basis, and how do you expect the long-term growth to be from this business?

Okay. The key point that I want to highlight is that we've acquired Covelight because it allows us to accelerate our next generation strategy of business-smart network. It is not going to be a stand alone product offering, or another I would say area or market in which the Company operates. As a result of that, we're looking within the next 12 to 18 months for the return on investment for the full Company business to enjoy. While in the first several quarters, this is definitely a new innovative strategy, a new market direction that we should work on executing, we believe that that's going to be the next step, and I quoted for example, Mark Fabbi from Gartner, but additional analysts from IDC Network, (inaudible) I think, believe now the same that it's going to be the next wave. And as a result, the ROI that we're looking is -- or the leverage that we're looking for is across the whole business of the Company and the timeframe should be within 12 to 18 months.

That's fair. When you look at this new direction that you're taking, Covelight, just given the numbers that you've provided, seems to be a very small company. I mean it might have interesting technology, but no revenues and a lot of OpEx attached to it. What do you think you're missing right now to fully address that business-smart network platform that you're looking? What else would you look to add that you think you will need or would possibly do over the next 12 to 18 months to continuing to build that business?

Okay. So first of all, we are going to launch several internal developments that were done. As I've mentioned in my prepared remarks, we were evolving our absolute product offering towards that direction over the last two quarters, and we will be announcing capabilities that are directly -- that are directly attached to the business-smart network and complete the execution on the vision. If you're speaking about additional acquisitions that we will need to do in the short-term in order to execute this vision, currently, we are not focusing on that direction, we will be first focused on our internal developments and integration of the Covelight component into our business.

Very good. And lastly, with regards to your R&D and your prioritization within it, now clearly was this shift, as you mentioned, you're shifting a lot of the R&D towards that direction. Does security then become less of a priority, less of a focus from a minority standpoint for you?

Not at all. If you're looking on the business-smart network, and let me give another example, if there is a fraud happening and we are able now to communicate the fraud event in real-time from the E-banking system, or from the network front ending the E-banking system to the enterprise fraud system of the bank, when this system decides that that user is actually now doing a money laundering or a fraud action, you would like in real-time to block that user. An excellent way to do that would be through our security offering where in real-time the business application can instruct the DefensePro to do that. So we continue to invest in that product line. Actually, in the last several quarters, we is have increased R&D resources there, as we are seeing strong differentiation in the market, and we see that as an integral and extremely important and strategic component of the business-smart network. The ability of the network to self-protect itself, or what we call self-defending network, and on top of that, the ability of business applications to enforce the real-time security action is of key importance going forward.

Very good. And lastly, Meir, can you just give us the head count including Covelight, and what is it without and with the Company?

Actually, the head count is expected to be by the end of this quarter, this is including Covelight and people that we are adding because of the acquisition of Covelight, this is about 530 to 532.

All right. Good luck, guys.

Thank you.

Thank you. Our next question comes from the line of Jeff Meyers from Intrepid Capital. Please go ahead.

Great. Thanks, guys. So did Covelight have any revenue in '06, or it was all just new products?

It is very low revenues. Nothing meaningful.

Okay. And in terms of the new sales force in the U.S., maybe you could just comment on the pipeline that they're building now, versus what you saw last year, six months ago, before all of these new guys came on.

As I've mentioned, we believe so far we are on plan, which means that we are seeing a larger pipeline in the U.S., entering Q2 obviously, it is early to say about the actual results in the U.S. in the quarter, and in the future quarters, but we believe we are starting to be more engaged with the market and key customers, and we're seeing currently an increase in the pipeline.

Got it. And last question for you, just in terms of the Q2 revenue guidance, obviously, directionally I guess its up, but can you give a little more color on that? Are you talking up a few 100,000, up a million? What sort of -- maybe you could frame that a little bit.

We decided to stay only with the direction this time, and not give a specific number in guidance.

Okay. In terms of seasonalities, usually Q2 is better than Q1?

That's correct.

Okay. Thank you.

Our next question comes from the line of Chris Rolland from Wedbush. Please go ahead.

My questions have been answered. Thank you.

(OPERATOR INSTRUCTIONS) And it will be just one moment. Thank you for waiting. Our next question comes from the line of Robert Cast from Sunbest. Please go ahead.

Hi, Roy and Meir. When you talk about Q1, Q2 revenues being up sequentially, is that from revenues from the new acquisition? And when do you expect to see first revenues from the new acquisition?

We don't expect in the first couple of quarters any contribution in terms of revenues from the new acquisition. Once the strategy and the product suite will be out, we believe there will be a ramp-up towards 2008 that will influence also our existing portfolio.

When do you expect those products to be out? Q3? Q4?

Yes, we are going to release them -- the first product will be launched this quarter. And then Q3 and Q4, there will be additional announcements.

And in dollars and cents, what type of market opportunity do you think you're going after?

We believe that the -- that this is going to be a new market. Basically, what we're speaking on is for the network to raise its strategic value by being able to directly communicate business events to the business applications. So the opportunity here is tied, we believe, to the market size of the business analytic software market. And now, the network is becoming a tool, to bring real-time events to those business analytics software in real-time for them to provide real value to the enterprise market. So there is no basically a time between the networking market or the intelligent network market, the Layer 4-7 market, and the business application market. We believe the value that this can provide to our customers, as it will allow them in real-time to act based on business events, is huge.

(MULTIPLE SPEAKERS) -- your Ap switch?

Yes. Correct.

And would it sell for the same prices as an Ap switch?

We believe pricing for the business-smart network should be higher than the current applications smart networking equipment.

This should really -- sorry. Go ahead.

As it provides more strategic benefit to the customers. It is going beyond the networking equipment. It is now tying business events of customers to the business processes. And as a result, value is bigger, and as a result, we believe customers will be willing to pay higher prices for this type of technology.

All right. Thank you very much. Good luck.

Thank you.

Thank you. Our next question is from the line of Scott Serial with Esquire Technologies. Please go ahead.

Good morning. Just to follow-up on a couple of the cost questions for the Covelight acquisition and incremental expenses, just to clarify, the increase in 1.5 in operating expenses is off the base in the March quarter and not the December quarter, is that correct?

Yes, that's correct.

And in terms of some color in transaction this quarter, could you give us an idea of the average size of the deal? I think you talked about that in the past, and as part of that, what you're seeing in the pipeline for some of the deals in the U.S., are you starting to get to the table at some of the bigger deals?

Okay, first of all, about the average bill that we had this quarter, it was about $70,000 a bill, about the U.S. This is of course, this is in the pipeline right now, but based on our analysis, in the pipe line, we are tied to higher deal sizes.

And in terms of the U.S. sales force right now, there have been a lot of changes there, could you just update us in terms of the number of quota carrying salesmen we had at the end of the quarter?

We have around 30 quota carrying people.

Okay. And so the time line for them to be ramped up and fully contributing is still about a six-month time period, so with that in mind, you're expecting real revenue contribution to be coming from these new additions by the September quarter at the latest? Is that correct?

That's correct.

So when you look at the size of the sales force, and North American market for you has been about 30% of revenues over the past couple of quarters, what type of an inflection do you consider success then, as we get into September and December? Is U.S. and North America 35% of revenues, or 40% of revenues, or how do you -- how are you going to gauge success by that?

Okay. Percentage out of the total Company is obviously also dependent on the international performance. But we definitely would like to see strong quarter-over-quarter growth, and that should be the metric that we will be looking for in absolute numbers.

Great. Thank you.

Thank you. And gentlemen, I will turn the conference back to you to conclude.

Okay. Thank you. We believe that the acquisition of Covelight System and the launch of the business-smart network is a very strategic and important move for Radware. It positions us in the forefront of a new, exciting market opportunity. We believe that with proper execution, we can lead that market and become a worldwide leader in a very exciting market. With that, I would like to close the call, and thank you, everyone, for joining us today. Have a great day.

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