Radware Ltd (RDWR) 2007 Q2 法說會逐字稿

Welcome to the Radware Conference Call Q2 '07 earnings call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session with instructions being 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, Mr. Roy Zisapel, President and CEO. Please go ahead, sir.

Thank you. Good morning everyone and welcome to Radware's second quarter 2007 earnings conference call. Joining me today is Meir Moshe, Chief Financial Officer and Chris McCleary, our Executive Chairman. Meir will start the call by reviewing the financial results and will be followed by a brief introduction by Chris before I present the business review of our second quarter results. After my comments, we'll open the discussion for Q&A. Meir?

Thank you, Roy and welcome everyone to our second quarter conference call. First, I would like to review the Safe Harbor language. During the course of this conference call, we make projections or other forward-looking statements regarding future events of 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 products, 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 filed in June 2007.

And now, ladies and gentleman, for the financials. Revenues for the second quarter increased to a record of $21.5 million and the deferred revenues increased as well. The non GAAP net loss for this quarter was $2.4 million, or $0.12. Gross margin remained at about 80% and non GAAP operating expenses totaled $21.3 million.

The operating expenses this quarter take into account operating expenses of $1.5 million, resulting from investment in Business Smart Networking which includes the operating expenses from the Covelight acquisition. The DSO saw the quarter with 69 days, down from 71 days in the first quarter, an improvement of 12 days.

Inventory levels went down this quarter by $0.5 million. The Company generated cash of almost $1 million this quarter, disregarding the investment in Covelight. Our cash position including long-term deposits and marketable security is approximately $158 million at the end of the quarter and we have no debt.

The headcount for this quarter was 540 employees. (Inaudible) equity is about $178 million. Guidance. We anticipate improvements in our third quarter results. We expect revenues to go up compared to the second quarter while maintaining the same high gross margins and (inaudible) operating expenses.

As you can see, ladies and gentlemen, the second quarter revenues increased to record sales of $21.5 million. Deferred revenues increased. We have maintained our high gross margins. DSOs and inventory have been improved. The cash position is up by $1 million and we look forward to having higher sales and better results in the third quarter.

And now I would like to turn the call over to our Executive Chairman of the Board, Mr. Chris McCleary.

Thank you, Meir and thank you all for joining today. My name is Chris McCleary. I'm the new Executive Chairman. The Board of Directors of Radware recently made a decision to create the position of Executive Chairman and the purpose of this new position is to assist management in developing high level strategies and also to help with various external relationships that we have around the world; partners, customers, as well as investors.

In addition, this position will create a tighter relationship between the operating company and our Board of Directors as well as our shareholder base. So I will be on the call going forward and also in our upcoming investor meetings throughout the rest of this year and next. So I look forward to meeting you all in person. I'm going to turn the call over to Roy now for the highlights and CEO comments.

Thank you, Chris. Our second quarter results reflect a quarter of record revenues for the Company. Our international business executed very well this quarter helping to drive record results for Radware. Our American sales results are still below our expectations, although we are seeing strong customer activity and an increased pipeline from the ramp up of our sales resources in the region.

During the quarter as Meir mentioned our deferred revenues continued to grow. We continue to see positive indications in our business, strengthening our review that we are heading in the right direction to post higher revenue figures throughout 2007 as reflected in the guidance we provided.

During the quarter, both the [Colair 47] and security product lines grew sequentially. We continue 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 (inaudible) in the performance and scalability of our platforms will continue to differentiate us and we expect additional revenue growth from our high end platforms.

During the quarter we won significant sales in both Carrier and Enterprise accounts including L3 Communication, CB Richard Ellis, the FDA, New York Stock Exchange, Bank of China and Cingular Wireless. A key milestone for Radware in Q2 was the launch of our Next Generation Business Smart Network Strategy. We are truly excited about the prospect of what the Business Smart Network means to the industry, our customers, our partners and to others. The Business Smart Network signifies a strategic move beyond the transitional industry approach to traffic switching to one that provides customers with the ability to make their networks business aware.

With our Inflight product real time transaction capture, transforming feed functionally, Radware can enable for the first time visibility into the business events that are embedded in user session traffic. This unique approach allows customers to tie their infrastructure to business needs by making this information immediately actionable without time consuming batch processing or expensive application integration projects. The addition of real time business event intelligence to our application delivery switch will enable our customers to optimize their business processes. They will be able to offer new products and services on the fly to their users and they will be able to stop and halt identity theft or fraudulent online behavior without unwanted delay.

As we mentioned on our last quarterly call, we're going to dedicate approximately $1.5 million per quarter in R&D, Sales Marketing and Business Development operational expenses to ensure our progress in leadership for this new initiative. We believe this is a very important investment that we are making in the future of the Company and in Radware's opportunity to be a worldwide leader in a multibillion dollar market in the future.

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

In addition, Miercom tested our LinkProof Multi-WAN switch product. Based on rigorous testing of LinkProof and our review of its configuration, deployment and operation, Miercom Labs found that in the voice over IP traffic test with 100 concurrent calls, LinkProof maintained 100% of voice over IP connections when a simulated run outage took place. This is very important as voice over IP traffic is very vulnerable to one outage basically disconnecting all calls. Customers with a voice over IP network when they have LinkProof in their network can guarantee 100% of voice over IP continuity. These are unique qualities that are unmatched by any other Radware competitor.

As a follow up to the relationship building we have done in the past several quarters with software application and equipment vendors such as Oracle, BA and IBM. We are striking new alliances with best of breed vendors that complement or extend the value of our present offering. As an example, we announced in Q2 a partnership with Riverbed, the technology and market share leader in wide-area data services to deliver high performance and fault tolerant remote office infrastructures for our customers.

The combination of Radware's LinkProof which performs multi-homing, link load-balancing and health monitoring with Riverbed Steelhead appliances which accelerate application response time and reduce transfer protocol chattiness, offer a compelling solution for building a continuously available high performance WAN infrastructure without the need for expensive bandwidth upgrades.

As the trend for data center consolidation is transcending there is a clear need to guarantee performance and availability at branch office sites that need access to centralized application resources in the data center. The combined solution addresses this critical need and offers uninterrupted access to consolidate data centers in remote locations, increase efficiency of the wide-area network, overcoming mix and service providers and link outages and accelerate the performance of the wide-area networks through ISP load balancing.

We believe the Riverbed alliance can be a strong growth engine for our LinkProof product line. Our companies have started to engage in field sales, technical and channel levers to implement the first phases of a go-to market strategy for the combined solution.

On the application and network security products side of our business, we announced multiple new enhancements for our security database which strengthens our competitive position to make Radware the most secure application delivery in the market. We announced that we added network protection for the new Oracle application vulnerabilities, ensuring that our customers' mission critical Oracle environment is secured against attacks.

We also exposed a new vulnerability in the YATE telephony engine that can destruct and completely disable voice over IP infrastructures. And most recently we also provided immediate protection for our customers against the "Italian Job" Web attack that within 48 hours compromised over 10,000 websites globally.

As you can see from the advances we have made across our product portfolio this quarter, our customers continue to enjoy the full benefit of our state of the art absolute architecture. And they can drive through that (inaudible) productivity, improved profitability and reduced IT operating and infrastructure costs.

To summarize, we believe that we have and will continue to make progress on multiple fronts. We will continue to increase our quarterly revenues and expect the Americas to grow sequentially as well. We are steadily deepening our value added partnership with leading vendors. And we are committed to innovating and strengthening our product offering by even further enhancing our competitive advantages; advantages that are industry validated.

We will continue to invest in identifying, developing and bringing to market evolving application deliverability requirements; requirements which we believe have the potential to change the current market landscape. And equally as important, we have maintained a lock step 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.

Thank you. (Operator instructions). Our first question will come from the line of Mark Sue of RBC Capital Markets.

Thank you. Roy just a question on how you feel about revenue growth going forward and sustainability and also the consistency, particularly as relates to the U.S. [theater]. Do you feel like you're putting things enough in place that if onward and forward from here where it might be a little lumpy going forward?

Our belief in the guidance is that we should have going forward sequential growth quarter over quarter in total, across the company and specifically in the U.S.

Okay. And any update on activity at IBM that you can give us any thoughts on when that might materialize into revenue growth for you?

We are progressing with the engagement with IBM and also this quarter in some of the regions IBM already contributed to the revenue. We're seeing good progress, but as we've mentioned in the previous calls it's about field engagements tendering together and a strong corporation in the field and every quarter we believe we are progressing.

All right. Separately for you Meir, recognizing you have to spend money to make money, maybe if you could just comment on OpEx trends going forward. Are we at the highest level from an absolute dollar point of view and what does that mean in terms of non GAAP profitability? Is there a particular quarter that we should model for you to turn profitable?

As I said in my script, that we expect that OpEx, non GAAP OpEx to remains flat throughout Q3 and by the way, this is the plan for the rest of the year. We haven't set up plans for '08, so I can't comment over Q4. In the model this is very clear. We also said that we plan to maintain our high gross margins which is over 80%. That means an increment of $1 million of sales should contribute almost [four pennies] to the EPS. This is taking into consideration that we are keeping the OpEx flat.

In my math I get about $24 million for break even. Is that kind of a reasonable assumption for revenues?

I believe that you need a little bit higher than that. You need a little bit higher than that based on the math that I just gave you.

Got it. Okay. Thank you, gentleman and welcome, Chris.

Thank you.

Thank you. Our next question will come from the line of Stanley Kovler of Merrill Lynch.

Thank you. First, I just wanted to get a sense of the breakouts for your U.S. business, Meir, and the Enterprise versus Carrier mix. Maybe you can give us some of those details.

Enterprise was 65% and the Carrier business was 35%. This quarter the International was 75%, while the U.S. contributor was 25%.

So, if my back of the envelope math here is correct then the U.S. business was actually down sequentially? Roy, maybe you can help us understand where exactly the performance has lagged or where you think you can do better. Is it the new sales people, the quotas are not coming in as high or is there something different that you have to do in terms of market strategy? Can you help us understand how it is that we'll see some sequential growth? Thank you.

Currently, in the U.S. our sales organization is ramping up as we said. Most of them from the January/February time frame in the company. I believe, given the sales cycles of around three to six months, we're starting to see the pipeline is now growing. Unfortunately, in Q2 most of the deals were still in the early stage and we could not close them while in Q1 we would still be left over of Q4 in the pipeline and now we need to basically work on building it back.

So we believe if we work on a pipeline trends of what our field sales are telling us as our people are ramping up, we are getting bigger pipelines, getting into bigger deals. We're seeing definitely more customer activity and given our currently high win ratios in the U.S., we believe that will translate in Q3 to sequential growth there.

Good. Can you qualitatively give a little bit of color on how the Carrier or any potential sort of other large relationships are shaping up? Is there a funnel of partners that you are working with that could materialize, maybe similar to IBM or similar to someone else?

Definitely the Carrier and others activity in the mobile world and the fixed line and world wide as they deploy new services. I think we are seeing that as well in the whole industry and we are working on some large projects. Generally, our larger projects within a quarter are coming from the Carrier market. We believe in that market we have a significant differentiated solution. Specifically I can mention the Application Switch 4 and Applications Switch 5 our high end platform, their performance and their scalability. We believe that actually would be one of the market's that will help us to enjoy very good growth for the remainder of the year and in 2008.

Got it. My last question is actually for Chris. I was wondering if you can give me a little bit more flavor as to what your if there is sort of an agenda that you have or plan of action maybe you can share with us. What sort of the first 90 days looks like and how you see your Executive Chairmanship going forward. What is it that you'll specifically focus on just sort of beyond generally speaking the relationship building?

Yes. It's really modeled much like public companies in Europe, in that we wanted to create more independence in the Board. We wanted to create a mechanism by which the Board could have more dimension to the decision making that would have to happen going forward. And so that's objective number one is to connect the Company, our Board of Directors, which is fairly new. We've had some terms expire and some Directors that have been on for a while migrate off. As well as -- I don't know if you remember, but (inaudible) Zisapel, one of the founders was the Chairman up through August and we also decided to rotate the audit, comp and chairmanship around at that time. Again, to position the Board to assist the Company in making the decisions to regain a level of growth that is what we believe commensurate with the market growth which we serve. So that's objective number one.

Objective number two, really, is to take a much broader view of Radware's current and future acquired assets and take a higher strategic view so we can put together a short, mid and long-term strategic plan for the company; again, to position Radware to go to the next level of growth and profitability in the markets that we serve.

And then lastly, specifically because I'm domicile here in the U.S., I will be able to assist the Company very specifically in the U.S. with higher level contacts that key customers and partners enabling us to make presentations of our product capabilities, not only at the level that our sales reps would gain access, but also at senior levels, both on the technology and the business side in particular Carrier and large enterprise and some government contracting prospects that we have in our strategy for this year and next. So those are the three basic pillars of the reason why this position was created by the Board.

Thank you very much. That was very helpful.

And next we'll go to the line of Ittai Kidron of CIBC World Markets.

Hi guys. Good to see revenue going in the right direction. Roy, can you comment on the U.S. The revenue that you had this quarter was a decline, but can you tell me how it was relative to your expectations going into the quarter? And with regard to the pipeline does that suggest that at some point you expect a real significant jump up in revenues let's say over the next two, three quarters there'll be this one quarter where everything is going to kick in?

First of all, we definitely as I mentioned in my remarks, our U.S. sales were still below our expectations. So we definitely -- we're looking to get more sales there, but if I'm measuring the activity and the customer engagement, I would say we're seeing now a very active organization, increased engagements and we're confident it will result in more business. We are looking for those efforts for the new organization to bear fruits in the second half and we are expecting obviously the results to impact the whole company results so we're not looking only for small contributions.

We're looking for a gradual improvement, but one that will be across the whole company. We definitely have a very strong customer base in the U.S. and during the last, I would say, three months, four months we're seen some very nice opportunities in new customers in the large enterprise market that we can definitely win our fair share if not more than that. So I think we have now a very strong team in the U.S.; a team that is ramping up and we will see the results.

Can you comment on the linearity of the U.S. business in the quarter?

The issue I think in a quarter was not the linearity as much as the absolute numbers. In those numbers, we have also the [nuance] of maintenance contracts and so on linearity can be quite good, but our focus is on increasing the sales themselves.

Okay. Meir, can you comment on Covelight. When do you expect that to make a contribution on the revenue line and can you remind us of the magnitude of this contribution?

This is actually -- this question we answered on the last conference call that within 12 to 18 months we expect to generate revenues on the Covelight. Right now the contribution to the company on the revenue side is flat. That means zero.

Very good. And with regard to the second quarter performance, it looks like from eyeballing the numbers that the only one area where things were somewhat of a surprise was on the tax rate. You had a reversal. Can you give us an explanation on what happened on taxes this quarter? How should we think about that normalizing going forward?

Actually, the tax rate as I said this is expected to be 10% on a yearly basis for several years. That means for least the next eight years. So on one quarter I don't see any measurement that we can check it. By the way, in this quarter it's more related to the financial income that in any case we have to pay some taxes and we have [losses] to carry forward in the future.

Okay. And lastly, with regard to the shares outstanding, nice decline there. Is that a buyback or is that just a reflection of the stock price?

It's a reflection of the stock price.

Very good. Good luck guys.

Thank you. And next we'll go to the line of Matt Robinson of Ferris, Baker Watts.

Good morning. Can you hear me?

Yes, good morning, Matt.

First of all, Meir, can you comment on whether or not in your revenue pipeline you see enough activity to keep the cash balance where it is? You ran quite a bit of cash out of receivables inventory and payables in the June quarter. Do you think you're going to burn cash or keep it even this quarter?

In the third quarter?

Yes.

In the third quarter it depends on the linearity within the quarter and the level of sales. Actually, the proof for you as you have said in this quarter regardless of the loss, we were able to generate cash of $1 million. So I believe that if results will be as we expect then the linearity will be good so we can maintain flat cash this quarter. This is based on many assumptions. I cannot focus in this stage, but in any case it's not going to be something which is significant either way.

Sounds good. Roy, any customers where your real time business initiative or the road map associated with it tips the balance in your favor for business in the June quarter?

I don't think the impact is in the June quarter, but the customers' reactions are very strong to this vision and to the early product announcement. We are now engaged with several very high end customers in the key enterprise segments and I believe that toward the end of the year as those sales cycles are a bit longer and involve the business application, not only the network. I hope that toward Q4 we will be able to share on the call with the progress that we're doing there.

Can you talk about the AT&T/Cingular application; whether it was a customer facing and what might have been [salient] features that got you that business?

Currently, we are providing traffic management for many applications. I believe one of the new applications concerning an iPhone provision required more traffic management, more balancing, more scalability and availability and as a result a Cingular increased their store-based with hardware. Overall, I think we are serving Cingular and over mobile carriers, many OSS AND BSS application, billing, provisioning, customer care, portals and so on. There's great opportunity in the carrier segment as a whole and mobile carriers specifically.

Thank you.

Thank you. Next we'll go to the line of Rohit Chopra of Wedbush. Please go ahead.

Thank you. I had three questions. One, what is the ratio of new to existing customers for Radware this quarter versus last quarter and last year?

Actually there's almost no change. This is in the range of 35% to 40% new clients while the rest is existing clients.

Okay. The next question is your expectation from the Riverbed alliance. When should we expect to see some growth driven by this relationship?

It's packaging of a solution together, I believe we are now both companies are engaging the (inaudible) channel as well as sharing some channel contacts. As we start this process, afterwards you should take a relative cycle of Riverbed for the combined solution. I would say I think that currently we're trading on 30 to 60 days' sales cycle. I believe at the channel that we already trained, delivered the message and signed up for the combined solution. The first deals would land within this time period after the initiation of the relationship there.

So, third quarter, fourth quarter probably?

That's correct.

The other question was have you ever seen any deals shift in the Carrier market so far? And who are you winning against in the Carrier and service provider market?

In terms of shifting, you mean from one vendor to the other?

Sorry, one quarter to another.

On the Carrier market it's very hard to have an exact quarter forecast. Those are generally very complicated purchasing systems and operations systems. It's hard to exactly forecast the specific quarter. There is some lumpiness in that revenue and definitely it's happening to us.

Overall in the Carrier market I think all the players are the same like in the enterprise market, but I think there's some specific features that the carriers are interested that are very different than the Enterprise. Definitely scalability and the built-in redundancy of the state of the device, the performance, the user session scalability and so on. Those are generally our advantages in the market. We have a very high end offering, very scaleable and very importantly it's not an Intel or [A&B base] but state switch designed from the ground up for traffic management. We have some key advantages in the carriers that we are trying obviously to win with more and more business.

And just curiously, as a follow up, what was the sales cycle for the AT&T/Cingular deal?

AT&T/Cingular those are repeat orders, but overall a carrier deal can go over 12 months of sales cycle.

Thank you.

Thank you. (Operator instructions). Next we'll go to line of Irit Jakoby of Susquehanna. Please go ahead.

Thank you. Can you comment on the ASBs in the quarter relative to past quarters and also to the ASBS that you're seeing in the pipeline?

Actually, average deal went up this quarter. It was $70,000. Before this quarter it was $75,000. As Roy mentioned that we were more focused on big clients and (inaudible) deals so in the future we expect that average deal will go up as well.

And also can you give us an update on what you're seeing in the federal initiatives?

The federal in the U.S., our business is ramping up, but it's still not a large business for us today. We are seeing large integrators. We've announced Harris for example taking us to the federal contracts. We are in good progress with other large federal system integrators, but this is a long term investment singularly to the carrier sale cycle alone, longer than what we know in the enterprise. And again that's an investment that we're doing now. You're seeing it on operational expenses, but the fruits will come in the coming quarters. We have several investments in our business model like that. That we have increased operational expenses, but they are laying the ground for future growth of our revenues.

With respect to federal specifically do expect significant contribution in the second half of the year?

Definitely Q3 is traditionally a strong quarter for federal, so we would expect growth there.

Okay. Thank you.

Thank you. Next we'll go to the line of Ehud Eisenstein of Oscar Gruss. Please go ahead.

Hi. Good morning. On the Covelight integration, can you comment on that? Is that going smoothly? I believe you increased headcount by eight people this quarter. Is that correct? What are your thoughts on that?

First of all, the headcount increase by more than that that. It's in the mid-teens. The headcount increased; the Covelight specific [in flight] products and overall we added additional resources to support the business model. That concept across the whole company.

The integration is going well. I think we've done a lot of progress on the Business Smart Network strategy this quarter working with customers, with channel partners and with the R&D. Again, I think every quarter we will be able to report to you some advancement and as Meir mentioned within a 12 to 18 month period already when the product is integrated for revenues coming from the Business Smart Network initiative.

I see. What was the headcount this quarter and the end of March quarter?

514 this quarter and the quarter before it was 506. 506 at the end of March and 540, five-four-zero, this quarter. Basically, we've added 34 people during the quarter, including Covelight.

I see. And just a couple of questions for Chris. How much of your time is spent in Radware nowadays?

This change from non Executive Chairman to Executive Chairman is full time.

It's a full time position?

This is a full time position with part of the time in the U.S.; part of it at headquarters in Tel Aviv and other parts of the world with customers and other partners. So it's a full time position.

So you travel to Tel Aviv pretty often now?

Well, we just made the change, but by coincidence I was just there for 10 days at our Annual Strategy and Management meeting as well as our last Board meeting. But I would say it's going to be six to seven times a year.

Six to seven times a year? Interesting. Should we expect a change in the way the Board looks at the share buyback plan?

That's a --

I can [take the question back].

I'll have to get back to you on that one. That wasn't on our agenda at the last meeting and so I'll have to research that and get back to you.

Excellent. Thanks so much and congrats.

Very good. Thank you.

Thank you. Gentlemen, there are no further questions at this time. I'll turn it back to you for any closing remarks.

I would like to thank everybody for joining us today. Have a great day and we're looking forward to meeting you next quarter. Thanks a lot.

Thank you. Ladies and gentleman, this conference will be available for replay after 12:15 p.m. Eastern Daylight Time today until August 2nd at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1 800 475 6701 and entering the access code of 875661. International participants may dial 1 320 365 3844. Again, those numbers are 1 800 475 6701 and 1 320 365 3844 with the access code of 875661.

That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.