Radware Ltd (RDWR) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Radware conference call Q3 2007 earnings conference call. (OPERATOR INSTRUCTIONS) Today's conference call is being recorded. I would now like to turn the conference over to your host, President and CEO, Roy Zisapel.

Thank you. Good morning everyone, and welcome to Radware's third quarter 2007 earnings conference call. Joining me today is Meir Moshe, our Chief Financial Officer; and Chris McCleary, our Executive Chairman. Meir will start the call by reviewing the financial results and afterwards I'll discuss the business highlights of the third quarter results. After my comments we'll open the discussion for Q&A. Meir?

Thank you Roy, and welcome everyone to our third quarter conference call. First, I would like to read you the Safe Harbor language. During the course of this conference call, we will 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 or our ability to address changes in our industry, changes in demand for products, the timing and demand for orders and other risks that differ 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.

Now, ladies and gentlemen, for the financials. We are very pleased to report again record revenues for the quarter. Moreover, we are very proud to report improvement in our American business. We enjoyed an increase in our high end offering across all product lines. Revenues for the third quarter increased sequentially 7% and 14% year-over-year, to a record of $23 million. The deferred revenues increased as well. The non-GAAP net loss this quarter was $1.2 million or $0.06, improvement from loss of $2.4 million or $0.12 in the second quarter. Gross margin remained at 80% level and non-GAAP operating expenses totaled to $21.4 million. As a reminder, $1.5 million of the operating expenses are as a result of investment in Business Month Networking which includes the operating expenses from the Covelight acquisition.

The DSOs for the quarter were 69 days. Inventory level went down this quarter by more than $0.5 million to $5.1 million. Our cash position including long-term deposits and marketable securities is approximately $156 million at the end of the quarter and we have no debt. The headcount for this quarter was 560 employees. Shareholders' equity is about $177 million.

Guidance. We anticipate improvement in our fourth quarter results. We expect revenues to go up compared to the third quarter, while maintaining the same high gross margins and flat operating expenses. As you can see, ladies and gentlemen, in the third quarter, revenues increased to a record of $23 million. Deferred revenues increased. We have maintained our high gross margins. Operating expenses remain flat and we look forward to having higher sales and better results in the fourth quarter. And now, I would like to turn the call over to Roy.

Thank you, Meir. Our Q3 results reflect another quarter of record revenues for the Company. Our overall sales execution improved this quarter. Posting a more than 7% sequential increase and a double-digit growth annually in what is traditionally a seasonally weak quarter.

We were pleased with the improvement in our Americas business and the ongoing strength of our international business. We continue to see strong customer activity and an increased buy time from the ramp-up of our sales resources globally. We see this as a positive indication for our business which further underscores our view that we are heading in the right direction as we try to reflect in the guidance provided. During the quarter, we won significant sales in both carriers and enterprise accounts including AT&T Wireless, NTT, Tele Atlas, China Ministry of Railway, Fortis, shopping.com, New York Stock Exchange, Hong Kong Stock Exchange, and Diesel.

As evident from the customer list, we are doing very well in the high end of the market with strong growth in the third quarter sales of our high end Application Switch 4 and Application Switch platform. We believe that the unique value proposition we offer large enterprises and materials in the performance and scalability of our platforms will continue to differentiate us and we expect additional revenue growth from the high end platforms.

As we mentioned in our last quarterly call, a key milestone for Radware was the launch of our next generation Business-Smart strategy. The Business-Smart Network signifies a strategic move beyond the traditional industry approach to traffic switching to one that provides customers with the ability to make their networks business aware. This will enable our customers to have for the first time visibility into the business events embedded in user sessions, optimize their business processes, offer new products and services on the fly to their users and stop identity theft and fraudulent online behavior without unwanted delay.

Yesterday, we announced the release of the next major version of Inflight, Inflight version 3.0 and that's within just six months of acquiring the Company. This release features out of the box templates based on an innovative Inflight template language, statewide business event support and an enhanced user interface. These features will allow customers to deploy the business event delivery platform across the enterprise with the utmost ease in real time and with zero impact to applications or users.

As we mentioned on our last quarterly call and as Meir noted in his opening remarks, we're dedicating approximately $1.5 million per quarter in R&D, sales, and marketing and business development expenses to ensure our progress and leadership for this new initiative. We believe this is an important investment that we're making in the future of the Company in order to lead a multi billion dollar market and we are already executing on this strategy.

As a core element of our Business-Smart Networking strategy, we are also engaging partners that through working together we feel we can collectively offer a strong, competitive, and innovative business application to our customers. During the third quarter, we teamed with [RXSite] and presented a realtime network based data acquisition and logging of online user activity in web applications for compliance and forensics. This is the first industry solution that offloads logging from servers and applications to the network in order to solve complicated, expensive compliance issues and it does this while concurrently accelerating application performance.

We also made good 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. In particular, 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. This quarter we announced the SAP stop testing and certification of our solution.

SAP Enterprise Services Community Networking Lab evaluated interoperability and compatibility of rubber and SAP solutions for global enterprise SOA environments. The findings showed that other solution provides the following significant end user benefits. One, we demonstrated up to 90% performance improvement in end user response time on critical transactions. Two, for remote users of the SAP NetWeaver platform, Radware was able to reduce document download time from 5 megabits -- for 5 megabits (inaudible) by 85% for T3 lines and by 94% for DSL lines. Three, through our integrated behavioral design of service protection, we were able to ensure 100% transaction processing and delivery, eliminating result performance degradation and approximate 22% failure rate for unprotected transaction.

Another strong third party validation for our products came from Info Security magazine who named our DefensePro product as a finalist in the application security solution and intrusion prevention categories in Info Security Products Guide for the 2008 Global Product Excellence Awards. The DefensePro was voted a finalist by more than 11,000 voters worldwide, consisting of end users, channel partners, and readers of Info Security Products Guide. This award comes after last quarter win of the Best in Test awards from IDG Techworld magazine for our AppDirector Application Switch which won in a head to head test with (inaudible) Coyote Point Equalizer. These awards are further testimonial to the strength and competitive advantage of our product portfolio.

On the application security side of our business we released a major version, DefensePro 440, unveiling the industry's first full spectrum protection technology. The newly added behavioral server protection functionality, allows the network to automatically respond to attacks targeted at revenue generating applications without human intervention. The new security features include web, voice-over-IP, E-mail and Microsoft SQL, adaptive server based behavioral protection. Threats that are detected and prevented include brute force attempts, dictionary attacks, web scanning, seek flooding and so on. With this version, we extend our leadership in behavioral security and execute on our security vision for zero minute, zero touch and zero force positive application security.

Our behavioral technology is now protecting the full spectrum of application level pre-attack probes, server cracks, network based denial of service, and application based denial of service attacks. Coupled with our large pattern invulnerability based security database, DefensePro provides the best solution in the market for intrusion prevention and denial of service protection. These capabilities are extremely important to our Business-Smart Network vision with the network now being able to protect business applications from attacks in real time.

To summarize, we are executing according to our plan and believe we will continue to increase our quarterly revenues. We will continue to identify and secure partnerships that extend the value of our products and our market reach. We are already well positioned to introduce several key product innovations in the fourth quarter, innovations that will further enhance our competitive advantage in the application delivery space, as well as enable us to sustain our future momentum in the marketplace. With that I would like to open the discussion for Q&A.

(OPERATOR INSTRUCTIONS) Our first question comes from Mark Sue with RBC Capital Markets. Please go ahead.

Thank you. Roy, how should we look at guidance for the December quarter on a year-over-year basis, having just performed 14% over your revenue growth? If I add seasonality and your comments on backlog, and also the big partnerships, any thoughts on what the year-over-year guidance might be?

Okay. Currently we are guiding for an up quarter. That would be the statement that we are going to use. We obviously are encouraged by the acceleration of our growth but at this point we feel comfortable with guiding up the revenues. In addition, we didn't speak about backlog but we spoke about deferred revenues. Going up, the deferred revenues are mainly softer, subscription and service that we recognized over a period of time.

Any thoughts on why the year-over-year growth might not improve or is it just conservatism?

Let's wait and see after Q4 and we'll know the answer. Currently we would like to speak to an up quarter.

Got it. Any thoughts on what the market for application and behavior networking is growing at? Is this a -- any thoughts on what is it 10%? Is it 30%? Any planning thoughts for 2008, what the market might grow at?

I think the general market analysis is thinking about around 10 to 15% increase. Obviously, we believe that once we continue to build the momentum, et cetera, we should be back to taking market share. But currently, I think those are the general assessments by Gartner and IDC, Yankee, if you average all of them together.

Okay. That's helpful. Thank you. Good luck, gentlemen.

Thank you.

Our next question comes from Ittai Kidron from CIBC, please go ahead.

Thank you. Congrats, guys, on a good quarter. Meir, can you give us the geographical split of your revenue?

Yes. As I indicated in my comments, we enjoyed an increase in our U.S. business. That means that this quarter the U.S. contributes about 30% of our total revenues, while international was 70%, just if you recall last quarter, it was only 25% the U.S.

Very good. And with regards to the large contracts you announced this quarter, how much of that will go through in the fourth quarter and how much will spill over into the first quarter of next year?

We don't know yet exactly. We are in discussions. It might be that it will split between the two quarters. A small portion of it was recognized already in this quarter.

Do you expect, though, your revenue to increase quarter-over-quarter also excluding this contract?

This quarter, they did. We want to -- just so you know, we look on our overall revenues per quarter. This quarter we did that. We believe that also there is a possibility for next quarter as well. But we will need to monitor the situation.

Very good. With regards to the Business-Smart technology, can you give us a sense on what do you think timing before that becomes a revenue driver for you guys?

We indicated when we did the acquisition in 30, of April that we believe the time slot will be 12 to 18 months until we will start to recognize revenues. We are still holding that assumption, although as time progresses, we're starting to feel more comfortable with it and there might be some positive upside to this initial assumption. But again, so far in this quarter we did not recognize revenues. We're targeting 2000 -- the second and third quarter of 2008. But there might be some positive surprise there.

Very good. And lastly, with regards to the OpEx, Meir, you mentioned flat CapEx -- I'm sorry, OpEx quarter-over-quarter. Can you give us a little bit more color on the dynamics in there and how should we think about the behavior of OpEx as we move into March and June next year?

Okay. We haven't guided the market for 2008 on one end. On the other end, also the Board discussion on 2008 is scheduled only through early November. So in this stage, I don't want to elaborate more than that, but we should monitor the expenses closely, actually we expect to have some increase in 2008. It's predicted to review salary review that we have to make based on the business plan that we will discuss with our Board about more investment that are needed, if they will be approved. But at the same time, we are targeting also increasing the revenues. So we have to see the total picture. I believe that we can share the full outlook with you in the next earning, to cut long story short, this is going to be positively hopefully sales will exceed -- the increasing sales will exceed the expenses.

Very good. Congratulations. Good luck, guys.

Our next question is from [Arit Dekobe] from Susquehanna.

Can you talk about the split between new and existing customers this quarter?

The new and repeat remains almost the same as we had before, about 40% of the revenue derived from new clients and 60 from existing clients.

And also the split between carrier and enterprise, is that also consistent?

The carrier is almost the same again as we had last quarter. While enterprise, the rest of that, that means two-thirds of that.

Do you expect that to change over time as you move into 2008 and as some of the Covelight product gets more into the pipeline?

I don't know. We don't have visibility about the split for the near future. But if there will be a change, we can expect maybe to have it at the end of '08, while when carrier sales will ramp up based on the initiatives that we see in the market. But right now we don't -- we do not expect any major change in the very near future, that means in the next couple of quarters.

Okay. That's helpful. And last question, as you talk about the new partnerships that you are forging for the business networking, when do you think those will start to show in the pipeline?

I think, again, as discussed, we believe the first revenue recognition from Business-Smart Network will happen in Q2 and Q3 '08. I believe between now and then, we and you should expect additional announcements of partnerships and companies that are adopting the Business-Smart Network to deliver realtime action and business event information to their customers. Once I think this base of partnerships will be built, we will start to see revenues coming in from it, starting from enterprise customers and later on carrier customers.

Okay. Great. Thank you. That's it for me.

Our next question is from Matt Robison from Ferris, Baker Watts.

Can you comment on the relative strength of your sales into resellers that have branded names like OEM kind of sales, whether it's actually OEM with their brand or whether they're just reselling your products, how that looked on a sequential basis and also how it has changed in terms of a portion of your backlog or revenue pipe?

This type of sales I think is roughly growing in line with the Company growth. I cannot now give a special insight that they're growing faster or lower than the overall growth rate. Obviously, on the individual accounts or individual names, we are seeing on some of them very strong and nice traction in the -- specifically in the carrier market. But currently I don't think it's -- the overall number of this type of channel is materially different than the growth of the Company.

Think it's going to be a driver in 2008?

It might be, pending some announcements that we might do in the future, I think there's a good potential there, yes.

When did you guys start having to do a full on Sarb-Ox 404 and all that stuff. I'm talking about G&A here?

Yes, all the expenses are included in the G&A.

Right. Okay. You've been doing that -- did you just start that or have you been doing it in prior years?

This is actually for 2007 only.

Okay. So should we expect an uptick in the fourth quarter related to that activity?

No, not at all. As I said, I mentioned all the expenses remain flat. This is including those expenses.

What was the headcount?

I said 560 for this quarter.

Sorry, I missed that. Okay. Thanks a lot.

Our next question is from Stanley Kovler with Merrill Lynch. Please go ahead.

Just wanted to ask you about the DefensePro and generally speaking the security side of the business, wanted to see if you could give us an update on the traction there, with maybe what portion of revenue security has been representing and how that business has been tracking, whether it's grown faster or slower this past quarter, recent couple of quarters, just to see what the trends are on that business, and then I have a follow-up.

Basically, overall the DefensePro product line is increasing nicely now, quarter-over-quarter. If I'm looking from the beginning of the year, it grew a bit more than the Application Delivery product line. This quarter specifically, we had a lot of strength in the Application Delivery product line, DefensePro had a record quarter last quarter and another growth but smaller one this quarter for another record quarter. As I have mentioned in the last quarter and on this call, we believe that the product itself is now advancing very quickly. We have very big expectations from the last version that we have just released to the market, the version 4.0. And we believe that we will be able to gain market share, both in the online businesses, portals, and so on, large enterprise gateways and end carrier customers. So both today, the DefensePro product line and the Application Delivery product lines are in record levels and we believe there is good opportunity to increase revenues, in both of them. We believe we are well-positioned with the Business-Smart Network on the Application Delivery product line with the full spectrum protection and the behavioral security on the DefensePro product line to have strong product cycles right now.

What was the average deal size this quarter? Did that change at all?

Yes. It was up to $80,000. Up from $75,000 a quarter ago.

If I could just take a stab at the guidance commentary, should we think about the sequential growth rate or year-over-year growth rate slowing down in the December quarter, even though on a dollar basis it will be up?

Actually, we would like to stick to the up quarter as we mentioned before. But you can take into consideration that third quarter on one end will -- seasonal quarter specifically in some regions as Europe. On top of that, the fourth quarter, typically this is third quarter for us.

Great. Thank you.

Our next question is from Rohit Chopra from Wedbush Morgan. Please go ahead.

Can you tell me what book-to-bill was, greater than 1, less than 1?

It was towards 1.

It was 1. Okay. And was there a negative exchange rate impact that you guys felt in the quarter?

Actually, it was meaningless. It was about $100,000 that related to some currency fluctuations. That's all.

Okay. And then could you maybe comment a little bit on your partnership with Riverbed. Has that begun to deliver any type of revenue or maybe leads or pipeline? Can you comment?

It started last quarter. I think we've done the very first deals this quarter and we have some joint partners that are engaged. The partnership is obviously meeting in the channel. We need the combined channel to sell the solutions. We have several partners now that are engaged with that. The first initial deals have started to happen. We believe that once we continue to execute on that and increase the amount of channels that are engaged in selling the combined solution we will see more revenues from that angle.

Right. Last question, I know you don't give this except in the annuals that you publish but is there any way that you can provide what maintenance was as a percentage of revenue and cost of goods sold this quarter, last quarter, and a year ago? I just want to get a sense of what segment is actually growing, your services or your products, just get an idea.

Actually, there is no big change between the split as we had before. And as you said, we are reporting this one only on yearly basis so we'll do it in next quarter.

Okay.

As I mentioned already in my comments, product sales are in record level.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And there are no further questions at this time. Please continue.

I would like to thank everybody for joining us today and have a great day. See you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and you may now disconnect.