Radware Ltd (RDWR) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Radware second-quarter results conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, giving instructions at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

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

Thank you. Good morning, everyone, and welcome to Radware's second-quarter 2008 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 will discuss the business highlights of the second-quarter results. After my comments, we will 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 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 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-S, filed in June 2008.

And now, ladies and gentlemen, for the financials. Revenues for the second quarter were $24 million, an increase of 12% compared to revenues of $21.5 million in the second quarter of 2007 and a sequential increase of 8% compared to revenues of $22.2 million in the first quarter of 2008.

The non-GAAP net loss this quarter was $5 million, or diluted loss per share of $0.25, compared to a net loss of $6.3 million or diluted loss per share of $0.32 in the first quarter of 2008.

Our gross margin remained at the 80% range. The non-GAAP operating expenses totaled to $24.9 million, down from $25.2 million in the first quarter of 2008.

During the second quarter, the devaluation of the US dollars against the Israeli shekel, the euro, the Australian dollar, and other Asian currencies resulted in increase in our operating expenses of $800,000, in addition to an increase of $1 million in the first quarter. To make it clear, due to devaluation of the US dollar, we had to record additional expenses of $1 million in the first quarter and $1.8 million in the second quarter versus the same dollar-shekel basis as at the end of 2007. This increase was offset by a decrease in expenses derived from cutting operational costs to optimize efficiency.

The DSOs for the quarter were 50 days. Our cash position including long-term deposits and marketable securities totaled for $149 million as of the end of the second quarter, and we have no debt.

The headcount for this quarter was 579 employees, down from 584 employees at the end of Q1. Shareholders equity is about $166 million.

Buyback. We plan to reactivate our stock purchase program. Chris will discuss it in detail.

Guidance. We reiterate our guidance for an annual growth rate in the mid to high teens and returning to operating profitability by the fourth quarter of 2008. And now, I would like to turn the call over to Roy.

Thank you, Meir. Our Q2 results reflect improved execution on both the revenue side as well as on the operational expense side. We are pleased with the strong performance of our international business and the improved traction in the Americas.

As a result of good momentum in the markets for our on-demand switches, we were able to achieve 8% sequential growth and 12% year-over-year growth. This is the fourth quarter in a row that we have posted double-digit growth rates, and we believe we will be able to finish 2008 with a double digit growth rate as well.

In Q2, we realigned some of our investments in the business and were able to make significant progress towards our goal of Q4 profitability.

As Meir mentioned, an analysis of our results on the same dollar-shekel basis as in Q1 showed that we reduced our expenses in $1.1 million in comparison to Q1, while we increased our sales by $1.8 million. Together, those two items brought a reduction of $2.6 million in our operational loss in a single quarter, a reduction that was offset by $800,000 due to the continued strengthening of the shekel versus the dollar and the other currencies.

As we discussed in the previous call, we are committed to operational profitability by Q4 and will continue to manage the growth of our business and our investments towards achieving that goal.

On the sales front, we continue to enjoy the strength of our global business and global distribution. In Q2, our Americas business came back to a more regular level and posted several large customer wins. In parallel, we continued to enjoy strong business trends in Europe and APAC, with good momentum coming from the key markets -- Germany, France, Italy, Spain, Korea, China, and Australia.

We believe that during this time of a difficult economic environment in the US, our global presence will allow us to continue to grow our business and increase our market share.

On the market front, we are seeing several drivers for continued growth in our business. First, cost reductions and efficiency in business and IT operations. With our on-demand switches, customers can achieve strong cost efficiencies while allowing them to greatly optimize the infrastructure they already have in place. Our ability to optimize the customer environment and help them save cost on upgrades, while improving and accelerating their application response time, is a key driver for our success.

Radware is unique in the market with the on-demand switching concept. On-demand switches provide customers with a pay-as-you-grow software licensing model, delivering the best CapEx savings in the industry, and full investment protection for future growth projects.

Our ability to free our customers from the significant costs involved in new [operating projects] is resonating extremely well with IT buyers and channels in this period.

The second driver we are seeing is business agility. Customers are looking for solutions that will provide them with competitive advantages by being able to respond more quickly and in real-time to business events as they unfold. Radware business-smart networking solution is the only solution today that enables customers to use the network and extract real-time business events.

The third driver that we are seeing is new application deployment for OpEx savings and real-time enterprise initiatives. We see today a new wave of applications, applications that are based on collaboration and communication between people. As enterprises and carriers deploy more and more voice, video streaming, conferencing, and collaboration applications, there is a growing demand for availability, acceleration, and security of these applications.

Last quarter, we discussed our leading SIP Director solution, and this quarter we announced several key wins in the space. For example disy, a German provider of hosted telephone conference and call center solutions, and Virtual PBX, a US-hosted PBX provider. Both implemented our SIP solutions in their networks.

The fourth driver that we are seeing is increasing application-level threats. We continue to see a growing number of critical application vulnerabilities. Last quarter the Radware security operations center discovered a new critical vulnerability in the iPhone browser.

Radware APSolute Immunity offering not only protects against known vulnerabilities, but actually immunizes the network and its applications from new threats. This unique capability is right on the mark in providing a solution to our customer key concerns.

These four drivers -- cost savings and efficiency, business agility, next-generation application deployment, and increased application-level threats -- will continue to drive growth in our space, growth that we are confident we can capitalize on with our leading solutions.

In the second quarter, we continued to win awards for our products. Our DefensePro product won the Network Product Guide 2008 Product Innovation Award. This award joins a long list of awards our products have won in the last six months, including Best Application Security Solution from Infosecurity Magazine; Product of the Year Award for AppDirector from Internet Telephony Magazine; best load balancer distinction in head-to-head comparison by IDG TechWorld; and so on. These awards are further testimonial to the strength and competitive advantage of our product portfolio.

In addition NSS, an independent and well-known lab for security device testing, issued an exceptionally positive report on our DefensePro security product. NSS acknowledged the innovative security protection mechanisms, the accuracy of detecting intrusions and attacks, while letting all legitimate traffic pass uninterrupted. NSS concluded that DefensePro should be on every customer's short list and is one of the best attack mitigation devices ever tested in their lab.

Another validation for our market leadership is the last-quarter announcement of our strategic alliance with Juniper. As part of Juniper's exit of the Layer 4-7 market, Juniper evaluated several potential solution and products to offer its installed base as an approved alternative. We are proud to be chosen by Juniper as an approved application delivery provider.

Our partnership with Juniper centers on delivering high-performance networking solutions that customers require. Juniper is now recommending other application delivery solutions to their end-users' channels and channels that are looking for application delivery solutions.

As a result of this partnership, we were able to sign over 10 elite Juniper partners in the second quarter and see continued traction in the Juniper channel for our solutions. This is an excellent opportunity for Radware to take market share and strengthen our channel network worldwide.

To summarize, we have a leadership position in the market as it relates to our product and solution offering. Our revenues are now growing in the double-digit growth rate, and we believe we will be able to sustain and accelerate this growth as our solutions are fully aligned with both current and future market drivers.

We continue to make progress with our strategic relationships with leading vendors in the market, the latest example being Juniper, and we continue to grow our customer base. Coupled with a continued focus on managing our operational expenses and focusing on business leverage, we are committed to reaching operational profitability in Q4.

With that, I would like to open the discussion for Q&A.

(Operator Instructions) Mark Sue, RBC Capital Markets.

Thank you. Rory, maybe if you could help us understand how we should think about the revenue number for operating breakeven for Q4 and the moving parts you have to control the operating expenses, so that we do get a breakeven during that quarter.

Okay, as we are not providing specific guidelines, but in the previous call we were saying that we will target $24 million operational expenses as a metric. I think knowing our business metrics, you are able to get to the rest of the equation. Obviously, as I've mentioned, we will manage both parameters to an operational profitability.

Okay. Then just on the Juniper partnership, recognizing it is still pretty early, how should we look at that in terms of quantifying the opportunity and the subsequent ramp? Should we just look for more partnerships in the near term and maybe revenue opportunities next year? Or maybe if you could help us understand that.

Our partnership with Juniper is basically a meeting-the-channel type of partnership. So I think the first leading indicator is our ability to sign leading and significant Juniper channels worldwide, following by increased pipeline and actual business revenues from these partners. We are expecting business through the Juniper channel already in 2008.

Okay. Lastly, just on North America execution, if you could just help us understand where we can improve consistency so that would get us onward and forward in North America in some of the initiatives that you might be taking.

I think we are doing several initiatives. Definitely we are executing on the Juniper channel to bring more consistency to the numbers and not rely on large deals in a specific quarter. We are also putting a lot of focus on large enterprise and the carrier segment in this market to allow us to really break out the total revenues that this region produces.

Generally, we saw good improvement in Q2. We went back to more regular levels of business. But we think the potential is there, and we have a strong team there, and we believe we will be able to improve our own execution, and coupled with strategic alliances such as Juniper and others, to take it to the next level.

Okay, thank you. Good luck, gentlemen.

Stanley Kovler, Merrill Lynch.

Thank you very much. I was wondering if you can give us the typical breakdowns for the geographic mix, first, and talk about maybe some of the regional trends. Thank you.

Okay, about the international contribution, this quarter it was about 74% of revenues. The US was 26% of revenues.

Thanks. I'm just wondering, in terms of the guidance for operating expenses, it seems like on a constant currency basis you're expecting the OpEx to be pretty flattish. Yet you are trying to grow revenues. So maybe you can help us understand why you don't need to increase sales and marketing or the R&D expenses to drive that forward.

We are not looking on a neutral environment, but we are actually looking for $24 million in absolute terms. So basically, given the tougher environment for us because of the currency exchange, we will need to make more optimization on the operational expenses of the Company.

Got it. Thank you.

Ittai Kidron, Oppenheimer.

Hi, a couple of questions. Meir, with regards to the -- I think Roy mentioned that without the $800,000 exchange rate impact your operating expenses actually declined $1.1 million or $1.2 million sequentially. Yet your headcount has stayed flat.

Can you give us a little bit much more color on what is it that you are cutting in OpEx in order to get to where you need to get?

Actually, you know, this Company with about 600 employees and activities in 14 countries, you can optimize expenses in many fields. So we do whatever we need to do, first of all, to guarantee the success of the Company, not to cut any of our future activities that can sacrifice our future potential. This is on one hand.

On the other hand, you can find many other expenses that you can do better or cheaper, all to serve them. Starting from, for example, moving to better communication on voice over IP. That can cost you a lot.

As I mentioned, 600 employees in 14 countries; this is a significant cut. We can do much better on travel. When we have open position, we look how to fill this open position maybe by the existing headcount that we have.

So it's coming from many single items that each of them contribute a little. All of them together can bring us to the results expected.

Okay. A question for you, Roy. I mean, if you are going to stick to your fourth-quarter breakeven target, that implies that in the third and in the fourth quarter you would get similar sequential growth rates as you did, at the very least, in this June quarter, if we just kind of normalize it.

That implies that you get to revenue levers you really never got to as a company. So what is it, if you can tell me, what region do you expect needs to really outperform in order for you to deliver on that target? That is question number one.

Question number two, with regards to the ODS product, can you give us some color on progress in the sense of what percent of your Layer 4-7 business was ODS this quarter?

Okay, first of all, concerning the revenue levers, every quarter that we are doing now -- Q1 was a record Q1 for us; Q2 is a record level for Q2 -- always in the Company. And we're expecting that to continue.

So the fact that in absolute terms, yes, we will need to make a record quarter, that is not new to us. If you look on Q4 last year, it was a record quarter. Q3 before last year was also a record quarter for the Company ever.

So with the seasonality and the continued strong momentum that we have, we don't see that as a new risk factor, so to speak to our business. We've done it before, and we believe that the Company from the products and the solutions is getting stronger.

Again, as I've mentioned, our Q1 and Q2 numbers are record for that quarter specifically. Last year Q3 and Q4 were all-time record quarters.

Now, concerning your second questions about on-demand switch. On demand switch reception in the market is very strong for us. It's the best product launch we ever had. We believe with additional launches that we are going to make around it and extensions to it, we are going to see in '09 even stronger growth rates and acceptance of our solution.

Today, we are seeing strong migration towards on-demand switch. I would say that already 20% of the units we shipped in Q2 -- which is basically the first full quarter that we were selling on-demand switch -- were are coming from this platform. And going forward, we are seeing strong growth in that segment.

Okay, good. Can you just complete the answer on the first question? Is what region -- if you expect performance in one region needs to be higher than others in order to deliver on your fourth-quarter targets?

We are looking and getting feedback from all regions that they are targeting higher numbers.

Very good.

So it's not dependent on a single region execution.

Very good. Good luck, guys.

Irit Jakoby, Susquehanna.

Hi, thank you. So it looks like you had an up quarter in the Americas this time. I wanted to drill down into that a little bit. Is it execution mostly?

Also, what are you seeing in the environment in terms of the macro? Are you seeing lengthening sales cycles? Are you seeing cut in budgets that you would have done even better in a different environment?

Okay, so first of all, it's definitely that we improved our own execution. You know, the numbers that we are posting are too small to have a complete macro economic view on the American economy.

But definitely we are seeing also in our small world, we are seeing projects being postponed and canceled in several segments, especially in the financial segment and transportation segments. On the other end, there are some segments that continue to do very well and progress as planned, like the online business, for example, and other segments, healthcare, etc.

So we could have done definitely better in a better environment, but that is the environment that we have and there is plenty of opportunity for other in the Americas to grow.

In this given environment we are seeing progress in our operation. We are seeing bigger customers and larger opportunities. We will need to sell them better, highlighting the cost efficiencies, the cost reductions, and the business optimization that one can get utilizing our technology.

Okay, great. Turning to headcount, of the total headcount how many are based in Israel?

We have 284 based in Israel.

Okay, great. Thank you, that's it for me and good luck.

Rohit Chopra, Wedbush Morgan.

I have a few questions here. One, can you give the split between carrier and enterprise?

It was 30/70, carrier 30% and enterprise 70%.

So no change there. Your CapEx and depreciation?

This is $1.3 million both for this quarter -- CapEx $1.3 million and depreciation $1.3 million.

Then Meir, deal size in the quarter? Average deal size?

Yes, average deal size was $80,000. This is the same also as the last quarter.

Yes, same as last quarter. Then you mentioned something about a buyback. I was wondering if you could elaborate on that.

Chris?

This is Chris McCleary. How are you today? Good to talk to you. Listen, the background on the buyback is as follows. Yesterday, the Radware Board of Directors held its regular quarterly meeting. After digesting all of the information provided by management and our review of market conditions, the Board voted unanimously to reactivate our share repurchase program.

It's our intention between now and the end of this calendar fiscal year to take opportunities when they present themselves to us to repurchase our common shares, both in private transactions and in the open market.

Is there a size to that, Chris?

No, but I will refer you back to our original share repurchase program announced a couple years ago. We have about $39 million left on our court approval from the Israeli authority; and we have over $14 million left on the previous approval by the Board on the original share repurchase program.

Thank you.

(Operator Instructions) Ittai Kidron, Oppenheimer.

Yes, Chris, just to clarify then, then what's left of the buyback is aiding those two together, 39 plus 14?

No, the $14 million is a subset of the $39 million.

Okay, so $39 million is the cap that you can do effectively? Or, actually $14 million is the cap.

Well, $14 million is the original Board-approved target amount. The $39 million is what the balance is on the Israeli court approval.

Right, so unless the Board changes its mind, the Company can only do $14 million?

Yes, but I mean we are going to review this on a continuous basis. I will add that we will give update reports on our progress in this program on a quarterly basis.

Very good, thank you.

Jonathan Kreizman, Oscar Gruss.

A question related more to the business model in general. Looking at the operating expenses, we see the sales and marketing as a percent of revenues are about 68%, down from about 75% in the previous quarter. Can you comment a little bit on how these expenses are incurred? They are relatively high to what we see in other companies, similar to Radware. Thank you.

So, I agree with you, the overall sales and marketing expenses as a percentage of revenues are high. This is because we are investing a lot not only in our channel go-to-market strategy but also in direct touch with our large end-users and carrier markets.

We are investing not only in the core application delivery market but also in the security space. These activities and our push for growth is basically dictating this high level of expenses.

On the other hand, obviously, you can see that -- like last quarter we don't need to increase the level of sales and marketing expenses to get nice growth in our business and nice leverage in it. So going forward, we think there is a lot of places to continue to optimize on one hand the expense model, and on the other hand to continue to get leverage from our more competitive, more advanced product line in the market.

Okay. A follow-up question, can you please refer to the main cash flow highlights?

About this quarter, actually we burned $7 million in cash. Just to remind you, this last quarter we generated cash of $1 million. So, so far for the first half of the year we burned $6 million.

We are watching the cash flow very closely. One of the criteria for us handling the second half of the year, this is based on the cash flow. The target is to be breakeven in cash flow in Q4 -- that means not to burn in Q4 -- and to return to positive cash flow from Q1 next year as we have ever had.

Okay, so the operating negative cash flow was $7 million?

Yes.

Okay, thanks a lot.

(Operator Instructions) Speakers, there are no questions at this time. Please continue.

I would like to thank everybody for joining us today and looking forward to meeting you next quarter. Have a great day. Bye-bye.

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That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.