Radware Ltd (RDWR) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware third-quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone, and welcome to Radware's third-quarter 2008 earnings conference call. Joining me today is Meir Moshe, our Chief Financial Officer. Meir will start the called by reviewing the financial results, and afterwards I will discuss the business highlights of the third-quarter results. After my comments we will open the discussion for Q&A.

Thank you, Roy, and welcome, everyone, to our third-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-F filed in June 2008. And now, ladies and gentlemen, for the financials.

Revenues for the third quarter were $23.5 million, up from $23 million in the third quarter of 2007. The non-GAAP net loss this quarter was $4.3 million or a diluted loss per share of $0.22 compared to a net loss of $5 million or a diluted loss per share of $0.25 in the second quarter of 2008. Our gross margin remained at the 80% range, and the non-GAAP operating expenses totaled to $23.7 million, down from $24.9 million in the second quarter of 2008.

The DSOs for the quarter were 55 days.

Our cash position including long-term deposits and marketable securities totaled to $137 million, as of the end of the third quarter, and we have no debt. The headcount for this quarter was 554 employees, down from 579 employees at the end of the second quarter.

Shareholders equity is about $154 million. During the third quarter we have purchased 458,000 shares in total amount of approximately $4 million. We will continue activating our stock repurchase program this quarter.

Guidance -- we expect to grow revenues next quarter. We reduced headcount and optimized other operational expenses. Therefore, we can reiterate our guidance for returning to operating profit in December quarter of 2008.

And now I would like to turn the call over to Roy.

Thank you, Meir. Our Q3 results reflect another step towards our goal of operational profitability in Q4. On the revenue side we have seen during the quarter continued strength for our international business and an expected softness in US results.

Q3 was a very important quarter for us, as we have achieved during the quarter several product and operational milestones that position us very well towards 2009 and beyond. In Q3 we realigned some of our investments in the business and were able to make significant progress towards our goal of Q4 profitability. We were able to reduce our operational expenses by $1.3 million versus Q2 and by $2.5 million versus Q1. More importantly, we have completed in the beginning of Q3 all the necessary steps to support our plans for Q4 profitability and believe we are on track to achieve it.

On the sales side we continue to enjoy the strength of our global business and global distribution. Our business is well balanced geographically today as well as across markets and market verticals. Therefore, we believe that in times of difficult economic environment in the US and even globally, our balanced model will allow us to continue to grow our business and increase our market share.

Based on the current economic climate, we see our customers making much more informed decisions and analyses targeting clear business benefits. We see several drivers for IT projects, even in this environment.

The first is cost reduction and efficiency in business and IT operation. Our customers are looking to reduce the cost of their infrastructure, do more with less and protect their IT investments. Radware is unique in this market with our OnDemand Switch concept. OnDemand Switch provides pay-as-you-grow models for software licensing, delivering the best CapEx and OpEx savings in the industry and full investment protection for future growth projects.

Our ability to free our customers from the huge cost involved in new hardware projects, forklift upgrades, et cetera, is resonating extremely well with IT buyers and channels.

The second trend we are seeing is the deployment of new applications for cost savings. Customers are deploying today more applications for Voice over IP, videoconferencing and collaboration. As enterprises and carriers deploy more of these applications, there is a growing demand for availability, acceleration and security for this. We see Voice over IP, video over IP, videoconferencing as key drivers for cost reduction in the enterprise and carrier markets.

Our SIP Director is by far the leading solution in the industry, and we continue to get strong industry endorsement of this solution.

The third driver that we're seeing is increasing application-level threats. We continue to see a growing number of critical application vulnerabilities. Our APSolute Immunity offering that not only protects against known vulnerabilities but actually immunes the network and the applications from new threats, is right on the mark to provide a solution to this concern.

These drivers -- cost savings and efficiency, next-generation application deployment and increased application-level threats -- will continue to drive projects in our space and we are confident we can capitalize on this.

In Q3 we continued to win awards for our products. Our SIP Director was awarded Internet Telephony 2008 Innovation Award, and it's already the third product award this year for SIP Director, further emphasizing our technology leadership in this space. In addition, our AppDirector won the 2008 Network Products Guide award for the best in global load balancing.

On the alliance side we continued to be very active and became a VMware Technology Alliance Partner with our newly introduced product, Virtual Director, and our AppDirector product line. We stand to benefit from the growing trend of virtualization. We are going to put emphasis on virtualization for 2009, as it plays very well with the current economic climate.

We also continued to develop our partnership with Juniper, and recruited around 15 Juniper resellers that are now carrying the Radware product portfolio. In parallel, we plan to release more joint solutions with Juniper around delivering high-performance networking solutions that customers require.

On the customer front, we continue to win many new customers. Last quarter we added over 200 new customers to our Group. For example, China Eastern Airlines, one of the leading airlines in China, selected Radware to handle all application delivery aspects in their global network. They deployed the full suite of our APSolute product line, including the AppDirector, AppXcel, LinkProof, SecureFlow and DefensePro.

Another example is IRESS, a supplier of share market and wealth management systems. IRESS is handling very time-critical financial information, and they required an application delivery solution that would ensure the high availability of their data centers across multiple sites globally in Australia, in the US, in Europe and greater investment protection as new customers for IRESS are sourced. IRESS's previously implemented solution was functional, but it was both expensive to maintain and limited in the ability to deliver future business requirements. IRESS chose Radware OnDemand Switches to enhance their business continuity in their data centers. We simplified their network topology and provided their customers with the assurance of always-on financial information.

Going back now to the business discussion, we are very focused on creating shareholder value. Our strategy consists of a clear focus on today's key concerns of our customers for cost savings and IT (inaudible) [efficiency]. Central to our strategy are our newly introduced on-demand switches and our Business-Smart data center strategy. While we see the global economic uncertainty, our solution provides unmatched benefits for cost savings and IT optimization. Therefore, we plan to grow our market share.

As part of this strategy, we are putting more focus on our alliances with other vendors to provide integrated certified solutions for our customers and prospects and leverage other vendors' sales and marketing infrastructure to our benefit.

Looking on the gross margin line, we see a good opportunity for future gross margin expansion. Given that our margins are holding up even with the introduction of OnDemand Switches, as our customers will start to take advantage of the license-only capacity and service upgrade options on their existing platforms, we will be able to enjoy a close to 100% gross margin on these upgrades, potentially increasing our gross margins in the future.

On the operational expenses, we took already at the beginning of Q3 the necessary steps to reduce our operational expenses, and we plan to continue to do so in the future whenever needed and to manage our business to profitability. All these steps together will provide great shareholder value and make Radware a global leading company in the application delivery space.

To summarize, we are focusing our sales efforts on solving immediate customer needs for cost savings and IT efficiency. Our revenues are growing year over year and we believe we will be able to sustain this growth as our solutions are fully aligned with market drivers and needs.

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

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

(Operator Instructions) Rohit Chopra, Wedbush Morgan.

I had three really easy questions, then I wanted to ask you where you see further cuts. But can you give us the CapEx and depreciation number, the split between carrier and enterprise, and also the geographic breakdown, if you don't mind?

Yes, sure. First of all, the CapEx was $700,000 this quarter and depreciation $1.2 million. The split between enterprise and carrier, it was 70/30; 70% was the enterprise, carrier was 30%. And geographic split -- it was the US 26% and rest of the world 74%.

74%. Then what I was trying to get is, let's assume that the revenues only grow modestly next quarter. It looks like you have somewhere around $4 million or $5 million in OpEx that still needs to be cut to get to operating profitability by current quarter, I guess as you exit this quarter. Is that all going to be coming from sales and marketing and R&D, or is there some assumption of some big revenue growth?

We don't want to speak specifically on the numbers, but we are planning on revenue growth as well as cost-cutting. As I have mentioned, a lot of these steps were already taken beginning of Q3, but their impact in the P&L will be seen only in Q4, and especially in Israel and Europe. If you do something on headcount, for example, given termination periods, severance pays, et cetera, the impact is delayed roughly by a quarter.

Okay. Thank you.

Irit Jakoby, Susquehanna.

So actually to follow up on the last question, it seems like revenues in the Americas were down significantly year over year and somewhat quarter over quarter. When you talk about the cuts to operating expenses, is a large part of it in what you're seeing in the US organization?

We have done across the organization. I would not say that we have done specifically in the US. I think in the US, obviously, we have to reduce our expenses in line with what's going on currently in the market and take a more cautious view, obviously, on revenue growth, especially in some of the market verticals. But I believe we have done the cost savings across the Company, and I think we are now better prepared, not only for Q4 but also for 2009 climate.

Okay, so in the US, have you already done the headcount reduction, or is that something that is still in progress?

As I've mentioned, we have done everything beginning of Q3 already.

Okay. And then, given the climate in the US, I wonder how that is affecting your partnership with Juniper and potentially with others?

We don't see that impact directly. On the channel side, we continue to recruit Juniper channel. I think, for us, as I've mentioned, as part of the strategy, especially in this environment, joint solutions, integrated solutions with other vendors are a way to actually grow or get more customers and leverage other vendors' marketing channels, sales channels. So we continue to work on this very hard.

You are going to see additional joint solutions with Juniper that are going to be published this quarter, so I think we are progressing well with Juniper in the Americas, and as well as internationally.

Okay, and finally, when do you expect that Juniper will be meaningful to revenue and to the -- given the macro backdrop?

Our alliance with Juniper is a meeting-the-channel type of alliance, and Juniper is not a Radware customer directly. They are recommending our solution. They are a preferred application delivery solution. Their channels are buying directly from us.

So we are seeing in our pipeline more and more deals that are coming from Juniper channels, and some deals we already closed for replacing of an existing Juniper infrastructure with a Radware infrastructure. And we're seeing this opportunity growing not only on replacement of existing Juniper load balancers but also as it relates to their SSL VPN product, to their Intranet controller, to their Ethernet switch product lines, the ability to sell joint solutions.

Okay, that's it for me, thank you.

Mark Sue, RBC Capital Markets.

Roy, just a thought on whether or not you could do things dramatically different to stimulate demand with your partnerships, whether or not you could consider equity ownership or -- so that you can not only just have channels in common, but a real drive in terms of motivating your partners to sell Radware equipment. Any thoughts there? I'm not just talking about Juniper, but also maybe, perhaps, IBM.

We don't specifically speak about our negotiations with other vendors or our strategy on equity. But I think the Company Board and the management feels that there is a lot of potential in our share price and Company valuation. And I think the statement that we've made about the share repurchase is an evidence for us. So definitely we are seeing a big potential for appreciation there if we will deliver the expected results and what we have committed to.

Concerning offering equity as part of a stronger strategic alliance, I'm not sure that's what's needed to do that; but we are working, as I've mentioned, on strengthening the relationship in other manners.

And also, Roy, is there a void on the Board at the moment and you're looking to add? Maybe if you could give us (technical difficulty) kind of help at Radware?

I didn't hear your question very well. Can you please repeat it?

Sure, sorry about that. Are you looking for a new Board member to add? I think you might have a void at the moment. And maybe the background of the individual that you might be looking for?

We didn't start an official search yet for a new Board member. Probably in the next quarter or so, we will do so.

That's helpful. Thank you, Roy; thank you, Meir.

Peter Wright, PAW Partners.

Yes, I have a few questions. First, could you talk about, I guess, cash, it was down about $11 million, what are the different components of that, start there?

Yes. The cash is down $11 million, as you said, but only $4 million is the result of operational loss. Additional $4 million is due to the buyback, and another $3 million is a balance sheet reclassification of mark to market of corporate bonds that we invest.

I'm sorry; so $4.4 million was buyback. How many shares did you buy back?

$4 million, four. $4 million, this is the buyback. $4 million, this is as a result of the operational loss. And $3 million, this is the balance sheet reclassification.

Okay. So you expect ultimately to get that $3 million back?

Yes.

How many shares did you buy back this quarter?

As I mentioned in my comments, it was 458,000 shares.

Okay. And so, the shares outstanding showed 19.34 million, which was the average for the quarter. Where is it coming -- where do you think it will be going into the next quarter?

First of all, without another repurchase plan, it should remain the same. So it will be deduct on the level of shares that we will buy back in Q4.

Okay. And, what is your current plan on the buyback?

Just as I said, that we continue with our buyback plan. We do not disclose the terms of our buyback plan, just not to give leverage to anybody on other.

How much do you have left in your buyback plan? How's that?

We have court approval for another $10 million. We have another $25 million court approval that we can use it, in our opinion. And we can submit -- this is a process of about two or three weeks to get additional approval as needed.

I'm sorry, you have 35? I just want to make sure. You have $10 million, or $10 million plus $25 million, or $10 million out of the $25 million? I'm confused.

No, we have $10 million plus $25 million.

Okay, so you have $35 million (multiple speakers).

Peter, and basically we can also submit another court approval. But as I said, we don't disclose the amount of shares that we are going to buy and the other terms, how many shares, how many days, what is the price (multiple speakers) et cetera.

That's fine. And then, on operating expenses, your GAAP operating expenses went up from $26.7 million to $27.6 million; so it was up $900,000. Could you talk to that, and also talk to what you call a non-recurring retention expense of $2.2 million? What happened to the GAAP operating expenses and non-GAAP operating expenses?

This is -- the non-GAAP operating expenses, this is mainly including the expenses which is related to the option, and this time what we are talking about, the $2.2 million, related to not recurring retention expenses. This amount also -- it's $800,000 cash and $1.4 million which is only option expenses.

And then both amounts, the $2.2 million related to the Chairman of the Board following his decision not to stand for reelection for additional term and, according to his original compensation agreement approved by the shareholders.

I'm sorry -- $1.2 million is related to Chris McCleary leaving?

This is all the $2.2 million. As I said, $800,000, this is cash; and $1.4 million, this is the value of the option.

And, when does that get paid out?

Which one?

Well, the $800,000 in cash.

This is based on his agreement we will pay it until the end of next year.

So it will be a cash payment, but not an operating expense. So you are saying that, ex --- all right. So what happened to the non-GAAP operating expense from June to September?

As I said, the non-GAAP, it's $24.9 million in Q2, versus $23.6 million in this quarter. So this is $1.3 million down in this quarter, the non-GAAP.

And what is your expectation on the non-GAAP operating expense for December at this point?

This is, as we said, based on our guidance, that we expect to return to profitability, both from increasing revenues and the Q4. This is our strongest quarter, and what we see in the pipeline -- what we record in the book in the month of October, and reduction in expenses. Reduction in expenses is also related to currency exchange rate, et cetera.

But all the steps that should be taken have been taken early in Q3, and we believe we can deliver operating profit in Q4. We cannot -- we don't give more breakdown on those numbers.

And just to follow up, once you contribute operating profit in Q4, should we expect this Company to continue to deliver operating profit? Or, will there be a loss situation back in first quarter?

We haven't planned and approved our 2009 plan yet, but our goal, this is to sustain and to increase our profitability. I cannot relate it in this stage to any given quarter, but the plan for 2009 should be, in our view, to keep operating profit and even increase it.

And then, each and every quarter, I assume, is the plan, is the concept?

Peter, we didn't say each and every quarter. This statement was on the full year, but we don't give guidance right now. And as Meir mentioned, we don't have even an internally approved budget yet for next year. So probably on the next call, we can update on that.

Okay. If you are successful in generating or not losing operating profit this quarter, should we suspect that the cash balances, ex-any buyback, will rise?

In Q4?

Correct.

In Q4, ex-buyback, it should be breakeven -- maximum burning of $1 million to $2 million, just because the revenues that we record in Q4 will be collected, in general, in Q1. So this is the maximum.

Thank you.

Stanley Kovler, Merrill Lynch.

I just wanted to ask about the outlook, a couple more questions here. Specifically on the revenue side, are you saying that we shouldn't imply that you are going to get a substantial increase in revenue? Because it seems like there's a pretty wide gap to fill, as far as covering the operating expenses. So it looks like you probably have to grow both revenues pretty dramatically and continue to cut operating expenses to generate your breakeven or slight profitability that you're targeting. So I was wondering if you could speak to that as well.

I don't use adjectives, but we will need to grow revenues and to reduce expenses. So it's not going to come only from expenses, like you said; otherwise, we will need to cut very, very significantly. So our plan for Q4 is to grow revenues and, at the same time, to show a reduction in expenses. And, as we've mentioned, we believe we are on target for that.

So, maybe you could talk about the confidence that you have as far as the top-line. The US seems to be in a relatively stable mode. How do you feel about Europe, in particular? Is that really where you think that the revenue growth will come from? Some of your competitors were actually talking about some weakness that they experienced in Europe, and I was wondering if you could discuss the differences that you're seeing there.

Okay. First of all, for Q4, we expect all of our regions to grow in absolute numbers. Second, Europe, it will as well, also in Q3. Obviously, we are monitoring the situation. We hear the comments, in the overall economy. But so far, our business in Europe is progressing well.

The only maybe problem for us in Q4 in terms of the strength of the increase in Europe would be the euro currency that dropped versus the dollar. But we still -- even with that, we are forecasting a growth in our European numbers in Q4. But in Q3 Europe behaved according to our plan, and we had actually very nice wins there. And so is Asia-Pacific.

So if I get that right, then your sales are denominated in local currencies, in Europe and Asia?

In Asia it's in dollar. Only in Europe, it's in euros.

Got it, that's helpful. And just last question is on the US, what's the size of the sales organization that you have left, and what were the changes made there?

In total in the US we have today close to 90 people, and the key changes that we've done were mainly on the corporate staff left on the field. So in the field we still have a similar sales organization with sales in AFEs focused on geographic location with inside sales and channel development managers helping them to develop the region.

We mainly took action on nonperforming sales teams. We didn't change the whole organization. And as I've mentioned, we have reduced our corporate expenses there.

That's very helpful, thank you very much.

(Operator Instructions) Joe Park, Oppenheimer.

I just had a few questions here, hoping you can help us answer, address some of these issues we were having. In terms of your gross margin, you mentioned that you expect this to expand. Can you please give us some color on some of the drivers there? And how far do you think this can go up in the near-term?

Okay, so on the gross margins, what we've mentioned is a future possibility for gross margin expansion, and that's based on our OnDemand Switch product line. We changed things much within production of OnDemand Switch 1 and 2 in last month with the introduction of our high-end OnDemand Switch 3, we've changed basically the way that customers can buy from us the product.

With our OnDemand Switch, a customer can buy a load balancer, application switch, a security switch from us. And when he needs more capacity, when his demands are growing, instead of replacing and buying new hardware from us like you would normally do from other vendors and from our competitors, he can put in a software license key that will expand the capacity of the device.

That means that every switch that Radware sells is a high-end switch, but it's limited by software to the capacity that the customer purchased from us, which means that up front we have the biggest hit on gross margin. And as our customers will need more application services, or else they will need more capacity for their environment, they will come back to us and purchase software licenses, which obviously carry a very high gross margin, close to 100%.

Right, right. And so, how many customers out of your base do you anticipate actually upgrading within the near-term? Or is it something that you're seeing further out?

First of all, all the majority of our new sales are of this OnDemand Switch, and every quarter that proportion, we believe, will grow and not only for existing customers that will purchase the OnDemand Switch as an upgrade to an existing infrastructure or replacement of the cycle, but also the new sales that we do. And I have mentioned, we've added over 200 new customers last quarter.

Then, you know, the pace of them coming back and purchasing new services and new capacity is yet unknown to us because of the short time since the introduction. But from what we know, customers every three years are upgrading their infrastructure. So we believe that, definitely, because they don't need to buy new hardware, this upgrade cycle of buying new licenses will become much shorter.

Okay, great. And then, in regards to your absolute headcount, any idea of what your anticipation would be for 4Q?

For Q4?

Yes.

Actually, this is a similar number that we have right now, this is -- 554, in this range.

Okay, got you. And then, assuming that you're able to reach your operating profitability in Q4, what do you anticipate your non-GAAP effective tax rate to be?

This is about 5% to 6% of revenues.

And just last question. I know you are not giving official guidance for 2009, but can you talk about some of the visibility you have in terms of order growth and just customer trends and demand you're seeing?

So, so far, we -- first of all, a general statement on our business. Our visibility is limited to between 60 to 120 days, which is generally our sales cycle. We don't have [frame] agreements with our customers, or commitment for purchases over time. That's on products.

The only place that we have good visibility on is our service contracts; and renewal of these service contracts, that's done in very high percentages, over 90%.

Concerning the specific signs we're seeing from the market, so far we are not seeing specific signs of projects that are being canceled. But we believe it's simply because of the short time and because people are now working and preparing their next-year budget. So obviously, we do expect in specific segments the IT budget will be hit considerably.

But, as I've mentioned in my prepared comments, our products can allow and can provide huge cost savings. And we are targeting our efforts to these applications and these solutions that are providing our customers with immediate cost savings.

We believe that that type of applications will be more immune to the recession and to the IT budget cuts. But as I've mentioned, we don't have, yet, concrete evidence from the market.

Okay, that's great, thanks a lot.

Jonathan Kreizman, Oscar Gruss.

Hi, thank you for taking my question. This is (inaudible) on behalf of Jonathan Kreizman. On the second-quarter conference call you mentioned that you target cash flow to break even in fourth quarter. Considering this quarter results, do you still hold to the fourth-quarter target? And, if not, when do you see cash flow breakeven now? Thanks.

As I comment for other question, this call, this quarter, the fourth quarter, our plan, this is that burning will be around $1 million to $2 million based on the focus that we have right now. And if we will reach the profitability in Q4, so Q1 will be breakeven and might generate some cash on the operational level.

Right. Thank you.

(Operator Instructions). There are no further questions. Please continue.

Okay, I would like to thank everyone for joining us, and we are looking forward to meet you again in the fourth-quarter call. Have a great day.

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