Radware Ltd (RDWR) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the fourth-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 a reminder, this conference is being recorded. I would now like to turn the conference over to your host, President and CEO, Mr. Roy Zisapel. Please go ahead, sir.

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

Thank you, Roy and welcome, everyone to our fourth-quarter conference call. First, I would like to read you 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 products, the timing and the 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. We report record revenues for the quarter and for the year 2008 and material decrease in our operating expenses due to major steps we have taken in this direction.

Revenues for the fourth quarter increased sequentially 6% and 2% year-over-year to a record of $24.9 million. Revenues for 2008 increased by 7% sequentially to a record of $94.6 million. The deferred revenues increased in 2008 from $18.4 million to a total of $19 million. The non-GAAP net loss for the quarter was $400,000 or $0.02 per share, improvement from loss of $4.3 million or $0.22 per share in the third quarter.

During the fourth quarter, we have decided to recognize an impairment charge to Covelight Technology in the amount of $2 million and to write off deferred tax assets in the amount of $2.6 million. We have also recognized a loss of $400,000 from the decline in the fair value of seven state funds due to the economic crisis.

Together with stock-based compensation expenses in the amount of $1.4 million, amortization of intangible assets in the amount of $300,000, that brings to a GAAP net loss of $7.1 million, or $0.38 per share for the fourth quarter.

We continue to maintain our non-GAAP gross margin. Fourth-quarter gross margin remained at about 80%, similar to all previous quarters of 2007 and 2008. During the second half of 2008, we have taken major steps in order to cut our operating expenses. As a result of those steps, our non-GAAP operating expenses in the fourth quarter decreased significantly to a total of $20.9 million, representing a decrease of $2.8 million compared to the previous quarter and a decrease of $4.3 million compared to the first quarter of this year.

The headcount for this quarter was 534 employees. The DSOs for the quarter were 49 days, down from 55 days at the end of the previous quarter and from 65 days at the end of 2007. Our cash position, including long-term deposits and marketable securities, totaled to $134 million at the end of the quarter and we have no debt.

During the fourth quarter, we have continued to activate our stock repurchase plan and repurchased 422,000 shares in a total amount of $2.6 million. That share count for the end of the year is 18.9 million shares. Cash position of $134 million and share count of 18.9 million shares represents $7.08 per share. Shareholders' equity is about $148 million.

Guidance. While the economic environment is challenging, we will continue to take necessary steps to reduce OpEx and work towards profitability. And now I would like to turn the call over to Roy.

Thank you, Meir. Our Q4 results reflect improved execution on both the revenue side, as well as on the operational expenses side. Given the global economic situation, we are very pleased with our worldwide revenue performance.

We continued to witness growth in our OnDemand Switch sales, which, in Q4, accounted for 50% of our total sales. In today's difficult economy, budgeting, capacity planning and return on investment are capturing center stage. Carriers and enterprises are looking for ways to advance their data centers to serve business requirements while reducing costs to save money.

Our OnDemand Switch family provides an excellent solution for these requirements. The OnDemand Switch was specifically designed to ensure long-term savings while providing customers with breakthrough performance, superior throughput and service scalability. This platform is setting a new standard in the application delivery market by providing customers with a new pay-as-you-grow, hassle-free, upgradeable and flexible solution.

This dramatically reduces the total cost of ownership and eliminates the risk of inaccurate capacity planning. Meaning that the customer doesn't need to estimate how much traffic they will have in a year, three years or five years. The customer deploys and pays for what is needed today and when the need comes, through a simple software license, without buying new hardware or redeploying its infrastructure, the customer simply upgrades the performance of their infrastructure.

This translates into very large cost savings on other purchases, eliminates upgrade project costs, minimizes change processes risks and significantly reduces ongoing operational costs. The result is a clear advantage for Radware in terms of total cost of ownership and ROI provided by the OnDemand Switch family.

On the operational side, we also saw significant improvement in Q4. In Q4, several of the steps we have taken earlier in the year concerning operational expenses started to show in our P&L. We were able to reduce operational expenses sequentially by $2.8 million on a non-GAAP basis while increasing sales. As we discussed, we are committed to operational profitability and we will continue to manage the growth of our business and our investments towards achieving that goal.

In Q4, we continued to win many new customers and added over 190 new customers to our install base. As you can see from the examples I am going to share, we do see continuous strong activity in the online business segment. Whether it is online ticket reservations, auctions, gaming or betting, we are seeing that overall this segment has been less impacted by the economic slowdown.

We have a very strong offering for this segment that covers their needs to provide always-on application availability and the best user experience possible. Our OnDemand Switches with the pay-as-you-grow business model, coupled with industry-leading performance introductions per second processing and response time, perfectly fits the requirements of this marketplace.

In addition with our DefensePro APSolute immunity offering, we are able to protect online businesses from the key risks they are exposed to -- denial of service attack that either bring down or significantly slow down their application and thus cause business interruptions, financial losses and more importantly customer churn.

One example of the value we bring with our security offering is Gmarket. Gmarket is the leading Korean online market space with 50 million registered members and more than 80 million hits per month. In order to secure its infrastructure and revenue-generating web-enabled services, Gmarket deployed 18 high-end DefensePro devices in a two-tier architecture.

The first tier deployed in the network perimeter, protects the infrastructure, the routers, the firewalls and servers against incoming denial of service attacks. The second tier deployed at a data center protects the Web servers and the applications against application vulnerabilities and misuse.

On the application delivery side, we announced ibibo, a leading social media business in India, which implemented Radware application delivery solution in its Bombay and Delhi data center. Ibibo has special application requirements to support high availability and scalability for its application.

Unlike competing solutions that require scripting to accommodate the requirements, our feature-rich AppDirector delivers an out-of-the-box configuration-based-only solution to these requirements. In the current economic environment, that immediately translates into lower total cost of ownership and better ROI for the customer.

Another example of the strengths of our OnDemand Switches and the clear total cost of ownership benefits they bring to our customers come from HRS. HRS, or Hotel Reservation Service, is Europe's leading online hotel reservation portal. HRS is a long-term Radware customer and in Q4, they upgraded their infrastructure to OnDemand Switches to enjoy faster performance, significantly lower operation costs and seamless future proof scalability. We do expect this quarter in Q1 to receive a follow-on order from HRS for our security solution, providing them with a denial of service attack protection and intrusion prevention for their leading online business.

The last customer example I want to mention is Nedstat. Nedstat is a large European leader in the website analytics. They had another vendor solution deployed for those balancing that fell short in providing global load-balancing between their data centers and was quickly nearing its performance limitation. Nedstat deployed Radware OnDemand Switches seeing immediate improvement in transaction response time, as well as gaining the ability to continue to scale their performance simply through applying a license.

Given the fact that Web analytics transactions are small in size, the OnDemand Switch provides a huge advantage as Nedstat can enjoy the full strength of the high-end platform performance in terms of transaction processing, even though their total bandwidth requirements are moderate. And thus, can save on the license costs. Again, the advantages of the OnDemand concept translate into meaningfully lower total cost of ownership and much faster ROI.

On the product front, we continue to win awards for our industry-leading solutions. During the fourth quarter, SIP Director won the 2008 Internet Telephony Excellence Award. Radware's SIP Director is the first to market, fully SIP-aware application delivery solution. It is designed to address six specific carrier application delivery requirements and answer the needs for and application in a converged web and voiceover IP application delivery environment.

We do see, across the world, strong growth in the deployment of collaboration and messaging applications to improve efficiency, improve productivity and save costs. These collaboration applications are based on the SIP protocol. Coupled with the growing usage of voiceover IP in both enterprise and carrier customers for cost savings, we do see a large growth in SIP traffic and consequently, in SIP application delivery needs.

For the reasons mentioned, enterprise and carriers continue to invest in this type of application, even in the current environment, as a result of the clear business benefits. We are leading this market with our SIP Director solution and we do see strong traction for this solution in 2009.

In addition, we had a major announcement regarding our OnDemand Switch (inaudible). OnDemand Switch 3 extends our application delivery platform up to 16 gigabits from a previous limit of six gigabits. This obviously opens up for us new opportunities in the market beyond what we had before. In addition, it takes the OnDemand concept even further to provide our customers with license-only performance scalability from zero to 16 gig with no hardware replacement, configuration changes or even a reboot. This, again, is a major CapEx and OpEx competitive advantage.

To summarize, today, we have a leadership position in the market as it relates to our products and solution offerings. We are delivering and announcing new solutions and products that increase our addressable market and open up new market segments for us. Our revenues continue to grow, even in this tough market environment and at the same time, our operational efficiency is increasing. We plan to continue to place a lot of focus on increasing the efficiency of our business while capitalizing on the market opportunities and thus, continuously improving our operational results. With that, I would like to open the discussion for Q&A.

(Operator Instructions). Mark Sue, RBC Capital Markets.

Thank you and good morning. Roy, perhaps if you could give us a sense of how we should see seasonality in this type of environment. With all the macroeconomic stuff that is going on, maybe how things might play out, should we see magnified seasonality during the first quarter? And then separately, how should we consider the bankruptcy of Nortel? I think there was some thought that you might be interested in the original Alteon assets. If you could give us some sense there, particularly since most of the other competitors have programs in place to replace the Nortel gear. That would be helpful. Thank you.

Okay. So, first of all, regarding seasonality in Q1, we don't want to give specific guidance, but, obviously, we don't believe that seasonality can be better than what we were used to in the previous year. So we believe, obviously, Q1 will be challenging and you should expect sales -- a reduction in sales sequentially, at least at the level that you have experienced in Radware in the previous years. Obviously, this market is more difficult.

On the other end, and as I have mentioned in my prepared comments, we do feel very strong on the competitive landscape and we believe that, in this environment, we will be able to grow our share.

Concerning your second question, and that also is a good point regarding the growth in our shares. Obviously, based on the Nortel bankruptcy, the Alteon install base is in a transition situation. Like I would say most of our competitors, we also have a replacement program in place that we are offering these customers, and we are aggressively working in the market to increase our marketshare. And I agree with you that Nortel's situation is one of the opportunities to do so.

Helpful. Thank you, Roy.

Stanley Kovler, Banc of America Securities.

Thank you, good morning. I was just wondering if you can help us understand the geographic trends and any impact from FX on your business? And then on the cost side, a question for Meir. Maybe you can help us understand how do you intend to scale down the OpEx, whether we should expect a similar increase in Q1 as we saw in Q4? Thanks.

Okay, so, first of all, the split was 26% of revenues came from the US and 74% came from the international. Of course, about the exchange rate that this quarter the exchange rate worked for us and about $900,000 is related to the exchange rate. So if the increase in operating expenses this quarter was about $2.8 million, so it was -- about $2 million is what, based on our activities and the rest, about $900,000, it was based because of the exchange rate worked in the right direction this quarter.

About operating expenses, as I mentioned in my script and also Roy [returned] about that we have continued to take steps in order to work toward profitability and toward profitability also means reducing expenses. So without giving a specific number, we expect that Q1 will reduce our operating expenses versus the Q4 that we have just announced.

Thank you. That's helpful.

Rohit Chopra, Wedbush Morgan.

Good morning, guys. I was wondering if you can provide depreciation and amortization and CapEx.

CapEx for this quarter was about $800,000 and the depreciation, it was $1.3 million. This is almost similar to what we had a quarter ago.

Right. I just wanted to ask you also, could you provide an enterprise service provider breakdown as well?

Yes. The enterprise, it was 79% this quarter and the carrier 21%.

Okay, so it's a big shift over there. And then also just two other questions here. Can you talk about how your Juniper channel has progressed over the last couple quarters? Especially if you could talk about since last quarter and also the number of salespeople you now have in the United States?

Okay, regarding the Juniper channel, we continue to see good traction across mainly North America and Europe. We do see more and more deals in the pipeline and we were able to close already some of them, but that is, as I have mentioned in the previous call, that is a long process with the channel, etc.

With Juniper itself, we are publishing almost every quarter a new integrated solution of Radware and Juniper and the one to come now is with their enterprise ZX switches and our load-balancer is, again, a solution for the data center. So we continue to work with them to extend the joint solution library and to encourage the partners to provide a full, integrated solution to the end users.

Regarding the US, we have today 16 in [quarter] carrying sales guys.

And that -- am I correct that you had 90 last quarter and you are down to 16 or --? What did you have last quarter, I think that is really what I need to get to?

Last quarter, I believe, we had the same number.

The same number? Okay.

I think the 90 is the total --

Total?

Total headcount we have in the Americas, including our R&D center in North Carolina, including other activities that are unrelated to the sales.

Thank you, guys.

[Peter Wright], [Paul Partners].

Just a couple questions. One, last quarter, you had to write down your long-term cash by $3.5 million. Is that still written down and I assume that you ultimately will get that $3.5 million back?

Actually what we got back this quarter, it was about $2.3 million we got back this quarter.

So you still $1.2 million left?

Yes.

And then second, what is your thought about your buyback?

About the buyback, as we said, the plan is activated. As we announced this quarter, we bought 420,000 shares back, reduced the share count to 18.9 and we will continue to do it based on both directions also in this quarter.

How much do you have left before you have to go back to, A, the Board and then, B, the authorities in Israel?

We have about $9 million before going back to the Board and before going back to the court. We have additional $25 million. So we are far away from this point.

Okay. And any thoughts on cash burn this year and next quarter?

Actually, we don't provide the cash burn forecast, but based on what we say that we work towards profitability and in our case, CapEx and depreciation are the same, so we expect to be breakeven in 2009 on cash, not to burn cash in 2009. It is not related to any specific quarter. We might have some fluctuation, but you can see also that the DSOs went down this quarter below the target for other years. So all the activation and the Company maintaining the cash is very positive.

And for the year, you expect to be at least operating breakeven on a non-GAAP basis?

This is the goal, this is -- we work in order to achieve that.

Okay, thank you.

Jonathan Kreizman, Oscar Gruss.

Hi, good morning. My first question is related to the cash flow on interest income. If you could please provide us with some of the cash flow statistics for the quarter -- operating cash and investment and financing-related cash operation. And just -- and regarding the decrease in financial income, just to make sure, I assume the kind of run rate you are seeing here is what you are expecting to see going forward?

About the interest -- financial income, this quarter, it was about $500,000. You understand that the interest rate in the world went down dramatically. So our focus for the remaining of 2009 to be in this range and even lower than that based on the current interest rate. The cash flow for this quarter was about $2 million actually negative cash flow.

Okay. And then the related cash flow for investing activities as a whole and financing?

I don't understand the question.

Just the complete cash flow --

We don't provide in this stage the complete cash flow, but I can tell you that investment activities, it was $7 million, but it include also the buyback that we have done in this quarter and we will issue the full cash flow report in our 20-F. Hopefully, this is during March or April.

Okay. Then a second question for me. Putting together your average quarterly revenue this year and assuming a ballpark gross margin of around a little above 80% where you pretty much stabilized, we are looking at an OpEx level of about $19 million, which, in my math, would generally keep you at an operating breakeven level. So are you intending to adjust operations to these levels and if so, what part of the operations would you need to impact (inaudible) in order to achieve this?

We don't want -- as we've said, we don't provide specific guidance. But as we have mentioned, we are working on increasing our revenues, even in this economic downturn and looking for these pockets of relative strength where we can sell effectively and at the same time, we are committed to run the business in a profitable manner. So we will adjust the operational expenses to the correct level of revenues to achieve our goals. Beyond that, we don't want to provide specific guidance for up revenues and for how mucho or for flat revenues, etc.

Okay and then a last one for me. Just following up one of the previous questions. There were some speculations over the quarter regarding a possible acquisition related to Nortel's assets. Does this have any [nature] behind it?

We don't comment on rumors.

I understand. Okay, thank you. That is all for me.

(Operator Instructions). Robert Katz, Senvest.

Hi, Roy and Meir. How would international sales break out between EMEA and APAC?

EMEA was about 40% and APAC 34% this quarter.

34%. And in terms of strength from different regions, what are you seeing in the market today?

I think overall it is -- we have no news I think to the audience in this aspect. The market is difficult across the world. Yet, there are countries that are, I would say, more immune, especially if they were having a more closed system. That is one. And second, there are countries that the governments are trying to put large investments into the market in order to bring back the economy.

The approach we are taking in our sales is, first of all, identify the markets that there is more activity because of the last two reasons I have mentioned. And in these markets, to work on segments, and I have mentioned one of them in my comments, that are still continuing business and there are even some segments that are enjoying or are strengthening in the current environment. So we do focus on these areas and I think the result of Q4 is an evidence for that. We were able to achieve a record quarter with this crisis all over the world, obviously, playing against us.

How did you see revenues throughout Q4 in terms of bookings and what are you seeing so far in Q1?

In Q4, we had the regular split throughout the quarter. We didn't see a difference in that. We thought -- we saw -- we, obviously, saw difficulty in closing deals. Also, we have mentioned that the foreign exchange helped us on the expenses side, but on the revenue side, it played against us this quarter by several hundreds of thousands of dollars for this quarter.

So in terms of seasonality -- in terms of linearity, I would say it was a normal quarter, just more difficult in order to close the pipeline that we had. So under regular terms, we would have expected higher revenues in Q4.

In terms of Q1, again, it is too early to say because we don't -- in order to know linearity, you need to know the final result. But so far, it looks to be -- again, given the economic environment according to what we understand and know from the past.

Thank you very much.

And Mr. Roy Zisapel, there are no additional questions at this time. Please continue.

Okay, I would like to thank all the Radware employees, partners and customers for their great efforts and contribution to our result and thank you, everyone, for joining us. Have a great day and we look forward to meeting you during the quarter and meeting you again in our next quarterly call. Have a great day.

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