Radware Ltd (RDWR) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 2009 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and 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 Chief Executive Officer, Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone and welcome to Radware's first-quarter 2009 earnings call. Joining me today is Meir Moshe, our Chief Financial Officer. Meir will start the call by reviewing the financial results and afterwards, I will discuss the business highlights of the first-quarter results. After my comments, we will open the discussion for Q&A.

Thank you, Roy and welcome, everyone, to our first-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 referred 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 Form 20-F filed in March 2009.

And now, ladies and gentlemen, for the financials. We report $20.5 million revenues for the quarter, an additional material decrease in our operating expenses due to the major steps we have taken in this direction already last July and now showing in the expenses report. Revenues for the first quarter decreased 8% year over year due to the world weak economy. The deferred revenues continued to increase in the first quarter.

The non-GAAP net loss this quarter was $2.2 million, or $0.12 per share compared to a net loss of $6.3 million, or $0.32 per share in the first quarter last year. Acquisition expenses in the amount of $2.5 million, together with stock-based compensation expenses in the amount of $1.3 million and amortization of intangible assets in the amount of $100,000 bring this quarter the GAAP net loss to $6.1 million, or $0.32. We continued to maintain our non-GAAP gross margin. First-quarter gross margin remained at about 80%, similar to all previous quarters of 2008.

During the second half of 2008, we have taken major steps in order to cut our operating expenses. As a result of these steps, our non-GAAP operating expenses in the first quarter decreased significantly to a total of $18.5 million, representing a decrease of $2.4 million compared to the previous quarter and a decrease of $6.7 million compared to the first quarter last year. The devaluation of the US dollar versus other currencies, mainly the euro, caused our financial income to decrease by $400,000.

The headcount for the quarter was 509 employees. The DSOs for the quarter were 56 days compared to 55 days at the end of the previous quarter.

On March 31, we completed the acquisition of the Alteon business from Nortel for the amount of $80 million in cash and service and warranty obligations. We see this acquisition as a huge opportunity for Radware and plan to continue to sell this product under the Radware Alteon brand and invest in their development, leveraging mutual strengths of both Radware and Alteon technology experience and customer base. Our cash position, including long-term deposits and marketable securities, totaled to $140 million at the end of the quarter and we have no debt. $18.4 million out of the $19.8 million decrease in cash related to the acquisition.

During the first quarter, we repurchased approximately 43,000 shares in total amount of $250,000. That sharecount at the end of the quarter is 18.9 million shares. Shareholders' equity is about $140 million.

Guidance, Nortel [didn't plant] Alteon business as a separate profit center. In addition, significant revenues derived from bundled contracts, so split methodology isn't clear and accurate. Also, expenses were allocated based on Nortel process that are not in line with how we run the business and allocate resources. As a result, past information isn't accurate and we don't want to set expectations based on that.

We have an aggressive plan and hopefully, in a quarter or two, we will be able to discuss information further based on actuals that are more relevant to Radware. We reiterate our commitment to moving the business back to profitability sometime in 2009. We believe that Alteon business will ease and speed our growth to return to profitability. And now I would like to turn the call over to Roy.

Thank you, Meir. Our Q1 results reflect our continuous business improvement towards profitability. Given the global economic situation, we are pleased with our performance on the revenue side across the world. Yet, the larger development in our business and the most impactful is the acquisition of the Alteon productline from Nortel.

On March 31, we completed the acquisition of the Nortel Layer 4-7 application delivery business for the amount of the $18.4 million. Included in the acquisition are Nortel application delivery products, certain related intellectual property assets, inventory and service contracts, in addition to a number of employees related to this business.

We acquired the Layer 4-7 business, formerly known as Alteon, from Nortel for the large install base and channel footprint. There are thousands of Alteon customers around the world, including AT&T, Verizon, France Telecom, GEICO, BNP Paribas, Samsung, Westpac bank, [the MTA] in New York, Hyundai and many more.

We view that the acquisition, especially in the current economy, is an excellent way to strengthen our business, leverage our technology strength and our support infrastructures to increase our sales and marketshare in the application delivery market. Yet, the Alteon productline had not evolved at the same pace as other products within the industry. As a result, many customers over the last several years reduced the purchase of new Alteon switches and some replaced their Alteon install base with other products from other vendors. We believe we have a comprehensive plan to address these problems, reigniting confidence in the productline and making it, again, a leading product in the industry.

Our plans are simple and focused -- maintain the Alteon customer base, provide world-class support, invest in the productline and grow the sales and service revenues with these customers by answering their current and future needs in application delivery and application security.

To execute on this, we have three main initiatives. The first initiative is around people and expertise. We are adding 120 people to the organization that are dedicated to the Alteon productline. Over 80 people in R&D will be dedicated to advancing the productline and executing on our roadmap for Alteon. Over 20 people will be dedicated support personnel that were added to our technical support centers across the world to guarantee we provide the best support and customer experience possible.

The second initiative we have is around customer support. We implemented a five-year product support plan for all current Alteon products, reinforcing our commitment to the Alteon productline and securing the investments of the customers in the Alteon technology. This move was accepted extremely positively by the customer base.

The third initiative is around product and technology. We committed to a well-defined roadmap for Alteon productline, including the release of the new Alteon 10 gig solution and the addition of acceleration and compression capabilities to the productline. We plan to continue to leverage the mutual strength of both Radware and Alteon technologies and experience to provide customers with the next generation of more reliable, high-performance and feature-rich solutions.

In the last several weeks, we conducted a large-scale customer and channel outreach during which we met our customer base and discussed with them our plans. We are very encouraged by customer reaction to the acquisition and believe it provides Radware with an excellent platform for growth, even in the current economy.

In addition, as part of the deal, we have signed an OEM agreement with Nortel. We are partnering with Nortel on customer transition, as well as leveraging their strong customer relationships across the world to continue and sell the Alteon productline to prospects and customers. While as Meir mentioned we are not ready yet to discuss specific revenue targets for the business in Q2, we strongly believe that the Alteon acquisition will allow us more easily and quickly grow our business and achieve profitability.

On the operational side, we continue to benefit from the steps we took in Q3 '08 and in this quarter, we saw the full impact in the P&L. Our expenses declined $2.4 million from Q4 and $6.7 million from Q1 last year. Obviously, with this acquisition of Alteon and the planned addition of 120 employees and contractors, our expenses will grow in the coming quarters. However, we believe we are on track to profitability as we discussed on previous calls.

In Q1, we continued to win many customers and added over 150 new customers to our install base. Some of the customers that contributed to our revenue this past quarter are ConAgra Foods, eBay, TELUS, Corning, Bloomberg, (inaudible), Telekom Austria and Fiat.

On the product side, we continue to advance our productline. We are very satisfied with the pace at which we are progressing and we will continue to see major product releases this year and next. The past quarter, we announced our new DefensePro productline, now also based on our own demand switches. The new productline extends the intrusion prevention and denial of service protection performance to 12 gig, the highest in the industry. This performance increase is more than doubling the throughput and delivering four times the transaction processing, provides us with the ability to increase our addressable market with new carrier opportunities, large enterprise data center deployments and more.

The new productline, based on the OnDemand switches, allow our customers to scale and grow their performance needs in real-time based on the traffic and business needs. And they can do that without installing new hardware, redesigning their infrastructure or having any downtime.

The OnDemand concept reduces the overall IP investment and operations management cost needed to secure the infrastructure. All of this while allowing for significant scalability and increasing performance to answer traffic peaks and transaction growth.

As part of this release, there are several major new capabilities for our behavior and security that allow our customers to protect data centers against existing and emerging threats. Our unique behavioral-based technology not only detects attacks, but automatically generates real-time signatures. This technology prevents zero minute and non-vulnerability-based threats, which have the potential to misappropriate service without a vulnerability.

The new DefensePro productline achieved this without blocking legitimate user traffic and without the need for human intervention. The strength of the productline has been recognized by the Info Security Products Guide, which named DefensePro the winner of the 2009 Global Excellence in Intrusion Prevention Solution. This award is a strong endorsement to the fact the DefensePro is ahead of the curve in terms of best-of-breed products capable of providing the highest security in intrusion prevention.

In addition, Gartner, a leading analyst firm, has moved Radware to a visionary position in the latest magic quadrant for IPS. Gartner advises Radware has a focus on behavioral assessment, which is unique in the IPS market. When combined with traditional detection mechanism, this puts Radware in a strong position to address emerging threats. And in addition, Gartner further states the DefensePro intrusion prevention system has well-advanced safeguards for rate-limiting and session initiation protocol protection.

These are very strong words, speaking for the innovation and leadership we have in the space. We see application security and denial of service protection as a clear growth opportunity for us in the coming year, now coupled with the growth we expect in application delivery.

To summarize, we today have a leadership position in the market as it relates to our product and solution offering. With the Alteon acquisition, we have now an even larger customer base and channel footprint that enable us to profitably grow our business and leverage our leading technology for marketshare gains. We plan to continue to put a lot of focus on increasing the efficiency of our business while capitalizing on available market opportunities and thus continuously improve our operating results.

Before I open the discussion for Q&A, I would like to thank our customers and partners for their continued support and trust. This quarter, I would like to rank the Radware team for all the efforts, wisdom and dedication they put in place to sign and execute the Alteon acquisition. It was not an easy process to complete, especially while in parallel continuing to deliver on the ongoing business. Yet, we strongly believe this is a major strategic move on our part that will strengthen considerably our Company for the future. With that, I would like to open the discussion for Q&A.

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

Roy, do you have a sense of what Alteon posted a revenues in 2Q of last year and are there any differences in how Nortel recognized revenues and how you will recognize revenues? If you could help us there.

We have some numbers, but those numbers are not audited and Nortel was not running it as a separate business unit. So we have some assumptions, but it will take us more time as we are doing the outreach and understanding with the partners the exact order, etc., where it stands.

In addition, currently, we don't know how much of the business we will sell directly to customers, channels, distributors and how much will be sold from Nortel. And obviously, our pricing through Nortel is much lower than the distribution price that can also affect the final figures.

Okay. Maybe that aside, can you touch on just top-line visibility for the core Radware business, how you see end demand as we kind of move into what is typically a seasonally better quarter for you? That might be helpful.

So far, we are seeing encouraging signs on the sales side. We do expect on the Radware legacy productlines for an up quarter. And obviously, I think, as we are meeting more and more customers from the Alteon side as well, there are some opportunities early on in the cycle, but some opportunities for cross-selling that we are discovering. So all in all, we feel good about the business.

Lastly, Meir, the increase in inventories, is that mostly or all of that related to Alteon?

That's correct. This is related to the Alteon business and just below $2 million, which is related to the acquisition of the Alteon business. Part of that was the acquisition of the inventory.

And overall, Meir, maybe just your thoughts on when profitability or actually breakeven for us might come and any thoughts on timeframe for that? That would be helpful. Thank you.

This is exactly as I said in the call. It will be, as we commented, in 2009. We don't want to commit on the specific quarter, but taking into consideration the high gross margins that we make, so you can understand that every incremental million dollars, if we are taking into consideration our gross margins, which is 80%, 8-0, will contribute $800,000 to the bottom line.

So it is achievable, but we don't want to commit on a specific quarter. Either it is going to be second or third or fourth quarter, but as also Roy commented, we see positive signs and we expect an up quarter for the Radware legacy on top of the Nortel. But it is too early in the quarter to predict for the second quarter for visibility.

That's helpful. Thank you, gentlemen.

Rohit Chopra, Wedbush Morgan.

Hi, guys. I had three housekeeping questions and then I had some questions related to Nortel. First, could you provide the geographic split between the US, EMEA and APAC?

The US, it was 24% of the business and 76% was the international.

D&A, CapEx, enterprise and carrier?

About enterprise, it was 70% carrier, about 30% of the business. About CapEx this quarter, it was $1.6 million. Depreciation, almost similar, $1.5 million for the quarter.

Okay. And then I was wondering if you could tell us how many customers you actually got with the Alteon acquisition?

Okay, so under the information we got from Nortel, this is around 2000 customers in the last three years, but we don't -- we didn't get from them information beyond three years. It is important to note that Alteon, as a product, was sold since '97, early '98. So we believe there is a meaningful install base; although some of it dormant and thousands of customers that are still using the equipment. The figure I gave you from Nortel is the total customers they sold to. As I have mentioned, some of those customers have left, replaced the Alteon productline. But any case you take it, it is thousands of new customers for Radware.

Is there any way to get how many customers there are who are revenue-generating? So for example, still paying maintenance revenues or something like that?

So that is exactly the key point behind our very strong and worldwide outreach campaign to the customers where of the executive team and the field team ongoing and meeting Alteon customers, trying to find out the exact situation. And again, I believe there is north of 1000 custom customers that are still active.

Okay. And then the other part of that is do you know how many channel partners you are actually acquiring through Alteon? Like how does your channel base change?

Okay. So also here, we are seeing a major impact. Also, some of the channels were common Radware and Alteon channels. We are definitely seeing between 50 and 100 strong committed Alteon channels that are potential to be recruited by us. It obviously requires work. Some of them will continue to buy through Nortel for the time being and some will start to work directly with us. But definitely also here, it is a major impact on our Radware business and major potential for the future if we are able to convince these customers to sell our complete productline and not only Alteon.

Okay, and then lastly, just on the core business, is there any more room for cost-cutting? I know you have done a lot over the last 12 months or so. Is there anything more you can do?

There is room, but we feel comfortable on the current level. It allows us -- there are major investments in the current level for the future as you can see in product development, in R&D and also in sales and marketing. Part of these investments allow us to take over the Alteon business and operate it quite immediately because we have this infrastructure in place. So we don't foresee any further cuts on the Radware side. We feel comfortable with the level of expenses we have.

And let me just ask you this last question. I understand how Nortel was not running the Alteon business as a separate business unit. Is there any time in the quarter where you think you will actually have some of that data and is there a potential to sort of update investors as to your thoughts as we go into 2Q?

There might be a point in a month or so, but we are not sure about it and as a result, for the time being, we will keep it for our next goal. If we have a clear picture and one that we can trust, definitely we will share it with the investors in a call.

Thank you.

Robert Katz, Sinvest.

How are you, Meir. Congratulations on your Nortel Alteon acquisition. I'll start off with some bookkeeping questions. There seems to be a reclassification on the balance sheet of deferred revenues and some long-term liabilities. Can you walk through the details of what is in deferred revenues now and some of the other?

Actually there is no reclassification of any item on the balance sheet. Just that while the P&L doesn't include any impact on the Nortel acquisition, the balance sheet does. That means all balance sheet items are included now and affected by the Alteon acquisition from the cash position that I mentioned, the deferred revenues, the ex parte liabilities that we took on ourselves for warranty for service contracts, etc. So no reclassification of any items on the balance sheet.

So what were the deferred revenues? How did that break out between severance and deferred and [cable] unaccrued?

You know that we break the deferred revenues only on the yearly financial statement and not the quarter and we will do it at the end of the year.

And you made a comment earlier that they were down?

On the legacy Radware, we had an increase in the deferred revenues.

Increase in deferred revenues? Okay. That's very good.

(multiple speakers). Up, up.

Up. That's great. And can you break out what revenues were between EMEA and APAC?

Okay. EMEA was 32% and APAC 44% this quarter.

Okay. And also how much incremental OpEx should we expect from the Alteon acquisition? You said there was like 120 additional employees. What would be a good quarterly run rate to attach that?

This is not only the headcount. There are some other expenses related to the business. As we say, we don't want now to start to break down any kind -- neither revenues nor the expenses. But on average, it should be average cost, which is lower than the cost that we have since part of the employees are located in areas that the salary is not so high.

All right. So you are not ready to give us sort of what OpEx could be or should be in Q2?

We share it next quarter. We will share it next quarter as I mentioned that we feel more comfortable based on actual to share it next quarter.

And can you give a little bit of color about I guess revenues in the quarter, linearity and business tone and where you saw strengthening or weakening in the business throughout the quarter?

Okay. Q1 is obviously a seasonal quarter and a back-end loaded one normally and this quarter was no different. We saw weakness in budget issues across the world. So there is no single geography that was immune.

In general, I think we saw better trends, not surprisingly, in the carrier market and the enterprise as a whole, especially the mobile carriers seem to be doing well. So nothing special. It was across the board and we saw the challenges on one end. On the other end, I think we have done an okay performance on the legacy given the economy, the seasonal quarter and obviously, the distraction of the management given the deal was taking place across the quarter.

And in the first month of the second quarter, you said you have seen signs of improvement over Q1?

Yes, we did.

And that is across geographies?

Yes.

Okay. Very good. Thanks very much, guys.

Jonathan Kreizman, Oscar Gruss.

A few questions on my side. First of all, understand you're not ready to go into future numbers with your acquisition, could you just maybe tell us the geographical span of Nortel's unit going back to last year? In other words, what you expect the contribution is going to be to the US?

Again, what I am going to tell is not -- is based on non-audited numbers and I would call it a best guess rather than the numbers. The information we have got is that it is roughly 20% in the Americas and 80% internationally. But again, we don't want -- I would not rely on these numbers fully. We need to see the actual trend.

Okay, that's helpful. Then if you could say the operating cash flow for the quarter.

As I said, the decrease in the cash this quarter was just below $20 million. $18.4 million out of that, it was related to the acquisition. So about $1.5 million, this is burning due to the operating.

Okay. Then if you could say a few other words on operating initiatives you have in place. For instance, your partnership with Juniper, what is it delivering up to now? How do you see this going forward?

Okay. So on the legacy productline, we continue with the same focus that we had, especially as we are seeing most in the next-generation data center, with the entry of Cisco to the server side and I would say reaction by both networking vendors and server vendors to that move. So obviously, Juniper for us is becoming more and more a key player in that. We continue to work with them on joint solutions and we are publishing more and more joint solutions to the channels. We are participating this month as their only partner for Layer 4-7 in their channel conference in Europe. They are going also to participate in Q4 in our channel conference. So we are strengthening the ties with them. We are starting to have nice wins through their channels. But so far, the relationship is not of a business relationship, but just as a partnering and meeting the channel type of business. So that is what I have to say on the Juniper front.

Okay, that's all for me. Thanks and good luck.

I am showing no questions in queue.

Okay, at this point, I would like to thank everyone for joining us today. Have a great day and we will meet next quarter. Thanks a lot.

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