Radware Ltd (RDWR) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the quarter two 2009 earnings conference call. At this time all lines are in a listen only mode. Later there will be an opportunity for your questions, and instructions will be given at that time. (Operator instructions). As a reminder, this conference is being recorded.

At this time I would like to turn the conference over to our host, President and CEO, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone, and welcome to Radware's second quarter 2009 earnings conference 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 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 will make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are just predictions and 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 [callbacks], the timing and amount of orders and other risks detailed from time to time in Radware's filing. We refer you to the 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 are very pleased to report record revenues, non-GAAP operating profit and $0.04 EPS. Revenues for the second quarter are $27.1 million, 32% sequential growth. The deferred revenues continued to increase in the second quarter.

Although our policy is not providing breakdowns of revenues by product line, we have decided to share with you this quarter the add-on product revenues to provide more visibility to all our businesses performing, including the smooth integration of the Alteon acquisition.

Our core business has grown 10% sequentially to $22.5 million, and the Alteon business contributed additional $4.6 million.

The non-GAAP profit this quarter was $800,000 or $0.04 per share compared to net loss of $5 million or loss of $0.25 per share in the second quarter last year. Stock-based compensation expenses in the amount of $1.4 million and amortization of intangible assets in the amount of $1.1 million bring the GAAP net loss this quarter to $1.7 million, or $0.09 per share compared to a net loss of $7.1 million or $0.36 loss per share in the second quarter of 2008.

We increased our non-GAAP gross margins from 80.2% to 81% as a result of running higher sales on the same infrastructure. Non-GAAP operating expenses in the second quarter were $21.7 million, representing a decrease of $3.2 million compared to the second quarter last year and an increase of $3.2 million compared to Q1 '09, due to the added headcount and other expenses related to the Alteon integration.

This quarter we added 120 employees as a result of the Alteon integration, thus the headcount for this quarter increased from 509 employees to 629 employees.

The DSOs for the quarter were 52 days compared to 56 days at the end of the previous quarter. We generated cash in the amount of $650,000 this quarter. Thus our cash position including long-term deposits and marketable securities increased this quarter to $115 million, and we have no debt.

During the second quarter we repurchased approximately 25,000 shares in the total amount of $190,000. Thus, share count for the end of the quarter is 18.8 million shares. Shareholders equity is about $144 million.

Guidance -- we expect [up quarter]. We believe that revenues in the third quarter will range between $27.3 million to $27.7 million. We will maintain similar OpEx level, and non-GAAP EPS will range between $0.05 to $0.06. We also expect higher positive cash flow.

As you can see, ladies and gentlemen, revenues increased, we returned to operating profitability, our gross margin increased, we generated cash and we expect higher and better results next quarter.

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

Thank you, Meir. Our Q2 results reflect our continuous business improvements throughout the last several quarters with our core business continuing to grow its market share. That, coupled with the addition of the Alteon revenues and continuous strong cost controls, resulted in strong revenue growth and a return to operational profitability.

In the last three quarters we were able to sequentially grow our market share [for the government and IDC] industry analyst report.

In Q2, As Meir mentioned, we grew our results and revenues from our application delivery and application security products by 10% sequentially. This means another quarter of share gains [for other] as we continued to execute well despite the challenging economy. This was the first quarter for our newly acquired Alteon business, and we are very pleased with our performance. We were able to achieve the Alteon revenues while increasing the revenues from our original product lines.

In our last call we shared with you our plans for the Alteon business. Our plans are simple and focused -- maintain the Alteon customer base, provide world-class support, invest in the product line 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 one is around people and expertise. We have added approximately 120 people to the organization in the past quarter that are dedicated to the Alteon product line. Over 80 people in R&D are dedicated to advancing the product line and executing on our road map for Alteon. Over 20 dedicated support personnel were added to our TAC centers across the world to guarantee we provide the best support and customer experience possible.

The second initiative is around customer support. We implemented a five years product support plan for all current Alteon products, reinforcing our commitment to the product line and securing the investment of these customers in Alteon technology. This was accepted very positively by the customer base. From the first day, we took over all support services for customers worldwide, and the feedback is extremely positive. Through servicing the customers, we are starting to create strong relationships with the installed base that we believe in the future will translate into strong repeat business from these customers across our complete product line portfolio.

The third initiative is around products and technology. We committed to a well-defined roadmap for the Alteon product line, including the release of a new Alteon 10-gig solution and the addition of acceleration and compression capabilities. I am pleased to say we released during the quarter our first maintenance version for the Alteon line with a second version expected in the current quarter.

As part of our customer and channel outreach, we're signing key Alteon partners as Radware partners to up-sell and cross-sell our complete portfolio. Last quarter we announced that AREC Networks, the Alteon master distributor in Taiwan, has signed with Radware. This quarter we already announced more partnerships, including Packet Fusion and Ronco in the US. These are just a couple of examples of the confidence Alteon channel partners have in our plans and execution.

Specifically, AREC already contributed to our Q2 results and was able to start selling other Radware product, other than Alteon, to its customer base. We believe that, as the integration progresses, we will be able to share with you more channel partners that join our partner program and increase our footprint globally.

On the operational side, the results show the business leverage we have with our global infrastructure. As you can see, we were able to grow our revenues with a minimal addition to our sales and marketing headcount and expenses. Successful integration of the IT and the supply chain operation that was completed within the first 45 days enabled us to gain from economies of scale and keep and even slightly improve our industry-high gross margin.

On the operational side, the steps we took a year ago continued to produce the results. We were able, despite the Alteon acquisition additional expenses, still to reduce expenses in a meaningful manner versus Q2 of 2008. As we are adding additional resources to select markets and R&D initiatives, we do see an increase in our operational expenses in the coming quarters, yet we stay fully committed to tight expense control.

In Q2 we continued to win many new customers and added over 250 new customers to our installed base. Some of the key customers that contributed to our revenue this past quarter are Bell Mobility in Canada, GEICO, the FDA, China Mobile, Hilton Hotels, Samsung, Chunghwa Telecom, he largest carrier in Taiwan, and many others.

Some key customer wins we announced this quarter are East China University and Groupama. East China University deployed a complete suite of other products to ensure maximum availability, performance and security of their next-generation campus network. This large installation demonstrates the complete solution we provide for application delivery, not on a product basis but really a complete architecture for application delivery over high-speed, next-generation networks. In this win we deployed our LinkProof products to guarantee and accelerate Internet access, we deployed our DefensePro products to secure the mission-critical applications against attacks and to secure the University from denial-of-service attacks and deployed our AppDirector product for the University mission critical application acceleration and availability.

Another important win was Groupama. Groupama is a worldwide mutual insurance banking and financial services group. They deployed our application delivery products, replacing another vendor equipment that could not handle any more growth in the number of transactions and capacity. The key differentiation that helped us win the deal was Radware unique solution for securing mission-critical applications against attacks and our industry-leading global graphic management between data centers.

These strengths that allow us to win major customers also reflect in the numerous awards that we won last quarter. Last quarter our mobile Internet gateway solution was named 2009 Next Generation Network Leadership award. Our SIP Director won another award, this time the 2008 Communications Solution Product of the Year for its innovation around SIP application delivery. DefensePro was named Best Product in Behavioral Security and Intrusion Prevention as well as Customer Trust, and AppDirector won the best global load-balancing solution by Network Product Guide magazine.

These are exactly the differentiations that won us, for example, the Groupama customer win that I just discussed. This amount and breadth of awards covering multiple hardware product lines are a strong testimonial for the innovation and the technological leadership we have.

On the product side, we continued to advance our product line. We are very satisfied with the pace at which we are progressing and will continue to see major product releases this year and next.

Currently, all our products run on the OnDemand Switch platforms, which gives us a very strong competitive advantage in the market. The OnDemand Switch allow our customers to scale and grow their performance needs in real time, based on their traffic and business needs without installing new hardware or redesigning their infrastructure. The OnDemand concept reduces the overall IT investment and operation management costs needed to secure the infrastructure, all while allowing for significant scalability and increasing performance to answer traffic peaks and transaction growth.

With over 250 people in R&D we believe we will be able to continue to strengthen our product line offering and even accelerate the base of our innovation. We definitely see this innovation and technical leadership as the driving force behind our market share gains in the last several quarters and believe it will continue to help us to grow even further.

As part of our growth strategy, we are adding leadership experience to help us scale the business. In the Americas, Ramesh Barasia joined us as the new president for our America geography. Ramesh brings with him broad executive management experience with significant expertise in the application delivery and carrier market. With the increased customer base, we definitely have a good platform to build our next-stage growth, and Ramesh will help us in executing it.

To summarize, we today have a leadership position in the market which relates to our product and solution offering. We were able to continue and grow our market share, as we have done in the past three quarters. With the Alteon acquisition, we have now an even larger customer base and channel footprint that enables us to profitably grow our business and leverage our leading technologies for market share gains. We plan to continue to put significant focus on increasing the efficiency of our business while capitalizing on available market opportunities, and thus continuously improve our operational results.

Before I open the discussion for Q&A, I would like to thank our customers and partners for their continuous support and trust. I would like to thank the hardware team for all their efforts and commitment for the successful integration of the Alteon business. It was not an easy process to complete, especially while, in parallel, growing our traditional business, and I commend the team for that.

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

Rohit Chopra, Wedbush Morgan.

It looks like you had a pretty strong quarter, so congratulations, I guess, are in order. I had three questions, and then maybe a follow-up on something. But if you can go through the geographic splits, I just wanted to get a sense of how the US, EMEA and Asia are doing, if you could do that. The other question is, can you maintain gross margin at the current level? And then maybe talk about some regions where you see some improvement in IT spending.

Okay. As for the geographic split, actually it is very similar what we had before was the US, it was 24% of our total revenues. The international was 76% total revenues.

On the gross margins, I would like to say that also at this stage we don't see a reason for erosion on gross margins. [We prefer] conservative focus of 80.2% of that. The reason for that -- that we have the highest gross margin in our segment, anyway. Also this is the first quarter that we increased gross margins, and gross margin is also affected by the pricing in the industry and mix of products.

So I believe I covered this one. About the IT spending, maybe Roy will take this part.

Yes. So, in general, as you can see also from our split, it's pretty consistent with previous quarters, only very slight changes internationally, I would say. So I'm not sure we are seeing on our region or a geography basis the improved spending. I think it's more on a segment basis. Definitely, we are seeing across the world more public-sector government projects, more projects in carriers and maybe still a soft environment in the general enterprise.

And then I just wanted to ask you a couple follow-ups. Can you talk a little bit about the competitive environment and how that is different from the past few quarters, if it is? Any pricing changes, anybody becoming a little bit more aggressive? And then my last question is really related to the Alteon integration. How long is that going to take? Where are you in that process? What should we expect over the next few quarters?

Okay. First of all, concerning the competitive landscape, there's not much change in terms of the product offering. I think, as I've mentioned in my prepared comments, the OnDemand Switch with the scalability, performance, investment protection, pay-as-you-growth model is very successful for us, especially in this environment where budgets are tight and customers are looking how to optimize their budgets.

On the pricing environments we are seeing mainly F5 pushing the prices down and giving very high discounts, especially towards the end of the quarter. But we feel very good about our position. We have high gross margin, so we can handle any price pressure, if there will be. Going forward, I don't know if it's a one-time event or a new policy.

Concerning the Alteon integration, the operational integration is basically done. Alteon, across the company, is now treated as another product line, and all the functions -- tech services, R&D sales, marketing, [bill serve] -- and are dealing with both the original Radware product line, there is Alteon at the same level. So from that point of view, I think we are pretty much done.

The business process takes more time. We are signing new partners, we are reaching out to more and more customers. We are building the relationships, and this, I believe, will take at least 12 months until we can say it's fully executed and that all these customers and channel partners are trained, effective, productive as the other Radware customers.

Mark Sue, RBC Capital Markets.

Have we rationalized all the products between Radware and Alteon? Should we expect some streamlining of products going forward, or no major changes there? And, additionally, have you had a chance to review your major partnerships, and are there things you might be able to do to make the relationships develop a little bit faster with the likes of Juniper, IBM and perhaps even HP? Thank you.

Okay, so first of all, concerning the product lines, as we have announced, we are planning to keep on developing both the AppDirector and the Alteon product lines. And basically, Alteon customers will continue to enjoy the Alteon product line and its enhancements. Obviously, as the part of the development plan we are leveraging technologies between the two. So, for example, one of the key ways in which we are accelerating the Alteon development is using hardware platforms and new software modules from the Radware technology and integrate them into the Alteon -- for example, the Alteon 10-G platform, we have accelerated dramatically its time to market using this leverage.

So we are definitely leveraging technologies internally between the two product lines, but customers will continue to be able to purchase and commit to the product line they prefer. And as I've mentioned, we've committed for five years support for every existing Alteon product. So we are very committed to that product line, and we are not seeing any time soon that we will stop one or the other.

Concerning the partnerships, we're definitely working there very strongly. I don't have anything specific at this time to share. Also definitely, with the recent movements in the data center between Cisco, IBM and HP, there are many opportunities for collaboration. I think we are positioned very well as a strong technology player in the application delivery to answer these needs, and I hope that in the coming quarters we will be able to update you on some steps we've taken there as well.

Jonathan Kreizman, Oscar Gruss.

Congratulations on a great quarter. If you could, please, break down the carrier enterprise revenues?

It was 30% the carrier and 70% the enterprise. This is very similar to what we had last quarter.

Are you seeing any signs for changes in these trends going forward in the second half of the year?

I believe there's an opportunity that the carrier market will grow. It's still too early to say, but we are seeing strength in mobile carriers. There's some weakness in the wireline; but, given the situation in the enterprises, I think mobile carriers is one of the most stable segments currently, and we are seeing some large projects there.

Also, Alteon used to have a large installed base in the carrier market. So all in all, there might be a possibility that the carrier segment will play a bigger role of our total revenues going forward.

Then I think in previous years, you've always been looking at the US as a kind of indicator on how or what you're managing to penetrate and make inroads in the market. So what is your sense with regard of an increase -- increasing your footprint in the US market with the Alteon acquisition, and how do you see that developing going forward?

The Alteon business was even more internationally focused than ours, so the percentage of Alteon sales in the US are lower than what we have originally, in Radware. Yes, we gained some of our key customers that we're definitely planning to leverage as well as key system integration and channel partners. So we are encouraged to see that the US also grew significantly sequentially, as evidenced by the numbers. Also, the Alteon share was lower.

And we believe now there's an opportunity to grow our business there, despite the economic situation. That's one of the reasons that led us to appoint Ramesh as our new president and to actually increase our investments in this market. We definitely believe we can take more market share there.

Okay. Then, last question for me -- looking into the guidance you've just given obviously suggests that your visibility is much improved over the past few quarters. So maybe you can give us a sense of what percent of visibility you are entering the quarter currently compared to maybe the first half of the year?

So I think you are right; our visibility now is better on the business. It's a combination of the strength we've seen in the last quarter on our business together with some large projects that we know are going our way. So we feel better about our business, and this results in the guidance for a numeric range and an up quarter, both on revenues as well as on the bottom line.

(inaudible), [Old School] Partners.

Congratulations, it's a lot of effort and it's done well. I have a couple questions. One is, should I be reading anything into on the balance sheet where it says deferred revenues, other payables and accrued expenses was up over $10 million from quarter to quarter? Is most of that deferred revenues, or is that just a combination of things?

This is a combination, but in my remarks I said clearly that deferred revenues is up. We split the deferred revenues only on the yearly basis. But as I said, the revenue, deferred revenues, is up this quarter as well.

So, of that amount, the $35.6 million, how much of that is deferred revenues?

We don't break it. In this stage, as I said, we do it only on the yearly basis.

Okay, no worries. Also, on an operating basis, I recognize that you guys were not profitable, due to all these -- due to GAAP accounting. Do you expect in the next quarter to be operating profitable on a GAAP accounting basis?

Actually, this is with, say, $0.05 to $0.06, in this range, we won't be, on GAAP basis, positive.

You still will not be? Okay. And you also mentioned that next quarter you will be more cash-flow positive. Can you give us a sense how much that means, in terms of dollars?

It will be definitely higher than this number. In this stage we don't have the exact focus for that. We don't want to share it. But it's going to be meaningful additions of [650], not talking about additional 10-K, or etc.

Okay, fair enough. Can you give me a sense (technical difficulty) quarter you guys are going out on a limb a little bit here. First of all, the numbers, the EPS is higher than this quarter, as -- obviously, and significantly higher than last year. What gives you the -- how do you get to that $0.05 and $0.06 a share? Can you give us a sense of that?

Actually, we said we maintain OpEx at the same level. Also, if you take into consideration that gross margin would maintain, the financial income will be the same. So it brings you to the range of $0.05 to $0.06 of --

No; I understand that. But I'm wondering, on the revenue side, are you comfortable because you already have the revenues booked? Is it 80% booked for the quarter? In terms of your visibility, which you said on the last question that you felt much improved visibility, is it 80% of your order booked right now that gives you that visibility? Is it 90%? Is it 100%? I just want to understand is why you guys are so confident about this quarter.

In our market, there's not -- we don't have [frame] agreements or this type of business that gives you absolute visibility. What we do have is analysis of pipeline and analysis of deals that we know that are coming, and win ratio, etc. At this point, given this analysis, we definitely are seeing improved visibility versus previous quarters, and that's why we decided not just to say general statements about the environment but actually to give numeric guidance.

And I don't know if this question was asked, but is there a market share issue going on here, too? Are you guys taking away any market share from your competitors?

No. As I've mentioned, per Gartner and IDC in the last three quarters, we've taken market share. We grew quarter by quarter. I believe that, given the results we shared today -- and by the way, even without Alteon, 10% sequential growth versus what I believe is, at best, a flat sequential market -- we definitely took a lot of market share during last quarter.

Okay. And just finally, the acquisition -- you said it was not an easy acquisition. Obviously, no acquisition is easy. Do you feel that it's all behind you now, or is there still some integration issues going on?

So, as I've mentioned, from integration point of view, the operation -- I think we're almost done. There's always things to do, but generally speaking we're almost there. There's a lot to do on the business side, finding all the Alteon partners, training them on our portfolio, meeting the customers, securing the installed base and cross-selling the other solutions that we have, which is, by the way, the big potential going forward for growth in our business.

So this is a process that's continuous. We're only 90 days through that process. There's a lot more work to do, but I think we are progressing nicely on that.

Okay, great quarter, guys. Thank you.

(Operator instructions). And gentlemen, nobody else is queuing up at this time.

Okay, thanks a lot. I would like to thank everybody for joining us today, and have a great day. See you next quarter. Bye-bye.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.