Radware Ltd (RDWR) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Quarter Three Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there'll be an opportunity for your questions and comments, and instructions will be given at that time.

At this time, I'd like to turn the conference over to our host, CEO of Radware, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone, and welcome to Radware's Third Quarter 2009 Earning Conference Call. Joining me today is Meir Moshe, Chief Financial Officer. Meir will start the call by reviewing the financial results, and afterwards I'll discuss the business highlights for the third quarter results. After my comments, we'll open the discussion for q-and-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'll 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 amount of others and other risks detailed from time to time in Radware's filing. We refer you to document the Company files from time to time with the Security 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 $0.12 EPS. Revenue for the third quarter are $29.2 million, 8% sequential growth, and 24% year-over-year. The deferred revenues continue to increase in the third quarter. The non-GAAP profit this quarter was tripled sequentially to $2.3 million, or $0.12 per share compared to the second quarter results, and represents a dramatic improvement compared to the net loss of $4.3 million, a loss of $0.22 per share in the third quarter last year.

Stock based compensation expenses in the amount of $1.1 million, and amortization of intangible assets in the amount of $1.1 million bring the GAAP net profit this quarter to $200,000 or $0.01 per share, compared to a net loss of $8.5 million or $0.44 loss per share in the third quarter of 2008.

This quarter, we have maintained the 81% non-GAAP gross margins that we have increased already in the second quarter from 80.2% to 81% as a result of running higher sales on the same infrastructure. Non-GAAP operating expenses in the quarter reached $21.8 million, almost the same as in the last quarter, and in line with our plans of tight expenses control.

The headcount for the end of this quarter was 611 employees. The DSOs for the quarter were 50 days compared to 52 days at the end of the previous quarter. This improvement is a result of more linear quarter. We generated cash in the amount of $5.4 million this quarter. Thus, our cash position, including long term deposits and marketable security increased this quarter to $120.2 million and we have no debt. Shareholders equity is about $146 million.

We have been proving in the last two quarters the leverage we have in our business model. Every incremental $1 million of sales increasing our EPS by $0.04. In this quarter, revenue increased sequentially by $2.1 million. As a result, EPS increased by $0.08 from $0.04 in the second quarter to $0.12 this quarter. Another way to still deliver the leverage is the operating margin, that increased from 1% in the second quarter to 6% this quarter. This leverage continues in the fourth quarter.

Guidance for the fourth quarter -- we expect revenues to increase to $30 million. Similar gross margins and OpEx -- similar gross margin OpEx as in the third quarter, and an increase of non-GAAP EPS to a range of $0.15 to $0.16. As you can see, ladies and gentlemen, revenues are up, gross margin is maintained, operating profitability and operating margins increased, cash is up by $5.4 million, 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 Q3 results reflect our continued business improvements throughout the last several quarters with our core business continuing to grow its market share. That, coupled with the addition of Alteon revenues, and our continued focus on strict cost controls has resulted in strong revenue growth, and increased operational profitability. In fact, in three out of the last four quarters, we delivered record results, and as evident by the guidance we provided, we expect another record quarter in Q4.

In the last four quarters, we were able to sequentially grow our market share, [Bill Gardner] an IDC industry analyst reports. This quarter, as Meir mentioned, we grow our revenues by 8% sequentially and 24% year-over-year. We estimate the market as a whole is not growing year-over-year. And therefore, this is a clear indication of the strong market share gains that we've achieved.

We have and will continue to execute on the plan that was discussed on our previous calls. First, we will focus on our key markets and customer base. We'll provide world class support. We'll invest in the product line. And we are going to grow sales and service revenues with these customers by answering their current and future needs in application delivery, and application security.

As we are adding additional resources to select markets and R&D initiatives, we do see in the future increasing our operational expenses in the coming quarters. However, we will remain fully committed to the exercise of tight expense control.

In Q3, we steadily won many new customers, adding over 300 new customers to our install base. Some of the new and repeat customers that contributed our revenues this past quarter are Bell Mobility, Geico, FDA, China Mobile, Hilton Hotels, Samsung, and many more.

One of the significant customer wins announced this quarter is Carolina HealthCare, the largest healthcare system in North and South Carolina. CHS uses our LinkProof solution to guarantee network availability and connectivity to 40,000 employees, and our CID solution to accelerate scale and simplify its web filtering and anti-spam capabilities.

Recently, CHS added our AppDirector products to its data centers in order to support its corporate intranet, and main data center application. Our solution answered the critical challenge to insuring CHS staff ability to record important patient information and access care instructions without complications.

CHS is a very good example for the potential business scalability we have with our customer base. These customers continue to install not only more of the products they bought initially, and CHS example, for example LinkProof. But they do acquire new solutions from Radware to address additional needs they have in their data center environments. CHS bought additional CIDs and AppDirectors. With 10,000 customers worldwide, executing properly on our business initiatives will provide a strong and profitable platform for growth in the future.

As part of our customers and channels outreach, we are signing key Alteon partners as Radware partners to up sell and cross sell our complete portfolio. Fuji Xerox, an Alteon master distributor in Japan, has signed with Radware. This is a prime example of the confidence Alteon channel partners have in our plan and execution. Specifically, Fuji Xerox already contributed to our Q3 results, and we believe with their help we can significantly grow our market share in Japan. We are signing these contracts across the world with similar contracts with [Optivar] in the US, as one example, and a worldwide distribution agreement with Westcon.

Building on our past relationship with Westcon in several markets such as the US, Brazil, Canada, and Australia, and leveraging the business Westcon had with Alteon, we signed a global agreement with Westcon covering all other products, thus enabling us to broaden our channel core coverage worldwide. We already recognized in the third quarter revenues from Westcon UK, Westcon France, Westcon Germany, and other new Westcon entities that joined our partner network following the conclusion of the agreement.

On the product side, last quarter our AppDirector won the Internet Telephony Excellence Award for 2009 for the second year in a row. Also, our SIP Director was honored for delivering exceptional IP communications solutions. These awards join a long list of awards we've received over the last couple of years, such as the recent 2009 Next Generation Network Leadership Award, the 2008 Communications Solution Product of the Year for SIP Director, and so on.

In addition, Gardner also recognized our advantage in SIP based applications, stating that the hardware has delivered an innovative advanced proxy based SIP solution for collaboration services such as Microsoft OCS, as well as for key deployment in service provider networks. These awards and industry recognitions speak to the technology advantage we have in video, voice, messaging and collaboration applications, an area with strong growth that will become one of our growth drivers for next years.

In our core solutions areas, AppDirector won Network Product's Guide Best Global Balancing Solution, and DefensePro was named by the magazine Best Product in Behavioral Security and Intrusion Prevention. The amount and breadth of the awards, covering multiple Radware product lines, are a strong testimonial to the innovation and technological leadership we have. In addition, we continue to advance our portfolio this quarter. We are very satisfied with the pace at which we are progressing, and you will continue to see major product releases already in Q4, and obviously next year.

All our products run on an on-demand switch platform, which gives us an extremely strong competitive advantage in the market. The on-demand switches 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 on-demand concept reduces the overall IT investment and operational management costs needed to support the infrastructure. And all of that while providing a really magnificent scalability and increasing performance.

With over 250 R&D engineers, we believe we will be able to continue to strengthen our product offering, and even accelerate the pace of our innovation. We definitely see that as a major competitive advantage for us, and a driving force behind the growth in revenues.

Another strong potential for future growth for us is our applications security product line. We recently announced a new version of our DefensePro product line, a version that is centered on protection against high volume cyber criminal activity. The market need was very evident in the recent waves of attacks in July and August that brought down and significantly slowed down sites such as the US Homeland Security, Treasury, CIA, Facebook, and many others.

Building on our absolute immunity unique capabilities, we've now added a booster shot feature, where DefensePro 5.0 can accurately detect and neutralize security breeches without the risk of blocking legitimate users or bypassing the security engine.

In addition, we announced, along with RSA, a technology partnership to offer service for increased protection against Trojan and pfishing attacks. This partnership results in stronger fraud protection for end users against both information and identity theft. And it's another strong and unique differentiator for us in the market.

Continuing on the alliances side, we achieved major progress last quarter, completing multiple certifications with Microsoft, Oracle, and IBM. For Oracle, we announced certification for Siebel 8, and Oracle E-Business Suite 12. We announced the certification of AppDirector with Microsoft OCS. And we finalized the certification with IBM Lotus Domino. These certifications allows us to more easily sell and get into projects on the applications side. And we plan to leverage them more and more as we deepen our relationship with not only our customers, but also industry technology partners.

To summarize, today we have a leadership position in the market as it relates to our product and solution offering. We have consistently grown our market share over the past five quarters. We've steadily developed and introduced market leading solutions.

We've ramped up our alliances and certifications with leading vendors such as Microsoft, Oracle, IBM, and RSA -- alliances that will allow us to offer unique solutions to the market, and continue growing our business. And we have demonstrated increased efficiency in our business while capitalizing on available market opportunities. And thus, have continuously improved our operational results.

Before concluding, I would like to thank our customers and partners for their continuous support and trust. I would like to thank the Radware team for all their efforts, commitment, and success in growing our business.

With that, I would like to open the discussion for q-and-a.

Thank you. (Operator Instructions)

Our first question today comes from the line of Mark Sue with RBC. Please go ahead.

Hi, this is Joe Longobardi on for Mark Sue. I was just wondering if you could provide a geographic breakdown of revenues across US, EMEA and Asia, as well as a break out of the carrier versus the enterprise?

Okay, on the carrier and enterprise, this is enterprise 70% of the business this quarter, and the carrier is 30% of the business. This quarter on the regions, the US increased to 30% of total revenues, while the international was 70% this quarter.

Okay, thank you.

And next, we will go to the line of Rohit Chopra with Wedbush Securities. Please go ahead.

Good morning, everyone. This is Sanjit Singh for Rohit Chopra. Maybe some quick questions on CapEx and depreciation. What was CapEx and depreciation this quarter?

Yes. CapEx and depreciation this quarter was very similar, $1.6 million each. So, actually the cash spent on this quarter on the CapEx exactly the same depreciation we had in the quarter. So, no impact on the cash flow on this side.

Right, thank you. And then I just wanted to reconcile something that Meir said, and then something that Roy said. On the OpEx side, I think Meir said that it was going to be similar to this past quarter. And then, Roy was mentioning that we could see some increases in OpEx. Could you just clarify that, what we should be thinking about OpEx for next quarter?

For next quarter, as Meir mentioned, it will be the same level as in the current quarter. But we're starting to hire for select places in sales and R&D to support the growth towards next year. So, from Q1 and throughout the year 2010, you should expect OpEx to increase. And as mentioned, we are putting it with tight operational control. And we will make sure that the people will continue to see the leverage in the business.

And then for next quarter, relative to the guidance, are we expecting the typical Q4 budget flush next quarter?

We are not sure from speaking to our customers. If we look on last year, we did not see the typical one. So, we would like to be more conservative. And I will say that obviously this quarter results were very strong -- higher than our expectations and guidance. And if the trend will continue, there's definitely a possibility to improve results, not only in Q4 but throughout year 2010. Currently, we would like to stick to the $30 million guidance.

Alright. And my final question has to do with the competitive environment. Last quarter, you mentioned that some of your competitors, including FI, have got a little bit more aggressive towards the end of the quarter. How did the competitor's dynamics play out this quarter?

So this quarter, in the end of the quarter, we didn't see the same pressure in the end of the quarter. But on the other end, we've continued to take market share and grow very nicely. So, definitely I think last quarter was less stressful from what we've seen from the other players in the market. But again, it doesn't impact us, it doesn't impact our execution. And we believe that with the on-demand switches, we have a huge advantage of performance and scalability that mitigates price pressure on specific entry points to the market.

Thank you very much.

(Operator Instructions).

And we will go to Jonathan Kreizman's line with Oscar Gruss. Please go ahead.

Hi, guys. Congrats for a good quarter. A couple of questions if I might. To begin with, if you could talk a little bit about the initiatives you have with server vendors and what your current plans are with these partnerships.

Your line is not that clear. Are you asking about our partnerships with server vendors and application partners?

Correct.

Okay. So, basically what we are doing is that we are currently certifying our solutions with the main applications in the market. As we've mentioned, last quarter we've done a major progress in that. And we've covered Microsoft OCS, Siebel and Business Suite 12 of Oracle, Domino of IBM. And that allows us basically to start working with them and their integrators about pushing our solutions as part of a new application project to the market.

This is an area of the market that we did not gain a lot of revenues in the past from and we see that therefore as another growth opportunity for us executed properly. So, we see that as an upside to our numbers. And we definitely are going to pursue that in the coming quarters.

Okay. Secondly, I think one of the opportunities you've been mentioning recently was the development of voice applications and evoke voice communications within the enterprises. How do you see the role of layer 4-7 switches more strongly than it was in the past? And if you could give a little more about where exactly the opportunity is there.

Okay, so definitely with the growth of video, whether it's just video streaming over IP or video conferencing, voice over IP, IVRs, call centers, and content centers, we see more and more applications that are mission critical to the enterprise that are moving over IP. All those applications around collaboration, the base protocol is SIP.

Now, obviously the challenges of availability of these applications are big. Performance, especially as we speak here about more real time applications than we are used to in the data side world. So for example, voice and video are much more real time than ELP and CRM in our demand. So performance, latency are key. And obviously, security. If there's an attack and it can bring your whole voice over IP network, it means that no one can talk to no one else. There's no faxes, there's no video conferencing and so on.

So security is a major concern and that's exactly the key values or benefits that the layer 7 switch can bring in general. The only caveat -- and that's why we've invested in that so long -- is that this protocol SIP requires special development, special adaptations, and really building a new solution.

Although it's called layer 7 switch, the fundamental technology should support this evolution. And because all those video conferencing, voice over IP contact centers are dual sided communication, there's no client and server anymore, as we know it from the data world. That means that a lot of technology should be developed to support that.

We've done it over the last two years. And we're seeing a very big success in that. We've developed a very strong competitive advantage. And there's many market evidence -- analysts, partners, and customers that are choosing us over the competition because of that. I think recent developments in the market and some acquisitions highlighted the big role of video going forward in networks and in the enterprise market. And we're definitely ready for that. And it can be a nice growth area for us in the future.

Okay. Then in terms of the revenue breakdown, you state that the rest of the world was 70%. I wonder if you could give a little bit more color to that. What geographies are looking more stable? Which have been growing larger in the quarter?

Okay, as you can see from the breakdown, that the US increase was first of all due to our better positioning in the market with the Alteon offering. And also we have Ramesh, the new manager that -- the President for the US, that came on board in July 1st. Also, we increased management level in the US.

All over the world, we have continued to see very strong momentum. EMEA this quarter were 30%. It's down, but this is expected due to the seasonal quarter. September quarter is very seasonal in Europe. It was expected to be 30%. [Epic] was 40% as in the second quarter. Overall strong momentum, overall with a little bit improvement in the US, as I said, based on our better positioning and also the leverages we have from the new management that came on board July 1st.

Okay, thanks a lot. Good luck.

Thank you.

(Operator Instructions).

And we have a follow up from Rohit Chopra's line, with Wedbush Securities. Please go ahead.

Hi, guys. Just one quick follow-up. Did you break out Alteon and core Radware revenues this quarter? I might have missed that.

As we discussed last quarter, we're not going to break it in the future. We gave it one time, just to give a short visibility to that. And the reason is is that we're cross selling the AppDirector to the Alteon customer base, and vice versa. And the solutions are migrating towards the same platforms and cost base. So, basically it's part of the overall revenue.

Fair enough. Thank you.

And gentlemen, there are no further questions at this time.

Okay. I would like to thank everybody for joining us today and have a great day.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.