Radware Ltd (RDWR) 2009 Q4 法說會逐字稿

Good day and welcome to the Radware Limited Fourth Quarter Results Conference Call. Today's conference is being recorded.

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

Thank you. Good morning, everyone and welcome to Radware's Fourth 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'll discuss the business highlights of the fourth quarter results. After my comments, we'll open the discussion for Q&A.

Meir?

Thank you, Roy, and welcome everyone to our fourth 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 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 the amount of products, the timing, and amount of orders and other risks return from time to time in Radware's filing. We refer you to the 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 an additional quarter of record revenues with non-GAAP operating profit and $0.21 EPS. Revenues for the fourth quarter totaled $32.1 million along with 10% sequential growth and 29% year-over-year growth.

Revenues for 2009 totaled to a record amount of $108.9 million, which represents an increase of 15% compared to revenues of $94.6 million in 2008. Deferred revenues have doubled in 2009, and totaled $38 million at the end of the year from $19 million at the end of 2008. The increase of deferred revenues gives a clear indication for a strong business momentum.

The non-GAAP net profit this quarter has increased to $4 million or $0.21 per share, and represents a dramatic improvement compared to a net loss of $400,000 or a loss of $0.02 per share in the fourth quarter of 2008. Stock-based compensation expenses in the amount of $1.2 million and amortization of intangible assets in the amount of $1.1 million brings the GAAP net profit this quarter to $1.7 million or $0.09 per share compared to a net loss of $7.1 million or a loss of $0.38 per share in the fourth quarter of 2008.

Non-GAAP gross margins maintained at 81%. Non-GAAP operating expenses reached $22.3 million, an increase of $470,000 compared to the third quarter of 2009 and in line with our plans for tight expense control. We're also very pleased with the continuing improvement of operational margins. This quarter, we reached above 11% of operational margins versus 6% in the previous quarter and a loss of 4% in Q4 2008.

The headcount for the end of this quarter was 627 employees. The DSOs for the quarter were 46 days compared to 50 days at the end of the previous quarter. This improvement is a result of a more linear quarter. We generated cash in the amount of $6 million this quarter. That's our cash position including short-term and long-term deposits, and marketable securities increased this quarter to $126 million, and we have no debt.

Shareholders' equity is $150 million. We want to leverage the strong business momentum we experienced in 2009. Thus, we are adding additional resources to selected markets and R&D initiatives, while we remain committed to tight expense control and improvement in our business efficiency and profitability.

Our guidance for the first quarter of 2010 is as follows. We feel strong about the business momentum. Therefore, unlike typical seasonal decline in Q1 versus Q4, we expect revenues this quarter to range between $30 million to $32 million, 81% of gross margins, operating expenses at $22 million to $23 million, and non-GAAP EPS to range between $0.14 to $0.17. As you can see, ladies and gentlemen, revenues are up, gross margin is maintained, operating profitability and operating margins increased, cash is up by $6 million and we expect higher and better results in 2010.

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

Thank you, Meir. Our Q4 results reflect another quarter of strong performance. Our business for several quarters now is outgrowing the competition and with growth accelerating in Q4 to 29% year-over-year, we're continuously winning market share.

This quarter capped another record year for Radware with $109 million in revenues up 15% from last year, and coupled with strong market share growth. Although the market overall in 2009 declined, we believe in Q4 we enjoyed strong market demand due to relative industry budget flush that took place. We continue to execute on the plan discussed on our previous calls. This plan, as you will recall, centered on the following four elements.

One, focus on our key markets and customer base, specifically in the enterprise market from data center consolidation and virtualization, and in the carrier market on the growth in mobile data. Number two, provide world class support. Number three; continue to invest in the product line and number four, grow sales and service revenues with our existing customers by answering the current and future needs in application delivery and application security.

As we are adding additional resources to select markets and R&D initiatives, we did see an increase in our operational expenses this past quarter, and forecast additional increases in the coming quarters. However, we will remain fully committed to tight expense control and continuous improvement in our business profitability.

In Q4, we steadily won many new customers, adding over 200 new customers to our installed base. Some of the new and repeat customers that contributed to our revenues in this past quarter are Corning, TELUS, APC, EmblemHealth, China Mobile, LG from Korea, [La Poste] in France, Converse, and many more.

On the product side, we continue to advance our portfolio. We had two major announcements last quarter. The first announcement focused on the revamping of the Alteon line which we refer to in the market place as "Alteon is back," which emphasized that Alteon performance is screaming again. Within seven months from the acquisition with a list of new Alteon switch, the Alteon 5412. That is already the outcome of the integration between the AppDirector and the Alteon technology.

The Alteon 5412 brings on demand scalability up to 20 gigs, the highest in the industry, and provides Alteon customers with the capacity, scalability and connectivity options they need. This is the first new Alteon switch in the last six years and it was received very positively by the Alteon customers and channel community.

The Alteon 5412 has several important capabilities that we believe will initiate and upgrade cycle in the existing customer base. First, it has 10 times better performance than existing Alteon platforms. Second, it has 10 gig ports connectivity that did not exist previously in Alteon switches. This is very important for new data center architecture and data center consolidation projects.

Third, our industry-leading on demand pay-as-you-grow model with an industry unique five-years longevity commitment for the platform. Also, we released it only mid-quarter. We already received bookings in Q4 from several customers for this exciting product and we are encouraged by the upgrade business opportunities that exist in 2010.

The second major announcement we made during Q4 focused on the introduction of vAdapter. With virtualization taking the key holding data center architecture, the management and provisioning challenges are growing significantly.

The dynamic nature of the virtualized data center compared to the physical one, and the frequent changes that are taking place, are creating a big challenge of keeping the application delivery controller aligned with the application resources. vAdapter is a free of charge easy to deploy tool that ensure real time automatic synchronization of the application delivery controller configuration, mainly our AppDirector and Alteon switches with any relevant changes in the virtual environment.

vAdapter allows our customers to prevent configuration levels and reduce expensive operation costs that are common place when change occurs in the data center. This tool is important and strategic to both the customers given the large benefits of simplicity, cost reduction and automation, and to hardware as it increases the stickiness of our products in the data center architecture. In summary, we made two major announcements in Q4 directly focused on our key initiatives for next generation data centers.

Let me take you now through why we believe the growth we are seeing in our business is sustainable for 2010. Let's take a bottom up approach starting from the market, next moving to our offering, and lastly discussing our customers; so first, the market.

With enterprise investing more and more in consolidating the data centers and deploying virtualization projects, there is a growing demand for application traffic management and application acceleration. That coupled with ongoing demand for security and compliance results in a strong market demand for our offering. We believe we are early in this cycle. And a lot is still going to happen here in the coming years with major investments from both customers and vendors.

In the carrier market, clearly mobile data and mobile applications are the number one driving force. Carriers are conforming from supplying minutes and bandwidth to application providers. This highlights the criticality of application traffic management and acceleration as a means for improving the profitability of the carrier business model as well as for service differentiation. We believe that also in this front, we are early in the cycle. And with the forecasted exponential growth in mobile data in the coming years, it's easy to see why we are very, very enthusiastic with the market opportunities in this segment.

On the product side, we are really enjoying the fruits of the last two years of major investments we made in our products and business mode data center strategy. With our entire product portfolio now available on the on demand switch platform, we provide today hands down, the best performance, the best cost performance, and total cost of ownership in every market segment we play in.

With our unique advantages in global traffic management, denial of service protection, behavioral security and SIP traffic management, we have a leading offering which is truly aligned to the key initiatives of our customers. With our strong product pipeline, and it was very evident I think this year how fast we are progressing in releasing new products, we believe we can even increase our competitive advantage even further in 2010.

The last component is our customers. With 10,000 customers worldwide in the medium to large enterprise and carrier markets, and with roughly 1,000 new customers that we are adding every year, we are very well-positioned to enjoy the trends I mentioned and leverage the product offering we have. The Alteon acquisition we did in 2009 strengthened our business significantly, bringing thousands of new customers to our installed base and allowing us to greatly increase our market position.

To summarize, today we have a leading position in the market which relates to our product and solution offering. We have consistently grown our market share over the past five quarters. We have steadily developed, introduced market leading solutions targeting the key market trends. And we have demonstrated increased efficiency in our business and continuously improved our operational results.

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

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

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions).

We'll go to Mark Sue of RBC.

Good morning, Roy, good morning, Meir. Perhaps if you could comment on the Alteon contributions during the quarter and if you don't want to be specific, maybe just touch on the sequential trajectory, the size of the upgrade opportunity, and also feedback from the existing customers for both your new products and the Radware gear.

Okay, so basically the Alteon business grew but to a lesser extent to the overall. So, the key growth this past quarter came from our regular product lines. Be it Alteon provided us already in Q3 a nice jump from Q2. But we are very encouraged here.

With the 5412 just released, we believe that we can start to grow this customer base contribution significantly, although obviously the two product lines are now starting to merge, and the 5412 is the first introduction around it. So all in all, we were very happy with the Alteon customer contribution. We believe there's much more potential given this product introduction and the product pipeline that we have for 2010.

Do you feel, now that you are -- have been into it for quite some time, that the Alteon opportunity is now larger? Or smaller? And the trajectory, do you think that slowed a little bit because customers are waiting for the 5412?

I don't know if they were waiting for the 5412, but I would say that every quarter and every month that's passing, we're feeling better and better about the Alteon customer base. We are getting more and more. China is committed to us.

More and more customers are not only hearing, but also seeing live evidence of how committed we are to growing the product line, for serving the customers, and definitely we are seeing more and more customers roaming up for the new Alteon versions and platforms. So, that with also cross-selling the other Radware solutions to the same base allows us to be very optimistic about the future prospects there.

Got it. Separately, Roy, maybe if you could just touch on the IBM relationship, how that's going and, broadly speaking, any other opportunities with other networking partners or storage partners, now that many companies are looking for an alternative to Cisco?

So, we have nothing new to report on the IBM relationship. We have a general reseller agreement with IBM in -- across the different regions. We were involved with them, with the several very nice deals, but there's nothing dramatic or any new, I would say, news from last quarter.

Overall, we believe that with the new data center architectures, and what we're seeing in the market, whether it's the Cisco move to servers, HP into networking and so on, we believe that our type of equipment and solution has more strategic play in the data center and in alliances and we are obviously investing in that. I think the new trends in the data centers, and I've mentioned some of them, are playing very favorably for application delivery and application security and we have a very strong offering, especially to those networking and server platforms that are looking for embedded solutions, given our architecture.

So definitely, that's a major upside for the coming years and we believe we will take our fair share there.

Okay. Thank you and good luck.

Thank you.

We'll go next to Ittai Kidron of Oppenheimer.

Yes, hi guys, and congratulations on good results. Meir, can you comment about your tax rate for the year? What do you think that's going to be?

The cash stock for 2010?

No, tax rate.

You're asking? Ah, the tax rate. Oh, excuse me. The tax rate, this is a -- as an Israeli-based technology company, we enjoy, from certain tax incentives, and we believe that tax rate in 2010 and fair values after that will range between 5% to 10% as our tax rate, I believe, in the next eight years.

Okay. And can you give us some color about your geographical breakdown?

Yes. The US, in this quarter, the US contributed about 30% of our revenues and EMEA and the A-PAC of them, 35%.

Okay. Now, Roy, with regards to the Alteon business, how much leakage or bleeding do you see in that installed base? I mean, competition has been -- your competitors have made several special bundles to try and lure away a lot of that installed base once your acquisition was announced. How should we think about how much of that business has eroded by now?

I think when we bought the Alteon business, we discussed very openly that that business was declining and over the years, all the competitors were basically looking for upgrade that installed base. But once we took off and we took the business, I think that the trend has changed. I think we are seeing an increase in the Alteon revenues and we're seeing major customers and expanding their investment in that -- in this technology and with us, given the -- they see that there's a clear future for the product line, that the new developments are introduced and definitely that the support for the Alteon business is world-class.

So, I think at this point, we're doing very well with the Alteon installed base. Obviously, it's a very large one. The company was operating independently and under Nortel over 10 years. So, there's many generations of Alteon products. But we're getting to more and more customers by the day. We're signing more channels and, I think also last quarter, we've announced Fuji Xerox and Pomeroy and so on. So, there's clear evidence for that channels that maybe in the past was -- were selling other solutions to the Alteon customer base, are now coming back and recommitting themselves to the product line.

Very good. And with regards to your March quarter guidance, you mentioned in your prepared remarks that the December quarter had the benefit of some budget flushing. What is it that helps you avoid normal seasonality in March? Is there a big contract out there that you expect to recognize revenue on? I'm just trying to pinpoint specifically what is it that you think will make your business perform much better than seasonality in March?

So, first of all, when we are monitoring the regular business parameters, like pipeline, the forecasts and so on, that gives us the confidence, as you've seen, and it's not only Q4 phenomena, we believe we have a very strong business momentum currently in the market.

We're seeing better trends in all aspects, in the size of the pipeline, win ratio, the strength of our offering, the increase in the amount of channels, the customer -- we discussed shortly the Alteon customers that are becoming more and more committed. So in all the business parameters, we feel very comfortable and therefore, instead of the regular seasonal decline of 12% to 18% that we've experienced in previous years, we feel very comfortable with the guidance we've provided.

Very good. Good luck, guys.

Thank you.

(Operator Instructions)

We'll go to Rohit Chopra with Wedbush Securities.

Hey guys. A question -- if you could provide us with the book-to-bill number, and if you can't provide a number, can you just tell us whether it was greater than 1?

Yes, it was about 1.

It was about 1.

Yes.

Roy, you mentioned OpEx was going to go up a little bit as you go through, but you're going to maintain, I guess, control over expenses. But can you give us a sense of what we're looking at for 2010 as far as spending?

So, I think Q4 was a good example for the methodology or the kind of thoughts that we have. If you look on the actual results, the operational expenses went up by $0.5 million, roughly, versus Q3, while profitability increased. So, leveraging the gross margins that we have and the increasing revenues, I think we can continue to increase investments in the business itself to support future growth, while also enjoying the leverage and increasing profitability. So, I think we can use Q4 and that type of balance also as an example for 2010.

Is there any way to break out the service revenues? And the reason I'm asking is because I just want to get a sense of how the Alteon customers have taken service contracts versus buying new products from you? And maybe you can talk a little bit about that at the same time?

Okay. We are not breaking the -- specifically that. But I would mention two points. The comments that I've made on Alteon revenues were related to how do our sales, meaning to new product sales. In the past, Nortel did not charge fully for the service contracts, or did not -- or at least did not charge in line with what we are used to charge. Though obviously, the Alteon maintenance revenues are lower per unit versus our regular and industry rates.

So, while we are slightly increasing these revenues, obviously for existing customers, it's not easy to accept sharp increases in maintenance revenues, especially when they are used and budgeted at certain fees. So, our key growth and plans is obviously about selling more units, expanding the installed base in these customers as they are deploying more applications. And they are getting into virtualization and data center consolidation. There's a huge potential for the 5412 or for our security offering or connectivity offering and that's our focus.

We believe we can dramatically grow the Alteon customers' business, not only with Alteon units, but with our complete offering. And at the same time, and I must tell you, we're very excited on our traditional customers, as you've seen this growth and my comments on this quarter growth, with the potential of up-sell and cross-sell to that customer base as well. So, we're seeing, today, our 10,000 customers as a huge potential for both our application delivery and application security offerings.

Okay. I had a couple of questions for Meir, if you don't mind. I wanted to get depreciation and amortization and then, I wanted to get a sense of what is left as far as deferred to be recognized from the Alteon acquisition in their service revenue?

Okay. First of all, about CapEx for this quarter was $1.1 million, while depreciation $1.8 million. As you said, since we have started the business with Alteon on April 1st, so by the second quarter -- by the end of second quarter, we recognized fully the service revenues from this acquisition -- second quarter of 2010.

Thanks, Meir. I appreciate it.

We'll go next to Jonathan Kreizman of Oscar Gruss.

Hi, Meir, Roy. A couple of questions on my side. First of all, if you could provide the breakup between enterprise and carriers?

Yes, this is the same ratio that we experienced in the year, about 70% on the enterprise and 30% from carriers.

Okay. Then, Roy, if you could talk about the opportunities you see with the carriers, and how are more opportunities opening up with CapEx loosening into 2010?

Okay. In the Chilean market, we're seeing several large opportunities that I think are for 2010 and beyond. I mentioned in my prepared comments the mobile data and obviously with iPhone and Android and all these new smartphones on the end-user side, we're seeing dramatic growth in mobile data and mobile applications consumption by end-users.

And that information that the carrier used to sell us only minutes of voice or in bandwidth to the home, that information too, applications and application-oriented networks, dramatically increases the need to control the application traffic, to optimize the user experience, to increase the scale of the server phones, whether it's regular data, video or voice and so on.

So, the number one opportunity we're seeing there is around mobile data and mobile applications and it's starting from traditional 2G, 2.5G applications like SMS, MMS, WAP, in markets like India and China, all the way to 3G and LTE deployments in some of the other markets. In -- so that's number one.

Second, we're seeing an increase of the need for security, for application security in the carrier network. Whether it -- those are protection against denial of service attacks, similarly to what we've seen on July 4th in the US and the following months, as in other areas of the world, where the carriers need to provide protection for their own infrastructure, as well as for their customers, we believe security in the carrier market, both for wireline and mobile is the second largest opportunity that we have.

And the third one is all around the new services, like IPTV, unified communications, messaging and so on, and I think also on that opportunity we are well positioned. So, we have several large opportunities in front of us and directly and through our channels and alliance partners, we are targeting and believe we'll be able to grow the business towards that segment.

Okay. Then secondly, within the geographies, you mentioned a message you have, a stronger recovery within the quarter. Could you talk about the underlying demand? More specifically, where were you seeing pipelines stronger than maybe in other places?

Okay. So Q4, in EMEA is regular -- is Q4 is a seasonal quarter and also Q3. So, I think we've seen the regular strength from that region, with further exception of the 5412, actually, that -- the customers there were very quick to test and to order the new products. We've also seen, from a country point of view, we've seen the large countries leading the growth. So, the UK, Germany, France, Italy, Spain, that's where we're seeing the majority of the growth.

Okay. And then lastly, any progress with the Fuji Xerox you announced a quarter back?

Yes, we're very happy with the progress of that relationship. Actually, we believe that Japan will be a very strong country for us in 2010. Already in Q4, we've seen very nice contribution from Fuji Xerox and their forecast to us for Q1 and beyond is showing growth in the business.

Okay. That sounds good. Good luck. Thanks.

Thank you.

Thanks.

At this time, there are no further questions in the queue. I'll turn the conference back to you for closing remarks.

Okay. Thank you, Monisha. I would like to thank everybody for joining us today and have a great day. We'll meet you next quarter.

That does conclude today's conference. We thank you for your participation.