Radware Ltd (RDWR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Radware First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Roy Zisapel, President and CEO.

Good morning, everyone. Welcome to Radware's First Quarter 2010 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 first quarter. After my comments we will open the discussion for Q&A.

Thank you, Roy. Welcome, everyone, to our first quarter conference call. First, I would like to read you the Safe Harbor language. During the course of this conference call, we make projections or other forward-looking statements regarding future events or the future financial performance of the Company.

We wish to caution you that such statements are just predictions and that actual results or event 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 detailed from time to time in Radware's filings.

We refer you to documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last Form 20F filed today, April 29, 2010.

Now, ladies and gentlemen, for the financials. We are very pleased to report additional quarter over quarter revenues with operating profit and non-GAAP EPS of $0.18. Revenues for the first quarter totaled $33.1 million, representing 3% sequential growth and 61% year over year growth. Usually the first quarter is a down quarter for the industry overall. Nevertheless, this quarter we returned to the sequential growth over the fourth quarter of last year. The last time we were able to do so was five years ago in the third quarter of 2005.

The increase in our sales this quarter, along with book to bill greater than one, and additional increase of our differed revenues is a few indications for strong business momentum. In order to leverage this business momentum and accelerate growth in top and bottom line, we decided to increase our investments in operating expenses in the short-term. Non-GAAP operating expenses reached $23.7 million, in line with our plans to tie expenses going forward.

We reiterate our commitments to increase growth in top and bottom line and to improve on our margins. The non-GAAP net profit this quarter, in amount of $3.5 million or $0.18 per share represents a significant improvement compared to a net loss of $1.6 million or $0.09 per share in the first quarter of 2009.

Stock based compensation expenses in the amount $1.3 million, amortization of intangible assets in the amount of $1 million, and exchange rate differences in the amount $600,000 brings the GAAP net profit this quarter to $600,000 or $0.03 per share compared to a GAAP net loss of $6.1 million or a loss of $0.72 per share in the first quarter of 2009.

Non-GAAP gross margin remained at 88.1%. The headcount for the end of this quarter was 663 employees. The DSOs for the quarter were 33 days compared to 48 days at the end of the previous quarter. We generated cash in the amount $12.7 million this quarter, $10.4 million from operations and $2.3 million from options exercised by employees. That's our cash position, including short-term and long-term bank deposits and securities increased this quarter to $139 million and we have no debt. Shareholders equity is $145 million.

Our guidance for the second quarter of 2010 is as follows. We expect revenues to range between $34 million to $35 million, 81% gross margin, operating expenses to range between $24 million to $24.5 million, and non-GAAP EPS to range between $0.19 to $0.21. As you can see, ladies and gentlemen, revenues are up, gross margin, operating profitability, and operating margins are maintained, cash is up by $1.7 million, we expect higher and better results next quarter and in the rest of 2010 and we reiterate our commitments to increase top and bottom line and to improve our margins.

On May 3, this coming Monday the Company hosts an analyst day in New York City. Web registration is still available. We look forward to seeing you all on Monday. Now I would like to turn the call to Roy.

Thank you, Meir. Our Q1 results reflect our continued business improvements over the last several quarters. Incremental revenues are positioning us well for another strong year in 2010. In fact, four quarters in a row we've delivered record sales results and as evidenced by the guidance we provided, we expect another record quarter in Q2.

We've continued to execute on the plans discussed on our previous calls. One, focus on key details; two, provide world-class support to our customers; three, invest in the products line; and four, grow sales and service revenues with our existing customers by answering their current and future needs in application delivery and application security.

In the first quarter we steadily won new customers, adding over 200 new customers to our install base. Some of the new and repeat customers that contributed to our revenue this past quarter are Bloomberg, Avaya, Renault, Verizon, Bank of China, WorldCom, the Driving License Association of the UK, and many more. With 10,000 customers, executing properly on our repeat business initiatives will provide a strong and profitable platform for growth in the future.

One of the most active segments today is the mobile carrier. We are seeing strong market growth horizons this segment. And as we discussed in several calls, we are focused on delivering unique solutions to this market. Last quarter, we released several solutions that allow mobile carriers to first streamline their multiservice platform, especially in light of Verizon, iPhone, Android phones, and the increase of 3G mobile usage for laptops and PCs, and two, to protect their network from emerging broadband related threats.

With all the new devices, unlimited mobile internet browsing and the advent of distributed mobile applications opened the door for new internet to mobile and mobile to mobile networks. Our solution allows the carriers to protect against these emerging threats. We're seeing good traction in this space and we believe we have a strong competitive position.

Last quarter we also announced the very nice thing in Pelephone. Pelephone is one of Israel's leading mobile operators. We deployed their mobile internet gateway solutions through dynamic search and steering and streamlining of their mobile service platform which currently serves 2.7 million subscribers. Specifically, Pelephone invested in 3.75G, (inaudible) and the strong growth in mobile global traffic was the unlimited browsing packages, created a strong need for application awareness and user awareness, traffic steering which we provide.

On the product side, in the first quarter we received the Internet Telephony Magazine Annual Product of the Year Award for both our DefensePro and Alteon 5412 product lines. Collaborations from voice and video over IP and increasing video traffic for business and consumer usage are strong trends. We've invested to several years in developing innovative solutions for delivering and securing this type of traffic. We've built unique mechanisms and capabilities to do so and these awards for both of our solutions are strong evidence of the innovation we have in these markets.

Continuing on the product side, we believe the biggest announcement and advancement we made this quarter was the release of the new Alteon four series switches. The Alteon four series rounds out the Alteon product suite, together with the Q4 announcement of production of the Alteon 5412. The refreshed product suite now offers complete on demand applications (inaudible) coverage, up to 20 gigabit per second.

The new four series is based on our on demand switches and provides Alteon customers with unmatched performance and response time in the zero to four gig performance band. 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 infrastructures.

The on demand concept reduces the overall IT investment and operations management costs that are needed to support the infrastructure, all while allowing for significant scalability and increasing performance to answer traffic peaks and production growth.

In less than a year since the acquisition of Alteon, we came up with a completely new Alteon lineup. We've extended the reach of this product line from three gigabit to 20 gigabit per second and improved the performance over tenfold. This provides us with a major opportunity to up sell and refresh the Alteon customer install base.

Speaking of the on demand switch strengths, Tolly Group released last month a competitive test between the other on demand switches and BIG-IP's 1600 and 3600. As the test value basis, the performance superiority of our on demand switches. The test determined that the other on demand switches exhibit over 380,000, near seven transactions per second which is 3.5 times faster than the transaction per second handled by the BIG-IP 7600. In addition, the on demand switch provides faster response time of up to 40 times faster than the BIG-IP platform and, last but not least, the on demand switches successfully combat two times more the amount of attack traffic versus the BIG-IP platform.

With over 300 R&D engineers we believe we will be able to continue to strengthen our product offering and even accelerate the base of our innovations. We definitely see these innovations and technical innovations as the driving force behind our growth in the last several quarters and believe it will continue to help us grow even further. As we're adding additional resources to select markets and R&D initiative will be increasing our operation expenses as we mentioned. But we remain fully committed to the exercise of price expense control and the leverage of our business.

To summarize, today we have a leadership position in the market as it relates to our products and solution offerings. We are growing consistently over the past four quarters. We have seen major growth consistently in the market and have steadily developed and introduced market leading solutions to address it. And we have demonstrated increased efficiency in our business 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 their efforts, commitment, and success in growing our business. And with that, I would like to open the discussion for Q&A.

(Operator Instructions) Our first question comes from Mark Sue from Royal Bank of Canada.

Hi. This is [Jo Ann Ira] for Mark Sue. If you could just give us an idea of the sequential trajectory for the Alteon contribution in the quarter?

We're not splitting the Alteon business (inaudible) especially (inaudible) the product lines going forward. But the main growth came from the core business, the legacy products, as well as some growth from the Alteon product line.

If you could give us some color about your geographical breakdown and also if you can breakout carrier versus enterprise in the quarter?

The US contributed 30% of our revenues this quarter, India 33%, and (inaudible), 37%. This quarter was split between enterprise and carriers, enterprise 72% and carriers, 28% this quarter.

Okay. Thank you.

Our next question comes from Rohit Chopra from Wedbush Securities.

Hey, guys. Just wanted to ask you a few questions here. Can you talk a little bit about the sales cycle and maybe the competitive marketplace you're seeing out there and if pricing has stabilized?

In terms of the sales cycle, I think it depends on the market. We saw some lengthening sales cycles last year in the enterprise market. But I think the environment today is extremely -- a lot of improvement in the second half and this quarter. As it relates to the carrier market, in the fixed areas, I think the sales cycle will seem long but in the mobile carriers, we're seeing accelerated sales cycle, especially as it relates to controlling the iPhone and Android traffic. I think the basis of small byte data is overwhelming the networks and the carriers are looking for solutions and therefore the sales cycle is becoming much faster.

On the competitive landscape, we don't see a lot of change over the last year, year and a half. We do see F5 and Cisco in many deals but we're seeing less from Citrix and other small players like Foundry. As I've mentioned, we feel very comfortable with the current competitive situation and we are able to grow nicely in this environment.

Roy, can I ask you a quick follow-up? You were talking about the iPhone. Does that mean AT&T is also a customer in addition to Verizon who you mentioned?

AT&T is a customer as well. Most all of the customers we are serving will be ready for iPhone data traffics across the globe but most of the large use carriers are customers of ours today.

Okay. Thank you.

Our next question comes from Jonathan Kreizman from Oscar Gruss.

Hi. A few questions from my side. Firstly, you mentioned with respect to some kind of buildup in the expenses to sustain the growth you're seen this year and the following. If you could just elaborate on how you're expecting to allocate the additional investments, R&D, global marketing?

(inaudible) You're very unclear. Nobody can understand.

(inaudible) Is it better now?

Can you please repeat the question? We'll try to --

Yes. You mentioned you expect some additional investment into the business to sustain the growth trend currently seen. If you could elaborate on the allocation you're planning? How much of this should we expect to come into R&D, sales and marketing? How exactly are these breaking down?

I'm not sure I understood your question but maybe you're speaking about the increase in the operational expenses and the split between R&D and server marketing?

Yes. Exactly.

Okay. So, basically I think we're going to see some increases in both areas. I think you can take the increase between Q1 and Q4 as an example of what you're going to see from Q2 to Q1. Beyond that, I'm not sure you'll see large growth over the remainder of the year. And therefore any additional growth of revenue we expect to impact more strongly the bottom line.

Could you give us some color on the product side? What part of the business is being (inaudible) which is (inaudible) et cetera?

Jonathan, we can't understand your question. I'm sorry.

I'll follow-up off line, later. Thanks.

Okay. Do that.

Our next question comes from Joe Park from Oppenheimer.

Hi. Thanks for taking my question and congratulations on a good, strong quarter. Regarding Alteon, you mentioned you launched the 4000 series products, you have the 5412 in the marketplace. How far along are we in terms of you upgrading some of the legacy customers to those new switches? How much room do we have left to grow there?

We are in the very early beginning. We have just basically started. A few things went out, the sales cycle being around six months. The shorter side is three months. We just started recognizing revenues from 5412 in the end maybe of the first quarter and so it's very early in the cycle. We are seeing a lot of interest. We're seeing a lot of discussions and we believe we're going to see a lot of revenue once the Alteon service plan is launched into the field. This is the first platform after six years. Therefore we have a strong focus on upgrading this customer base. But currently, the influence from the Q1 results from the new product line are still very low which provides us with a lot of optimism for growth potential in the coming quarters.

And, Meir, how should we be modeling your tax rate?

The tax, as you can see from this quarter and also last quarter this was 5% to 6%. We see very long-term since we continue to benefit from both enterprise partners. So, 5% to 6%, this is the tax rate for the foreseeable future.

Thank you.

(Operator Instructions) Next we have a follow-up from Rohit Chopra.

I just wanted to ask you about your partners. We haven't talked a lot about the partners in awhile. If you could elaborate on maybe some things that are happening with your partners, that would be helpful. Let's just start there, if you don't mind.

We continue to be very active on the application partners such as Oracle, Microsoft, SVP, and so on. I think that this quarter we will have an announcement about the additional announcements in the pipeline. Beyond that, at this point we're not ready to announce any other alliance or OEM partnerships but definitely, I think, there's a lot of potential in the market for such collaboration work.

Okay. You talked a little bit about the mobile carriers and how things were going well over there, but the mobile business seems to be down quarter over quarter, carriers seem to be down, I think. They were at 30% last quarter. You're at 28% this quarter. Does that mean that the business is yet to come or it's business that's been booked and is ready to go here for the next quarters? What's happening there?

I think business especially in the same cycle and the nature as we discussed in cannot be measured quarterly because it's lumpy and sometimes we get larger orders. Sometimes people delay. But we are seeing a lot of activity there. We are seeing many more proof of concepts and also initial deployments that are very encouraging. So, we see carriers, the mobile carriers specifically as a strong growth driver for this year and next year. I think it will also show in our future results.

Thanks, Roy.

Our next question comes from the line of Robert Katz from Senvest.

Hi, Roy and Meir. Nice quarter. I have a question about your deferred revenue line. It seems like that number has gone up and you don't breakout revenues on your quarterly basis. Can you at all talk to where the increased and deferred revenues came from and if you're continuing to see that level of bookings going forward or is this a onetime booking, a one customer event?

Thank you, Robert. As I mentioned, deferred revenues was up this quarter. This is more than two years quarter over quarter, this is more than eight quarters in a row that we've seen an up quarter or an increase in the deferred revenues. I believe that we will continue to see an increase in deferred revenues in the rest of 2010. It's a good indication for the business momentum that our clients continue to be committed, are renewing and enjoying from a hardware project.

On top of this, I mentioned in the call that the book to bill was greater than one, another indication for good business momentum. We don't split by quarterly the deferred revenues. We do it only on a yearly basis. We mentioned last quarter that in 2009 actually we (inaudible) from $19 million to $38 million the total deferred revenues. This quarter, as I said, it's tough but we don't give a specific number to the market.

Right. I have a question about your OpEx. It seems that has gone up more than you last guided to or talked to when you got in on your business model. It sounds like you're increasing that sequentially. Should we be modeling for that to go up another $1.5 million sequentially and then level off? How do you view or think about your long-term operating model in terms of where your operating profitability should be for this Company?

If you stick to our guidance through second quarter, you can see that our operating margins expect to be (inaudible) 11% as we had in Q4 and from now on, as Roy mentioned, no intention to increase OpEx or marketing or any additional expenses. So, any interest in top line we contribute to increasing margins by market. We mentioned several times on the call, both Roy and myself, that we are fully committed to increase top and bottom line and increase our margins.

So, excuse me, just to add to that. We see very clear business momentum and would like to enjoy this business momentum. We decided and I said it specifically in the short-term to increase the operating expenses. It's nothing related to continue to increase long-term operating expenses. This is in the short-term just to leverage the growth and enjoy the business momentum that we see right now.

Are you ready to talk to what a longer-term business model is for the Company in terms of what your goals are for operating margin or on a certain run rate where you expect your operating margins to be?

We shared in the presentation as we do, our midterm business models. This is being the 20s, of course we should do it quarter by quarter. I believe that again, Q1, this is a very visible quarter. You have a lot of expenses which are related to (inaudible) interviews. We decided on top of that to add some (inaudible) again to leverage what we see right now and to which 20% growth in midterm investments versus the (inaudible) we are going to profit in every quarter from now on.

What is your headcount for now and how has that changed over the last few quarters?

Our headcount right now is 663 employees.

And you have contractors as well or does that include the contractors?

This is everybody.

Okay. Thank you very much. Very nice quarter and nice revenue guidance.

Thank you.

(Operator Instructions) I'm showing no further questions in the queue.

Thank you. I would like to thank everybody for joining us today. We look forward to meeting you next week. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.