Radware Ltd (RDWR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Radware second-quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Roy Zisapel, President and CEO. Sir, you may begin.

Good morning, everyone and welcome to Radware's second-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 will discuss the business highlights of the second quarter. 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 make projections or other forward-looking statements regarding future events or the future financial performance of the Company.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially, including, but are not limited to general business conditions and our ability to address changes in our industry, changes in demand for our products, the timing and amount of orders and other risks detailed from time to time in Radware's filings. 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 April 2010.

And now ladies and gentlemen, for the financials. We are very pleased to report an additional quarter of record revenues and operating profit and non-GAAP EPS of $0.21. Revenues for the second quarter totaled $35.2 million, representing a 6% sequential growth and 30% year-over-year growth. The increase in the sales this quarter, along with book-to-bill greater than 1 and additional increase of the deferred revenues give a clear indication for the strong business momentum.

Non-GAAP operating expenses reached $24.5 million, in line with our guidance and with our plans for tight expense control. The non-GAAP net [income] for this quarter is $4.3 million, or $0.21 per share, up from $3.5 million, or $0.18 per share in the March quarter this year. Stock-based compensation expenses in the amount of $1.2 million, amortization of intangible assets in the amount of $1 million and exchange rate differences in the amount of $700,000 brings the GAAP net profit this quarter to $1.4 million, or $0.07 per share compared to a net loss of $1.7 million, or a loss of $0.09 per share in the second quarter of 2009.

Non-GAAP gross margin remained at 81%. The headcount for the end of the quarter was 696 employees. The DSOs for the quarter were 35 days compared to 33 days at the end of the previous quarter and 52 days in the second quarter last year.

Over the past 12 months, we have generated cash in the amount of $35 million. This quarter, we generated cash in the amount of $10.4 million, $7.5 million from operations and $2.9 million from employee options exercised. Thus, our cash position, including short-term and long-term bank deposits and marketable securities, increased this quarter to $149 million and we have no debt.

Shareholders' equity is $159 million. Guidance, we expect for the third quarter of 2010 record results, both top and bottom line. We expect revenues to range between $35.5 million to $36.5 million, 81% of gross margin, operating expenses to remain the same as in the last quarter at $24.5 million and non-GAAP EPS to range between $0.22 to $0.25.

As you can see, ladies and gentlemen, revenues are up to a record level of $35.2 million. Gross margin maintained at 81%. Operating margins increased to 11.4%. Cash is up by $10.4 million this quarter and $35 million for the last 12 months. We expect record results in each of the next two quarters of 2010 and we reiterate our commitment to increase margins. And now I would like to turn the call over to Roy.

Thank you, Meir. Our Q2 results reflect another quarter of strong performance. Our business for several quarters now has grown sequentially and we continue to outgrow the general market with our 30% growth year-over-year versus IDC 8% and Gartner's 15% market growth estimate.

We continue to execute on the plan discussed on our previous call. (inaudible) if you will recall centered on the following four elements. One, focus on our key markets and execute on the growth drivers of data center consolidation and utilization in the enterprise market and the growth in mobile data in the carrier market; two, focus on upselling and cross-selling to our existing customer base while providing world-class support; three, invest in the productline to answer current and future needs of our customers; and four, increase our channel network and market footprint.

We have made solid progress on executing this strategy. For example, last quarter, we saw important wins for us in the mobile carrier market. Two relatively large orders, one from North America and one from EMEA, were part of the Q2 revenues. In addition, heavy reading of a specialized industry research firm called the Carrier Industry released a report on the ADC market for carriers stating that Radware does have a well-defined and market-leading telco strategy and is already the (inaudible) carrier of ADC-focused products. And among the ADC vendors, Radware is notable for the strength of its focus on the telco segment. As you know, we see the carrier market as one of our key growth drivers for 2010 and beyond.

On the product front, we continue to innovate and last quarter, we won two additional awards. SIP Director won the 2010 next-generation network leadership award for a second year in a row. This is another proof point for our leadership in the carrier market and this award highlights our differentiation as it comes to voice, video and collaboration over IP.

In addition, Info Security Product Guide named the DefensePro the winner of the 2010 Global Excellence in Intrusion Prevention Solution. That, together with the three new US patents that were awarded to us last quarter for our behavioral security technologies, speaks well for the innovation we deliver in the space.

We announced a new version of DefensePro that integrates together for the first time various attack prevention mechanisms to create the best-in-class attack mitigator. With denial of service prevention, intrusion prevention, network behavior analysis and anti-phishing, DefensePro provides network and data center infrastructures with comprehensive protection from involving attacks that we are seeing that are using multi-(inaudible) attack tools and methods.

We see our application security offering as a growing opportunity for us to increase our presence in the data center and cross sell to our existing customers. In the second quarter, we steadily won many new customers, adding over 200 customers to our install base. One of the interesting wins we had is the 2010 World Expo in Shanghai. Expo 2010 has developed an online expo based on network technologies for filling organic interactions with the physical Expo.

Multi-provider solutions, including AppDirector, [Appwar], LinkProof and DefensePro, have been deployed to optimize Expo 2010 to protect the infrastructure, as well as accelerate and guarantee online ticketing availability, logistics applications and security applications. This is the second worldscale event that our devices play a key role in, the application security and delivery, following the Winter Olympics in Vancouver.

Let me take now a couple of minutes and walk you 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 mix moving to our offering and lastly, summarizing with our customers.

First, the market. With enterprises investing more and more in consolidating their data centers and the joint virtualization, 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 the cycle and a lot is still going to happen here in the coming years with major investments from customers and vendors.

In the carrier market, clearly, mobile data and mobile applications are the number one driving force. Carriers are transforming 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 on this front we are early in the cycle and with the forecasted exponential growth in mobile data in the coming years, it is easy to see why we are 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 have made in our products and our business smart data center strategy. Our entire product portfolio, including the Alteon productline, is now available on the OnDemand Switch platform. And today, we provide hands-down the best performance, 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, SIP traffic management and acceleration, we are the leading offering, which is truly aligned to the key initiatives of our customers. With our strong product pipeline, it was very evident in the past 12 months how fast we are progressing and releasing new products, we believe we can even increase our competitive advantage further this year.

The last component is our customers. With 10,000 customers worldwide in the medium-to-large enterprise and carrier market, and with roughly 1000 new customers that we are adding every year, and just as an example, this quarter, we have added over 200 new ones, we are very well-positioned to enjoy the trends I mentioned and leverage the product offerings we have.

The Alteon acquisition we did in 2009 strengthened our business significantly, bringing thousands of new customers to our install base and allowing us to greatly increase our market position.

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 revenues over the past five quarters. We have steadily developed and introduced market-leading solutions targeting the key market trends and we have demonstrated increased efficiency in our business and continue to improve our operational results.

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

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

Hi, this is Chris for Mark Sue. Can you give us some color about your geographical breakdown and also can you break out carrier versus enterprise for the quarter?

Yes. The carrier enterprise this quarter is about 72% enterprise and 28% carriers. About the geographic split, 30% is the US while EMEA, 31% and Asia-Pacific is 39%.

Thank you.

Ittai Kidron, Oppenheimer.

Hi and congrats, guys, on good numbers. Roy, maybe can you talk about the mobile market? You mentioned you had two customers, one in North America, one in EMEA, if I got it right. Can you tell us about sort of the timing of rollouts of such products, how big they typically end up being, how the competitive landscape, specifically in those areas and when is it that you expect to see a real inflection point in this area?

Okay, so basically we had more customers, but I think two were meaningful in the fact that the first deployment of mobile data was (inaudible) to us close to a $1 million project, each one of them. And obviously, we have competed with all the other leading vendors in the application delivery market, but I do think that we have a very unique solution for the carrier market in auto-generic load-balancing or acceleration device and that helped us to secure those two wins.

Specifically, I think in both of these carriers with the start of the 3G services and the ramp-up of the smartphones, they require our solution. So I would say we are early in the game in the fact that the initial deployment that will be finished in my opinion already this quarter are only to serve the current demand plus some forecast for growth. But I do believe that if mobile data continues to progress in the 3X multiplies that it does, obviously, we are going to see repeat orders and in growing amounts from these carriers.

Also, for this quarter, I believe there are several carriers that, while timing of the finalization of the contract can sometimes move from one quarter to the other, but I do believe we will have additional wins in mobile carriers to serve the growth in mobile data in this quarter as well like we had last quarter.

Can you tell me how much of what you call carrier revenue was mobile in this past quarter just as a feeler?

We don't have it -- we don't split it also -- in some of the carriers, they already united the mobile and the fixed operations. So for example in carriers that we do have a frame agreement, I can purchase for the multi-parallel operations. So we don't follow that. There are certain projects that we know from the get-go that it is not a regular load-balancing project, but supporting the GI interface and the mobile data, iPhone/Android deployments and then obviously, it is easy for us to focus on them.

Is the revenue recognition different in this business segment?

In this specific contract, it was not because it was immediate deployment. From time to time, we do have some larger contracts over time and then obviously we treat them accordingly.

And lastly, on your revenue guidance for the next quarter, I took a look at the last six years and with the exception of '08, which was an unusual year, it seems like every year in the third quarter was actually a strong quarter for you, north of 5% sequential growth. So I am wondering what is behind sort of the growth outlook you have for the next quarter. Is there just a certain element of uncertainty given macro or does it, in your opinion, truly reflect the business activity you are seeing?

I think we are feeling very strong on the business activity and on the growth. We are very optimistic and the business is progressing well, which did well on all aspects. I think the only reason in Q3, coming into Q3 is we are conservative in the guidance and given the fact that it is generally a back-end loaded quarter given the vacations, we decided to go with this guidance. But I would not read into that any weakness whatsoever in the business.

Very good. Good luck, guys.

Rohit Chopra, Wedbush Securities.

Hey, guys. A few questions here. I just wanted to get a sense of where the strength was actually coming from. Is it coming from the core or is it coming from the upgrade of the Alteon base? Maybe if you could give some color there.

The growth is coming today from the core. We are progressing in upgrades of the Alteon, but obviously the cycles are taking us some time. So generally, as we've discussed I think also at the Analyst Day, it takes six months minimum just to finish a project or to get the order and the 5412 this quarter will already be above six months, the 4-series will be in the Q4. So we are seeing the first signs of people upgrading. We are seeing expansions of existing customers with the new Alteon, but the core growth is coming from the traditional productlines.

Okay. And then I was wondering if you could also provide an update on the OEM strategy. You talked a little bit about that on the Analyst Day. If you can maybe just give us an update?

So we continue to see that as a great potential for us. I don't want to share right now any specifics on progress that we have done, but we do feel that's a very exciting way for us to increase our marketshare and to continue to grow our business in the coming years. And we will probably update when we will have something more concrete to share.

Okay. Then I just want to get a sense on Europe. Maybe you can talk a little bit about that. I don't think there was any real mention of that today and talk a little bit about currency and how that was a negative drag on the income statement.

The count -- the business in Europe as a whole is good. We are monitoring it closely obviously given the situation and the news. But we do feel that our business, because of its criticality to the organization, basically was not hit by the latest events, but we are taking a cautious standard just to be sure.

Sensing some of the European countries, we are selling in euros. Obviously, the changes in the foreign exchange rate between the dollar and the euro decreased our results. You can assume it is roughly $0.5 million, $500,000 of hit to the top line, as well as to the bottom line because there is no additional expenses. So we see the magnitude of $0.02 EPS that the exchange played against us this quarter. But again, on the business itself, we see no problem.

Okay. And two other questions here. Do you have a lot of public sector exposure? I wonder if you can quantify that.

We don't provide this statistic, but I think we don't have overexposure to that versus the traditional IP split of government spend as a percentage of our growth.

Okay. And my last question is are we still on track to hit a 20% operating margin sometime next year?

Actually this is exactly on track and even a little bit accelerated if you -- at the high end of the guidance for the third quarter. On the high end, the guidance for the next quarter, actually we are reaching 14%. So it is a little bit even ahead of our initial plan. So I think this is better than plan and even a little bit better.

Thanks, Meir. Thanks, Roy.

(Operator Instructions). Robert Katz, Senvest.

Hi, Roy and Meir. Congratulations on a nice quarter. And Roy, mazel tov. I have a question on your sharecount. I notice that has been trending up and can you sort of elaborate on how many shares or options are still out there and what the fully diluted share count is?

Actually, the share count for the quarter, this is $21 million in our model. What I take into consideration $21.2 million for next quarter since we have about $1 million options that are vested, an average price of about $14. So all of them earn their money, so this is what we took in our internal model.

So that is sort of what the fully diluted share count we should be modeling out for the next year or two or there are more options still invested that will drive that number up?

We allocate about 3% to 4% every year of options that are the main ramp of option expected to be on the next year, not this year.

Excellent. And another question, can you elaborate a bit on certain (inaudible) you made recently about the certification (inaudible) on VMware and maybe any other software vendors that you are working with and how you see that impacting your business and sort of the timing on that, like how meaningful were these announcements?

I think as part of us being -- playing in the data center for application acceleration, application load-balancing and security, obviously we need to make sure that our product is certified and also interoperable with the key application vendors. And our focus is around VMware, Oracle, Microsoft and SAP and these certifications provide our customers with, I would say, a safer decision-making when they are about to upgrade to continue with us and upgrade to the latest (inaudible) and obviously, we certify the OnDemand Switches. So for example for the Alteon customer base, that is a very good way to enter the new switches and for us, once they do that, we are able to initiate a larger upgrade project. So all in all, it is a mandatory thing to do in our business and it also accelerates our sales cycle.

And finally, one last question. One of your competitors last week said that they were taking marketshare. And I believe they said they were taking it from one of the large networking companies. Can you sort of tell us what you are seeing in the market in terms of competitive wins and sort of bake-offs head-to-head with your peer group? What is your win rate?

Okay. So obviously, we feel very well. 30% growth rate is higher than the average in the market. I mentioned the Gartner figure of 15% and IDC of 8%. So you can think about the current market growth in the [fields]. And so obviously, we are taking marketshare in this growth rate. We believe that our competitive position has written proof. Specifically speaking, the trend in the market in the last quarter, two quarters for F5 to take the most marketshare. Second was us and Citrix and Cisco were declining, as well as the smaller players. So this is what was the math by the analysts so far. I am not sure if there is a big change for that this quarter. But specifically on us, we feel very comfortable in our position.

As you get larger as a company, are you putting more infrastructure now in place on the OpEx or (inaudible) sales and support for these new OEM channels that you are developing and how should that impact your P&L? Do you continue to see at some point OpEx continue to pull up or is it just a transfer of dollars from R&D to more sales support?

I think we are -- from an OpEx point of view, I think we have the right level of investment in the business. As we have shared also in the Analyst Day, we have seen there is a lot of leverage on this level of ))op expenses and I believe in the coming quarters, the investors would see that as well.

If the business will need for additional growth beyond that to invest in operations, we will do that. But as I mentioned, we feel good on the current level, the leverage in the business model is there. One, the first step was shown this quarter. I do believe the next step will be shown next quarter and we will take it from there.

Excellent. Thank you, guys and good luck.

I am showing no further questions. Actually, we have a follow-up question from Mark Sue of RBC Capital Markets.

Thank you. Roy and Meir, I was just looking at -- when we think about the mobile opportunity, are there different things that you can do in terms of go-to-market to drive faster adoption of the Radware solution with the mobile carriers, whether it is partnerships or a different route to market? Anything that you can share with us would be great. Thank you.

So definitely, we believe to the carrier market there is a set of partnerships, alliances, consultants and integrators that is different from the enterprise market and beyond our [direct arch] and regular channel efforts, obviously we are moving ahead in execution on this whole new set. I think we are doing very good progress in that and I think that we will be able to report on that in the coming quarters. Beyond that, I don't want to add right now.

Okay. Good luck, gentleman and thank you.

Showing no further questions, sir.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect.