Radware Ltd (RDWR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Radware third-quarter results 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, today's conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Roy Zisapel, President and CEO.

Good morning everyone, and welcome to Radware's third 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 third-quarter results. After my comments we will open the discussion for Q&A. Meir?

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 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 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 Security (sic) and Exchange Commission, specifically the company's last Form 20-F filed in April 2010.

And now ladies and gentlemen for the financials.

We're very pleased to report for the third quarter record revenues, operating profit, and non-GAAP EPS of $0.26.

Revenues for the third quarter totaled $36.8 million, represents 4.4% sequential growth and 26% year-over-year growth.

The increase in the third -- this -- quarter along with book to bill greater than 1 and additional increase in our deferred revenue give a clear indication for the strong business momentum.

Non-GAAP operating expenses reached $24.6 million, in line with our guidance and with our plans for tight expenses control.

The non-GAAP net profit this quarter amounted to $5.6 million or $0.26 per share and represents a dramatic improvement compared to a net gain of $2.1 million or $0.11 per share in the third quarter of 2009.

Stock-based compensation expenses in the amount of $1.6 million, amortization of intangible assets in the amount of $1 million, an offset of exchange rate income in the amount of $[600,000] brings the GAAP net profit this quarter to $3.7 million or $0.17 per share compared to a net gain of $200,000 or $0.01 per share in the third quarter of 2009.

Non-GAAP gross margin remained that 81%.

The headcount for the end of this quarter was [740] employees.

The DSOs for the quarter were 34 days, compared to 35 days in the previous quarter and compared to 50 days in the third quarter last year.

During the past 12 months we've generated cash in an amount of $52 million. This quarter we generated cash in an amount of $23 million, including $9.3 million from operations. Thus our cash position, including short-term and long-term bank deposits and marketable securities, increased this quarter to $172 million, and we have no debt.

Shareholders' equity amounted to $[179] million.

Guidance -- we expect record results, both top- and bottom-line, for the fourth quarter of 2010. We expect revenues to range between $38 million to $39 million, 81% gross margin. As we address more opportunities, OpEx will range between [$25 million to $25 million], and non-GAAP EPS will range between $0.28 to $0.29.

As you can see, ladies and gentlemen, revenues are up. Gross margin maintains that 81%. Operating profitability and operating margins increase. Cash is up by $23 million. We expect record results for the next quarter, and we reiterate our commitment to increase margins.

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

Thank you Meir. Our Q3 results reflect continuing growth in revenues and strong leverage from our business model. In fact, in the last six quarters we delivered record sales results, and as with guidance we provided, we are targeting and expecting another record quarter in Q4.

We are pleased with the progress we're making on the key points of our strategy, focusing on data center applications delivering security, benefiting from virtualization and cloud computing growth driver in the enterprise market, and mobile data growth driver in the carrier market, growing our business with our existing customers, and increasing our channel network and market footprint.

This quarter we had a major announcement on our VADI strategy, our Virtualized Application Delivery Infrastructure. At the core of the VADI strategy stands the decoupling of the application delivery capabilities -- such as load-balancing, application acceleration and security -- from the underlying [outlook].

We're the first vendor to introduce the concept of an application delivery hypervisor allowing for the consolidation of multiple ADC appliances into a single appliance running multiple instances.

Basically our application delivery hypervisor concept, which we named ADC-VX, brings to the application delivery market what server virtualization brought to the server market.

We are also the first vendor to offer an application delivery instance over three form factors -- a dedicated physical appliance, a physical appliance running multiple application delivery instances, and on a general purpose server as a virtual appliance.

And we again are the first to market, offering advanced virtualization services over an application delivery virtualization layer common to all our ADC instances.

We believe the VADI strategy and our continuous release of additional components will provide us with a unique position in both the virtualized data center and cloud spaces and will allow us to grow our market share in these areas.

I think this is a very exciting announcement.

On the product side we continue to advance our portfolio. We have released a major version for our flagship AppDirector product line. This new version integrates our market-leading behavioral real-time denial of service protection (inaudible) both [mitigation] engine coupled with complete security audit reporting capabilities into the AppDirector product.

With this release AppDirector is clearly the strongest integrated security offering in the market, ranging from anti-scanning capabilities and network behavioral analysis to denial of service protection.

A very good customer example to how our portfolio addresses all of the needs for application delivery and security is 2xmoinscher, one of France leading online sites. This site installed our AppDirector for accelerating the response time to its uses, and our DefensePro and AppWall product to ensure business continuity and PCI compliance for those visitors.

We're the only vendor in the market that can cover the needs of content providers with a complete solution addressing quality of experience, security and compliance.

On the alliance side we achieved major progress last quarter completing multiple certifications with Oracle and VMware. For Oracle we announced the following validated integrations -- Oracle Siebel CRM 8.1, Oracle E-Business Suite 12.1, Oracle PeopleSoft 9.1. And VMware certified our vAdapter product for real-time synchronization of the virtual server infrastructure with our application delivery controls.

These certifications allow us to sell more easily and obtain more opportunities with new projects on the application side. We plan to leverage this more and more as we deepen our relationship with not only our customers but also industry technology partners.

Last quarter our products received many awards. CID won the 2010 Internet Telephony Magazine Innovation Award. TMC named Alteon 5412 and DefensePro winners of the 2009 Communication Solution Product of the Year.

These highly regarded awards, together with a long list of rewards from the last couple of years, and the industry recognition resulting from them speak to the technology advantages we have in the next-generation carrier networks, an area with strong growth that is one of our key growth drivers for the coming years.

On the operational side our results show the strong business leverage we have. As you can see, we were able to grow our revenues with a minimal addition to our cost structure. And with our high-growth margins, the growth in sales allowed us to see over 20% of sequential growth in operational profitability and EPS.

To summarize, today we have a leadership position in the market as it relates to our products and solution offerings. We are introducing key innovation into the space, and the latest being very significant one -- our VADI strategy for ADC virtualization.

We have consistently grown revenues over the past six quarters, and we have demonstrated the 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 continued support and business, and I would like to thank the Radware team for all their efforts, commitments and success in growing our business.

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

(Operator Instructions) Mark Sue, RBC Capital Markets.

Roy and Meir, maybe if you could just kind of address the issue of consolidation head-on, your plans for Radware as a separate entity. And maybe if you could just talk about just kind of like the plans longer-term as you invest in new products and go at it alone or with partners, or if it needs to be under a bigger umbrella?

The company's policy is not to comment. We have sustained business model. We intend to keep on growing. However, in keeping with our fiduciary duties, we keep our eyes and ears open for opportunities which may increase value for our shareholders.

Fair enough. And then maybe if you could just touch on just kind of the partnerships -- Oracle, VMware -- in addition to IBM. How that might grow into opportunities and revenues for you, timing-wise. How you're engaging in the field to drive revenues. Any update there would be great, just kind of like how you would proactively drive new leads and things like that.

So I think obviously one of the drivers for the usage of our equipment is the new projects for applications. And as we deepen our relationship with the certifications on one end and with the consultants, both in these companies in the field, but also with the large system integrators, we're seeing more and more deployments of our products.

So obviously in the field we're working with the different services arms of these companies, as well as with leading integrators across the world to create a template that our solution is used in those application deployments, and I think that is an upside for our model.

We have of course many installations worldwide with Oracle, VMware, etc., but we're now focusing more and more on extending these relationships. As we connect to (multiple speakers)

Okay. And Roy, lastly just on wireless applications, maybe if you could just touch on whether you're seeing an acceleration with wireless carriers, and just kind of how you might see an uptick in how you might add resources for that opportunity. Thank you.

Okay. So the mobile data, we're obviously seeing an increase. I would say that in the last several quarters, in each quarter we won one or two new carrier customers on the mobile data application.

Generally the typical size of this deployment is relatively high for us. I would say the minimum is around $500,000, and the larger ones are going into the $1 million to $2 million.

Obviously we feel very good about our position in the space. We have unique capabilities that are recognized by many analysts, such as [Heavy Lifting], Gartner, etc., in this space, and I think we are enjoying a good growth in the market share.

Today I think our pipeline in the mobile data space is at record levels. We believe also the win ratio that we enjoy there is relatively good, and as these demands are -- continue to grow and as our relationship with the key players in the space are improving, I think we can enjoy a larger share of this activity.

So we do see mobile data and the specific needs there for optimization, acceleration off-loading -- user or networking -- as key drivers for our growth.

So as I mentioned in my comments, the two main ones are the virtualized data center and cloud, and that is where our alliances with Oracle, VMware, IBM, HP has a lot of significance, and in the other side, the mobile data will be -- alliances in that side and the unique product capabilities should serve us to continue to grow the business.

Thank you, and good luck gentlemen.

(Operator Instructions) Ittai Kidron, Oppenheimer.

Hi guys, and congrats on good numbers.

Roy, I have to say, I'm somewhat disappointed with the guidance to the next quarter. When I look at your sequential growth through the year, it is kind of low mid-single digit, far below your major competitor, F5, and still also here in this fourth quarter we do expect some budget flush and more momentum and on -- when you look at what F5 said yesterday, and they're seeing a third -- three quarters in a row of double-digit sequential growth for them.

I'm just trying to understand what is it that they are seeing that you're not seeing in your business? Why aren't you seeing a stronger breakout in your revenue? With all the opportunities that you mentioned, why are we talking still $2 million or $3 million steps?

So first of all, obviously we would like to come in the end ahead of that if possible. I think today overall in the market we are growing faster than the market. I think we are the second fastest growing in the market. F5 is growing currently faster than us, but we believe with the new VADI strategy and our steps in mobile carriers, we will be able to accelerate our growth.

But if you see on the overall markets, I think we've done pretty well in the last two years in terms of market share growth and business growth. It's true that in the last couple of quarters F5 is growing faster than us, but we believe we have strong positioning and we can accelerate our growth.

When would -- do you expect the new products that you have announced today to make a material, noticeable contribution to your P&L?

So I think the VADI strategy, the first deliverables are being released this quarter, so I hope to see already some impact in Q4, although generally the sales cycle is three to six months in our industry, but definitely from the first feedbacks that we're getting from customers in our beta sites, the feedback is very encouraging. So I definitely seeing strong contribution in 2011, and I would like to be more conservative on Q4, simply because of timing.

Very good. And lastly, on the operating expenses, it seemed like on a sequential basis you had a decline in OpEx in sales and marketing and G&A, quarter over quarter. So that's great from a discipline standpoint, but can you give us a little bit more color why with expanding revenues your sales and marketing expenses are actually shrinking? Do you feel that you're invested correctly? Or do you think you're maybe under investing relative to the needs of your business?

So I think a lot of the sales and marketing expenses are also related to our quota plans and vacation that in Q3 are taking place. So I think those are the major impacts there.

I think overall we are staffed correctly. I think we've increased our investment during the different quarters and continue to do so, as we've discussed on previous calls, and we feel comfortable with the efficiency of the organization as well as the investment in R&D that drives the innovation.

So at this point we feel well.

We are planning to add, like we did in the past, additional resources as we see our businesses growing, and I think as we discussed, while keeping the control, we are going to invest more in our business.

Very good. Good luck.

(Operator Instructions) Rohit Chopra, Wedbush.

I had a few questions, if I could. I was wondering if you could talk about some OEM deals. I know you've been working on those. Is there any timing where you believe you may be able to announce some of these deals?

Well, I think when we have something specific to report, we will report it. But obviously consolidation in the mobile data carry major opportunities for partnership, and we see that. I mentioned that as part of our business strategy points, the increasing the channel and the footprint is a major initiative for us.

Thanks Roy. Then could we just come back to operating margins? I think you had set out a target of about 20%, and at one point you had talked about the end of next year and maybe hitting it a little bit ahead of plan. Do you think you can hit 20% operating margin by the middle of next year?

We opened the year with 9% operating profit that has increased 11% in the second quarter and 14% in the third quarter. Based on our high end guidance for this quarter, we expect [16]% operating margin for the fourth quarter.

Although we haven't guided the market for the next year, we believe that 20% is achievable sometime during next year.

Okay. And then I was wondering, there's a few housekeeping things, if you can give the enterprise and carrier split and a geographic breakdown and maybe your CapEx and D&A.

Enterprise and carrier, it was 75%/25% this quarter -- 75% enterprise, 25% carriers. [About the sub], it was in the US 30%, in the international 70%.

About the CapEx this quarter, it was $1.1 million, and depreciation was $1.7 million.

Thank you.

Robert Katz, Senvest.

Hi Roy and Meir. Nice quarter.

I have a few questions. You mentioned that your OpEx was going up sequentially. Can you elaborate on why it is going up and where you see specifically putting more dollars to work?

Okay. So what we've discussed is basically why in Q3 some of the OpEx in sales and marketing went down. If you speak about the total OpEx numbers, we continued to increase our investment in R&D, as we see major opportunities for innovation in the market.

Our market I think is in a very interesting point as mobile data and the virtualized data center are starting, and that a major opportunity for us to differentiate ourselves and grow market share faster, so we do invest more in R&D towards these trends.

And in addition, across the world we're seeing opportunities. Some of them are geographical in markets that we were not active before, and we think we can take our fair share of the market. In some we're increasing our investment in carrier and virtual data center sales force across the world.

And are you seeing any more partnering opportunities that you're putting more money towards? Or is it still focused on interesting opportunities that you've highlighted at your analyst day?

So the partnership opportunities we are seeing are also tied to this market. Obviously without discussing specifically hardware in this data center consolidation trend, we definitely see a lot of moving parts with the next generation data center architecture around Cisco, IBM, HP, Dell, Oracle, etc. So there is tremendous partnering opportunities on the enterprise data center.

As we go to mobile carriers, again, there is a -- multiple opportunities there as the large network equipment providers are supplying carriers with LTE and 4G networks, as carriers are ramping up their IP networks to cope with the increase of mobile data coming from smartphones and tablets, etc. So we've seen both these areas, major opportunities for partnerships.

At your analyst day you highlighted that you were pretty far along with some partnering agreements. When do you anticipate getting revenues from that channel?

We believe in 2011.

Is that first half or second half?

I don't know the specific timing now, but it will be within the year.

And a little bit of housekeeping. What was the breakup between APAC and EMEA for international revenues? And can you also break out revenues by the different product lines?

Actually EMEA and Asia Pac actually was the same, 35% each.

On product lines we don't break these figures.

Thanks a lot guys.

Thank you.

(Operator Instructions) I'm showing no further questions at this time, sir.

I would like to thank everybody 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. Thank you, and have a nice day.