Radware Ltd (RDWR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Radware Limited fourth-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, this conference is being recorded.

I would now like to turn the conference to your host, Roy Zisapel, President and CEO.

Good morning, everyone, and welcome to Radware's fourth-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 fourth-quarter results. After my comments, we will 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 will 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 and 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, operating profit and non-GAAP EPS of $0.29. Revenues for the fourth quarter totaled to $39.1 million, along with 6% sequential growth and 22% year-over-year growth. Revenues for 2010 totaled to a record amount of $144.1 million, an increase of 32% compared to revenues of $108.9 million in 2009.

Deferred revenues have increased in each of the quarters of 2010, in total, to $47 million at the end of the year, up from $38 million at the end of 2009. The increase in deferred revenues, along with book-to-bill greater than 1, gives a good indication for the Company's strong business momentum.

Non-GAAP operating expenses reached $25.9 million, in line with our plan for tight expense control. The non-GAAP net profit this quarter has increased to $6.6 million, or $0.29 per share, an improvement compared to a net profit of $4 million, or $0.21 per share, in the fourth quarter of 2009.

Stock-based compensation expenses in the amount of $1.4 million, amortization of intangible assets in the amount of $1.1 million, and exchange-rate differences in the amount of [$200,000] bring the GAAP net profit this quarter to $3.9 million, or $0.17 per share, compared to a net profit of $1.7 million, or $0.09 per share, in the fourth quarter of 2009. Non-GAAP gross margin remained at 81%.

The headcount for the end of this quarter was 719 employees. The DSOs for the quarter were 39 days compared to 34 days at the end of previous quarter and 48 days at the end of the fourth quarter of 2009.

We generated cash in the amount of $6.5 million this quarter and $52.7 million in the last 12 months, $30.5 million from operation and $21.2 million from options exercised by employees. Thus, our cash positions, including long-term deposits and marketable securities, increased this quarter to $179 million and we have no debt. Shareholders' equity is about $185 million.

Guidance for the first quarter. We expect revenues to range between $37.5 million to $38.5 million; gross margins, 81%; operating expenses, $25.5 million to $25.8 million; financial income $1.1 million; tax rate of 5%; share count of 23 million shares; and non-GAAP EPS range between $0.25 to $0.27.

As you can see, ladies and gentlemen, revenues are up at record level, gross margins is maintained, operating profitability and operating margins increased, cash is up, and we expect higher and better results in 2011.

Now I would like to turn the call over to Roy.

Thank you, Meir. Our Q4 results reflect another quarter of strong performance. We continue to execute on the plan discussed on our previous calls. We are focused on the main two growth drivers -- in the enterprise data center, virtualization and cloud computing, and in the carrier segment, our focus is on the mobile data space. We believe these two growth drivers are expanding Radware's addressable market, from the traditional load-balancing and application delivery use cases to becoming the control plane and critical component in data center and carrier infrastructure.

Last quarter, we had a major announcement on our VADI strategy, the first industry virtualized application delivery solution. The VADI strategy centers around our ability to run virtual application delivery instances on a variety of form factors, including dedicated appliances, consolidation appliances and general-purpose servers.

With full integration to the data center orchestration system and the ability to scale on demand, add new application services, add new instances and bursts to the cloud, our VADI solution leads the industry in application delivery for the next-generation data centers.

We've received extremely positive feedback from customers, channel partners and industry analysts on our strategy and solutions. Gartner, for example, said that Radware is a strong vision of how application delivery controllers fit into a seamless virtualized and cloud-based architecture. Enterprisewide Management Associates, another core IT analyst firm, declared that Radware VADI initiative represents both an evolution and a revolution for application delivery solutions. And IT analyst firm IDC stated that Radware, with their VADI strategy and product release, is meeting virtual data center needs and allowing companies to adopt virtual application delivery deployments according to the evolution of their IT needs.

A major component of our VADI strategy is our ADC-VX, the industry's first [ADCI] provider. ADC-VX allows our customers to consolidate multiple-load balancer devices into a single device. This translates into major CapEx and OpEx savings coming from fewer of the units to purchase, efficient use of the hardware the customer purchases, large reduction in maintenance costs, less power and space consumption, and more. We see ADC consolidation as a major business opportunity for us.

Similar to server virtualization, our ADC virtualization dramatically improves also business agility. The ADC-VX allows our customers to provision an ADC in seconds versus weeks for a traditional application delivery appliance. This brings unique IT agility capability to our customers' data centers.

Already in Q4 -- and this trend continues in this quarter -- we are seeing many new projects opening up for VADI solutions, as customers recognize the significant ROI and improved IT agility resulting from these solutions. We are winning very strategic deals for this solution, and we have just recently announced a deployment in Buypass in Scandinavia, and we do plan to announce regularly new customers that have deployed these solutions.

On the product front, we continue to innovate. VADI released in October is at least 12 months ahead of the competition, and we have clear plans how to maintain and grow this competitive advantage. This week, we announced our second phase of the VADI strategy with the release of our industry-first vDirect plug-in for VMware Orchestrator and the Alteon VA, virtual appliance for soft ADC. We are excited with early customer feedback on this release.

Switching to our application security business, we saw in December how distributed denial of service attacks, designed by supporters of Wikileaks, crippled multiple websites, causing a domino effect. The intent of the denial of service attacks was to disrupt operations or render the payment code brand and government websites unusable.

In almost every instance, the operation payback attack overwhelmed the target websites, even if business-appropriate technology protection was in place. Sites like Visa and MasterCard were brought down. This was a new type of activism, and there were several important lessons learned from these operation payback attacks, including cyber retaliation, where denial of service attacks are used as a new tool of angry end-users; use of social media networks for quick distribution of malicious tools; the used of bundled, multi-layered denial of service attacks; and unquantifiable scalability, which included any attacker from anywhere in the world.

As far as we know, our DefensePro product was the only solution in the market that was able to stop the Wikileaks operation payback attacks, and allowed our customers to continue their business operation uninterrupted. This was another real-life example for our superior offering for attack mitigation, and we see our application security offering as a growing opportunity for us to increase our presence in the data center, as well as cross-sell to our existing customers.

In Q4, we continued to win many new customers, adding over 200 customers to our installed base. We also saw many existing customers increase their Radware deployment. For example, we announced that SK Group, a Fortune 100 company, chose our Alteon 5412 switches for their strategic unified communication project. This is a good illustration of the trend we are experiencing, whereby customers are purchasing more and more of our high-end devices versus our entry-level switches, as the deployments increase in size and become more strategic. Solutions like ADC-VX, the application delivery consolidation solution, obviously strengthen these trends.

A clear proof point is the increase we saw in our average deal size this quarter to $107,000 versus an average of around $80,000 to $85,000 a year ago. We are looking for this shift to continue and we believe it demonstrates the increased value our customers see in our solutions.

Another important milestone for us in Q4 was the release of the Gartner Magic Quadrant for application delivery controllers. Radware made the most positive advance, both in vision and in execution, and was upgraded by Gartner to a market leader position. Notably, Gartner mentioned our leading virtualization and on-demand application delivery as key strengths, together with our advanced (inaudible) application security and unique fixed solutions.

This is essential third-party and independent validation for the key points we have discussed on these calls over the last several quarters, and a strong demonstration for our technology leadership.

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 2011. I will start from the market.

With enterprise investing more and more in consolidation of 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 on to happen here in the coming years, with major investments from customers as well as 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.

We believe that also on this front, we are early on 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 opportunity in this segment.

On the product side, we strongly feel we have a clear technology lead. Our entire product portfolio is based on the OnDemand Switch platform, that already today provides hands-down the best technical performance, best cost for performance and total cost of ownership in every market segment we play in. We have unique advantages in global traffic management, denial of service protection, SIP traffic management and so on.

And specifically, our VADI solution and attack mitigation capabilities are exactly on mark with the next-generation data center and data center consolidation initiatives of our customers.

The last component comprises our customers and partners. With over 10,000 customers worldwide in the medium to large enterprise and carrier markets, and with roughly 1000 new customers that we add every year, we are quite well-positioned to enjoy the trends I mentioned and leverage the product portfolio we have.

Before concluding, I would like also 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 discussion for Q&A.

(Operator Instructions) Mark Sue, RBC Capital Markets.

Maybe if we could us -- you could give us some help on how we should think of the growth of the market this year versus last year. Does it feel like we are seeing an accelerating number of projects in addition to the increased deal sizes? Should we kind of think about a market that is growing at 15%, 20%, 25% or higher? Just your thoughts there, qualitative thoughts, would be great.

So, we are relying on the analysts. I think the analysts are forecasting around 10% to 15% in what we call the traditional application delivery market. Yet, as I've mentioned in my remarks, we believe that our application delivery consolidation solution and the specific solution that we offer for mobile data are basically expanding our addressable market, and are not counted in these assumptions, at least some of it.

So basically, we are optimistic that we can grow beyond the market growth. And obviously, we will update you quarter-by-quarter on our progress.

And then maybe new products, such as the Soft ADC -- any thoughts on what that might contribute, how we should think about that, and whether or not there should be some cannibalization of that from the existing products?

I think our approach to Soft ADC is a bit different than the regular software-based solution in the market. And as a result, we don't feel there will be cannibalization, but actually addition, to our sales. And let me explain that.

When we announced the Alteon Virtual Appliance, it is not lower the -- a load capability of our flagship-dedicated appliance; but it is actually part of our VADI strategy. And the key point in the strategy, that I've mentioned, is the ability to decouple the application delivery capability from the underlying hardware. And once you've done that, this instance of application delivery, application acceleration, load balancing, can run the data center over multiple form factors.

It can be a general-purpose server, and then is the Alteon virtual appliance, but it can run on a dedicated hardware, dedicated appliance from us, and then it is our traditional switches. Or -- and that is a major advancement in the market -- it can run on top of our ADC-VX, our [high] device running on our high-end appliances.

And the ability now to move this instance, to scale this instance, to burst it to the cloud, creates new capabilities for the enterprise. So we are not treating the Alteon VA as a cheap load balancer for SMB and then cannibalization, but actually an extension of the data center for high-end customers and cloud providers to really drive business agility to the next level.

As a result, we are seeing combined deals of our ADC-VX and Alteon VA as a way to scale, to grow, to push productivity and business agility, and we don't see cannibalization of our current offering.

Okay. And lastly, just the OpEx guidance. What will make the OpEx come in at the low end or the high end of the range?

This is just the commission that we have; it would put the range sales of 37.5 to 38.5. So the range for the OpEx, 25.5 to 25.8. This is related to the commissions associated with the extra sales.

I see. And it's not meaningful headcount additions.

There are some additions, not meaningful, but it is built in in the model.

Okay. That's helpful. Thank you and good luck, gentlemen.

Ittai Kidron, Oppenheimer.

Roy, can you talk about VADI so far, what has been the traction and how much did it contribute in dollars to this past quarter?

The revenues that we recognized are small, but we did close and got commitments from customers on meaningful deals of VADI. And it also, as I've mentioned in my notes, is pushing the sales to the higher-end appliances, as especially the application delivery consolidation solution means that you change multiple appliances, existing appliances, ours or of our competitors, and consolidate them into a single high-end appliance with multiple separate instances for each of the previous physical devices.

So obviously, that pushes the sale to the high-end platforms, and as a result, we believe the trend that we've mentioned about increased average deal price should continue, or at least we should stay at this level, and it is not a one-time effect.

I also think -- we are also seeing that helping us put a lot of pressure on our competitors, as they lack this solution, and they are only speaking on it in terms of roadmap. And we are -- I think we are taking good advantage of this lead in the markets.

When do you think this becomes more than 10% of your revenue?

I definitely think this year it will be over 10%. And I think every quarter, you should see a meaningful growth in the percentage of the revenue that it provides us.

Can you give me some color on -- with regards to your March quarter guide, I must say, I am a bit disappointed by the revenue guide. You look at major competitor, F5, and they actually guided for a sequential increase of 2% to 4%, and you are guiding down 1% to 4%. I'm trying to understand if -- is there anything specific to you that you think makes your business more prone to seasonality in the March quarter?

I think in general -- I am not looking into their financials -- but I think generally, the business environment in the world is seasonal in Q1. And I think if you look on our expectations, actually it is -- it shows strength over seasonality. I think in general in networking business, Q1 is 10% to 15%, as well as security is 10% to 15%, below Q4. And the fact that we are actually guiding to where we guided, I think, speaks for the strength that we see in the business.

And I think let's see over the year the actual results, not only the guidance. I think in Q4, our result was not that bad sequentially, and I hope that it will persist throughout next year and that our growth rates will accelerate.

That said, in the years of '02 through '05, when you were riding good product cycles, you always had an up, actually, March quarter, up materially. I mean, we are talking about up mid-single digits. And now you are in another product cycle, a good one -- again, correct me if I'm wrong -- I mean, that is what you're pitching. So I am really trying to understand why is it that you are still seeing down in the first quarter.

By the way, March 2010, granted, this was some sort of a rebound year, but nonetheless, it seems like from what all other big vendors are saying the IT spend in 2011 is going to be just as good as it was in 2010. And so I'm trying, again, to understand why is it that you can't post better than what you did, or what you are hoping to do for the March quarter.

I think this is where we feel comfortable. We feel very good in our business. It is true we are in a very good product cycle for us, but I think VADI was announced just in October. Given the sales cycle of three to six months, we will start to see the impact in Q1, but not fully.

And I believe that during this year, you will see us again, like we've done in the last couple of years, we will outgrow the market. So we feel comfortable with our business, with our market positioning, with us gaining share. And this is the guidance we've provided. I apologize for the fact that you are disappointed, but I think you will continue to see from us strong results and even better profitability in 2011.

Very good. Good luck, guys.

(Operator Instructions) Rohit Chopra, Wedbush Securities.

Just a couple of housekeeping questions. Can you give us the carrier and enterprise split, and maybe go through the geographic split, Americas, EMEA and APAC? Then I had a couple of questions after that.

The enterprise/carrier was 70/30, 70% for the enterprise, 30% for the carriers. As for the region split, US contributed 30% dollar revenues, while the international was 70%, split almost equally between two regions. EMEA was 36%, round number, and Asia-Pacific 34%.

34. All right. A couple questions here. I just want to get a sense, maybe, on partnerships. You had talked about some large deals that may be coming in 2011. Maybe you can update us on partnerships or OEM deals.

The second thing I wanted to get an understanding of, are we still headed towards a 20% operating margin in 2011?

Okay, so first, concerning partnership, we are still on track and we believe that in the second half of this year, we will have more meaningful revenues from OEM partnerships.

Another comment I wanted to make following your previous question about the carrier enterprise, I think in Q4, we had a very good carrier business, with some large repeat sales to key accounts, both in the Americas and internationally. And we think, I've unmentioned initially, that the mobile data market is a very good market for us. Very focused competition, very technical, and I think we can do very well there.

Also, our partnership model is targeting this carrier business. And we hope that we will be able to show you the results and share more information in the coming quarter.

As for the operating margin, we opened the year with 9% -- 2010, it was 9% operating profit. And increased to 11% in the second quarter; 14%, it was in the third quarter; and ended the year with 15% in the fourth quarter. Although we haven't guided the market for the full year of 2011, we believe that 20% is achievable sometime during 2011.

Thank you.

I am showing no additional questions at this time.

Okay. Thank you very much, everybody, for joining, and have a great day. We look forward to meeting you in the coming quarter.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.