Radware Ltd (RDWR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Radware first-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 call over to your host, Roy Zisapel, President and CEO. You may begin.

Thank you. Good morning, everyone, and welcome to Radware's first-quarter 2011 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 first quarter. After my comments we will open the discussion for Q&A. Meir?

Okay. Thank you, Roy, and welcome, everyone, to our first-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 not limited to, general business conditions and our ability to address changes in our industry; changes in the demand for products; the time 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 20-F filed in March 2011.

And now, ladies and gentlemen, for the financials. Revenues for the first quarter totaled $38.6 million, representing 17% year-over-year growth. The deferred revenues have increased this quarter, giving a good indication for the Company's strong business momentum.

Non-GAAP EPS amounted to $0.27, in line with our high-end guidance for the first quarter. Non-GAAP operating expenses amounted to $25.9 million, the same as in the previous quarter.

The non-GAAP net income for the first quarter of 2011 amounted to $6.1 million or $0.27 per share, compared to a net income of $3.5 million or $0.18 per share for the first quarter of 2010. Stock-based compensation expenses in the amount of $1.2 million, amortization of intangible assets in the amount of $1 million, and offset of exchange rate income in the amount of $400,000 brings the GAAP net profit this quarter to $4.4 million or $0.19 per share, compared to a net gain of $600,000 or $0.03 per share in the first quarter last year.

Non-GAAP gross margin remains at 81%. The headcount for the end of this quarter was 722 employees. The DSOs for the quarter were 34 days compared to 33 days in the first quarter last year.

During the past 12 months we have generated cash in the amount of $54 million. This quarter we generated cash in an amount of $14 million including $10.4 million from operations. Plus our position including short-term and long-term bank deposits and marketable securities increased this quarter to $193 million, and we have no debt.

Shareholders equity amounted to $195 million.

Guidance. We expect record results both top and bottom line for the second quarter of 2011. We expect revenues to range between $40 million to $41 million; 81% gross margin; operating expenses will range between $26.6 million to $26.7 million; financial income at $1.1 million to $1.15 million; and non-GAAP EPS to range between $0.28 to $0.32.

As you can see, ladies and gentlemen, our first-quarter results were in line with our high-end guidance. 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 first-quarter results reflect continued growth in revenues and strong leverage from our business model. In fact, in the last several quarters we are seeing strong sales momentum. And with the guidance we provided, we are targeting and expecting a record quarter in the second quarter across all financial metrics.

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

We continue to innovate and lead the market in application delivery virtualization and provide today the strongest solution to [viltron] and cloud data centers. This past quarter we continued to release additional components of our VADI, Virtual Application Delivery Infrastructure, Strategy. At the core of the VADI Strategy stands the [vADC], the virtual ADC, or the decoupling of the application delivery capability from the underlying hardware.

In January we announced the availability of our Alteon Virtual Appliance that can run on top of a VMware or KVM virtual infrastructure. We are the first vendor to offer an application delivery instance over three form factors -- a dedicated physical appliance; a physical appliance running multiple ADC instances, which is our ADC-VX solution that we released last October; and now also a virtual appliance as I have mentioned.

We are again the first to market in offering advanced virtualization services over an ADC layer common across all these instances. In January we've also released our vDirect Plug-in. vDirect is again first-to-market application delivery management orchestration plug-in, initially, targeting the VMware virtualized infrastructure.

Through vDirect API, our cloud and large enterprise customers can automate the complete operation of the data centers and drive the efficiency and the agility to the next level. Operational tasks such as deploying a new SharePoint server farm or migrating an SAP or Oracle application from one data center to the other. This stuff used to take weeks and months; and now with our technology will take seconds for our all our VADI customers.

Lastly, yesterday we released another version for VADI that adds a layer of virtualization services on top of our virtual ADC offering. Services such as migration of a physical device to a virtual device; movement of a virtual instance between data centers; initiating an instance based on a predefined template such as a SharePoint or SAP template are all available -- and again, first to market.

We believe the VADI Strategy and our continuous release of additional components of this Strategy will provide us with a unique position in both the virtualized data center and cloud, and will allow us to grow our market share in the coming quarters.

We see strong customer activity on the virtual ADC offering, and in the past quarter announced several leading examples for these customer wins. The first example I would like to discuss is Telenet.

Telenet is the largest cable service provider in Belgium. They are offering video broadband Internet and a voice-over-IP telephony to over 2 million subscribers. They also offer mobile telephony service as an MVNO.

Telenet is doing an impressive data center consolidation solution using our ADC-VX. They are consolidating a couple of dozens of legacy load balancers into 4 high-end Alteon VX platforms, each running 28 instances of our virtual ADC. This project is resulting in significant savings for Telenet on hardware, power, and rack space costs as opposed to costly traditional application delivery approaches.

For example, 28 load balancers will take a minimum of 28 rack space, while our ADC-VX takes only 2, a 14-times improvement. On energy, there is roughly a 10-times improvement in our approach.

Let's move now from data center consolidation to private and public cloud services. We announced last quarter another win in P&T, the leading postal and telecom service operator in Luxembourg. P&T is expanding their offering, and they are becoming a cloud service provider.

They selected Radware ADC-VX because it is the only solution that provides them with clear segmentation and isolation between customers, while providing the agility at the same time that is crucial to customer-automated provision in the cloud. Our ADC-VX is the only available solution in the market where each virtual ADC or ADC instance is completely isolated all the way to the outer resources.

It is a perfect example for the customer traction we are seeing in data center consolidation, data center virtualization projects, as well as with cloud providers. Obviously, these are major industry trends; and we feel very strong in our position to serve well these customers and grow our revenues with these markets.

On the product front, we have made a very important announcement last quarter on the new Alteon 10000 application switch. Followed by our OnDemand Switch [4] hardware platform, Alteon 10000 delivers on-demand extendable throughput of 80 gigabits with breakthrough performance at any throughput point.

The Alteon 10000 is built on an advanced telecom computing architecture, ATCA chassis, and fulfills the challenging capacity growth that is required by the carrier sector including Internet, video, mobile, critical applications, and so on. This platform is very important for our business as it expands our total addressable market.

Till the launch of this platform we were selling our switches up to 20-gigabit total capacity. In the higher capacities till now it was usually the [FI-Vperion] with 72-gig or the Cisco ACE platform with 64-gig network presence. With this announcement we are positioned at the top of the group, with a very strong scalable product that enjoys our broad software capabilities.

Obviously being such a high-end product, we have also the opportunity to increase our average deal sizes, as a fully-loaded pair of Alteon 10000 carries a $900,000 list price. We are seeing many opportunities for this solution especially in large data centers and carrier customers.

We are happy to report that we are already winning initial orders from customers. We will start to recognize revenues from this product in the current quarter and see it as another growth engine for Radware in the coming quarters and years.

To summarize, today we have leadership position in the market as it relates to our product and solution offering. We are introducing key innovation into the space; and the latest and very significant, our VADI Strategy for application delivery virtualization.

We are expanding our addressable market with very competitive and unique product offering. We have consistently grown revenue over the past several years, and we are also very optimistic on this year growth opportunity.

We continue to demonstrate increased efficiency in our business, and we continue to focus additional improvements in our operational results. Before concluding, I would like to thank our customers and partners for their continuous support and trust, and I would like to thank the Radware team for all their efforts, commitment, 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.

Thank you. Rory and Meir, maybe if we could just start on any Japan impact, if any? And then just qualitatively, tell us just how we should think about the pipeline for VADI, its traction [to] customers, how the application might be expanding for that, and how we may see the trajectory for VADI develop for this year.

Okay, so, Japan used to be a fixed 6% to 9% revenue contributor for us every quarter. Obviously last quarter it was not the case. I think it was around 4%, 4% to 5%. Obviously Q1 in Japan is generally a stronger one, so we look for around 4, 5 percentage points of revenue there.

We don't believe that there is going to be a very fast recovery, based on the inputs we are getting from the markets and hearing. So in our Q2 forecast and guidance we are very conservative on Japan revenues.

Yes, we believe that towards the second half of the year and mainly in Q4, we feel it will go back to a business more usual, like we used to have. So currently with the current situation in Japan, we have modeled the guidance. And obviously we could have done better, but this is (technical difficulty).

Concerning VADI, we are seeing a lot of traction in the market, especially as I mentioned in data center consolidation and cloud providers. Obviously, this quarter already in the first months we have landed three large deals -- large deals being over $500,00 -- from carriers and large enterprises that are using our VADI Strategy to either consolidate or start to offer cloud services.

We are very optimistic about that and we are seeing very strong growth. As a result of that you can see more and more product releases. There are more to come, and basically every quarter we are going to enhance this offering with additional components and capabilities.

Okay, that's helpful. Then maybe just [pronounce] -- an update on your partnerships, how that is trending and how we should see that develop for the balance of the year?

Then also Meir, if you could just give us a sense of cash generation near term and perhaps for the cash generation for the full year. Thank you, gentlemen.

I will take first the partnership. I think we are on track as we have mentioned in the previous calls; I think it would be a second-half contribution. We believe we are on target to reach that.

We do see additional opportunities for partnerships in the market, especially in the new era in the data center, in the multiple vertical stacks that exist. And we are executing accordingly.

Okay, as for the cash, as I mentioned in my script, we generated in the last 12 months $54 million in cash; last quarter it was $14 million in cash. For this quarter, the June quarter, we expect double digit, in million dollars increase in the cash.

As for the full year we have not guided the market, but you can understand that we are targeting it would end -- at the end of the year in every and each quarter to generate cash about the same level as we do right now.

Okay. Thank you. Good luck, gentlemen.

Ittai Kidron, Oppenheimer.

You mentioned three large deals, but can you talk about how the pipeline for VADI looks like? How much of the activity in this, with this product, is within your existing customer base versus actually helping you open the doors to new customers?

Okay, so, the pipeline again is very strong. I would say the majority of the large deals above $100,000 is obviously centered on VADI. We have a very big advantage of being first to market, and our sales team across the world is very focused on that.

Even more than that, VADI plays into the hot spots in the industry -- cloud service providers, and data center consolidation, and virtualization projects. So obviously there is a lot to talk here to customers.

Now concerning the customer mix, it is roughly half and half between existing customers and new customers. But one point I want to strengthen, even in existing customers -- let's say a carrier -- we are generally selling VADI not only to areas that we have been traditionally involved in. For example, their IT. But we are actually able to win a new type of business that they are entering like the cloud service business.

So for example, I have mentioned one of the carriers in my prepared comments. We were serving them on their enterprise side or data center side. VADI allowed us to win the new business of cloud.

And we are seeing that in many of our existing carrier customers, a very strong winning ratio or very good positioning towards the cloud business that they are just building out right now.

Aside from that, it allows us to penetrate many new customers. Some of them in the cloud business, some of them large data centers that are doing their migration from our competition to us because of this strength in [phasings]. Operationally, CapEx, and the agility that VADI provides them for the future.

So I think I have mentioned, for example, in Telenet's case, the ability to replace 20, 30, 40, load balancers with 2 or 4 devices has dramatic impact on the whole CapEx and OpEx model of application delivery.

Do you still then subscribe to your previous view that it is in the second half of this year that we should see bigger movements in your business as this pipeline starts materializing?

I think so. I also mentioned the Alteon 10000, which this quarter we will start to ship. But obviously we will see some ramp-up in second half and even more contribution next year. I think that is another growth factor for the Company as well as the alliances that I touched upon in my previous answer.

Very good. Meir, regarding the operating expenses, you are modeling a solid increase here in expenses, which is coming a little bit ahead of where we were modeling. Can you give us a little bit more color on what is the dynamics that is impacting your OpEx; and how should we think about OpEx growth between now and year-end?

Okay, actually, the weakening of the US dollar against the Israeli shekel and the euro results in higher expenses of about $200,000 in the first quarter; and we estimate another increase of $200,000 in the second quarter.

Throughout the second half of the year, we don't see a major increase in our operating expenses. But we will probably have to increase some of the expenses due to more opportunities that we have to [stay with].

We discussed several times -- if you would like to address correctly opportunities you have to invest, and we will do it. At the same time, you should put attention to the fact that we opened the year with 14% operating margins. Based on the high-end guidance for this quarter, we should reach 16% of operating margin.

And we discussed several times that our near-term operating margin target to reach at the end of the year is 20%. So it speaks for itself that we continue to invest while increasing the margin at the same time.

Okay. So you still think you can hit the 20% this year then?

In Q4, this is based on reaching the level of revenues that we need already.

But we're very comfortable.

And lastly, just household. Can you give us the geographic split of the revenues as well as the enterprise versus service provider?

Okay. Enterprise and service providers, this is 70/30; 70% enterprise and 30% service providers. As for the split for regions, the US was 28% of our revenue this quarter, while EMEA 37%, and Asia-Pacific 35%.

Thank you. Good luck.

I am showing no further questions at this time and would like to turn the call back to management for further remarks.

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

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.