Radware Ltd (RDWR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Radware second quarter results conference call. At this time, all participants are in a listen-only mode. Later we'll, conduct a question-and-answer session and instructions will follow 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. Sir, you may begin.

Thank you. Good morning everyone, and welcome to Radware's second 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'll discuss the business highlights for the second quarter. After my comments, we'll 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 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 demand for most products; the timing and the 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 & Exchange Commission, specifically the Company's last Form 20-F filed in March 2011.

And now, ladies and gentlemen, for the financials. We are very pleased to report an additional quarter of record revenues, operating profit and EPS. Revenues for the second quarter totaled $41.1 million. This is 6% sequential growth and 17% year-over-year growth. The deferred revenues continued to increase this quarter, giving a good indication for the Company's strong business momentum.

Non-GAAP EPS amounted to $0.32, up from $0.27 in the first quarter of 2011 and in line with our high-end guidance for the second quarter.

Non-GAAP operating expenses amounted to $27 million. The non-GAAP income for the second quarter of 2011 amounted to $7.3 million or $0.32 per share compared to a net income of $4.3 million or $0.21 per share for the second quarter of 2010.

Stock-based compensation expenses in the amount of $1.1 million, amortization of intangible assets in the amount of $1 million, and offset of exchange rate income in an amount of $17,000, bring the GAAP net profit this quarter to $4.9 million or $0.21 per share compared to a net gain of $1.4 million or $0.07 per share in the second quarter last year.

Non-GAAP gross margin remained at 81%. The headcount at the end of this quarter was 725 employees. The DSOs for the quarter was 36 days compared to 35 days in the second quarter last year.

Since the beginning of the year, we have generated cash in the amount of $25 million, including other $19 million cash from operations. This quarter, we generated cash in the amount of $11 million, thus our cash flow position, including short-term and long-term bank deposits and marketable securities, increased this quarter to $204 million and we have no debt. Shareholders' equity amounted to $203 million.

Guidance. We expect results both top and bottomline for the third quarter of 2011. We expect revenues to range between $42 million to $43 million, 81% gross margin. Operating expenses will range between $27 million to $27.5 million; financial income at $1 million to $1.1 million; and non-GAAP EPS to range between $0.33 to $0.35.

As you can see, ladies and gentlemen, revenues are up, gross margin is maintained, operating profitability and operating margins increased. Cash is up by $11 million. We expect higher and better results in 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 second quarter results reflect another quarter of strong performance. We continue to execute on the plan discussed on our previous calls.

We are focused on the two main growth drivers in application delivery; in the Enterprise, its data center consolidation, virtualization and cloud computing; and in the Carrier segment, 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 application delivery fabric and a critical component in data center and carrier infrastructures.

Last quarter, we continued to enhance our VADI strategy, the first industry's virtualized application delivery solution. The VADI strategy centers around our ability to run virtual application delivery instances on a variety of computing resources form factors, including dedicated hardware appliance, consolidation of virtualized appliances and general-purpose servers.

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

We've dozens of customers purchasing our VADI solution in the past three quarters. We are happy to report that VADI booking is now over 10% of total booking.

A major component of our VADI strategy is our ADC-VX, which allows our customers to consolidate multiple-load balancer devices into one high-performing scalable ADC virtualized platforms. This translates into major CapEx and OpEx savings coming from fewer units that customer has to purchase, efficient use of the hardware, large reduction in maintenance costs, power and space consumption. We see ADC consolidation as a major business opportunity for us.

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

In short, our ADC-VX brings to the application delivery space the benefit that VMWare brought to the server world. We have a very strong competitive advantage in this space, being the first company to introduce this solution, and have a great advantage in the ADC consolidation ratio we offer our customers versus any other vendor.

We had excellent wins in the past quarter, demonstrating our advantage in the market. I would like to highlight a couple of them.

First is P&T, which is the incumbent carrier in Luxembourg. P&T decided to expand its offering and become a cloud service provider. Therefore, they needed to have a solution that provides clear segmentation and isolation between customers, a solution that supports the needed agility in provisioning and decommissioning new customers and a solution that supports the cloud business model from a cost perspective.

As P&T Head of Server & Security stated, no other cloud solution in the market even came close to providing the features that Radware offers. Once we learned more about Radware ADC-VX, there was never a question over which vendor to choose.

Another very strong market opportunity for our VADI solution, as I mentioned, is the data center consolidation project. Simply put, we allow our customers to replace dozens of legacy application delivery devices from CISCO, F5 and Citrix with a single high-end scalable Radware application delivery device that provides an ADC instance-ware application with full isolation, superior fault tolerance and unmatched ROI.

Garanti Bank, the second largest private bank in Turkey, implemented Radware's VADI solution in its data center consolidation project. After evaluating several application delivery solutions, Garanti chose Radware ADC-VX for its unique virtualization capabilities, which include complete fault, network and management isolation between ADC instances. This capability is mandatory for data centre consolidation projects.

On the product front, we continue to innovate, announcing the third phase of our VADI strategy last quarter. While other players are still discussing their plans to introduce these capabilities to the market, we've been shipping out solutions for almost a year now.

Last quarter, we added additional capabilities, increasing our competitive edge even further. These services include physical-to-virtual migration, meaning converting the traditional dedicated application delivery appliance into a virtual ADC instance on the fly. We've announced virtual-to-virtual migration for greater agility in moving virtual ADCs across different data center computing resources, for example, from a general-purpose server to our consolidation appliances. And we've announced the market-first virtual ADC templates for quick replication of web services to customer with predefined configurations.

Let me take now a few minutes and walk you through why we believe the growth we're seeing in our business is sustainable. Let's take a bottom-up approach, starting from the market, next moving to our offering and lastly summarizing with our customers.

First, the markets. With enterprise investing more and more in consolidating their data centers and deploying virtualization projects, there is a growing demand for application traffic management and application acceleration and specifically application delivery that matches the virtual data centre requirements. That coupled with ongoing demand for security and compliance result in a strong market demand for our offerings.

We believe we are early in this cycle and a lot is still going to happen during the coming years with major investments from customers and vendors.

In the carrier market, clearly mobile data and mobile application are the number one driving force. Carriers are transforming from supplying minutes and bandwidths to become application providers. This highlights the criticality of application traffic management as means for improving the profitability of the carrier business model as well as for service differentiation.

We also believe that on this front, we are early in the cycle. And with the forecasted exponential growth in mobile data in the coming years, it's easy to see why we're very enthusiastic about this market opportunity.

On the product side, we strongly feel that we have a clear technology lead. Our entire product portfolio is based on the OnDemand Switch platform that hands-down provides the best technical performance, best [scope for] performance and total cost of ownership in every market segment in which we compete.

Our VADI strategy is exactly on mark with the requirement for next-generation data centers, and we are the first to market ADC fabric, the ADC instance-ware application and the improved fault tolerance from instance based redundancy. We feel very strongly about our leadership in this space and specifically as it relates to next-generation data centers and data center consolidation initiatives of our customers.

The last component comprises our customers and partners. With 10,000 customers worldwide in the medium to large enterprise and carrier markets and with roughly 1,000 new customers that we are adding every year, we are quite well positioned to enjoy the trends I mentioned and leverage the product offerings we have.

To summarize, today, we're at a leadership position in the market that is strengthening every quarter. We're consistently growing our revenue over the past several years. We've steadily developed and introduced market-leading solutions targeting key marketplaces. And we've demonstrated increased efficiency in our business and continuously improved our operating results.

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 all their efforts, commitments 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.

Okay. Good morning, gentlemen. Let's see if we can start with VADI and maybe the booking strength there. Where you might be seeing the growth in the pipeline, the type of customers, is it tier-1 or tier-2, is it both for mobile applications and data center applications? Just a little bit more detail on VADI, please.

Okay, good morning. So the strength in VADI comes from both carriers and large enterprises. The key deals that we are seeing success in is data center consolidation, which means that they are consolidating multiple load balancers, legacy one from different vendors into one large virtualized device with instances, [their] applications. So they replace a physical unit with an instance, but they consolidate the physical footprint into a single device, very similar to taking many Windows servers and moving it to a VMWare where you have less physical servers, but same amount of instances or sometimes even more instances in the virtualized environment.

So we're seeing success in carriers tier-1 and tier-2. And obviously it's easier for us to announce the tier-2, but we have very strong wins also in tier-1 carriers worldwide. And we're seeing very strong traction in large data centers of the enterprise. That's the focus of the VADI success.

Okay, that's helpful. And then perhaps an update on the OEM relationships now that you have found several deals and you now have intent, what can you do to kind of drive the further acceptance and maybe stimulate that relationship so that we can contribute to revenues?

I think we're progressing well also on that front. And as we discussed on previous calls, we expect to start recognizing revenue from at least one [partner] in H2, and we believe we are on track.

All right. Is there any thought of maybe incentives for the sales force or other partners to push the Radware product, now that we're past the training stage and the agreement stage with the products?

I don't want to speak specifically on each partner. But I think at least in some of the partners, we are basically discussing a product that's fully integrated into the other vendor product offering. So they don't have to sell the Radware solution as a standalone, which means that actually by marketing their own data center solution or carrier solution, the Radware component is already there and therefore the incentive for them is clear. They are getting full commission from their own company on the complete sale. And it actually allows them to increase the value of their own product -- of their own company product when they can sell together with our solution.

So we think that's a much stronger business model than us offering incentive on a standalone box for the other sales force. But we will obviously review that as now the quarters, say progress, and see how to take full advantage of these OEM channels.

Got it. Lastly, the acquisition of Zeus by Riverbed. Are customers starting to think about contrasting and comparing virtual application delivery versus a hardware-based solution? Do you think this might cause some pause in the industry as customers think about which solution to deploy or do you see that as a non-invent?

I don't think so. I don't think it's a new driver for our industry. I want to remind everyone on the call, as part of our VADI strategy we are offering our application delivery solution on three form factors.

One is a general-purpose server, Alteon virtual appliance, similar to what a Zeus or what you refer to as virtual ADC (inaudible). The second is a dedicated hardware appliance, the Alteon appliance, which supports up to 80-gig of application delivery to cover the most demanding applications. And third is our consolidation appliances where in a single physical hub, you can run up to 28 virtual ADCs or application delivery instances.

So I think when we go to market, we are offering our customers the three form factors. Each by the way is matching different business case and different environment. For example, virtual ADC is mostly used in QA and staging environment. And if they move to production, actually they migrate, and that's one of the unique things we're offering them. In our VADI solution, they migrate on the fly to the consolidation appliances as an instance.

So I don't see any business interruptions there. As a matter of fact, we offer, and that's one of our strengths, the multiple form factors with immediate migration, as we're the only company that has exactly the same source code, exactly the same framework across all. And that's also one of the differentiators for our VADI.

It's helpful. Thank you and good luck, gentlemen.

Thank you.

Ittai Kidron, Oppenheimer.

Thanks. Roy, I wanted to go back to comments you made earlier in the year. And back then, you expected your business to see significant acceleration in the second half of the year. And yet when we look at the guidance as we -- as you've put it, you actually are guiding to a much smaller jump from June to September as you did from March to June. And so I was hoping to get a much better understanding as to why are we not seeing the breakout that you expected to see in your revenue in the second half of the year. What is -- where is the challenge right now?

I think we're conservative in our guidance like we've been in the past several years. We do feel very strong on the trends in our business. And going back to the comments, we are seeing the acceleration beyond the current growth that's consistent regardless of the macroeconomic weakness and some comments from our peers.

We continue to steadily grow our core business, and we think the acceleration -- a strong acceleration can come once the OEM is starting to generate meaningful revenues and as our new solutions, for example the Alteon 10000, the high-end, is starting to generate more revenues.

So all those drivers are there. I think we are progressing on our plans, and we feel very comfortable on the growth perspective.

Do you see -- think the OEMs will contribute to you in the September quarter?

I definitely think on second half. On September, timing-wise, I don't know. We did not break it into the guidance.

What has been the reason of the delay in getting revenues through that channel?

I think there is not -- I am not sure there is delay. I think the process of introducing the product and making it jig is the key gating factor. And after that, we need to start looking for the regular sales cycle in our industry that varies between anywhere -- the fastest would be three months to nine months. So I think from a timing perspective, it's bolder line for Q3. But we feel very strongly on the pipeline and what we are seeing out there.

When you look at your VADI customer list right now, can you tell me the mix of existing customers that have upgraded to VADI versus customers that you've never done business with that now with this solution have decided to come and work with you?

I think it's roughly 60% existing, 40% new.

Okay, very good. And lastly, Meir, with regards to the revenue in the June quarter, in the past you talked about having some -- being unable to recognize all of the VADI revenue. There is a certification process that can take up to three, four months. Can you tell us if in the June quarter there was this certain amount of kind of unrecognized revenue that flowed through, now that you've been certified? And is that a recurring element into the September quarter, or at this point VADI is pretty much being recognized as shipped?

No, this is the same as we had in previous quarters, still about a couple of millions of dollars that haven't been recognized in the June quarter because of the reasons that you have just mentioned.

Okay. And lastly, can you give us the geographic breakdown?

This is -- the U.S. was 27% this quarter, EMEA 37%, and Asia Pacific 36%.

Very good. Good luck, guys.

Thank you.

(Operator Instructions) Rohit Chopra, Wedbush.

Hey, guys, just a few questions here. Can you give us the carrier and enterprise splits?

Yes, the enterprise this quarter was 69% and this carrier 31%.

31. And I just want to come to this question of there is a few companies I guess who have indicated there is -- they're seeing some weakness in some regions of the world, particularly EMEA. Can you tell us -- I mean it doesn't look like you saw any weakness. What's the reason that you didn't see it and what are you seeing now out there?

So, Rohit, the reason we didn't see it, I'm not sure, because our business there was strong. And I think one of the key drivers for that is VADI, because VADI allows us to be very cost-effective in next-generation projects, because they don't need to buy so many new hardware appliances. They can buy much fewer devices and consolidate.

So I think especially in areas like EMEA, maybe also Japan given the power requirements, and some market segments that are very close to countries like cloud computing providers, I think VADI dramatically excelled there beyond the technical advantage of what it brings. So we saw good business in EMEA overall, and we continue to feel strong about this region.

Okay. A couple of other questions. Is there a way that you can give us your exposure to government as a whole?

Don't break it out, but it's not one of our leading segments. The leading segments are carrier, financial services and then general enterprise and government. I don't see a lot of big risk from a government spending curve.

Okay. And here is the last question. I just want to get a sense of where you were on the Alteon upgrade cycle. Have you maxed out what you could extract from the Alteon customer base as far as upgrades and maintenance? And is it now just business as usual with just an increased level of customers? Where are we in that?

I think there is still work to do in the Alteon upgrades definitely. And I think again, the new solutions that we bring into the market, whether it's the Alteon 10000, the high-end or the VADI solutions are a great reason for them to upgrade and do more business with us. But I think there is still plenty of work to do.

Okay. And then lastly, Meir, operating margin target for the year-end, still shooting for 20%, and does that 20% require you to have that OEM revenue in place?

Actually, as we said from the beginning of the year, we are targeting 20% by the December quarter. Also, we planned by December quarter to have revenue from OEMs -- recognize revenue from OEM. I believe this is achievable to do it either way. But as you can see, the progress based on the guidance that we gave for the September quarter, operating margins is at 17%. So we feel very comfortable about achieving with the OEM and also without the OEM, which is very unlikely not to get revenues by that time to reach the 20% operating margin by December.

Thanks, Meir. Thanks, Roy.

Thank you.

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

Okay, thanks a lot, 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.